FILED PURSUANT TO RULE NO. 424(b)(5)
REGISTRATION NO. 333-95263
Prospectus Supplement
(To Prospectus dated February 7, 2000)
$515,000,000 (approximate)
Provident Bank Home Equity Loan Trust 2000-2
Home Equity Loan Asset-Backed Certificates, Series 2000-2
The Provident Bank
as Seller and Master Servicer
The Trust will issue The certificates represent
obligations of the trust only and
do not represent an interest in or
obligation of The Provident Bank,
the trustee or any of their
affiliates.
. two classes of senior Class A
Certificates, which are offered
hereby
. two classes of senior Class X
Certificates, which are not
offered hereby
This prospectus supplement may
be used to offer and sell the
certificates only if accompanied
by the prospectus.
. one class of subordinate Residual
Certificates, which is not offered
hereby
The Certificates
. represent the entire beneficial interest in a trust, whose assets are a
pool of closed-end fixed and adjustable rate mortgage loans consisting of
two loan groups.
Credit Enhancement
. will be provided in the form of a spread account and an irrevocable and
unconditional certificate guaranty insurance policy issued by MBIA
Insurance Corporation.
The trust will make a REMIC election for Federal income tax purposes.
Review the information in Risk Factors on page S-9 and on page 1 in the
prospectus.
Lehman Brothers, on behalf of the underwriters, will buy the Class A
Certificates from The Provident Bank at a price equal to approximately 99.70%
of their face value. The underwriters will sell the Class A Certificates from
time to time in negotiated transactions.
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or passed upon the adequacy or accuracy of this prospectus.
Any representation to the contrary is a criminal offense.
---------------
Lehman Brothers
Banc of America Securities LLC
Credit Suisse First Boston
June 22, 2000
For ninety days following the date of this prospectus supplement, all
dealers selling the Class A Certificates will deliver a prospectus supplement
and prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters of the Class A Certificates and with
respect to their unsold allotments or subscriptions.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
We are not offering the Class A Certificates in any state where the offer is
not permitted.
Table of Contents
Page
----
Prospectus Supplement
Summary.................................................................... S-3
Risk Factors............................................................... S-9
The Certificate Insurer.................................................... S-13
The Provident Bank......................................................... S-15
Description of the Mortgage Loans.......................................... S-18
Prepayment and Yield Considerations........................................ S-36
Description of the Certificates............................................ S-42
Use of Proceeds............................................................ S-65
Federal Income Tax Consequences............................................ S-65
State Taxes................................................................ S-68
ERISA Considerations....................................................... S-68
Legal Investment Considerations............................................ S-69
Underwriting............................................................... S-70
Experts.................................................................... S-70
Legal Matters.............................................................. S-70
Ratings.................................................................... S-70
Index of Defined Terms..................................................... S-72
Annex I.................................................................... I-1
Prospectus
Risk Factors............................................................... 1
The Trust Fund............................................................. 2
Use of Proceeds............................................................ 7
The Provident Bank......................................................... 7
Loan Program............................................................... 8
Description of the Securities.............................................. 11
Credit Enhancement......................................................... 21
Yield and Prepayment Considerations........................................ 26
The Agreements............................................................. 28
Legal Aspects of the Loans................................................. 40
Federal Income Tax Consequences............................................ 47
State Tax Considerations................................................... 71
ERISA Considerations....................................................... 71
Legal Investment........................................................... 76
Method of Distribution..................................................... 77
Legal Matters.............................................................. 78
Financial Information...................................................... 78
Rating..................................................................... 78
Index of Defined Terms..................................................... 80
S-2
Summary
This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. Please read this entire
prospectus supplement and the accompanying prospectus carefully for additional
information about the Class A Certificates.
Home Equity Loan Asset-Backed Certificates, Series 2000-2
Last Scheduled
Initial Class Distribution
Class Certificate Rate Principal Balance Date
----- ---------------- ----------------- --------------
Class A-1 Variable $315,000,000 8/25/31
Class A-2 Variable $200,000,000 8/25/31
Class X-1 Variable 0 N/A
Class X-2 Variable 0 N/A
Class R N/A 0 N/A
-----------
The rate on the Class A-1 Certificates will be the lesser of (a) one-month
LIBOR plus 0.27% (or 0.54% on or after the call option date) and (b) 13.0% per
annum.
The rate on the Class A-2 Certificates will be one-month LIBOR plus 0.27%
(or 0.54% on or after the call option date). If this rate exceeds the weighted
average net interest rate for loan group 2 on any distribution date, you will
receive interest at the weighted average net interest rate for loan group 2.
On future distribution dates, you will be entitled to receive interest accrued
at the certificate rate in excess of the net interest rate for loan group 2.
These amounts will not be insured under the certificate insurance policy.
The initial class principal balance is subject to a variance of 5%. The
actual last distribution date for each Class A Certificate may be
significantly earlier than its last scheduled distribution date.
The Class X-1, Class X-2 and Class R Certificates are not offered pursuant
to this prospectus supplement.
The Seller and Master Servicer
. The Provident Bank.
. The Provident Bank maintains its principal office at One East Fourth Street,
Cincinnati, Ohio. Its telephone number is (513) 579-2000.
. The master servicer will receive a monthly fee from the interest payments on
the mortgage loans equal to 0.50% per annum on the principal balance of each
mortgage loan.
We refer you to "The Provident Bank" in this prospectus supplement for
additional information.
The Trust
. Provident Bank Home Equity Loan Trust 2000-2
Trustee
. Norwest Bank Minnesota, National Association.
Certificate Insurer
. MBIA Insurance Corporation, a New York stock insurance company.
We refer you to "The Certificate Insurer" in this prospectus supplement for
additional information.
Cut-Off Date
. For any initial mortgage loan, the cut-off date is June 1, 2000. For any
subsequent mortgage loan, the cut-off date is the date of origination or
purchase of that mortgage loan, unless a subsequent mortgage loan was
originated prior to June 1, 2000, then June 29, 2000.
Closing Date
. June 30, 2000.
S-3
Distribution Date
. The 25th day of each month, or if that day is not a business day, the next
business day. The first distribution date is July 25, 2000.
Due Period
. The calendar month immediately preceding a determination date or a
distribution date, as applicable.
Designations
. Offered Certificates--The Class A Certificates.
. Non-Offered Certificates--The Class R Certificates and the Class X
Certificates.
. Regular Certificates--All classes of certificates other than the Class R
Certificates.
. Class X Certificates--The Class X-1 and Class X-2 Certificates.
. Residual Certificates--The Class R Certificates.
. Class A Certificates--The Class A-1 and Class A-2 Certificates.
. Group 1 Certificates--The Class A-1 Certificates. These certificates will
receive their payments from loan group 1.
. Group 2 Certificates--The Class A-2 Certificates. These certificates will
receive their payments from loan group 2.
Registration of Class A Certificates
We will issue the Class A Certificates in book-entry form. You will hold your
interests either through a depository in the United States or through one of
two depositories in Europe. While the certificates are book-entry, they will be
registered in the name of the applicable depository, or in the name of the
depository's nominee.
Transfers within any depository system will be made in accordance with the
usual rules and operating procedures of that system. Cross-market transfers
between two different depository systems may be made through a third-party bank
and/or the related depositories. The limited circumstances under which
definitive certificates will replace the book-entry certificates are described
in this prospectus supplement.
We refer you to "Risk Factors--Consequences on Liquidity and Payment Delay
Because of Owning Book-Entry Certificates", "Description Of The Certificates--
Book-Entry Certificates" and "Annex I" in this prospectus supplement for
additional information.
Trust Property
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
. a pool of closed-end fixed and adjustable rate mortgage loans, secured by
first and second deeds of trust or mortgages on primarily one- to four-
family residential properties;
. payments on the mortgage loans received on or after the cut-off date;
. property that secured a mortgage loan which has been acquired by foreclosure
or deed in lieu of foreclosure and the net proceeds from the sale of a
foreclosed property;
. rights under any hazard insurance policies covering the mortgaged properties;
. amounts on deposit in the accounts described in this prospectus supplement;
and
. a certificate guaranty insurance policy for the benefit of the holders of the
Class A Certificates.
The Mortgage Loans
On the closing date, the trust will acquire an initial pool of closed-end,
fixed and adjustable rate home equity loans, or initial mortgage loans.
The initial mortgage loans will have the following characteristics as of the
cut-off date:
. number of mortgage loans: 4,474
. aggregate principal balance: $338,339,067.51
. mortgaged property location: 45 states and the District of Columbia
. loan rates range: 7.50% to 18.00% per annum
. weighted average interest rate: 11.44% per annum (approximate)
S-4
. weighted average remaining term to stated maturity: 292 months (approximate)
. term to stated maturity range: 58 months to 360 months
. last maturity date: July 1, 2030
. combined loan-to-value ratio range: 16.00% to 100.00% (approximate)
. weighted average combined loan-to-value ratio: 76.99%
. balloon loans--loans with amortization schedules that don't fully amortize by
their maturity date: 23.23% (approximate)
The initial mortgage loans in loan group 1 are all fixed rate mortgage loans
and will have the following characteristics as of the cut-off date:
. number of mortgage loans: 3,085
. aggregate principal balance: $207,913,326.27
. mortgaged property location: 45 states and the District of Columbia
. average principal balance: $67,394.92
. maximum principal balance: $564,773.04
. interest rates range: 7.50% to 18.00% per annum
. weighted average interest rate: 11.54% per annum (approximate)
. weighted average remaining term to stated maturity: 250 months (approximate)
. remaining term to stated maturity range: 58 months to 360 months
. combined loan-to-value ratio range: 16.00% to 98.40% (approximate)
. weighted average combined loan-to-value ratio: 76.30%
. balloon loans--loans with amortization schedules that don't fully amortize by
their maturity date: 37.80% (approximate)
The initial mortgage loans in loan group 2 are all adjustable rate mortgage
loans and will have the following characteristics as of the cut-off date:
. number of mortgage loans: 1,389
. aggregate principal balance: $130,425,741.24
. mortgaged property location: 43 states
. average principal balance: $93,899.02
. maximum principal balance: $643,000.00
. interest rates range: 7.85% to 16.85% per annum
. weighted average interest rate: 11.29% per annum (approximate)
. weighted average remaining term to stated maturity: 359 months (approximate)
. remaining term to stated maturity range: 240 months to 360 months
. combined loan-to-value ratio range: 16.23% to 100.00% (approximate)
. weighted average combined loan-to-value ratio: 78.11% (approximate)
. weighted average initial periodic cap (first interest rate adjustment): 1.60%
. weighted average periodic cap (subsequent interest rate adjustments): 1.33%
. range of periodic caps for loans (subsequent interest rate adjustments):
0.50% to 6.00%.
We refer you to "Description Of The Mortgage Loans" in this prospectus
supplement for additional information.
Monthly Advances
During any due period, the master servicer may receive less than the monthly
payment amount due on each mortgage loan.
If the master servicer reasonably believes that cash advances can be recovered
from future monthly payments or collections on the mortgage loans, the master
servicer will make cash advances to the trust to cover delinquent mortgage loan
payments. The master servicer will make advances only to maintain a regular
flow of scheduled interest payments on the certificates, not to guarantee or
insure against losses.
We refer you to "Description Of The Certificates--Monthly Advances" in this
prospectus supplement for additional information.
The Certificates
1. General
. Each month the trustee will calculate the amount you are owed.
. If you hold a certificate on the business day immediately preceding a
distribution date, you will be entitled to receive payments on that
distribution date.
S-5
We refer you to "Description Of The Certificates" in this prospectus supplement
for additional information.
2. Interest Distributions
. Interest accrues on the offered certificates from the distribution date in
the month prior to that distribution date (or in the case of the first
distribution date, from the closing date) through the day before that
distribution date.
On each distribution date, you will be entitled to the following:
. interest at the related certificate rate that accrued during the related
interest period; and
. any interest that was due on a prior distribution date and not paid. In
addition, interest will have accrued on the amount of interest which was
previously due and not paid.
We refer you to "Description Of The Certificates--Interest" in this prospectus
supplement for additional information.
3. Principal Distributions
. Principal distributions are payable on each distribution date.
. Principal payments on the group 1 mortgage loans will be distributed to the
Class A-1 Certificates.
. Principal payments on the group 2 mortgage loans will be distributed to the
Class A-2 Certificates.
. Shortfalls in available funds and failure of the certificate insurer to
perform its obligations under the policy will result in a class receiving
less than what is due.
We refer you to "Description Of The Certificates--Principal" in this prospectus
supplement for additional information.
Credit Enhancements
1. The Certificate Insurance Policy: The certificate insurance policy
guarantees the payment of:
. accrued and unpaid interest on the Class A Certificates;
. principal losses on the mortgage loans; and
. any principal amounts owed to the certificateholders on the distribution date
in August 2031.
We refer you to "The Certificate Insurer" in this prospectus supplement for
additional information.
2. The Spread Accounts
Amounts on deposit in the spread accounts will be available to the trustee to
pay some shortfalls in interest due on the Class A Certificates and to cover
principal losses on the mortgage loans prior to a draw on the certificate
insurance policy.
We refer you to "Description of the Certificates--the Spread Accounts" in this
prospectus supplement for additional information.
Pre-Funding Account
On the closing date, the trustee shall deposit up to a maximum of
$107,086,673.73 in the group 1 pre-funding account and up to a maximum of
$69,574,258.76 in the group 2 pre-funding account. It is expected that the
seller will have originated or acquired subsequent mortgage loans from June 1,
2000 to the closing date. Such loans will be transferred to the trust on the
closing date. The maximum amount to be deposited into the pre-funding accounts
on the closing date will be reduced by the principal balance of the subsequent
mortgage loans transferred to each loan group on the closing date. The trust
will use the amounts on deposit in the pre-funding accounts to acquire
subsequent mortgage loans for the related loan group from the seller. The
trustee may only acquire such subsequent mortgage loans until July 21, 2000.
If any amounts are left in the pre-funding accounts on July 21, 2000, holders
of the Class A-1 certificates will receive amounts left in the group 1 pre-
funding account and holders of the Class A-2 certificates will receive amounts
left in the group 2 pre-funding account on the July 2000 distribution date as
payment of principal.
We refer you to "RISK FACTORS--Risk of Prepayment Due to Subsequent Mortgage
Loans" and "DESCRIPTION OF THE CERTIFICATES--Pre-Funding Account" in this
prospectus supplement for additional information.
S-6
Capitalized Interest Account
On the closing date, if required by the pooling and servicing agreement, the
seller shall deposit with the trustee an amount available to cover interest
shortfalls on the Class A Certificates expected to occur as a result of the
trust's purchase of the subsequent mortgage loans.
Any amounts left in the capitalized interest account after the distribution
date in August 2000 will be paid to the seller.
We refer you to "Description of the Certificates--Capitalized Interest Account"
in the prospectus supplement for additional information.
Optional Termination
If the total pool principal balance declines below 10% of the aggregate
principal balance of the mortgage loans as of the applicable cut-off date, then
the seller may purchase all of the mortgage loans and the related properties in
the trust. If the seller purchases all of the mortgage loans, you will receive
a final distribution and the trust will be terminated.
We refer you to "Description Of The Certificates--Termination; Purchase of the
Mortgage Loans" in this prospectus supplement for additional information.
Federal Tax Considerations
For Federal income tax purposes:
. An election will be made to treat the trust (exclusive of the pre-funding
accounts, the capitalized interest accounts, the distribution account, a
spread account and the net funds cap carryover reserve account) as a "real
estate mortgage investment conduit" (a "REMIC").
. The Class A (excluding any rights of the classes to receive interest in
excess of the weighted average interest rate on the related mortgage loans)
and Class X Certificates will be "regular interests" in the REMIC and will be
treated as debt instruments of the trust.
. The Class R Certificates will represent the "residual interest" in the REMIC.
We refer you to "Federal Income Tax Considerations" in this prospectus
supplement and in the prospectus for additional information.
ERISA Considerations
The fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Internal Revenue Code can limit
investments by pension, employee benefit and other plans subject to those laws.
For example, the acquisition of some certificates by some plans may be
considered a prohibited transaction under ERISA and Section 4975 of the Code.
Exemptions from the prohibited transaction rules could be applicable to the
acquisition of the Class A Certificates, although pension, employee benefit and
other plans subject to these rules will not be permitted to purchase the Class
A Certificates until after July 21, 2000, unless the amount deposited in each
pre-funding account on the closing date is 25% or less of the aggregate initial
certificate principal balance of the Class A Certificates of the related
certificate group. If you are a fiduciary of a pension or other employee
benefit plan which is subject to ERISA, you should consult with your counsel
regarding the applicability of the provisions of ERISA and the tax code before
purchasing a Class A Certificate.
We refer you to "ERISA Considerations" in this prospectus supplement and the
prospectus for additional information.
Legal Investment Considerations
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage related
securities" to include only first mortgages, and not second mortgages. Because
the mortgage loans owned by the trust include second mortgage loans and because
not all of the mortgage loans were originated by entities that satisfy the
requirements of the act, the certificates will not be "mortgage related
securities" under that definition. Some institutions may be limited in their
legal investment authority to only first mortgages or "mortgage related
securities" and will be unable to invest in the Class A Certificates.
We refer you to "Legal Investment Considerations" in this prospectus supplement
and "Legal Investment" in the prospectus for additional information.
S-7
Certificate Rating
The trust will not issue the Class A Certificates unless they receive the
following ratings:
"AAA" by Standard & Poors Ratings Services, a division of The McGraw-Hill
Companies, Inc.
"Aaa" by Moody's Investors Service, Inc.
The ratings assigned to the Class A-2 Certificates do not address the
likelihood of the payment of any net funds cap carryover amount.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal by either rating agency.
We refer you to "Ratings" and "Risk Factors--Rating of the Securities" in the
prospectus for additional information.
S-8
Risk Factors
You should carefully consider the following risk factors prior to any
purchase of certificates. You should also carefully consider the information
set forth under "Risk Factors" in the prospectus.
Consequences on Liquidity and Payment Delay Because of Owning Book-Entry
Certificates
. Limit on Liquidity of Certificates. Issuance of offered certificates in
book-entry form may reduce the liquidity of the offered certificates in the
secondary trading market since investors may be unwilling to purchase
certificates for which they cannot obtain physical certificates.
. Limit on Ability to Transfer or Pledge. Since transactions in the book-
entry certificates can be effected only through DTC, participating
organizations, indirect participants and some banks, your ability to transfer
or pledge a book-entry certificate to persons or entities that do not
participate in the DTC system or otherwise to take actions in respect of the
certificates, may be limited due to lack of a physical certificate
representing the book-entry certificates.
. Delays in Distributions. You may experience some delay in the receipt of
distributions on the book-entry certificates since the distributions will be
forwarded by the trustee to DTC for DTC to credit the accounts of its
participants which will thereafter credit them to your account either directly
or indirectly through indirect participants, as applicable.
We refer you to "Description of the Certificates--Book-Entry Certificates"
in this prospectus supplement.
Balloon Loan Risk
Balloon loans pose a risk because a borrower must pay a large lump sum
payment of principal at the end of the loan term. If the borrower is unable to
pay the lump sum or refinance that amount, you will suffer a loss if the
collateral for the loan is insufficient, the other forms of credit enhancement
are insufficient to cover the loss and the certificate insurer fails to
perform its obligations under the certificate insurance policy. Approximately
23.23% of the initial mortgage loans, by initial pool balance as of the cut-
off date, are balloon loans. The balloon loans are in loan group 1.
Early Default Risk
All of the initial mortgage loans in the pool were originated within 23
months prior to the cut-off date. As of the cut-off date, the weighted average
remaining term to stated maturity for the initial mortgage loans was 250
months and 359 months for loan group 1 and loan group 2, respectively.
Generally, borrowers default on mortgage loans with greater frequency in the
early years of the term of the mortgage loan.
Delay in Receipt of Liquidation Proceeds; Liquidation Proceeds May Be Less
than Mortgage Loan Balance
Substantial delays could be encountered in connection with the liquidation
of delinquent mortgage loans. Further, liquidation expenses such as legal
fees, real estate taxes and maintenance and preservation expenses will reduce
the portion of liquidation proceeds payable to you. If a mortgaged property
fails to provide adequate security for the mortgage loan, you will incur a
loss on your investment if the other credit enhancements are not sufficient to
cover the loss and the certificate insurer fails to perform its obligations
under the certificate insurance policy.
We refer you to "Legal Aspects of the Loans--Foreclosure" in the
prospectus.
S-9
Prepayments Affect Timing and Rate of Return on Your Investment
The yield to maturity on your certificates will be directly related to the
rate of principal payments on the mortgage loans in the related loan group.
Please consider the following:
. Mortgagors may fully or partially prepay their mortgage loan at any time.
However, some mortgage loans require that the mortgagor pay a fee with any
prepayment. This may result in the rate of prepayments being slower than
otherwise would be the case. Approximately 70.86% of the initial mortgage
loans, by initial pool balance as of the cut-off date, have prepayment fees.
. All the mortgage loans contain due-on-sale provisions. Due-on-sale
provisions require the mortgagor to fully pay the mortgage loan when the
mortgaged property is sold. Generally, the master servicer will enforce the
due-on-sale provision unless prohibited by applicable law.
. The rate of principal payments on pools of mortgage loans is influenced by
a variety of factors, including general economic conditions, interest rates,
the availability of alternative financing and homeowner mobility.
. We cannot predict the rate at which borrowers will repay their mortgage
loans, nor are we aware of any publicly available studies or statistics on the
rate of prepayment of mortgage loans similar to the mortgage loans in the pool.
We refer you to "Prepayment and Yield Considerations" in this prospectus
supplement.
Certificate Rating Based Primarily on Financial Strength of the Certificate
Insurer
The ratings on the offered certificates depend primarily on the financial
strength of the certificate insurer. Therefore, a reduction of the rating
assigned to the financial strength of the certificate insurer may have a
corresponding reduction on the ratings assigned to the offered certificates. A
reduction in the rating assigned to the Class A Certificates would reduce the
market value of these certificates and may affect your ability to sell them. In
general, the rating on your certificate addresses credit risk and does not
address the likelihood of prepayments.
We refer you to "Ratings" in this prospectus supplement.
Lien Priority Could Result in Payment Delay and Loss
Approximately 9.33% and 1.12% of the initial mortgage loans in loan group 1
and loan group 2, respectively, by initial loan group balances, are secured by
mortgages which are junior in priority. If a mortgage loan secured by a second
mortgage succeeds to a first lien position after the cut-off date due to the
payoff of a prior first lien, the master servicer may consent under some
circumstances to a new first priority lien, which has the effect of making the
first mortgage a junior mortgage. Mortgage loans that are secured by junior
mortgages will receive proceeds from a sale of the related mortgaged property
only after any senior mortgage loans and prior statutory liens have been paid.
If the remaining proceeds are insufficient to satisfy the mortgage loan in the
trust, the other credit enhancements are insufficient to cover the loss and the
certificate insurer fails to perform its obligations under the certificate
insurance policy, then:
. there will be a delay in distributions to you while a deficiency
judgment against the borrower is sought; and
. you may incur a loss if a deficiency judgment cannot be obtained or, if
obtained, cannot be collected in full.
Distributions and Rights of Investors Adversely Affected by Insolvency of
Seller
The sale of the mortgage loans from the seller to the trust will be treated
by the seller and the trust as a sale of the mortgage loans. If the seller were
to become insolvent, a receiver or conservator for, or a creditor of,
S-10
the seller, may argue that the transaction between the seller and the trust is
a pledge of mortgage loans as security for a borrowing rather than a sale. This
attempt, even if unsuccessful, could result in delays in distributions to you.
In the event of the seller's insolvency, there is a possibility that the
FDIC could be appointed as a receiver or conservator of the seller and prevent
the trustee from taking any action with respect to the trust. The FDIC may
enforce the seller's contracts and may have the power to cause the seller to
continue to perform the master servicer's duties. This would prevent the
appointment of a successor servicer.
The seller will deliver the mortgage notes to the trustee on the closing
date or the date of transfer for any subsequent mortgage loan, and the
assignments of each mortgage will be delivered within 90 days of the closing
date or date of transfer, as applicable, in recordable form. However, all other
documentation relating to each mortgage loan will be held by the seller in its
capacity as document custodian and no assignment of any mortgage is required to
be recorded in the name of the trustee, unless the seller's long-term debt
rating is reduced below "Baa2" by Moody's or "BBB" by S&P or upon the
occurrence of other events. Within 30 days of this occurrence, the seller is
required to deliver the remaining mortgage documents to the trustee and to
either record the assignments, at its own expense, or deliver a legal opinion
to the effect that recordation of the assignments is not necessary in order to
perfect the interest of the trust in the mortgages. Prior to delivery and
recording, the interest of the trustee in the mortgages, the mortgage notes and
any proceeds from the mortgage loans may be subject to the claims of creditors
or to sale to a third party, as well as to a receiver or conservator appointed
in the event of the insolvency of the seller.
In some states in which the mortgaged properties are located, failure to
record the assignments of the related mortgages to the trustee will have the
result of making the sale of the mortgage loans potentially ineffective
against:
. any creditor of the seller who may have been fraudulently or
inadvertently induced to rely on the mortgage loans as assets of the
seller, or
. any purchaser of a mortgage loan who had no notice of the prior
conveyance to the trust if that purchaser perfects his interest in the
mortgage loan by taking possession of the related documents or other
evidence of indebtedness.
In these events, the trust would be an unsecured creditor of the seller.
Interest Payments on the Mortgage Loans May Be Reduced
. Prepayments of Principal May Reduce Interest Payments. If a mortgagor
prepays a mortgage loan, the mortgagor is charged interest only up to the date
of the prepayment, instead of a full month. The master servicer is obligated to
reduce its master servicing fee in the month of a prepayment so that one full
month's interest is paid with the prepayment in full. If the master servicing
fee is insufficient to pay the interest shortfalls attributed to prepayments, a
shortfall in interest due on the certificates may result. The certificate
insurer is required to cover this shortfall. If the other credit enhancements
are insufficient to cover it and the certificate insurer fails to perform its
obligations under the certificate insurance policy, you may incur a loss.
. Certain Interest Shortfalls Are Not Covered by the Master Servicer or the
Certificate Insurance Policy. The Soldiers' and Sailors' Civil Relief Act of
1940 permits some modifications to the payment terms for mortgage loans,
including a reduction in the amount of interest paid by the borrower under some
circumstances. Neither the master servicer nor the certificate insurer will pay
for any interest shortfalls created by the Soldiers' and Sailors' Civil Relief
Act of 1940.
Risk Associated with the Seller's Underwriting Standards
The seller's underwriting standards are less stringent than those of Fannie
Mae or Freddie Mac. Therefore, the mortgage loans may experience higher rates
of delinquencies, defaults and foreclosures than those underwritten according
to more traditional standards.
S-11
Risk of Losses as a Result of Geographic Concentration
The mortgaged properties relating to the mortgage loans are located in 45
states and the District of Columbia. However, 7.96%, 7.80%, 5.92%, 5.75% and
5.60% of the initial mortgage loans, by initial pool balance as of the cut-off
date, are secured by mortgaged properties located in Illinois, Ohio, Florida,
Michigan and South Carolina, respectively. If these states experience in the
future weaker economic conditions or greater rates of decline in real estate
values than the United States generally, then the mortgage loans may experience
higher rates of delinquencies and foreclosures than would otherwise be the
case.
Risk of Prepayment Due to Subsequent Mortgage Loans
The trust will buy the subsequent mortgage loans from the seller until July
21, 2000. During this time the seller will sell mortgage loans to the trust if
it has mortgage loans to sell. The ability of the seller to originate and
acquire additional mortgage loans is affected by a variety of factors,
including interest rates, unemployment levels, the rate of inflation and
consumer perception of economic conditions generally. If the full amount
deposited in the pre-funding accounts for the purpose of purchasing the
subsequent mortgage loans cannot be used for that purpose prior to July 21,
2000 any remaining amounts will be paid on the offered certificates as a
prepayment of principal on the July 2000 distribution date.
In addition, the subsequent mortgage loans will have different
characteristics than those described in this prospectus supplement. However,
the seller will not select any subsequent mortgage loans to adversely affect
the interests of the certificateholders or the certificate insurer.
We refer you to "Description of the Mortgage Loans--Conveyance of Subsequent
Mortgage Loans" and "Prepayment and Yield Considerations--Mandatory Prepayment"
in this prospectus supplement for more detail.
Yield on Group 2 Loans May Negatively Impact Yield on Group 2 Certificates
The group 2 certificates accrue interest at certificate rates based on one-
month LIBOR plus a specified margin, but are subject to a cap. The cap on
interest paid on the group 2 certificates is based on the weighted average of
the interest rates on the mortgage loans in loan group 2, net of certain trust
expenses. Substantially all of the mortgage loans in loan group 2 have interest
rates that are based on six-month LIBOR plus a specified margin. Substantially
all of the loan group 2 mortgage loans have periodic and maximum limitations on
adjustments to the mortgage interest rate. Furthermore, all of the mortgage
loans in loan group 2 are subject to an initial fixed period during which the
interest rates do not change. The initial fixed periods range from 6 months to
3 years from the date of origination. As a result, the group 2 certificates may
accrue less interest than they would accrue if their rates were based solely on
one-month LIBOR plus the specified margin.
A variety of factors could limit the certificate rates on the group 2
certificates. Some of these factors are described below:
. The certificate rate on the group 2 certificates adjusts monthly while the
loan rates on the loan group 2 mortgage loans adjust less frequently.
Consequently, the cap on the group 2 certificates may limit increases in the
certificate rate for extended periods in a rising interest rate environment.
. The loan rate on the group 2 mortgage loans may respond to different
economic and market factors than one-month LIBOR. It is possible that interest
rates on some of the loan group 2 mortgage loans may decline while one-month
LIBOR is stable or rising. It is also possible that interest rates on the loan
group 2 mortgage loans and one-month LIBOR may decline or increase during the
same period, but that the one-month LIBOR may decline more slowly or increase
more rapidly.
These factors may adversely affect the yields to maturity on the group 2
certificates.
We refer you to "Description of the Certificates--Net Funds Cap Carryover
Account" and "--The Certificate Rate" in this prospectus supplement.
S-12
The Certificate Insurer
The information set forth in this section and in the financial statements of
MBIA Insurance Corporation (the "Certificate Insurer") incorporated by
reference herein as described below have been provided by the Certificate
Insurer. No representation is made by the underwriters, the seller, the
trustee, the master servicer or any of their affiliates as to the accuracy or
completeness of any such information.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this prospectus supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the certificate insurance policy (the "Certificate
Insurance Policy") and the Certificate Insurer set forth under the headings
"The Certificate Insurer" and "Description of the Certificates--The Certificate
Insurance Policy" herein. Additionally, the Certificate Insurer makes no
representation regarding the Class A Certificates or the advisability of
investing in the Class A Certificates.
The Certificate Insurer
The Certificate Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company. MBIA Inc. is not obligated to pay the
debts of or claims against the Certificate Insurer. The Certificate Insurer is
domiciled in the State of New York and licensed to do business in and is
subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Certificate Insurer, changes in
control and transactions among affiliates. Additionally, the Certificate
Insurer is required to maintain contingency reserves on its liabilities in
specified amounts and for specified periods of time.
Certificate Insurer Financial Information
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1999 and
December 31, 1998 and for each of the three years in the period ended December
31, 1999, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 1999 and the consolidated financial statements of the Certificate
Insurer and its subsidiaries as of March 31, 2000 and for the three month
periods ended March 31, 2000 and March 31, 1999 included in the Quarterly
Report on Form 10-Q of MBIA Inc. for the period ended March 31, 2000 are hereby
incorporated by reference into this prospectus supplement and shall be deemed
to be a part hereof. Any statement contained in a document incorporated by
reference herein shall be modified or superseded for purposes of this
prospectus supplement to the extent that a statement contained herein or in any
other subsequently filed document which also is incorporated by reference
herein modifies or supersedes that statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus supplement.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the
date of this prospectus supplement and prior to the termination of the offering
of the Class A Certificates shall be deemed to be incorporated by reference
into this prospectus supplement and to be a part hereof from the respective
dates of filing those documents.
S-13
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities and generally accepted
accounting principles:
Statutory Accounting Practices
--------------------------------
December 31, 1999 March 31, 2000
----------------- --------------
(Audited) (Unaudited)
(In millions)
Admitted Assets............................. $7,045 $7,188
Liabilities................................. 4,632 4,770
Capital and Surplus......................... 2,413 2,418
Generally Accepted Accounting
Principles
--------------------------------
December 31, 1999 March 31, 2000
----------------- --------------
(Audited) (Unaudited)
(In millions)
Assets...................................... $7,446 $7,675
Liabilities................................. 3,218 3,315
Shareholder's Equity........................ 4,228 4,360
Where You Can Obtain Additional Information About the Certificate Insurer
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1999 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
Financial Strength Ratings of the Certificate Insurer
Moody's Investors Service, Inc. rates the financial strength of the
Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. rates the financial strength of the Certificate Insurer "AAA."
Fitch rates the financial strength of the Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect each respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on
its policies of insurance. Any further explanation as to the significance of
the above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class A
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Class A
Certificates. The Certificate Insurer does not guaranty the market price of the
Class A Certificates nor does it guaranty that the ratings on the Class A
Certificates will not be revised or withdrawn.
S-14
The Provident Bank
The Provident Bank will be responsible for servicing the mortgage loans for
the trust in accordance with the terms of the pooling and servicing agreement.
See "--Servicing and Collection Procedures."
Provident is the principal banking subsidiary of Provident Financial Group,
Inc., a Cincinnati based commercial banking and financial services holding
company registered under the Bank Holding Company Act. Provident Financial
Group, Inc. operates throughout Ohio, Northern Kentucky, Southeastern Indiana
and Florida. As of March 31, 2000, Provident Financial Group, Inc. had total
assets of $11.7 billion, net loans and leases of $6.7 billion, deposits of $7.6
billion and total shareholders' equity of $928 million. Provident Financial
Group, Inc.'s tier 1 and total risk-based capital ratios were 9.29% and 10.83%,
respectively. For the year ended December 31, 1999, Provident Financial Group,
Inc. had net earnings of $146 million. For the three months ended March 31,
2000, Provident Financial Group, Inc. had net earnings of $44 million prior to
a deduction of $27 million for merger and restructuring charges. Provident
represents approximately 95% of Provident Financial Group, Inc.'s assets.
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines customarily
employed by Provident for mortgage loans which it purchases or originates. Each
mortgage loan was underwritten according to these guidelines. Provident
believes its guidelines are consistent with those utilized by home equity
lenders generally. The underwriting process is intended to assess both the
prospective borrower's ability to repay and the adequacy of the real property
security as collateral for the loan granted. In limited cases, loans may be
made outside of these guidelines with the prior approval of an underwriting
manager of Provident.
Provident generally originates or purchases loans which either fully
amortize over a period not to exceed 360 months or provide for amortization
over a 360 month schedule with a "balloon" payment required at the maturity
date, which generally will not be less than 15 years after origination. The
loan amounts generally range from a minimum of $5,000 to a maximum of $750,000
unless a higher amount is specifically approved by authorized officers of
Provident. Provident primarily originates or purchases non-purchase money first
or second mortgage loans although Provident also originates purchase money
first mortgage loans.
The homes used for collateral to secure the loans may be either primary
residential, which includes second and vacation homes, or investor owned one-
to four-family homes, condominiums, townhouses or manufactured housing.
Generally, each home must have a minimum appraised value as described below.
Mobile housing or agricultural land are not accepted as collateral. In some
cases, the loan may be secured by the owner-occupied residence plus additional
collateral.
Each property proposed as security for a loan must be appraised within six
months prior to the date of the loan. The combined loan-to-value ratio of the
first and second mortgages generally may not exceed 90%. If a prior mortgage
exists, Provident first reviews the first mortgage history. If it contains
open-end, advance or negative amortization provisions, the maximum potential
first mortgage balance is used in calculating the combined loan-to-value ratio
which determines the maximum loan amount.
For Provident's full documentation process, each mortgage applicant must
provide, and Provident must verify, personal financial information. The
applicant's total monthly obligations, which include principal and interest on
each mortgage, tax assessments, other loans, charge accounts and all other
scheduled indebtedness, generally cannot exceed 60% of the applicant's gross
monthly income. Applicants who are salaried employees must provide current
employment information in addition to two recent years of employment history.
Verifications are based on written confirmation from employers or a combination
of the two most recent pay stubs, the two most recent years' W-2 tax forms and
telephone confirmation from the employer. Self-employed applicants must be
self-employed in the same field of work for a minimum of two years and must
provide signed copies of complete federal income tax returns, including
schedules, filed for the most recent two years.
S-15
For Provident's stated-income program, proof of one year history of
employment plus proof of current self-employed status is required. The
applicant's debt-to-income ratio is calculated based on income as certified by
the borrower on the application and must be reasonable. For Provident's non-
income verifier program, the loan is underwritten based upon the applicant's
credit report and the appraised value of the mortgaged property. The maximum
combined loan-to-value ratio may not exceed 85% for the stated-income and the
non-income verifier program.
For potential borrowers with excellent credit histories, less stringent
underwriting criteria may apply for first mortgage loans. Subject to the
satisfaction of certain conditions, a limited number of loans are approved
based upon a review of the borrower's mortgage loan payment history only rather
than a review of the borrower's complete credit report.
Generally, a credit report by an independent credit reporting agency is
required reflecting the applicant's complete credit history. Credit reports
usually reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies, divorce actions and similar adverse
credit events that can be discovered by a search of public records. If a credit
report is obtained more than 60 days prior to the loan closing, Provident will
determine whether the reported information has changed. Written verification is
obtained of any first mortgage balance if not reported by the credit bureau.
Provident assigns credit grades to applicants after it has completed its
review of their applications and related income, payment and credit histories.
Credit grades so assigned are used by Provident to determine the loan terms,
for example, loan amount, interest rate and maturity date, it offers. The
credit grading system used by Provident is proprietary and was developed for
the purpose of grading the creditworthiness of its loan applicants. Applicants
determined to be the most creditworthy under Provident's credit grading system
are assigned a credit grade of "A;" those determined to be the least
creditworthy are assigned a credit grade of "C." Provident's credit grading
system includes intermediate gradations between "A" and "C." Loans to
applicants graded less than "C" may be approved by Provident's mortgage loan
underwriters subject to the conditions set forth in Provident's underwriting
guidelines. Provident periodically evaluates the extent to which its credit
grading system has been accurate in predicting the creditworthiness of its
borrowers based upon the actual performance of its mortgage loans and servicing
portfolios, and revises the system from time to time as it deems appropriate
based upon its periodic evaluations. A borrower may not be assigned a credit
grade if the loan was originated pursuant to underwriting criteria less
stringent than Provident's standard underwriting criteria.
Generally, an applicant should have an acceptable credit history in relation
to the amount of equity available in the mortgaged property, the strength of
the applicant's employment history and the level of the applicant's income to
debt obligations. The rescission period, which is generally a period of three
days, must have expired prior to funding a loan. The rescission period may not
be waived by the applicant except as permitted by law. Either an ALTA title
insurance policy or an attorney's opinion of title is required for all loans.
Certain of the mortgage loans may feature scheduled rate reductions for
borrowers who make their payments on time under Provident's "Twelve On Time"
program. Under this program, after twelve consecutive on-time payments, the
borrower's loan rate is reduced by 0.25%. An on-time payment is defined as one
made before a late charge is imposed. If the borrower makes another consecutive
twelve payments on-time, the loan rate is reduced by an additional 0.50%.
Finally, if the customer makes a third consecutive twelve payments on-time, the
loan rate will be reduced by another 1.00% for an available cumulative loan
rate reduction of 1.75%. Notwithstanding the qualifications described above,
borrowers may still qualify for the loan rate reductions so long as they make
no more than one late payment in any twelve month period. If a payment is
received late, the twelve month qualification clock resets. If a borrower is
late more than once during any twelve month period, that borrower will be
permanently disqualified from the loan rate reduction program. However, any
loan rate reductions already earned will be maintained for the life of the
loan.
S-16
Applicants are required to obtain property insurance in an amount sufficient
to cover the new loan and any prior mortgage. If the sum of any outstanding
first mortgage and the home equity loan exceeds replacement value, insurance
equal to replacement value may be accepted. Provident requires that its name
and address are properly added to the "Mortgage Clause" of the insurance
policy. If Provident's name is added to a "Loss Payee Clause" and the policy
does not provide for prior written notice to Provident of policy changes or
cancellation, an endorsement adding that provision is required.
Provident's credit underwriting guidelines require that any major deferred
maintenance on any property must be cured from the proceeds of the loan.
Servicing and Collection Procedures
The following is a description of the servicing policies and procedures
customarily and currently employed by Provident for the portion of its mortgage
loan portfolio which it services. Provident intends to service the mortgage
loans in accordance with these policies and procedures and in accordance with
the pooling and servicing agreement. Provident revises its servicing policies
and procedures from time to time, based upon its business judgment, in
connection with changes in economic and market conditions, the mortgage loan
portfolio and applicable laws and regulations. Provident advises new borrowers
of its policies and procedures and of appropriate phone numbers and addresses
for Provident's servicing personnel through an introductory courtesy call.
Servicing of Provident's mortgage loan portfolio is conducted through its
principal office in Cincinnati, Ohio. Centralized controls and standards have
been established by Provident for the servicing and collection of mortgage
loans in its portfolio. Servicing includes, but is not limited to, post-closing
loan processing, payment processing, customer service, collections and
liquidations.
Borrowers are billed monthly in advance of the date on which mortgage
payments are due. Provident's collection policy emphasizes working with
borrowers in default in an effort to bring payments current and to avoid
foreclosures. If timely payment is not received, collection procedures are
generally initiated within 5 days after the due date. Initial collection
procedures involve attempting to contact the borrower on a two-day call
schedule by telephone to make payment arrangements. Telephone contacts continue
on that schedule until the mortgage loan is brought current, other payment
arrangements are made or Provident determines to take other action. A standard
form letter from Provident's in-house legal counsel is utilized when a mortgage
loan becomes 30 days delinquent. This letter sets forth Provident's collection
options as well as the borrower's options for curing the delinquency.
Regulations and practices regarding the liquidation of mortgaged
properties--e.g. foreclosure--and the rights of the borrower in default vary
greatly from state to state. Provident will decide that liquidation is the
appropriate course of action only if a delinquency cannot otherwise be cured.
Generally, Provident commences foreclosure proceedings when a loan becomes 60
days delinquent. If Provident determines that purchasing a property securing a
mortgage loan will minimize the loss associated with it, Provident may bid at
the foreclosure sale for the property or accept a deed in lieu of foreclosure.
Any realization from the sale of foreclosed property is taken as a recovery.
After Provident acquires title to a mortgaged property by foreclosure or deed
in lieu of foreclosure, an approved realtor is selected to list and advertise
the property for sale.
Provident's foreclosure on property securing a junior mortgage loan will be
subject to any senior mortgages. If any senior mortgage loan is in default
after Provident has initiated its foreclosure action, Provident may advance
funds to keep the senior mortgage loan current until the time that Provident
satisfies the senior mortgage loan. These amounts are added to the balance of
the mortgage loan. In the event that foreclosure proceedings have been
instituted on any senior mortgage prior to the initiation of Provident's
foreclosure action, Provident will either satisfy the senior mortgage loan at
the time of the foreclosure sale or take other action to protect its interest
in the property.
S-17
Delinquency Experience
The following table sets forth Provident's delinquency experience on its
servicing portfolio of home equity loans similar to the mortgage loans to be
included in the trust for the periods indicated. There can be no assurance that
the delinquency experience on the mortgage loans will be consistent with the
historical information provided below. Accordingly, this information should not
be considered to reflect the credit quality of the mortgage loans included in
the trust, or a basis of assessing the likelihood, amount or severity of losses
on the mortgage loans. The statistical data in the table is based on all of the
closed-end fixed and adjustable rate home equity loans in Provident's servicing
portfolio, which are similar to the mortgage loans to be included in the trust.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of Provident's mortgage loan
portfolio during the periods shown. Accordingly, delinquency as a percentage of
aggregate principal balance of mortgage loans serviced for each period may be
higher than those shown if a group of mortgage loans were artificially isolated
at a point in time and the information showed the activity only in that
isolated group. However, since most of the mortgage loans in Provident's
mortgage loan portfolio are not fully seasoned, the delinquency information for
an isolated group would also be distorted to some degree. Through March 31,
2000, Provident's mortgage loan servicing portfolio had experienced cumulative
losses on liquidations of approximately $32,665,852 since home equity loans
similar to the mortgage loans were first originated by Provident in September
1995.
The following table sets forth information relating to the delinquency
experience of mortgage loans similar to and including the mortgage loans for
the quarters ended March 31, 2000, December 31, 1999, September 30, 1999 and
June 30, 1999. As of March 31, 2000, there were 474 real estate owned
properties in Provident's mortgage loan servicing portfolio, and mortgage loans
representing $78,542,223.80 of Provident's mortgage loan servicing portfolio
were in bankruptcy, $50,524,208.71 of which were delinquent.
Quarter Ended
-----------------------------------------------------------------------------------------------
March 31, 2000 December 31, 1999 September 30, 1999 June 30, 1999
----------------------- ----------------------- ----------------------- -----------------------
Number Dollar Number Dollar Number Dollar Number Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
-------- ------ -------- ------ -------- ------ -------- ------
Portfolio............... 49,418 $3,763,828,061 44,644 $3,402,635,488 38,004 $2,912,312,730 32,196 $2,464,264,515
Delinquency percentage
30-59 days.............. 1.15% 1.11% 1.30% 1.30% 1.95% 1.88% 1.56% 1.57%
60-89 days.............. 0.74% 0.75% 0.85% 0.82% 0.87% 0.90% 0.69% 0.66%
90 days or more......... 5.41% 5.72% 4.96% 5.18% 4.60% 4.76% 4.44% 4.86%
------ -------------- ------ -------------- ------ -------------- ------ --------------
Total................... 7.30% 7.58% 7.11% 7.30% 7.42% 7.54% 6.69% 7.09%
====== ============== ====== ============== ====== ============== ====== ==============
The delinquency percentage represents the number or principal balance of
mortgage loans with payments contractually past due for at least 30 days. The
delinquency percentage for 90 days or more also includes properties in
foreclosure, delinquent bankruptcies and real estate owned.
Description of the Mortgage Loans
General
The statistical information presented in this prospectus supplement only
covers the initial mortgage loans that will be included in the trust. All
information--including weighted averages, percentages and mortgage loan data--
in this section is as of the cut-off date and is computed based upon the cut-
off date pool principal balance, unless otherwise specified, and pertains only
to the initial mortgage loans.
The mortgage loans are divided into two loan groups. As of the cut-off date,
loan group 1 consisted of 3,085 mortgage loans with fixed interest rates and
loan group 2 consisted of 1,389 mortgage loans with adjustable interest rates.
Interest will be calculated on the mortgage loans on the basis of a 360-day
year and
S-18
twelve 30-day months. The loan group 1 principal balance on any date and the
loan group 2 principal balance on any date will be equal to the aggregate of
the principal balances of all mortgage loans in loan group 1 and loan group 2,
respectively, on that date.
All of the mortgage loans are evidenced by promissory or mortgage notes
secured by deeds of trust or mortgages on the related mortgaged property. The
mortgaged properties securing the mortgage loans consist primarily of one- to
four-family residential properties. The mortgaged properties may be owner
occupied, which includes second and vacation homes, or non-owner occupied.
As of the cut-off date, the mortgage pool consisted of 4,474 initial
mortgage loans with an aggregate principal balance of $338,339,067.51. The
principal balance of a mortgage loan that is not a liquidated mortgage loan on
any day is equal to its cut-off date principal balance minus all collections
applied in reduction of the cut-off date principal balance of the mortgage
loan. The pool principal balance on any day is the aggregate of the principal
balances of all the mortgage loans on that day. The mortgage pool consists of
closed-end, fixed and adjustable rate mortgage loans with remaining terms to
stated maturity of not more than 360 months, including both fully amortizing
and balloon loans. Approximately 93.84% of the mortgage loans are secured by
first lien mortgages on the mortgaged properties and 6.16% are secured by
second liens on the mortgaged properties. Approximately 1.34% of the initial
mortgage loans were 30 to 59 days delinquent. No mortgage loan was more than 59
days delinquent, assuming for purposes of this calculation, that all months
have 30 days. The average principal balance of the initial mortgage loans was
$75,623.39, the minimum principal balance was $6,575.00, and the maximum
principal balance was $643,000.00. Interest on each initial mortgage loan is
payable monthly on its outstanding principal balance at the rate per annum
specified in the related mortgage note. The minimum interest rate on the
initial mortgage loans and the maximum interest rate on the initial mortgage
loans were 7.50% and 18.00% per annum, respectively, and the weighted average
interest rate on the initial mortgage loans was 11.44% per annum. The combined-
loan-to-value ratio of each initial mortgage loan, computed on the date that
the loan was originated, did not exceed 100%. The weighted average original
combined loan-to-value ratio of the initial mortgage loans was 76.99%.
Approximately 23.23% of the initial mortgage loans are balloon loans. Each
initial mortgage loan made its first monthly payment during or after July 1,
1998. The remaining terms to stated maturity of the initial mortgage loans
range from 58 months to 360 months and the weighted average remaining term to
stated maturity of the initial mortgage loans is 292 months.
The mortgage loans provide that interest is charged to the borrowers, and
payments are due from the borrowers, on a scheduled day of each month that is
fixed at the time of origination. Scheduled monthly payments made by the
borrowers on the mortgage loans either earlier or later than their scheduled
due dates will not affect the amortization schedule or the relative application
of the payments to principal and interest. Approximately 0.33% of the aggregate
principal balance of the mortgage loans as of the cut-off date feature
scheduled rate reductions for borrowers who make their payments on time under
Provident's "Twelve On Time" program.
Set forth below is information as of the cut-off date regarding the loan
group 1 initial mortgage loans and the loan group 2 initial mortgage loans.
Prior to the closing date, some of the initial mortgage loans for which
information is presented herein may be removed from either loan group and other
mortgage loans with similar characteristics may be substituted. The seller
believes that the information set forth herein with respect to the initial
mortgage loans as presently constituted is representative of the initial
mortgage loans as they will be constituted at the closing date, although
certain characteristics of such mortgage loans may vary but any such variance
will not be material.
S-19
Loan Group 1 Statistics
The sum of the columns below may not equal the total indicated due to
rounding. All information--including weighted averages, percentages and
mortgage loan data--in this section is as of the cut-off date and is computed
based upon the cut-off date loan group principal balance, unless otherwise
specified and pertains only to the loan group 1 initial mortgage loans.
As of the cut-off date, the initial mortgage loans in loan group 1 consisted
of 3,085 loans, and the related mortgaged properties were located in 45 states
and the District of Columbia. The loan group 1 initial mortgage loans had an
aggregate principal balance of $207,913,326.27, the maximum principal balance
of any of the loan group 1 initial mortgage loans was $564,773.04, the minimum
principal balance was $6,575.00 and the principal balance of these initial
mortgage loans averaged $67,394.92. The interest rates on the loan group 1
initial mortgage loans ranged from 7.50% per annum to 18.00% per annum, and the
weighted average interest rate was 11.54% per annum. The original term to
stated maturity for each loan group 1 initial mortgage loan ranged from 60
months to 360 months, the weighted average original term to stated maturity was
251 months, the remaining term to stated maturity ranged from 58 months to 360
months, the weighted average remaining term to stated maturity was 250 months
and the combined loan-to-value-ratio ranged from 16.00% to 98.40% with a
weighted average combined loan-to-value-ratio of 76.30%, in each case computed
on the date the loan was originated. Each initial mortgage loan in loan group 1
made its first monthly payment during or after April 9, 1999. Approximately
90.67% and 9.33% of the initial mortgage loans in loan group 1 were secured by
first and second liens, respectively on the related property. Approximately
62.20% of the initial mortgage loans in loan group 1 require monthly payments
that will fully amortize the mortgage loans by their respective maturity dates,
and 37.80% of the initial mortgage loans in loan group 1 are balloon loans. The
remaining terms to stated maturity of the balloon loans ranged from 167 months
to 357 months and the weighted average remaining term to maturity of the
balloon loans was 179 months.
Principal Balances
Loan Group 1
Initial Mortgage Loans
Number of Cut-off Date % of
Loan Group 1 Loan Group 1 Cut-off Date
Initial Initial Loan Group 1
Range of Cut-Off Date Mortgage Principal Initial
Principal Balances ($) Loans Balance Principal Balance
- ----------------------- ------------ --------------- -----------------
0.01 - 50,000.00....... 1,354 $ 46,699,125.72 22.46%
50,000.01 - 100,000.00........ 1,266 87,775,526.06 42.22
100,000.01 - 150,000.00........ 294 35,027,074.85 16.85
150,000.01 - 200,000.00........ 87 14,989,620.87 7.21
200,000.01 - 250,000.00........ 44 9,812,166.83 4.72
250,000.01 - 300,000.00........ 17 4,663,482.46 2.24
300,000.01 - 350,000.00........ 10 3,239,455.08 1.56
350,000.01 - 400,000.00........ 4 1,497,390.28 0.72
400,000.01 - 450,000.00........ 6 2,562,926.54 1.23
500,000.01 - 550,000.00........ 2 1,081,784.54 0.52
550,000.01 - 600,000.00........ 1 564,773.04 0.27
----- --------------- ------
Total......................... 3,085 $207,913,326.27 100.00%
===== =============== ======
S-20
Geographic Distribution By State
Loan Group 1
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 1 Loan Group 1 Date Loan
Initial Initial Group 1 Initial
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
Alabama...................... 221 $ 11,830,077.47 5.69%
Arizona...................... 16 986,671.12 0.47
Arkansas..................... 37 1,701,952.90 0.82
California................... 67 7,108,459.07 3.42
Colorado..................... 26 2,185,021.24 1.05
Connecticut.................. 28 2,157,106.32 1.04
Delaware..................... 20 1,583,299.19 0.76
District of Columbia......... 8 808,911.00 0.39
Florida...................... 181 11,130,351.39 5.35
Georgia...................... 131 10,472,777.09 5.04
Idaho........................ 4 305,250.65 0.15
Illinois..................... 190 13,891,953.29 6.68
Indiana...................... 163 8,607,958.42 4.14
Iowa......................... 14 806,364.17 0.39
Kansas....................... 15 1,254,128.13 0.60
Kentucky..................... 32 1,745,248.40 0.84
Louisiana.................... 175 8,586,145.13 4.13
Maine........................ 1 35,000.00 0.02
Maryland..................... 65 5,379,146.25 2.59
Massachusetts................ 39 2,955,764.85 1.42
Michigan..................... 152 10,505,179.93 5.05
Minnesota.................... 11 700,448.80 0.34
Mississippi.................. 83 4,181,506.98 2.01
Missouri..................... 62 3,547,993.99 1.71
Montana...................... 4 135,449.42 0.07
Nebraska..................... 14 845,228.92 0.41
Nevada....................... 3 146,437.52 0.07
New Hampshire................ 7 420,538.39 0.20
New Jersey................... 100 10,834,668.60 5.21
New Mexico................... 6 491,716.48 0.24
New York..................... 102 8,921,051.06 4.29
North Carolina............... 143 10,645,039.88 5.12
Ohio......................... 225 14,264,472.92 6.86
Oklahoma..................... 28 1,812,568.99 0.87
Oregon....................... 7 487,517.21 0.23
Pennsylvania................. 114 7,481,067.94 3.60
Rhode Island................. 3 165,930.30 0.08
South Carolina............... 192 12,134,271.40 5.84
Tennessee.................... 112 8,167,439.02 3.93
Texas........................ 110 7,399,420.77 3.56
Utah......................... 4 302,470.62 0.15
Virginia..................... 44 2,807,835.56 1.35
Washington................... 15 1,435,927.07 0.69
West Virginia................ 80 4,437,012.02 2.13
Wisconsin.................... 30 1,974,579.30 0.95
Wyoming...................... 1 135,967.10 0.07
----- --------------- ------
Total........................ 3,085 $207,913,326.27 100.00%
===== =============== ======
- ------------
The geographic distribution by state is determined by property address in the
related mortgage.
S-21
Combined Loan-To-Value Ratios
Loan Group 1
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 1 Loan Group 1 Date Loan
Combined Loan-to- Initial Initial Group 1 Initial
Value Ratio (%) Mortgage Loans Principal Balance Principal Balance
- ----------------- -------------- ----------------- -----------------
10.01 - 20.00.............. 14 $ 418,327.61 0.20%
20.01 - 30.00.............. 29 1,165,405.09 0.56
30.01 - 40.00.............. 49 1,941,900.59 0.93
40.01 - 50.00.............. 100 4,910,238.23 2.36
50.01 - 60.00.............. 126 6,453,977.93 3.10
60.01 - 70.00.............. 473 28,064,832.78 13.50
70.01 - 80.00.............. 1,489 104,715,767.21 50.37
80.01 - 90.00.............. 797 59,599,561.61 28.67
90.01 - 100.00............. 8 643,315.22 0.31
----- --------------- ------
Total.................... 3,085 $207,913,326.27 100.00%
===== =============== ======
- ------------
With respect to each initial mortgage loan, the combined loan-to-value ratios
shown above are equal to:
(1) the sum of (a) the original principal balance of the initial mortgage loan
at the date of origination plus (b) the remaining balance of any senior
lien(s) at the date of origination of the initial mortgage loan, divided
by
(2) the lesser of (a) the value of the related mortgaged property, based upon
the appraisal made at the time of origination of the initial mortgage loan
or (b) the purchase price of the mortgaged property if the proceeds of the
initial mortgage loan are used to purchase the mortgaged property.
Lien Position
Loan Group 1
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 1 Loan Group 1 Date Loan
Initial Initial Group 1 Initial
Lien Position Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
1............................ 2,642 $188,519,435.61 90.67%
2............................ 443 19,393,890.66 9.33
----- --------------- ------
Total...................... 3,085 $207,913,326.27 100.00%
===== =============== ======
S-22
Second Mortgage Ratios
Loan Group 1
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 1 Loan Group 1 Date Loan
Initial Initial Group 1 Initial
Second Mortgage Ratio (%) Mortgage Loans Principal Balance Principal Balance
- ------------------------- -------------- ----------------- -----------------
0.01 - 10.00.................. 2 $ 39,879.12 0.21%
10.01 - 20.00................. 78 2,503,916.00 12.91
20.01 - 30.00................. 187 7,787,678.26 40.16
30.01 - 40.00................. 88 4,010,491.02 20.68
40.01 - 50.00................. 52 2,771,494.35 14.29
50.01 - 60.00................. 17 894,339.35 4.61
60.01 - 70.00................. 12 978,784.13 5.05
70.01 - 80.00................. 5 230,738.13 1.19
80.01 - 90.00................. 2 176,570.30 0.91
--- -------------- ------
Total....................... 443 $19,393,890.66 100.00%
=== ============== ======
- ------------
The second mortgage ratios apply only to initial mortgage loans in loan group 1
in a second lien position. With respect to each initial mortgage loan in a
second lien position, the second mortgage ratios shown above are equal to the
original principal balance of the initial mortgage loan at the date of
origination, divided by the sum of (a) the original principal balance of the
initial mortgage loan at the date of origination and (b) the remaining balance
of the senior lien at the date of origination of the initial mortgage loan.
Interest Rates
Loan Group 1
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 1 Loan Group 1 Date Loan
Initial Initial Group 1 Initial
Interest Rates (%) Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
7.001 - 7.500................ 1 $ 134,400.18 0.06%
7.501 - 8.000................ 2 223,772.92 0.11
8.001 - 8.500................ 13 1,065,850.74 0.51
8.501 - 9.000................ 34 2,928,852.11 1.41
9.001 - 9.500................ 85 6,403,074.00 3.08
9.501 - 10.000............... 193 15,068,964.43 7.25
10.001 - 10.500.............. 228 19,243,506.65 9.26
10.501 - 11.000.............. 420 31,424,077.91 15.11
11.001 - 11.500.............. 391 28.053,658.71 13.49
11.501 - 12.000.............. 518 33,493,481.46 16.11
12.001 - 12.500.............. 423 26,456,559.78 12.72
12.501 - 13.000.............. 400 23,884,342.59 11.49
13.001 - 13.500.............. 195 10,386.054.19 5.00
13.501 - 14.000.............. 109 5,357,369.85 2.58
14.001 - 14.500.............. 47 2,265,438.97 1.09
14.501 - 15.000.............. 18 1,150,922.00 0.55
15.001 - 15.500.............. 2 92,456.41 0.04
15.501 - 16.000.............. 1 52,000.00 0.03
16.001 - 16.500.............. 1 19,993.37 0.01
17.501 - 18.000.............. 4 208,550.00 0.10
----- --------------- ------
Total...................... 3,085 $207,913,326.27 100.00%
===== =============== ======
S-23
Remaining Months to Stated Maturity
Loan Group 1
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 1 Loan Group 1 Date Loan
Remaining Term to Initial Initial Group 1 Initial
Stated Maturity (months) Mortgage Loans Principal Balance Principal Balance
- ------------------------ -------------- ----------------- -----------------
1 - 60.................... 7 $ 171,788.94 0.08%
61 - 90.................... 2 68,000.00 0.03
91 - 120.................... 100 3,613.975.69 1.74
121 - 150.................... 1 47,840.48 0.02
151 - 180.................... 1,673 108,134,876.39 52.01
211 - 240.................... 322 18,520,575.06 8.91
271 - 300.................... 13 710,771.10 0.34
331 - 360.................... 967 76,645,498.61 36.86
----- --------------- ------
Total...................... 3,085 $207,913,326.27 100.00%
===== =============== ======
Months Since Origination
Loan Group 1
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 1 Loan Group 1 Date Loan
Initial Initial Group 1 Initial
Months Since Origination Mortgage Loans Principal Balance Principal Balance
- ------------------------ -------------- ----------------- -----------------
0 - 11....................... 3,082 $207,650,783.10 99.87%
12 - 23...................... 3 262,543.17 0.13
----- --------------- ------
Total...................... 3,085 $207,913,326.27 100.00%
===== =============== ======
Property Type
Loan Group 1
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 1 Loan Group 1 Date Loan
Initial Initial Group 1 Initial
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
Single Family.............. 2,589 $173,752,639.08 83.57%
Two-to-Four Family......... 178 13,921,935.07 6.70
Manufactured Housing....... 185 10,680,538.57 5.14
Planned Unit Development
(PUD)..................... 57 4,833,708.99 2.32
Condominium................ 69 4,315,914.30 2.08
Row House.................. 7 408,590.26 0.20
----- --------------- ------
Total.................... 3,085 $207,913,326.27 100.00%
===== =============== ======
Occupancy Status
Loan Group 1
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 1 Loan Group 1 Date Loan
Initial Initial Group 1 Initial
Occupancy Status Mortgage Loans Principal Balance Principal Balance
- ---------------- -------------- ----------------- -----------------
Owner-Occupied............... 2,826 $193,942,743.77 93.28%
Non-Owner Occupied........... 259 13,970,582.50 6.72
----- --------------- ------
Total...................... 3,085 $207,913,326.27 100.00%
===== =============== ======
S-24
Loan Group 2 Statistics
The sum of the columns below may not equal the total indicated due to
rounding. All information--including weighted averages, percentages and
mortgage loan data--in this section is as of the cut-off date and is computed
based upon the cut-off date loan group principal balance, unless otherwise
specified and pertains only to the loan group 2 initial mortgage loans.
As of the cut-off date, the loan group 2 initial mortgage loans consisted of
1,389 adjustable rate mortgage loans, and the mortgaged properties were located
in 43 states. The loan group 2 initial mortgage loans had an aggregate
principal balance of $130,425,741.24, the maximum principal balance of any of
the loan group 2 initial mortgage loans was $643,000.00, the minimum principal
balance was $10,300.00 and the principal balance of these initial mortgage
loans averaged $93,899.02. The interest rates on the loan group 2 initial
mortgage loans ranged from 7.85% per annum to 16.85% per annum, and the
weighted average loan rate was 11.29% per annum. The original term to stated
maturity of each loan group 2 initial mortgage loan ranged from 240 to 360
months with a weighted average original term to stated maturity of 360 months,
the remaining term to stated maturity ranged from 240 months to 360 months, the
weighted average remaining term to stated maturity was 359 months and the
combined loan-to-value ratio ranged from 16.23% to 100.00% with a weighted
average combined loan-to-value ratio of approximately 78.11%, in each case
computed on the date the loan was originated. Approximately 98.88% and 1.12% of
the initial mortgage loans in loan group 2 are secured by first liens and
second liens, respectively, on the related property. Each loan group 2 initial
mortgage loan made its first monthly payment during or after July 1, 1998.
All of the loan group 2 initial mortgage loans have interest rates which
will adjust semi-annually after an initial period during which the interest
rate is fixed. The initial period is six months, twenty-four months or thirty-
six months and the interest rate changes on each change date to equal the sum
of:
(1) the Loan Index and
(2) the Gross Margin, subject to rounding and to the effects of the
periodic cap, the applicable lifetime cap and the applicable lifetime
floor.
"Loan Index" means the average of the interbank offered rate for six-month
U.S. dollar denominated deposits in the London market, as published in The Wall
Street Journal as of the first business day of the month immediately preceding
the month of the interest rate adjustment date. "Gross Margin" means, as to
each mortgage loan in loan group 2 the percentage set forth as the margin for
such mortgage loan on the mortgage loan schedule.
The periodic cap generally limits changes in the interest rates for each
initial mortgage loan on each change date to 1.00%, except (a) with respect to
the first change date for several mortgage loans, the periodic cap may be
higher and (b) 282 initial mortgage loans in loan group 2, representing 21.00%
of the cut-off date loan group 2 initial principal balance, have periodic caps
ranging from 1.25% to 6.00%. The lifetime cap is the maximum interest rate that
may be borne by a mortgage loan in loan group 2 over its life. The lifetime
floor is the minimum interest rate that may be borne by a mortgage loan in loan
group 2 over its life. The mortgage loans in loan group 2 do not negatively
amortize. On each change date for a mortgage loan in loan group 2, the monthly
payment will be adjusted to an amount which will pay interest at the adjusted
interest rate and fully amortize the then outstanding principal balance over
its remaining term.
The weighted average lifetime cap of the loan group 2 initial mortgage loans
was approximately 18.11% per annum, with a maximum lifetime cap of 23.85% per
annum and a minimum lifetime cap of 14.10% per annum; the weighted average
lifetime floor of the loan group 2 initial mortgage loans was approximately
8.97% per annum, with a maximum lifetime floor of 14.50% per annum and a
minimum lifetime floor of 4.50% per annum; and the loan group 2 initial
mortgage loans had a weighted average Gross Margin of approximately 5.98%. The
weighted average number of months to the next change date of the loan group 2
initial mortgage loans is approximately 35 months, with a maximum number of
months and a minimum number of months of 38 and 1, respectively.
S-25
Principal Balances
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Range of Loan Group 2 Loan Group 2 Date Loan
Cut-Off Date Initial Initial Group 2 Initial
Principal Balances ($) Mortgage Loans Principal Balance Principal Balance
- ---------------------- -------------- ----------------- -----------------
0.01 - 50,000.00.... 272 $ 10,311,370.26 7.91%
50,000.01 - 100,000.00... 692 49,830,187.62 38.21
100,000.01 - 150,000.00... 251 30,305,084.54 23.24
150,000.01 - 200,000.00... 99 17,094,258.67 13.11
200,000.01 - 250,000.00... 33 7,300,703.56 5.60
250,000.01 - 300,000.00... 10 2,801,304.67 2.15
300,000.01 - 350,000.00... 12 3,940,955.84 3.02
350,000.01 - 400,000.00... 8 3,026,862.97 2.32
400,000.01 - 450,000.00... 3 1,242,500.00 0.95
450,000.01 - 500,000.00... 5 2,342,263.11 1.80
500,000.01 - 550,000.00... 3 1,587,250.00 1.22
600,000.01 - 650,000.00... 1 643,000.00 0.49
----- --------------- ------
Total..................... 1,389 $130,425,741.24 100.00%
===== =============== ======
S-26
Geographic Distribution By State
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Initial Initial Group 2 Initial
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
Alabama...................... 37 $ 3,193,211.82 2.45%
Arizona...................... 8 833,098.76 0.64
Arkansas..................... 3 257,540.00 0.20
California................... 35 6,265,563.39 4.80
Colorado..................... 33 3,713,959.04 2.85
Connecticut.................. 18 1,812,460.74 1.39
Delaware..................... 4 342,010.00 0.26
Florida...................... 99 8,909,481.41 6.83
Georgia...................... 42 4,655,701.77 3.57
Idaho........................ 2 159,400.00 0.12
Illinois..................... 112 13,044,771.61 10.00
Indiana...................... 94 6,329,802.80 4.85
Iowa......................... 11 664,766.89 0.51
Kansas....................... 5 451,853.14 0.35
Kentucky..................... 34 3,284,399.00 2.52
Louisiana.................... 24 1,760,569.47 1.35
Maryland..................... 19 2,260,652.98 1.73
Massachusetts................ 8 1,413,008.59 1.08
Michigan..................... 113 8,957,192.21 6.87
Minnesota.................... 33 3,127,524.33 2.40
Mississippi.................. 6 507,897.95 0.39
Missouri..................... 77 6,071,126.48 4.65
Montana...................... 5 457,293.90 0.35
Nebraska..................... 20 1,464,533.09 1.12
Nevada....................... 2 227,500.00 0.17
New Jersey................... 10 1,996,121.80 1.53
New Mexico................... 3 541,850.00 0.42
New York..................... 23 3,357,682.52 2.57
North Carolina............... 51 4,502,436.43 3.45
Ohio......................... 158 12,133,655.94 9.30
Oklahoma..................... 11 809,735.32 0.62
Oregon....................... 4 428,649.17 0.33
Pennsylvania................. 33 3,791,099.70 2.91
Rhode Island................. 3 239,262.70 0.18
South Carolina............... 81 6,822,444.25 5.23
Tennessee.................... 42 3,531,120.41 2.71
Texas........................ 35 2,984,848.24 2.29
Utah......................... 7 743,359.71 0.57
Virginia..................... 20 1,967,408.31 1.51
Washington................... 25 2,957,739.21 2.27
West Virginia................ 15 1,363,606.99 1.05
Wisconsin.................... 23 2,059,441.40 1.58
Wyoming...................... 1 29,959.77 0.02
----- --------------- ------
Total...................... 1,389 $130,425,741.24 100.00%
===== =============== ======
- ------------
The geographic distribution by state is determined by property address in the
related mortgage.
S-27
Combined Loan-to-Value Ratios
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Combined Loan-to- Initial Initial Group 2 Initial
Value Ratio (%) Mortgage Loans Principal Balance Principal Balance
- ----------------- -------------- ----------------- -----------------
10.01 - 20.00.............. 1 $ 28,347.10 0.02%
20.01 - 30.00.............. 4 328,456.48 0.25
30.01 - 40.00.............. 7 410,845.75 0.32
40.01 - 50.00.............. 17 1,073,474.58 0.82
50.01 - 60.00.............. 35 2,660,364.54 2.04
60.01 - 70.00.............. 166 12,970,814.19 9.94
70.01 - 80.00.............. 752 70,391,524.99 53.97
80.01 - 90.00.............. 403 41,977,498.59 32.18
90.01 - 100.00............. 4 584,415.02 0.45
----- --------------- ------
Total.................... 1,389 $130,425,741.24 100.00%
===== =============== ======
- ------------
With respect to each initial mortgage loan, the combined loan-to-value ratios
shown above are equal to:
(1) the sum of (a) the original principal balance of the initial mortgage loan
at the date of origination plus (b) the remaining balance of any senior
lien(s) at the date of origination of the initial mortgage loan, divided
by
(2) the lesser of (a) the value of the related mortgaged property, based upon
the appraisal made at the time of origination of the initial mortgage loan
or (b) the purchase price of the mortgaged property if the proceeds of the
initial mortgage loan are used to purchase the mortgaged property.
Lien Position
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Initial Initial Group 2 Initial
Lien Position Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
1............................ 1,361 $128,961,430.70 98.88%
2............................ 28 1,464,310.54 1.12
----- --------------- ------
Total...................... 1,389 $130,425,741.24 100.00%
===== =============== ======
S-28
Second Mortgage Ratios
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Initial Initial Group 2 Initial
Second Mortgage Ratio (%) Mortgage Loans Principal Balance Principal Balance
- ------------------------- -------------- ----------------- -----------------
0.01 - 10.00................. 1 $ 14,400.00 0.98%
10.01 - 20.00................. 5 137,976.41 9.42
20.01 - 30.00................. 11 582,250.77 39.76
30.01 - 40.00................. 6 334,668.75 22.86
40.01 - 50.0.................. 2 88,200.00 6.02
50.01 - 60.00................. 3 306,814.61 20.95
--- ------------- ------
Total....................... 28 $1,464,310.54 100.00%
=== ============= ======
- ------------
The second mortgage ratios apply only to initial mortgage loans in loan group 2
in a second lien position. With respect to each initial mortgage loan in a
second lien position, the second mortgage ratios shown above are equal to the
original principal balance of the initial mortgage loan at the date of
origination, divided by the sum of (a) the original principal balance of the
initial mortgage loan at the date of origination and (b) the remaining balance
of the senior lien at the date of origination of the initial mortgage loan.
Interest Rates
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Initial Initial Group 2 Initial
Interest Rates (%) Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
7.501 - 8.000............... 1 $ 88,377.15 0.07%
8.001 - 8.500............... 1 110,553.89 0.08
8.501 - 9.000............... 9 944,259.58 0.72
9.001 - 9.500............... 33 3,629,373.07 2.78
9.501 - 10.000.............. 102 11,476,318.77 8.80
10.001 - 10.500.............. 121 11,760,452.36 9.02
10.501 - 11.000.............. 278 27,632,174.43 21.19
11.001 - 11.500.............. 262 24,946,088.49 19.13
11.501 - 12.000.............. 277 24,692,804.54 18.93
12.001 - 12.500.............. 147 12,767,907.77 9.79
12.501 - 13.000.............. 109 8,684,154.60 6.66
13.001 - 13.500.............. 27 2,411,009.23 1.85
13.501 - 14.000.............. 16 1,110,792.52 0.85
14.001 - 14.500.............. 4 128,987.13 0.10
14.501 - 15.000.............. 1 10,300.00 0.01
16.501 - 17.000.............. 1 32,187.71 0.02
----- --------------- ------
Total...................... 1,389 $130,425,741.24 100.00%
===== =============== ======
S-29
Months Since Origination
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Initial Initial Group 2 Initial
Months Since Origination Mortgage Loans Principal Balance Principal Balance
- ------------------------ -------------- ----------------- -----------------
0 - 11...................... 1,385 $130,190,528.52 99.82%
12 - 23...................... 4 235,212.72 0.18
----- --------------- ------
Total...................... 1,389 $130,425,741.24 100.00%
===== =============== ======
Property Type
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Initial Initial Group 2 Initial
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
Single-Family............... 1,115 $104,191,562.21 79.89%
Two-to-Four Family.......... 100 9,449,564.08 7.25
Planned Unit Development
(PUD)...................... 46 6,566,318.71 5.03
Manufactured Housing........ 73 5,152,744.49 3.95
Condominium................. 53 4,880,770.33 3.74
Row House................... 2 184,781.42 0.14
----- --------------- ------
Total..................... 1,389 $130,425,741.24 100.00%
===== =============== ======
Occupancy Status
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Initial Initial Group 2 Initial
Occupancy Status Mortgage Loans Principal Balance Principal Balance
- ---------------- -------------- ----------------- -----------------
Owner Occupied............... 1,257 $121,508,263.68 93.16%
Non-Owner Occupied........... 132 8,917,477.56 6.84
----- --------------- ------
Total...................... 1,389 $130,425,741.24 100.00%
===== =============== ======
S-30
Gross Margin
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Initial Initial Group 2 Initial
Margin (%) Mortgage Loans Principal Balance Principal Balance
- ---------- -------------- ----------------- -----------------
0.000 - 4.000................ 3 $ 411,701.94 0.32%
4.001 - 5.000................ 347 31,374,255.73 24.06
5.001 - 6.000................ 543 53,326,504.93 40.89
6.001 - 7.000................ 261 24,319,979.12 18.65
7.001 - 8.000................ 157 13,988,349.29 10.73
8.001 - 9.000................ 60 5,649,526.47 4.33
9.001 - 10.000............... 16 1,251,044.13 0.96
10.001 - 11.000.............. 2 104,379.63 0.08
----- --------------- ------
Total...................... 1,389 $130,425,741.24 100.00%
===== =============== ======
Initial Period
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Initial Initial Group 2 Initial
Initial Period (months) Mortgage Loans Principal Balance Principal Balance
- ----------------------- -------------- ----------------- -----------------
6........................... 4 $ 470,554.67 0.36%
24........................... 118 10,654,290.88 8.17
36........................... 1,267 119,300,895.69 91.47
----- --------------- ------
Total...................... 1,389 $130,425,741.24 100.00%
===== =============== ======
Periodic Cap For First Change Date
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Periodic Cap For First Initial Initial Group 2 Initial
Change Date (%) Mortgage Loans Principal Balance Principal Balance
- ---------------------- -------------- ----------------- -----------------
0.500...................... 1 $ 29,991.42 0.02%
1.000...................... 931 85,820,476.53 65.80
1.125...................... 1 95,725.19 0.07
1.250...................... 2 227,512.97 0.17
1.500...................... 36 4,183,894.89 3.21
2.000...................... 41 4,114,179.08 3.15
2.250...................... 1 106,844.42 0.08
3.000...................... 375 35,800,616.74 27.45
7.000...................... 1 46,500.00 0.04
----- --------------- ------
Total.................... 1,389 $130,425,741.24 100.00%
===== =============== ======
S-31
Periodic Cap Following First Change Date
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Periodic Cap Following Initial Initial Group 2 Initial
First Change Date (%) Mortgage Loans Principal Balance Principal Balance
- ---------------------- -------------- ----------------- -----------------
0.500...................... 1 $ 29,991.42 0.02%
1.000...................... 1,106 103,009,332.43 78.98
1.250...................... 2 227,512.97 0.17
1.500...................... 51 5,986,352.97 4.59
2.000...................... 27 2,042,637.31 1.57
2.250...................... 1 106,844.42 0.08
3.000...................... 200 18,997,075.92 14.57
6.000...................... 1 25,994.06 0.02
----- --------------- ------
Total.................... 1,389 $130,425,741.24 100.00%
===== =============== ======
Next Interest Rate Change Date
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Initial Initial Group 2 Initial
Next Change Date Mortgage Loans Principal Balance Principal Balance
- ---------------- -------------- ----------------- -----------------
June, 2000................... 1 $ 261,804.67 0.20%
November, 2000............... 1 68,000.00 0.05
December, 2000............... 2 140,750.00 0.11
June, 2001................... 1 127,666.17 0.10
September, 2001.............. 1 76,302.48 0.06
October, 2001................ 4 281,817.80 0.22
November, 2001............... 3 296,500.08 0.23
December, 2001............... 15 1,368,325.17 1.05
January, 2002................ 4 846,957.17 0.65
February, 2002............... 8 804,882.12 0.62
March, 2002.................. 25 1,883,603.34 1.44
April, 2002.................. 41 3,378,946.22 2.59
May, 2002.................... 19 1,772,503.05 1.36
June, 2002................... 2 83,316.43 0.06
October, 2002................ 1 69,437.99 0.05
November, 2002............... 2 438,695.27 0.34
December, 2002............... 3 414,271.54 0.32
January, 2003................ 12 1,317,328.78 1.01
February, 2003............... 22 1,770,812.13 1.36
March, 2003.................. 51 3,808,752.58 2.92
April, 2003.................. 289 27,030,198.65 20.72
May, 2003.................... 569 53,086,223.90 40.70
June, 2003................... 312 31,022,145.70 23.79
July, 2003................... 1 76,500.00 0.06
----- --------------- ------
Total...................... 1,389 $130,425,741.24 100.00%
===== =============== ======
S-32
Lifetime Cap
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Initial Initial Group 2 Initial
Lifetime Cap (%) Mortgage Loans Principal Balance Principal Balance
- ---------------- -------------- ----------------- -----------------
14.001 - 14.500.............. 1 $ 110,553.89 0.08%
14.501 - 15.000.............. 4 550,747.35 0.42
15.001 - 15.500.............. 5 915,534.56 0.70
15.501 - 16.000.............. 24 2,585,807.56 1.98
16.001 - 16.500.............. 49 4,592,365.96 3.52
16.501 - 17.000.............. 138 14,680,802.06 11.26
17.001 - 17.500.............. 142 13,837,660.32 10.61
17.501 - 18.000.............. 273 26,421,847.42 20.26
18.001 - 18.500.............. 243 22,982,351.08 17.62
18.501 - 19.000.............. 238 21,816,535.14 16.73
19.001 - 19.500.............. 125 10,751,061.91 8.24
19.501 - 20.000.............. 101 7,887,934.35 6.05
20.001 - 20.500.............. 25 2,115,272.28 1.62
20.501 - 21.000.............. 15 1,005,792.52 0.77
21.001 - 21.500.............. 4 128,987.13 0.10
21.501 - 22.000.............. 1 10,300.00 0.01
23.501 - 24.000.............. 1 32,187.71 0.02
----- --------------- ------
Total...................... 1,389 $130,425,741.24 100.00%
===== =============== ======
S-33
Lifetime Floor
Loan Group 2
Initial Mortgage Loans
Number of Cut-off Date % of Cut-off
Loan Group 2 Loan Group 2 Date Loan
Initial Initial Group 2 Initial
Lifetime Floor (%) Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
4.001 - 4.500................ 16 $ 1,615,794.76 1.24%
4.501 - 5.000................ 110 10,180,611.03 7.81
5.001 - 5.500................ 147 15,659,002.16 12.01
5.501 - 6.000................ 69 6,039,622.12 4.63
6.001 - 6.500................ 66 7,159,301.35 5.49
6.501 - 7.000................ 71 6,975,332.86 5.35
7.001 - 7.500................ 46 4,245,499.39 3.26
7.501 - 8.000................ 35 2,577,526.49 1.98
8.001 - 8.500................ 14 1,190,755.06 0.91
8.501 - 9.000................ 8 901,022.62 0.69
9.001 - 9.500................ 26 2,716,421.13 2.08
9.501 - 10.000............... 67 7,432,344.51 5.70
10.001 - 10.500.............. 85 8,907,731.47 6.83
10.501 - 11.000.............. 159 15,476,429.63 11.87
11.001 - 11.500.............. 158 13,961,866.46 10.70
11.501 - 12.000.............. 151 12,297,813.23 9.43
12.001 - 12.500.............. 75 6,093,000.05 4.67
12.501 - 13.000.............. 65 5,406,737.40 4.15
13.001 - 13.500.............. 14 1,276,048.74 0.98
13.501 - 14.000.............. 6 299,230.78 0.23
14.001 - 14.500.............. 1 13,650.00 0.01
----- --------------- ------
Total...................... 1,389 $130,425,741.24 100.00%
===== =============== ======
S-34
Conveyance of Subsequent Mortgage Loans
The pooling and servicing agreement permits the trust to acquire during the
funding period up to approximately $107,086,673.73 and $69,574,258.76 aggregate
principal balance of subsequent mortgage loans for loan group 1 and loan group
2, respectively. Accordingly, the statistical characteristics of the mortgage
loans in the trust will vary upon the acquisition of subsequent mortgage loans.
The obligation of the trust to purchase subsequent mortgage loans during the
funding period is subject to the following requirements, any of which
requirements may be waived or modified in any respect by the certificate
insurer:
(i) such subsequent mortgage loan may not be 30 or more days contractually
delinquent as of its cut-off date;
(ii) the remaining term to stated maturity of such subsequent mortgage loan
will not exceed 30 years for fully amortizing loans or 15 years for
"Balloon Loans";
(iii) such subsequent mortgage loan will not have a Loan Rate less than
7.50% per annum for loan group 1 and 7.50% per annum for loan group
2; and
(iv) such subsequent mortgage loan will be otherwise acceptable to the
Certificate Insurer.
Following the purchase of such subsequent mortgage loans by the trust for
loan group 1, the mortgage loans in loan group 1, including the subsequent
mortgage loans, will have the following characteristics:
. a weighted average loan rate of at least 11.50% per annum;
. a weighted average remaining term to stated maturity of less than 257
months;
. a weighted average CLTV of not more than 77.00%
. no more than 39.00% of the mortgage loans by aggregate cut-off date
principal balance for loan group 1 will be balloon loans;
. no more than 7.50% of the mortgage loans by aggregate cut-off date
principal balance for loan group 1 will be concentrated in one state;
. no more than 7.10% of the mortgage loans by aggregate cut-off date
principal balance for loan group 1 will relate to non-owner occupied
properties; and
. no more than 9.75% of the mortgage loans by aggregate cut-off date
principal balance for loan group 1 will be secured by mortgages in a
second lien position.
Following the purchase of such subsequent mortgage loans by the trust for
loan group 2, the mortgage loans in loan group 2, including such subsequent
mortgage loans, will have the following characteristics:
. a weighted average loan rate of at least 11.20% per annum;
. a weighted average remaining term to stated maturity of less than 360
months;
. a weighted average CLTV of not more than 79.00%
. no more than 10.50% of the mortgage loans by aggregate cut-off date
principal balance for loan group 2 will be concentrated in one state;
. no more than 7.50% of the mortgage loans by aggregate cut-off date
principal balance for loan group 2 will relate to non-owner occupied
properties; and
. no more than 2.00% of the mortgage loans by aggregate cut-off principal
balance for loan group 2 will be secured by mortgages in a second lien
position.
S-35
Prepayment and Yield Considerations
General
The rate of principal payments on the Class A Certificates, the aggregate
amount of distributions on the Class A Certificates and the yield to maturity
of the Class A Certificates will be related to the rate and timing of payments
of principal on the mortgage loans. The rate of principal payments on the
mortgage loans will in turn be affected by the amortization schedules of the
mortgage loans and by the rate of principal prepayments. For this purpose,
principal prepayments include prepayments from refinancings, liquidations of
mortgage loans due to defaults, occurrences of casualty events and condemnation
and repurchases by the seller. The mortgage loans may be prepaid by the
mortgagors at any time. However, approximately 70.86% of the initial mortgage
loans by initial pool principal balance as of the cut-off date are subject to
prepayment penalties that vary from jurisdiction to jurisdiction. These
prepayment fees may affect a mortgagor's decision to prepay a mortgage loan.
Prepayment Considerations
Prepayments, liquidations, and purchases of the mortgage loans in a loan
group--including any optional purchase by the seller of the remaining mortgage
loans in connection with the termination of the trust and any payment under the
certificate insurance policy of the Class A principal balance on the final
distribution date--will result in distributions on the related Class A
Certificates of principal amounts that would otherwise be distributed over
their remaining terms. Since the rate of payment of principal of the mortgage
loans will depend on future events and a variety of factors, we cannot assure
you about the rate of principal prepayments. The extent to which the yield to
maturity of a Class A Certificate may vary from the anticipated yield will
depend upon the degree to which a certificate is purchased at a discount or
premium, and the degree to which the timing of payments on it is sensitive to
prepayments, liquidations and purchases of the mortgage loans.
We cannot predict the rate of prepayment on the mortgage loans. We are not
aware of any publicly available studies or statistics on the rate of prepayment
on home equity loans. Generally, home equity loans are not viewed by borrowers
as permanent financing. Accordingly, the mortgage loans may experience a higher
rate of prepayment than purchase money first mortgage loans. The prepayment
experience of the trust may be affected by a wide variety of factors, including
economic conditions, prevailing interest rate levels, the availability of
alternative financing, homeowner mobility and changes affecting the
deductibility for Federal income tax purposes of interest payments on loans.
All of the mortgage loans contain due-on-sale provisions, and the master
servicer is required by the pooling and servicing agreement to enforce these
provisions unless enforcement is not permitted by applicable law. The
enforcement of a due-on-sale provision will have the same effect as a
prepayment of a mortgage loan. See "Legal Aspects of the Loans--Due-on-Sale
Clauses in Mortgage Loans" in the prospectus.
As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates, such as the mortgage loans in loan group 1,
is affected by prevailing market rates for mortgage loans of a comparable term
and risk level. When the market interest rate is below the interest rate on a
mortgage loan, mortgagors may have an increased incentive to refinance their
mortgage loans to realize the benefits of a lower market rate. Depending on
prevailing market rates, the future outlook for market rates, and economic
conditions generally, some mortgagors may sell or refinance mortgaged
properties to realize their equity in the mortgaged properties, to meet cash
flow needs or to make other investments.
All of the loan group 2 initial mortgage loans are adjustable rate mortgage
loans. As is the case with conventional fixed rate mortgage loans, adjustable-
rate mortgage loans may be subject to a greater rate of principal prepayments
in a declining interest rate environment. For example, if prevailing interest
rates fall significantly, adjustable-rate mortgage loans could be subject to
higher prepayment rates than if prevailing interest rates remain constant
because the availability of fixed-rate mortgage loans at competitive interest
rates may encourage mortgagors to refinance their adjustable-rate mortgage
loans to lock in a lower fixed interest rate.
S-36
The Class A-2 Certificates
The yield to investors on the Class A-2 Certificates will be sensitive to,
among other things, the level of one-month LIBOR. The certificate rate for the
Class A-2 Certificates may in no event exceed the weighted average loan rate
for loan group 2, which depends in large part on the interest rates in loan
group 2 in effect on the first day of the month preceding the month of a
distribution date. It is possible that an increased level of one-month LIBOR
could occur simultaneously with a lower level of prevailing interest rates,
which may result in faster prepayments of mortgage loans with relatively higher
interest rates resulting in a lower weighted average loan rate for loan group
2. Although substantially all of the mortgage loans in loan group 2 bear
interest at an adjustable rate based upon the Loan Index after an initial
period, this rate is subject to a periodic rate cap and a lifetime cap. If the
Loan Index changes substantially between change dates, the adjusted interest
rate on the related mortgage loan may not equal the Loan Index plus the related
Gross Margin due to the constraint of these caps. If this were to occur, the
interest rate would be less than would have been the case in the absence of
these caps. In addition, the interest rate applicable to any change date will
be based on the Loan Index most recently announced as of the first business day
of the month immediately preceding the month of the applicable change date.
Thus, if the value of the Loan Index rises, the lag in time before the
corresponding interest rate increases will, all other things being equal, slow
the upward adjustment of the weighted average loan rate for loan group 2.
Furthermore, mortgage loans that have not reached their first change date are
more likely to be subject to the periodic rate cap on their first change date.
See "Description of the Mortgage Loans" herein.
Although the interest rates on the mortgage loans in loan group 2 are
subject to adjustment after an initial period, the interest rates adjust less
frequently than the certificate rate for the Class A-2 Certificates.
Substantially all of the mortgage loans in loan group 2 adjust by reference to
the Loan Index. Changes in the level of one-month LIBOR may not correlate with
changes in the Loan Index and may not correlate with prevailing interest rates.
It is possible that an increased level of the one-month LIBOR could occur
simultaneously with a lower level of prevailing interest rates, which would be
expected to result in faster prepayments. This would have the effect of
reducing the weighted average life of the Class A-2 Certificates.
Mandatory Prepayment
During the funding period, it is expected that up to $107,086,673.73 and
$69,574,258.76 of subsequent mortgage loans will be transferred to the trust
for loan group 1 and loan group 2, respectively. If less than these amounts of
subsequent mortgage loans are transferred to the trust for a loan group, the
Class A Certificates relating to this loan group will receive an additional
distribution allocable to principal on the distribution date immediately
following the end of the funding period. This distribution of principal will
equal the excess of:
. $107,086,673.73 in the case of loan group 1, and $69,574,258.76 in
the case of loan group 2, over
. the aggregate cut-off date principal balances of the subsequent
mortgage loans for that loan group.
Although no assurances can be given, Provident intends that the principal
amount of mortgage loans in each loan group at the end of the funding period
will substantially equal the related Class A principal balance as of that date.
Accordingly, there should be no material principal prepayment to the
certificateholders due to a lack of subsequent mortgage loans.
Weighted Average Lives
Generally, greater than anticipated prepayments of principal will increase
the yield on the Class A Certificates purchased at a price less than par and
will decrease the yield on offered certificates purchased at a price greater
than par. The effect on an investor's yield due to principal prepayments on the
mortgage loans occurring at a rate that is faster or slower than the rate
anticipated by the investor in the period following the issuance of the
certificates will not be entirely offset by a subsequent like reduction or
increase in the rate of
S-37
principal payments. The weighted average life of the Class A Certificates will
also be affected by the amount and timing of delinquencies and defaults on the
mortgage loans and any recoveries on defaulted mortgage loans and foreclosed
properties.
The weighted average life of a certificate refers to the average amount of
time that will elapse from the date of issuance to the date each dollar of
principal of the certificate is repaid. The weighted average life of any class
of Class A Certificates will be influenced by, among other factors, the rate at
which principal payments are made on the mortgage loans, including final
payments made upon the maturity of balloon loans.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this prospectus supplement is the
prepayment assumption, which represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of the pool of
mortgage loans for the life of the mortgage loans. A 100% prepayment assumption
(the "Prepayment Assumption") assumes a conditional prepayment rate ("CPR") of
4% per annum of the outstanding principal balance of the mortgage loans in the
first month of the life of the mortgage loans and an additional 1.455%
(precisely 16/11 expressed as a percentage per annum) in each month thereafter
until the twelfth month. Beginning in the twelfth month and in each month
thereafter during the life of the mortgage loans, a conditional prepayment rate
of 20% per annum each month is assumed. As used in the table below, 0%
Prepayment Assumption assumes a conditional prepayment rate equal to 0% of the
Prepayment Assumption, i.e., no prepayments. Correspondingly, 115% Prepayment
Assumption assumes prepayment rates equal to 115% of the Prepayment Assumption,
and so forth. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the mortgage loans.
Provident believes that no existing statistics provide a reliable basis for
holders of Class A Certificates to predict the amount or the timing of receipt
of prepayments on the mortgage loans.
The tables were prepared on the basis of the assumptions in the following
paragraph; therefore, there are discrepancies between characteristics of the
actual mortgage loans and the characteristics of the mortgage loans assumed in
preparing the tables. These discrepancies may have an effect upon the
percentages of the principal balances outstanding and weighted average lives of
the Class A Certificates set forth in the tables. In addition, since the actual
mortgage loans in the trust have characteristics which differ from those
assumed in preparing the tables set forth below, the distributions of principal
on the Class A Certificates may be made earlier or later than as indicated in
the tables.
For the purpose of the tables below, it is assumed that:
. the mortgage loans consist of pools of loans with the level-pay and
balloon amortization characteristics set forth below.
. the amount of interest accrued on the mortgage loans is reduced by
amounts sufficient to pay servicing fees, trustee fees and
insurance premiums,
. the closing date for the Class A Certificates is June 30, 2000,
. distributions on the Class A Certificates are made on the 25th day
of each month regardless of the day on which the distribution date
actually occurs, commencing in July 2000 and are made in accordance
with the priorities described herein,
. the scheduled monthly payments of principal and interest on the
initial mortgage loans will be timely delivered on the last day of
each month with no defaults, commencing in June 2000,
. with respect to loan group 1 and loan group 2, the related mortgage
loans' prepayment rates are a multiple of the Prepayment
Assumption, as set forth in the "Prepayment Scenarios" table,
. all prepayments are prepayments in full received on the last day of
each month, commencing in June 2000 and include 30 days of
interest,
. no optional termination is exercised (unless otherwise indicated),
S-38
. each class of Class A Certificates has the respective certificate
rate and initial Class A principal balance as set forth herein,
. the Loan Index for each due period will be 6.96%,
. the LIBOR Index for each interest period will be 6.65%,
. the interest rate for the mortgage loans in loan group 2 is
adjusted on its next change date, and on subsequent change dates,
if necessary, to equal the sum of the assumed level of the Loan
Index and the respective Gross Margin, that sum being subject to
the applicable caps and floors, and
. the certificate insurance policy covers the remaining Class A
principal balance on the final distribution date.
Loan Group 1
Original Original Remaining
Term Amortization Term to
Loan to Maturity Term Maturity Amortization
Principal Balance($) Rate(%) (in months) (in months) (in months) Method
- -------------------- ------- ----------- ------------ ----------- ------------
119,072,931.34 11.635 180 360 179 Balloon
5,838,663.06 11.354 117 117 116 Level
44,903,590.86 11.400 180 180 179 Level
29,136,535.64 11.459 242 242 241 Level
116,048,279.10 11.532 360 360 359 Level
Loan Group 2
Original Remaining
Next Initial Term to Term to
Loan Change Gross Lifetime Lifetime Periodic Periodic Maturity Maturity
Principal Balance($) Rate(%) Date Margin(%) Cap(%) Floor(%) Cap(%) Cap(%) (in months) (in months)
- -------------------- ------- ------- --------- -------- -------- -------- -------- ----------- -----------
4,019,400.38 10.368 9/01/01 6.613 16.759 9.546 2.337 1.462 360 354
13,448,584.99 10.901 4/01/02 6.994 17.474 9.963 2.780 2.294 357 356
11,990,421.85 11.022 2/01/03 6.831 17.538 9.541 2.586 1.532 360 357
41,449,177.74 11.388 4/01/03 6.240 18.134 8.568 1.704 1.342 360 359
81,404,519.38 11.340 5/01/03 5.681 18.235 8.966 1.360 1.190 360 360
47,687,895.66 11.353 6/01/03 5.719 18.328 8.845 1.277 1.234 360 360
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average life of each class of Class A Certificates, and
set forth the percentages of the initial Class A principal balance of each
class of Class A Certificates that would be outstanding after each of the dates
shown at the various prepayment scenarios set forth below.
Prepayment Scenarios
Prepayment Scenario
---------------------------
Scenario I II III IV V VI VII
- -------- --- --- --- --- --- --- ---
Prepayments on Loan Group I Mortgage Loans......... 50 75 100 125 150 175 200
Prepayments on Loan Group II Mortgage Loans........ 50 75 100 125 150 175 200
- ------------
The prepayments on Loan Group I are expressed as a percentage of 115% of the
Prepayment Assumption and the prepayments on Loan Group II are expressed as a
percentage of 150% of the Prepayment Assumption.
S-39
Percent Of Initial Class A Principal Balance Outstanding
At The Following Prepayment Scenarios
Class A-1
-------------------------------------------------------
Distribution Date I II III IV V VI VII
- ----------------- ------- ------- ------- ------- ------- ------- -------
Initial
Percent........ 100 100 100 100 100 100 100
June 25, 2001... 91 88 84 80 76 72 68
June 25, 2002... 80 72 64 56 49 42 36
June 25, 2003... 70 59 49 40 32 25 19
June 25, 2004... 61 48 37 28 21 15 10
June 25, 2005... 53 39 28 20 13 9 5
June 25, 2006... 46 32 21 14 9 5 3
June 25, 2007... 40 26 16 10 5 3 2
June 25, 2008... 35 21 12 7 4 2 1
June 25, 2009... 30 17 9 5 2 1 0
June 25, 2010... 26 13 7 3 1 1 0
June 25, 2011... 22 11 5 2 1 0 0
June 25, 2012... 19 9 4 2 1 0 0
June 25, 2013... 16 7 3 1 0 0 0
June 25, 2014... 14 5 2 1 0 0 0
June 25, 2015... 6 2 1 0 0 0 0
June 25, 2016... 5 2 1 0 0 0 0
June 25, 2017... 4 1 0 0 0 0 0
June 25, 2018... 4 1 0 0 0 0 0
June 25, 2019... 3 1 0 0 0 0 0
June 25, 2020... 2 1 0 0 0 0 0
June 25, 2021... 2 0 0 0 0 0 0
June 25, 2022... 2 0 0 0 0 0 0
June 25, 2023... 1 0 0 0 0 0 0
June 25, 2024... 1 0 0 0 0 0 0
June 25, 2025... 1 0 0 0 0 0 0
June 25, 2026... 1 0 0 0 0 0 0
June 25, 2027... 0 0 0 0 0 0 0
June 25, 2028... 0 0 0 0 0 0 0
June 25, 2029... 0 0 0 0 0 0 0
June 25, 2030... 0 0 0 0 0 0 0
Weighted Average
Life to
Maturity
(years)*....... 6.90 5.08 3.95 3.19 2.66 2.27 1.98
Weighted Average
Life to
Optional
Termination
(years)*....... 6.61 4.66 3.56 2.86 2.38 2.04 1.77
- ------------
*The weighted average life of a certificate of any class is determined by:
. multiplying the amount of each distribution in reduction of the
related Class A principal balance by the number of years from
the date of issuance of the certificate to the related
distribution date,
. adding the results, and
. dividing the sum by the original principal balance of the
certificates.
S-40
Percent of Initial Class A Principal Balance Outstanding
at the following Prepayment Scenarios
Class A-2
-------------------------------------------------------
Distribution Date I II III IV V VI VII
- ----------------- ------- ------- ------- ------- ------- ------- -------
Initial Percent....... 100 100 100 100 100 100 100
June 25, 2001......... 90 85 80 75 70 65 60
June 25, 2002......... 76 66 56 47 38 31 24
June 25, 2003......... 64 51 39 29 21 15 9
June 25, 2004......... 54 39 27 18 12 7 4
June 25, 2005......... 46 30 19 11 6 3 2
June 25, 2006......... 39 23 13 7 3 2 1
June 25, 2007......... 33 18 9 4 2 1 0
June 25, 2008......... 28 14 6 3 1 0 0
June 25, 2009......... 23 11 4 2 1 0 0
June 25, 2010......... 20 8 3 1 0 0 0
June 25, 2011......... 17 6 2 1 0 0 0
June 25, 2012......... 14 5 1 0 0 0 0
June 25, 2013......... 12 4 1 0 0 0 0
June 25, 2014......... 10 3 1 0 0 0 0
June 25, 2015......... 8 2 0 0 0 0 0
June 25, 2016......... 7 2 0 0 0 0 0
June 25, 2017......... 6 1 0 0 0 0 0
June 25, 2018......... 5 1 0 0 0 0 0
June 25, 2019......... 4 1 0 0 0 0 0
June 25, 2020......... 3 0 0 0 0 0 0
June 25, 2021......... 2 0 0 0 0 0 0
June 25, 2022......... 2 0 0 0 0 0 0
June 25, 2023......... 2 0 0 0 0 0 0
June 25, 2024......... 1 0 0 0 0 0 0
June 25, 2025......... 1 0 0 0 0 0 0
June 25, 2026......... 1 0 0 0 0 0 0
June 25, 2027......... 0 0 0 0 0 0 0
June 25, 2028......... 0 0 0 0 0 0 0
June 25, 2029......... 0 0 0 0 0 0 0
June 25, 2030......... 0 0 0 0 0 0 0
Weighted Average Life
to Maturity
(years)*............. 6.19 4.22 3.16 2.51 2.07 1.76 1.52
Weighted Average Life
to Optional
Termination
(years)*............. 5.81 3.97 2.99 2.39 1.98 1.68 1.46
- ------------
*The weighted average life of a certificate of any class is determined by:
. multiplying the amount of each distribution in reduction of the
related Class A principal balance by the number of years from the
date of issuance of the certificate to the related distribution
date,
. adding the results, and
. dividing the sum by the original principal balance of the
certificates.
S-41
Description of the Certificates
The Home Equity Loan Asset-Backed Certificates, Series 2000-2 will be issued
pursuant to the pooling and servicing agreement dated as of June 1, 2000,
between The Provident Bank, as seller and master servicer, and Norwest Bank
Minnesota, National Association, as trustee. The form of the pooling and
servicing agreement has been filed as an exhibit to the registration statement
of which this prospectus supplement and the prospectus are a part. The
following is a description of the material provisions of the pooling and
servicing agreement. Wherever particular sections or defined terms of the
pooling and servicing agreement are referred to, those sections or defined
terms are incorporated by reference into this discussion.
General
The trust will issue two classes of offered certificates, the Class A-1
Certificates and the Class A-2 Certificates. Each class of Class A Certificates
represents the right to receive payments of interest at the certificate rate
for its class and payments of principal as described in this prospectus
supplement. Delivery of the offered certificates will be made on or about June
30, 2000, which is referred to as the closing date. In addition, the trust will
issue three classes of certificates which are not offered, the Class X-1
Certificates, the Class X-2 Certificates and the Class R Certificates. The
rights of the holders of the Class X-1 and Class X-2 Certificates to receive
distributions of interest with respect to the mortgage loans will be pari passu
with the rights of the holders of the Class A-1 and Class A-2 Certificates,
respectively. The rights of the holders of the Class R Certificates to receive
distributions with respect to the mortgage loans will be subordinate to the
rights of the Class A Certificates and the Class X Certificates. Distributions
to holders of the Class R Certificates are expected to be minimal.
The Class A Certificates will be issued in denominations of $1,000 and
multiples of $1 in excess of $1,000. The Class A Certificates will evidence
specified undivided interests in the trust. The property of the trust will
consist of, to the extent provided in the pooling and servicing agreement:
. each of the mortgage loans that from time to time are subject to
the pooling and servicing agreement;
. collections on the mortgage loans received on or after the cut-off
date, exclusive of interest payments accrued on the mortgage loans
during May 2000 and interest due before but received on or after
the cut-off date, as described in the pooling and servicing
agreement;
. mortgaged properties relating to the mortgage loans that are
acquired by foreclosure or deed in lieu of foreclosure;
. the collection account for the mortgage loan proceeds and the
distribution account for the certificates, the net funds cap
carryover reserve account, the pre-funding accounts, the
capitalized interest accounts and the spread accounts and funds on
deposit in these accounts, excluding net earnings on amounts in
them;
. the certificate insurance policy; and
. the rights under hazard insurance policies covering the mortgaged
properties.
Each mortgage loan in the trust will be assigned to one of two mortgage loan
groups, loan group 1 or loan group 2. The Class A-1 Certificates represent
undivided ownership interests in the mortgage loans assigned to loan group 1,
all collections on them except interest payments accrued on the mortgage loans
during May 2000 and payments of interest due before but received on or after
their cut-off date and their proceeds. The Class A-2 Certificates represent
undivided ownership interests in the mortgage loans assigned to loan group 2,
all collections on them except interest payments accrued on the mortgage loans
during May 2000 and payments of interest due before but received on or after
their cut-off date and their proceeds.
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The principal amount of a class of Class A Certificates on any distribution
date is equal to the applicable Class A principal balance on the closing date
minus the aggregate of amounts actually distributed as principal to the holders
of that class of Class A Certificates.
A Class A Certificate's respective percentage interest in the trust on the
closing date is equal to the percentage derived by dividing its original
principal balance by the original aggregate certificate principal balance of
that class.
The certificates will not be listed on any securities exchange. The
certificates represent interests in the trust only and do not represent
interests in or obligations of Provident, the trustee or any of their
affiliates. Neither the certificates nor the mortgage loans are guaranteed or
insured by any governmental agency.
Book-Entry Certificates
The offered certificates will be book-entry certificates. Persons acquiring
beneficial ownership interests in the offered certificates may elect to hold
their certificates through the Depository Trust Company in the United States,
or Cedelbank or the Euroclear System in Europe if they are participants in
those systems, or indirectly through organizations that are participants in
those systems. Investors may hold beneficial interests in the book-entry
certificates in minimum denominations representing certificate principal
balances of $1,000 and in multiples of $1 in excess of $1,000. Certificate
owners will not be certificateholders as that term is used in the pooling and
servicing agreement. Certificate owners are only permitted to exercise their
rights indirectly through the participating organizations that utilize the
services of DTC, including securities brokers and dealers, banks and trust
companies, and clearing corporations and other participants in DTC, and DTC.
For information with respect to tax documentation procedures relating to the
certificates, see "Federal Income Tax Consequences--Foreign Investors" and "--
Backup Withholding" herein and "Global, Clearance, Settlement And Tax
Documentation Procedures--U.S. Federal Income Tax Documentation Requirements"
in Annex I to this prospectus supplement.
Distributions on the book-entry certificates will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
the amount of those payments to the accounts of the applicable DTC participants
in accordance with DTCs normal procedures. Each DTC participant will be
responsible for disbursing those payments to the beneficial owners of the book-
entry certificates that it represents and to each financial intermediary for
which it acts as agent. Each financial intermediary will be responsible for
disbursing funds to the beneficial owners of the book-entry certificates that
it represents.
For further discussion about DTC, the European depositaries, and book-entry
procedures see "Description of the Securities--Book-Entry Registration of
Securities" in the prospectus.
If definitive certificates are issued, they will be transferable and
exchangeable at the corporate trust office of the trustee, which will initially
maintain the certificate register for the certificates. No service charge will
be made for any registration of exchange or transfer of certificates, but the
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
Assignment of Mortgage Loans
The sale of the mortgage loans by the seller to the trust will be treated by
the seller and the trust as a sale of the mortgage loans. The seller will
warrant that the transfer is a sale of its interest in the mortgage loans. In
the event of an insolvency of the seller, it is possible that a receiver or
conservator for, or a creditor of, the seller, may argue that the sale of the
mortgage loans by the seller was a pledge of the mortgage loans in connection
with a borrowing by the seller rather than a true sale. Such an attempt, even
if unsuccessful, could result in delays in distributions on the offered
certificates.
If the FDIC were appointed receiver or conservator for the seller, the FDIC
could exercise legal authority to prevent the trustee from taking any action
based solely upon the appointment or insolvency of the seller. For
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example, the FDIC has the power to enforce contracts of the seller and may have
the power to cause the seller to continue to perform the duties of the master
servicer. In addition, the FDIC may also prevent the appointment of a successor
servicer, or cause the sale or liquidation of the mortgage loans and early
retirement of the certificates, notwithstanding instructions of the
certificateholders or the certificate insurer to the contrary. The FDIC may
void some transfers determined to be fraudulent which occurred prior to the
appointment of a receiver or conservator and has the power to repudiate or
disaffirm any contract of the seller. In the event of any repudiation or
disaffirmance, damages for the repudiation or disaffirmance are limited by
statute, and the FDIC as receiver may require the trustee to comply with
certain claims procedures. Consequently, payments on the certificates could be
delayed or reduced. In addition, the FDIC as conservator or receiver may have
the power to transfer to another party all of the seller's rights and
obligations with respect to the trust, the certificateholders and the related
property.
The seller believes that even if the FDIC were appointed as a receiver or
conservator and a security interest in the mortgage loans were deemed to have
been granted, it would not void the security interest in the mortgage loans
granted to the trust if:
. the agreement granting the security interest was undertaken in the
ordinary course of business and not in contemplation of the seller's
insolvency;
. the grant of the security interest was not intended to hinder, delay or
defraud the seller or its creditors or any Federal banking regulator;
. the trust, as the secured party, is not an insider or affiliate of the
seller;
. the grant of the security interest and the obligation created under the
grant represents a bona fide arms' length transaction;
. the grant or creation of the security interest was for adequate
consideration;
. the agreement creating the security interest is in writing, approved by
the seller's board of directors or loan committee, with the approval
reflected in the minutes of the board or agreement;
. the agreement creating the security interest, since the time of its
execution, has been continuously an official record of the seller; and
. the security interest is otherwise legally perfected and enforceable.
This conclusion assumes that the FDIC will abide by its Statement of Policy
Regarding Treatment of Security Interests After Appointment of the FDIC as
Conservator or Receiver, dated March 31, 1993. However, even if the FDIC does
not void the security interest of the trust in the mortgage loans, it could
still require compliance with the claims procedures and limit the amount
recoverable from the mortgage loans or seek to redeem or prepay secured
obligations of the seller, to the extent that it recognized a claim for a
secured obligation without permitting the sale of the property. If any claim of
the trustee or the certificateholders allowed by the FDIC were not satisfied
from the mortgage loans, the trustee or the certificateholders would be an
unsecured creditor of the seller, entitled to payment on the claim in the same
manner as other unsecured creditors. The payment of this claim would follow
only after payment of other secured claims, administrative expenses of the
receiver and deposit liabilities of the seller.
On the closing date for the initial mortgage loans and any subsequent
transfer date for the subsequent mortgage loans, Provident will transfer to the
trust all of its right, title and interest in and to each mortgage loan, the
mortgage notes, mortgages and related documents, including all payments
received on or with respect to each mortgage loan on or after the applicable
cut-off date, exclusive of some interest payments accrued on the mortgage loans
during May 2000 and interest payments on the delinquent mortgage loans due
prior to the applicable cut-off date and received thereafter. Concurrently with
this transfer on the closing date, the trustee will deliver the certificates to
Provident. Each mortgage loan transferred to the trust will be identified on a
mortgage loan schedule delivered to the trustee pursuant to the pooling and
servicing agreement and any
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subsequent transfer agreement. The mortgage loan schedules will include
information as to the principal balance of each mortgage loan as of its
applicable cut-off date, its interest rate as well as other information.
Under the terms of the pooling and servicing agreement, Provident will
maintain possession of each document comprising the mortgage file other than
the mortgage notes. The mortgage notes will be delivered to the trustee on the
closing date for each initial mortgage loan or the date of transfer for each
subsequent mortgage loan. Assignments of each mortgage will be delivered to the
trustee in recordable form within 90 days of the closing date or the transfer
date, as applicable. Within 30 days of an Assignment Event, Provident will
deliver the remainder of the documents comprising each mortgage file to the
trustee and either record the assignment of each mortgage or deliver a legal
opinion stating that recordation of an assignment is not necessary to perfect
the trust's interest in a mortgage. The trustee will acknowledge the assignment
of the mortgage loans to the trust. Provident will agree that the portion of
each mortgage file that it holds is for and on behalf of the trustee.
The trustee will review the mortgage notes within 60 days of the closing
date or a subsequent transfer date, as applicable, and the assignments of each
mortgage within 180 days of the closing date or a subsequent transfer date, as
applicable. If any mortgage note or assignment is found to be defective in any
material respect and that defect is not cured within 90 days following
notification to the seller, the seller will be obligated to either substitute
an eligible substitute mortgage loan for the defective loan or purchase the
defective mortgage loan at a price equal to the outstanding principal balance
of the defective mortgage loans as of the date of purchase, plus all accrued
and unpaid interest on the defective mortgage loan, computed at its interest
rate, plus the amount of any unreimbursed Servicing Advances made by the master
servicer. However, the substitution of a mortgage loan for a defective mortgage
loan is permitted only within two years of the closing date and may not be made
unless an opinion of counsel is provided to the effect that the substitution
will not disqualify any REMIC as a REMIC or result in a prohibited transaction
tax under the Internal Revenue Code of 1986, as amended. The purchase price
will be deposited in the Collection Account on or prior to the next succeeding
determination date after the obligation arises. The obligation of the seller to
repurchase or substitute for a defective mortgage loan is the sole remedy
regarding any defects in the mortgage loans and related documents available to
the trustee or the certificateholders.
Within 60 days of an Assignment Event, the trustee will review the mortgage
file, to the extent not previously reviewed, and if any related document is
found to be defective in any material respect and that defect is not cured
within 90 days following notification to the seller, the seller will be
obligated to purchase or substitute the defective mortgage loan in the manner
described above. An "Assignment Event" will occur on the 30th day following
either the occurrence and continuance of an Event of Default, the reduction of
the seller's long-term unsecured debt rating below "Baa2" by Moody's or "BBB"
by S&P or the suspension, termination or withdrawal of the seller's long-term
unsecured debt rating by Moody's or S&P.
When substituting a defective mortgage loan with an eligible substitute
mortgage loan, the seller will be required to deposit in the collection account
on or prior to the next succeeding determination date after the obligation
arises a substitution adjustment amount which is equal to the excess of the
principal balance of the related defective mortgage loan over the principal
balance of the eligible substitute mortgage loan.
Eligible substitute mortgage loans are mortgage loans substituted by the
seller for a defective mortgage loan that must, on the date of substitution:
. have an aggregate outstanding principal balance not greater than the
defective mortgage loan and not more than 5% less than the defective
mortgage loan;
. have an interest rate not less than the interest rate of the defective
mortgage loan and not more than 1% in excess of the interest rate of the
defective mortgage loan;
. if the defective mortgage loan is an adjustable rate mortgage loan, have
an interest rate based on the same index or six-month LIBOR with the
next adjustment to the interest rate to be made no later than the next
interest rate adjustment date of the defective mortgage loan;
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. if the defective mortgage loan is an adjustable rate mortgage loan, have
a Gross Margin that is not less than the Gross Margin of the defective
mortgage loan and not more than 1% higher than the Gross Margin for the
defective mortgage loan;
. have a mortgage of the same or higher level of priority as the mortgage
relating to the defective mortgage loan at the time of transfer to the
trust;
. have a remaining term to maturity not more than 6 months earlier and not
later than the remaining term to maturity of the defective mortgage
loan;
. comply with each representation and warranty as to the mortgage loans in
the pooling and servicing agreement as of the date of substitution;
. have an original combined loan-to-value ratio or loan-to-value ratio not
greater than that of the defective mortgage loan;
. if the defective mortgage loan is an adjustable rate mortgage loan, have
a lifetime rate cap and a periodic rate cap no lower than the lifetime
rate cap and periodic rate cap, respectively, of the defective mortgage
loan; and
. be of the same type of mortgaged property as the defective mortgage loan
or a detached single family residence.
More than one eligible substitute mortgage loan may be substituted for a
defective mortgage loan if the eligible substitute mortgage loans meet the
attributes listed above in the aggregate and the substitution is approved in
writing in advance by the certificate insurer.
The seller will make representations and warranties as to the accuracy in
all material respects of some of the information furnished to the trustee with
respect to each mortgage loan, e.g., cut-off date principal balance and the
interest rates applicable to the mortgage loans. In addition, the seller will
represent and warrant on the closing date or on each subsequent transfer date
that at the time of transfer to the trust, the seller has transferred or
assigned all of its interests in each mortgage loan and the related documents,
free of any lien, subject to specified exceptions, and that each mortgage loan
complied, at the time of origination, in all material respects with applicable
state and federal laws. Upon discovery of a breach of any of its
representations and warranties that materially and adversely affect the
interests of the certificateholders or the certificate insurer in the related
mortgage loan and related documents, the seller will have a period of 60 days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 60-day period, the seller will be obligated to substitute
for the defective mortgage loan an eligible substitute mortgage loan or
purchase the defective mortgage loan from the trust. The procedure and
limitations set forth above for the transfer of defective mortgage loans will
apply to the transfer of a mortgage loan that is required to be transferred
because of a breach of a representation or warranty in the pooling and
servicing agreement that materially and adversely affects the interests of the
trust, the certificateholders or the certificate insurer.
Payments on Mortgage Loans; Deposits to Collection Account and Distribution
Account
The master servicer shall establish and maintain in the name of the trustee
a collection account for the benefit of the holders of the certificates. The
collection account will be an Eligible Account. Upon receipt by the master
servicer, the master servicer will deposit in the collection account all
amounts collected on the mortgage loans except amounts representing the master
servicing fee. Amounts deposited in the collection account may be invested in
Eligible Investments maturing no later than two business days before the date
on which they are required to be deposited in the distribution account.
The trustee will establish a distribution account into which will be
deposited amounts withdrawn from the collection account for distribution to
certificateholders on a distribution date. The distribution account will be an
Eligible Account. Amounts on deposit in the distribution account may be
invested in Eligible Investments maturing on or before the business day prior
to the related distribution date.
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An "Eligible Account" is either:
. a segregated account that is maintained with a depository institution
whose debt obligations at the time of any deposit have the short-term
debt rating of "A-1" by S&P or "P-1" by Moody's,
. one or more segregated accounts with a depository institution having a
minimum long-term unsecured debt rating of "A2" by Moody's and "A" by
S&P which accounts are fully insured by either the Savings Association
Insurance Fund or the Bank Insurance Fund of the FDIC,
. a segregated trust account maintained with the trustee or an affiliate
of the trustee in its fiduciary capacity, or
. a segregated account otherwise acceptable to the certificate insurer and
each rating agency without reduction or withdrawal of their then current
ratings of the certificates as evidenced by a letter from the
certificate insurer and each rating agency to the trustee.
"Eligible Investments" are specified in the pooling and servicing agreement
and are limited to investments which meet the criteria of the certificate
insurer and the rating agencies from time to time as being consistent with the
then current ratings of the certificates. All net investment earnings on funds
deposited to the collection account and the distribution account will be for
the benefit of the master servicer as additional servicing compensation. The
master servicer will be obligated to deposit the amount of any net loss
incurred in respect of an Eligible Investment.
Monthly Advances
Not later than the date specified in the pooling and servicing agreement
prior to each distribution date, the master servicer will remit to the trustee
for deposit in the distribution account an amount, to be distributed on the
related distribution date, equal to interest due but not received on each
mortgage loan during the related due period, net of the master servicing fee
(the "Monthly Advance"). With respect to any balloon loan that is delinquent on
its maturity date, the master servicer will continue to make Monthly Advances
with respect to that balloon loan in an amount equal to one month's interest on
the unpaid principal balance at its interest rate, net of the master servicing
fee. This obligation of the master servicer continues with respect to each
mortgage loan until a mortgage loan becomes a liquidated mortgage loan;
provided, however, neither the master servicer nor the trustee is required to
make any Monthly Advances, including, without limitation, monthly advances for
balloon loans, which it determines would be a Nonrecoverable Advance. In
deciding whether to make a Monthly Advance, the trustee shall be entitled to
conclusively rely upon the master servicer's determination that the advance is
a Nonrecoverable Advance.
In the course of performing its servicing obligations, the master servicer
will pay all reasonable and customary out-of-pocket costs and expenses incurred
in the performance of its servicing obligations, including, but not limited to,
the cost of the preservation, restoration and protection of the mortgaged
properties, any enforcement or judicial proceedings, including foreclosures and
the management and liquidation of mortgaged properties acquired in satisfaction
of the related mortgage. Each of these expenditures will constitute a
"Servicing Advance."
The master servicer's right to reimbursement for Servicing Advances is
limited to late collections of interest on that mortgage loan and to
liquidation proceeds, insurance proceeds and other amounts as may be collected
by the master servicer from the related mortgagor or otherwise relating to the
mortgage loan in respect of which the unreimbursed amounts are owed. The master
servicer's right to reimbursement for Monthly Advances shall be limited to late
collections of interest on any mortgage loan and to liquidation proceeds and
insurance proceeds on the related mortgage loan. The master servicer's right to
these reimbursements is prior to the rights of certificateholders.
The master servicer is not required to make any Monthly Advance or Servicing
Advance if, in its good faith judgment and sole discretion, the master servicer
determines that the advance will not be ultimately recoverable from collections
received from the mortgagor in respect of the related mortgage loan or other
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recoveries in respect of that mortgage loan (a "Nonrecoverable Advance").
However, if any Servicing Advance or Monthly Advance is determined by the
Master Servicer to be nonrecoverable from those sources, the amount of the
Nonrecoverable Advance may be reimbursed to the master servicer from other
amounts on deposit in the collection account. The master servicer's right to
these reimbursements is prior to the rights of the certificateholders.
Distribution Dates
On each determination date, which is the eighteenth day of each month, the
master servicer will deliver information reasonably required by the trustee in
order for the trustee to calculate the amounts to be paid to the
certificateholders on the next distribution date.
On the 25th day of each month, or if it is not a business day, then the next
business day, commencing in July 2000, the holders of offered certificates of
record will be entitled to receive, from amounts then on deposit in the
distribution account, principal and interest distributions then due, to the
extent of funds available therefor in accordance with the priorities and in the
amounts described below under "--Priority of Distributions." Distributions will
be made in immediately available funds to holders of offered certificates
holding certificates, the aggregate principal balance of which is at least
$1,000,000, by wire transfer or otherwise to the account of the
certificateholder at a domestic bank or other entity having appropriate
facilities, if the certificateholder has so notified the trustee in accordance
with the pooling and servicing agreement, or by check mailed to the address of
the person entitled thereto as it appears as of the last record date on the
certificate register maintained by the certificate registrar.
The record date is the business day immediately preceding a distribution
date; provided, however, that if a certificate becomes a definitive
certificate, the record date for that certificate will be the last business day
of the month immediately preceding the month in which the related distribution
date occurs.
Deposits to the Distribution Account
No later than the date specified in the pooling and servicing agreement
prior to each distribution date, the following amounts in respect of a loan
group and the previous due period shall be deposited into the distribution
account and shall constitute the "Available Funds" for the related certificate
group for that distribution date:
. payments of principal and interest on the mortgage loans in the loan
group, net of the master servicing fee for the related loan group and
reimbursement for related Monthly Advances and Servicing Advances,
including Nonrecoverable Advances, and the interest portion of payaheads
received during that due period that is intended for application in
subsequent due periods;
. the interest portion of payaheads received during a prior due period
intended for application in the due period related to the distribution
date;
. net liquidation proceeds and insurance proceeds with respect to the
mortgage loans in the loan group, net of amounts applied to the
restoration or repair of a mortgaged property;
. the purchase price for repurchased defective mortgage loans with respect
to the mortgage loans in the loan group and any related substitution
adjustment amounts;
. payments from the master servicer in connection with Monthly Advances,
Prepayment Interest Shortfalls, and the termination of the trust with
respect to the mortgage loans in the loan group;
. any amounts withdrawn from a spread account or other trust account, paid
under the certificate insurance policy or on deposit in the distribution
account that are available to be distributed in respect of monthly
interest, in each case in respect of the related certificate group; and
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. any amounts withdrawn from the related pre-funding account or
capitalized interest account for the purpose of making a distribution on
the Class A Certificates during the funding period or the distribution
date immediately following.
A payahead is a scheduled monthly payment received by the master servicer
with the scheduled monthly payment for the current due date, intended by the
related mortgagor to be applied on a subsequent due date--for example, because
the mortgagor intends to be on vacation the following month. The interest
portion of payaheads will be held in the collection account until deposited to
the distribution account as part of the Available Funds for the due period in
which the due date occurs for which the mortgagor intends the application of
the scheduled monthly payment. The principal portion of each payahead will be
part of the Available Funds for the due period in which the payahead was
received.
The Spread Account
The pooling and servicing agreement requires the trustee to establish on the
closing date and to maintain one or more spread accounts for the benefit of the
certificate insurer and the certificateholders. On the closing date, the
trustee will make a deposit to the spread accounts, as specified in the pooling
and servicing agreement, in respect of each certificate group. No additional
deposits will be required to be made to the spread accounts.
On any distribution date, any amounts on deposit in a spread account in
respect of a certificate group will be available to fund any shortfall between:
. the sum of (a) the Class Interest Distribution for the related
class of Class A Certificates and (b) the Class A Principal
Distribution for that certificate group on that date, and
. funds on deposit in the distribution account available to be
distributed therefor on that distribution date, prior to giving
effect to any draw on the policy; provided, however, the spread
accounts will generally not be available to cover any interest
shortfall resulting from a certificate rate exceeding the
weighted average interest rate of the mortgage loans in the
related loan group.
On any distribution date if the amount on deposit in the spread account in
respect of a certificate group is insufficient to fund any covered shortfall,
the amount on deposit in the spread account in respect of the other certificate
group--after giving effect to any withdrawal required to be made in respect of
that certificate group on the distribution date--may be applied to fund the
covered shortfall. The pooling and servicing agreement permits reductions to
the amount on deposit in the spread account as specified in the pooling and
servicing agreement. Any reduction will be dependent on the delinquency and
loss performance of the mortgage loans in the related loan group. The maximum
amount required to be on deposit at any time in a spread account in respect of
a certificate group is referred to as the group spread account requirement.
The amounts in a spread account in respect of a certificate group in excess
of the related group spread account requirement will be distributed to the
seller. The seller will not be required to refund any amounts previously and
properly distributed to it, regardless of whether there are sufficient funds on
a subsequent distribution date to make a full distribution to holders of the
Class A Certificates on that distribution date. Funds credited to the spread
account may be invested in Eligible Investments or other investments specified
in the pooling and servicing agreement that are scheduled to mature on or prior
to the next distribution date. The spread account shall be an Eligible Account.
The pooling and servicing agreement will specify which spread account, if
any, will be an asset of a REMIC although all spread accounts will be assets of
the trust.
The spread account may be terminated or other assets, including mortgage
loans such as the mortgage loans or a guarantee of Provident or a letter of
credit issued on behalf of Provident, may be substituted for
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some or all of any assets held therein, provided that the certificate insurer
and the rating agencies consent to that action and the then current ratings of
the Class A Certificates assigned by the rating agencies are not lowered as a
result.
Net Funds Cap Carryover Reserve Account
The pooling and servicing agreement requires the trustee to establish on the
closing date and maintain a net funds cap carryover reserve account. On each
distribution date, the amount called for by clause B.(3)(b) will be deposited
to the net funds cap carryover reserve account as described below under "--
Priority of Distributions."
On each distribution date, the trustee shall withdraw from the net funds cap
carryover reserve account, to the extent funds are available, the net funds cap
carryover amount for the Class A-2 Certificates and pay that amount to the
holders of the Class A-2 Certificates. Amounts deposited to the net funds cap
carryover reserve account will only be available to pay the net funds cap
carryover amount for the Class A-2 Certificates. The net funds cap carryover
reserve account will be funded on the closing date with a reserve account
initial deposit of $5,000. If the weighted average net mortgage interest rate
for loan group 2 does not exceed the certificate rate on the Class A-2
Certificates by 0.20% on any distribution date, the amount to be held in the
net funds cap carryover reserve account for each subsequent distribution date
will equal the greater of (1) 0.50% of the outstanding certificate principal
balance of the Class A-2 Certificates and (2) $15,000, and will be funded from
amounts otherwise paid to the Class X-2 Certificates. If the weighted average
net interest rate for loan group 2 for any distribution date exceeds the
certificate rate on the Class A-2 Certificates by 0.20% or more, the required
reserve amount for that distribution date will be $5,000 and will be funded
from amounts otherwise paid to the Class X-2 Certificates. Any distribution by
the trustee from amounts in the net funds cap carryover reserve account shall
be made on the applicable distribution date. The amount required to be on
deposit in the net funds cap carryover reserve account at any time is referred
to herein as the required reserve amount.
Amounts on deposit in the net funds cap carryover reserve account in excess
of the required reserve amount will be released and distributed to the holders
of the Class X-2 Certificates on any distribution date.
The net funds cap carryover reserve account and the income earned thereon
will not be assets of the REMIC. The certificate insurance policy does not
cover any net funds cap carryover amount.
Pre-Funding Account
On the closing date, up to $107,086,673.73 will be deposited to the group 1
pre-funding account and up to $69,574,258.76 will be deposited to the group 2
pre-funding account. The pre-funding accounts shall be Eligible Accounts. It is
expected that the seller will have originated or acquired subsequent mortgage
loans from June 1, 2000 to the closing date. These mortgage loans will be
transferred to the trust on the closing date. The maximum amount to be
deposited into the pre-funding accounts on the closing date for each loan group
will be reduced by the principal balance of the subsequent mortgage loans
transferred to each loan group on the closing date. The amounts on deposit in
the pre-funding account for a loan group may only be used to acquire subsequent
mortgage loans for that loan group or to make accelerated payments on the
related Class A Certificates on the July 2000 distribution date. During the
funding period beginning on the closing date and ending on July 21, 2000,
amounts will, from time to time, be withdrawn from the pre-funding account to
purchase subsequent mortgage loans for the related loan group in accordance
with the pooling and servicing agreement. Any pre-funded amounts in the pre-
funding account for a loan group remaining at the end of the funding period
will be distributed as a principal prepayment on the July 2000 distribution
date to the Class A Certificates of the related certificate group. See "Risk
Factors--Risk of Prepayment Due to Subsequent Mortgage Loans."
Amounts on deposit in the pre-funding accounts will be invested in Eligible
Investments or other investments specified in the pooling and servicing
agreement. The pre-funding accounts will not be an asset of the REMIC. Any
interest earned on the pre-funding accounts will be taxable to the seller.
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Capitalized Interest Accounts
On the closing date, the amounts, if any, specified in the pooling and
servicing agreement will be deposited into two separate capitalized interest
accounts in the name of the trustee on behalf of the trust. The amounts on
deposit in a capitalized interest account, including reinvestment income, will
be used by the trustee to fund on the July 2000 and August 2000 distribution
dates a portion of the excess of the amount of interest accruing at the
certificate rate for the related certificate group on the amount by which the
Class A principal balance of the related certificate group as of that
distribution date exceeds the principal balance of the mortgage loans in the
related loan group that have due dates in the related due period. Any amounts
remaining in the capitalized interest accounts following the August 2000
distribution date will be paid to the seller.
Amounts on deposit in the capitalized interest accounts will be invested in
Eligible Investments or other investments specified in the pooling and
servicing agreement that are scheduled to mature on or prior to the next
distribution date. The capitalized interest accounts will not be an asset of
the REMIC. Any reinvestment earned on the capitalized interest accounts will be
taxable to the seller.
Priority of Distributions
On each distribution date, the trustee shall withdraw from the distribution
account the sum of the Available Funds with respect to each certificate group
(that sum, the "Amount Available"), and make the following disbursements and
transfers as described below and to the extent of the Amount Available, except
that withdrawals from the spread account and amounts paid under the certificate
insurance policy shall only be available for distribution to holders of the
Class A Certificates:
A. With respect to the Class A-1 Certificates, the Available Funds with
respect to that class will be distributed in the following order of priority:
(1) to the trustee, the trustee fee for loan group 1 and to the
certificate insurer, the amount owing to the certificate insurer under the
insurance agreement for the premium payable in respect of the Class A-1
Certificates, in each case for that distribution date;
(2) to the trustee, as reimbursement for certain expenses incurred by
the trustee pursuant to the pooling and servicing agreement, which, in the
aggregate, after giving effect to B.(2), shall not exceed $100,000 during
the trust's existence.
(3) concurrently, as follows:
(a) to the holders of the Class A-1 Certificates, an amount equal to
the Class Interest Distribution for that class for that distribution
date; and
(b) to the holders of the Class X-1 Certificates, the amount to
which they are entitled in accordance with the terms of the pooling and
servicing agreement, which will generally be equal to interest on a
notional balance equal to the Class A principal balance of the Class A-
1 Certificates at a rate equal to any positive excess of the weighted
average net mortgage interest rate for loan group 1 over the formula
rate for the Class A-1 Certificates, in each case for that distribution
date, plus any interest shortfall from previous distribution dates with
interest thereon;
provided, however, if Available Funds with respect to the Class A-1
Certificates--prior to giving effect to withdrawals from the spread account,
draws on the certificate insurance policy and other amounts on deposit in the
distribution account available to be distributed in respect of monthly interest
on the Class A-1 Certificates--on that distribution date are insufficient to
make the distributions required to be made pursuant to this clause A.(3), the
Available Funds will be allocated between subclauses (a) and (b), above, pro
rata, based on the amount required to be paid pursuant to each subclause
without giving effect to any shortfall in the Available Funds; and
(4) to the holders of the Class A-1 Certificates, an amount equal to the
Class A Principal Distribution for that class for that distribution date.
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B. With respect to the Class A-2 Certificates, the Available Funds with
respect to that class will be distributed in the following order of priority:
(1) to the trustee, the trustee fee for loan group 2 and to the
certificate insurer, the amount owing to the certificate insurer under the
insurance agreement for the premium payable in respect of the Class A-2
Certificates, in each case for that distribution date;
(2) to the trustee, as reimbursement for certain expenses incurred by
the trustee pursuant to the pooling and servicing agreement, which, in the
aggregate, after giving effect to A.(2), shall not exceed $100,000 during
the trust's existence.
(3) concurrently, as follows:
(a) to the holders of the Class A-2 Certificates, an amount equal to
the Class Interest Distribution for that class for that distribution
date; and
(b) to the holders of the Class X-2 Certificates, the amount to which
they are entitled in accordance with the terms of the pooling and
servicing agreement, which will generally be equal to interest on a
notional balance equal to the Class A principal balance of the Class A-2
Certificates at a rate equal to any positive excess of the weighted
average net mortgage interest rate for loan group 2 over the formula
rate for the Class A-2 Certificates, in each case for that distribution
date, plus any interest shortfall from previous distribution dates with
interest thereon. These amounts shall be first deposited to the net
funds cap carryover reserve account to cover any net funds cap carryover
amount--to the extent not covered by amounts already on deposit in the
net funds cap carryover reserve account--and then to cover any amount
required to be on deposit therein and any remainder to the holders of
the Class X-2 Certificates;
provided, however, if Available Funds with respect to the Class A-2
Certificates--prior to giving effect to withdrawals from the spread account or
draws on the certificate insurance policy--on that distribution date are
insufficient to make the distributions required to be made pursuant to this
clause B.(3), the Available Funds will be allocated between subclauses (a) and
(b), above, pro rata, based on the amount required to be paid pursuant to each
subclause without giving effect to any shortfall in the Available Funds; and
(4) to the holders of the Class A-2 Certificates an amount equal to the
Class A Principal Distribution for that class for that distribution date.
C. After making the distributions referred to in subclauses A. and B.
above, the trustee shall make distributions in the following order of
priority, to the extent of the balance of the Amount Available;
(1) to the master servicer, the amount of any accrued and unpaid master
servicing fee;
(2) to the master servicer, the amount of Nonrecoverable Advances to the
extent not previously reimbursed;
(3) to the certificate insurer, any other amounts owing to the
certificate insurer under the insurance agreement; and
(4) to the Class R Certificateholders, the balance.
Net funds cap carryover amount means, on any distribution date and with
respect to only the Class A-2 Certificates, the sum of the following amounts:
(1) if on that distribution date, the certificate rate for the Class A-2
Certificates is based upon the weighted average net mortgage interest rate
for loan group 2, the excess of the amount of interest the certificates
would have otherwise received had the rate been calculated at the formula
rate for the Class A-2 Certificates over the amount of interest payable in
respect of the Class A-2 Certificates at the weighted average net mortgage
interest rate,
(2) the net funds cap carryover amount for all previous distribution
dates not previously paid, and
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(3) one month's interest on the amount calculated in (2) above at the
formula rate for the Class A-2 Certificates for that distribution date.
No net funds cap carryover amounts will be payable with respect to the Class
A-1 Certificates. The certificate insurance policy does not cover the payment,
nor do the ratings assigned to the Class A-2 Certificates address the
likelihood of payment, of any net funds cap carryover amounts.
The Certificate Rate
The certificate rate on any distribution date for the Class A-1 Certificates
will be a per annum rate equal to the lesser of (A) the related formula rate
for that distribution date and (B) 13.00% per annum. The certificate rate on
any distribution date for the Class A-2 Certificates will be a per annum rate
equal to the lesser of (A) the related formula rate and (B) the weighted
average net mortgage interest rate for loan group 2 for that distribution date.
Interest in respect of any distribution date and each Class A Certificate will
accrue during the related interest period on the basis of a 360-day year and
the actual number of days elapsed.
The formula rate for the Class A-1 Certificates for any distribution date is
the sum of (a) the LIBOR Index as of the related LIBOR determination date and
(b) 0.27%, or 0.54%, on or after the call option date. The formula rate for the
Class A-2 Certificates for any distribution date is the sum of (a) the LIBOR
Index as of the related LIBOR determination date and (b) 0.27%, or 0.54%, on or
after the call option date.
The interest period means, with respect to each distribution date, the
period from the distribution date in the month preceding the month of a
distribution date, or in the case of the first distribution date, from the
closing date, through the day before that distribution date.
The weighted average net mortgage interest rate for any distribution date
and loan group shall equal the difference between (a) the average of the
interest rates of the mortgage loans in the related loan group as of the first
day of the month preceding the month of a distribution date, or, in the case of
the first distribution date, the closing date, weighted on the basis of the
related principal balances as of that date and (b) the sum of the master
servicing fee rate and the rates at which the trustee fee and the premium
payable to the certificate insurer are calculated. The weighted average
interest rate will be computed on the basis of a 360-day year and the actual
number of days elapsed during the related interest period.
The LIBOR Index for the Class A Certificates shall be established by the
trustee for each distribution date and will equal the rate for one month United
States dollar deposits quoted on Telerate Page 3750 as of 11:00 A.M., London
time, on the second LIBOR business day prior to the first day of the related
interest period, or the second LIBOR business day prior to the closing date, in
the case of the first distribution date. Telerate Page 3750 means the display
designated as page 3750 on the Telerate Service, or another page that may
replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks. If this rate does not appear on that
page or another page as may replace that page on that service (or if the
service is no longer offered, another service for displaying LIBOR or
comparable rates as may be selected by the trustee after consultation with the
master servicer), the rate will be the reference bank rate. The reference bank
rate will be determined on the basis of the rates at which deposits in U.S.
Dollars are offered by the reference banks--which shall be three major banks
that are engaged in transactions in the London interbank market, selected by
the trustee after consultation with the master servicer--as of 11:00 A.M.,
London time, on the day that is two LIBOR business days before the immediately
preceding distribution date to prime banks in the London interbank market for a
period of one month in amounts approximately equal to the aggregate Class A
principal balances of the Class A Certificates then outstanding. The trustee
will request the principal London office of each of the reference banks to
provide a quotation of its rate. If at least two quotations are provided, the
rate will be the arithmetic mean of the quotations. If fewer than two
quotations are provided as requested, the rate will be the arithmetic mean of
the rates quoted by one or more major banks in New York City, selected by the
trustee after consultation with the master servicer, as of 11:00 A.M., New York
City time, on the day that is two LIBOR Business Days before the immediately
preceding distribution date for loans in U.S. Dollars to leading European banks
for a
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period of one month in amounts approximately equal to the aggregate Class A
principal balance of the Class A Certificates then outstanding. If no
quotations can be obtained, the rate will be the LIBOR Index for the prior
distribution date. LIBOR business day means any day other than a Saturday or a
Sunday or a day on which banking institutions in the State of New York or in
the city of London, England are required or authorized by law to be closed.
Interest
On each distribution date, to the extent of funds available therefor,
interest will be distributed to each class of Class A Certificates in an amount
(each, a "Class Interest Distribution") equal to the sum of interest accrued
during the related interest period at the related certificate rate on the
related Class A principal balance immediately prior to that distribution date
(the "Class Monthly Interest Distributable Amount") and any Class Interest
Carryover Shortfall for that class of Class A Certificates for that
distribution date. As to any distribution date and class of Class A
Certificates, the "Class Interest Carryover Shortfall" is the sum of the excess
of the related Class Monthly Interest Distributable Amount for the preceding
distribution date and any outstanding Class Interest Carryover Shortfall on the
preceding distribution date, over the amount in respect of interest that is
actually distributed in respect of the class on the preceding distribution date
plus one month's interest on the excess, to the extent permitted by law, at the
related certificate rate. The interest entitlement described above will be
reduced by each Class's pro rata share of any Civil Relief Act Interest
Shortfalls for the related loan group for that distribution date. Civil Relief
Act Interest Shortfalls will not be covered by payments under the certificate
insurance policy.
Principal
On each distribution date, to the extent of funds available therefor,
principal will be distributed to the holders of Class A Certificates of each
certificate group in an amount equal to the lesser of the related Class A
principal balance and the related Class A Principal Distribution for the
distribution date. The "Class A Principal Distribution" means, with respect to
any distribution date and certificate group, other than the final distribution
date, the sum of the related Class A Monthly Principal Distributable Amount for
that distribution date and any Class A Principal Shortfall Amount for that
distribution date, and on the final distribution date, the related Class A
principal balance.
"Class A Monthly Principal Distributable Amount" means, with respect to any
distribution date and certificate group, the amount equal to the sum of the
following amounts, without duplication, with respect to the prior due period:
. each payment of principal on a mortgage loan in the related loan group
received by the master servicer during that due period, including all
full and partial principal prepayments,
. the principal balance as of the end of the preceding due period of each
mortgage loan in the related loan group that became a liquidated
mortgage loan for the first time during the related due period,
. the portion of the purchase price allocable to principal of all
repurchased defective mortgage loans in the related loan group with
respect to the due period and the principal portion of the amount
received in connection with the termination of the trust with respect to
that loan group,
. any substitution adjustment amounts received on or before the previous
determination date and not yet distributed with respect to the related
loan group, and
. any amounts transferred from the related pre-funding account into the
distribution account in respect of each certificate group on the first
distribution date after the funding period.
"Class A Principal Shortfall Amount" means, with respect to any distribution
date and class of Class A Certificates, the excess of the sum of the related
Class A Monthly Principal Distributable Amount for the
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preceding distribution date and any outstanding Class A Principal Shortfall
Amount with respect to any class of Class A Certificates on the preceding
distribution date over the amount of principal that is actually distributed to
the Class A certificateholders of each class on the preceding distribution
date.
Due period means, with respect to any determination date or distribution
date, the calendar month immediately preceding a determination date or
distribution date, as the case may be.
A liquidated mortgage loan, as to any distribution date, is a mortgage loan
which the master servicer has determined, in accordance with the servicing
procedures specified in the pooling and servicing agreement, as of the end of
the preceding due period, that all liquidation proceeds which it expects to
recover with respect to a mortgage loan--including disposition of the related
REO Property--have been recovered.
The Certificate Insurance Policy
The following information has been supplied by the certificate insurer (the
"Certificate Insurer") for inclusion in this prospectus supplement.
Accordingly, Provident does not make any representation as to the accuracy and
completeness of such information.
The Certificate Insurer, in consideration of the payment of a premium and
subject to the terms of the certificate insurance policy (the "Certificate
Insurance Policy"), thereby unconditionally and irrevocably guarantees to any
Class A Certificateholder that an amount equal to each full and complete
Insured Payment will be received from the Certificate Insurer by the trustee,
or its successors, as trustee for the Class A Certificateholders, on behalf of
the Class A Certificateholders, for distribution by the trustee to each Class A
Certificateholder of that Class A Certificateholder's proportionate share of
the Insured Payment.
The Certificate Insurer's obligations under the Certificate Insurance
Policy, with respect to a particular Insured Payment, will be discharged to the
extent funds equal to the applicable Insured Payment are received by the
trustee, whether or not those funds are properly applied by the trustee.
Insured Payments will be made only at the time set forth in the Certificate
Insurance Policy, and no accelerated Insured Payments will be made regardless
of any acceleration of the Class A Certificates, unless the acceleration is at
the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust,
the REMIC or the trustee for withholding taxes, if any (including interest and
penalties in respect of any liability for withholding taxes) or any net funds
cap carryover amounts.
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount on the business day following receipt on a business day by the
Certificate Insurer's fiscal agent of the following:
. a certified copy of the order requiring the return of a preference
payment,
. an opinion of counsel satisfactory to the Certificate Insurer that the
order is final and not subject to appeal,
. an assignment in a form that is reasonably required by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights and
claims of the Class A Certificateholder relating to or arising under the
Class A Certificates against the debtor which made the preference
payment or otherwise with respect to the preference payment; and
. appropriate instruments to effect the appointment of the Certificate
Insurer as agent for the Class A Certificateholder in any legal
proceeding related to the preference payment, which instruments are in a
form satisfactory to the Certificate Insurer,
provided that if these documents are received after 12:00 p.m., New York time,
on that business day, they will be deemed to be received on the following
business day. Payments by the Certificate Insurer will be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of
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the Class A Certificateholder and not to any Class A Certificateholder directly
unless the Class A Certificateholder has returned principal or interest paid on
the Class A Certificates to the receiver or trustee in bankruptcy, in which
case that payment will be disbursed to the Class A Certificateholder.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 p.m., New York time, on the
later of the distribution date on which the related Deficiency Amount is due or
the business day following receipt in New York, New York on a business day by
State Street Bank and Trust Company, N.A., as fiscal agent for the Certificate
Insurer or any successor fiscal agent appointed by the Certificate Insurer of a
notice from the trustee specifying the Insured Payment which is due and owing
on the applicable distribution date; provided that if the notice is received
after 12:00 p.m. New York time on that business day, it will be deemed to be
received on the following business day. If any notice received by the
Certificate Insurer's fiscal agent is not in proper form or is otherwise
insufficient for the purpose of making a claim under the Certificate Insurance
Policy it will be deemed not to have been received by the Certificate Insurer's
fiscal agent for purposes of this paragraph, and the Certificate Insurer or the
fiscal agent, as the case may be, will promptly so advise the trustee and the
trustee may submit an amended notice.
Insured Payments due under the Certificate Insurance Policy unless otherwise
stated therein will be disbursed by the Certificate Insurer's fiscal agent to
the trustee on behalf of the Class A Certificateholder, by wire transfer of
immediately available funds in the amount of the Insured Payment less, in
respect of Insured Payments related to Preference Amounts, any amount held by
the trustee for the payment of the Insured Payment and legally available
therefor.
The fiscal agent is the agent of the Certificate Insurer only and the fiscal
agent will in no event be liable to the Class A Certificateholders for any acts
of the fiscal agent or any failure of the Certificate Insurer to deposit or
cause to be deposited sufficient funds to make payments due under the
Certificate Insurance Policy.
As used in the Certificate Insurance Policy, the following terms shall have
the following meanings:
"Deficiency Amount" means for any distribution date (A) the excess, if
any, of (i) Class Monthly Interest Distributable Amount for each class of
Class A Certificates (net of any Civil Relief Act Interest Shortfalls with
respect to the related loan group) plus any Class Interest Carryover
Shortfall for each class of Class A Certificates over (ii) funds on deposit
in the distribution account available to be distributed therefor on such
distribution date and (B) the Guaranteed Principal Amount.
"Final Distribution Date" means the distribution date in August 2031.
"Guaranteed Principal Amount" means (a) for any distribution date (other
than the Final Distribution Date for a certificate group) the amount, if
any, by which the Class A Principal Balance of each certificate group
exceeds the related Loan Group Principal Balance at the end of the previous
month (after giving effect to all distributions of principal on the related
Class A Certificates on such distribution date) and (b) on the distribution
date in August 2031, with respect to the group 1 certificates and August
2031, with respect to the group 2 certificates (after giving effect to all
other distributions of principal on the group 1 certificates and the group
2 certificates on such distribution date, as applicable), an amount equal
to the applicable Class A Principal Balance.
"Insured Payment" means (i) as of any distribution date any Deficiency
Amount and (ii) any Preference Amount.
"Preference Amount" means any amount previously distributed to a Class A
Certificateholder on the Class A Certificates that is recoverable and
sought to be recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended from
time to time, in accordance with a final nonappealable order of a court
having competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not otherwise
defined in the Certificate Insurance Policy shall have the meanings set forth
in the pooling and servicing agreement as of the date of
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execution of the Certificate Insurance Policy, without giving effect to any
subsequent amendment or modification to the pooling and servicing agreement
unless such amendment or modification has been approved in writing by the
Certificate Insurer.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to the maturity
of the Class A Certificates.
The Certificate Insurance Policy is being issued under and pursuant to, and
will be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policy is not covered by
the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
Reports to Certificateholders
Concurrently with each distribution to the certificateholders, the trustee
will make available to each certificateholder and the certificate insurer a
distribution date statement, based solely on information received from the
master servicer, setting forth among other items with respect to each
distribution date:
(1) the aggregate amount of the distribution to each class of
certificateholders;
(2) the amount of distribution set forth in paragraph (1) above in
respect of interest, the amount in respect of any Class Interest Carryover
Shortfall and the amount of any Class Interest Carryover Shortfall
remaining;
(3) the amount of distribution set forth in paragraph (1) above in
respect of principal, the amount in respect of the Class A Principal
Shortfall Amount and any remaining Class A Principal Shortfall Amount;
(4) any amounts by which the Class A principal balance of a certificate
group exceeds the related loan group principal balance at the end of the
previous month, after giving effect to all distributions of principal on
the related Class A Certificates on that distribution date;
(5) the amount paid under the certificate insurance policy for that
distribution date in respect of the Class Interest Distribution to each
class of certificates;
(6) the master servicing fee;
(7) the pool principal balance, the loan group 1 principal balance and
the loan group 2 principal balance, in each case as of the close of
business on the last day of the preceding due period;
(8) the Class A principal balance of each class and class principal
balance of each class of Class A Certificates, after giving effect to
payments allocated to principal above;
(9) the amount on deposit in the spread account for each class of Class
A Certificates on the distribution date, after giving effect to any
withdrawals therefrom on that distribution date;
(10) the number and aggregate principal balances of the mortgage loans
of each loan group as to which the minimum monthly payment is delinquent
for 30-59 days, 60-89 days and 90 or more days, respectively, as of the end
of the preceding due period;
(11) the book value of any real estate which is acquired by the trust
through foreclosure or grant of deed in lieu of foreclosure;
(12) the aggregate amount of prepayments received on the mortgage loans
during the previous due period and specifying that amount for each loan
group;
(13) the weighted average interest rate on the mortgage loans and
specifying the weighted average interest rate for each loan group as of the
first day of the month prior to the distribution date;
(14) the amount of any Civil Relief Act Interest Shortfalls, specifying
that amount for each loan group;
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(15) the amount of any net funds cap carryover amount;
(16) the amount of any Monthly Advances and Servicing Advances; and
(17) the certificate rate applicable to each class of Class A
Certificates on that distribution date.
In the case of information furnished pursuant to clauses (2) and (3) above,
the amounts shall be expressed as a dollar amount per certificate with a $1,000
denomination.
The trustee will make the distribution date statement, and, at its option,
any additional files containing the same information in an alternative format,
available each month to certificateholders, and other parties to the pooling
and servicing agreement via the trustee's internet website and its fax-on-
demand service. The trustee's fax-on-demand service may be accessed by calling
(301) 815-6610. The trustee's internet website shall initially be located at
"www.ctslink.com." Assistance in using the website or the fax-on-demand service
can be obtained by calling the trustee's customer service desk at (301) 815-
6600. Parties that are unable to use the above distribution options are
entitled to have a paper copy mailed to them via first class mail by calling
the customer service desk and indicating such. The trustee shall have the right
to change the way distribution date statements are distributed in order to make
such distribution more convenient and/or more accessible to the above parties
and the trustee shall provide timely and adequate notification to all above
parties regarding any such changes.
Within 60 days after the end of each calendar year, the trustee will forward
to each person, if requested in writing by such person who was a
certificateholder during the prior calendar year, a statement containing the
information set forth in clauses (2) and (3) above aggregated for such calendar
year.
Last Scheduled Distribution Date
The last scheduled distribution date for each class of Class A Certificates
is the distribution date in August 2031. It is expected that the actual last
distribution date for each Class of Class A Certificates will occur
significantly earlier than such scheduled distribution dates. See "Prepayment
and Yield Considerations."
The last scheduled distribution dates for the Class A-1 and Class A-2
Certificates has been calculated assuming that the certificate insurer makes
the payment of the outstanding Class A principal balance on the distribution
date in August 2031.
Collection and Other Servicing Procedures on Mortgage Loans
The master servicer will make reasonable efforts to collect all payments
called for under the mortgage loans and will, consistent with the pooling and
servicing agreement, follow collection procedures which generally conform to
the mortgage servicing practices of prudent mortgage lending institutions which
perform servicing functions for their own account for mortgage loans of the
same type as the mortgage loans to be included in the trust in the
jurisdictions in which the related mortgage properties are located. Consistent
with the above, the master servicer may in its discretion waive any late
payment charge or any assumption or other fee or charge that may be collected
in the ordinary course of servicing the mortgage loans.
With respect to the mortgage loans, the master servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a specified
period, provided that this arrangement is consistent with the master servicer's
policies with respect to mortgage loans it owns or services which are similar
to the mortgage loans.
Hazard Insurance
The master servicer will cause to be maintained fire and hazard insurance
with extended coverage customary in the area where each mortgaged property is
located, in an amount which is at least equal to the lesser of the maximum
insurable value of the improvements securing the mortgage loan from time to
time, and the combined principal balance owing on the mortgage loan and any
mortgage loan senior to the mortgage loan. Generally, if a mortgaged property
is in an area identified in the Federal Register by the Flood Emergency
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Management Agency as FLOOD ZONE "A," flood insurance has been made available
and the master servicer determines that the insurance is necessary in
accordance with accepted mortgage servicing practices of prudent lending
institutions, the master servicer will cause to be purchased a flood insurance
policy with a generally acceptable insurance carrier. The flood insurance
policy shall be in an amount representing coverage not less than the lesser of
the combined principal balance owing on the mortgage loan and any senior
mortgage loan, and the maximum amount of insurance available under the National
Flood Insurance Act of 1968, as amended. The master servicer will also maintain
on REO Property, to the extent that insurance is available, fire and hazard
insurance in the applicable amounts described above and liability insurance. In
addition, if the master servicer determines that flood insurance is necessary
in accordance with accepted mortgage servicing practices and prudent lending
institutions and to the extent required and available under the National Flood
Insurance Act of 1968, as amended, the master servicer will also maintain flood
insurance in an amount equal to that required above. Any amounts collected by
the master servicer under any of these policies, other than amounts to be
applied to the restoration or repair of the mortgaged property, or to be
released to the mortgagor in accordance with customary mortgage servicing
procedures, will be deposited in the collection account.
In the event that the master servicer obtains and maintains a blanket policy
as provided in the pooling and servicing agreement insuring against fire and
hazards of extended coverage on all of the mortgage loans, then, to the extent
that the policy names the master servicer or its designee as loss payee and
provides coverage in an amount equal to the aggregate unpaid principal balance
of the mortgage loans without coinsurance, and otherwise complies with the
requirements of the first paragraph of this subsection, the master servicer
will be deemed conclusively to have satisfied its obligations with respect to
fire and hazard insurance coverage.
Realization upon Defaulted Mortgage Loans
The master servicer will foreclose upon or otherwise comparably convert to
ownership mortgaged properties securing the mortgage loans as come into and
continue in default when, in accordance with applicable servicing procedures
under the pooling and servicing agreement, no satisfactory arrangements can be
made with borrowers for the collection of delinquent payments. In connection
with any foreclosure or other conversion of ownership, the master servicer will
follow the practices as it deems necessary or advisable and as are in keeping
with its general mortgage servicing activities. However, the master servicer
will not be required to expend its own funds in connection with foreclosure or
other conversion, correction of default on a related senior mortgage loan or
restoration of any property unless, in its sole judgment, foreclosure,
correction or restoration will increase net liquidation proceeds. The master
servicer will be reimbursed out of liquidation proceeds for advances of its own
funds as liquidation expenses before any net liquidation proceeds are
distributed to certificateholders.
Servicing Compensation and Payment of Expenses
For each due period, the master servicer will be entitled to receive a
monthly master servicing fee from interest payments on the mortgage loans at a
rate equal to 0.50% per annum on the principal balance of each mortgage loan as
of the first day of each due period. All assumption fees, late payment charges,
prepayment penalties and other fees and charges, to the extent collected from
mortgagors, will be retained by the master servicer as additional servicing
compensation.
Not later than the determination date, the master servicer is required to
remit to the trustee, without any right of reimbursement, an amount equal to,
with respect to each mortgage loan as to which a principal prepayment in full
was received during the related due period, the lesser of:
(1) any excess of 30 days' interest on the principal balance of the
mortgage loan at its interest rate, or at a lower rate as may be in effect
for the mortgage loan because of application of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "Civil Relief Act") minus the
master servicing fee for the mortgage loan over the amount of interest
actually paid by the related mortgagor in connection with the principal
prepayment in full minus the master servicing fee for that mortgage loan
(with respect to all the mortgage loans, the "Prepayment Interest
Shortfall"), and
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(2) the sum of the aggregate master servicing fee received by the master
servicer in the most recently ended due period.
The aggregate amount remitted by the master servicer each month is referred
to herein as "Compensating Interest."
Civil Relief Act Interest Shortfalls will not be covered by the certificate
insurance policy, although Prepayment Interest Shortfalls, after application of
the master servicing fee for the related due period, will be covered. The
master servicer is not obligated to offset any of the master servicing fee
against, or to provide any other funds to cover, any shortfalls in interest
collections on the mortgage loans that are attributable to the application of
the Civil Relief Act (this shortfall, a "Civil Relief Act Interest Shortfall").
See "Risk Factors--Payments on the Mortgage Loans" in this prospectus
supplement.
Evidence as to Compliance
The pooling and servicing agreement provides for delivery on or before the
last day of the fifth month following the end of the master servicer's fiscal
year, beginning in 2001, to the trustee, the certificate insurer and the rating
agencies of an annual statement signed by an officer of the master servicer to
the effect that the master servicer has fulfilled its material obligations
under the pooling and servicing agreement throughout the preceding fiscal year,
except as specified in the annual statement.
On or before the last day of the fifth month following the end of the master
servicer's fiscal year, beginning in 2001, the master servicer will furnish a
report prepared by a firm of nationally recognized independent public
accountants, who may also render other services to Provident, to the trustee,
the certificate insurer and the rating agencies to the effect that the firm has
examined documents and the records relating to servicing of the mortgage loans
under the Uniform Single Attestation Program for Mortgage Bankers and the
firm's conclusion with respect thereto.
The master servicer's fiscal year is the calendar year.
Matters Regarding the Master Servicer
The pooling and servicing agreement provides that the master servicer may
not resign from its obligations and duties under the pooling and servicing
agreement, except in connection with a permitted transfer of servicing, unless
its duties and obligations are no longer permissible under applicable law as
evidenced by an opinion of counsel delivered to the certificate insurer or on
the satisfaction of the following conditions:
. the master servicer has proposed a successor master servicer to the
trustee in writing and the proposed successor master servicer is
reasonably acceptable to the trustee;
. the rating agencies have confirmed to the trustee that the
appointment of the proposed successor master servicer will not
result in the reduction or withdrawal of the then current rating of
the certificates; and
. the proposed successor master servicer is reasonably acceptable to
the certificate insurer.
No resignation will become effective until the trustee or a successor master
servicer has assumed the master servicer's obligations and duties under the
pooling and servicing agreement.
The master servicer may perform any of its duties and obligations under the
pooling and servicing agreement through one or more subservicers or delegates,
which may be affiliates of the master servicer. Notwithstanding this
arrangement, the master servicer will remain liable and obligated to the
trustee and the certificateholders for the master servicer's duties and
obligations under the pooling and servicing agreement, without any diminution
of its duties and obligations and as if the master servicer itself were
performing those duties and obligations.
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The master servicer may permit the placement of a subsequent senior mortgage
on any mortgaged property, provided that:
. the related mortgage succeeded to a first lien position after the
closing date for the mortgage loan and, immediately following the
placement of a senior lien, the mortgage is in a second lien
position and the outstanding principal amount of the mortgage loan
secured by the senior lien is no greater than the outstanding
principal amount of the first mortgage loan existing as of the
closing date or a subsequent transfer date, as the case may be, and
the recalculated combined loan-to-value ratio of the mortgage loan
is not greater than the combined loan-to-value ratio of the
mortgage loan as of that date; or
. the mortgage relating to the mortgage loan was in a second lien
position as of the closing date or a subsequent transfer date, as
the case may be, the new senior lien secures a mortgage loan that
refinances an existing first mortgage loan and the outstanding
principal amount of the refinanced mortgage loan is no greater than
the outstanding principal amount of the first mortgage loan
existing as of the closing date and the recalculated combined loan-
to-value ratio of the mortgage loan is not greater than the
combined loan-to-value ratio of the mortgage loan as of that date.
In addition, the master servicer may agree to changes in the terms of a
mortgage loan, provided, however, that the changes will not cause the REMIC to
fail to qualify as a REMIC (as evidenced by an opinion of counsel, if required
by the pooling and servicing agreement) and do not adversely affect the
interests of the certificateholders or the certificate insurer and do not
change the interest rate of the mortgage loan or extend the maturity date of
the mortgage loan, unless the related mortgagor is in default, or a default is,
in the judgment of the master servicer, imminent. Any changes to the terms of a
mortgage loan that would cause the REMIC to fail to qualify as a REMIC,
however, may be agreed to by the master servicer, provided that the master
servicer has determined the changes are necessary to avoid a prepayment of the
mortgage loan, the changes are in accordance with prudent business practices
and the master servicer purchases the mortgage loan in accordance with the
terms of the pooling and servicing agreement.
The pooling and servicing agreement provides that the master servicer will
indemnify the trust and the trustee from and against any loss, liability,
expense, damage or injury suffered or sustained as a result of the master
servicer's actions or omissions in connection with the servicing and
administration of the mortgage loans that are not in accordance with the
provisions of the pooling and servicing agreement. The pooling and servicing
agreement provides that neither Provident nor the master servicer nor their
directors, officers, employees or agents will be under any other liability to
the trust, the trustee, the certificateholders or any other person for any
action taken or for refraining from taking any action pursuant to the pooling
and servicing agreement. However, neither Provident nor the master servicer
will be protected against any liability which would otherwise be imposed by
reason of willful misconduct, bad faith or gross negligence of Provident or the
master servicer, as the case may be, in the performance of their respective
duties under the pooling and servicing agreement or by reason of reckless
disregard of their respective obligations thereunder. In addition, the pooling
and servicing agreement provides that the master servicer will not be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its servicing responsibilities under the pooling and servicing
agreement. The master servicer may, in its sole discretion, undertake any legal
action which it may deem necessary or desirable with respect to the pooling and
servicing agreement and the rights and duties of the parties thereto and the
interest of the certificateholders thereunder.
Any corporation into which the master servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the master servicer shall be a party, or any corporation
succeeding to the business of the master servicer shall be the successor of the
master servicer under the pooling and servicing agreement, without the
execution or filing of any paper or any further act on the part of any of the
parties to the pooling and servicing agreement, anything in the pooling and
servicing agreement to the contrary notwithstanding.
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Events of Default
Events of default are any of the following:
. any failure of the master servicer to make any required Monthly
Advance, subject to the grace period described below, or any other
failure of the master servicer to deposit in the collection account
or distribution account any deposit required to be made under the
pooling and servicing agreement, which failure continues unremedied
for two business days after written notice of the failure to the
master servicer by the trustee, or to the master servicer and the
trustee by the certificate insurer or any certificateholder;
. any other failure by the master servicer duly to observe or perform
in any material respect any of its covenants or agreements in the
pooling and servicing agreement that, in each case, materially and
adversely affects the interests of the certificateholders or the
certificate insurer and continues unremedied for a period of 30
days after written notice of the failure to the master servicer by
the trustee, or to the master servicer and the trustee by the
certificate insurer or any certificateholder;
. any failure by the master servicer to make any required Servicing
Advance, which failure continues unremedied for a period of 30 days
after written notice of the failure to the master servicer by the
trustee, or to the master servicer and the trustee by the
certificate insurer or any certificateholder;
. events of insolvency, readjustment of debts, marshalling of assets
and liabilities, or similar proceedings relating to the master
servicer, and certain actions by the master servicer indicating
insolvency, reorganization, or inability to pay its obligations;
. the loss and delinquency performance of the mortgage loans
exceeding levels specified in the pooling and servicing agreement;
or
. events relating to the financial condition of the master servicer,
as further specified in the pooling and servicing agreement.
Notwithstanding the foregoing, a delay in or failure to make any required
Monthly Advance or any other failure of the master servicer to deposit in the
collection account or distribution account any deposit required to be made for
a period of ten business days or a delay in or failure to perform any of its
covenants or agreements set forth in the pooling and servicing agreement for a
period of thirty business days, shall not constitute an event of default if the
delay or failure could not be prevented by the exercise of reasonable diligence
by the master servicer and the delay or failure was caused by an act of God or
other similar occurrence. Upon the occurrence of any of these events, the
master servicer shall not be relieved from using its best efforts to perform
its obligations in a timely manner in accordance with the pooling and servicing
agreement and the master servicer shall provide the trustee, the certificate
insurer and the certificateholders prompt notice of the failure or delay by it,
together with a description of its efforts to so perform its obligations.
Rights upon an Event of Default
Upon the failure for one business day of the master servicer to make any
required Monthly Advance following notice of that failure to the master
servicer, the trustee will, subject to its right of reimbursement, make the
Monthly Advance and the trustee will terminate the rights and obligations of
the master servicer under the pooling and servicing agreement. After the
termination, the trustee or a successor master servicer will succeed to the
rights and responsibilities of the master servicer and shall assume all duties
of the master servicer. The successor master servicer or trustee shall be
entitled to similar compensation arrangements as described in the pooling and
servicing agreement. So long as any other event of default remains unremedied,
other than an event of default occurring as a result of loss and delinquent
performance of the mortgage loans exceeding certain levels, either the trustee,
certificateholders holding certificates evidencing at least 51% of the voting
rights in the trust, with the consent of the certificate insurer, or the
certificate insurer may terminate all
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of the rights and obligations of the master servicer under the pooling and
servicing agreement and in and to the mortgage loans, whereupon the trustee or
successor master servicer will succeed to and assume all the responsibilities,
duties and liabilities of the master servicer under the pooling and servicing
agreement and will be entitled to similar compensation arrangements. Upon the
occurrence of an event of default occurring as a result of the loss and
delinquency performance of the mortgage loans exceeding certain levels, as
discussed above, the certificate insurer may require that an audit of the
master servicer's servicing practices be performed. Upon review of the audit,
the certificate insurer may terminate all of the rights and obligations of the
master servicer under the pooling and servicing agreement if it reasonably
concludes that the master servicer's servicing practices have not been in
accordance with the pooling and servicing agreement and the condition giving
rise to the default is continuing, whereupon the trustee or a successor master
servicer will succeed to and assume all responsibilities, duties and
liabilities of the master servicer as described above. Notwithstanding anything
to the contrary above, there will be a transition period, which shall not
exceed 90 days, before any servicing transfer is fully effected. During this
transition period, the trustee or successor master servicer, as the case may
be, may appoint a sub-servicer (which may be Provident) with written approval
of the certificate insurer to service the mortgage loans. Notwithstanding the
foregoing, the trustee or successor master servicer will be obligated to make
any and all advances during the transition period.
If the trustee is obligated to succeed to all the responsibilities, duties
and liabilities of the master servicer but is unwilling or unable to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a housing and home finance institution or other mortgage loan or home
equity loan servicer with all licenses and permits required to perform its
obligations under the pooling and servicing agreement and having a net worth of
at least $50,000,000 and acceptable to the certificate insurer to act as
successor to the master servicer under the pooling and servicing agreement.
Pending that appointment, the trustee will be obligated to act in the capacity
of master servicer unless prohibited by law. The successor will be entitled to
receive the same compensation that the master servicer would otherwise have
received, or a lesser compensation as the trustee and the successor may agree.
A receiver or conservator for the master servicer may be empowered to prevent
the termination and replacement of the master servicer if the only event of
default that has occurred is the insolvency or similar event of the master
servicer.
Amendment
The pooling and servicing agreement may be amended from time to time by the
seller, the master servicer and the trustee and with the consent of the
certificate insurer, but without the consent of the certificateholders, to cure
any ambiguity to correct any defective provisions, to correct or supplement any
of its provisions that may be inconsistent with any other provisions of the
pooling and servicing agreement, to add to the duties of the master servicer,
to comply with any requirements imposed by the Internal Revenue Code or any
regulation under the Internal Revenue Code, or to add or amend any provisions
of the pooling and servicing agreement as required by the rating agencies to
maintain or improve any rating of the offered certificates (it being understood
that, after obtaining the ratings in effect on the closing date, neither the
seller, the trustee, the certificate insurer, nor the master servicer is
obligated to obtain, maintain, or improve any rating), or to add any other
provisions with respect to matters or questions arising under the pooling and
servicing agreement that are not inconsistent with the provisions of the
pooling and servicing agreement. No amendment will be permitted unless the
amendment will not, as evidenced by an opinion of counsel, materially and
adversely affect the interests of any certificateholder or the certificate
insurer or that amendment is necessary to maintain the qualification of a
REMIC. An amendment will not be considered to materially and adversely affect
the certificateholders and no opinion will be required to be delivered if the
person requesting the amendment obtains confirmation from the rating agencies
indicating that the amendment would not result in a downgrading of the then
current ratings of the offered certificates.
The pooling and servicing agreement may also be amended from time to time by
the seller, the master servicer and the trustee, with the consent of
certificateholders evidencing at least 51% of the percentage interests of each
class affected thereby and the certificate insurer, for the purpose of adding
any provisions to or changing in any manner or eliminating any of the
provisions of the pooling and servicing agreement or
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otherwise modifying in any manner the rights of the certificateholders.
However, no amendment may reduce in any manner the amount of, or delay the
timing of, collections of payments on the certificates or payments under the
trust's certificate insurance policy that are required to be made on any
certificate without the consent of the holder of that certificate and the
certificate insurer or reduce the aforesaid percentage required to consent to
any such amendment, without the consent of the holders of all certificates then
outstanding.
Termination; Purchase of Mortgage Loans
The trust will terminate on the distribution date following the later of
payment in full of all amounts owing to the certificate insurer and the
earliest of:
. the distribution date on which the aggregate Class A principal balance
has been reduced to zero,
. the final payment or other liquidation of the last mortgage loan in the
trust,
. the optional purchase by the seller of the mortgage loans, and
. the distribution date in August 2031.
Subject to provisions in the pooling and servicing agreement concerning
adopting a plan of complete liquidation, the seller may, at its option,
terminate the pooling and servicing agreement on any date on which the pool
principal balance is less than 10% of the aggregate cut-off date principal
balance of the initial and subsequent mortgage loans by purchasing, on the next
distribution date, all of the outstanding mortgage loans. The purchase price
will be an amount equal to the sum of the outstanding pool principal balance
and accrued and unpaid interest thereon at the weighted average of the interest
rate on the mortgage loans through the end of the due period preceding the
final distribution date, together with all amounts due and owing to the
certificate insurer and as further described in the pooling and servicing
agreement. The purchase shall be accomplished by deposit into the distribution
account of the purchase price.
Voting Rights
Under the pooling and servicing agreement, voting rights will be allocated
to the Class A Certificates in proportion to their respective class principal
balances. Voting rights allocated to a class of certificates will be further
allocated among the certificates of the class based on their respective
percentage interests. So long as no Insurer Default is continuing, the
certificate insurer will be entitled to exercise the voting rights of the Class
A Certificates.
The Trustee
Norwest Bank Minnesota, National Association, a national banking
association, has been named trustee pursuant to the pooling and servicing
agreement.
The trustee may have normal banking relationships with Provident and the
master servicer.
The trustee may resign at any time, in which event Provident will be
obligated to appoint a successor trustee, as approved by the certificate
insurer. Provident may also remove the trustee if the trustee ceases to be
eligible to continue as trustee under the pooling and servicing agreement or if
the trustee becomes insolvent. Upon becoming aware of these circumstances,
Provident will be obligated to appoint a successor trustee, as approved by the
certificate insurer. Any resignation or removal of the trustee and appointment
of a successor trustee will not become effective until acceptance of the
appointment by the successor trustee.
No holder of a certificate will have any right under the pooling and
servicing agreement to institute any proceeding with respect to the pooling and
servicing agreement unless the holder previously has given to the trustee
written notice of default and unless certificateholders holding certificates
evidencing at least 51% of the voting rights in the trust have made written
requests upon the trustee to institute a proceeding in its own name as trustee
thereunder and have offered to the trustee reasonable indemnity and the trustee
for 60 days has
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neglected or refused to institute the proceeding. The trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the pooling
and servicing agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
certificateholders, unless the certificateholders have offered to the trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred.
Use Of Proceeds
The net proceeds to be received from the sale of the certificates will be
applied by Provident towards the origination or purchase of the mortgage loans
and for general corporate and banking purposes.
Federal Income Tax Consequences
Assuming compliance with the pooling and servicing agreement, Brown & Wood
LLP is of the opinion that the trust (not including the pre-funding accounts,
the capitalized interest accounts, the distribution account, a spread account
and the net funds cap carryover reserve account) will qualify as a REMIC for
Federal income tax purposes. The "regular interests" in the REMIC will be
represented by Class A Certificates (not including the right of the Class A
Certificates to receive any LIBOR Carryover Amounts) and the Class X
Certificates. The Class R Certificates will represent the single class of
"residual interest" in the REMIC. See "Federal Income Tax Consequences" in the
prospectus.
The Class A Certificates generally will be treated as debt instruments
issued by the REMIC for Federal income tax purposes. Income on these
certificates must be reported under an accrual method of accounting.
The Class A Certificates (not including the right of the Class A
Certificates to receive LIBOR Carryover Amounts) may be issued with OID for
Federal income tax purposes. Holders of Class A Certificates issued with OID
will be required to include OID in income as it accrues under a constant yield
method, in advance of the receipt of cash attributable to that income. The OID
Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6) which applies to prepayable securities such as the Class A
Certificates. Until the U.S. Department of the Treasury issues guidance to the
contrary, the trustee intends to base its OID computation on Code Section
1272(a)(6) and the OID Regulations as described in the prospectus. However,
because no regulatory guidance currently exists under Code Section 1272(a)(6),
there can be no assurance that this methodology represents the correct manner
of calculating OID.
A reasonable application of the principles of the OID Regulations to Class A
Certificates issued with OID generally would be to report all income as OID for
each period, computing OID by assuming that the value of the index on the
certificates will remain constant for purposes of determining the original
yield to maturity and projecting future distributions on the Class A
Certificates, thereby treating the certificates as fixed rate instruments to
which the OID computation rules can be applied, and by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to OID with respect
to that period.
The yield used to calculate accruals of OID with respect to the Class A
Certificates with OID will be the original yield to maturity of the
Certificates. The yield is determined by assuming that the mortgage loans in
loan group 1 will prepay in accordance with 115% of the Prepayment Assumption
and that the mortgage loans in loan group 2 will prepay in accordance with 150%
of the Prepayment Assumption. No representation is made as to the actual rate
at which the mortgage loans will prepay.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The Prepayment Assumption model used in this prospectus
supplement represents an assumed monthly rate of prepayment relative to the
then outstanding principal balance of the pool of mortgage loans for the life
of the mortgage loans. See "Prepayment And Yield Considerations--Weighted
Average Lives." The Prepayment
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Assumption does not purport to be either a historical description of the
prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, and there is no
assurance that the mortgage loans will prepay at the indicated percentage of
the Prepayment Assumption. Provident does not make any representation about the
appropriateness of the Prepayment Assumption model.
The Class A Certificates will be treated as regular interests in a REMIC
under section 860G of the Code. Accordingly, the Class A Certificates will be
treated as assets described in section 7701(a)(19)(C) of the Code and "real
estate assets" within the meaning of section 856(c)(4)(A) of the Code, as
further described in the prospectus. Interest on the Class A Certificates will
be treated as interest on obligations secured by mortgages on real property
within the meaning of section 856(c)(3)(B) of the Code to the same extent that
the Class A Certificates are treated as real estate assets. See "Federal Income
Tax Consequences" in the prospectus.
The beneficial owners of the Class A Certificates and the related rights to
receive amounts in respect of interest at a rate in excess of the related
weighted average interest rate (the "LIBOR Carryover Amounts"), will be treated
for tax purposes as owning two separate assets:
(1) the respective Class A Certificates without the rights to receive
LIBOR Carryover Amounts, which constitute regular interests in a REMIC; and
(2) the related rights to receive LIBOR Carryover Amounts.
Accordingly, a purchaser of a Class A Certificate must allocate its purchase
price between the two assets comprising the certificate. In general, this
allocation would be based on the relative fair market values of the assets on
the date of purchase of the certificates. No representation is or will be made
as to the relative fair market values. All holders of Class A Certificates are
urged to consult their tax advisors regarding the taxation of LIBOR Carryover
Amounts, the taxation of which is generally governed by the provisions of the
Code and Treasury regulations relating to notional principal contracts and
possibly those relating to straddles.
The rights to receive LIBOR Carryover Amounts will not constitute:
(1) a "real estate asset" within the meaning of section 856(c)(4)(A) of
the Code for a real estate investment trust;
(2) a "qualified mortgage" or a "permitted investment" within the
meaning of section 860G(a)(3) and section 860(G)(a)(5), respectively, of
the Code if held by a REMIC; or
(3) an asset described in section 7701(a)(19)(C)(xi) of the Code if held
by domestic building and loan association.
Further, the LIBOR Carryover Amounts will not constitute income described in
section 856(c)(3)(B) of the Code for a real estate investment trust. Moreover,
other special rules may apply to some investors, including dealers in
securities and dealers in notional principal contracts.
Backup Withholding
Some certificate owners may be subject to backup withholding at the rate of
31% with respect to interest paid on the Class A Certificates if the
certificate owners, upon issuance, fail to supply the trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other "reportable
payments" properly, or, under some circumstances, fail to provide the trustee
or their broker with a certified statement, under penalty of perjury, that they
are not subject to backup withholding.
The trustee will be required to report annually to the IRS and to each Class
A certificateholder of record the amount of interest paid and any OID accrued
on the Class A Certificates and any amount of interest withheld for Federal
income taxes, for each calendar year, except as to exempt holders. Exempt
holders are generally holders that are corporations, some tax-exempt
organizations or nonresident aliens who provide
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certification as to their status as nonresidents. As long as the only "Class A
Certificateholder" of record is Cede as nominee for DTC, certificate owners and
the IRS will receive tax and other information including the amount of interest
paid on the certificates owned from participants and indirect participants
rather than from the trustee. The trustee, however, will respond to requests
for necessary information to enable participants, indirect participants and
other persons to complete their reports. Each non-exempt certificate owner will
be required to provide, under penalty of perjury, a certificate on IRS Form W-9
containing his or her name, address, correct Federal taxpayer identification
number and a statement that he or she is not subject to backup withholding.
Should a nonexempt certificate owner fail to provide the required
certification, the participants or indirect participants or the paying agent
will be required to withhold 31% of the interest and principal otherwise
payable to the holder, and remit the withheld amount to the IRS as a credit
against the holder's Federal income tax liability.
The New Withholding Regulations dealing with withholding tax on income paid
to foreign investors, backup withholding and related matters were issued by the
Treasury Department on October 6, 1997 and amended on May 15, 2000. The New
Withholding Regulations will generally be effective for payments made after
December 31, 2000, subject to certain transition rules. Prospective certificate
owners are strongly urged to consult their own tax advisors with respect to the
New Withholding Regulations.
These amounts will be deemed distributed to the affected certificate owner
for all purposes of the Class A Certificates, the pooling and servicing
agreement and the certificate insurance policy.
Federal Income Tax Consequences to Foreign Investors
The following information describes the United States Federal income tax
treatment of holders that are foreign investors. The term foreign investor
means any person other than the following:
. a citizen or resident of the United States,
. a corporation, partnership or any entity treated as a corporation or
partnership for Federal income tax purposes, created or organized in or
under the laws of the United States or any state thereof or the District
of Columbia--other than a partnership that is not treated as a United
States person under any applicable Treasury regulation,
. an estate, the income of which is includible in gross income for United
States Federal income tax purposes regardless of its source,
. a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United
States persons have the authority to control all substantial decisions
of the trust, or
. some trusts treated as United States persons before August 20, 1996 that
elect to continue to be so treated to the extent provided in
regulations.
The Code and Treasury regulations generally subject interest paid to a
foreign investor to a withholding tax at a rate of 30%, unless that rate was
changed by an applicable treaty. The withholding tax, however, is eliminated
with respect to some portfolio debt investments issued to foreign investors.
Portfolio debt investments include debt instruments issued in registered form
for which the United States payor receives a statement that the beneficial
owner of the instrument is a foreign investor. Because the Class A Certificates
will be issued in registered form, if the information required by the Code is
furnished and no other exceptions to the withholding tax exemption are
applicable, no withholding tax will apply to the Class A Certificates.
For the Class A Certificates to constitute portfolio debt investments exempt
from the United States withholding tax, the withholding agent must receive from
the certificate owner an executed IRS Form W-8BEN or a similar form listing the
certificate owner's name and address from the certificate owner stating that
the certificate owner is a foreign investor. The statement must be received by
the withholding agent in the calendar year in which the interest payment is
made, or in either of the two preceding calendar years.
S-67
A certificate owner that is a nonresident alien or foreign corporation will
not be subject to United States Federal income tax on gain realized on the
sale, exchange, or redemption of the Class A Certificate, provided that:
. the gain is not effectively connected with a trade or business carried
on by the certificate owner in the United States,
. in the case of a certificate owner that is an individual, the
certificate owner is not present in the United States for 183 days or
more during the taxable year in which the sale, exchange or redemption
occurs and
. in the case of gain representing accrued interest, the conditions
described in the immediately preceding paragraph are satisfied.
In addition, prospective foreign investors are strongly urged to consult
their own tax advisors with respect to the New Withholding Regulations.
State Taxes
Provident makes no representations regarding the tax consequences of
purchase, ownership or disposition of the offered certificates under the tax
laws of any state. Investors considering an investment in the certificates
should consult their own tax advisors regarding state tax consequences.
All investors should consult their own tax advisors regarding the Federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the offered certificates.
ERISA Considerations
Any fiduciary of a pension or other employee benefit plan which proposes to
cause the plan to acquire any of the offered certificates should consult with
its counsel with respect to the potential consequences under ERISA and the Code
of the plan's acquisition and ownership of the Offered Certificates. See "ERISA
Considerations" in the prospectus.
The U.S. Department of Labor has granted to Lehman Brothers Inc. Prohibited
Transaction Exemption 91-14 which exempts from the application of the
prohibited transaction rules transactions relating to (1) the acquisition, sale
and holding by plans of certificates representing an undivided interest in
asset-backed pass-through trusts and meeting other requirements, with respect
to which Lehman Brothers or any of its affiliates is the sole underwriter or
the manager or co-manager of the underwriting syndicate; and (2) the servicing,
operation and management of the asset-backed pass-through trusts, provided that
both the general conditions and additional conditions set forth in the
exemption are satisfied. The exemption will apply to the acquisition, holding
and resale of the Class A Certificates by a plan, provided that specified
conditions, some of which are described below, are met.
Among the conditions which must be satisfied for the exemption to apply are
the following:
(1) The acquisition of the Class A Certificates by a plan is on terms,
which include the price of the certificates, that are at least as favorable
to the investing plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Class A Certificates
acquired by the plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
(3) The Class A Certificates acquired by the plan have received a rating
at the time of the acquisition that is in one of the three highest generic
rating categories from either S&P, Moody's or Fitch;
S-68
(4) The sum of all payments made to and retained by an underwriter in
connection with the distribution of the Class A 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 mortgage loans to the trust represents not more than the fair market
value of the mortgage loans; and the sum of all payments made to and
retained by the master servicer and any sub-servicer represents not more
than reasonable compensation for the master servicer's and sub-servicer's
services under the pooling and servicing agreement and reimbursement of the
master servicer's and sub-servicer's reasonable expenses in connection
therewith;
(5) The trustee is not an affiliate of any underwriter, the seller, the
master servicer, any subservicer, the certificate insurer, any borrower
whose obligations under one or more mortgage loans constitute more than 5%
of the aggregate unamortized principal balance of the assets in the trust,
or any of their respective affiliates (together with the trustee, the
"Restricted Group"); and
(6) The plan investing in the Class A Certificates is an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the SEC under the
Securities Act of 1933, as amended.
The exemption does not apply to plans sponsored by members of the Restricted
Group.
Although the maximum amount permitted to be deposited in the pre-funding
accounts on the closing date may cause either the loan group 1 or loan group 2
pre-funded amounts to exceed 25% of the aggregate initial Class A principal
balance of the related certificate group, it is anticipated that a sufficient
amount of subsequent mortgage loans will be acquired by the trust on the
closing date and, as a result, the amount actually deposited to each pre-
funding account will be 25% or less of such initial aggregate balance. Provided
this is the case, the underwriters believe that the exemption will apply to the
acquisition and holding of the Class A Certificates by plans at closing and
that all conditions of the exemption other than those within the control of the
investors will be met. Any plan fiduciary considering whether to purchase any
Class A Certificates on behalf of a plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to such investment. Among other
things, before purchasing any Class A Certificates, a fiduciary of a plan
subject to the fiduciary responsibility provisions of ERISA or an employee
benefit plan subject to the prohibited transaction provisions of the Code
should make its own determination as to the availability of the exemptive
relief provided in the exemption, and also consider the availability of any
other prohibited transaction exemptions.
However, if either the loan group 1 or loan group 2 prefunded amounts
exceeds 25% of the aggregate initial Class A principal balance of the related
certificate group, then the exemption will not apply to the acquisition and
holding of the Class A Certificates of either certificate group until the
funding period has ended. In such event, no plan will be permitted to purchase
a Class A Certificate until the funding period has ended.
Legal Investment Considerations
Although, as a condition to their issuance, the offered certificates will be
rated in the highest rating category of the rating agencies, the offered
certificates will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), because not
all of the mortgages securing the mortgage loans are first mortgages and not
all of the mortgage loans were originated by entities that satisfy SMMEA
originator requirements. Accordingly, many institutions with legal authority to
invest in comparably rated securities based on first mortgage loans may not be
legally authorized to invest in the offered certificates, because they evidence
interests in a pool that includes junior mortgage loans. See "Legal Investment"
in the prospectus.
S-69
Underwriting
Subject to the terms and conditions set forth in the underwriting agreement
between Provident and the underwriters named below, Provident has agreed to
sell to the underwriters and each of the underwriters has severally agreed to
purchase from Provident the principal amount of Class A Certificates set forth
below opposite their respective names.
Class A-1 Class A-2
Underwriter Certificates Certificates
- ----------- ------------ ------------
Lehman Brothers Inc. ................................ $220,500,000 $140,000,000
Banc of America Securities LLC....................... 63,000,000 40,000,000
Credit Suisse First Boston Corporation............... 31,500,000 20,000,000
------------ ------------
Total.............................................. $315,000,000 $200,000,000
============ ============
In addition, the underwriting agreement provides that the obligations of
the underwriters to pay for and accept delivery of the offered certificates
are subject to conditions precedent and that the underwriters will be
obligated to purchase all of the offered certificates if any of the offered
certificates are purchased.
Provident has been advised by the underwriters that they presently intend
to make a market in the Class A Certificates; however, no underwriter is
obligated to do so, any market-making may be discontinued at any time, and
there can be no assurance that an active public market for the Class A
Certificates will develop.
The underwriting agreement provides that Provident will indemnify the
underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended.
Some expenses of the underwriters incurred in connection with this offering
will be paid by Provident.
In the ordinary course of business, Lehman Brothers Inc. and its affiliates
conduct routine banking activities with Provident and its affiliates.
Experts
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1999 and December 31, 1998 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1999,
incorporated by reference in this prospectus supplement, have been
incorporated herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
Legal Matters
Legal matters with respect to the Class A Certificates will be passed upon
for Provident by Keating, Muething & Klekamp, P.L.L., Cincinnati, Ohio.
Federal income tax consequences with respect to the certificates will be
passed upon for the trust by Brown & Wood LLP, New York, New York. Brown &
Wood LLP, New York, New York will act as counsel for the underwriters. Legal
matters relating to the certificate insurer will be passed upon by Kutak Rock
LLP, Omaha, Nebraska.
Ratings
It is a condition to the issuance of the Class A Certificates that they
receive ratings of "AAA" by Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc. and "Aaa" by Moody's Investors Service, Inc.
A securities rating addresses the likelihood of the receipt by Class A
Certificateholders of distributions on the mortgage loans. The rating takes
into consideration the characteristics of the mortgage loans and the
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structural, legal and tax aspects associated with the Class A Certificates. The
ratings on the Class A Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the mortgage loans or
the possibility that Class A Certificateholders might realize a lower than
anticipated yield.
The ratings assigned to the Class A Certificates will depend primarily upon
the financial strength of the certificate insurer. Any reduction in a rating
assigned to the financial strength of the certificate insurer below the ratings
initially assigned to the Class A Certificates may result in a reduction of one
or more of the ratings assigned to the Class A Certificates.
The ratings assigned to the Class A-2 Certificates do not address the
likelihood of the payment of any net funds cap carryover amount.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each securities rating should be evaluated independently
of similar ratings on different securities.
S-71
Index of Defined Terms
Term Page
- ---- ----------
Amount Available..................................................... S-51
Assignment Event..................................................... S-45
Available Funds...................................................... S-48
Balloon Loans........................................................ S-35
Certificate Insurance Policy......................................... S-13, S-55
Certificate Insurer.................................................. S-13, S-55
Civil Relief Act..................................................... S-59
Civil Relief Act Interest Shortfall.................................. S-60
Class A Certificateholder............................................ S-67
Class A Monthly Principal Distributable Amount....................... S-54
Class A Principal Distribution....................................... S-54
Class A Principal Shortfall Amount................................... S-54
Class Interest Carryover Shortfall................................... S-54
Class Interest Distribution.......................................... S-54
Class Monthly Interest Distributable Amount.......................... S-54
Compensating Interest................................................ S-60
CPR.................................................................. S-38
Term Page
- ---- ----
Deficiency Amount.......................................................... S-56
Eligible Account........................................................... S-47
Eligible Investment........................................................ S-47
Final Distribution Date.................................................... S-56
Guaranteed Principal Amount................................................ S-56
Insured Payment............................................................ S-56
LIBOR Carryover Amounts.................................................... S-66
Loan Index................................................................. S-25
Nonrecoverable Advance..................................................... S-48
Preference Amount.......................................................... S-56
Prepayment Assumption...................................................... S-38
Prepayment Interest Shortfall.............................................. S-59
REMIC...................................................................... S-7
Restricted Group........................................................... S-69
Servicing Advance.......................................................... S-47
SSMEA...................................................................... S-69
Trustee.................................................................... S-3
U.S. Person................................................................ I-4
S-72
Annex I
Global Clearance, Settlement and Tax Documentation Procedures
Except in limited circumstances, the globally offered Home Equity Loan
Asset-Backed Certificates, Series 2000-2 will be available only in book-entry
form. Investors in the globally offered securities may hold the global
securities through any of DTC, Cedelbank or Euroclear. The global securities
will be tradeable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding global securities
through Cedelbank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding global securities
through DTC will be conducted according to the rules and procedures applicable
to US corporate debt obligations and prior home equity loan asset-backed
certificates issues.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-
payment basis through the respective Depositaries of Cedelbank and Euroclear
and as DTC Participants.
Non-US holders of global securities will be subject to U.S. withholding
taxes unless these holders meet specific requirements and deliver appropriate
U.S. tax documents to the securities clearing organizations or their
participants.
Initial Settlement
All global securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the global securities
will be represented through financial institutions acting on their behalf as
participants and indirect participants in DTC. As a result, Cedelbank and
Euroclear will hold positions on behalf of their participants through their
respective depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their global securities through DTC will follow
the settlement practices applicable to prior home equity loan asset-backed
certificates issues. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their global securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between Cedelbank and/or Euroclear Participants. Secondary market
trading between Cedelbank participants or Euroclear participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
I-1
Trading between DTC seller and Cedelbank or Euroclear purchaser. When
global securities are to be transferred from the account of a DTC participant
to the account of a Cedelbank participant or a Euroclear participant, the
purchaser will send instructions to Cedelbank or Euroclear through a Cedelbank
participant or Euroclear participant at least one business day prior to
settlement. Cedelbank or Euroclear will instruct the respective depositary to
receive the global securities against payment. Payment will include interest
accrued on the global securities from and including the last coupon payment
date to and excluding the settlement date, on the basis of either the actual
number of days in the accrual period and a year assumed to consist of 360 days
or a 360-day year of 12 30-day months. For transactions settling on the 31st
of the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
depositary of the DTC participant's account against delivery of the global
securities. After settlement has been completed, the global securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Cedelbank participant's or
Euroclear participant's account. The securities credit will appear the next
day (European time) and the cash debt will be back-valued to, and the interest
on the global securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Cedelbank or
Euroclear cash debt will be valued instead as of the actual settlement date.
Cedelbank participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of credit
to them, Cedelbank participants or Euroclear participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedelbank participants or Euroclear
participants purchasing global securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the global securities were
credited to their accounts. However, interest on the global securities would
accrue from the value date. Therefore, in many cases the investment income on
the global securities earned during that one-day period may substantially
reduce or offset the amount of the overdraft charges, although this result
will depend on each Cedelbank participant's or Euroclear participant's
particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending global securities
to the respective European depositary for the benefit of Cedelbank
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC participants a cross-
market transaction will settle no differently than a trade between two DTC
participants.
Trading between Cedelbank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank participants and Euroclear
participants may employ their customary procedures for transactions in which
global securities are to be transferred by the respective clearing system,
through the respective depositary, to a DTC participant. The seller will send
instructions to Cedelbank or Euroclear through a Cedelbank participant or
Euroclear participant at least one business day prior to settlement. In these
cases Cedelbank or Euroclear will instruct the respective depositary, as
appropriate, to deliver the global securities to the DTC participant's account
against payment. Payment will include interest accrued on the global
securities from and including the last coupon payment to and excluding the
settlement date on the basis of either the actual number of days in the
accrual period and a year assumed to consist of 360 days or a 360-day year of
12 30-day months as applicable to the related class of global securities. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment
will then be reflected in the account of the Cedelbank participant or
Euroclear participant the following day, and receipt of the cash proceeds in
the Cedelbank participant's or Euroclear participant's account would be back-
valued to the
I-2
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedelbank participant or Euroclear participant have a line
of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-
valuation will extinguish any overdraft incurred over that one-day period. If
settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the Cedelbank participant's or
Euroclear participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
global securities from DTC Participants for delivery to Cedelbank participants
or Euroclear participants should note that these trades would automatically
fail on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day until the
purchase side of the day trade is reflected in their Cedelbank or Euroclear
accounts in accordance with the clearing system's customary procedures;
(b) borrowing the global securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the global
securities sufficient time to be reflected in their Cedelbank or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the Cedelbank
participant or Euroclear participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of a global security holding securities through
Cedelbank or Euroclear, or through DTC if the holder has an address outside
the U.S., will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest, including OID, on registered debt instruments
issued by a U.S. Person, unless:
. each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business in
the chain of intermediaries between such beneficial owner and the U.S.
entity required to withhold tax complies with applicable certification
requirements, and
. such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate.
Exemption for non-U.S. Persons (Form W-8 or Form W-8BEN). Beneficial owners
of global securities that are non-U.S. persons can obtain a complete exemption
from the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status) or Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for
United States Tax Withholding). If the information shown on the Form W-8 or
Form W-8BEN changes, a new Form W-8 or Form W-8BEN must be filed within 30
days of that change. After December 31, 2000, only Form W-8BEN will be
acceptable.
Exemption for non-U.S. Persons with effectively connected income (Form 4224
or Form W-8ECI). A non-U.S. person, including a non-U.S. corporation or bank
with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing a Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States) or Form W-8ECI (Certificate of Foreign
Person's Claim for Exemption from Withholding on Income Effectively Connected
with the Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001 or Form W-8BEN). Non-U.S. Persons that are certificate owners
residing in a country that has a tax treaty with the United States can obtain
an exemption or reduced tax rate, depending on the treaty terms, by filing,
Form 1001 (Ownership, Exemption or Reduced Rate Certificate, or Form W-8BEN
(Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). If Form 1001 is provided and the treaty provides only for
I-3
a reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the certificate owners
or his agent. After December 31, 2000, only Form W-8BEN will be acceptable.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing a Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The certificate owner of a
global security or, in the case of a Form 1001 or a Form 4224 filer, its
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8, Form 1001 and Form 4224 are effective
until December 31, 2000. Form W-8BEN and Form W-8ECI are effective until the
third succeeding calendar year from the date the form is signed.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnerships or other entity treated as a corporation or
partnership for federal income tax purposes created or organized in or under
the laws of the United States or any state thereof or the District of
Columbia, (other than a partnership that is not treated as a United States
person under any applicable Treasury regulation) an estate whose income is
subject to U.S. Federal income tax regardless of its source of income, or a
trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in regulations,
some trusts in existence on August 20, 1996 and treated as United States
persons prior to that date that elect to continue to be treated as United
States persons shall be considered U.S. persons as well. This summary does not
deal with all aspects of U.S. Federal income tax withholding that may be
relevant to foreign holders of the global securities. Investors are advised to
consult their own tax advisors for specific tax advice concerning their
holding and disposing of the global securities.
I-4
Prospectus
Asset Backed Securities
(Issuable in Series)
----------------
Consider carefully the The Provident Bank may periodically issue
risk factors beginning securities, which may be in the form of asset-
on page 1 of this backed certificates or asset-backed notes. Each
prospectus. issue of securities will have its own series
designation and will evidence interests in or
obligations of a trust established by The
Provident Bank.
Each trust will consist of:
. mortgage loans secured by senior or junior liens on one- to four-family
residential properties; and
. closed-end or revolving home equity loans secured by senior or junior liens
on one- to four-family residential properties.
Each series of securities:
. will either evidence beneficial ownership of a trust or be secured by the
assets of a trust; and
. will be issued in one or more classes of securities. A class of securities:
. will be entitled to anywhere from 0% to 100% of the interest payments and
principal payments on the assets of the trust;
. may be senior or subordinate in right of payment to other classes; and
. may receive payments from an insurance policy, cash account, or other
form of credit enhancement to cover losses on the trust assets.
The securities may be offered to the public through different methods as
described in "Method of Distribution" in this prospectus.
Neither the SEC nor any state securities commission has approved or
disapproved these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
February 7, 2000
Important Notice About Information Presented In This
Prospectus and the Accompanying Prospectus Supplement
We provide information to you about the securities in two separate documents
that progressively provide more detail:
. this prospectus, which provides general information, some of which may
not apply to your series of securities and
. the accompanying prospectus supplement, which describes the specific
terms of your series of securities.
The terms of any particular series of securities as generally described in
this prospectus will be supplemented by the disclosure in the accompanying
prospectus supplement, which must be read in conjunction with this prospectus.
This prospectus may be used to offer and sell the securities only if
accompanied by a prospectus supplement.
We have authorized the use of only the information provided in this
prospectus and the accompanying prospectus supplement, including the
information incorporated by reference. We have not authorized anyone to provide
you with different information. We are not offering the securities in any state
where the offer is not permitted.
We include cross-references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following Table of Contents and the Table of Contents
included in the accompanying prospectus supplement provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Defined Terms" beginning on
page 115.
i
Table Of Contents
RISK FACTORS.................................................................. 1
THE TRUST FUND................................................................ 2
General...................................................................... 2
The Loans.................................................................... 4
Substitution of Trust Fund Assets............................................ 7
USE OF PROCEEDS............................................................... 7
THE PROVIDENT BANK............................................................ 7
General...................................................................... 7
Available Information........................................................ 8
Incorporation of Certain Documents by Reference.............................. 8
LOAN PROGRAM.................................................................. 8
Underwriting Standards....................................................... 8
Qualifications of Provident.................................................. 10
Representations by Provident;
Repurchases................................................................. 10
DESCRIPTION OF THE SECURITIES................................................. 11
General...................................................................... 11
Distributions on Securities.................................................. 12
Advances..................................................................... 14
Reports to Securityholders................................................... 15
Categories of Classes of Securities.......................................... 16
Book-Entry Registration of Securities........................................ 18
CREDIT ENHANCEMENT............................................................ 21
General...................................................................... 21
Subordination................................................................ 22
Letter of Credit............................................................. 23
Insurance Policies, Surety Bonds, and Guaranties............................. 23
Over-Collateralization....................................................... 23
Reserve Accounts............................................................. 23
Pool Insurance Policies...................................................... 25
Cross-Collateralization...................................................... 26
YIELD AND PREPAYMENT CONSIDERATIONS........................................... 26
THE AGREEMENTS................................................................ 28
Assignment of the Trust Fund Assets.......................................... 28
Payments on Loans; Deposits to Security Account.............................. 29
Pre-Funding Account.......................................................... 31
Sub-Servicing................................................................ 32
Collection Procedures........................................................ 32
Hazard Insurance............................................................. 33
Realization Upon Defaulted Loans............................................. 34
Servicing and Other Compensation and Payment of Expenses..................... 35
Evidence as to Compliance.................................................... 35
Matters Regarding the Master Servicer and Provident.......................... 35
Events of Default; Rights Upon Event of Default.............................. 36
Amendment.................................................................... 38
Termination; Optional Termination.......................................... 39
The Trustee................................................................ 40
LEGAL ASPECTS OF THE LOANS.................................................. 40
General.................................................................... 40
Foreclosure and Repossession............................................... 41
Environmental Risks........................................................ 42
Rights of Redemption....................................................... 43
Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens.................... 43
Due-on-Sale Clauses........................................................ 44
Enforceability of Prepayment and Late Payment Fees......................... 45
Applicability of Usury Laws................................................ 45
Soldiers' and Sailors' Civil Relief Act.................................... 45
Junior Mortgages; Rights of Senior Mortgagees.............................. 46
Consumer Protection Laws................................................... 47
FEDERAL INCOME TAX CONSEQUENCES............................................. 47
General.................................................................... 47
Taxation of Debt Securities................................................ 48
Taxation of the REMIC and its Holders...................................... 52
REMIC Expenses; Single Class REMICs........................................ 53
Taxation of the REMIC...................................................... 53
Taxation of Holders of Residual Interest Securities........................ 54
Administrative Matters..................................................... 57
Tax Status as a Grantor Trust.............................................. 57
Sale or Exchange........................................................... 60
Miscellaneous Tax Aspects.................................................. 60
Tax Treatment of Foreign Investors......................................... 61
Tax Characterization of the Trust Fund as a Partnership.................... 62
Tax Consequences to Holders of the Notes................................... 62
Tax Consequences to Holders of the Certificates............................ 64
Taxation of Trust as FASIT................................................. 68
Treatment of FASIT Regular Securities...................................... 70
Treatment of High-Yield Interests.......................................... 70
Tax Treatment of FASIT
Ownership Securities...................................................... 71
State Tax Considerations................................................... 71
ERISA Considerations....................................................... 71
Legal Investment........................................................... 76
Method of Distribution..................................................... 77
Legal Matters.............................................................. 78
Financial Information...................................................... 78
Rating..................................................................... 78
Index of Defined Terms..................................................... 80
ii
Risk Factors
Please carefully consider the following risk factors in deciding whether to
purchase any of the securities.
Limited Resale Market For Securities
No market will exist for the securities of any series before they are
issued. We cannot assure you that a resale market will develop following the
issuance and sale of any series of the securities. Consequently, you may not be
able to sell your securities at prices that will enable you to realize your
desired yield.
Limited Source of Payments--No Recourse to Provident or Master Servicer
The securities of each series will be payable solely from the assets of the
related trust, including any applicable credit enhancement. Moreover, at the
times specified in the related prospectus supplement, some assets of the trust
may be released to The Provident Bank, the master servicer, a credit
enhancement provider, or other person. Once released, those assets will no
longer be available to make payments to you.
The securities will not represent an interest in The Provident Bank, the
master servicer, or any of their respective affiliates, nor will the securities
represent an obligation of any of them. Our only obligation with respect to a
trust is the obligation to repurchase a trust asset if we breach a
representation and warranty concerning that trust asset. You will not have any
recourse against us or the master servicer if any required distribution on the
securities is not made. Consequently, if payments on the trust assets are
insufficient to make all payments required on the securities you may incur a
loss of your investment.
Limitations on the Effectiveness of Credit Enhancement
Credit enhancement is intended to reduce the effect of delinquent payments
or loan losses on those classes of securities that have the benefit of the
credit enhancement. However, the amount of any credit enhancement may decline
or be depleted before the securities are paid in full. As a result, you may
suffer losses. In addition, credit enhancement may not cover all potential
sources of loss, such as a loss from fraud or negligence by a loan originator
or other party.
Nature of Mortgages Securing the Loans
.Decline in Property Values May Increase Loan Losses. Because your
securities represent an interest in mortgage loans or are secured by mortgage
loans, your investment may be affected by a decline in property values. If the
outstanding balance of a mortgage loan and any secondary financing on the
underlying property is greater than the value of the property, the risk of
delinquency, foreclosure, and loss increases. A decline in property values
could extinguish the value of a junior mortgagee's interest in a property.
.Delays Due to Liquidation. Substantial delays may occur before defaulted
loans are liquidated and the proceeds are forwarded to investors. Property
foreclosure actions are regulated by state statutes and rules and are subject
to many of the delays and expenses that characterize lawsuits if defenses or
counterclaims are made. As a result, foreclosure actions can sometimes take
several years to complete and their proceeds may not cover the defaulted loan
amount. Some states prohibit a mortgage lender from obtaining a judgment
against the borrower for amounts not covered by property proceeds.
We refer you to "Legal Aspects of the Loans--Anti-Deficiency Legislation;
Bankruptcy Laws; Tax Liens" for additional information.
.Junior Liens Satisfied After Senior Liens. Some of the loans in the trust
may be junior loans. Mortgages or deeds of trust securing junior loans will be
satisfied after the claims of the senior mortgage holders and the foreclosure
costs are satisfied. In addition, a junior mortgage lender may only foreclose
subject to any related senior mortgage. As a result, the junior mortgage lender
generally must either pay the related
1
senior mortgage lender in full at or before the foreclosure sale or agree to
make the regular payments on the senior mortgage. Since the trust will not have
any source of funds to satisfy any senior mortgage or to continue making
payments on it, the trust's ability as a practical matter to foreclose on any
junior mortgage will be limited.
.Regulated by Consumer Protection Laws. Most states have laws and public
policies for the protection of consumers that regulate interest rates and other
loan changes, require licensing of loan originators and servicers, and prohibit
unfair and deceptive practices in making, servicing, and collecting loans.
Violations of these laws may limit the ability of the master servicer to
collect interest or principal on the loans and may entitle the borrowers to a
refund of amounts previously paid.
The loans may also be subject to federal laws relating to the origination
and underwriting of loans. These laws
. require disclosures of the terms of the loans to the borrowers;
. 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;
. regulate the use and reporting of information related to the borrower's
credit experience; and
. require additional application disclosures, limit changes that may be
made to the loan documents without the borrower's consent, and restrict
a lender's ability to declare a default or to suspend or reduce a
borrower's credit limit to enumerated events.
Some violations of these federal laws may render the master servicer unable
to collect all or part of the principal or interest on the loans. The trust
also could be subject to damages and administrative enforcement.
We refer you to "Legal Aspects of the Loans" for additional information.
Trust Subject to Environmental Risks
Under the laws of some states, contamination of a property may create a lien
on the property to assure the costs of cleanup. In several states, that lien
has priority over the lien of an existing mortgage. In addition, the holder of
a mortgage, such as a trust, may be held responsible for the costs associated
with the clean up of hazardous substances released at a property. These costs
could result in your incurring a loss on your investment.
We refer you to "Legal Aspects of the Loans--Environmental Risks" for
additional information.
Value of Trust Assets
We cannot assure you that the value of the trust assets for any series of
securities at any time will equal or exceed the principal amount of the
outstanding securities of the series. If trust assets have to be sold because
of an event of default or otherwise, providers of services to the trust,
including the trustee, the master servicer, and any credit enhancer, generally
will be entitled to receive the proceeds of the sale to the extent of their
unpaid fees and other amounts due them before any proceeds are paid to
investors. As a result, you may not receive the full amount of interest and
principal due on your investment.
The Trust Fund
General
The Asset-Backed Certificates and the Asset-Backed Notes that may be issued
from time to time in one or more series will represent interests in the assets
of the related trust fund. The notes of each series will be
2
secured by the pledge of the assets of the related trust fund. The trust fund
for each series will be held by the trustee for the benefit of the holders of
the related securities. Each trust fund will consist of a pool of loans as
specified in the related prospectus supplement, together with payments on the
loans, as specified in the related prospectus supplement. The pool of loans
will be created on the first day of the month of the issuance of the related
series of securities or another date specified in the related prospectus
supplement (the "Cut-Off Date"). The securities will be entitled to payment
from the assets of the related trust fund or other assets pledged for the
benefit of the securityholders as specified in the related prospectus
supplement and will not be entitled to payments from the assets of any other
trust fund established by Provident.
Each loan will have been originated or acquired by The Provident Bank
("Provident") in accordance with the underwriting criteria specified under
"Loan Program--Underwriting Standards" or as otherwise described in the related
prospectus supplement. The trust fund assets will be conveyed without recourse
by Provident to the related trust fund.
Provident will assign the trust fund assets to the trustee named in the
related prospectus supplement for the benefit of the securityholders. The
master servicer named in the related prospectus supplement will service the
trust fund assets, either directly or through sub-servicers, pursuant to a
pooling and servicing agreement between Provident, the master servicer, and the
trustee with respect to a series consisting of certificates, or a master
servicing agreement between the trustee and the master servicer with respect to
a series consisting of certificates and notes, and will receive a fee for its
services. See "Loan Program" and "The Agreements." With respect to loans
serviced by the master servicer through a sub-servicer, the master servicer
will remain liable for its servicing obligations under the related pooling and
servicing agreement as if the master servicer alone were servicing the loans.
As used in this prospectus, agreement means the pooling and servicing
agreement when used with reference to a series consisting of certificates, and
means the trust agreement, the indenture, and the master servicing agreement
when used with reference to a series consisting of certificates and notes.
If so specified in the related prospectus supplement, a trust fund relating
to a series of securities may be a business trust formed under the laws of the
state specified in the related prospectus supplement pursuant to a trust
agreement between Provident and the trustee of the trust fund.
A trust fund will have no assets or liabilities before the initial offering
of its related series of securities. No trust fund is expected to engage in any
activities other than acquiring, managing and holding the related trust fund
assets and other specified assets contemplated in this prospectus and in the
related prospectus supplement and their proceeds, issuing securities and making
payments and distributions on them, and other related activities. No trust fund
is expected to have any source of capital other than its assets and any related
credit enhancement.
The only obligations of Provident with respect to a series of securities
will be to make specified representations and warranties to the trustee for the
series. Provident will be obligated to cure any breach of a representation or
warranty that materially and adversely affects the interests of a
securityholder or to repurchase or substitute for the affected loans. See "The
Agreements--Assignment of the Trust Fund Assets." The obligations of the master
servicer with respect to the loans will consist principally of its contractual
servicing obligations under the related agreement and its obligation, if any,
to make specified cash advances upon delinquencies in payments on the loans in
the amounts described in this prospectus under "Description of the Securities--
Advances." The obligations of the master servicer under the related agreement
include its obligation to enforce the obligations of the sub-servicers or
Provident, or both, as more fully described in this prospectus under "Loan
Program--Representations by Provident; Repurchases" and "The Agreements--Sub-
Servicing" and "--Assignment of the Trust Fund Assets." The obligations of the
master servicer to make advances may be subject to limitations to the extent
provided in this prospectus and in the related prospectus supplement.
3
The following is a brief description of the assets expected to be included
in the trust funds. If specific information about trust fund assets is not
known at the time the related series of securities initially is offered, more
general information of the nature described under "The Loans" will be provided
in the related prospectus supplement, and specific information will be provided
in a report on Form 8-K to be filed with the SEC within fifteen days after the
initial issuance of the securities. A copy of the agreement for each series of
securities 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 the series will be attached to the agreement delivered to the
trustee on delivery of the securities.
The Loans
General. Loans will consist of mortgage loans and home equity loans. As more
fully described in the related prospectus supplement, the loans will be
conventional loans.
The loans in a pool will have monthly payments due on the first day of each
month or on another day of the month specified in the related prospectus
supplement. The payment terms of the loans to be included in a trust fund will
be described in the related prospectus supplement and may include any of the
following features, or combinations of them:
Interest may be payable at
. a fixed rate,
. an adjustable rate based on an index,
. a rate that is fixed for a period of time or under specified
circumstances and is followed by an adjustable rate,
. a rate that otherwise varies, or
. a rate that is convertible from an adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates, or a combination of these limitations. Accrued
interest may be deferred and added to the principal of a loan for periods and
under circumstances specified in the related prospectus supplement. A loan may
provide for the interest to be paid by the borrower to be at a rate lower than
the specified interest rate borne by the loan for a period of time or for the
life of the loan. In these cases, the amount of any difference would be
contributed from funds supplied by the seller of the property or another
source.
Principal may be payable:
. at an amortization rate calculated on the basis of level debt service
calculated to amortize the loan fully over its term,
. at an amortization rate calculated on the basis of an assumed
amortization schedule that is significantly longer than the original
term to maturity,
. at an amortization rate calculated on the basis of an interest rate that
is different from the interest rate provided for in the mortgage loan
note,
. at an amortization rate that may not amortize principal during all or a
portion of the original term,
. as a balloon payment where all or a substantial portion of the principal
may be due on maturity, or
. as negative amortization where interest that has been deferred is added
to the principal balance of the loan.
4
Monthly payments of principal and interest may be fixed for the life of the
loan, may increase over a specified period of time, 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.
Prepayments of principal may be subject to a prepayment fee, which may be
fixed for the life of the loan or may decline over time. Also prepayments may
be prohibited for the life of the loan or for specified periods commonly called
lockout periods. Some loans may permit prepayments after expiration of a
lockout period and may require the payment of a prepayment fee in connection
with that subsequent prepayment. 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 that permit the mortgagee to demand
payment of the entire loan in connection with the sale or specified transfers
of the related mortgaged property. Other loans may be assumable by persons
meeting the then applicable standards in the agreement.
A trust fund may contain loans commonly called buydown loans where a third
party partially subsidizes the monthly payments of the borrowers on the loans
during their early years, the difference being made up from a buydown fund
contributed by the third party when the loan is made. A buydown fund will be in
an amount equal either to the discounted value or full aggregate amount of
future payment subsidies. The underlying assumption of buydown plans is that
the income of the borrower will increase during the buydown period as a result
of normal increases in compensation and inflation, so that the borrower will be
able to meet the full loan payments at the end of the buydown period. To the
extent that this assumption as to increased income is not fulfilled, the
possibility of defaults on buydown loans is increased. The related prospectus
supplement will contain information about limitations on the interest rate paid
by the borrower initially, the annual increases in the interest rate, and the
length of the buydown period for any buydown loans.
The real property that secures repayment of a loan is referred to as the
mortgaged property. Each loan will be secured by mortgages or deeds of trust or
other similar security instruments creating a lien on a mortgaged property. In
the case of home equity loans, the liens generally will be subordinated to one
or more senior liens on the related mortgaged properties as described in the
related prospectus supplement. The mortgaged properties relating to loans will
consist of detached or semi-detached one- to four-family dwelling units,
townhouses, rowhouses, individual condominium units, individual units in
planned unit developments, manufactured homes, and other single family
properties. The mortgaged properties may include vacation and second homes,
investment properties, and dwellings situated on land that is leased rather
than owned. In the case of leasehold interests, the term of the leasehold will
exceed the scheduled maturity of the loan by at least five years, unless
otherwise specified in the related prospectus supplement. The mortgaged
properties may be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico, or any other territory of the United States.
Loans with specified loan-to-value ratios or specified principal balances
may be covered wholly or partially by primary mortgage guaranty insurance
policies. The existence, extent, and duration of the insurance coverage will be
described in the applicable prospectus supplement.
The aggregate principal balance of loans secured by mortgaged properties
that are owner-occupied may be disclosed in the related prospectus supplement.
The basis for a representation that a given percentage of the loans is secured
by single family properties that are owner-occupied will be either:
. a representation by the borrower at origination of the loan either that
the underlying property will be used by the borrower for a period of at
least six months every year or that the borrower intends to use the
property as a primary residence or
. a finding that the address of the underlying property is the borrower's
mailing address.
Home Equity Loans. As more fully described in the related prospectus
supplement, interest on each revolving credit line loan or some of their
balances is computed and payable monthly on the average daily
5
outstanding principal balance of the loan, except for introduction rates
offered from time to time during promotional periods. Principal amounts up to a
maximum amount on a revolving credit line loan may be drawn down or repaid
under each revolving credit line loan from time to time, but may be subject to
a minimum periodic payment. As specified in the related prospectus supplement,
the trust fund may include any amounts borrowed under a revolving credit line
loan after the Cut-Off Date. The full amount of a closed-end loan is advanced
at the inception of the loan and generally is repayable in equal, or
substantially equal, installments of an amount to amortize the loan fully at
its stated maturity or is a balloon loan.
As more fully described in the related prospectus supplement, interest on
each closed-end loan is calculated on the basis of the outstanding principal
balance of the loan multiplied by its interest rate and then by a factor for
the period involved. The factor for the period involved is either the fraction
30 divided by 360 or a fraction whose numerator is the number of days in the
period elapsed since the preceding payment of interest was made and whose
denominator is the number of days in the annual period for which interest
accrues on the loan.
Except to the extent provided in the related prospectus supplement, the
original terms to stated maturity of closed-end loans generally will not exceed
360 months. Under specified circumstances, under either a revolving credit line
loan or a closed-end loan, a borrower may choose an interest only payment
option and is obligated to pay only the amount of interest that accrues on the
loan during the billing cycle. An interest only payment option may be available
for a specified period before the borrower must begin paying at least the
minimum monthly payment of a specified percentage of the average outstanding
balance of the loan.
Additional Information. Each prospectus supplement will contain information,
about its loan pool, including:
. the aggregate outstanding principal balance and the average outstanding
principal balance of the loans as of the applicable Cut-Off Date,
. the type of property securing the loan, e.g., single family residences,
individual units in condominium apartment buildings, two- to four-family
dwelling units, or other real property,
. the original terms to maturity of the loans,
. the largest principal balance and the smallest principal balance of any
of the loans,
. the earliest origination date and latest maturity date of any of the
loans,
. the loan-to-value ratios or combined loan-to-value ratios, as
applicable, of the loans,
. the interest rates provided for in the mortgage loan notes or annual
percentage rates or range of interest rates provided for in the mortgage
loan notes or APR's borne by the loans,
. the maximum and minimum per annum interest rate provided for in the
mortgage loan notes, and
. the geographical location of the loans.
This information will be as of the date of the prospectus supplement and to
the extent then specifically known to Provident. If specific information about
the loans is not known to Provident at the time the related securities are
initially offered, more general information of this nature will be provided in
the related prospectus supplement, and specific information will be provided in
a subsequent 8-K filing with the SEC.
Generally, the loan-to-value ratio of a loan at any given time is equal to a
fraction whose numerator is the original principal balance of the related loan
and whose denominator is the collateral value of the related mortgaged
property. Generally, the combined loan-to-value ratio of a loan at any given
time is the ratio of:
. the sum of:
. the original principal balance of the loan, or, in the case of a
revolving credit line loan, its maximum available amount and
6
. the outstanding principal balance at the date of origination of the
loan of any senior mortgage loans or, in the case of any open-ended
senior mortgage loan, its maximum available line of credit, to
. the collateral value of the related mortgaged property.
The collateral value of a mortgaged property, other than particular loans the
proceeds of which are used to refinance an existing mortgage loan, is the
lesser of the appraised value determined in an appraisal obtained at
origination of the loan and the sales price for the mortgaged property. The
collateral value of a mortgaged property securing a refinance loan is its
appraised value determined in an appraisal obtained at the time of refinancing.
The residential real estate market could experience an overall decline in
property values. That decline could be so large that the sum of the outstanding
principal balances of the loans and any primary or secondary financing on the
mortgaged properties, in a particular pool becomes greater than the value of
the mortgaged properties. In that case, the actual rates of delinquencies,
foreclosures, and losses could be higher than those now generally experienced
in the mortgage lending industry. In addition, adverse economic conditions and
other factors, which may or may not affect real property values, may affect the
timely payment by borrowers of scheduled payments of principal and interest on
the loans and, accordingly, the actual rates of delinquencies, foreclosures,
and losses in any pool. To the extent that these losses are not covered by
subordination provisions or alternative arrangements, they will be borne, at
least in part, by the holders of the securities of the related series.
Substitution of Trust Fund Assets
The sellers of assets that wind up in the trust fund make representations
and warranties about those assets. If the representations and warranties turn
out to be untrue or if the documentation for a trust fund asset is determined
to be incomplete, new assets may be substituted for the defective trust fund
assets. The period during which substitution will be permitted generally will
be indicated in the related prospectus supplement.
Use Of Proceeds
The net proceeds to be received by Provident from the sale of trust fund
assets will be applied by Provident to the purchase of additional trust fund
assets or will be used by Provident for general corporate purposes. Provident
expects to sell securities in series issued by the related trust fund from time
to time, but the timing and amount of offerings of securities will depend on a
number of factors, including the volume of trust fund assets originated or
acquired by Provident and sold to the trust fund, prevailing interest rates,
availability of funds, and general market conditions.
The Provident Bank
General
Provident, an Ohio banking corporation, is the principal banking subsidiary
of Provident Financial Group, Inc., a Cincinnati-based bank holding company
registered under the Bank Holding Company Act. Provident Financial Group, Inc.
operates throughout Ohio, Northern Kentucky, Southeastern Indiana and Florida.
The principal executive offices of Provident are located at One East Fourth
Street, Cincinnati, Ohio 45202 (Telephone: (513) 579-2000).
The securities represent obligations of the trust only and do not represent
an interest in or obligation of The Provident Bank, the master servicer, or any
of their affiliates. Neither Provident nor any of Provident's affiliates will
insure or guarantee distributions on the securities of any series.
7
Available Information
Provident has filed with the Securities and Exchange a registration
statement under the Securities Act of 1933 covering the Securities. This
prospectus, which forms a part of the Registration Statement, and the
prospectus supplement relating to each series of securities contain
descriptions of the material terms of the documents referred to in the
registration statement, but do not contain all of the information in the
registration statement. For further information, reference is made to the
registration statement and its exhibits. The registration statement, exhibits,
and the information incorporated by reference described under "Incorporation of
Certain Documents by Reference" can be inspected and copied at prescribed rates
at the public reference facilities maintained by the SEC at its Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: Midwest Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and Northeast Regional Office,
Seven World Trade Center, Suite 1300, New York, New York 10048. Information on
the operation of Public Reference Room may be obtained by calling the SEC at 1-
800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov from
which the registration statement and exhibits may be obtained.
Incorporation of Certain Documents by Reference
All documents subsequently filed by or on behalf of the trust fund referred
to in the accompanying prospectus supplement with the SEC pursuant to Section
13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934, after the
date of this prospectus and before the termination of any offering of the
securities issued by the trust fund are incorporated by reference in this
prospectus and a part of this prospectus from the date of their filing. Any
statement contained in a document incorporated by reference in this prospectus
shall be modified or superseded for all purposes of this prospectus to the
extent that a statement contained in this prospectus or in the accompanying
prospectus supplement or in any other subsequently filed document that also is
incorporated by reference modifies or replaces the statement. The statement so
modified or superseded shall not constitute a part of this prospectus, except
as so modified or superseded. Neither Provident nor the master servicer for any
series intends to file with the SEC periodic reports with respect to the
related trust fund following completion of the reporting period required by
Rule 15d-1 or Regulation 15D under the Securities Exchange Act of 1934.
The trustee or another entity specified in the related prospectus supplement
on behalf of any trust fund will provide without charge to each person to whom
this prospectus is delivered, on the written or oral request of the person, a
copy of any of the documents referred to in the previous paragraph that have
been incorporated by reference in this prospectus. Exhibits to the information
that is incorporated by reference will not be provided unless the exhibits are
specifically incorporated by reference into the information that this
prospectus incorporates. Requests should be directed to the corporate trust
office of the trustee or the address of the other entity specified in the
accompanying prospectus supplement. Included in the accompanying prospectus
supplement is the name, address, telephone number, and, if available, facsimile
number of the office or contact person at the corporate trust office of the
trustee or the other entity.
Loan Program
The loans will have been originated or purchased by Provident, either
directly or through affiliates. The loans will have been originated in
accordance with the underwriting criteria specified under "Underwriting
Standards" and as further described in the related prospectus supplement.
Underwriting Standards
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and
adequacy of the related property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the
8
underwriting officer pertinent credit information, including the principal
balance and payment history of any senior mortgage, which will be verified by
Provident. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report that summarizes the borrower's credit history with
local merchants and lenders and any record of bankruptcy. In most cases, an
employment verification is obtained from an independent source, typically the
borrower's employer, which verification reports, among other things, the length
of employment with that organization and the borrower's current salary. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has
demand or savings accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing. The
appraiser is generally required to inspect the property, issue a report on its
condition, and, if applicable, verify construction has been completed. The
appraisal is based on the market value of comparable homes, the estimated
rental income, if considered applicable by the appraiser, and the cost of
replacing the property. The value of the property being financed, as indicated
by the appraisal, must be such that it currently supports, and is anticipated
to support in the future, the outstanding loan balance.
The maximum loan amount will vary depending upon a borrower's credit grade
and loan program but will not generally exceed $750,000. Variations in maximum
loan amount limits will be permitted based on compensating factors.
Compensating factors may generally include, to the extent specified in the
related prospectus supplement, low loan-to-value ratio, low debt-to-income
ratio, stable employment, favorable credit history, and the nature of the
underlying first mortgage loan, if applicable.
Provident's underwriting standards generally permit loans with loan-to-value
ratios at origination of up to 100% depending on the loan program, type and use
of the property, creditworthiness of the borrower, and debt-to-income ratio.
After obtaining all applicable employment, credit, and property information,
Provident will use a debt-to-income ratio to assist in determining whether the
prospective borrower has sufficient monthly income available to support the
payments of principal and interest on the mortgage loan in addition to other
monthly credit obligations. The debt-to-income ratio is the ratio of the
borrower's total monthly obligations (including principal and interest on each
mortgage, tax assessments, other loans, charge accounts, all other scheduled
indebtedness) to the borrower's gross monthly income. The maximum monthly debt-
to-income ratio will vary depending upon a borrower's credit grade and loan
program but will not generally exceed 60%. Variations in the monthly debt-to-
income ratio limit will be permitted based on compensating factors to the
extent specified in the related prospectus supplement.
If specified in the related prospectus supplement, a portion of the loans in
a trust fund may have been originated under a limited documentation program.
Under a limited documentation program, more emphasis is placed on the value and
adequacy of the property as collateral and other assets of the borrower than on
credit underwriting. Under a limited documentation program, some credit
underwriting documentation concerning income or income verification or
employment verification is waived.
In the case of a loan secured by a leasehold interest in real property, the
title to which is held by a third party lessor, Provident will represent and
warrant, among other things, that the remaining term of the lease and any
sublease is at least five years longer than the remaining term on the loan.
Some of the types of loans that may be included in a trust fund may involve
uncertainties not present in traditional types of loans. For example, some of
the loans may provide for escalating or variable payments by the borrower.
These types of loans are underwritten on the basis of a judgment that the
borrowers have the ability to make the monthly payments required initially. In
some instances, a borrower's income may not be
9
sufficient to permit continued loan payments as the payments increase. These
types of loans may also be underwritten primarily on the basis of loan-to-value
ratios or other favorable credit factors.
Qualifications of Provident
Provident will be required to satisfy the following qualifications.
Provident is, and each entity from which it acquires loans must be, an
institution experienced in originating and servicing loans of the type
contained in the related pool in accordance with accepted practices and prudent
guidelines, and must maintain satisfactory facilities to originate and service
those loans. Provident is a seller-servicer approved by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation. Provident
is a mortgagee approved by the Federal Housing Authority and is an institution
the deposit accounts in which are insured by the Federal Deposit Insurance
Corporation.
Representations by Provident; Repurchases
Provident will have made representations and warranties about the loans sold
by Provident to the trust fund and evidenced by all, or a part, of a series of
securities. These representations and warranties may include, among other
things:
. that title insurance, or in the case of mortgaged properties located in
areas where title policies are generally not available, an attorney's
certificate of title, and any required hazard insurance policy were
effective at origination of each loan and that each policy, or
certificate of title, as applicable, remained in effect on the date of
purchase of the loan from Provident;
. that Provident had good title to each loan and the loan was subject to
no offsets, defenses, counterclaims, or rights of rescission except to
the extent that any buydown agreement may forgive specified indebtedness
of a borrower;
. that each loan constituted a valid lien on, or a perfected security
interest in, the property, subject only to disclosed permissible liens,
title insurance exceptions, and other exceptions described in the
agreement;
. the property is not damaged by waste, fire, earthquake, earth movement,
windstorm, flood, tornado, or other casualty, so as to affect adversely
the value of the mortgaged property;
. that there were no delinquent tax or assessment liens against the
mortgaged property;
. that no required payment on a loan was delinquent more than the number
of days specified in the related prospectus supplement; and
. that each loan was made in compliance with, and is enforceable under,
all applicable state and federal laws and regulations in all material
respects.
The master servicer or the trustee will promptly notify Provident of any
breach of any representation or warranty made by it about a loan that
materially and adversely affects the interests of the securityholders in the
loan. If Provident cannot cure the breach within the number of days specified
in the related prospectus supplement following notice from the master servicer
or the trustee, as the case may be, then Provident will be obligated either to
substitute for the loan a replacement loan that satisfies the criteria
specified in the related prospectus supplement or to repurchase the loan from
the trust fund at a purchase price equal to 100% of its unpaid principal
balance as of the date of the repurchase plus unpaid accrued interest on it to
the first day of the month following the month of repurchase at the interest
rate provided for in the mortgage loan note, less any servicer advances or
amount payable as related servicing compensation if Provident is the master
servicer. If a trust fund is to elect status as a real estate mortgage
investment conduit, the master servicer or a holder of the related residual
certificate generally will be obligated to pay any prohibited transaction tax
that may arise in connection with any repurchase or substitution and the
trustee must have received a satisfactory opinion of counsel that the
repurchase or substitution will not cause the trust fund to lose its status as
a REMIC or
10
otherwise subject the trust fund to a prohibited transaction tax. This
repurchase or substitution obligation will constitute the sole remedy available
to holders of securities or the trustee for a breach of representation by
Provident.
Neither the trustee nor the master servicer (unless the master servicer is
Provident) will be obligated to purchase or substitute a loan if Provident
defaults on its obligation to do so, and we cannot assure you that Provident
will carry out its respective repurchase or substitution obligations.
Description of the Securities
Each series of certificates will be issued pursuant to a pooling and
servicing agreement or a trust agreement between Provident, the master
servicer, and the trustee. A form of pooling and servicing agreement and trust
agreement has been filed as an exhibit to the registration statement of which
this prospectus forms a part. Each series of notes will be issued pursuant to
an indenture between the related trust fund and the entity named in the related
prospectus supplement as trustee for the series, and the related loans will be
serviced by the master servicer pursuant to a master servicing agreement. A
form of indenture and master servicing agreement has been filed as an exhibit
to the registration statement of which this prospectus forms a part.
A series of securities may consist of both notes and certificates. Each
agreement will be between Provident, the master servicer, and the trustee for
the benefit of the holders of the securities of the series and will be dated as
of the related Cut-Off Date. The provisions of each agreement will vary
depending upon the nature of the securities to be issued under it and the
nature of the related trust fund. The following are descriptions of the
material provisions that may appear in each agreement. The descriptions are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the agreement for each series of securities and the applicable
prospectus supplement. Provident will provide a copy of the agreement, without
exhibits, relating to any series of securities without charge upon written
request of a holder of record of a security of the series addressed to The
Provident Bank, One East Fourth Street, Cincinnati, Ohio 45202, Attention:
Secretary.
General
As described in the related prospectus supplement, the securities of each
series:
. will be issued in book-entry or fully registered form,
. will be in the authorized denominations specified in the related
prospectus supplement,
. will, in the case of certificates, evidence specified beneficial
ownership interests in, the assets of the related trust fund,
. will, in the case of notes, be secured by the assets of the related
trust fund, and
. will not be entitled to payments on the assets included in any other
trust fund established by Provident.
Unless otherwise specified in the related prospectus supplement, the securities
will not represent obligations of Provident or any affiliate of Provident. Some
of the loans may be guaranteed or insured as set forth in the related
prospectus supplement. Each trust fund will consist of:
. the trust fund assets, which may exclude specified retained interests,
. the assets required to be deposited in the related security account, as
described under "The Agreements--Payments on Loans; Deposits to Security
Account,"
. property acquired on behalf of the securityholders by foreclosure or
deed in lieu of foreclosure, and
. any insurance policies or other forms of credit enhancement required to
be maintained pursuant to the related agreement.
11
If so specified in the related prospectus supplement, a trust fund may also
include one or more of the following: reinvestment income on payments received
on the trust fund assets, a reserve account, a mortgage pool insurance policy,
a special hazard insurance policy, a bankruptcy bond, one or more letters of
credit, a surety bond, guaranties, or similar instruments.
Each series of securities will be issued in one or more classes. Each class
of certificates of a series will evidence beneficial ownership of a specified
percentage of future interest payments and a specified percentage of future
principal payments on the related trust fund assets. Some classes may have no
interest in future interest payments, and others may have no interest in future
principal payments. A series of securities may include one or more classes that
are senior in right to payment to one or more other classes of securities in
the series. Some series or classes of securities may be covered by insurance
policies, surety bonds, or other forms of credit enhancement, in each case as
described under "Credit Enhancement" in this prospectus and in the related
prospectus supplement. Distributions on some classes of a series of securities
may be made before distribution on other classes, and the priority of
distributions may be established or changed after the occurrence of specified
events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the related trust fund assets, in each
case as specified in the related prospectus supplement. The timing and amounts
of distributions may vary among classes or over time as specified in the
related prospectus supplement.
Distributions of principal or interest or both will be made by the trustee
on each distribution date in proportion to the percentages specified in the
related prospectus supplement. The distribution dates may be monthly,
quarterly, semi-annually, or at other intervals and on the dates specified in
the related prospectus supplement. Whoever the securities are registered to at
the close of business on the record dates specified in the related prospectus
supplement will be entitled to receive distributions. Except for the final
distribution, distributions will be made to the persons entitled thereto at the
address appearing in the security register maintained for securityholders in
the manner specified in the related prospectus supplement. The final
distribution in retirement of the securities will be made only on presentation
and surrender of the securities at the office or agency of the trustee or other
person specified in the notice to securityholders of the final distribution.
The securities will be freely transferable and exchangeable at the corporate
trust office of the trustee specified in the related prospectus supplement. No
service charge will be imposed for any registration of exchange or transfer of
securities of any series, but the trustee may require payment of a sum
sufficient to cover any related tax or other governmental charge.
As to each series, an election may be made to treat the related trust fund
or designated portions of it as a REMIC as defined in the Code. The related
prospectus supplement will specify whether a REMIC election is to be made.
Alternatively, the agreement for a series of securities may provide that a
REMIC election may be made at the discretion of Provident or the master
servicer and may only be made if specified conditions are satisfied. As to that
series, the terms applicable to a REMIC election will be specified in the
related prospectus supplement, if a REMIC election is made for a series of
securities, one of the classes will be designated as evidencing the sole class
of residual interests in the REMIC, as defined in the Code. All other classes
of securities in the series will constitute regular interests in the REMIC, as
defined in the Code. As to each series of securities for which a REMIC election
is to be made, the master servicer, the trustee, or a holder of the related
residual certificate will be obligated to take all actions required to comply
with applicable laws and regulations.
Distributions on Securities
General. In general, the method of determining the amount of distributions
on a particular series of securities will depend on the type of credit support,
if any, that is used for the series. See "Credit Enhancement." Various methods
that may be used to determine the amount of distributions on the securities of
a particular series are described under this heading. The prospectus supplement
for each series of securities will describe the method to be used in
determining the amount of distributions on the securities of the series.
12
Distributions on the securities entitled to distributions will be made
monthly, semi-annually, or at other intervals and on the distribution date
specified in the related prospectus supplement. Distributions allocable to
principal and interest on the securities will be made by the trustee out of,
and only to the extent of, funds in the related security account, including any
funds transferred from any reserve account. As between securities of different
classes and as between distributions of principal and interest, distributions
made on any distribution date will be applied as specified in the related
prospectus supplement. Likewise, the related prospectus supplement will specify
how distribution will be allocated between distributions of principal payments
and scheduled payments of principal. The prospectus supplement will also
describe the method for allocating distributions among securities of a
particular class.
Available Funds. All distributions on the securities of each series on each
distribution date will be made from the available funds, in accordance with the
terms described in the related prospectus supplement and specified in the
agreement. Available funds for a distribution date will generally equal the
amount on deposit in the related security account on the distribution date, net
of related fees and expenses payable by the related trust fund, other than
specified amounts to be held in the related security account for distribution
on future distribution dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance of each class of securities entitled to interest at the pass-through
rate or interest rate, as applicable for the periods specified in the
prospectus supplement. Securities entitled only to distributions allocable to
interest will use an aggregate notional amount instead of a principal balance
to compute interest. The pass-through rates and the interest rates may be a
fixed rate or an adjustable rate as specified in the prospectus supplement. To
the extent funds are available therefor, interest accrued during each specified
period on each class of securities entitled to interest currently will be
distributable on the distribution dates specified in the related prospectus
supplement until the aggregate current principal balance of the class has been
distributed in full or, in the case of securities entitled only to
distributions allocable to interest, until the aggregate notional amount of the
securities is reduced to zero, or for the period of time designated in the
related prospectus supplement. The original current principal balance of the
class of each security will equal the aggregate distributions allocable to
principal to which the security is entitled. Distributions allocable to
interest on each security that is not entitled to distributions allocable to
principal will be calculated based on the notional amount of the security. The
notional amount of a security will not evidence an interest in or entitlement
to distributions allocable to principal but will be used solely for convenience
in expressing the calculation of interest and for other specified purposes.
Interest payable on the securities of a series on a distribution date will
include all interest accrued during the period specified in the related
prospectus supplement. If interest accrues over a period ending two or more
days before a distribution date, the effective yield to securityholders will be
reduced from the yield that would otherwise be obtainable if interest payable
on the security were to accrue through the day immediately preceding the
distribution date, and the effective yield at par to securityholders will be
less than the indicated coupon rate.
Accrual securities provide for interest that accrues but is not paid
currently. If specified in the related prospectus supplement, any interest on
securities that has accrued but is not paid on a given distribution date will
be added to the aggregate current principal balance of that class of securities
on that distribution date. Distributions of interest on any class of accrual
securities will begin only after the conditions specified in the prospectus
supplement have been satisfied. Before that time, the beneficial ownership
interest in the trust fund or the principal balance, as applicable, of the
class of accrued securities, as reflected in the aggregate current principal
balance of the class of the class of accrual securities, will increase on each
distribution date by the amount of interest that accrued on the class of
accrual securities during the preceding interest accrual period but that was
not required to be distributed to the class on the distribution date. A class
of accrual securities will thereafter accrue interest on its outstanding
current principal balance of the class as so adjusted.
Distributions of Principal. The related prospectus supplement will specify
the method by which the amount of principal to be distributed on the securities
on each distribution date will be calculated and the manner in which that
amount will be allocated among the classes of securities entitled to
distributions of
13
principal. The aggregate current principal balance of the class of any class of
securities entitled to distributions of principal generally will be the
original aggregate current principal balance of the class of the class of
securities reduced by all distributions to the holders of the securities
allocable to principal. Additionally, the aggregate class security balance of
accrual securities will be increased by interest accrued but not then
distributable and the aggregate class security balance of adjustable rate
securities may increase if they experience negative amortization.
Principal prepayments occur when payments of principal are received from
borrowers in advance of their scheduled due dates and are not accompanied by
amounts representing scheduled interest due after the month of the payments. If
so provided in the related prospectus supplement, some classes of securities
will be entitled to receive all or a disproportionate percentage of principal
prepayments in the percentages and under specified circumstances or for the
specified periods. Disproportionate allocations of principal prepayments to
particular classes of securities will have the effect of accelerating their
amortization while increasing the interests evidenced by the other classes of
securities in the trust fund. Increasing the interests of the other classes of
securities relative to that of the accelerated securities is intended to
preserve the availability of the subordination provided by the other
securities. See "Credit Enhancement--Subordination."
Unscheduled Distributions. If specified in the related prospectus
supplement, the securities may receive distributions before the next scheduled
distribution date under the circumstances and in the manner described below and
in the prospectus supplement. If applicable, the trustee will be required to
make unscheduled distributions on the day and in the amount specified in the
related prospectus supplement if, due to substantial payments of principal,
including principal prepayments, on the trust fund assets, the trustee or the
master servicer determines that the funds available or anticipated to be
available from the security account and, if applicable, any reserve account,
may be insufficient to make required distributions on the securities on the
distribution date. Unless otherwise specified in the related prospectus
supplement, the amount of that unscheduled distribution allocable to principal
will not exceed the amount that would otherwise have been required to be
distributed as principal on the securities on the next distribution date.
Unless otherwise specified in the related prospectus supplement, the
unscheduled distributions will include interest at any applicable pass-through
rate or interest rate on the amount of the unscheduled distribution allocable
to principal for the period and to the date specified in the prospectus
supplement.
Advances
To the extent provided in the related prospectus supplement, the master
servicer will be required to advance on or before each distribution date an
amount equal to the aggregate of payments of interest or principal that were
delinquent on the related determination date subject to the master servicer's
determination that the advances may be recoverable out of late payments by
borrowers, liquidation proceeds, insurance proceeds, or otherwise. These
advances may come from its own funds, funds advanced by sub-servicers, or funds
held in the security account for future distributions to the holders of
securities of the related series.
The purpose of servicing advances is to maintain a regular flow of scheduled
interest and principal payments to securityholders, rather than to guarantee or
insure against losses. If servicing advances are made by the master servicer
from cash being held for future distribution to securityholders, the master
servicer will replace those funds by the following distribution dates to the
extent that funds in the applicable security account on any following
distribution date would be less than the amount required to be available for
distributions to securityholders on that date. Any master servicer funds
advanced will be reimbursable to the master servicer out of recoveries on the
specific loans with respect to which the advances were made, e.g., late
payments made by the related borrower, any related insurance proceeds,
liquidation proceeds, or proceeds of any loan purchased by Provident or a sub-
servicer pursuant to the related agreement. Advances by the master servicer or
a sub-servicer also will be reimbursable to the master servicer or sub-servicer
from cash otherwise distributable to junior and senior securityholders to the
extent that the master servicer determines that any of them would not otherwise
be recovered. To the extent provided in the related prospectus supplement, the
master servicer also will be obligated to make advances, for some taxes and
insurance premiums not paid by borrowers on a timely basis to the extent
recoverable out of insurance proceeds, liquidation proceeds, or
14
otherwise. Funds so advanced are reimbursable to the master servicer to the
extent permitted by the related agreement. The obligations of the master
servicer to make advances may be supported by a cash advance reserve fund, a
surety bond, or other arrangement of the type described in this prospectus
under "Credit Enhancement," in each case as described in the related
prospectus supplement.
If the master servicer or a sub-servicer fails to make a required advance,
the trustee will be obligated to make the advance in its capacity as successor
servicer if it is acting in that capacity. If the trustee makes an advance, it
will be entitled to be reimbursed for the advance just as the master servicer
or a sub-servicer is entitled to be reimbursed for advances. See "Description
of the Securities--Distributions on Securities."
Reports to Securityholders
Before or concurrently with each distribution on a distribution date, the
master servicer or the trustee will furnish to each securityholder of record
of a series a statement of each of the following that is applicable to any
class in the series:
(1) the amount of the distribution allocable to principal, separately
identifying the aggregate amount of any principal prepayments and, if so
specified in the related prospectus supplement, any applicable prepayment
penalties included therein;
(2) the amount of the distribution allocable to interest;
(3) the amount of any servicing advance;
(4) the aggregate amount
. otherwise allocable to the holders of subordinated securities on
the distribution date, and
. withdrawn from the reserve account, that is included in the
amounts distributed to the holders of senior securities;
(5) the outstanding principal balance or notional amount of each class
of the series after giving effect to the distribution of principal on the
distribution date;
(6) the percentage of principal payments on the loans that each class
will be entitled to receive on the following distribution date not
including principal prepayments;
(7) the percentage of any principal prepayments on the loans that each
class will be entitled to receive on the following distribution date;
(8) the related amount of the servicing compensation retained or
withdrawn from the security account by the master servicer, and the amount
of additional servicing compensation received by the master servicer
attributable to penalties, fees, excess liquidation proceeds, and other
similar items;
(9) the number and aggregate principal balances of loans as to which
the minimum monthly payment is delinquent 30-59 days, 60-89 days, and 90 or
more days, respectively, as of the close of business on the last day of the
calendar month preceding the distribution date;
(10) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
(11) the pass-through rate or interest rate, as applicable, of the
class expected to be applicable to the next distribution to the class if
the rate has changed from the date of the last statement;
(12) the amount remaining in any reserve account at the close of
business on the distribution date;
(13) the pass-through rate or interest rate, as applicable, as of the
day before the preceding distribution date; and
(14) any amounts remaining under letters of credit, pool policies, or
other forms of credit enhancement.
15
Where applicable, any of these amounts may be expressed as a dollar amount
per single security of the relevant class having the percentage interest
specified in the related prospectus supplement. The report to securityholders
for any series of securities may include additional or other information of a
similar nature to the listed information.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail to each
securityholder of record at any time during the calendar year a report as to
the aggregate of amounts reported pursuant to (1) and (2) above for the
calendar year or, if the person was a securityholder of record only during a
portion of the calendar year, for the applicable portion of the year and any
other customary information deemed appropriate for securityholders to prepare
their tax returns.
Categories of Classes of Securities
The securities of any series may be comprised of one or more classes. The
classes, in general, fall into different categories. The following chart
identifies and briefly explains some of the more typical categories. The
prospectus supplement for a series of securities may identify the classes that
comprise the series by reference to the following categories:
Categories of Classes Definition
Principal Types
Accretion Directed.................... A class that receives principal payments from the
accreted interest from specified classes of
accrual securities. An accretion directed class
also may receive principal payments from principal
paid on the underlying trust fund assets for the
related series.
Component Securities.................. A class consisting of components. The components
of a class of component securities may have
different principal and interest payment
characteristics but together constitute a single
class. Each component of a class of component
securities may be identified as falling into one
or more of the categories in this chart.
Notional Amount Securities............ A class having no principal balance and bearing
interest on the related notional amount. The
notional amount is used for purposes of the
determination of interest distributions.
Planned Principal Class, also
sometimes referred to as PACs........ A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming two constant
prepayment rates for the underlying trust fund
assets. These two rates are the endpoints for the
structuring range for the planned principal class.
The planned principal classes in any series of
securities may be subdivided into different
categories (e.g., primary planned principal
classes, secondary planned principal classes, and
so forth) having different effective structuring
ranges and different principal payment priorities.
The structuring range for the secondary planned
principal class of a series of securities will be
narrower than that for the primary planned
principal class of the series.
16
Scheduled Principal Class............. A class that is designed to receive principal
payments using a predetermined principal balance
schedule but is not designated as a planned
principal class or targeted principal class. In
many cases, the schedule is derived by assuming
two constant prepayment rates for the underlying
trust fund assets. These two rates are the
endpoints for the "structuring range" for the
scheduled principal class.
Sequential Pay........................ Classes that receive principal payments in a
prescribed sequence, that do not have
predetermined principal balance schedules and that
under all circumstances receive payments of
principal continuously from the first distribution
date on which they receive principal until they
are retired. A single class that receives
principal payments before or after all other
classes in the same series of securities may be
identified as a Sequential Pay class.
Strip................................. A class that receives a constant proportion, or
"strip," of the principal payments on the
underlying trust fund assets.
Support Class, also sometimes referred
to as companion classes.............. A class that receives principal payments on any
distribution date only if scheduled payments have
been made on specified planned principal classes,
targeted principal classes, and scheduled
principal classes.
Targeted Principal Class, also
sometimes referred to as TACs........ A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming a single constant
prepayment rate for the underlying trust fund
assets.
Interest Types
Fixed Rate............................ A class with an interest rate that is fixed
throughout the life of the class.
Floating Rate......................... A class with an interest rate that resets
periodically based upon a designated index and
that varies directly with changes in the index.
Inverse Floating Rate................. A class with an interest rate that resets
periodically based upon a designated index and
that varies inversely with changes in the index.
Variable Rate......................... A class with an interest rate that resets
periodically and is calculated by reference to the
rate or rates of interest applicable to specified
assets or instruments, e.g., the interest rate
borne by the underlying mortgage loans.
Interest Only......................... A class that receives some or all of the interest
payments made on the underlying trust fund assets
and little or no principal. Interest only classes
have either a nominal principal balance or a
notional amount. A nominal principal balance
represents actual principal that will be paid on
the class. It is referred to as nominal since it
is extremely small compared to other classes. A
notional amount is the amount used as a reference
to calculate the amount of interest due on an
interest only class that is not entitled to any
distributions in respect of principal.
17
Principal Only........................ A class that does not bear interest and is
entitled to receive only distributions in respect
of principal.
Partial Accrual....................... A class that accretes a portion of the amount of
accrued interest on it, which amount will be added
to the principal balance of the class on each
applicable distribution date, with the remainder
of the accrued interest to be distributed
currently as interest on the class. The accretion
may continue until a specified event has occurred
or until the partial accrual class is retired.
Accrual............................... A class that accretes the amount of accrued
interest otherwise distributable on the class,
which amount will be added as principal to the
principal balance of the class on each applicable
distribution date. The accretion may continue
until some specified event has occurred or until
the accrual class is retired.
Book-Entry Registration of Securities
As described in the related prospectus supplement, if not issued in fully
registered form, each class of securities will be registered as book-entry
certificates. Persons acquiring beneficial ownership interests in the
securities will hold their securities through The Depository Trust Company
("DTC") in the United States, or the European depositaries, Cedel Bank
("CEDEL") or the Euroclear System ("Euroclear"), in Europe, if they are
participants of those systems, or indirectly through organizations that are
participants in those systems. The book-entry securities will be issued in one
or more certificates that equal the aggregate principal balance of the
securities and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold the positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A., will act as depositary for CEDEL and
The Chase Manhattan Bank will act as depositary for Euroclear. Except in
limited circumstances, no person acquiring a book-entry security will be
entitled to receive a physical certificate representing the security. Until
definitive securities are issued, Cede & Co., as nominee of DTC, is the only
anticipated securityholder of the securities. Security owners are only
permitted to exercise their rights indirectly through clearing system
participants and DTC.
The beneficial owner's ownership of a book-entry security will be recorded
on the records of the brokerage firm, bank, thrift institution, or other
financial intermediary that maintains the beneficial owner's account for that
purpose. In turn, the financial intermediary's ownership of the book-entry
security will be recorded on the records of DTC, or of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
be recorded on the records of DTC, if the beneficial owner's financial
intermediary is not a DTC participant, and on the records of CEDEL or
Euroclear, as appropriate.
Security owners will receive all distributions of principal of, and interest
on, the securities from the trustee through DTC and DTC participants. While the
book-entry securities are outstanding, under the rules, regulations, and
procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers between clearing system participants on whose behalf
it acts with respect to the securities and is required to receive and transmit
distributions of principal of, and interest on, the securities. Clearing system
participants and indirect participants with whom security owners have
securities accounts are similarly required to make book-entry transfers and
receive and transmit distributions on behalf of their respective security
owners. Accordingly, although security owners will not possess certificates,
the clearing system rules provide a mechanism by which security owners will
receive distributions and will be able to transfer their interest.
18
Security owners will not receive or be entitled to receive certificates
representing their interests in the securities, except under limited
circumstances. Until definitive securities are issued, security owners who are
not clearing system participants may transfer ownership of securities only
through clearing system participants and indirect participants by instructing
the clearing system participants and indirect participants to transfer
securities, by book-entry transfer, through DTC for the account of the
purchasers of the securities. The purchaser's account must be maintained with
clearing system participants. Under the clearing system rules and in accordance
with DTC's normal procedures, transfers of ownership of securities will be
executed through DTC and the accounts of the respective clearing system
participants at DTC will be debited and credited. Similarly, the clearing
system participants and indirect participants will make debits or credits, as
the case may be, on their records on behalf of the selling and purchasing
security owners.
Because of time zone differences, credits of securities received in CEDEL or
Euroclear as a result of a transaction with a clearing system participant will
be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Those credits or any
transactions in the securities settled during that processing will be reported
to the relevant CEDEL or Euroclear participants on that business day. Cash
received in CEDEL or Euroclear as a result of sales of securities by or through
a CEDEL participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement with DTC.
Transfers between clearing system participants will occur in accordance with
DTC rules. Transfers between CEDEL participants and Euroclear participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
participants or Euroclear participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary. However, the cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in the system in accordance
with its rules and procedures and within its established deadlines, European
time. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
relevant depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL participants and Euroclear participants may not deliver instructions
directly to the European depositaries.
DTC is a New York-chartered limited purpose trust company that performs
services for its participants. Some of the participants or their
representatives or both own interests in DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC
participant in the book-entry certificates, whether held for its own account or
as a nominee for another person. In general, beneficial ownership of book-entry
certificates will be subject to the rules, regulations, and procedures
governing DTC and DTC participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations and
facilitates the clearance and settlement of securities transactions between
CEDEL participants through electronic book-entry changes in accounts of CEDEL
participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in CEDEL in any of [28] currencies,
including United States dollars. CEDEL provides to its CEDEL participants,
among other things, services for safekeeping, administration, clearance, and
settlement of internationally traded securities and securities lending and
borrowing. CEDEL interfaces with domestic markets in several countries. As a
professional depository, CEDEL is subject to regulation by the Luxembourg
Monetary Institute. CEDEL participants are recognized financial institutions
around the world, including underwriters, securities brokers, and dealers,
banks, trust companies, clearing corporations, and other organizations.
Indirect access to CEDEL is
19
also available to others, such as banks, brokers, dealers, and trust companies
that clear through or maintain a custodial relationship with a CEDEL
participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants and to
clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may be
settled in any of [32] currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York ("Morgan
Guaranty") under contract with Euroclear Clearance Systems S.C. ("Euroclear
Clearance Systems"), a Belgian cooperative corporation. All operations are
conducted by Morgan Guaranty, and all Euroclear securities clearance accounts
and Euroclear cash accounts are accounts with the Euroclear operator, not
Euroclear Clearance Systems. Euroclear Clearance Systems establishes policy for
Euroclear on behalf of Euroclear participants. Euroclear participants include
banks, central banks, securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear participant, either directly or indirectly.
Morgan Guaranty is the Belgian branch of a New York banking corporation
which is a member bank of the Federal Reserve System. As such, it is regulated
and examined by the Board of Governors of the Federal Reserve System and the
New York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan Guaranty are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law. These
provisions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear operator acts under these
provisions only on behalf of Euroclear participants, and has no record of or
relationship with persons holding through Euroclear participants.
Under a book-entry format, beneficial owners of the book-entry securities
may experience some delay in their receipt of payments, since the payments will
be forwarded by the trustee to Cede & Co., as nominee of DTC. Distributions on
securities held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL participants or Euroclear participants in accordance with the
relevant system's rules and procedures, to the extent received by the relevant
depositary. The distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Federal Income Tax
Consequences--Tax Treatment of Foreign Investors" and "--Tax Consequences to
Holders of the Notes--Backup Withholding" in this prospectus. Because DTC can
only act on behalf of financial intermediaries, the ability of a beneficial
owner to pledge book-entry securities to persons or entities that do not
participate in the depository system may be limited due to the lack of physical
certificates for the book-entry securities. In addition, issuance of the book-
entry securities in book-entry form may reduce the liquidity of the securities
in the secondary market since some potential investors may be unwilling to
purchase securities for which they cannot obtain physical certificates.
Monthly and annual reports on the trust fund will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations, and procedures
creating and affecting the Depository, and to the financial intermediaries to
whose DTC accounts the book-entry securities of the beneficial owners are
credited.
DTC has advised the trustee that, until definitive securities are issued,
DTC will take any action permitted to be taken by the holders of the book-entry
securities under the applicable agreement only at the direction of the
financial intermediaries to whose DTC accounts the book-entry securities are
credited, to the extent that the actions are taken on behalf of financial
intermediaries whose holdings include the book-entry securities.
20
CEDEL or the Euroclear operator, as the case may be, will take any other action
permitted to be taken by a securityholder under the agreement on behalf of a
CEDEL participant or Euroclear participant only in accordance with its relevant
rules and procedures and subject to the ability of the relevant depositary to
effect the actions on its behalf through DTC. DTC may take actions, at the
direction of its related clearing system participants, with respect to some
securities which conflict with actions taken with respect to other securities.
Definitive certificates will be issued to beneficial owners of the book-
entry certificates, or their nominees, rather than to DTC, only if:
. DTC or Provident advises the trustee in writing that DTC is no longer
willing, qualified, or able to discharge properly its responsibilities
as nominee and depository with respect to the book-entry certificates
and Provident or the Trustee is unable to locate a qualified successor,
. Provident, in its sole option, with the consent of the trustee, elects
to terminate a book-entry system through DTC, or
. after the occurrence of an event of default, beneficial owners
representing not less than 51% of the principal balance of the book-
entry Class A Certificates advise the trustee and DTC through the
financial intermediaries and the DTC participants in writing that the
continuation of a book-entry system through DTC is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the preceding
paragraph, the trustee will be required to notify all beneficial owners of the
occurrence of the event and the availability through DTC of definitive
securities. Upon surrender by DTC of the global certificate or certificates
representing the book-entry securities and instructions for re-registration,
the trustee will issue definitive securities, and thereafter the trustee will
recognize the holders of the definitive securities as securityholders under the
applicable agreement.
Although DTC, CEDEL, and Euroclear have agreed to the foregoing procedures
to facilitate transfers of securities between participants of DTC, CEDEL, and
Euroclear, they are under no obligation to perform or continue to perform those
procedures and those procedures may be discontinued at any time.
None of the master servicer, Provident, or the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising, or reviewing
any records relating to the beneficial ownership interests.
According to DTC, this information with respect to DTC has been provided to
the industry for informational purposes only and is not intended to serve as a
representation, warranty, or contract modification of any kind.
Credit Enhancement
General
Credit enhancement may be provided for one or more classes of a series of
securities or for the related trust fund assets. Credit enhancement may be in
the form of a limited financial guaranty policy issued by an entity named in
the related prospectus supplement, the subordination of one or more classes of
the securities of the series, the establishment of one or more reserve
accounts, the use of a cross-collateralization feature, the use of a mortgage
pool insurance policy, bankruptcy bond, special hazard insurance policy, surety
bond, letter of credit, guaranteed investment contract, overcollateralization,
or another method of credit enhancement contemplated in this prospectus and
described in the related prospectus supplement, or any combination of the
foregoing. Unless otherwise specified in the related prospectus supplement,
credit enhancement will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance of the securities
and interest on them. If losses occur that exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, securityholders
will bear their allocable share of any deficiencies.
21
If specified in the related prospectus supplement, the coverage provided by
one or more of the forms of credit enhancement described in this prospectus may
apply concurrently to two or more separate trust funds. If applicable, the
related prospectus supplement will identify the trust funds to which the credit
enhancement relates and the manner of determining the amount of coverage
provided to the trust funds by it and of the application of the coverage to the
identified trust funds.
Subordination
Protection afforded to holders of one or more classes of securities of a
series by a subordination feature may be accomplished by the preferential right
of holders of one or more other classes of the series to distributions of
scheduled principal, principal prepayments, interest, or any combination of
them that otherwise would have been payable to holders of subordinated
securities under the circumstances and to the extent specified in the related
prospectus supplement. Protection may also be afforded to the holders of senior
securities of a series by reducing the ownership interest of the related
subordinated securities, a combination of ownership reduction and preferential
payment rights, or as otherwise described in the related prospectus supplement.
The related prospectus supplement may provide that delays in receipt of
scheduled payments on the loans and losses on defaulted loans will be borne
first by the various classes of subordinated securities and thereafter by the
various classes of senior securities under specified circumstances. The related
prospectus supplement may limit the aggregate distributions of delinquent
payments on the loans over the lives of the securities or at any time, the
aggregate losses on defaulted loans that must be borne by the subordinated
securities by virtue of subordination, and the amount of the distributions
otherwise distributable to the holders of subordinated securities that will be
distributable to senior securityholders on any distribution date. If aggregate
distributions of delinquent payments on the loans or aggregate losses on
defaulted loans were to exceed an amount specified in the related prospectus
supplement, the holders of senior securities would experience losses on their
securities.
In addition to or in lieu of the foregoing, if so specified in the related
prospectus supplement, all or any portion of distributions otherwise payable to
subordinated securityholders on any distribution date may instead be
distributed to senior securityholders or deposited into one or more reserve
accounts established with the trustee. The deposits may be made on each
distribution date for specified periods, until the balance in the reserve
account has reached a specified amount, or to restore the balance in the
reserve account to required levels, in each case as specified in the related
prospectus supplement. Amounts on deposit in the reserve account may be
released to the holders of specified classes of securities at the times and
under the circumstances specified in the prospectus supplement.
If specified in the related prospectus supplement, various classes of senior
securities and subordinated securities may themselves be subordinate in their
right to receive specified distributions to other classes of senior and
subordinated securities, respectively, through a cross-collateralization
mechanism or otherwise. As between classes of senior securities and as between
classes of subordinated securities, distributions may be allocated among the
classes:
. in the order of their scheduled final distribution dates,
. in accordance with a schedule or formula,
. in relation to the occurrence of events, or
. otherwise, in each case as specified in the related prospectus
supplement.
As between classes of subordinated securities that would otherwise have been
entitled to the payments, the redirection of payments to holders of senior
securities on account of delinquencies or losses or to payments to any reserve
account will be allocated as specified in the related prospectus supplement.
22
Letter of Credit
The letter of credit, if any, with respect to a series of securities will be
issued by the bank or financial institution specified in the related prospectus
supplement. Under the letter of credit, the letter of credit bank will be
obligated to honor drawings under its letter of credit in an aggregate fixed
dollar amount, net of unreimbursed payments under its letter of credit, equal
to the percentage specified in the related prospectus supplement of the
aggregate principal balance of the loans on the related Cut-Off Date or of one
or more classes of securities. If so specified in the related prospectus
supplement, the letter of credit may permit drawings against losses not covered
by insurance policies or other credit support, such as losses arising from
damage not covered by standard hazard insurance policies, losses resulting from
the bankruptcy of a borrower and the application of the federal Bankruptcy
Code, or losses resulting from denial of insurance coverage due to
misrepresentations in connection with the origination of a loan. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments under it. The obligations of the letter of
credit bank under its letter of credit for each series of securities will
expire at the earlier of the date specified in the related prospectus
supplement or the termination of the trust fund. See "The Agreements--
Termination: Optional Termination." A copy of any letter of credit for a series
will be filed with the SEC as an exhibit to a Current Report on Form 8-K to be
filed within 15 days of issuance of the securities of the related series.
Insurance Policies, Surety Bonds, and Guaranties
The prospectus supplement for a series of securities, may provide that
deficiencies in amounts otherwise payable on the securities or specified
classes of them will be covered by insurance policies or surety bonds provided
by one or more insurance companies or sureties. These instruments may cover,
with respect to one or more classes of securities of the related series, timely
distributions of interest or full distributions of principal on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. In addition, a trust fund may
also include bankruptcy bonds, special hazard insurance policies, other
insurance, or guaranties:
. to maintain timely payments or provide additional protection against
losses on the assets included in the trust fund,
. to pay administrative expenses, or
. to establish a minimum reinvestment rate on the payments made in respect
of the assets or principal payment rate on the assets.
These arrangements may include agreements under which securityholders are
entitled to receive amounts deposited in various accounts held by the trustee
on the terms specified in the prospectus supplement. A copy of the instrument
providing this enhancement for a series will be filed with the SEC as an
exhibit to a Current Report on Form 8-K to be filed with the SEC within 15 days
of issuance of the securities of the related series.
Over-Collateralization
The prospectus supplement for a series of securities may provide that a
portion of the interest payment on each loan will be applied as an additional
distribution in respect of principal to reduce the principal balance of
a specified class or classes of securities and, thus, accelerate the rate of
payment of principal on the class or classes of securities relative to the
principal balance of the loans in the related trust fund.
Reserve Accounts
The related prospectus supplement may provide that credit support for a
series of securities will be provided by establishing and maintaining with the
trustee for the series, in trust, of one or more reserve accounts for the
series. The reserve account for a series will be funded:
23
. by depositing in it cash, United States Treasury securities, instruments
evidencing ownership of principal or interest payments on United States
Treasury securities, letters of credit, demand notes, certificates of
deposit, or a combination of them,
. by depositing in it from time to time specified amounts to which
subordinated securityholders would otherwise be entitled, or
. in any other manner specified in the related prospectus supplement.
Any amounts on deposit in the reserve account and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in permitted
investments. Permitted investments may include:
. direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by, the United States or any agency or
instrumentality thereof, if the obligations are backed by the full faith
and credit of the United States;
. repurchase agreements on obligations specified in the first item in this
list maturing not more than three months from the date of their
acquisition, if the short-term unsecured debt obligations of the party
agreeing to repurchase the obligations are at the time rated by each
rating agency in its highest short-term rating category;
. certificates of deposit, time deposits, and bankers' acceptances of any
U.S. depository institution or trust company incorporated under the laws
of the United States or any of its states and subject to supervision and
examination by federal or state banking authorities, if the unsecured
short-term debt obligations of the depository institution or trust
company at the date of their acquisition have been rated by each rating
agency in its highest unsecured short-term debt rating category, and
that, in the case of bankers' acceptances, shall not have an original
maturity of more than 365 days and, if Moody's is a rating agency, shall
each have an original maturity of not more than 90 days;
. commercial paper of any corporation incorporated under the laws of the
United States or any of its states that on the date of acquisition has
been rated by the rating agencies in their highest short-term rating
categories having original maturities of not more than 90 days;
. short-term investment funds sponsored by any trust company or bank
incorporated under the laws of the United States or any of its states
that on the date of acquisition has been rated by the rating agencies in
their respective highest rating category of long-term unsecured debt;
. interests in any money market fund that at the date of acquisition of
the interests in the fund and throughout the time the interest is held
in the fund has the rating specified in the related prospectus
supplement by each rating agency; and
. other obligations or securities that are acceptable to each rating
agency as a permitted investment and will not result in a reduction in
the then current rating of the securities, as evidenced by a letter to
that effect from the rating agency.
A permitted investment may not evidence either the right to receive only
interest on the obligations underlying the instrument or both principal and
interest payments derived from obligations underlying the instrument and the
interest and principal payments on the instrument provide a yield to maturity
at par greater than 120% of the yield to maturity at par of the underlying
obligations. In addition, no permitted investment may be purchased at a price
greater than par if the instrument may be prepaid or called at a price less
than its purchase price before its stated maturity. Unless otherwise specified
in the related prospectus supplement, any instrument deposited in the reserve
accounts will name the trustee, in its capacity as trustee for the holders of
the securities, as beneficiary and will be issued by an entity acceptable to
each rating agency that rates the securities of the related series. The related
prospectus supplement will contain additional information about the instruments
deposited in the reserve accounts.
24
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the reserve account for distribution to the
holders of securities of the related series for the purposes, in the manner,
and at the times specified in the related prospectus supplement.
Pool Insurance Policies
The related prospectus supplement, may provide that a separate pool
insurance policy will be obtained for the pool and issued by the insurer named
in the prospectus supplement. Each pool insurance policy will, subject to
specified limitations, cover loss from default in payment on loans in the pool
in an amount equal to a specified percentage of the aggregate principal balance
of the loans on the Cut-Off Date that are not covered as to their entire
outstanding principal balances by primary mortgage insurance policies. The
master servicer will present claims under that insurance to the pool insurer on
behalf of itself, the trustee, and the holders of the securities of the related
series. However, the pool insurance policies are not blanket policies against
loss, since claims under them may only be made against particular defaulted
loans and only on satisfaction of specified conditions precedent. The pool
insurance policies generally will not cover losses due to a failure to pay or
denial of a claim under a primary mortgage insurance policy.
The pool insurance policies generally will provide that no claims may be
validly presented unless
. any required primary mortgage insurance policy is in effect for the
defaulted loan and a claim under it has been submitted and settled;
. hazard insurance on the related property has been kept in force and real
estate taxes and other protection and preservation expenses have been
paid;
. if there has been physical loss or damage to the mortgaged property, it
has been restored to its physical condition, reasonable wear and tear
excepted, at the time of issuance of the policy; and
. the insured has acquired good and merchantable title to the property
free of liens except specified permitted encumbrances.
On satisfaction of these conditions, the pool insurer will have the option
either to purchase the property securing the defaulted loan at a price equal to
its principal balance plus accrued and unpaid interest and specified expenses
incurred by the master servicer on behalf of the trustee and securityholders,
or to pay the amount by which the sum of the principal balance of the defaulted
loan plus accrued and unpaid interest at the interest rate provided for in the
mortgage loan note to the date of payment of the claim and the aforementioned
expenses exceeds the proceeds received from an approved sale of the mortgaged
property, in either case net of specified amounts paid or assumed to have been
paid under the related primary mortgage insurance policy. If any property
securing a defaulted loan is damaged and any proceeds from the related hazard
insurance policy or the applicable special hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to
permit recovery under the pool insurance policy, the master servicer will not
be required to expend its own funds to restore the damaged property unless it
determines that the restoration will increase the proceeds to securityholders
on liquidation of the loan after reimbursement of the master servicer for its
expenses and the expenses will be recoverable by it through proceeds of the
sale of the property or proceeds of the related pool insurance policy or any
related primary mortgage insurance policy.
The pool insurance policies generally will not insure, and many primary
mortgage insurance policies do not insure, against loss sustained by reason of
a default arising from, among other things, failure to construct a property in
accordance with plans and specifications, or fraud or negligence in the
origination or servicing of a loan, including misrepresentation by the
borrower, the originator, or persons involved in its origination. A failure of
coverage attributable to one of these events might result in a breach of
Provident's representations and in that case might obligate Provident to
repurchase the defaulted loan if the breach cannot be cured by Provident. No
pool insurance policy will cover, and many primary mortgage insurance policies
do not cover, a claim on a defaulted loan occurring when the servicer of the
loan, at the time of default or thereafter, was not approved by the applicable
insurer.
25
The original amount of coverage under each pool insurance policy generally
will be reduced over the life of the related securities by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the
pool insurer on disposition of all foreclosed properties. The amount of claims
paid will include specified expenses incurred by the master servicer as well as
accrued interest on delinquent loans to the date of payment of the claim or
another date set forth in the related prospectus supplement. Accordingly, if
aggregate net claims paid under any pool insurance policy reach the original
policy limit, coverage under that pool insurance policy will be exhausted and
any further losses will be borne by the related securityholders.
Cross-Collateralization
The related prospectus supplement may provide that the beneficial ownership
of separate groups of assets included in a trust fund will be evidenced by
separate classes of the related series of securities. In that case, credit
support may be provided by a cross-collateralization feature that requires that
distributions be made to securities evidencing a beneficial ownership interest
in, or secured by, one or more asset groups within the same trust fund before
distributions to subordinated securities evidencing a beneficial ownership
interest in, or secured by, one or more other asset groups within the trust
fund. Cross-collateralization may be provided by the allocation of specified
excess amounts generated by one or more asset groups to one or more other asset
groups within the same trust fund or by the allocation of losses from one or
more asset groups to one or more other asset groups within the same trust fund.
The prospectus supplement for a series of securities that includes a cross-
collateralization feature will describe the manner and conditions for applying
the cross-collateralization feature.
Yield And Prepayment Considerations
The yields to maturity and weighted average lives of the securities will be
affected primarily by the amount and timing of principal payments received on
the trust fund assets included in the related trust fund. The original terms to
maturity of the loans in a given pool will vary depending upon the type of
loans included in it. Each prospectus supplement will contain information about
the type and maturities of the loans in the related pool. The related
prospectus supplement will specify any circumstances under which the related
loans will be subject to prepayment penalties. The prepayment experience on the
loans in a pool will affect the weighted average life of the related series of
securities.
The rate of prepayment on the loans cannot be predicted. Home equity loans
and home improvement contracts have been originated in significant volume only
during the past few years and Provident is not aware of any publicly available
studies or statistics on the rate of prepayment of those loans. Generally, home
equity loans and home improvement contracts are not viewed by borrowers as
permanent financing. Accordingly, the loans may experience a higher rate of
prepayment than traditional first mortgage loans. On the other hand, because
home equity loans such as the revolving credit line loans generally are not
fully amortizing, the absence of voluntary borrower prepayments could cause
rates of principal payments lower than, or similar to, those of traditional
fully-amortizing first mortgage loans. The prepayment experience of the related
trust fund may be affected by a wide variety of factors, including general
economic conditions, prevailing interest rate levels, the availability of
alternative financing, homeowner mobility and the frequency and amount of any
future draws on any revolving credit line loans. Other factors that might be
expected to affect the prepayment rate of a pool of home equity mortgage loans
or home improvement contracts include the amounts of, and interest rates on,
the underlying senior mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and subordinate mortgage loans as
shorter-term financing for a variety of purposes, including home improvement,
education expenses, and purchases of consumer durables such as automobiles.
Accordingly, these loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations on
the right of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of prepayments of the
loans. The enforcement of a due-on-sale provision will have the same effect as
a prepayment of the related loan. See "Legal Aspects of the Loans--Due-on-Sale
Clauses."
26
The yield to an investor who purchases securities in the secondary market at
a price other than par will vary from the anticipated yield if the rate of
prepayment on the loans is actually different than the rate anticipated by the
investor at the time the securities were purchased.
Collections on home equity loans may vary because, among other things,
borrowers may make payments as high as the entire outstanding principal balance
plus accrued interest and the fees and charges or make payments during any
month as low as the minimum monthly payment for the month that for some loans
is only the interest and the fees and charges for the month. In addition,
collections on the loans may vary due to seasonal purchasing and the payment
habits of borrowers.
Some of the conventional loans will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of the loan upon sale or
some transfers by the borrower of the related mortgaged property. Thus, the
rate of prepayments on the loans may be lower than that of conventional loans
bearing comparable interest rates. The master servicer generally will enforce
any due-on-sale or due-on-encumbrance clause to the extent it has knowledge of
the conveyance or further encumbrance or the proposed conveyance or proposed
further encumbrance of the property and reasonably believes that it is entitled
to do so under applicable law. See "The Agreements--Collection Procedures" and
"Legal Aspects of the Loans" for a description of each agreement and legal
developments that may affect the prepayment experience on the loans.
The rate of prepayments of conventional mortgage loans has fluctuated
significantly in recent years. In general, if prevailing rates fall
significantly below the interest rate in the mortgage loan notes, the loans are
more likely to be subject to higher prepayment rates than if prevailing
interest rates remain at or above the interest rate in the mortgage loan notes.
Conversely, if prevailing interest rates rise appreciably above the interest
rate in the mortgage loan notes, the loans are more likely to experience a
lower prepayment rate than if prevailing rates remain at or below the interest
rate in the mortgage loan notes. However, we cannot assure you that that will
continue to be the case.
When a full prepayment is made on a loan, the borrower is charged interest
on the principal amount prepaid only for the number of days in the month
actually elapsed up to the date of the prepayment, rather than for a full
month. The effect of prepayments in full will be to reduce the amount of
interest passed through or paid in the following month to holders of securities
because interest on the principal amount of any loan so prepaid will generally
be paid only to the date of prepayment. Partial prepayments in a given month
may be applied to the outstanding principal balances of the loans so prepaid on
the first day of the month of receipt or the month following receipt. In the
latter case, partial prepayments will not reduce the amount of interest passed
through or paid in that month. Generally, neither full nor partial prepayments
will be passed through or paid until the month following receipt.
Even assuming that the properties provide adequate security for the loans,
substantial delays could be encountered in liquidating defaulted loans and
corresponding delays in the receipt of related proceeds by securityholders
could occur. An action to foreclose on a property securing a loan is regulated
by state law 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 sale of mortgaged property by
the secured party. Upon a default by a borrower, these restrictions, among
other things, may impede the ability of the master servicer to foreclose on or
sell the property or to obtain liquidation proceeds sufficient to repay all
amounts due on the related loan. In addition, the master servicer will be
entitled to deduct from related liquidation proceeds all expenses reasonably
incurred in attempting to recover amounts due on defaulted loans and not yet
repaid, including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes, and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
on a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a
27
defaulted mortgage loan having a large remaining principal balance, the amount
realized after expenses of liquidation would be smaller as a percentage of the
remaining principal balance of the small mortgage loan than would be the case
with the defaulted mortgage loan having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other charges,
require various disclosures, and require licensing of some originators and
servicers of loans. In addition, most 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 originating,
servicing, and collecting loans. Depending on the applicable law and the
specific circumstances involved, violations of these laws, policies, and
principles may limit the ability of the master servicer to collect all or part
of the principal of or interest on the loans, may entitle the borrower to a
refund of amounts previously paid, and, in addition, could subject the master
servicer to damages and administrative sanctions.
If the rate at which interest is passed through or paid to the holders of
securities of a series is calculated on a loan-by-loan basis, disproportionate
principal prepayments among loans with different interest rates will affect the
yield on the securities. In most cases, the effective yield to securityholders
will be lower than the yield otherwise produced by the applicable pass-through
rate or interest rate and purchase price, because while interest will generally
accrue on each loan from the first day of the month, the distribution of
interest will not be made earlier than the month following the month of
accrual.
Under specified circumstances, the master servicer, the holders of the
residual interests in a REMIC, or any person specified in the related
prospectus supplement may have the option to purchase the assets of a trust
fund and thereby affect earlier retirement of the related series of securities.
See "The Agreements--Termination; Optional Termination."
The relative contribution of the various factors affecting prepayment may
vary from time to time. We cannot provide you assurances about the rate of
payment of principal of the trust fund assets at any time or over the lives of
the securities.
The prospectus supplement relating to a series of securities will discuss in
greater detail the effect of the rate and timing of principal payments,
including prepayments, delinquencies, and losses on the yield, weighted average
lives, and maturities of the securities.
The Agreements
A description of the material provisions of each agreement that are not
described elsewhere in this prospectus follows. The description is subject to,
and qualified in its entirety by reference to, the provisions of each
agreement. Where particular terms used in the agreements are referred to, those
terms are as specified in the agreements.
Assignment of the Trust Fund Assets
Assignment of the Loans. When a series of securities is issued, Provident
will assign the loans comprising the related trust fund to the trustee, without
recourse, together with all principal and interest due after the Cut-Off Date
and received by Provident on the loans after the Cut-Off Date, other than any
retained interest specified in the related prospectus supplement. The trustee
will, concurrently with the assignment, deliver the securities to Provident in
exchange for the loans. Each loan will be identified in a schedule appearing as
an exhibit to the related agreement. The schedule will include information as
to the outstanding principal balance of each loan after application of payments
due on or before the Cut-Off Date, as well as information about the APR or the
interest rate provided for in the mortgage loan note, the maturity of the loan,
the loan-to-value ratios or combined loan-to-value ratios, as applicable, at
origination, and other information.
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Unless otherwise specified in the related prospectus supplement, the
agreement will require that Provident will also deliver or cause to be
delivered to the trustee or to the custodian a loan file for each mortgage loan
or home equity loan. Among other things, the loan file contains:
. the mortgage note or contract endorsed without recourse in blank or to
the order of the trustee,
. the mortgage, deed of trust, or similar instrument with evidence of
recording indicated on it, except for any mortgage not returned from the
public recording office, in which case Provident will deliver or cause
to be delivered a copy of the mortgage together with a certificate that
the original of the mortgage was delivered to the recording office,
. an assignment of the mortgage to the trustee, which assignment will be
in recordable form in the case of a mortgage assignment, and
. other security documents, including those relating to any senior
interests in the mortgaged property, specified in the related prospectus
supplement or the related agreement.
Unless otherwise specified in the related prospectus supplement, Provident will
not promptly cause the assignments of the mortgages to be recorded in the
appropriate public office for real property records. If specified in the
related prospectus supplement, some or all of the loan documents may not be
delivered to the trustee until after the occurrence of events specified in the
related prospectus supplement.
The trustee or the custodian will review the loan documents after their
receipt, and the trustee will hold them in trust for the benefit of the related
securityholders. Unless otherwise specified in the related prospectus
supplement, if any document is found to be missing or defective in any material
respect, the trustee or the custodian will notify the master servicer and
Provident. If Provident cannot cure the omission or defect within the
appropriate time period after receipt of the notice, Provident will be
obligated either to purchase the related loan from the trust fund at the
purchase price or if so specified in the related prospectus supplement, to
remove the loan from the trust fund and substitute in its place one or more
other loans that meets specified requirements. We cannot assure you that
Provident will fulfill this purchase or substitution obligation. Unless
otherwise specified in the related prospectus supplement, this obligation to
cure, purchase, or substitute 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 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 agent of the trustee.
Notwithstanding these provisions, no purchase or substitution of a loan will
be made if the purchase or substitution would result in a prohibited
transaction tax under the Code for a trust fund for which a REMIC election is
to be made.
No Recourse to Provident or Master Servicer. As described under "--
Assignment of the Loans," Provident will assign the loans comprising the
related trust fund to the trustee, without recourse. However, Provident will be
obligated to repurchase or substitute for any loan as to which particular
representations and warranties are breached or for failure to deliver
particular documents relating to the loans as described in this prospectus
under "Assignment of the Loans" and "Loan Program--Representations by
Provident; Repurchases." These obligations to purchase or substitute constitute
the sole remedy available to the securityholders or the trustee for a breach of
a representation or warranty or failure to deliver a constituent document.
Payments on Loans; Deposits to Security Account
The master servicer will establish and maintain or cause to be established
and maintained for the related trust fund a separate security account or
accounts for the collection of payments on the related trust fund assets in the
trust fund that, unless otherwise specified in the related prospectus
supplement, must be either
29
. maintained with a depository institution whose short-term debt
obligations and long-term debt obligations at the time of any deposit
and throughout the time the interest is maintained are rated as
specified in the related prospectus supplement by the rating agencies,
and the deposits in the account or accounts are fully insured by either
the Bank Insurance Fund or the Savings Association Insurance Fund and
that is any of
. a federal savings and loan association duly organized, validly
existing, and in good standing under the applicable banking laws of
any state,
. an institution duly organized, validly existing, and in good
standing under the applicable banking laws of any state,
. a national banking association duly organized, validly existing, and
in good standing under the federal banking laws,
. a principal subsidiary of a bank holding company,
. a segregated trust account maintained with the corporate trust
department of a federal or state chartered depository or trust company
having capital and surplus of not less than $50,000,000, acting in its
fiduciary capacity, or
. an account otherwise acceptable to each rating agency as evidenced by a
letter from each rating agency to the trustee, without reduction or
withdrawal of the then current ratings of the securities.
The collateral eligible to secure amounts in the security account is limited to
permitted investments. A security account may be maintained as an interest
bearing account or its funds may be invested pending each succeeding
distribution date in permitted investments. Unless otherwise specified in the
related prospectus supplement, the master servicer or its designee will be
entitled to receive the interest or other income earned on funds in the
security account as additional compensation and will be obligated to deposit in
the security account the amount of any loss immediately as realized. The
security account may be maintained with the master servicer or with a
depository institution that is an affiliate of the master servicer, provided it
meets the required standards.
The master servicer will deposit or cause to be deposited in the security
account for each trust fund, to the extent applicable and unless otherwise
specified in the related prospectus supplement, the following payments and
collections received or advances made by or on behalf of it after the Cut-Off
Date, other than specified payments due on or before the Cut-Off Date and
exclusive of any amounts representing retained interest:
. all payments on account of principal, including principal prepayments
and, if specified in the related prospectus supplement, any applicable
prepayment penalties, on the loans;
. all payments on account of interest on the loans, net of applicable
servicing compensation;
. all net proceeds of the hazard insurance policies and any primary
mortgage insurance policies, to the extent the proceeds are not applied
to the restoration of the property or released to the mortgagor in
accordance with the master servicer's normal servicing procedures and
all other net cash amounts received and retained in connection with the
liquidation of defaulted loans, by foreclosure or otherwise, together
with any net proceeds received on a monthly basis with respect to any
properties acquired on behalf of the securityholders by foreclosure or
deed in lieu of foreclosure, netted against these items generally are
unreimbursed expenses associated with them;
. all proceeds of any loan or the property associated with it purchased by
Provident as described under "Loan Program--Representations by
Provident; Repurchases" or "--Assignment of Trust Fund Assets" and all
proceeds of any loan repurchased as described under "--Termination;
Optional Termination";
. all payments required to be deposited in the security account with
respect to any deductible clause in any blanket insurance policy
described under "--Hazard Insurance";
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. any amount required to be deposited by the master servicer in connection
with losses realized on investments for the benefit of the master
servicer of funds held in the security account and, to the extent
specified in the related prospectus supplement, any payments required to
be made by the master servicer in connection with prepayment interest
shortfalls; and
. all other amounts required to be deposited in the security account
pursuant to the agreement.
The master servicer may from time to time direct the institution that
maintains the security account to withdraw funds from the security account
for the following purposes:
. to pay to the master servicer the servicing fees described in the
related prospectus supplement, the master servicing fees (subject to
reduction), and, as additional servicing compensation, earnings or
investment income on funds in the security account;
. to reimburse the master servicer for advances, limited in amount to
amounts received that represent late recoveries of payments of principal
or interest on the loan with respect to which the servicing advance was
made, whether the receipt is a payment by the obligor or insurance
proceeds or liquidation proceeds;
. to reimburse the master servicer for any servicing advances previously
made which the master servicer has determined to be nonrecoverable;
. to reimburse the master servicer from insurance proceeds for expenses
incurred by the master servicer and covered by the related insurance
policies;
. to reimburse the master servicer for unpaid master servicing fees and
unreimbursed out-of-pocket costs incurred by the master servicer in the
performance of its servicing obligations, limited to amounts received
representing late recoveries of the payments for which the servicing
advances were made;
. to reimburse the master servicer or Provident for expenses incurred and
reimbursable pursuant to the agreement;
. to withdraw any amount deposited in the security account that was not
required to be deposited in it; and
. to clear and terminate the security account upon termination of the
agreement.
In addition, unless otherwise specified in the related prospectus
supplement, by the business day before each distribution date, the master
servicer shall withdraw from the security account the amount of available
funds, to the extent on deposit, for deposit in an account maintained by the
trustee for the related series of securities.
The applicable agreement may require the master servicer to establish and
maintain one or more escrow accounts into which mortgagors deposit amounts
sufficient to pay taxes, assessments, hazard insurance premiums, or comparable
items. Withdrawals from the escrow accounts maintained for mortgagors may be
made to effect timely payment of taxes, assessments, and hazard insurance
premiums or comparable items; to reimburse the master servicer out of related
assessments for maintaining hazard insurance; to refund to mortgagors amounts
determined to be overages; to remit to mortgagors, if required, interest
earned, if any, on balances in any of the escrow accounts; to repair or
otherwise protect the property; and to clear and terminate any of the escrow
accounts. The master servicer will be solely responsible for administration of
the escrow accounts and will be expected to make advances to the accounts when
a deficiency exists in any of them.
Pre-Funding Account
The related prospectus supplement may provide that the master servicer will
establish and maintain an account, in the name of the related trustee on behalf
of the related securityholders, into which Provident will
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deposit cash in an amount equal to the pre-funded amount on the related closing
date. The pre-funding account will be maintained with the trustee for the
related series of securities and is designed solely to hold funds to be applied
by the trustee during the funding period specified in the related prospectus
supplement to pay to Provident the purchase price for subsequent loans. Monies
on deposit in the pre-funding account will not be available to cover losses on
loans. The pre-funded amount will not exceed 50% of the initial aggregate
principal amount of the securities of the related series. The pre-funded amount
will be used by the related trustee to purchase subsequent loans from Provident
from time to time during the funding period. Any funding period for a trust
fund will begin on the related closing date and will end on the date specified
in the related prospectus supplement, which will not be later than the date
that is one year after the related closing date. Monies on deposit in the pre-
funding account may be invested in permitted investments under the
circumstances and in the manner described in the related agreement. Earnings on
investment of funds in the pre-funding account will be deposited into the
related security account or another trust account specified in the related
prospectus supplement and losses will be charged against the funds on deposit
in the pre-funding account. Any amounts remaining in the pre-funding account at
the end of the funding period will be distributed to the related
securityholders in the manner and priority specified in the related prospectus
supplement, as a prepayment of principal of the related securities.
In addition, if so provided in the related prospectus supplement, on the
related closing date Provident will deposit in a capitalized interest account
cash in an amount necessary to cover shortfalls in interest on the related
series of securities that may arise as a result of utilization of the pre-
funding account. The capitalized interest account shall be maintained with the
trustee for the related series of securities and is designed solely to cover
these interest shortfalls. Monies on deposit in the capitalized interest
account will not be available to cover losses on loans. To the extent that the
entire amount on deposit in the capitalized interest account has not been
applied to cover shortfalls in interest on the related series of securities by
the end of the funding period, any amounts remaining in the capitalized
interest account will be paid to Provident.
Sub-Servicing
The master servicer may enter into an agreement with any servicing entity
that will act as the sub-servicer for the related loans, which sub-servicing
agreement will not contain any terms inconsistent with the related agreement.
Notwithstanding any subservicing arrangement, unless otherwise provided in the
related prospectus supplement, the master servicer will remain liable for its
servicing duties and obligations under the master servicing agreement as if the
master servicer alone were servicing the loans.
Collection Procedures
The master servicer, directly or through one or more sub-servicers, will
make reasonable efforts to collect all payments called for under the loans and
will follow customary collection procedures for loans comparable to the loans
that are consistent with each agreement and any pool insurance policy, primary
mortgage insurance policy, bankruptcy bond, or alternative arrangements.
Consistent with that, the master servicer may waive any assumption fee, late
payment, or other charge in connection with a loan and arrange with a borrower
a schedule for the liquidation of delinquencies consistent with the master
servicer's policies with respect to the mortgage loans it owns and services for
others and consistent with any applicable coverage of the loan by a pool
insurance policy, primary mortgage insurance policy, bankruptcy bond, or
alternative arrangements. To the extent the master servicer is obligated to
make or cause to be made servicing advances, the obligation will remain during
any period of an arrangement.
In any case in which property securing a loan has been, or is about to be,
conveyed by the mortgagor or obligor, the master servicer will exercise or
cause to be exercised its rights to accelerate the maturity of the loan under
any applicable due-on-sale clause if it has knowledge of the conveyance or
proposed conveyance, but only if permitted by applicable law. If these
conditions are not met or if the master servicer reasonably believes it is
unable under applicable law to enforce the due-on-sale clause, the master
servicer will enter into or cause to be entered into an assumption and
modification agreement with the person to whom the property
32
has been or is about to be conveyed, pursuant to which the person becomes
liable for repayment of the loan and, to the extent permitted by applicable
law, the mortgagor also remains liable. Any fee collected by or on behalf of
the master servicer for entering into an assumption agreement will be retained
by or on behalf of the master servicer as additional servicing compensation.
See "Legal Aspects of the Loans--Due-on-Sale Clauses." The terms of the related
loan may not be changed in connection with an assumption.
Hazard Insurance
Except as otherwise specified in the related prospectus supplement, the
master servicer will require the mortgagor or obligor on each loan to maintain
a hazard insurance policy providing for no less than the coverage of the
standard form of fire insurance policy with extended coverage customary for the
type of property in the state in which the property is located. The coverage
will be in an amount that is at least equal to the lesser of
. the maximum insurable value of the improvements securing the loan from
time to time,
. the combined principal balance owing on the loan and any mortgage loan
senior to the loan, and
. the minimum amount required to compensate for damage or loss on a
replacement cost basis.
All amounts collected by the master servicer under any hazard policy will be
deposited in the related security account except for amounts to be applied to
the restoration or repair of the property or released to the mortgagor or
obligor in accordance with the master servicer's normal servicing procedures.
If the master servicer maintains a blanket policy insuring against hazard
losses on all the loans comprising part of a trust fund, that will satisfy its
obligation relating to the maintenance of hazard insurance. The blanket policy
may contain a deductible clause, in which case the master servicer will be
required to deposit from its own funds into the related security account the
amounts that would have been deposited therein but for that clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike, and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms, their basic
terms are dictated by state laws, and most policies typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods
and other water-related causes, nuclear reactions, wet or dry rot, vermin,
rodents, insects or domestic animals, theft, some cases of vandalism, and earth
movement, including earthquakes, landslides, and mud flows. This list is merely
indicative of some kinds of uninsured risks and is not intended to be all
inclusive. If the property securing a loan is located in a federally designated
special flood area at the time of origination, the master servicer may require
the mortgagor or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the loans
typically contain a clause that in effect requires the insured at all times to
carry insurance of a specified percentage of the full replacement value of the
insured property in order to recover the full amount of any partial loss. That
percentage is generally 80% to 90%. If the insured's coverage falls below this
specified percentage, then the insurer's liability upon partial loss will not
exceed the larger of the actual cash value of the improvements damaged or
destroyed and the proportion of the loss as the amount of insurance carried
bears to the specified percentage of the full replacement cost of the
improvements. Actual cash value of improvements is generally defined as
replacement cost at the time and place of loss, less physical depreciation.
Since the amount of hazard insurance the master servicer may cause to be
maintained on the improvements securing the loans declines as the principal
balances owing the loans decreases, and since improved real estate generally
has appreciated in value over time in the past, the effect of this requirement
upon partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damaged property. The related prospectus supplement may
require that a special hazard insurance policy be obtained to insure against
some of the uninsured risks. See "Credit Enhancement."
33
If the property securing a defaulted loan is damaged and any proceeds from
the related hazard insurance policy are insufficient to restore the damaged
mortgaged property, the master servicer is not required to expend its own funds
to restore the damaged property unless it determines that the restoration will
increase the proceeds to securityholders on liquidation of the loan after
reimbursement of the master servicer for its expenses and that the expenses
will be recoverable by it from related insurance proceeds or liquidation
proceeds.
If recovery on a defaulted loan under any related insurance policy is not
available, or if the defaulted loan is not covered by an insurance policy, the
master servicer will be obligated to follow or cause to be followed the normal
practices and procedures it deems appropriate to realize upon the defaulted
loan. If the proceeds of any liquidation of the property securing the defaulted
loan are less than the principal balance of the loan plus its accrued interest
that is payable to securityholders, the trust fund will realize a loss in the
amount of the difference plus the aggregate of recovery expenses incurred by
the master servicer that are reimbursable under the agreement. In the unlikely
event that the proceedings result in a total recovery that is, after
reimbursement to the master servicer of its expenses, in excess of the
principal balance of the loan plus its accrued interest that is payable to
securityholders, the master servicer will be entitled to withdraw or retain
from the security account amounts representing its normal servicing
compensation with respect to the loan and, unless otherwise specified in the
related prospectus supplement, amounts representing the balance of the excess,
exclusive of any amount required by law to be forwarded to the related
borrower, as additional servicing compensation.
If the master servicer or its designee recovers insurance proceeds that,
when added to any related liquidation proceeds and after deduction of expenses
reimbursable to the master servicer, exceed the principal balance of the loan
plus its accrued interest that is payable to securityholders, the master
servicer will be entitled to withdraw or retain from the security account
amounts representing its normal servicing compensation with respect to the
loan. If the master servicer has expended its own funds to restore the damaged
property and the funds have not been reimbursed under the related hazard
insurance policy, it will be entitled to withdraw from the security account out
of related liquidation proceeds or insurance proceeds an amount equal to the
expenses incurred by it, in which event the trust fund may realize a loss up to
the amount so charged. Since insurance proceeds cannot exceed deficiency claims
and particular expenses incurred by the master servicer, no payment or recovery
will result in a recovery to the trust fund that exceeds the principal balance
of the defaulted loan together with its accrued interest. See "Credit
Enhancement."
The proceeds from any liquidation of a loan will be applied in the following
order of priority:
. first, to reimburse the master servicer for any unreimbursed expenses
incurred by it to restore the related property and any unreimbursed
servicing compensation payable to the master servicer with respect to
the loan;
. second, to reimburse the master servicer for any unreimbursed servicing
advances with respect to the loan;
. third, to accrued and unpaid interest on the loan to the extent no
servicing advance has been made for that amount; and
. fourth, as a recovery of principal of the loan.
Realization Upon Defaulted Loans
Primary Mortgage Insurance Policies. If so specified in the related
prospectus supplement, the master servicer will maintain or cause to be
maintained in full force a primary mortgage insurance policy on each loan for
which coverage is required. Primary mortgage insurance policies reimburse
specified losses sustained due to defaults in payments by borrowers. The master
servicer will not cancel or refuse to renew any primary mortgage insurance
policy in effect at the time of the initial issuance of a series of securities
that is required to be kept in force under the applicable agreement unless the
replacement primary mortgage insurance policy for
34
the cancelled or nonrenewed policy is maintained with an insurer whose claims-
paying ability is sufficient to maintain the current rating of the classes of
securities of the series that have been rated.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the master servicer for
its master servicing activities for each series of securities will be equal to
the percentage per annum of the outstanding principal balance of each loan, and
that compensation will be retained by it from collections of interest on the
loan in the related trust fund. The master servicing fee percentage may vary
under specified circumstances, and it will be described in the related
prospectus supplement. As compensation for its servicing duties, any sub-
servicer will be entitled to a monthly servicing fee as described in the
related prospectus supplement. In addition, the master servicer or sub-servicer
will retain all prepayment charges, assumption fees, and late payment charges,
to the extent collected from borrowers, and any benefit that may accrue as a
result of the investment of funds in the applicable security account, unless
otherwise specified in the related prospectus supplement.
The master servicer will pay or cause to be paid some ongoing expenses
associated with each trust fund and incurred by it in connection with its
responsibilities under the related agreement, including and if so specified in
the related prospectus supplement, payment of any fee or other amount payable
with respect to any credit enhancement arrangements; payment of expenses
incurred in enforcing the obligations of sub-servicers; and payment of the fees
and disbursements of the trustee, any custodian appointed by the trustee, the
certificate registrar, and any paying agent. The master servicer will be
entitled to reimbursement of expenses incurred in enforcing the obligations of
sub-servicers under limited circumstances.
Evidence as to Compliance
Each agreement will provide that by a specified date in each year a firm of
independent public accountants will furnish a statement to the trustee on the
basis of the examination by the firm conducted substantially in compliance with
the Uniform Single Attestation Program for Mortgage Bankers or the Audit
Program for mortgages serviced for Freddie Mac. The statement will be to the
effect that the servicing by or on behalf of the master servicer of the trust
fund assets pursuant to the agreement was conducted in compliance with the
servicing agreement except for any significant exceptions or errors in records
that in its opinion it is required to report under the Audit Program for
mortgages serviced for Freddie Mac or the Uniform Single Attestation Program
for Mortgage Bankers. In rendering its statement the firm may rely, as to
matters relating to the direct servicing of loans by sub-servicers, upon
comparable statements not more than a year old for examinations conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for mortgages serviced for Freddie Mac of
firms of independent public accountants with respect to the related sub-
servicer.
Each agreement will also provide for delivery to the trustee, by a specified
date in each year, of an annual statement signed by two officers of the master
servicer to the effect that the master servicer has fulfilled its obligations
under the agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers of
the master servicer may be obtained by securityholders of the related series
without charge on written request to the master servicer at the address in the
related prospectus supplement.
Matters Regarding the Master Servicer and Provident
The master servicer under each pooling and servicing agreement or master
servicing agreement, as applicable, will be named in the related prospectus
supplement. Any of Provident, an affiliate of Provident, or another entity may
serve as master servicer.
Each agreement will provide that the master servicer may not resign from its
obligations under the agreement except upon appointment of a successor servicer
and receipt by the trustee of a letter from the rating
35
agency that the resignation and appointment will not result in a downgrade of
the securities or a determination that its duties under the agreement are no
longer permissible under applicable law. The master servicer may, however, be
removed from its obligations as set forth in the agreement. No resignation will
become effective until the trustee or a successor servicer has assumed the
master servicer's obligations under the agreement.
Each agreement will further provide that neither the master servicer,
Provident, nor any director, officer, employee, or agent of the master servicer
or Provident will be under any liability to the related trust fund or
securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the agreement, or for errors in judgment.
However, neither the master servicer, Provident, nor the other person will be
protected against any liability that would otherwise be imposed for willful
misfeasance, bad faith, or negligence in the performance of duties under the
agreement or for reckless disregard of obligations under the agreement. Each
agreement will further provide that the master servicer, Provident, and any
director, officer, employee, or agent of the master servicer or Provident will
be entitled to indemnification by the related trust fund and will be held
harmless against any loss, liability, or expense incurred in connection with
any legal action relating to the agreement or the securities, other than any
loss, liability, or expense related to any specific loan or loans, except any
loss, liability or expense otherwise reimbursable pursuant to the agreement,
and any loss, liability or expense incurred for willful misfeasance, bad faith,
or negligence in the performance of duties under the agreement or for reckless
disregard of obligations under the agreement. In addition, each agreement may
provide that neither the master servicer nor Provident will be under any
obligation to appear in, prosecute, or defend any legal action that is not
incidental to its respective responsibilities under the agreement and that in
its opinion may involve it in any expense or liability. The master servicer or
Provident may, however, in its discretion undertake any action that it deems
appropriate with respect to the agreement and the rights and duties of the
parties to the agreement and the interests of the securityholders under the
agreement. In that case, the legal expenses and costs of the action and any
liability resulting from it will be costs and liabilities of the trust fund,
and the master servicer or Provident, as the case may be, will be entitled to
be reimbursed for them out of funds otherwise distributable to securityholders.
Except as otherwise specified in the related prospectus supplement, any
person into which the master servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the master servicer
is a party, or any person succeeding to the business of the master servicer,
will be the successor of the master servicer under each agreement, if the
person is qualified to service mortgage loans and meets the net worth
requirement specified in the agreement and if the merger, consolidation, or
succession does not adversely affect the then current rating or ratings of the
class or classes of securities of the series that have been rated.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Master Servicing Agreement. Except as
otherwise specified in the related prospectus supplement, events of default
under each agreement will consist of:
. any failure by the master servicer to make any required deposit pursuant
to the related agreement other than a servicing advance that continues
unremedied for five days after written notice of the failure to the
master servicer by the trustee, or to the master servicer and the
trustee by a holder of the securities of the related series;
. any failure by the master servicer to make a servicing advance as
required under the agreement;
. any failure by the master servicer duly to observe or perform in any
material respect any of its other covenants or agreements in the
agreement that continues unremedied for thirty days after written notice
of the failure to the master servicer by the trustee, or to the master
servicer and the trustee by a holder of the securities of the related
series; and
. events of insolvency, readjustments of debt, marshalling of assets and
liabilities, or similar proceedings and particular actions by or on
behalf of the master servicer indicating its insolvency, reorganization,
or inability to pay its obligations.
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If specified in the related prospectus supplement, the agreement will permit
the trustee to sell the trust fund assets if payments from them are
insufficient to make payments required in the agreement. The trust fund assets
will be sold only under the circumstances and in the manner specified in the
related prospectus supplement.
Unless otherwise provided in the related prospectus supplement, so long as
an event of default under an agreement remains unremedied, the trustee may
terminate all of the rights and obligations of the master servicer under the
agreement relating to the trust fund and in the related trust fund assets. At
the direction of holders of securities evidencing not less than 51% of the
aggregate of the percentage interests of all the holders and under other
circumstances specified in the agreement, the trustee must take that action if
an event of default under an agreement remains unremedied. Upon the removal of
the master servicer the trustee will succeed to all of the duties and
liabilities of the master servicer under the agreement, including, if specified
in the related prospectus supplement, the obligation to make servicing
advances, and will be entitled to similar compensation arrangements. If the
event of default results from the master servicer's failure to make a servicing
advance, the trustee shall terminate the master servicer. If the trustee is
unwilling or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a mortgage loan servicing institution with
a net worth of a least $50,000,000 to act as successor to the master servicer
under the agreement. Pending that appointment, the trustee is obligated to act
in that capacity. The trustee and any successor may agree upon the servicing
compensation to be paid, which may not be greater than the compensation payable
to the master servicer under the agreement.
Unless otherwise provided in the related prospectus supplement, no
securityholder, solely by virtue of its status as a securityholder, will have
any right under any agreement to institute any proceeding with respect to the
agreement, unless the securityholder previously has given to the trustee
written notice of default and unless the holders of securities of any class of
the series evidencing not less than 51% of the aggregate of the percentage
interests of all the holders constituting the class have requested that the
trustee institute the proceeding in its own name as trustee under the agreement
and have offered to the trustee reasonable indemnity, and the trustee for 60
days has neglected or refused to institute a proceeding.
Indenture. Except as otherwise specified in the related prospectus
supplement, events of default under the indenture for each series of notes
include:
. a default in the payment of any principal of or interest on any note of
the series that continues unremedied for five days after written notice
of the default is given as specified in the related prospectus
supplement;
. failure to perform in any material respect any other covenant of
Provident or the trust fund in the indenture that continues for a period
of thirty days after notice of the failure is given in accordance with
the procedures described in the related prospectus supplement;
. events of bankruptcy, insolvency, receivership, or liquidation of
Provident or the trust fund; or
. any other event of default provided with respect to notes of that series
including specified defaults on the part of the issuer, if any, of a
credit enhancement instrument supporting the notes.
If an event of default with respect to the notes of any series at the time
outstanding occurs and is continuing, either the trustee or the holders of a
majority of the then aggregate outstanding amount of the notes of the series
may declare the principal amount of all the notes of the series to be due and
payable immediately. If any notes of that series have an interest rate of 0%,
the acceleration of principal shall relate to a portion of the principal amount
specified in the terms of that series, as provided in the related prospectus
supplement. The declaration may, under some circumstances, be rescinded by the
holders of more than 50% of the percentage interests of all the holders of the
notes of the series.
If, following an event of default with respect to any series of notes, the
notes of the series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding the acceleration, elect to
37
maintain possession of the collateral securing the notes of the series and to
continue to apply distributions on the collateral as if no declaration of
acceleration had occurred if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the notes of the series
as they would have become due if there had not been a declaration of
acceleration. In addition, the trustee may not sell or otherwise liquidate the
collateral securing the notes of a series following an event of default, other
than a default in the payment of any principal or interest on any note of the
series that continues unremedied for five days after written notice of the
default is given as specified in the related prospectus supplement, unless
. the holders of 100% of the percentage interests of all the holders of
the notes of the series consent to the sale,
. the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the
outstanding notes of the series at the date of the sale, or
. the trustee determines that the collateral would not be sufficient on an
ongoing basis to make all payments on the notes as the payments would
have become due if the notes had not been declared due and payable, and
the trustee obtains the consent of the holders of 66% of the of the
percentage interests of all the holders of the notes of the series.
If the trustee liquidates the collateral in connection with an event of
default involving a default in the payment of principal of or interest on the
notes of a series that continues unremedied for five days after written notice
of the default is given as specified in the related prospectus supplement, the
indenture provides that the trustee will have a prior lien on the proceeds of
the liquidation for unpaid fees and expenses. As a result, upon the occurrence
of such an event of default, the amount available for distribution to the
noteholders would be less than would otherwise be the case. However, the
trustee may not institute a proceeding for enforcement of its lien except in
connection with a proceeding for enforcement of the lien of the indenture for
the benefit of the noteholders after the occurrence of such an event of
default.
Except as otherwise specified in the related prospectus supplement, if the
principal of the notes of a series is declared due and payable after an event
of default, the holders of any notes issued at a discount from par may be
entitled to receive no more than an amount equal to their unpaid principal
amount less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of the
trustee, although an event of default occurs and is continuing with respect to
a series of notes, the trustee shall be under no obligation to exercise any of
the rights or powers under the indenture at the request or direction of any of
the holders of notes of the series unless the holders offered to the trustee
security or indemnity satisfactory to it against the costs and liabilities that
might be incurred by it in complying with the request or direction. Subject to
the provisions for indemnification and limitations contained in the indenture,
the holders of a majority of the then aggregate outstanding amount of the notes
of the series shall have the right to direct the time, method, and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee with respect to the notes of the
series, and the holders of a majority of the then aggregate outstanding amount
of the notes of the series may, in some cases, waive any default with respect
to them, except a default in the payment of principal or interest or a default
with respect to a covenant or provision of the indenture that cannot be
modified without the waiver or consent of all the holders of the outstanding
notes of the series affected by it.
Amendment
Except as otherwise specified in the related prospectus supplement, each
agreement may be amended by Provident, the master servicer, and the trustee,
without the consent of any of the securityholders, to cure any ambiguity; to
correct or supplement any provision in it that may be defective or inconsistent
with any other provision in it; or to make any other revisions with respect to
matters or questions arising under the agreement that are not inconsistent with
its provisions, if the action will not adversely affect in any material respect
the
38
interests of any securityholder. An amendment will be considered not to
adversely affect in any material respect the interests of the securityholders
if the person requesting the amendment obtains a letter from each rating agency
requested to rate the class or classes of securities of the series stating that
the amendment will not result in the downgrading or withdrawal of the
respective ratings then assigned to the securities. In addition, to the extent
provided in the related agreement, an agreement may be amended without the
consent of any of the securityholders to change the manner in which the
security account is maintained, if that change does not adversely affect the
then current rating on the class or classes of securities of the series that
have been rated. In addition, if a REMIC election is made for a trust fund, the
related agreement may be amended to modify, eliminate, or add to any of its
provisions to the extent necessary to maintain the qualification of the related
trust fund as a REMIC, if the trustee has received an opinion of counsel to the
effect that the action is necessary or helpful to maintain the qualification.
Each agreement may also be amended by Provident, the master servicer, and
the trustee with the consent of holders of securities of the series evidencing
not less than 51% of the aggregate of the percentage interests of all the
holders of each class affected by the amendment for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the agreement or of modifying in any manner the rights of the holders of the
related securities. However, no amendment may reduce the amount of or delay the
timing of, payments received on loans that are required to be distributed on
any security without the consent of the holder of that security, or reduce the
percentage of securities of any class the holders of which are required to
consent to that amendment, without the consent of the holders of all securities
of the class covered by the agreement then outstanding. If a REMIC election is
made with respect to a trust fund, the trustee will not be entitled to consent
to an amendment to the related agreement without having first received an
opinion of counsel to the effect that the amendment will not cause the trust
fund to fail to qualify as a REMIC.
Termination; Optional Termination
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise specified
in the related agreement, the obligations created by each pooling and servicing
agreement and trust agreement for each series of securities will terminate upon
the payment to the related securityholders of all amounts held in the security
account by the master servicer and required to be paid to them pursuant to the
agreement following the later of:
(1) the final payment of or other liquidation of the last of the trust fund
assets or the disposition of all property acquired upon foreclosure of
any trust fund assets remaining in the trust fund and
(2) the purchase by the master servicer or, if REMIC treatment has been
elected and if specified in the related prospectus supplement, by the
holder of the residual interest in the REMIC or any other party
specified to have that right from the related trust fund of all of the
remaining trust fund assets and all property acquired in respect of the
trust fund assets. See "Federal Income Tax Consequences."
Unless otherwise specified by the related prospectus supplement, any
purchase of trust fund assets and property acquired in respect of trust fund
assets evidenced by a series of securities will be made at the option of the
master servicer, another specified person, or, if applicable, the holder of the
REMIC residual interest, at a price specified in the related prospectus
supplement. The exercise of that right will affect early retirement of the
securities of that series, but the right of the master servicer, the other
specified person, or, if applicable, the holder of the REMIC residual interest,
to so purchase is subject to the principal balance of the related trust fund
assets being less than the percentage specified in the related prospectus
supplement of the aggregate principal balance of the trust fund assets at the
Cut-Off Date for the series. The foregoing is subject to the provision that if
a REMIC election is made with respect to a trust fund, any repurchase pursuant
to clause (2) above will be made only in connection with a qualified
liquidation of the REMIC within the meaning of Section 860F(g)(4) of the Code.
Indenture. The indenture will be discharged with respect to a series of
notes on the delivery to the trustee for cancellation of all the notes of the
series or, with specified limitations, upon deposit with the trustee
39
of funds sufficient for the payment in full of all of the notes of the series.
The discharge does not apply with respect to limited continuing rights
specified in the indenture.
In addition to discharge, the indenture may provide that for the notes of
any series, the related trust fund will be discharged from all obligations in
respect of the notes of the series through defeasance although generally
discharged, the obligations relating to temporary notes and exchange of notes;
to register the transfer of or exchange notes of the series; to replace stolen,
lost, or mutilated notes of the series; to maintain paying agencies; and to
hold monies for payment in trust will continue. Defeasance will require the
deposit with the trustee, in trust, of money or direct obligations of or
obligations guaranteed by the United States of America that through the payment
of their interest and principal in accordance with their terms will provide
money in an amount sufficient to pay the principal of and each installment of
interest on the notes of the series on the last scheduled distribution date for
the notes and any installment of interest on the notes in accordance with the
terms of the indenture and the notes of the series. Upon defeasance and
discharge of notes of the series, holders of notes of the series would be able
to look only to that money and those deposited obligations for payment of
principal and interest, if any, on their notes until maturity.
The Trustee
The trustee under each agreement will be named in the applicable prospectus
supplement. The commercial bank or trust company serving as trustee may have
normal banking relationships with Provident, the master servicer, and any of
their respective affiliates.
Legal Aspects of the Loans
The following discussion contains summaries, which are general in nature, of
legal matters relating to the loans. The legal aspects applicable to the loans,
the mortgages, and the mortgaged properties are governed primarily by
applicable state laws that may differ substantially from state to state. The
descriptions, therefore, will not be exact for every jurisdiction the loans are
found, and do not reflect the laws of any particular state except where so
stated. Nor do the descriptions encompass the laws of all states in which the
security for the loans is situated. The descriptions are qualified in their
entirety by reference to the applicable federal laws and the appropriate laws
of the states in which loans may be originated.
General
The loans for a series may be secured by deeds of trust, mortgages, security
deeds, or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. California uses
almost exclusively deeds of trust instead of mortgages. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is generally
not before the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. A mortgage has two parties, the mortgagor, who is the
borrower and owner of the mortgaged property, and the mortgagee, who is the
lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee
a note or bond and the mortgage. Although a deed of trust is similar to a
mortgage, a deed of trust formally has three parties, the borrower-property
owner 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 borrower 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. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until the underlying debt is
repaid. The trustee's authority under a deed of trust, the mortgagee's
authority under a mortgage, and the grantee's authority under a security deed
or deed to secure debt are governed by law and, with respect to some deeds of
trust, the directions of the beneficiary.
40
Foreclosure and Repossession
Deed of Trust. Foreclosure of a deed of trust is generally accomplished by a
non-judicial sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In some states,
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In addition to any notice requirements contained
in a deed of trust, in some states, such as California, the trustee must record
a notice of default and send a copy to the borrower-trustor, to any person who
has recorded a request for a copy of any notice of default and notice of sale,
to any successor in interest to the borrower-trustor, to the beneficiary of any
junior deed of trust, and to some other persons. In some states, including
California, 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 statutorily prescribed reinstatement period, cure a monetary
default by paying the entire amount in arrears plus other designated costs and
expenses incurred in enforcing the obligation. Generally, state law controls
the amount of foreclosure expenses and costs, including attorney's fees, which
may be recovered by a lender. After the reinstatement period has expired
without the default having been cured, the borrower or junior lienholder no
longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states, including California, published for a specific
period of time in one or more 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. In California, the
entire process from recording a notice of default to a non-judicial sale
usually takes four to five months.
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. In Ohio, judicial foreclosure is mandatory for residential property.
The action is initiated by the service of legal pleadings upon all parties
having an interest 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
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to
conduct the sale of the property. In some states, mortgages may also be
foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Ohio requires judicial foreclosure, which includes the issuance of a
decree in foreclosure, a statutorily required appraisal process, and public
advertising for at least one month in a newspaper of general circulation
providing adequate notice of a public auction to be conducted by the sheriff
generally on one or more pre-established days each month, depending on the
county in which the foreclosure occurs. In Ohio, the procedure, if uncontested,
will take approximately six months assuming successful service of process (one
month), motion for summary judgment (two months), decree in foreclosure and
appraisal (one month), advertising (one month), and sheriff's sale and
confirmation (one month). A contested case will take longer.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings, and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest, and the expenses of foreclosure,
in which case the mortgagor's debt will be extinguished. On the other hand, the
lender may purchase for a lesser amount to preserve its right against a
borrower to seek a deficiency judgment in states where a deficiency judgment is
available. Thereafter, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burden of ownership, including obtaining hazard insurance and making the
repairs necessary to render the property suitable for sale at its own expense.
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,
41
the ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure that are
generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. 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 does not involve sufficient state
action to afford constitutional protection to the borrower. Ohio law places a
two year limitations period, following the sheriff's sale and confirmation
order, in which a deficiency judgment may be obtained and enforced.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or
deed of trust. See "Junior Mortgages; Rights of Senior Mortgagees."
Environmental Risks
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of some states, contamination of a property
may give rise to a lien on the property to assure the payment of the costs of
clean-up. In several states that lien has priority over the lien of an existing
mortgage against the property. In addition, under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the
United States Environmental Protection Agency (the "EPA") may impose a lien on
property where the EPA has incurred clean-up costs. However, a CERCLA lien is
subordinate to pre-existing, perfected security interests.
Under the laws of some states and under CERCLA, a secured lender conceivably
could be held liable as an owner or operator for the costs of addressing
releases or threatened releases of hazardous substances at a property, even
though the environmental damage or threat was caused by a prior or current
owner or operator. CERCLA imposes liability for these costs on all responsible
parties, including owners or operators. However, CERCLA excludes from the
definition of owner or operator a secured creditor who holds indicia of
ownership primarily to protect its security interest but without actually
participating in the management of the property. Thus, if a lender's activities
begin to encroach on the actual management of a contaminated facility or
property, the lender may incur liability as an owner or operator under CERCLA.
Similarly, if a lender forecloses and takes title to a contaminated facility or
property, the lender may incur CERCLA liability in various circumstances,
including when it fails to market the property in a timely fashion or holds the
facility or property as an investment, including leasing the facility or
property to third party.
Whether actions taken by a lender would constitute actual participation in
the management of a mortgaged property or the business of a borrower so as to
render the secured creditor exclusion unavailable to a lender is a matter of
judicial interpretation, on a case-by-case basis. The term "participation in
the management" was not defined until certain amendments to CERCLA were
enacted, as part of the Asset Conservation, Lender Liability and Deposit
Insurance Protection Act of 1996. Under those amendments, a lender will lose
the protection of the secured creditor exclusion only if it exercises decision-
making control over the borrower's environmental compliance and hazardous
substance handling and disposal practices, or assumes day-to-day management of
operational functions of the mortgaged property. If a lender is or becomes
liable, it can bring an action for contribution against any other responsible
parties, including a previous owner or operator, who created the environmental
hazard, but those persons or entities may be bankrupt or otherwise judgment
proof. The costs associated with environmental cleanup may be substantial.
Securityholders could conceivably realize a loss from the costs arising from
these circumstances.
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CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks,
except heating oil tanks. The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under that rule, a holder
of a security interest in an underground storage tank or real property
containing an underground storage tank is not considered an operator of the
underground storage tank as long as petroleum is not added to, stored in, or
dispensed from the tank. In addition, under the Asset Conservation, Lender
Liability and Deposit Insurance Protection Act of 1996, the protections
accorded to lenders under CERCLA are also accorded to the holders of security
interests in underground storage tanks. Liability for cleanup of petroleum
contamination may, however, be governed by state law, which may not provide for
any specific protection for secured creditors, or, alternatively, may not
impose liability on secured creditors at all.
Except as otherwise specified in the related prospectus supplement, at the
time the loans were originated, no environmental assessments or very limited
environmental assessments of the mortgaged properties were conducted.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In other
states, including California, this right of redemption applies only to sales
following judicial foreclosure and not to sales pursuant to a non-judicial
power of sale. In most states where the right of redemption is available,
statutory redemption may occur upon payment of the foreclosure purchase price,
accrued interest, and taxes. In other states, redemption may be authorized if
the former borrower pays only a portion of the sums due. The effect of a
statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from the lender after foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to
force the lender to retain the property and pay the expenses of ownership until
the redemption period has run. In some states, there is no right to redeem
property after a trustee's sale under a deed of trust. In Ohio, the right of
redemption is dual in nature, arising both from equity and from statute. By
customary practice in the Court of Common Pleas, the judgment of foreclosure
allows a three day grace period for the defendant to pay amounts owed before
foreclosure of the equity of redemption. By statute, the debtor's common law
equity of redemption actually continues until the time of confirmation of sale.
The judgment debtor may redeem the property by depositing the amount of the
judgment plus costs with the Clerk of Court of Common Pleas where the execution
was made.
Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens
Some states have imposed statutory and judicial restrictions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, including California, statutes and case law limit the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or some other foreclosure proceedings. 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 fair market value of the real
property at the time of the foreclosure sale. As a result of these
prohibitions, it is anticipated that in most instances the master servicer will
utilize the non-judicial foreclosure remedy and will not seek deficiency
judgments against defaulting borrowers.
Some state 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 other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting the security.
However, in some of these states, the lender, following judgment on the
personal action, may be deemed to have elected a remedy and may be precluded
from exercising other
43
remedies with respect to the security. Consequently, the practical effect of
the election requirement, when applicable, is that lenders will usually proceed
first against the security rather than bringing a personal action against the
borrower. In some states, exceptions to the anti-deficiency statutes are
provided for in instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, upon waste of the
property. Ohio law does not limit the amount of the deficiency judgment, but
does impose a two year limitations period on the enforcement of the judgment.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of the public sale.
The purpose of these statutes is generally to prevent a beneficiary or a
mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on a
mortgaged property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the mortgaged
property is not the debtor's principal residence and the court determines that
the value of the mortgaged property is less than the principal balance of the
mortgage loan, for the reduction of the secured indebtedness to the value of
the mortgaged property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under the mortgage loan, change the rate of
interest, and alter the mortgage loan repayment schedule. The effect of any
proceedings under the federal Bankruptcy Code, including any automatic stay,
could result in delays in receiving payments on the loans underlying a series
of securities and possible reductions in the aggregate amount of the payments.
The federal tax laws provide priority to some tax liens over the lien of a
mortgage or secured party.
Due-on-Sale Clauses
Each conventional loan generally will contain a due-on-sale clause that will
generally provide that if the mortgagor or obligor sells, transfers, or conveys
the mortgaged property, the loan or contract may be accelerated by the
mortgagee or secured party. Court decisions and legislative actions have placed
substantial restrictions on the right of lenders to enforce these clauses in
many states. For instance, the California Supreme Court in August 1978 held
that due-on-sale clauses were generally unenforceable. However, the Garn- St
Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act"),
subject to some exceptions, preempts state constitutional, statutory, and case
law prohibiting the enforcement of due-on-sale clauses. As a result, due-on-
sale clauses are generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of these
clauses with respect to mortgage loans that were originated or assumed during
the window period under the Garn-St Germain Act that ended in all cases not
later than October 15, 1982, and that were originated by lenders other than
national banks, federal savings institutions, and federal credit unions.
Freddie Mac has taken the position in its published mortgage servicing
standards that, out of a total of eleven window period states, five states
(Arizona, Michigan, Minnesota, New Mexico, and Utah) have enacted statutes
extending, on various terms and for varying periods, the prohibition on
enforcement of due-on-sale clauses with respect to specified categories of
window period loans. Also, the Garn-St Germain Act does encourage lenders to
permit assumption of loans at the original rate of interest or at some other
rate less than the average of the original rate and the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the act may
not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related property to an
uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being
44
assumed by a new home buyer, that may affect the average life of the loans and
the number of loans that may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under some circumstances, be
eliminated in any modified mortgage resulting from the bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages, and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid before maturity. In some states, specific
limitations exist on the late charges that a lender may collect from a borrower
for delinquent payments. Some states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. Under
some state laws, prepayment charges may not be imposed after a specified period
following the origination of mortgage loans with respect to prepayments on
loans secured by liens encumbering owner-occupied residential properties. Since
many of the mortgaged properties will be owner-occupied, we anticipate that
prepayment charges may not be imposed with respect to many of the loans. The
absence of such a restraint on prepayment, particularly with respect to fixed
rate loans having high interest rates, may increase the likelihood of
refinancing or other early retirement of the loans or contracts. Late charges
and prepayment fees are typically retained by servicers as additional servicing
compensation.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 provides that state usury limitations shall not apply to specified
types of residential first mortgage loans originated by specified lenders after
March 31, 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of
Title V. Title V authorized the states to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision that
expressly rejects application of the federal law. Fifteen states adopted such a
law before the April 1, 1983 deadline. In addition, even where Title V was not
so rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Some
states have taken action to reimpose interest rate limits or to limit discount
points or other charges.
Soldiers' and Sailors' Civil Relief Act
Generally, under the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, a borrower who enters military service after the origination of the
borrower's loan may not be charged interest above an annual rate of 6% during
the period of the borrower's active duty status, unless a court orders
otherwise on application of the lender. A borrower 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 is included in this status. It is
possible that the interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the master servicer to collect
full amounts of interest on some of the loans. Unless otherwise provided in the
related prospectus supplement, any shortfall in interest collections resulting
from the application of this Act could result in losses to securityholders.
This Act also imposes limitations that would impair the ability of the master
servicer to foreclose on an affected loan during the borrower's period of
active duty status. Moreover, the Act permits the extension of a loan's
maturity and the re-adjustment of its payment schedule beyond the completion of
military service. Thus, if such a loan goes into default, the inability to
realize upon the property in a timely fashion may occasion delays in payment
and losses.
45
Junior Mortgages; Rights of Senior Mortgagees
To the extent that the loans in the trust fund for a series are secured by
mortgages that are junior to other mortgages held by other lenders or
institutional investors, the rights of the trust fund as mortgagee under the
junior mortgage are subordinate to those of any mortgagee under any senior
mortgage. The senior mortgagee has the right to receive hazard insurance and
condemnation proceeds and to cause the property securing the loan to be sold
upon default of the mortgagor, thereby extinguishing the junior mortgagee's
lien unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted
senior mortgage. A junior mortgagee may satisfy a defaulted senior loan in full
and, in some states, may cure a default and bring the senior loan current, in
either event adding the amounts expended to the balance due on the junior loan.
In most states, absent a provision in the mortgage or deed of trust, no notice
of default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders confers
on the mortgagee the right both to receive all proceeds collected under any
hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply these proceeds and awards to any indebtedness secured
by the mortgage, in the order the mortgagee determines. Thus, if improvements
on the property are damaged or destroyed by fire or other casualty, or if the
property is taken by condemnation, the mortgagee or beneficiary under a senior
mortgage will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgage. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges, and liens on the property that appear before the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property, and not to commit or permit any
waste, and to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under some mortgages to perform the obligation itself, at its
election, with the mortgagor reimbursing the mortgagee for any sums expended by
the mortgagee on behalf of the mortgagor. All sums so expended by the mortgagee
become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders that make revolving credit line loans typically contains
a future advance clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
Cut-Off Date with respect to any mortgage will not be included in the trust
fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens that intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of the intervening junior trust
deeds or mortgages and other liens at the time of the advance. In most states,
including Ohio, the trust deed or mortgage lien securing mortgage loans of the
type that includes home equity credit lines applies retroactively to the date
of the original recording of the trust deed or mortgage, if the total amount of
advances under the home equity credit line does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage and except as
to advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
46
Consumer Protection Laws
Numerous federal and state consumer protection laws impose substantive
requirements on mortgage lenders in connection with originating, servicing, and
enforcing loans secured by single family properties. These laws include the
federal Truth-in-Lending Act and Regulation Z promulgated thereunder, the Real
Estate Settlement Procedures Act and Regulation B promulgated thereunder, the
Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, and related statutes and regulations. In particular, Regulation
Z requires disclosures to borrowers regarding terms of the loans. The Equal
Credit Opportunity Act and Regulation B promulgated under it prohibit
discrimination in the extension of credit 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. The Fair
Credit Reporting Act regulates the use and reporting of information related to
the borrower's credit experience. Some provisions of these laws impose specific
statutory liabilities on lenders who fail to comply with them. In addition,
violations of those laws may limit the ability of Provident to collect all or
part of the principal of or interest on the loans and could subject Provident
and in some cases its assignees to damages and administrative enforcement.
The Reigle Act. Some loans may be subject to the Reigle Community
Development Regulatory Improvement Act of 1994 that incorporates the Home
Ownership and Equity Protection Act of 1994. These provisions impose additional
disclosure and other requirements on creditors with respect to non-purchase
money mortgage loans with high interest rates or high up-front fees and
charges. The provisions of this Act apply on a mandatory basis to all loans
originated on or after October 1, 1995. These provisions can impose specific
statutory liabilities on creditors who fail to comply with their provisions and
may affect the enforceability of the related loans. In addition, any assignee
of the creditor would generally be subject to all claims and defenses that the
consumer could assert against the creditor, including the right to rescind the
loans.
Federal Income Tax Consequences
General
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership, and disposition of the securities and
is based on advice of Brown & Wood LLP, special counsel to the trust fund. The
summary is based upon the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the regulations promulgated under the Code, including,
where applicable, proposed regulations, and the judicial and administrative
rulings and decisions now in effect, all of which are subject to change or
possible differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change,
and the change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with some types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily on investors
who will hold securities as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective investors are
advised to consult their own tax advisers concerning the federal, state, local,
and any other tax consequences to them of the purchase, ownership, and
disposition of the securities.
The federal income tax consequences to securityholders will vary depending
on whether
. the securities of a series are classified as indebtedness;
. an election is made to treat the trust fund relating to a particular
series of securities as a REMIC under the Code;
. the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series; or
47
. an election is made to treat the trust fund relating to a particular
series of certificates as a partnership.
The prospectus supplement for each series of securities will specify how the
securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to the series.
Before issuance of each series of securities, the trust fund shall file with
the SEC a Form 8-K on behalf of the related trust fund containing an opinion of
Brown & Wood LLP with respect to the validity of the information under "Federal
Income Tax Consequences" in this prospectus and in the related prospectus
supplement.
Taxation of Debt Securities
Interest and Acquisition Discount. Securities representing regular interests
in a REMIC ("Regular Interest Securities") are generally taxable to
securityholders in the same manner as evidences of indebtedness issued by the
REMIC. Stated interest on the Regular Interest Securities will be taxable as
ordinary income and taken into account using the accrual method of accounting,
regardless of the securityholder's normal accounting method. Interest other
than original issue discount on securities other than Regular Interest
Securities that are characterized as indebtedness for federal income tax
purposes will be includible in income by its securityholders in accordance with
their usual methods of accounting. Securities characterized as debt for federal
income tax purposes and Regular Interest Securities will be referred to
collectively as "Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with "original issue discount"
("OID"). The following discussion is based in part on the rules governing OID
that are set forth in Sections 1271-1275 of the Code and the Treasury
regulations issued under the Code on February 2, 1994, as amended on June 11,
1996, (the "OID Regulations"). A securityholder should be aware, however, that
the OID Regulations do not adequately address some issues relevant to
prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. A
securityholder of a debt security must include the OID in gross income as
ordinary interest income as it accrues under a method taking into account an
economic accrual of the discount. In general, OID must be included in income in
advance of the receipt of the cash representing that income. The amount of OID
on a debt security will be considered to be zero if it is less than a de
minimis amount determined under the Code.
The issue price of a debt security is the first price at which a substantial
amount of Debt Securities of that class are sold to the public (excluding bond
houses, brokers, underwriters, or wholesalers). If less than a substantial
amount of a particular class of Debt Securities is sold for cash on or before
the related Closing Date, the issue price for the class will be treated as the
fair market value of that class on the Closing Date. The issue price of a debt
security also includes the amount paid by an initial holder of a debt security
for accrued interest that relates to a period before the issue date of the debt
security. The stated redemption price at maturity of a debt security includes
the original principal amount of the debt security, but generally will not
include distributions of interest if the distributions constitute "qualified
stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate if the
interest payments are unconditionally payable at intervals of one year or less
during the entire term of the debt security. The OID Regulations state that
interest payments are unconditionally payable only if a late payment or
nonpayment is expected to be penalized or reasonable remedies exist to compel
payment. Some Debt Securities may provide for default remedies upon late
payment or nonpayment of interest. The interest on those Debt Securities will
be unconditionally payable and constitute qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where Debt Securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Interest
is payable at a single fixed rate only if the rate
48
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments,
in which case the stated redemption price at maturity of the Debt Securities
includes all distributions of interest as well as its principal. Where the
interval between the issue date and the first distribution date on a debt
security is either longer or shorter than the interval between subsequent
distribution dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and
tested under the de minimis rule. In the case of a debt security with a long
first period that has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the debt security
will generally have OID. Holders of Debt Securities are encouraged to consult
their own tax advisors to determine the issue price and stated redemption price
at maturity of a debt security.
Under the de minimis rule, OID on a debt security will be considered to be
zero if the OID is less than 0.25% of the stated redemption price at maturity
of the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled
to be made by a fraction, whose numerator is the amount of each distribution
included in the stated redemption price at maturity of the debt security and
whose denominator is the stated redemption price at maturity of the debt
security. Securityholders generally must report de minimis OID pro rata as
principal payments are received, and the income will be capital gain if the
debt security is held as a capital asset. However, accrual method
securityholders may elect to accrue all de minimis OID as well as market
discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable rate.
Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally,
. the interest is unconditionally payable at least annually,
. the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
. interest is based on a "qualified floating rate," an "objective rate,"
or a combination of "qualified floating rates" that do not operate in a
manner that significantly accelerates or defers interest payments on the
debt security.
In the case of Compound Interest Securities, some Interest Weighted Securities,
and some of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
Treasury regulations governing the calculation of OID on instruments having
contingent interest payments (the "Contingent Regulations") specifically do not
apply for purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the debt security. Additionally, the OID
Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the trustee
intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), we cannot assure you
that this methodology represents the correct manner of calculating OID.
The holder of a debt security issued with OID must include in gross income,
for all days during its taxable year on which it holds the debt security, the
sum of the "daily portions" of the OID. The amount of OID includible in income
by a securityholder will be computed by allocating to each day during a taxable
year a pro rata portion of the OID that accrued during the relevant accrual
period. In the case of a debt security that is not a Regular Interest Security
and the principal payments on which are not subject to acceleration resulting
from prepayments on the loans, the amount of OID includible in income of a
securityholder for an accrual
49
period will equal the product of the yield to maturity of the debt security and
the adjusted issue price of the debt security, reduced by any payments of
qualified stated interest. An accrual period is generally the period over which
interest accrues on the debt instrument. The adjusted issue price is the sum of
its issue price plus prior accruals or OID, reduced by the total payments made
with respect to the debt security in all prior periods, other than qualified
stated interest payments.
The amount of OID to be included in income by a securityholder of a debt
instrument, such as certain classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing the
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors:
. the original yield to maturity of the Pay-Through Security, determined
on the basis of compounding at the end of each accrual period and
properly adjusted for the length of the accrual period,
. events that have occurred before the end of the accrual period, and
. the assumption that the remaining payments will be made in accordance
with the original Prepayment Assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a securityholder to take into account prepayments with
respect to the loans at a rate that exceeds the Prepayment Assumption, and to
decrease the portions of OID for any period required to be included in income
by a securityholder of a Pay-Through Security to take into account prepayments
with respect to the loans at a rate that is slower than the Prepayment
Assumption. The decrease may not be a decrease below zero for any period in the
portions of OID required to be included in income by a securityholder of a Pay-
Through Security. Although OID will be reported to securityholders of Pay-
Through Securities based on the Prepayment Assumption, no representation is
made to securityholders that loans will be prepaid at that rate or at any other
rate.
Provident may adjust the accrual of OID on a Class of Regular Interest
Securities or other regular interests in a REMIC in a manner that it believes
to be appropriate to take account of realized losses on the loans, although the
OID Regulations do not provide for the adjustments. If the Internal Revenue
Service were to require that OID be accrued without the adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Some classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless otherwise provided in the related
prospectus supplement, the trustee intends, based on the OID Regulations, to
calculate OID on those securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a debt security will also be required to include OID
in gross income, but a subsequent securityholder who purchases the debt
security for an amount that exceeds its adjusted issue price will be entitled
to offset the OID by comparable economic accruals of portions of the excess, as
will an initial securityholder who pays more than a debt security's issue
price.
Effects of Defaults and Delinquencies. Securityholders will be required to
report income with respect to the related securities under an accrual method
without giving effect to delays and reductions in distributions attributable to
a default or delinquency on the loans, except possibly to the extent that it
can be established that the amounts are uncollectible. As a result, the amount
of income including OID reported by a securityholder of
50
such a security in any period could significantly exceed the amount of cash
distributed to the securityholder in that period. The securityholder will
eventually be allowed a loss, or will be allowed to report a lesser amount of
income, to the extent that the aggregate amount of distributions on the
securities is deducted as a result of a loan default. However, the timing and
character of the losses or reductions in income are uncertain and, accordingly,
securityholders are encouraged to consult their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities the payments
on which consist solely or primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC or on loans underlying Pass-
Through Securities ("Interest Weighted Securities"). The Issuer intends to take
the position that all of the income derived from an Interest Weighted Security
should be treated as OID and that the amount and rate of accrual of the OID
should be calculated by treating the Interest Weighted Security as a Compound
Interest Security. However, in the case of Interest Weighted Securities that
are entitled to some payments of principal and that are Regular Interest
Securities, the IRS could assert that income derived from an Interest Weighted
Security should be calculated as if the security were a security purchased at a
premium equal to the excess of the price paid by the securityholder for the
security over its stated principal amount, if any. Under this approach, a
securityholder would be entitled to amortize the premium only if it has in
effect an election under Section 171 of the Code with respect to all taxable
debt instruments held by the securityholder. Alternatively, the IRS could
assert that an Interest Weighted Security should be taxable under the rules
governing bonds issued with contingent payments. This treatment may be more
likely in the case of Interest Weighted Securities that are Stripped
Securities. See "--Tax Status as a Grantor Trust; Discount or Premium on Pass-
Through Securities."
Variable Rate Debt Securities. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index ("Variable Rate Debt Securities"), it appears that the yield to
maturity of the Variable Rate Debt Securities and in the case of Pay-Through
Securities, the present value of all payments remaining to be made on the
Variable Rate Debt Securities, should be calculated as if the interest index
remained at its value as of the issue date of the securities. Because the
proper method of adjusting accruals of OID on a variable rate debt security is
uncertain, holders of Variable Rate Debt Securities are encouraged to consult
their own tax advisers regarding the appropriate treatment of the securities
for federal income tax purposes.
Market Discount. A purchaser of a security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A securityholder that
acquires a debt security with more than a prescribed de minimis amount of
"market discount" will be required to include accrued market discount in income
as ordinary income in each month, but limited to an amount not exceeding the
principal payments on the debt security received in that month and, if the
securities are sold, the gain realized. Market discount is generally the excess
of the principal amount of the debt security over the purchaser's purchase
price. The market discount would accrue in a manner to be provided in Treasury
regulations but, until the regulations are issued, the market discount would in
general accrue either on the basis of a constant yield in the case of a Pay-
Through Security, taking into account a Prepayment Assumption or in the ratio
of
. in the case of securities (or in the case of a Pass-Through Security,
the loans underlying the security) not originally issued with OID,
stated interest payable in the relevant period to total stated interest
remaining to be paid at the beginning of the period or
. in the case of securities (or, in the case of a Pass-Through Security,
the loans underlying the security) originally issued at a discount, OID
in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the debt security (or, in the case of a Pass-Through Security, the loans),
the excess of interest paid or accrued to purchase or carry a security (or, in
the case of a Pass-Through Security, the underlying loans) with market discount
over interest received on the security is allowed as a current deduction only
to the extent the excess is greater than the market discount that accrued
during the taxable year in which the interest expense was incurred. In general,
the
51
deferred portion of any interest expense will be deductible when the market
discount is included in income, including on the sale, disposition, or
repayment of the security (or in the case of a Pass-Through Security, an
underlying loan). A securityholder may elect to include market discount in
income currently as it accrues, on all market discount obligations acquired by
the securityholder during the taxable year the election is made and thereafter,
in which case the interest deferral rule will not apply.
Premium. A securityholder who purchases a debt security (other than an
Interest Weighted Security to the extent described above) at a cost greater
than its stated redemption price at maturity, generally will be considered to
have purchased the security at a premium, which it may elect to amortize as an
offset to interest income on the security on a constant yield method and not as
a separate deduction item. Although no regulations addressing the computation
of premium accrual on securities similar to the securities have been issued,
the legislative history of the 1986 Act indicates that premium is to be accrued
in the same manner as market discount. Accordingly, it appears that the accrual
of premium on a Class of Pay-Through Securities will be calculated using the
Prepayment Assumption used in pricing the class. If a securityholder makes an
election to amortize premium on a debt security, the election will apply to all
taxable debt instruments (including all REMIC regular interests and all pass-
through certificates representing ownership interests in a trust holding debt
obligations) held by the securityholder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by the securityholder, and will be irrevocable without the consent
of the IRS. Purchasers who pay a premium for the securities are encouraged to
consult their tax advisers regarding the election to amortize premium and the
method to be employed.
On December 30, 1997, the IRS issued final regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6) such as the securities. Absent further guidance from
the IRS, the trustee intends to account for amortizable bond premium in the
manner described above. Prospective purchasers of the securities are encouraged
to consult their tax advisors regarding the possible application of the
Amortizable Bond Premium Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a debt security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a debt security with market discount, the holder of the debt
security would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that the holder of the debt security acquires during the year
of the election or thereafter. Similarly, a holder of a debt security that
makes this election for a debt security that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that the holder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a debt security is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of Brown & Wood LLP, special counsel to the trust
fund, if a REMIC election is made with respect to a series of securities, then
the arrangement by which the securities of that series are issued will be
treated as a REMIC as long as all of the provisions of the applicable agreement
are complied with and the statutory and regulatory requirements are satisfied.
Securities will be designated as "Regular Interests" or "Residual Interests" in
a REMIC, as specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if a
REMIC election is made with respect to a series of securities,
(1) securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within the meaning
of Code Section 7701(a)(19)(C)(xi) (assuming that at
52
least 95% of the REMIC's assets consist of cash, government securities,
"loans secured by an interest in real property," and other types of assets
described in Code Section 7701(a)(19)(C)); and
(2) securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Code Section 856(c)(4)(A), and
income with respect to the securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B) (assuming, for
both purposes, that at least 95% of the REMIC's assets are qualifying
assets).
If less than 95% of the REMIC's assets consist of assets described in (1) or
(2) above, then a security will qualify for the tax treatment described in (1)
or (2) in the proportion that the REMIC assets are qualifying assets.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
REMIC Expenses; Single Class REMICs
As a general rule, all of the expenses of a REMIC will be taken into account
by holders of the Residual Interest Securities. In the case of a "single class
REMIC," however, the expenses will be allocated, under Treasury regulations,
among the holders of the Regular Interest Securities and the holders of the
Residual Interest Securities on a daily basis in proportion to the relative
amounts of income accruing to each holder on that day. In the case of a holder
of a Regular Interest Security who is an individual or a "pass-through interest
holder" (including some pass-through entities, but not including real estate
investment trusts), the expenses will be deductible only to the extent that the
expenses, plus other "miscellaneous itemized deductions" of the securityholder,
exceed 2% of the securityholder's adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount, adjusted
for inflation, will be reduced by the lesser of 3% of the excess of adjusted
gross income over the applicable amount or 80% of the amount of itemized
deductions otherwise allowable for the taxable year. The reduction or
disallowance of this deduction may have a significant impact on the yield of
the Regular Interest Security to the a securityholder. In general terms, a
single class REMIC is one that either
. would qualify under existing Treasury regulations as a grantor trust if
it were not a REMIC (treating all interests as ownership interests, even
if they would be classified as debt for federal income tax purposes) or
. is similar to the a trust and which is structured with the principal
purpose of avoiding the single class REMIC rules.
Unless otherwise specified in the related prospectus supplement, the expenses
of the REMIC will be allocated to holders of the related Residual Interest
Securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
Residual Interests. The Regular Interests are generally taxable as debt of the
REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between the gross income produced by
the REMIC's assets, including stated interest and any OID or market discount on
loans and other assets, and deductions, including stated interest and OID
accrued on Regular Interest Securities, amortization of any premium with
respect to loans, and Servicing Fees and other expenses of the REMIC. A holder
of a Residual
53
Interest Security that is an individual or a "pass-through interest holder"
(including some pass-through entities, but not including real estate investment
trusts) will be unable to deduct Servicing Fees payable on the loans or other
administrative expenses of the REMIC for a given taxable year, to the extent
that the expenses, when aggregated with the securityholder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
the securityholder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the Regular Interests and the Residual Interests on the Startup
Day, which is generally, the day that the interests are issued. That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on those loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue OID, i.e., under the constant yield method taking into account the
Prepayment Assumption. The REMIC will deduct OID on the Regular Interest
Securities in the same manner that the holders of the Regular Interest
Securities include the discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities." However, a REMIC that acquires loans
at a market discount must include the market discount in income currently, as
it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant
yield method. Although the law is somewhat unclear regarding recovery of
premium attributable to loans originated on or before that date, it is possible
that the premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include:
. subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
. subject to limited exceptions, the sale or other disposition of a cash
flow investment;
. the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
. the receipt of any fees or other compensation for services rendered by
the REMIC.
We do not anticipate that a REMIC will engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition, subject
to a number of exceptions, a tax is imposed at the rate of 100% on amounts
contributed to a REMIC after the close of the three-month period beginning on
the Startup Day. The holders of Residual Interest Securities will generally be
responsible for the payment of those taxes imposed on the REMIC. To the extent
not paid by the securityholders or otherwise, however, those taxes will be paid
out of the trust fund and will be allocated pro rata to all outstanding classes
of securities of the REMIC.
Taxation of Holders of Residual Interest Securities
The holder of a security representing a Residual Interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year in which
the holder held the Residual Interest Security. The daily portion is determined
by allocating to
54
each day in any calendar quarter its ratable portion of the taxable income or
net loss of the REMIC for that quarter, and by allocating that amount among the
holders on that day of the Residual Interest Securities in proportion to their
respective holdings on that day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to the income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in some REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of
discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on Regular Interests issued
without any discount or at an insubstantial discount. If this occurs, it is
likely that cash distributions will exceed taxable income in later years.
Taxable income may also be greater in earlier years of some REMIC issues
because interest expense deductions, as a percentage of outstanding principal
on Regular Interest Securities, will typically increase over time as lower
yielding securities are paid, whereas interest income with respect to loans
will generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a Residual Interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a
securityholder may take into account currently is limited to the
securityholder's adjusted basis at the end of the calendar quarter in which the
loss arises. A securityholder's basis in a Residual Interest Security will
initially equal the securityholder's purchase price, and will subsequently be
increased by the amount of the REMIC's taxable income allocated to the
securityholder, and decreased by the amount of distributions made and the
amount of the REMIC's net loss allocated to the securityholder, but not below
zero. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
securityholders of Residual Interest Securities to deduct net losses may be
subject to additional limitations under the Code, as to which the
securityholders are encouraged to consult their tax advisers.
Distributions. Distributions on a Residual Interest Security will generally
not result in any additional taxable income or loss to a securityholder of a
Residual Interest Security whether they occur at their scheduled times or as a
result of prepayments. If the amount of the payment exceeds a securityholder's
adjusted basis in the Residual Interest Security, however, the securityholder
will recognize gain to the extent of the excess. That gain will be treated as
gain from the sale of the Residual Interest Security.
Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and the securityholder's
adjusted basis in the Residual Interest Security at the time of the sale or
exchange. Except to the extent provided in regulations, which have not yet been
issued, any loss upon disposition of a Residual Interest Security will be
disallowed if the selling securityholder acquires any residual interest in a
REMIC or similar mortgage pool within six months before or after the
disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder of a
Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on the
securityholder's federal income tax return. Further, if the holder of a
Residual Interest Security is an organization subject to the tax on unrelated
business income imposed by Code Section 511, the securityholder's excess
inclusion income will be treated as unrelated business taxable income of the
securityholder. In addition, under Treasury regulations yet to be issued, if a
real estate investment trust, a regulated investment company, a common trust
fund, or some cooperatives were to own a Residual Interest Security, a portion
of dividends or other distributions paid by the real estate investment trust or
other entity
55
would be treated as excess inclusion income. If a Residual Interest Security is
owned by a Foreign Person, excess inclusion income is subject to tax at a rate
of 30%, which may not be reduced by treaty, is not eligible for treatment as
"portfolio interest," and is subject to additional limitations. See "Tax
Treatment of Foreign Investors." The Small Business Job Protection Act of 1996
has eliminated the special rule permitting Section 593 institutions ("thrift
institutions") to use net operating losses and other allowable deductions to
offset their excess inclusion income from REMIC residual certificates that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except with respect to
residual certificates continuously held by a thrift institution since November
1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative
minimum taxable income of the holder of a Residual Interest Security. First,
alternative minimum taxable income for the holder of a Residual Interest
Security is determined without regard to the special rule that taxable income
cannot be less than excess inclusions. Second, a Residual Interest Security
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December
31, 1986, unless a holder of a Residual Interest Security elects to have the
rules apply only to tax years beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for the quarterly period of
120% of the long-term applicable federal rate on the Startup Day multiplied by
the adjusted issue price of the Residual Interest Security at the beginning of
the quarterly period. The adjusted issue price of a Residual Interest
Securities at the beginning of each calendar quarter will equal its issue price
which is calculated in a manner analogous to the determination of the issue
price of a Regular Interest, increased by the aggregate of the daily accruals
for prior calendar quarters, and decreased by the amount of loss allocated to a
securityholder and the amount of distributions made on the Residual Interest
Security before the beginning of the quarter, but not below zero. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Under the REMIC Regulations, in some circumstances, transfers of Residual
Interest Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors."
Restrictions on Ownership and Transfer of Residual Interest Securities. As a
condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a Residual Interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if the entity is not subject to tax on its unrelated business income.
Accordingly, the applicable pooling and servicing agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee has furnished to the trustee an affidavit representing
and warranting that it is neither a Disqualified Organization nor an agent or
nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization in violation of these restrictions, a substantial tax will be
imposed on the transferor of the Residual Interest Security at the time of the
transfer. In addition, if a Disqualified Organization holds an interest in a
pass-through entity that owns a Residual Interest Security, the pass-through
entity will be required to pay an annual tax on its allocable share of the
excess inclusion income of the REMIC. Pass-through entity includes, among
others, a partnership, trust, real estate investment trust, regulated
investment company, or any person holding as nominee.
56
The Taxpayer Relief Act of 1997 adds provisions to the Code that will apply
to an "electing large partnership." If an electing large partnership holds a
Residual Interest Security, all interests in the electing large partnership are
treated as held by disqualified organizations for purposes of the tax imposed
upon a pass-through entity by section 860E(e) of the Code. An exception to this
tax, otherwise available to a pass-through entity that is furnished certain
affidavits by record holders of interests in the entity and that does not know
the affidavits are false, is not available to an electing large partnership.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," a transfer of a Residual Interest Security to
a United States person will be disregarded for all federal tax purposes unless
no significant purpose of the transfer was to impede the assessment or
collection of tax. A Residual Interest Security is a "noneconomic residual
interest" unless at the time of the transfer
. the present value of the expected future distributions on the Residual
Interest Security at least equals the product of the present value of
the anticipated excess inclusions and the highest rate of tax for the
year in which the transfer occurs, and
. the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the taxes
accrue on the anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes.
If a transfer of a Residual Interest is disregarded, the transferor would be
liable for any federal income tax imposed on taxable income derived by the
transferee from the REMIC. The REMIC Regulations provide no guidance as to how
to determine if a significant purpose of a transfer is to impede the assessment
or collection of tax. A similar type of limitation exists with respect to some
transfers of Residual Interests by foreign persons to United States persons.
See "--Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a Residual Interest Security
should be aware that a Residual Interest Security acquired after January 3,
1995 cannot be marked-to-market.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject
to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in
a unified administrative proceeding.
Tax Status as a Grantor Trust
General. As specified in the related prospectus supplement if a REMIC or
partnership election is not made, in the opinion of Brown & Wood LLP, special
counsel to Provident, the trust fund relating to a series of securities will be
classified for federal income tax purposes as a grantor trust under Subpart E,
Part I of Subchapter J of the Code and not as an association taxable as a
corporation (the securities of that series, "Pass-Through Securities"). In some
series there will be no separation of the principal and interest payments on
the loans. In those circumstances, a securityholder will be considered to have
purchased a pro rata undivided interest in each of the loans. In other cases
("Stripped Securities"), sale of the securities will produce a separation in
the ownership of all or a portion of the principal payments from all or a
portion of the interest payments on the loans.
Each securityholder must report on its federal income tax return its share
of the gross income derived from the loans not reduced by the amount payable as
fees to the trustee and the servicer and similar fees (collectively, the
"Servicing Fees"), at the same time and in the same manner as those items would
have been reported under the securityholder's tax accounting method had it held
its interest in the loans directly, received directly its share of the amounts
received with respect to the loans, and paid directly its share of the
Servicing Fees. In the case of Pass-Through Securities other than Stripped
Securities, the income will consist of a pro
57
rata share of all of the income derived from all of the loans and, in the case
of Stripped Securities, the income will consist of a pro rata share of the
income derived from each stripped bond or stripped coupon in which the
securityholder owns an interest. The securityholder will generally be entitled
to deduct the Servicing Fees under Section 162 or Section 212 of the Code to
the extent that the Servicing Fees represent "reasonable" compensation for the
services rendered by the trustee and the Servicer, (or third parties that are
compensated for the performance of services). In the case of a noncorporate
securityholder, however, Servicing Fees, to the extent not otherwise
disallowed, e.g., because they exceed reasonable compensation, will be
deductible in computing the securityholder's regular tax liability only to the
extent that the fees, when added to other miscellaneous itemized deductions,
exceed 2% of adjusted gross income and may not be deductible to any extent in
computing the securityholder's alternative minimum tax liability. In addition,
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds the applicable amount,
adjusted for inflation, will be reduced by the lesser of 3% of the excess of
adjusted gross income over the applicable amount or 80% of the amount of
itemized deductions otherwise allowable for the taxable year.
Discount or Premium on Pass-Through Securities. The securityholder's
purchase price of a Pass-Through Security is to be allocated among the loans in
proportion to their fair market values determined as of the time of purchase of
the securities. In the typical case, the trustee, to the extent necessary to
fulfill its reporting obligations, will treat each loan as having a fair market
value proportional to the share of the aggregate principal balances of all of
the loans that it represents, since the securities, unless otherwise specified
in the related prospectus supplement, will have a relatively uniform interest
rate and other common characteristics. To the extent that the portion of the
purchase price of a Pass-Through Security allocated to a loan, other than to a
right to receive any accrued interest thereon and any undistributed principal
payments, is less than or greater than the portion of the principal balance of
the loan allocable to the security, the interest in the loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount represents
OID or market discount. In the case of a loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a securityholder will be
required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year. OID with respect to a loan could
arise, for example, by virtue of the financing of points by the originator of
the loan, or by virtue of the charging of points by the originator of the loan
in an amount greater than a statutory de minimis exception, in circumstances
under which the points are not currently deductible pursuant to applicable Code
provisions. Any market discount or premium on a loan will be includible in
income, except that in the case of Pass-Through Securities, market discount is
calculated with respect to the loans underlying the certificate, rather than
with respect to the security. A securityholder that acquires an interest in a
loan originated after July 18, 1984 with more than a de minimis amount of
market discount will be required to include accrued market discount in income.
Market discount is generally the excess of the principal amount of the loan
over the purchaser's allocable purchase price. See "--Taxation of Debt
Securities; Market Discount" and "--Premium."
In the case of market discount on a Pass-Through Security attributable to
loans originated on or before July 18, 1984, the securityholder generally will
be required to allocate the portion of the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time the principal payment
is made. That treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in
income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the loans, a right to receive only
principal payments on the loans, or a right to receive specified payments of
both interest and principal. Some Stripped Securities ("Ratio Strip
Securities") may represent a right to receive differing percentages of both the
interest and principal on each loan. Pursuant to Section 1286 of the Code, the
separation of ownership of the right to receive some or all of the interest
payments on an
58
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. Section 1286
of the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing OID, a stripped bond or a stripped coupon is treated as a
debt instrument issued on the date that the stripped interest is purchased with
an issue price equal to its purchase price or, if more than one stripped
interest is purchased, the ratable share of the purchase price allocable to the
stripped interest.
Servicing Fees in excess of reasonable Servicing Fees will be treated under
the stripped bond rules. If those excess Servicing Fees are less than 100 basis
points on the loan principal balance or the securities are initially sold with
a de minimis discount (assuming no Prepayment Assumption is required), any non-
de minimis discount arising from a subsequent transfer of the securities should
be treated as market discount. The IRS appears to require that reasonable
Servicing Fees be calculated on a loan-by-loan basis, which could result in
some loans being treated as having more than 100 basis points of interest
stripped off.
The Code, OID Regulations, and judicial decisions provide no direct guidance
as to how the interest and OID rules are to apply to Stripped Securities and
other Pass-Through Securities. Under the described method for Pay-Through
Securities (the "Cash Flow Bond Method"), a Prepayment Assumption is used and
periodic recalculations are made which take into account with respect to each
accrual period the effect of prepayments during the period. However, the 1986
Act does not, absent Treasury regulations, appear specifically to cover
instruments such as the Stripped Securities, which technically represent
ownership interests in the underlying loans, rather than being debt instruments
"secured by" those loans. For tax years beginning after August 5, 1997, the
Taxpayer Relief Act of 1997 may allow use of the Cash Flow Bond Method with
respect to the Strip Securities and other Pass-Through Securities because it
provides that that method applies to any pool of debt instruments the yield on
which may be affected by prepayments. Nevertheless, we believe that the Cash
Flow Bond Method is a reasonable method of reporting income for the securities,
and we expect that OID will be reported on that basis unless otherwise
specified in the related prospectus supplement. In applying the calculation to
Pass-Through Securities, the trustee will treat all payments to be received by
a securityholder with respect to the underlying loans as payments on a single
installment obligation. The IRS could, however, assert that OID must be
calculated separately for each loan underlying a security.
Under some circumstances, if the loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
securityholder's recognition of income. If, however, the loans prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate a securityholder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the trustee intends, absent contrary authority, to report income to
securityholders as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The described characterizations of
the Stripped Securities are not the only possible interpretations of the
applicable Code provisions. Among other possibilities, the IRS could contend
that:
. in some series, each non-Interest Weighted Security is composed of an
unstripped undivided ownership interest in loans and an installment
obligation consisting of stripped principal payments;
. the non-Interest Weighted Securities are subject to the contingent
payment provisions of the Contingent Regulations; or
. each Interest Weighted Stripped Security is composed of an unstripped
undivided ownership interest in loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the securities for federal income tax
purposes.
59
Character as Qualifying Loans. In the case of Stripped Securities, there is
no specific legal authority existing regarding whether the character of the
securities, for federal income tax purposes, will be the same as the loans. The
IRS could take the position that the loans' character is not carried over to
the securities in those circumstances. Pass-Through Securities will be, and,
although the matter is not free from doubt, Stripped Securities should be,
considered to represent "real estate assets" within the meaning of Section
856(c)(6)(B) of the Code and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code. Interest income
attributable to these securities should be considered to represent "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. Reserves or
funds underlying the securities may cause a proportionate reduction in the
above-described qualifying status categories of securities.
Sale or Exchange
Subject to the discussion under "Tax Characterization of the Trust Fund as a
Partnership" with respect to trust funds as to which a partnership election is
made, a securityholder's tax basis in its security is the price the
securityholder pays for a security, plus amounts of original issue or market
discount included in income and reduced by any amortized premium and any
payments received, other than qualified stated interest payments. Gain or loss
recognized on a sale, exchange, or redemption of a security, measured by the
difference between the amount realized and the security's basis as so adjusted,
will generally be capital gain or loss, assuming that the security is held as a
capital asset. In the case of a security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss
realized on the sale or exchange of a Regular Interest Security will be taxable
as ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of the amount that would
have been includible in the securityholder's income if the yield on the Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of the securityholder's holding period, over the amount of ordinary
income actually recognized by the securityholder with respect to the Regular
Interest Security. The maximum tax rate on ordinary income for individual
taxpayers is 39.6% and the maximum tax rate on long-term capital gains for
individual taxpayers is 20%. The maximum tax rate on both ordinary income and
long-term capital gains of corporate taxpayers is 35%. Prospective investors
are encouraged to consult their own tax advisors concerning these tax law
changes.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion under "Tax Characterization of
the Trust Fund as a Partnership" with respect to trust funds as to which a
partnership election is made, a securityholder, other than a holder of a
Residual Interest Security, may, under some circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent
interest or OID on the securities. This withholding generally applies if the
securityholder
. fails to furnish the trustee with its taxpayer identification number;
. furnishes the trustee an incorrect taxpayer identification number;
. fails to report properly interest, dividends, or other "reportable
payments" as defined in the Code; or
. under specified circumstances, fails to provide the trustee or the
securityholder's securities broker with a certified statement, signed
under penalty of perjury, that the taxpayer identification number
provided is its correct number and that the securityholder is not
subject to backup withholding.
Backup withholding will not apply, however, with respect to some payments made
to securityholders, including payments to some exempt recipients and to some
Nonresidents. Securityholders are encouraged to consult their tax advisers as
to their qualification for exemption from backup withholding and the procedure
for obtaining the exemption.
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The trustee will report to the securityholders and to the Servicer for each
calendar year the amount of any "reportable payments" during the year and the
amount of tax withheld, if any, with respect to payments on the securities.
Tax Treatment of Foreign Investors
Subject to the discussion under "Tax Characterization of the Trust Fund as a
Partnership" with respect to trust funds as to which a partnership election is
made, under the Code, unless interest including OID paid on a security other
than a Residual Interest Security is considered to be "effectively connected"
with a trade or business conducted in the United States by "Foreign Holder,"
the interest will normally qualify as portfolio interest and will be exempt
from federal income tax. This interest will not qualify as portfolio interest
where the recipient is a holder, directly or by attribution, of 10% or more of
the capital or profits interest in the issuer, or the recipient is a controlled
foreign corporation to which the issuer is a related person. Upon receipt of
appropriate ownership statements, the issuer normally will be relieved of
obligations to withhold tax from the interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate (unless that rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
Foreign Holders. Foreign Holders of Pass-Through Securities and Stripped
Securities, including Ratio Strip Securities, however, may be subject to
withholding to the extent that the loans were originated on or before July 18,
1984.
Interest and OID of securityholders who are Foreign Holders are not subject
to withholding if they are effectively connected with a United States business
conducted by the securityholder. They will, however, generally be subject to
the regular United States income tax.
Payments to Foreign Holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% United
States withholding tax or the lower treaty rate. Securityholders should assume
that that income does not qualify for exemption from United States withholding
tax as "portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess inclusion
income, a Foreign Holder of a Residual Interest Security will not be entitled
to an exemption from or reduction of the 30% (or lower treaty rate) withholding
tax rule. If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only when
paid or distributed, or when the Residual Interest Security is disposed of. The
Treasury has statutory authority, however, to promulgate regulations which
would require the amounts to be taken into account at an earlier time to
prevent the avoidance of tax. Those regulations could, for example, require
withholding before the distribution of cash in the case of Residual Interest
Securities that do not have significant value. Under the REMIC Regulations, if
a Residual Interest Security has tax avoidance potential, a transfer of a
Residual Interest Security to a Nonresident will be disregarded for all federal
tax purposes. A Residual Interest Security has tax avoidance potential unless,
at the time of the transfer, the transferor reasonably expects that the REMIC
will distribute to the transferee amounts that will equal at least 30% of each
excess inclusion, and that the amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Foreign Holder transfers a
Residual Interest Security to a United States person, and if the transfer has
the effect of allowing the transferor to avoid tax on accrued excess
inclusions, then the transfer is disregarded and the transferor continues to be
treated as the owner of the Residual Interest Security for purposes of the
withholding tax provisions of the Code. See "--Excess Inclusions."
For purposes of this section, a "Foreign Holder" is defined for United
States federal income tax purposes as any securityholder other than:
. any individual who is a citizen or resident of the United States,
. a corporation or partnership (including any entity treated as a
corporation or partnership for United States federal income tax
purposes) created or organized in or under the laws of the United
States,
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any state thereof or the District of Columbia unless, in the case of a
partnership, Treasury regulations provide otherwise,
. an estate the income of which is subject to United States federal income
tax regardless of its source,
. a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have authority to control all substantial decisions of
the trust, or
. certain trusts in existence on August 20, 1996, and treated as United
States persons (as defined in Code Section 7701(a)(30)) before the date
that elect to continue to be so treated.
Tax Characterization of the Trust Fund as a Partnership
Brown & Wood LLP, special counsel to Provident, will deliver its opinion
that a trust fund for which a partnership election is made will not be an
association or a publicly traded partnership taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the trust agreement and related documents will be complied with,
and on counsel's conclusions that the nature of the income of the trust fund
will exempt it from the rule that some publicly traded partnerships are
taxable as corporations or the issuance of the securities has been structured
as a private placement under an IRS safe harbor, so that the trust fund will
not be characterized as a publicly traded partnership taxable as a
corporation.
If the trust fund were taxable as a corporation for federal income tax
purposes, the trust fund would be subject to corporate income tax on its
taxable income. The trust fund's taxable income would include all its income,
possibly reduced by its interest expense on the notes. That corporate income
tax could materially reduce cash available to make payments on the notes and
distributions on the certificates, and certificateholders could be liable for
any such tax that is unpaid by the trust fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The trust fund will agree, and the
securityholders will agree by their purchase of notes, to treat the notes as
debt for federal income tax purposes. Brown & Wood LLP, special counsel to
Provident, will, except as otherwise provided in the related prospectus
supplement, advise Provident that the notes will be classified as debt for
federal income tax purposes. The following discussion assumes this
characterization of the notes is correct.
OID, Indexed Securities, etc. The discussion following assumes that all
payments on the notes are denominated in U.S. dollars, and that the notes are
not Indexed Securities or Strip Securities. Moreover, the discussion assumes
that the interest formula for the notes meets the requirements for "qualified
stated interest" under the OID Regulations, and that any OID on the notes does
not exceed a de minimis amount, all within the meaning of the OID Regulations.
If these conditions are not satisfied with respect to any given series of
notes, additional tax considerations with respect to the notes will be
disclosed in the applicable prospectus supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the notes will not be considered issued
with OID. The stated interest on them will be taxable to a noteholder as
ordinary interest income when received or accrued in accordance with the
noteholder's method of tax accounting. Under the OID Regulations, a holder of
a note issued with a de minimis amount of OID must include the OID in income,
on a pro rata basis, as principal payments are made on the note. Any
prepayment premium paid as a result of a mandatory redemption will be taxable
as contingent interest when it becomes fixed and unconditionally payable. A
purchaser who buys a note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a note that has a fixed maturity date of not more than one year
from the issue date of the note (a "Short-Term Note") may be subject to
special rules. An accrual basis noteholder of a Short-Term Note and
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some cash method noteholders, including regulated investment companies, as set
forth in Section 1281 of the Code, generally would be required to report
interest income as interest accrues on a straight-line basis over the term of
each interest period. Other cash basis noteholders of a Short-Term Note would,
in general, be required to report interest income as interest is paid or, if
earlier, upon the taxable disposition of the Short-Term Note. However, a cash
basis noteholder of a Short-Term Note reporting interest income as it is paid
may be required to defer a portion of any interest expense otherwise deductible
on indebtedness incurred to purchase or carry the Short-Term Note until the
taxable disposition of the Short-Term Note. A cash basis taxpayer may elect
under Section 1281 of the Code to accrue interest income on all nongovernment
debt obligations with a term of one year or less, in which case the taxpayer
would include interest on the Short-Term Note in income as it accrues, but
would not be subject to the interest expense deferral rule referred to in the
preceding sentence. Special rules apply if a Short-Term Note is purchased for
more or less than its principal amount.
Sale or Other Disposition. If a noteholder sells a note, the noteholder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the noteholder's adjusted tax basis in the note. The
adjusted tax basis of a note to a particular noteholder will equal the
noteholder's cost for the note, increased by any market discount, acquisition
discount, OID, and gain previously included by the noteholder in income with
respect to the note and decreased by the amount of any bond premium previously
amortized and by the amount of principal payments previously received by the
noteholder with respect to the note. That gain or loss will be capital gain or
loss if the note was held as a capital asset, except for gain representing
accrued interest and accrued market discount not previously included in income.
Capital losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made or accrued to a noteholder who is a
Foreign Holder generally will be considered "portfolio interest," and generally
will not be subject to United States federal income tax and withholding tax if
the interest is not effectively connected with the conduct of a trade or
business within the United States by the Foreign Holder and the Foreign Holder
is not actually or constructively a "10 percent shareholder" of the trust fund
or Provident (including a Holder of 10% of the outstanding certificates) or a
"controlled foreign corporation" with respect to which the trust fund or
Provident is a "related person" within the meaning of the Code and provides the
Owner trustee or other person who is otherwise required to withhold U.S. tax
with respect to the notes with an appropriate statement on Form W-8 or a
similar form, signed under penalties of perjury, certifying that the beneficial
owner of the note is a foreign person and providing the foreign person's name
and address. If a note is held through a securities clearing organization or
certain other financial institutions, the organization or institution may
provide the relevant signed statement to the withholding agent. In that case,
however, the signed statement must be accompanied by a Form W-8 or substitute
form provided by the foreign person that owns the note. If the interest is not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement, or other
taxable disposition of a note by a Foreign Holder will be exempt from United
States federal income and withholding tax, if the gain is not effectively
connected with the conduct of a trade or business in the United States by the
Foreign Holder and in the case of an individual Foreign Holder, the Foreign
Holder is not present in the United States for 183 days or more in the taxable
year.
Backup Withholding. Each noteholder except exempt noteholders will be
required to provide, under penalties of perjury, a certificate containing the
noteholder's name, address, correct federal taxpayer identification number, and
a statement that the noteholder is not subject to backup withholding. Exempt
noteholders are a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account, or nonresident alien who
provides certification as to status as a nonresident. Should a nonexempt
noteholder fail to provide the required certification, the trust fund will be
required to withhold 31 percent of the amount otherwise payable to the
noteholder, and remit the withheld amount to the IRS as a credit against the
noteholder's federal income tax liability.
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New Withholding Regulations. Final regulations dealing with withholding tax
on income paid to foreign persons, backup withholding, and related matters (the
"New Withholding Regulations") were issued by the Treasury Department on
October 6, 1997. The New Withholding Regulations will generally be effective
for payments made after December 31, 2000, subject to transition rules.
Prospective investors are strongly urged to consult their own tax advisors with
respect to the New Withholding Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the opinion of
Brown & Wood LLP, special counsel to the trust fund, the IRS successfully
asserted that one or more of the notes did not represent debt for federal
income tax purposes, the trust fund might be treated as a publicly traded
partnership that would not be taxable as a corporation because it would meet
qualifying income tests. Nonetheless, treatment of the notes as equity
interests in such a publicly traded partnership could have adverse tax
consequences to some noteholders. For example, income to some tax-exempt
entities including pension funds would be "unrelated business taxable income,"
income to Foreign Holders generally would be subject to U.S. tax and U.S. tax
return filing and withholding requirements, and individual holders might be
subject to limitations on their ability to deduct their share of the trust
fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The trust fund and the master
servicer will agree, and the securityholders will agree by their purchase of
certificates, to treat the trust fund as a partnership for purposes of federal
and state income tax, franchise tax, and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
trust fund, the partners of the partnership being the certificateholders, and
the notes being debt of the partnership. However, the proper characterization
of the arrangement involving the trust fund, the certificates, the notes, the
trust fund, and the Servicer is not clear because there is no authority on
transactions closely comparable to that contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. That characterization
would not result in materially adverse tax consequences to certificateholders
as compared to the consequences from treatment of the certificates as equity in
a partnership. The following discussion assumes that the certificates represent
equity interests in a partnership.
Indexed Securities, etc. The following discussion assumes that all payments
on the certificates are denominated in U.S. dollars, none of the certificates
are Indexed Securities or Strip Securities, and that a series of securities
includes a single class of certificates. If these conditions are not satisfied
with respect to any given series of certificates, additional tax considerations
with respect to the certificates will be disclosed in the applicable prospectus
supplement.
Partnership Taxation. As a partnership, the trust fund will not be subject
to federal income tax. Rather, each certificateholder will be required to
separately take into account its allocated share of income, gains, losses,
deductions, and credits of the trust fund. The trust fund's income will consist
primarily of interest and finance charges earned on the loans (including
appropriate adjustments for market discount, OID, and bond premium) and any
gain upon collection or disposition of loans. The trust fund's deductions will
consist primarily of interest accruing with respect to the notes, servicing and
other fees, and losses or deductions on collection or disposition of loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations, and the partnership agreement (here, the
trust agreement and related documents). The trust agreement will provide, in
general, that the certificateholders will be allocated taxable income of the
trust fund for each month equal to the sum of:
. the interest that accrues on the certificates in accordance with their
terms for the month, including interest accruing at the pass-through
rate for the month and interest on amounts previously due on the
certificates but not yet distributed;
64
. any trust fund income attributable to discount on the loans that
corresponds to any excess of the principal amount of the certificates
over their initial issue price;
. prepayment premium payable to the certificateholders for the month; and
. any other amounts of income payable to the certificateholders for the
month.
The allocation will be reduced by any amortization by the trust fund of premium
on loans that corresponds to any excess of the issue price of certificates over
their principal amount. All remaining taxable income of the trust fund will be
allocated to Provident. Based on the economic arrangement of the parties, this
approach for allocating trust fund income should be permissible under
applicable Treasury regulations, although we cannot assure you that the IRS
would not require a greater amount of income to be allocated to
certificateholders. Moreover, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire pass-through
rate plus the other items described above even though the trust fund might not
have sufficient cash to make current cash distributions of the amount. Thus,
cash basis certificateholders will in effect be required to report income from
the certificates on the accrual basis and certificateholders may become liable
for taxes on trust fund income even if they have not received cash from the
trust fund to pay the taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all certificateholders but
certificateholders may be purchasing certificates at different times and at
different prices, certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the trust fund.
All of the taxable income allocated to a certificateholder that is a
pension, profit sharing or employee benefit plan, or other tax-exempt entity
including an individual retirement account will constitute "unrelated business
taxable income" generally taxable to a certificateholder under the Code.
An individual taxpayer's share of expenses of the trust fund, including fees
to the servicer but not interest expense, would be miscellaneous itemized
deductions. Those deductions might be disallowed to the individual in whole or
in part and might result in the certificateholder being taxed on an amount of
income that exceeds the amount of cash actually distributed to the
certificateholder over the life of the trust fund.
The trust fund intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the IRS were to
require that those calculations be made separately for each loan, the trust
fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on certificateholders.
Discount and Premium. We believe that the loans were not issued with OID,
and, therefore, the trust fund should not have OID income. However, the
purchase price paid by the trust fund for the loans may be greater or less than
the remaining principal balance of the loans at the time of purchase. If so,
the loan will have been acquired at a premium or discount, as the case may be.
The trust fund will make this calculation on an aggregate basis, but might be
required to recompute it on a loan by loan basis.
If the trust fund acquires the loans at a market discount or premium, the
trust fund will elect to include that discount in income currently as it
accrues over the life of the loans or to offset that premium against interest
income on the loans. A portion of the market discount income or premium
deduction may be allocated to certificateholders.
Section 708 Termination. Pursuant to final Treasury regulations issued May
9, 1997 under section 708 of the Code a sale or exchange of 50 percent or more
of the capital and profits in the trust fund within a 12-month period would
cause a deemed contribution of assets of the trust fund (the "old partnership")
to a new partnership (the "new partnership") in exchange for interests in the
new partnership. Those interests would be deemed distributed to the partners of
the old partnership in liquidation of it, which would not constitute a sale or
exchange.
65
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the certificates
sold. A certificateholder's tax basis in a certificate will generally equal the
certificateholder's cost increased by the securityholder's share of trust fund
income includible in income and decreased by any distributions received with
respect to the certificate. In addition, both the tax basis in the certificates
and the amount realized on a sale of a certificate would include the
certificateholder's share of the notes and other liabilities of the trust fund.
A certificateholder acquiring certificates at different prices may be required
to maintain a single aggregate adjusted tax basis in the certificates, and,
upon sale or other disposition of some of the certificates, allocate a portion
of the aggregate tax basis to the certificates sold, rather than maintaining a
separate tax basis in each certificate for purposes of computing gain or loss
on a sale of that certificate.
Any gain on the sale of a certificate attributable to the
certificateholder's share of unrecognized accrued market discount on the loans
would generally be treated as ordinary income to the certificateholder and
would give rise to special tax reporting requirements. The trust fund does not
expect to have any other assets that would give rise to the special reporting
requirements. Thus, to avoid those special reporting requirements, the trust
fund will elect to include market discount in income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income not including income attributable to disallowed itemized deductions over
the life of the certificates that exceeds the aggregate cash distributions with
respect thereto, the excess will generally give rise to a capital loss upon the
retirement of the certificates.
Allocations Between Transferors and Transferees. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
certificateholders in proportion to the principal amount of certificates owned
by them as of the close of the last day of the month. As a result, a
securityholder purchasing certificates may be allocated tax items attributable
to periods before the actual transaction that will affect its tax liability and
tax basis.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. If a certificateholder sells its certificates at a
profit (loss), the purchasing certificateholder will have a higher (lower)
basis in the certificates than the selling certificateholder had. The tax basis
of the trust fund's assets will not be adjusted to reflect that higher (or
lower) basis unless the trust fund were to file an election under Section 754
of the Code. To avoid the administrative complexities that would be involved in
keeping accurate accounting records, as well as potentially onerous information
reporting requirements, the trust fund will not make the election. As a result,
certificateholders might be allocated a greater or lesser amount of trust fund
income than would be appropriate based on their own purchase price for
certificates.
Administrative Matters. The owner trustee is required to keep or have kept
complete and accurate books of the trust fund. The books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to certificateholders and the IRS on Schedule K-
1. The trust fund will provide the Schedule K-l information to nominees that
fail to provide the trust fund with the information statement described in the
next paragraph and the nominees will be required to forward the information to
the beneficial owners of the certificates. Generally, certificateholders must
file tax returns that are consistent with the information return filed by the
trust fund or be subject to penalties unless the certificateholder notifies the
IRS of all the inconsistencies.
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Under Section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust
fund with a statement containing information on the nominee, the beneficial
owners, and the certificates so held. That information includes the name,
address and taxpayer identification number of the nominee and as to each
beneficial owner
. the name, address, and identification number of the person,
. whether the person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned
agency or instrumentality of either of the foregoing, and
. information on certificates that were held, bought, or sold on behalf of
the person throughout the year.
In addition, brokers and financial institutions that hold certificates through
a nominee are required to furnish directly to the trust fund information as to
themselves and their ownership of certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish that
information statement to the trust fund. The information referred to above for
any calendar year must be furnished to the trust fund on or before the
following January 31. Nominees, brokers, and financial institutions that fail
to provide the trust fund with this information may be subject to penalties.
Provident or the trustee will be designated as the tax matters partner in
the related trust agreement and, as such, will be responsible for representing
the certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the trust fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
certificateholders, and, under some circumstances, a certificateholder may be
precluded from separately litigating a proposed adjustment to the items of the
trust fund. An adjustment could also result in an audit of a
certificateholder's returns and adjustments of items not related to the income
and losses of the trust fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to Foreign
Holders because there is no clear authority dealing with that issue under facts
substantially similar to those described in this prospectus. Although the trust
fund is not expected to engage in a trade or business in the United States for
those purposes, the trust fund will withhold as if it were so engaged to
protect the trust fund from possible adverse consequences of a failure to
withhold. The trust fund expects to withhold on the portion of its taxable
income that is allocable to foreign certificateholders pursuant to Section 1446
of the Code, as if the income were effectively connected to a U.S. trade or
business, at a rate of 35% for Foreign Holders that are taxable as corporations
and 39.6% for all other Foreign Holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the trust fund to change its withholding procedures. In determining a
certificateholder's withholding status, the trust fund may rely on IRS Form W-
8, IRS Form W-9, or the certificateholder's certification of nonforeign status
signed under penalties of perjury.
Each Foreign Holder might be required to file a U.S. individual or corporate
income tax return on its share of the trust fund's income including, in the
case of a corporation, the branch profits tax. Each Foreign Holder must obtain
a taxpayer identification number from the IRS and submit that number to the
trust fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A Foreign Holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the trust fund taking the
position that no taxes were due because the trust fund was not engaged in a
U.S. trade or business. However, interest payments made or accrued to a
certificateholder who is a Foreign Holder generally will be considered
guaranteed payments to the extent the payments are determined without regard to
the income of the trust fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Foreign Holders will be subject to United
States federal income
67
tax and withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable treaty. In that case, a Foreign Holder would only be
entitled to claim a refund for that portion of the taxes in excess of the taxes
that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the certificates and proceeds from
the sale of the certificates will be subject to a "backup" withholding tax of
31% if, in general, the certificateholder fails to comply with identification
procedures, unless the certificateholder is an exempt recipient under
applicable provisions of the Code.
New Withholding Regulations. As discussed above, the New Withholding
Regulations deal with withholding tax on income paid to foreign persons, backup
withholding, and related matters. The New Withholding Regulations were issued
by the Treasury Department on October 6, 1997 and will generally be effective
for payments made after December 31, 2000, subject to transition rules.
Prospective investors are strongly urged to consult their own tax advisors with
respect to the New Withholding Regulations.
Taxation of Trust as FASIT
In the opinion of Brown & Wood LLP, special tax counsel to the trust fund,
if a FASIT election is made with respect to a series of securities, the trust
fund will be formed to qualify as a FASIT. The Small Business and Job
Protection Act of 1996 added Sections 860H through 860L to the Code (the "FASIT
Provisions"),
that provide for a new type of entity for federal income tax purposes known as
a "financial asset securitization investment trust" (a "FASIT"). Although the
FASIT provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance have been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Regular Securityholders.
Investors should also note that the FASIT discussion contained in this
prospectus constitutes only a summary of the U.S. federal income tax
consequences to the holders of FASIT securities. With respect to each series of
FASIT Regular Securities, the related prospectus supplement will provide a
detailed discussion regarding the federal income tax consequences associated
with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for U.S. federal income tax purposes,
or FASIT Ownership Securities, which generally are not treated as debt for the
purposes, but rather as representing rights and responsibilities with respect
to the taxable income or loss of the related series FASIT. The prospectus
supplement for each series of securities will indicate which securities of the
series will be designated as FASIT Regular Securities, and which, if any, will
be designated as FASIT Ownership Securities.
Qualification as a FASIT. The trust fund will qualify under the Code as a
FASIT in which FASIT Regular Securities (the "FASIT Regular Securities") and
the Ownership Interest Security (the "FASIT Ownership Security") will
constitute the "regular interests" and the "ownership interest," respectively,
if:
. a FASIT election is in effect,
. tests concerning the composition of the FASIT's assets and the nature of
the securityholders' interests in the FASIT are met on a continuing
basis, and
. the trust fund is not a regulated investment company as defined in
section 851(a) of the Code.
Asset Composition. For the trust fund to be eligible for FASIT status,
substantially all of the assets of the trust fund must consist of "permitted
assets" as of the close of the third month beginning after the closing date and
at all times thereafter (the "FASIT Qualification Test"). Permitted assets
include:
. cash or cash equivalents,
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. debt instruments with fixed terms that would qualify as regular
interests if issued by a REMIC as defined in section 860D of the Code
("REMIC"), which are generally instruments that provide for interest at
a fixed rate, a qualifying variable rate, or a qualifying interest-only
("IO") type rate,
. foreclosure property,
. hedging instruments that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT
interests, which are generally interest and currency rate swaps and
credit enhancement contracts,
. contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
. FASIT regular interests, and
. REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder of
the FASIT's ownership interest or by any person related to the holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT must meet other requirements. All of the
interests in a FASIT must belong to either one or more classes of regular
interests or a single class of ownership interest that is held by a fully
taxable domestic C Corporation.
A FASIT interest generally qualifies as a regular interest if
(1) it is designated as a regular interest,
(2) it has a stated maturity no greater than thirty years,
(3) it entitles its holder to a specified principal amount,
(4) the issue price of the interest does not exceed 125% of its stated
principal amount,
(5) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and
(6) if it pays interest, payable at either a fixed rate with respect to
the principal amount of the regular interest or a permissible variable rate
with respect to the principal amount.
Permissible variable rates for FASIT regular interests are the same as those
for REMIC regular interests. Interest will be considered to be based on a
permissible variable rate if generally, the interest is unconditionally payable
at least annually, the issue price of the debt instrument does not exceed the
total noncontingent principal payments, and interest is based on a "qualified
floating rate," an "objective rate," a combination of a single fixed rate and
one or more "qualified floating rates," one "qualified inverse floating rate,"
or a combination of "qualified floating rates" that do not operate in a manner
that significantly accelerates or defers interest payments on the FASIT regular
interest.
If an interest in a FASIT fails to meet one or more of the requirements set
out in clauses (3), (4), or (5) in the preceding paragraph, but otherwise meets
all requirements to be treated as a FASIT, it may still qualify as a type of
regular interest known as a "High-Yield Interest." In addition, if an interest
in a FASIT fails to meet the requirement of clause (6), but the interest
payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of
the security, the interest will also qualify as a High-Yield Interest. A High-
Yield Interest may be held only by domestic C corporations that are fully
subject to corporate income tax ("Eligible Corporations"), other FASITs, and
dealers in securities who acquire the interests as inventory, rather than for
investment. In addition, holders of High-Yield Interests are subject to
limitations on offset of income derived from the interest. See "Federal Income
Tax Consequences--Taxation of Trust as a FASIT--Treatment of High-Yield
Interests."
69
Consequences of Disqualification. If the trust fund fails to comply with one
or more of the Code's ongoing requirements for FASIT status during any taxable
year, the Code provides that its FASIT status may be lost for that year and
thereafter. If FASIT status is lost, the treatment of the former FASIT and
interests therein for U.S. federal income tax purposes is uncertain. Although
the Code authorizes the Treasury to issue regulations that address situations
where a failure to meet the requirements for FASIT status occurs inadvertently
and in good faith, those regulations have not yet been issued. It is possible
that disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for the
period of time in which the requirements for FASIT status are not satisfied.
Nevertheless, in the opinion of Tax Counsel, if the Trust Fund fails to qualify
as a FASIT, it will qualify as a partnership. See "Taxation of the Trust Fund
as Partnership."
Treatment of FASIT Regular Securities
Payments received by holders of FASIT Regular securities generally will be
accorded the same tax treatment under the Code as payments received on other
taxable debt instruments. Holders of FASIT Regular securities must report
income from the securities under an accrual method of accounting, even if they
otherwise would have used the cash receipts and disbursements method. Except in
the case of FASIT Regular Securities issued with original issue discount,
interest paid or accrued on a FASIT Regular Security generally will be treated
as ordinary income to the Holder and a principal payment on the security will
be treated as a return of capital to the extent that the securityholder's basis
is allocable to that payment. FASIT Regular Securities issued with original
issue discount or acquired with market discount or premium generally will treat
interest and principal payments on the securities in the same manner described
for senior securities. See "Taxation of Trust as Partnership--Treatment of
Senior Securities--OID, Indexed Securities." High-Yield securities may be held
only by Eligible Corporations, other FASITs, and certain securities dealers.
Holders of High-Yield securities are subject to limitations on their ability to
use current losses or net operating loss carryforwards or carrybacks to offset
any income derived from those securities.
If a FASIT Regular Security is sold, the securityholder generally will
recognize gain or loss upon the sale [in the manner described for Offered
Senior Securities]. See "Taxation of Trust as Partnership--Treatment of Senior
Securities--Sale or Other Disposition." In addition, if a FASIT regular
interest becomes wholly or partially worthless as a result of losses on the
underlying assets, some holders of the security may be allowed to deduct the
loss sustained.
Treatment of High-Yield Interests
High-Yield Interests are subject to special rules regarding the eligibility
of holders of the interest, and the ability of the holders to offset income
derived from their FASIT security with losses. High-Yield Interests only may be
held by Eligible Corporations, other FASITs, and dealers in securities who
acquire the interests as inventory. If a securities dealer other than an
Eligible Corporation initially acquires a High-Yield Interest as inventory, but
later begins to hold it for investment, the dealer will be subject to an excise
tax equal to the income from the High-Yield Interest multiplied by the highest
corporate income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor will continue to be treated as the holder of the High-Yield
Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived
from the High-Yield Interest, for either regular federal income tax purposes or
for alternative minimum tax purposes. In addition, the FASIT provisions contain
an anti-abuse rule that imposes corporate income tax on income derived from a
FASIT Regular security that is held by a pass-through entity other than another
FASIT that issues debt or equity securities backed by the FASIT Regular
security and that have the same features as High-Yield Interests.
70
Tax Treatment of FASIT Ownership Securities
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. In general, the character of the
income to the holder of a FASIT Ownership Securities will be the same as the
character of the income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT Ownership Securities is
treated as ordinary income. In determining that taxable income, the holder of a
FASIT Ownership Security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT Regular Securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT Ownership Securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
Regular Securities as are holders of High--Yield Interest. See "Federal Income
Tax Consequences--FASIT Regular Securities--Tax Treatment of FASIT Regular
Securities--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual securities
also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of the security
acquires any other FASIT Ownership Security that is economically comparable to
a FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under section 475 of the Code by the
holder, then section 475 of the Code will continue to apply to the securities,
except that the amount realized under the mark-to-market rules or the
securities' value after applying special valuation rules contained in the FASIT
provisions. Those special valuation rules generally require that the value of
debt instruments that are not traded on an established securities market be
determined by calculating the present value of the reasonably expected payments
under the instrument using a discount rate of 120% of the applicable federal
rate, compounded semi-annually.
The holder of a FASIT Ownership Security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include:
. the receipt of income derived from assets that are not permitted assets,
. some dispositions of permitted assets,
. the receipt of any income derived from any loan originated by a FASIT,
and
. in some cases, the receipt of income representing a Servicing Fee or
other compensation.
Any series for which a FASIT election is made generally will be structured in
order to avoid application of the prohibited transaction tax.
State Tax Considerations
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the securities. State and local income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or locality. Therefore,
potential investors are encouraged to consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
securities.
ERISA Considerations
The following describes considerations under the Employee Retirement Income
Security Act of 1974, as amended, and the Code, which apply only to securities
of a series that are not divided into subclasses. If
71
securities are divided into subclasses, the related prospectus supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to the securities.
ERISA imposes requirements on employee benefit plans subject to ERISA and on
persons who are fiduciaries with respect to those plans and Section 4975 of the
Code imposes requirements on other specified retirement plans and arrangements,
including individual retirement accounts and annuities and certain Keogh plans,
and on collective investment funds and separate accounts in which those plans,
accounts, or arrangements are invested (collectively, "Plans"). Generally,
ERISA applies to investments made by Plans. Among other things, ERISA requires
that the assets of Plans be held in trust and that the trustee, or other duly
authorized fiduciary, have exclusive authority to control the assets of the
Plans. ERISA also imposes duties on persons who are fiduciaries of Plans. Under
ERISA, any person who exercises any authority respecting the management of the
assets of a Plan is considered to be a fiduciary of the Plan, subject to
exceptions not relevant here. Some employee benefit plans, such as governmental
plans, as defined in ERISA Section 3(32), and, if no election has been made
under Section 410(d) of the Code, church plans, as defined in ERISA Section
3(33), are not subject to ERISA requirements. Accordingly, assets of these
plans may be invested in securities without regard to these ERISA
considerations, subject to the provisions of applicable state law. Any plan
that is not subject to ERISA, but that is qualified and exempt from taxation
under Code Sections 401(a) and 501(a), however, is subject to the prohibited
transaction rules in Code Section 503.
On November 13, 1986, the United States Department of Labor issued final
regulations concerning the definition of what constitutes the assets of a Plan.
See Labor Reg. Section 2510.3-101. Under this regulation, the underlying assets
and properties of corporations, partnerships, trusts, and other entities in
which a Plan makes an "equity" investment could be deemed for purposes of ERISA
to be assets of the investing Plan in specified circumstances. However, the
regulation generally provides that, in addition to other technical exceptions,
the assets of a corporation, partnership, or trust in which a Plan invests will
not be deemed for purposes of ERISA to be assets of the Plan if the equity
interest acquired by the investing Plan is a publicly-offered security. A
publicly-offered security, as defined in the regulation, is a security that is
widely held, freely transferable, and registered under the Securities Exchange
Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and the Code prohibit a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
specified relationships to a Plan and impose additional prohibitions where
Parties in Interest are fiduciaries with respect to the Plan. Because the loans
may be deemed Plan assets of each Plan that purchases securities, an investment
in the securities by a Plan might be or cause a prohibited transaction under
ERISA Sections 406 and 407 that is subject to an excise tax under Code Section
4975 unless a statutory, regulatory, or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1") the DOL exempted from
ERISA's prohibited transaction rules specified transactions relating to the
operation of residential mortgage pool investment trusts and the purchase,
sale, and holding of "mortgage pool pass-through certificates" in the initial
issuance of the certificates. PTE 83-1 permits, subject to certain conditions,
transactions that might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans related to the origination, maintenance,
and termination of mortgage pools consisting of mortgage loans secured by first
or second mortgages or deeds of trust on single-family residential property,
and the acquisition and holding by Plans of certain mortgage pool pass-through
certificates representing an interest in the mortgage pools. If the general
conditions of PTE 83-1 are satisfied, investments by a Plan in securities that
represent interests in a pool consisting of loans ("Single Family Securities")
will be exempt from the prohibitions of ERISA Sections 406(a) and 407 if the
Plan purchases the Single Family Securities at no more than fair market value
and will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
if, in addition, the purchase is approved by an independent fiduciary, no sales
commission is paid to the pool sponsor, the Plan does not purchase more than
25% of all Single Family Securities, and at least 50% of all Single Family
Securities are purchased by persons independent of the pool sponsor or pool
trustee. PTE 83-1 does not provide an exemption for transactions
72
involving subordinate securities. Accordingly, no transfer of a subordinate
security or a security that is not a Single Family Security may be made to a
Plan unless specified in the related prospectus supplement.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. Provident believes that, for purposes of PTE 83-1,
the term mortgage pass-through certificate would include:
(1) securities issued in a series consisting of only a single class of
securities, and
(2) senior securities issued in a series in which there is only one class
of senior securities,
if the securities in the case of clause (1), or the senior securities in the
case of clause (2) evidence the beneficial ownership of both a specified
percentage greater than 0% of future interest payments and a specified
percentage greater than 0% of future principal payments on the loans. It is not
clear whether any of the following would be a mortgage pass-through certificate
for purposes of PTE 83-1:
. a class of securities that evidences the beneficial ownership of a
specified percentage of interest payments only or principal payments
only, or
. a class of securities that evidences the beneficial ownership of
payments of either principal or interest based on a notional amount.
PTE 83-1 sets forth three general conditions that must be satisfied for any
transaction to be eligible for exemption:
. the maintenance of a system of insurance or other protection for the
pooled mortgage loans and property securing the loans and for
indemnifying securityholders against reductions in pass-through payments
due to property damage or defaults in loan payments in an amount not
less than the greater of one percent of the aggregate principal balance
of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan;
. the existence of a pool trustee who is not an affiliate of the pool
sponsor; and
. a limitation on the amount of the payment retained by the pool sponsor,
together with other funds inuring to its benefit, to not more than
adequate consideration for selling the mortgage loans plus reasonable
compensation for services provided by the pool sponsor to the pool.
Provident believes that the first of these general conditions will be satisfied
with respect to the securities in a series issued without a subordination
feature, or the senior securities only in a series issued with a subordination
feature, if credit enhancement described under "Credit Enhancement" in this
prospectus is maintained for a series of securities in an amount not less than
the greater of one percent of the aggregate principal balance of the loans or
the principal balance of the largest loan. See "Description of the Securities"
in this prospectus. In the absence of a ruling that the system of insurance or
other protection with respect to a series of securities satisfies the first
general condition referred to above, we cannot assure you that these features
will be so viewed by the DOL. In any event, the trustee will not be affiliated
with Provident.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraphs, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions.
The DOL has granted to some underwriters individual administrative
exemptions (the "Underwriter Exemptions") from some of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section
4975 of the Code with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates in pass-through trusts that consist
of certain types of secured receivables, loans, and other obligations that meet
the conditions and requirements of the Underwriter Exemptions.
73
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms that generally apply to the
Underwriter Exemptions are substantially the following:
. the acquisition of the certificates by a Plan is on terms that are at
least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party, including the price for the
certificates;
. the interests evidenced by the certificates acquired by the Plan are not
subordinated to the interests evidenced by other certificates of the
trust fund;
. the certificates acquired by the Plan have received a rating at the time
of their acquisition that is one of the three highest generic rating
categories from Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co., or Fitch IBCA, Inc.;
. the trustee must not be an affiliate of any other member of the
Restricted Group;
. the sum of all payments made to and retained by the underwriters 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 assignment of the loans to the trust fund represents not more than
the fair market value of the loans;
. the sum of all payments made to and retained by any servicer represents
not more than reasonable compensation for the person's services under
the agreement pursuant to which the loans are pooled and reimbursements
of the person's reasonable expenses in connection therewith; and
. the Plan investing in the certificates is an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the SEC under the
Securities Act of 1933, as amended.
The trust fund must also meet the following requirements:
. the corpus of the trust fund must consist solely of assets of a type
that have been included in other investment pools;
. certificates in those other investment pools must have been rated in one
of the three highest rating categories of S&P, Moody's, Fitch, or Duff &
Phelps for at least one year before the Plan's acquisition of
certificates; and
. certificates evidencing interests in those other investment pools must
have been purchased by investors other than Plans for at least one year
before any Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions generally provide relief from specified
self-dealing and conflict of interest prohibited transactions that may occur
when the Plan fiduciary causes a Plan to acquire certificates in a trust
holding receivables as to which the fiduciary or its affiliate is an obligor,
if, among other requirements:
. in the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent of each class of certificates in
which Plans have invested is acquired by persons independent of the
Restricted Group;
. the fiduciary or its affiliate is an obligor with respect to five
percent or less of the fair market value of the obligations contained in
the trust;
. a Plan's investment in certificates of any class does not exceed twenty-
five percent of all of the certificates of that class outstanding at the
time of the acquisition; and
. immediately after the acquisition, no more than twenty-five percent of
the assets of any Plan with respect to which the person is a fiduciary
is invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity.
74
The Underwriter Exemptions do not apply to Plans sponsored by Provident, any
Underwriter, the trustee, the master servicer, any insurer with respect to the
trust, any obligor with respect to loans included in the trust fund
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the trust fund, or any affiliate of those parties (the
"Restricted Group").
The prospectus supplement for each series of securities will indicate the
classes of securities, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Underwriter Exemptions that extends exemptive relief to specified mortgage-
backed and asset-backed securities transactions using pre-funding accounts for
trusts issuing pass-through certificates. The amendment generally allows
mortgage loans or other secured receivables (the "Obligations") supporting
payments to holders of securities and having a value equal to no more than
twenty-five percent of the total principal amount of the certificates being
offered by the trust fund, to be transferred to the trust during the Funding
Period instead of requiring that all the Obligations be either identified or
transferred on or before the applicable Closing Date. The relief is available
when the following conditions are met:
. The ratio of the amount allocated to the pre-funding account to the
total principal amount of the certificates being offered (the "Pre-
Funding Limit") must not exceed twenty-five percent.
. All Obligations transferred after the applicable Closing Date (the
"Additional Obligations") must meet the same terms for eligibility as
the original Obligations used to create the trust fund, which terms have
been approved by the rating agency.
. The transfer of the Additional Obligations to the trust fund during the
Funding Period must not result in the certificates to be covered by the
Exemption receiving a lower credit rating from the rating agency on
termination of the Funding Period than the rating that was obtained at
the time of the initial issuance of the securities by the trust fund.
. Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for all of
the Obligations in the trust at the end of the Funding Period must not
be more than 100 basis points lower than the average interest rate for
the Obligations that were transferred to the trust fund on the Closing
Date.
. The Funding Period must end no later than three months or 90 days after
the Closing Date or earlier in some circumstances if the pre-funding
account falls below the minimum level specified in the related agreement
or an event of default occurs thereunder.
. Amounts transferred to the pre-funding account or Capitalized Interest
Account used in connection with the pre-funding may be invested only in
particular permitted investments.
. The prospectus supplement for the related series must describe:
. the pre-funding account or Capitalized Interest Account used in
connection with the pre-funding account;
. the duration of the Funding Period;
. the percentage or dollar amount of the pre-funding limit for the
trust fund; and
. that the amounts remaining in the pre-funding account at the end of
the Funding Period will be remitted to holders of the securities
specified in the prospectus supplement for the related series as
repayments of principal.
. The related agreement must describe the permitted investments for the
pre-funding account or Capitalized Interest Account and the terms and
conditions for eligibility of Additional Obligations.
. To ensure that the characteristics of the Additional Obligations are
substantially similar to the original Obligations that were transferred
to the trust fund:
75
. the characteristics of the Additional Obligations must be monitored
by an insurer or other credit support provider that is independent
of Provident; or
. an independent accountant retained by Provident must provide
Provident with a letter stating whether or not the characteristics
of the Additional Obligations conform to the characteristics
described in the prospectus supplement for the related series or the
related agreement. A copy of the letter must be delivered to the
underwriters, the rating agencies, and the trustee. In preparing
that letter, the independent accountant must use the same type of
procedures as were applicable to the Obligations that were
transferred to the trust fund as of the Closing Date.
Any Plan fiduciary that proposes to cause a Plan to purchase securities is
encouraged to consult with its counsel concerning the impact of ERISA and the
Code, the applicability of PTE 83-1 and the Underwriter Exemption and the
potential consequences in their specific circumstances, before making an
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence 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.
Legal Investment
The prospectus supplement for each series of securities will specify which,
if any, of the classes of securities offered by it are mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Classes of securities that qualify as mortgage related
securities will 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
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or those entities. Under SMMEA, if a state
enacted legislation before October 4, 1991 specifically limiting the legal
investment authority of those entities with respect to mortgage related
securities, securities will constitute legal investments for entities subject
to such legislation only to the extent provided in the legislation.
Approximately twenty-one states adopted such legislation before the October 4,
1991 deadline.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell, or otherwise deal in securities
without limitations as to the percentage of their assets represented by them,
federal credit unions may invest in mortgage related securities, and national
banks may purchase 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 any regulations the applicable
federal authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to
Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities and the NCUA's regulation "Investment
and Deposit Activities" (12 C.F.R. Part 703), which sets forth restrictions on
investments by federal credit unions in mortgage related securities, in each
case whether or not the class of securities under consideration for purchase
constituted a mortgage related security.
All depository institutions considering an investment in the securities,
whether or not the class of securities under consideration for purchase
constitutes a mortgage related security, should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities to the extent adopted by their respective regulators
setting forth, in relevant part, particular securities trading and sales
practices deemed unsuitable for an institution's investment portfolio, and
guidelines for and restrictions on investing in mortgage derivative products,
including mortgage related securities, that are high-risk mortgage securities
as defined in the Supervisory Policy Statement on the Securities Activities.
According to the
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Supervisory Policy Statement on the Securities Activities, high-risk mortgage
securities include securities such as securities not entitled to distributions
allocated to principal or interest, or subordinated securities. Under the
Supervisory Policy Statement on the Securities Activities, it is the
responsibility of each depository institution to determine, before purchase and
at stated intervals thereafter, whether a particular mortgage derivative
product is a high-risk mortgage security, and whether the purchase or retention
of such a product would be consistent with the Supervisory Policy Statement on
the Securities Activities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including prudent investor
provisions that may restrict or prohibit investment in securities that are not
interest bearing or income paying.
There may be other restrictions on the ability of some investors, including
depository institutions, either to purchase securities or to purchase
securities representing more than a specified percentage of the investor's
assets. Investors are encouraged to consult their own legal advisors in
determining whether and to what extent the securities constitute legal
investments for them.
Method of Distribution
Securities are being offered by this prospectus and a related prospectus
supplement in series from time to time, each series evidencing or relating to a
separate trust fund, through any of the following methods:
. By negotiated firm commitment underwriting and public reoffering by
underwriters;
. By agency placements through one or more placement agents primarily with
institutional investors and dealers; and
. By placement directly by Provident with institutional investors.
A prospectus supplement will be prepared for each series that will describe
the method of offering being used for that series and will identify any
underwriters thereof and either the price at which the series is being offered,
the nature and amount of any underwriting discounts or additional compensation
to the underwriters, and the proceeds of the offering to Provident, or the
method by which the price at which the underwriters will sell the securities
will be determined. Each prospectus supplement for an underwritten offering
will also contain information regarding the nature of the underwriters'
obligations, any material relationship between Provident and any underwriter,
and, where appropriate, information regarding any discounts or concessions to
be allowed or reallowed to dealers or others and any arrangements to stabilize
the market for the securities so offered. In firm commitment underwritten
offerings, the underwriters will be obligated to purchase all of the securities
of the series if any of them are purchased. Securities may be acquired by the
underwriters for their own accounts and may be resold from time to time in one
or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
Provident to indemnification by Provident against specified civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribution with respect to payments that the underwriters or agents may be
required to make with respect to those liabilities.
If a series is offered other than through underwriters, the prospectus
supplement relating to it will contain information regarding the nature of the
offering and any agreements to be entered into between Provident and purchasers
of securities of the series.
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Legal Matters
Specified legal matters relating to the securities of each series will be
passed upon for Provident by Keating, Muething & Klekamp, P.L.L., Cincinnati,
Ohio. Legal matters relating to some of the federal income tax consequences
with respect to the securities will be passed upon for the trust fund by Brown
& Wood LLP, New York, New York. Brown & Wood LLP, New York, New York, will act
as counsel for the underwriter or underwriters specified in the prospectus
supplement.
Financial Information
A new trust fund will be formed for each series of securities and no trust
fund will engage in any business activities or have any assets or obligations
before the issuance of the related series of securities. Accordingly, no
financial statements for any trust fund will be included in this prospectus or
in the related prospectus supplement.
Rating
The issuance of the securities of each series offered by this prospectus and
a prospectus supplement is conditioned on their having been rated in one of the
four highest rating categories by the nationally recognized statistical rating
agency or agencies specified in the related prospectus supplement.
Any rating would be based on, among other things, the adequacy of the value
of the trust fund assets and any credit enhancement for the class and will
reflect the rating agency's assessment solely of the likelihood that Holders of
a class of securities will receive payments to which the securityholders are
entitled under the related agreement. A rating is not an assessment of the
likelihood that principal prepayments on the related loans will be made, the
degree to which the rate of the prepayments might differ from that originally
anticipated, or the likelihood of early optional termination of the series of
securities. A rating should not be considered a recommendation to purchase,
hold, or sell securities, inasmuch as it does not address market price or
suitability for a particular investor. Each security rating should be evaluated
independently of any other security rating. A rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause the investor to experience a lower than anticipated yield or
that an investor purchasing a security at a significant premium might fail to
recoup its initial investment under some prepayment scenarios.
We cannot assure you that any rating will remain in effect for any given
period of time or that it may not be lowered or withdrawn entirely by the
rating agency in the future if in its judgment circumstances in the future so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the trust fund assets or any credit enhancement for a
series, the rating might also be lowered or withdrawn for other reasons,
including an adverse change in the financial or other condition of a credit
enhancement provider or a change in the rating of the credit enhancement
provider's long-term debt.
The amount, type, and nature of credit enhancement, if any, established for
a series of securities will be determined on the basis of criteria established
by each rating agency rating classes of the series. The criteria are sometimes
based on an actuarial analysis of the behavior of mortgage loans in a larger
group. That analysis is often the basis on which each rating agency determines
the amount of credit enhancement required for each class. We cannot assure you
that the historical data supporting that actuarial analysis will accurately
reflect future experience or assure you that the data derived from a large pool
of mortgage loans accurately predicts the delinquency, foreclosure, or loss
experience of any particular pool of loans. We cannot assure you that values of
any mortgaged properties have remained or will remain at their levels on the
respective dates of origination of the related loans. If the residential real
estate markets should experience an overall decline in property values such
that the outstanding principal balances of the loans in a particular trust fund
and any secondary financing on the related mortgaged properties become equal to
or greater than the value of the
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mortgaged properties, the rates of delinquencies, foreclosures, and losses
could be higher than those now generally experienced in the mortgage lending
industry. In additional, adverse economic conditions that may or may not affect
real property values may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the loans and, accordingly, the rates of
delinquencies, foreclosures, and losses with respect to any trust fund. To the
extent that these losses are not covered by credit enhancement, they will be
borne, at least in part, by the Holders of one or more classes of the
securities of the related series.
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Index of Defined Terms
Term Page
- ---- ----
Additional Obligations..................................................... 75
Amortizable Bond Premium Regulations....................................... 52
Average Interest Rate...................................................... 75
Cash Flow Bond Method...................................................... 59
CERCLA..................................................................... 42
Code....................................................................... 47
Contingent Regulations..................................................... 49
Cut-Off Date............................................................... 3
Disqualified Organization.................................................. 56
Eligible Corporations...................................................... 69
FASIT Ownership Security................................................... 68
FASIT Provisions........................................................... 68
FASIT Qualification Test................................................... 68
FASIT Regular Securities................................................... 68
FASIT...................................................................... 68
Garn-St Germain Act........................................................ 44
High-Yield Interest........................................................ 69
Interest Weighted Securities............................................... 51
IO......................................................................... 69
NCUA....................................................................... 76
Term Page
- ---- ----
New partnership............................................................ 65
Obligations................................................................ 75
OID Regulations............................................................ 48
OID........................................................................ 48
Old partnership............................................................ 65
Parties in Interest........................................................ 72
Pay-Through Security....................................................... 50
Plans...................................................................... 72
Prepayment Assumption...................................................... 50
Provident.................................................................. 3
PTE 83-1................................................................... 72
Ratio Strip Securities..................................................... 58
RCRA....................................................................... 43
Regular Interest Securities................................................ 48
Residual Interest Security................................................. 54
Restricted Group........................................................... 75
SMMEA...................................................................... 76
Stripped Securities........................................................ 57
thrift institutions........................................................ 56
Underwriter Exemptions..................................................... 73
80
$515,000,000 (approximate)
Provident Bank Home Equity
Loan Trust 2000-2
$315,000,000 Class A-1 Variable Rate Certificates
$200,000,000 Class A-2 Variable Rate Certificates
Home Equity Loan
Asset-Backed Certificates,
Series 2000-2
The Provident Bank,
as Seller and Master Servicer
-------------------
PROSPECTUS SUPPLEMENT
June 22, 2000
-------------------
Lehman Brothers
Banc of America Securities LLC
Credit Suisse First Boston