1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 10, 1997)
$492,375,000
[FIRSTPLUS FINANCIAL LOGO]
FIRSTPLUS INVESTMENT CORPORATION
(SELLER)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
FIRSTPLUS HOME LOAN OWNER TRUST 1998-2
------------------------
The FIRSTPLUS Home Loan Owner Trust 1998-2 will be established pursuant to a
Trust Agreement among FIRSTPLUS Investment Corporation, as Seller, Wilmington
Trust Company, as Owner Trustee, and U.S. Bank National Association, in its
capacity as Co-Owner Trustee. The Trust will issue the eleven classes of Asset
Backed Notes set forth below (the "Notes") pursuant to an Indenture dated as of
March 1, 1998 (the "Indenture") between the Trust and U.S. Bank National
Association, in its capacity as Indenture Trustee. The Trust will also issue a
single Certificate representing the residual interest in the Trust (the
"Residual Interest Certificate") pursuant to the Trust Agreement, as defined
herein. The Notes and the Residual Interest Certificate are referred to together
herein as the "Securities." Only the Notes are offered hereby.
It is a condition to the issuance of the Notes that they each be rated by
the Rating Agencies as described herein under "Ratings."
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED BEFORE INVESTING IN THE
NOTES, SEE "RISK FACTORS" HEREIN AT PAGE S-8 AND IN THE PROSPECTUS AT PAGE 9.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
=============================================================================================================================
ORIGINAL CLASS
PRINCIPAL INTEREST PRICE TO UNDERWRITING PROCEEDS TO
BALANCE (1) RATE (2) PUBLIC DISCOUNT SELLER (3)
- -----------------------------------------------------------------------------------------------------------------------------
Class A-1 Notes............ $125,683,000 (4) 100.00000% 0.100% 99.90000%
- -----------------------------------------------------------------------------------------------------------------------------
Class A-2 Notes............ $ 39,716,000 6.23% 99.99948% 0.125% 99.87448%
- -----------------------------------------------------------------------------------------------------------------------------
Class A-3 Notes............ $ 83,435,000 6.32% 99.99357% 0.175% 99.81857%
- -----------------------------------------------------------------------------------------------------------------------------
Class A-4 Notes............ $ 23,603,000 6.54% 99.99732% 0.200% 99.79732%
- -----------------------------------------------------------------------------------------------------------------------------
Class A-5 Notes............ $ 30,765,000 6.61% 99.96250% 0.250% 99.71250%
- -----------------------------------------------------------------------------------------------------------------------------
Class A-6 Notes............ $ 35,135,000 6.96% 99.98104% 0.300% 99.68104%
- -----------------------------------------------------------------------------------------------------------------------------
Class A-7 Notes............ $ 30,521,000 7.16% 99.93019% 0.350% 99.58019%
- -----------------------------------------------------------------------------------------------------------------------------
Class A-8 Notes............ $ 22,517,000 7.39% 99.98999% 0.450% 99.53999%
- -----------------------------------------------------------------------------------------------------------------------------
Class M-1 Notes............ $ 50,500,000 7.22% 99.98133% 0.700% 99.28133%
- -----------------------------------------------------------------------------------------------------------------------------
Class M-2 Notes............ $ 27,775,000 7.51% 99.96644% 0.770% 99.19644%
- -----------------------------------------------------------------------------------------------------------------------------
Class B-1 Notes............ $ 22,725,000 8.19% 99.95952% 0.850% 99.10952%
- -----------------------------------------------------------------------------------------------------------------------------
Total...................... $492,375,000 $492,299,088 $1,519,543 $490,779,545
=============================================================================================================================
(1) Approximate.
(2) The Interest Rate for each Class remaining outstanding will be increased by
0.50% with respect to each Payment Date occurring after the Initial Call
Date (as defined herein).
(3) Before deducting expenses, estimated to be $500,000.
(4) Interest will accrue on the Class A-1 Notes with respect to each Payment
Date at a per annum rate equal to LIBOR for the related Accrual Period (each
as defined herein) plus 0.11%, subject to a maximum rate equal to the Net
Weighted Average Rate (as defined herein). The Interest Rate applicable to
the Class A-1 Notes for the initial Accrual Period will be 5.7975% per
annum.
------------------------
The Notes are offered by the Underwriters when, as and if issued and
accepted by the Underwriters and subject to their right to reject orders in
whole or in part. It is expected that delivery of the Notes will be made in
book-entry form only through the Same Day Funds Settlement System of The
Depository Trust Company on or about March 12, 1998 against payment therefor in
immediately available funds.
------------------------
PAINEWEBBER INCORPORATED
DEUTSCHE MORGAN GRENFELL
J.P. MORGAN & CO.
MERRILL LYNCH & CO.
------------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MARCH 5, 1998
2
(Continued from preceding page)
The assets of the Trust will consist primarily of Home Loans, which will be
secured by Mortgages (as defined herein). All of the Home Loans will be
conventional loans (i.e., not insured or guaranteed by a governmental agency)
("Conventional Loans"). The Home Loans will consist of loans for which the
related proceeds were used to finance (i) property improvements, (ii) debt
consolidation, or (iii) a combination of property improvements, debt
consolidation, cash-out, credit insurance premiums or other consumer purposes.
Substantially all of the Mortgages for the Home Loans will be junior in priority
to one or more senior liens on the related Mortgaged Properties, which will
consist primarily of owner occupied single family residences. In addition,
substantially all of the Home Loans will be secured by liens on Mortgaged
Properties in which the borrowers have little or no equity (i.e., the related
combined loan-to-value ratios approach or exceed 100%). See "Risk
Factors -- Adequacy of the Mortgaged Properties as Security for the Home Loans"
and "-- Additional Factors Affecting Delinquencies, Defaults and Losses on Home
Loans" herein.
Payments on the Notes will be made to the holders of the Notes (the
"Noteholders") on the 10th day of each month, or, if such day is not a Business
Day, the next succeeding Business Day (each, a "Payment Date"), beginning in
April 1998. The Notes will be secured by the assets of the Trust pursuant to the
Indenture. Interest on each Class of Notes will accrue at the applicable per
annum interest rate specified or described on the cover hereof. On each Payment
Date, the Noteholders will be entitled to receive, from and to the extent that
funds are available therefor in the Note Payment Account, payments of interest
and principal calculated as described herein. See "Description of the
Securities -- Payments" herein. Payments of interest and principal on the Class
M-1, Class M-2 and Class B-1 Notes (the "Subordinate Notes") will be subordinate
in priority to payments of interest and principal, respectively, on the Class
A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7 and Class
A-8 Notes (the "Senior Notes"), payments of interest and principal on the Class
M-2 and Class B-1 Notes will be subordinate in priority to payments of interest
and principal, respectively, on the Senior Notes and the Class M-1 Notes, and
payments of interest and principal on the Class B-1 Notes will be subordinate in
priority to payments of interest and principal, respectively, on all Classes of
Notes having a higher priority, all as described herein.
The holder of the Residual Interest Certificate (the "Certificateholder,"
and together with the Noteholders, "Securityholders") will be entitled to
receive, from and to the extent that funds are available therefor in the
Certificate Distribution Account, certain distributions of interest and
principal calculated as described herein, as well as any amounts remaining on
any Payment Date after all required payments have been made in respect of the
Notes and the A IO and B-2 Components (as defined below) on such date, as
described herein. Solely for purposes of calculating distributions of interest
and principal and of allocating Allocable Loss Amounts (as defined herein), the
Residual Interest Certificate will be composed of three payment components (the
"A IO Component," the "B-2 Component" and the "Excess Component," and each a
"Component") having, with respect to each of the A IO Component and the B-2
Component, the interest rate and approximate Original Component Notional Balance
or Original Component Principal Balance (each as defined herein) set forth under
"Summary of Terms" herein. Distributions of interest and principal on the
Residual Interest Certificate will be subordinate in priority to payments of
interest and principal, respectively, on the Notes. The Subordinate Notes and
the Residual Interest Certificate are referred to together herein as the
"Subordinate Securities." See "Description of the Securities -- Payments"
herein. The Residual Certificate is not offered hereby.
Credit enhancement with respect to the Notes will be provided by (a) the
subordination of (i) the Residual Interest Certificate to the Notes and (ii) the
Class B-1, Class M-2 and Class M-1 Notes, respectively, to each Class of Notes
having a higher payment priority, and (b) the overcollateralization feature
described herein. The Notes are not insured by any financial guaranty insurance
policy. See "Risk Factors -- Adequacy of Credit Enhancement" and "Description of
Credit Enhancement" herein.
The yields to maturity on the Notes will depend on (i) the rate and timing
of reductions of the outstanding principal balances of the Notes as a result of
the receipt of payments of principal and interest on, and other principal
reductions of, the Home Loans (including scheduled payments, prepayments,
delinquencies, liquidations, defaults, losses, substitutions, repurchases and
modifications) and payment of Excess
ii
3
Spread, (ii) any reductions of the outstanding principal balances of the Notes
due to payment of amounts remaining on deposit in the Pre-Funding Account after
the termination of the Funding Period (each as defined herein), (iii) the prices
paid for the Notes by investors, (iv) in the case of the Class M-1, Class M-2
and Class B-1 Notes, the application of Allocable Loss Amounts thereto and the
repayment of Deferred Amounts in respect thereof as described herein, (v) the
level of LIBOR from time to time while the Class A-1 Notes are outstanding, and
(vi) the rate and timing of the purchase of Subsequent Home Loans (as defined
herein) by the Trust. Because substantially all of the Home Loans will be
secured by junior liens, the prepayment experience of the Home Loan Pool may be
significantly different from that of a pool of conventional first lien
residential mortgage loans with equivalent interest rates and maturities or
unsecured consumer loans with equivalent interest rates and maturities.
Prospective investors should carefully consider the associated risks. See "Risk
Factors" and "Prepayment and Yield Considerations" herein and "Risk Factors" in
the Prospectus.
The yields to maturity on the Class M-1, Class M-2 and Class B-1 Notes will
be sensitive, in varying degrees (and will each be more sensitive than the
yields to maturity on the Senior Notes), to delinquencies and losses on the Home
Loans.
Prospective investors should consult their own investment, legal, tax and
accounting advisors to determine whether the Notes constitute appropriate
investments for them and the applicable legal, tax, regulatory and accounting
treatment of the Notes.
PROCEEDS OF THE ASSETS OF THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE
NOTES. THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT
OBLIGATIONS OF THE SELLER, THE TRANSFEROR, THE SERVICER, THE INDENTURE TRUSTEE,
THE OWNER TRUSTEE, THE CO-OWNER TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE NOTES NOR THE HOME LOANS ARE INSURED OR GUARANTEED BY ANY FINANCIAL
GUARANTY INSURER OR ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER
OR THE TRANSFEROR OR ANY OF THEIR RESPECTIVE AFFILIATES OR ANY OTHER PERSON.
Wherever reference is made in this Prospectus Supplement to a percentage of
the Initial Home Loans (as defined herein), such percentage is determined
(unless otherwise specified) on the basis of the Initial Pool Principal Balance
(as defined herein).
------------------------
This Prospectus Supplement does not contain complete information about the
offering of the Notes. Additional information is contained in the Prospectus and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full. Sales of the Notes may not be consummated unless the
purchaser has received both this Prospectus Supplement and the Prospectus.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
STABILIZING AND THE PURCHASE OF NOTES TO COVER SYNDICATE SHORT POSITIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING" HEREIN.
------------------------
iii
4
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission"), on behalf of the Trust, a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended. This Prospectus
Supplement and the related Prospectus, which form a part of the Registration
Statement, omit certain information contained in such Registration Statement in
accordance with the rules and regulations of the Commission. The Registration
Statement can be inspected and copied at the Public Reference Room of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite
1300, New York, New York 10048. Copies of such information can be obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding the
Seller.
REPORTS TO NOTEHOLDERS
Unaudited monthly and annual reports concerning the Notes will be sent by
the Indenture Trustee to the Noteholders. So long as any Note is in book-entry
form, such reports will be sent to Cede & Co., as the nominee of DTC and as the
registered owner of such Notes pursuant to the Indenture. DTC will supply such
reports to Note Owners (as defined herein) in accordance with its procedures.
iv
5
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the detailed
information appearing elsewhere herein and in the accompanying Prospectus.
Certain capitalized terms used herein may be defined elsewhere in this
Prospectus Supplement or in the Prospectus. See the "Index of Terms" included as
an appendix to this Prospectus Supplement and the Prospectus. Capitalized terms
that are used but not defined herein will have the meanings assigned to such
terms in the Prospectus.
Issuer..................... FIRSTPLUS Home Loan Owner Trust 1998-2 (the "Trust"
or the "Issuer"), a Delaware business trust
established pursuant to a trust agreement dated as
of March 1, 1998 (the "Trust Agreement") among the
Seller, the Owner Trustee and the Co-Owner Trustee.
Seller..................... FIRSTPLUS Investment Corporation (the "Seller"), a
Nevada corporation, in its capacity as Seller of
the Home Loans to the Trust.
Servicer and Transferor.... FIRSTPLUS Financial, Inc. ("FFI," the "Servicer" or
the "Transferor"), a Texas corporation, in its
capacity as Servicer and Transferor of the Home
Loans. FFI is a wholly owned subsidiary of
FIRSTPLUS Financial Group, Inc. ("FP"), a Nevada
corporation.
Indenture Trustee.......... U.S. Bank National Association, a national banking
association, as trustee under the Indenture (in
such capacity, the "Indenture Trustee"), and as
co-owner trustee under the Trust Agreement (in such
capacity, the "Co-Owner Trustee").
Owner Trustee.............. Wilmington Trust Company, as owner trustee under
the Trust Agreement (the "Owner Trustee").
Custodian.................. Bank One, Texas, N.A., as the custodian (the
"Custodian") under the Custodial Agreement dated as
of March 1, 1998 among the Seller, FFI, the Owner
Trustee, the Indenture Trustee and the Custodian.
Closing Date............... On or about March 12, 1998.
Cut-Off Date............... February 28, 1998 with respect to the Initial Home
Loans and, with respect to the Subsequent Home
Loans, the date specified as the cut-off date in
the applicable Subsequent Transfer Agreement.
Payment Date............... The 10th day of each month or, if such day is not a
Business Day, the next succeeding Business Day,
commencing in April 1998.
Due Period................. With respect to each Payment Date, the calendar
month immediately preceding such Payment Date.
Determination Date ........ The third Business Day (as defined herein) prior to
each Payment Date.
Record Date................ With respect to each Payment Date, the close of
business on the last Business Day of the calendar
month immediately preceding the month in which such
Payment Date occurs.
The Notes.................. The Trust will issue the Notes pursuant to the
Indenture. The approximate initial aggregate
principal balance of each Class of Notes (the
"Original Class Principal Balance" of each such
Class) is set forth on the cover hereof. The "Class
Principal Balance" of each Class of Notes, as of
any date of determination, will be equal to the
Original Class Principal Balance thereof reduced by
(i) all amounts previously paid to Noteholders of
such Class in reduction of the Class Principal
Balance thereof on all previous Payment Dates and
(ii) in the case of the
S-1
6
Subordinate Notes, any Allocable Loss Amounts
previously applied thereto. The aggregate principal
balance of the Notes, and the Original Class
Principal Balance of each Class, may vary by plus
or minus 5% to the extent that the Initial Pool
Principal Balance is increased or decreased as
described herein.
The Notes will be secured by the assets of the
Trust pursuant to the Indenture and, as described
herein, will be senior in right of payment of
interest and principal, respectively, to the
Residual Interest Certificate. Interest will accrue
on each Class of Notes at the applicable per annum
interest rate set forth or described on the cover
hereof (as to each Class, an "Interest Rate"). The
Interest Rate applicable to each Class of Notes
(and the B-2 Component of the Residual Interest
Certificate) will be increased by 0.50% with
respect to each Payment Date occurring after the
Payment Date on which the Pool Principal Balance
has declined to 10% or less of the Assumed Pool
Principal Balance (as defined herein) (the first
such Payment Date, the "Initial Call Date"). See
"Description of the Securities -- Optional
Termination" herein.
The Residual Interest
Certificate.............. The Trust will issue the Residual Interest
Certificate pursuant to the Trust Agreement. The
Residual Interest Certificate is not offered
hereby. The Residual Interest Certificate will be
composed of multiple payment Components having the
designations, Interest Rates and Original Component
Principal Balance or Original Component Notional
Balance as set forth below:
ORIGINAL
COMPONENT
COMPONENT INTEREST PRINCIPAL
DESIGNATION RATE BALANCE
----------- -------- ---------
A IO................. 5.00%(1) (2)
B-2.................. 8.36%(3) $12,625,000
Excess............... (4) (4)
---------------
(1) The A IO Component will be entitled to
receive payments of interest only up to
and including the Payment Date occurring
in May 2000.
(2) The A IO Component has no principal
balance but will have a Component
Notional Balance as of any Payment Date
equal to the sum of the Class Principal
Balances of the Class A-7 and Class A-8
Notes as of such date (but only on or
prior to the Payment Date in May 2000).
The Original Component Notional Balance
of the A IO Component will be
approximately $53,038,000.
(3) The applicable Interest Rate will be
increased by 0.50% with respect to each
Payment Date occurring after the Initial
Call Date.
(4) The Excess Component will have no
interest rate or principal balance.
The Class Principal Balance of the Residual
Interest Certificate as of any Payment Date will
equal the Component Principal Balance of the B-2
Component as of such date.
The Residual Interest Certificate is not offered
hereby.
Interest................... Interest on each Class of Securities (and each
Component other than the Excess Component) will be
payable on each Payment Date in an amount equal to
interest accrued for the applicable Accrual Period
at the applicable Interest Rate on the Class
Principal Balance (or, in the case of the Residual
Interest Certificate, the respective Component
Principal Balance or Component Notional Balance)
thereof immediately preceding such Payment Date.
The initial Accrual Period will consist of less
S-2
7
than 30 days. See "Description of the
Securities -- Payments" herein. To the extent funds
are available therefor, interest payments will be
made in the order of priority set forth under
"Description of the
Securities -- Payments -- Payment Priorities"
herein.
Principal.................. Principal of each Class of Securities (and each
Component other than the A IO and Excess
Components) will be payable on each Payment Date as
described herein under "Description of the
Securities -- Payments" herein. To the extent funds
are available therefor, principal payments will be
made in the order of priority set forth under
"Description of the
Securities -- Payments -- Payment Priorities"
herein.
Maturity Date.............. The outstanding principal amount of, and all
accrued and unpaid interest on, each Class of
Notes, to the extent not previously paid, will be
payable in full on the applicable maturity date
specified below (as to each Class, the "Maturity
Date"), although the actual final Payment Date for
each Class of Notes may occur earlier than the
applicable Maturity Date. See "Prepayment and Yield
Considerations -- Maturity Dates" herein.
CLASS MATURITY DATE
----- -------------
A-1 December 10, 2008
A-2 June 10, 2010
A-3 November 10, 2013
A-4 April 10, 2015
A-5 May 10, 2017
A-6 May 10, 2020
A-7 September 10, 2022
A-8 May 10, 2024
M-1 May 10, 2024
M-2 May 10, 2024
B-1 May 10, 2024
Form and Registration of
the Notes................ The Notes will initially be issued only in
book-entry form. Persons acquiring beneficial
ownership interests in the Notes ("Note Owners")
will hold such Notes through the book-entry
facilities of The Depository Trust Company ("DTC").
Transfers within DTC will be made in accordance
with the usual rules and operating procedures of
DTC. So long as each Class of Notes is in
book-entry form, each such Class of Notes will be
evidenced by one or more certificates registered in
the name of the nominee of DTC. The interests of
Note Owners will be represented by book-entries on
the records of DTC and participating members
thereof. No Note Owner will be entitled to receive
a definitive certificate representing such person's
interest, except in the event that Definitive Notes
(as defined herein) are issued under the limited
circumstances described herein. All references in
this Prospectus Supplement to any Class of Notes
reflect the rights of the Note Owners of such Class
only as such rights may be exercised through DTC
and its participating members so long as such Class
of Notes is held by DTC. See "Risk
Factors -- Book-Entry Registration" and "Certain
Information Regarding the Securities -- Book-Entry
Registration" in the Prospectus. The Note Owners'
interests in each Class of Notes will be held only
in minimum denominations of $100,000 and integral
multiples of $1,000 in excess thereof.
S-3
8
Assets of the Trust........ The assets of the Trust will consist primarily of a
pool (the "Home Loan Pool") of home loans ("Home
Loans") secured by mortgages, deeds of trust or
other security instruments ("Mortgages"), together
with certain other property described under
"Description of the Trust -- General" herein.
On the Closing Date, the Trust will purchase Home
Loans (the "Initial Home Loans") having an
aggregate principal balance of approximately
$375,001,534 (the "Initial Pool Principal Balance")
as of the Cut-Off Date from the Seller pursuant to
a Sale and Servicing Agreement to be dated as of
March 1, 1998 (the "Sale and Servicing Agreement")
among the Trust, as Issuer, the Seller, as Seller,
FFI, as Transferor and Servicer, and U.S. Bank
National Association, as Indenture Trustee and Co-
Owner Trustee. In addition, on the Closing Date the
Seller is expected to deposit approximately
$124,998,466 into the Pre-Funding Account for the
purchase of additional Home Loans (the "Subsequent
Home Loans") during the Funding Period. The sum of
the aggregate principal balance of the Initial Home
Loans and the amount expected to be deposited into
the Pre-Funding Account on the Closing Date equals
$500,000,000.
The Home Loans............. As further described herein, all of the Home Loans
will be Conventional Loans and will be secured by
Mortgages. Substantially all of the Mortgages for
the Home Loans will be junior in priority to one or
more senior liens on the related mortgaged
properties ("Mortgaged Properties"), which will
consist primarily of owner occupied single family
residences. Substantially all of the Home Loans
will be secured by liens on Mortgaged Properties in
which the borrowers have little or no equity. See
"The Home Loan Pool" herein and "Description of the
Trust Property -- Mortgage Loans" in the
Prospectus.
The Initial Home Loans will consist of
approximately 11,693 loans, having an Initial Pool
Principal Balance of approximately $375,001,534.
Such Initial Pool Principal Balance may vary by
plus or minus 5%, as described under "The Home Loan
Pool" herein. The statistical information presented
in this Prospectus Supplement regarding the Home
Loan Pool is based only on the Initial Home Loans
proposed to be included in the Home Loan Pool as of
the date of this Prospectus Supplement, and does
not take into account any Subsequent Home Loans
that may be added to the Home Loan Pool during the
Funding Period. See "Risk Factors -- Acquisition of
Subsequent Home Loans" and "The Home Loan Pool"
herein.
As further described herein, the Transferor will
have the option after the Closing Date to
repurchase any Home Loan incident to foreclosure,
default or imminent default thereof. The Transferor
will also be obligated either to repurchase any
Home Loan as to which a representation or warranty
has been breached, which breach remains uncured for
a period of 60 days and has a materially adverse
effect on the interests of the Noteholders in such
Home Loan (each, a "Defective Home Loan") or to
remove such Defective Home Loan and substitute a
Qualified Substitute Home Loan. See "The Transferor
and Servicer -- Repurchase or Substitution of Home
Loans" herein.
S-4
9
The Pre-Funding Account.... On the Closing Date, the Seller is expected to
deposit a portion of the proceeds from the sale of
the Securities in an amount equal to approximately
$124,998,466 (the "Pre-Funding Account Deposit")
into the Pre-Funding Account maintained by the
Indenture Trustee for the purpose of purchasing the
Subsequent Home Loans after the Closing Date. The
amount of the Pre-Funding Account Deposit may vary
by plus or minus 5% of the Initial Pool Principal
Balance, depending on the extent, if any, to which
Home Loans are added to or removed from the Home
Loan Pool prior to the Closing Date, as described
herein. During the period from the Closing Date
until the earliest of (i) the date on which the
amount in the Pre-Funding Account is reduced to
$50,000 or less and the Transferor directs that the
Funding Period end, (ii) the occurrence of an Event
of Default under the Sale and Servicing Agreement
or the Indenture, and (iii) May 11, 1998 (the
"Funding Period"), the amount on deposit in the
Pre-Funding Account will be reduced in accordance
with the terms of the Sale and Servicing Agreement
by the amount used to purchase Subsequent Home
Loans. Subsequent Home Loans purchased by the Trust
and added to the Home Loan Pool on any Subsequent
Transfer Date must satisfy the criteria set forth
in the Sale and Servicing Agreement. See "The Home
Loan Pool -- Conveyance of Subsequent Home Loans"
herein. A "Subsequent Transfer Date" is any date on
which any such Subsequent Home Loans will be
conveyed by the Seller to the Trust.
On the Payment Date following the Due Period in
which the Funding Period ends, the portion of the
Pre-Funding Account Deposit that is remaining will
be applied as described herein to reduce the Class
Principal Balances of the Securities. See "Risk
Factors -- Acquisition of Subsequent Home Loans,"
"Description of the Transfer and Servicing
Agreements -- Pre-Funding Account" and "Prepayment
and Yield Considerations" herein.
Credit Enhancement......... Credit enhancement with respect to the Notes will
be provided by (a) the subordination of (i) the
Residual Interest Certificate to the Notes and (ii)
the Class B-1, Class M-2 and Class M-1 Notes,
respectively, to each Class of Notes having a
higher payment priority, and (b) the
overcollateralization feature described herein. The
Notes are not insured by any financial guaranty
insurance policy. See "Risk Factors -- Adequacy of
Credit Enhancement" and "Description of Credit
Enhancement" herein.
Subordination.............. The rights of holders of the Subordinate Notes to
receive payments of interest and to receive
payments of principal, respectively, on each
Payment Date will be subordinate to such rights of
holders of each Class of Notes having a higher
payment priority, as described herein. The rights
of the holder of the Residual Interest Certificate
to receive distributions of interest and to receive
distributions of principal, respectively, on each
Payment Date will be subordinate to such respective
rights of Noteholders, as described herein. Such
subordination feature is intended to enhance the
likelihood of regular receipt of interest and
principal by the holders of the Senior Notes, and
to a lesser extent the Subordinate Notes (in order
of priority). See "Description of Credit
Enhancement -- Subordination and Allocation of
Losses" herein.
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Application of Allocable
Loss Amounts............. In the event that, on any Payment Date after the
Initial Undercollateralization Amount (as defined
herein) has been reduced to zero, (a) the aggregate
of the outstanding principal balances of the
Securities on such Payment Date (after giving
effect to all payments on such date) exceeds (b)
the sum of (i) the Pool Principal Balance as of the
end of the preceding Due Period and (ii) the
amount, if any, on deposit in the Pre-Funding
Account (other than investment income) as of the
end of such Due Period (such excess, an "Allocable
Loss Amount"), such Allocable Loss Amount will be
applied in reduction of the principal balances of
the Subordinate Securities in inverse order of
priority, until the respective principal balances
thereof have been reduced to zero. Allocable Loss
Amounts applied to the Residual Interest
Certificate will be applied in reduction of the
Component Principal Balance of the B-2 Component
until the Component Principal Balance thereof has
been reduced to zero. Allocable Loss Amounts will
not be applied in reduction of the Class Principal
Balance of any Class of Senior Notes. Holders of
any Class of Subordinate Securities will be
entitled, to the extent of Allocable Loss Amounts
so applied thereto, to receive payments of Deferred
Amounts (as defined herein) under the circumstances
and to the extent provided herein. See "Description
of the Securities -- Application of Allocable Loss
Amounts" herein.
Overcollateralization...... On the Closing Date, the aggregate principal
balance of the Securities is expected to exceed the
Assumed Pool Principal Balance by approximately
$5,000,000. The application of Excess Spread in
reduction of the outstanding principal balances of
the Securities as described herein is intended,
first, to eliminate such undercollateralization,
and then to create overcollateralization and
increase the Overcollateralization Amount (as
defined herein) over time until such amount is
equal to the Required Overcollateralization Amount
(as defined herein). However, there can be no
assurance that Excess Spread will be generated in
sufficient amounts to ensure that such
overcollateralization level will be achieved or
maintained at all times. While the Class A-1 Notes
are outstanding, any increase in LIBOR will
decrease the amount of Excess Spread for the
related Payment Date. See "Description of Credit
Enhancement -- Overcollateralization" and "Risk
Factors -- Adequacy of Credit Enhancement" herein.
Servicing of the Home
Loans.................... The Servicer will be required to service the Home
Loans pursuant to the Sale and Servicing Agreement
and will be entitled to receive a fee and other
servicing compensation, payable monthly as
described under "Description of the Transfer and
Servicing Agreements -- Servicing" herein. The
Servicer may subcontract its servicing duties with
respect to certain Home Loans to certain
unaffiliated lenders pursuant to a subservicing
agreement between the Servicer and each such lender
(each such lender, a "Subservicer"). As of the
Closing Date, the Servicer will not have
subcontracted its servicing duties to any
subservicers.
Fees and Expenses of the
Trust.................... Before any payments are made on the Securities on
any Payment Date, amounts otherwise payable to
Securityholders will first be applied to pay the
compensation of the Servicer. The Servicer will pay
the fees and
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expenses of the Indenture Trustee, Owner Trustee,
Co-Owner Trustee and Custodian. See "Description of
the Transfer and Servicing Agreements -- Trust Fees
and Expenses" and "Description of the
Securities -- Payments" herein.
Optional Termination....... The Seller may, at its option, effect an early
redemption or termination of the Securities on or
after the Initial Call Date by purchasing the Home
Loans for the Termination Price. See "Description
of the Securities -- Optional Termination" herein.
Tax Status................. In the opinion of Brown & Wood LLP, for federal
income tax purposes the Notes will be characterized
as debt, and the Trust will not be characterized as
an association (or a publicly traded partnership)
taxable as a corporation, but will be a grantor
trust. Each Noteholder, by the acceptance of a
Note, will agree to treat the Notes as
indebtedness. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus for
additional information concerning the application
of federal income tax laws to the Notes.
ERISA Considerations....... Subject to the considerations discussed under
"ERISA Considerations" herein and in the
Prospectus, the Notes may be purchased by an
employee benefit plan or an individual retirement
account (a "Plan") subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA") or Section 4975 of the Internal Revenue
Code of 1986, as amended (the "Code"). A fiduciary
of a Plan must determine that the purchase of a
Note is consistent with its fiduciary duties under
ERISA and does not result in a nonexempt prohibited
transaction as defined in Section 406 of ERISA or
Section 4975 of the Code.
Legal Investment
Considerations........... The Notes will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended
("SMMEA"). See "Legal Investment Matters" herein
and in the Prospectus.
Ratings of the Notes....... It is a condition to the issuance of the Notes that
(i) each of the Senior Notes be rated "AAA" by each
of Duff & Phelps Credit Rating Co. ("DCR"), and
Fitch IBCA, Inc. ("Fitch") and "Aaa" by Moody's
Investors Service, Inc. ("Moody's," and, together
with DCR and Fitch, the "Rating Agencies"), (ii)
the Class M-1 Notes be rated "AA" by each of DCR
and Fitch and "Aa2" by Moody's, (iii) the Class M-2
Notes be rated "A" by each of DCR and Fitch and
"A2" by Moody's, and (iv) the Class B-1 Notes be
rated "BBB" by each of DCR and Fitch and "Baa3" by
Moody's. A security rating does not address the
frequency of principal prepayments or the
corresponding effect on yield to Noteholders. None
of the Seller, the Transferor, the Servicer, the
Indenture Trustee, the Owner Trustee or any other
person is obligated to maintain the rating on any
of the Notes.
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RISK FACTORS
Prospective investors in the Notes should consider the following
information (as well as the information set forth under "Risk Factors" in the
Prospectus), which identifies certain significant sources of risk affecting an
investment in the Notes.
ACQUISITION OF SUBSEQUENT HOME LOANS
VARIATION IN CREDIT QUALITY AND CHARACTERISTICS OF SUBSEQUENT HOME
LOANS. Any conveyance of Subsequent Home Loans is subject to the conditions set
forth in the Sale and Servicing Agreement, which include, among others: (i) each
Subsequent Home Loan must satisfy the representations and warranties applicable
to the Initial Home Loans; (ii) the Transferor will not select Subsequent Home
Loans in a manner that it believes is adverse to the interests of
Securityholders, and (iii) as of the applicable Cut-Off Date, all of the Home
Loans must satisfy certain statistical criteria set forth in the Sale and
Servicing Agreement. The Subsequent Home Loans may have been originated or
purchased by the Transferor using credit criteria different from those applied
to the Initial Home Loans and may be of different credit quality and have
different loan characteristics than the Initial Home Loans. After the transfer
of the Subsequent Home Loans to the Trust, the aggregate statistical
characteristics of the Home Loan Pool may vary from those of the Initial Home
Loans as described herein. See "The Home Loan Pool -- Characteristics of Initial
Home Loans," and "-- Conveyance of Subsequent Home Loans" herein.
EFFECT OF PREPAYMENT FROM PRE-FUNDING ACCOUNT. If the Pre-Funding Account
Deposit has not been fully applied to purchase Subsequent Home Loans by the end
of the Funding Period, and the amount remaining in the Pre-Funding Account (net
of reinvestment income) is in excess of $50,000, then on the Payment Date
following the Due Period in which the Funding Period ends, such amount will be
applied to reduce, on a pro rata basis, the outstanding Class Principal Balance
of each Class of Securities. In the event that such amount remaining in the
Pre-Funding Account is substantial, Securityholders will receive a significant
unanticipated payment of principal in (or before) June 1998. All of the Home
Loans that the Transferor expects to deliver as Subsequent Home Loans have been
originated. As a result, the Seller expects that the principal amount of the
Subsequent Home Loans sold to the Trust will require the application of
substantially all of the Pre-Funding Account Deposit and that there will be no
material principal payment to Securityholders from the amount remaining in the
Pre-Funding Account after the Funding Period.
PREPAYMENT AND YIELD CONSIDERATIONS
The Home Loans may be prepaid in whole or in part at any time. However, a
majority of the Home Loans require payment of a prepayment penalty in connection
with any prepayment during the first three years after origination, which, if
not waived by the Servicer, may affect the rate of prepayment of the Home Loans.
The Servicer typically will waive such prepayment penalty if the borrower
refinances with the Servicer. Loans similar to the Home Loans have been
originated in significant volume only during the past few years, and the
prepayment experience of the Home Loans cannot be predicted with certainty. The
prepayment experience of the Home Loans may differ significantly from that of
first lien residential mortgage loans, or junior lien mortgage loans with
combined loan-to-value ratios at or below 100%.
The rate and timing of prepayments of principal of the Home Loans may be
influenced by a variety of factors, as described under "Prepayment and Yield
Considerations" herein. Any increase in the market values of Mortgaged
Properties, and the resulting decrease in the combined loan-to-value ratios of
the related Home Loans, may make alternative sources of financing available to
the related borrowers at lower interest rates.
The extent to which the yield to maturity of a Note may vary from the
anticipated yield will depend upon (i) the degree to which it is purchased at a
premium or discount, (ii) the degree to which the timing of payments to the
holder thereof is sensitive to scheduled payments, prepayments, liquidations,
defaults, delinquencies, substitutions, modifications and repurchases of Home
Loans and to the payment of Excess Spread and amounts remaining in the
Pre-Funding Account after the Funding Period, (iii) in the case of the Class
M-1, Class M-2 and Class B-1 Notes, the application of Allocable Loss Amounts
thereto and the repayment of Deferred Amounts in respect thereof as described
herein, (iv) the level of LIBOR from time to
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time while the Class A-1 Notes are outstanding, and (v) the rate and timing of
the purchase of Subsequent Home Loans by the Trust. In the case of a Note
purchased at a discount, an investor should consider the risk that a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield and, in the case of a Note purchased at a
premium, an investor should consider the risk that a faster than anticipated
rate of principal payments could result in an actual yield that is lower than
the anticipated yield. On each Payment Date, until the Overcollateralization
Amount is at least equal to the Required Overcollateralization Amount, the
allocation of Excess Spread for such Payment Date as an additional payment of
principal on the Securities is expected to accelerate the amortization of the
Securities relative to the amortization of the Home Loans; however, on the
Overcollateralization Stepdown Date, the distribution of any
Overcollateralization Reduction Amount to the Excess Component of the Residual
Interest Certificate, as described herein, can be expected to result in a slower
amortization of the Securities and may delay principal payments to the
Securityholders. In the event that principal payments are made to
Securityholders as a result of prepayments, liquidations and purchases of the
Home Loans or payments of Excess Spread, and amounts remaining in the
Pre-Funding Account, there can be no assurance that Securityholders will be able
to reinvest such payments in a comparable alternative investment having a
comparable yield. See "Prepayment and Yield Considerations" herein.
Because each Class of Subordinate Notes is subordinate in right of payment
of interest and of principal, respectively, to each Class of Notes having a
higher payment priority, and because Allocable Loss Amounts will be allocated to
the Subordinate Notes in inverse order of payment priority, the yields to
maturity of the Subordinate Notes will be sensitive, in varying degrees, to
delinquencies and losses on the Home Loans. As a result, holders of such Notes
could incur a loss on their investments.
ADEQUACY OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Notes will be provided by (a) the
subordination of (i) the Residual Interest Certificate to the Notes and (ii) the
Class B-1, Class M-2 and Class M-1 Notes, respectively, to each Class of Notes
having a higher payment priority and (b) the overcollateralization feature
described herein. The Notes are not insured by any financial guaranty insurance
policy. If the Home Loans experience higher rates of delinquencies, defaults or
losses than initially anticipated, there can be no assurance that the amounts
available from the applicable credit enhancement will be adequate to cover the
delays or shortfalls in payments that result from such higher delinquencies,
defaults or losses. If the amounts available from the applicable credit
enhancement are inadequate, Securityholders will bear the risk of any resulting
delays in payment or losses.
The payment of Excess Spread to Securityholders in the manner specified
herein is intended, first, to eliminate the 1% undercollateralization that will
exist on the Closing Date, and then to produce and maintain a particular level
of overcollateralization. However, there can be no assurance that Excess Spread
will be generated in sufficient amounts to ensure that such
overcollateralization level will be achieved or maintained at all times. As a
result of delinquencies on the Home Loans, the amount of interest received on
the Home Loans during any Due Period may be less than the amount of interest
payable on the Securities on the related Payment Date. The Servicer will not
advance delinquent payments.
The holder of the Residual Interest Certificate will not be required to
refund any amounts previously distributed to such holder pursuant to the
Transfer and Servicing Agreements, including any distributions of Excess Spread,
regardless of whether there are sufficient funds on a subsequent Payment Date to
pay all amounts then payable to Securityholders.
UNDERCOLLATERALIZATION
At the Closing Date, the aggregate principal balance of the Securities is
expected to exceed the Assumed Pool Principal Balance by approximately
$5,000,000. Such undercollateralization is expected to be eliminated by the
application of Excess Spread, which will then be applied to produce
overcollateralization as described herein. There can be no assurance, however,
that Excess Spread will be generated in sufficient amounts to eliminate such
undercollateralization, or to do so within the period of time anticipated by
investors.
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ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE HOME LOANS
The combined loan-to-value ratios for substantially all of the Initial Home
Loans ranged from approximately 17.50% to approximately 128.99%, with
approximately 87.01% of the Initial Pool Principal Balance consisting of Home
Loans having combined loan-to-value ratios in excess of 100%. The weighted
average combined loan-to-value ratio of the Initial Home Loans was approximately
113.06%. The Subsequent Home Loans are expected to have similar, or possibly
higher, combined loan-to-value ratios. Because the weighted average remaining
term to maturity of the Initial Home Loans as of the February 28, 1998 Cut-off
Date is approximately 246 months, the borrowers will not build equity in the
related Mortgaged Properties through scheduled amortization of the related Home
Loans for a substantial period of time. The Mortgaged Properties, therefore, are
highly unlikely to provide adequate security for the Home Loans. Even assuming
that a Mortgaged Property provides adequate security for the related Home Loan,
substantial delays could be encountered in connection with the liquidation of a
Home Loan that would result in current shortfalls in payments to Securityholders
to the extent such shortfalls are not covered by the applicable credit
enhancement. In addition, liquidation expenses (such as legal fees, real estate
taxes, and maintenance and preservation expenses) will reduce the liquidation
proceeds otherwise available for payment to Securityholders. In the event that
any Mortgaged Property fails to provide adequate security for the related Home
Loan, any losses in connection with such Home Loan will be borne by
Securityholders to the extent that the applicable credit enhancement is
insufficient to absorb all such losses.
RECENT ORIGINATION OF HOME LOANS
None of the Initial Home Loans were 31 days or more delinquent in payment
as of February 28, 1998. See "-- Additional Factors Affecting Delinquencies,
Defaults and Losses on Home Loans -- Limited Historical Delinquency, Loss and
Prepayment Information" below.
ADDITIONAL FACTORS AFFECTING DELINQUENCIES, DEFAULTS AND LOSSES ON HOME LOANS
UNDERWRITING GUIDELINES. Pursuant to the underwriting guidelines of the
Transferor, the assessment of the credit history of the borrower and the
borrower's capacity to make payments on the Home Loans are the primary
considerations in underwriting a Home Loan. The evaluation of the adequacy of
the value of the related Mortgaged Property, together with the amount of all
liens senior to the lien of the Home Loan (i.e., the related "combined
loan-to-value ratio") is given less consideration, and in certain cases no
consideration, in underwriting the Home Loans. See "The Transferor and
Servicer -- Underwriting Criteria" herein. The credit quality of some of the
borrowers under the Home Loans is lower than that of borrowers under mortgage
loans conforming to the FNMA or FHLMC underwriting guidelines for first-lien,
single family mortgage loans. See "The Home Loan Pool -- Characteristics of the
Initial Home Loans" herein. As a result of such lower credit quality and the
high loan-to-value ratios of the Home Loans, the Home Loans are likely to
experience higher rates of delinquencies, defaults and losses (which rates could
be substantially higher) than those that would be experienced by loans
underwritten in conformity with the FNMA or FHLMC underwriting guidelines for
first-lien, single family mortgage loans. In addition, the losses sustained from
defaulted Home Loans are likely to be more severe (and will frequently be total
losses) because the costs incurred in the collection and liquidation of
defaulted Home Loans in relation to the smaller principal balances thereof are
proportionately higher than for first-lien, single family mortgage loans, and
because substantially all of the Home Loans are secured by junior liens on
Mortgaged Properties in which the borrowers had little or no equity at the time
of origination of such Home Loans. See "-- Adequacy of Credit Enhancement"
above.
Although the creditworthiness of the borrower is the primary consideration
in the underwriting of a Home Loan, no assurance can be given that the
creditworthiness of such borrower will not deteriorate as a result of future
economic and social factors, which deterioration may result in a delinquency or
default by such borrower on the related Home Loan. Furthermore, because the
adequacy of the value of the related Mortgaged Property is given less or no
consideration in underwriting a Home Loan, no assurance can be given that any
proceeds will be recovered from the foreclosure or liquidation of the Mortgaged
Property securing a defaulted Home Loan. See "-- Realization Upon Defaulted Home
Loans" below.
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The Transferor's underwriting requirements for certain types of home loans
may change from time to time, which in certain instances may result in less
stringent underwriting requirements. Depending upon the dates on which Home
Loans were originated or purchased by the Transferor, such Home Loans may have
been originated or purchased by the Transferor pursuant to different
underwriting requirements, and accordingly, certain Home Loans included in the
Home Loan Pool may be of a different credit quality and have different loan
characteristics than other Home Loans. To the extent that certain Home Loans
were originated or purchased by the Transferor under less stringent underwriting
requirements, such Home Loans may be more likely to experience higher rates of
delinquencies, defaults and losses than those Home Loans originated or purchased
pursuant to more stringent underwriting requirements.
NO SERVICER DELINQUENCY ADVANCES. In the event of a delinquency or a
default on a Home Loan, neither the Servicer nor any Subservicer will have any
obligation to advance scheduled monthly payments of principal and interest with
respect to such Home Loan. As a result, the amount of principal and interest
received on the Home Loans during any particular Due Period may be less than the
amount of principal and interest payable on the Securities on the related
Payment Date. See "Description of the Transfer and Servicing Agreements --
Servicing" herein.
RELOCATION AND RELOADING OF DEBT. With respect to Home Loans with combined
loan-to-value ratios near or in excess of 100%, there is a risk that if the
related borrowers relocate, such borrowers will be unable to pay off the Home
Loans in full from the sale proceeds of the related Mortgaged Properties and any
other funds available to such borrowers, in which case the Home Loans could
experience higher rates of delinquencies, defaults and losses. With respect to
Home Loans the proceeds of which were used in whole or in part for debt
consolidation, there can be no assurance that, following the debt consolidation,
the related borrowers will not incur further consumer debt to third party
lenders. This reloading of debt could impair the ability of such borrowers to
service their debts, which in turn could result in higher rates of
delinquencies, defaults and losses on the Home Loans.
ACQUISITIONS FROM THIRD PARTIES. A substantial majority of the Home Loans
will have been acquired by the Transferor through purchases from a network of
correspondent lenders or through a portfolio acquisition program. See "The Home
Loan Pool -- General" herein. A substantial majority of such Home Loans will
have been re-underwritten and reviewed for compliance with the Transferor's
underwriting guidelines. The Transferor may have acquired certain Home Loans
from an originator that, at the time of origination, was not an approved FHA
lender or an approved FNMA or FHLMC seller/servicer, and therefore did not have
an internal quality control program substantially similar to the FNMA or FHLMC
required quality control programs. Such Home Loans may be subject to a higher
incidence of delinquency or default.
LIMITED HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT INFORMATION. Since
January 1995, the Servicer has substantially increased the volume of
conventional home loans that it has originated, purchased, sold and/ or
serviced, and thus, it has limited historical experience with respect to the
performance, including the delinquency and loss experience and the rate of
prepayments, of these conventional home loans, with respect to its entire
portfolio of loans and in particular with respect to such increased volume.
Accordingly, the delinquency experience and loan loss and liquidation experience
set forth under "The Transferor and Servicer -- Servicing Experience" herein or
under "The Servicer and the Transferor" in the Prospectus may not be indicative
of the performance of the Home Loans. Prospective investors should make their
investment determination based on the Home Loan underwriting criteria, the
applicable credit enhancement described herein, the characteristics of the Home
Loans and other information provided herein, and not based on any prior
delinquency experience and loan loss and liquidation experience information set
forth herein. Such lack of historical information may make it more difficult to
analyze the future performance of the Home Loans and may affect the market value
or liquidity of the Notes relative to comparably rated securities backed by
loans for which more historical information is available.
GEOGRAPHIC CONCENTRATION. Approximately 20.34% of the Initial Home Loans
are secured by Mortgaged Properties located in, or as to which the related
borrowers reside in, the State of California. Because of the relative geographic
concentration of Mortgaged Properties and borrowers within California,
delinquencies and losses on the Home Loans may be higher than would be the case
if the Home Loans were more geographically
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diversified. Adverse economic conditions in California (which may or may not
affect real property values) may affect the ability of the related borrowers to
make timely payments of their scheduled monthly payments and, accordingly, the
actual rates of delinquencies, defaults and losses on such Home Loans could be
higher than those currently experienced in the home lending and consumer finance
industry for similar types of loans. In addition, Mortgaged Properties located
in California may be more susceptible to certain types of special hazards that
are not covered by casualty insurance, such as earthquakes, floods and other
natural disasters and major civil disturbances, than residential properties
located in other parts of the country. In general, declines in the California
residential real estate market may adversely affect the values of Mortgaged
Properties located in California such that the related combined loan-to-value
ratios will increase. Accordingly, the rates of defaults and losses on such Home
Loans secured by Mortgaged Properties located in California could be higher than
those experienced in the home lending and consumer finance industry in general.
Any increase in the market values of Mortgaged Properties located in California,
and the resulting decrease in related combined loan-to-value ratios, may make
alternative sources of financing available to the related borrowers at lower
interest rates, resulting in an increased rate of prepayment of the Home Loans.
DEPENDENCE ON SERVICER FOR SERVICING HOME LOANS. Upon the Servicer's
failure to remedy an Event of Default under the Sale and Servicing Agreement, a
majority of the Securityholders or the Indenture Trustee or the Owner Trustee
may remove the Servicer and appoint a successor servicer. Absent such a
replacement, Securityholders will be dependent upon the Servicer to adequately
and timely perform its servicing obligations and remit to the Indenture Trustee
payments of principal and interest received on the Home Loans. The manner in
which the Servicer performs its servicing obligations will affect the amount and
timing of principal and interest payments received on the Home Loans. Such
principal and interest payments and other recoveries in respect of the Home
Loans are the sole source of funds for the payments due to Securityholders. See
"The Transferor and Servicer -- Servicing Experience" herein.
REALIZATION UPON DEFAULTED HOME LOANS. Substantially all of the Home Loans
are secured by junior liens, and the loans secured by the related senior liens
are not included in the Home Loan Pool. Adequate funds will generally not be
received in connection with a foreclosure of the related Mortgaged Property to
satisfy fully both the indebtedness secured by the related senior lien(s) and
the related Home Loan. See "Risk Factors -- Certain Factors Affecting
Delinquencies, Foreclosures and Losses on Loan Assets -- Limitations on
Realization of Junior Liens" in the Prospectus. In accordance with the loan
servicing practices of the Servicer for home loans secured by junior liens and
based upon a determination that the realization from a defaulted junior lien
Home Loan may not be an economically viable alternative, the Servicer will not,
in most cases, (i) pursue the foreclosure of a defaulted junior lien Home Loan,
(ii) satisfy the senior mortgage(s) at or prior to the foreclosure sale of the
related Mortgaged Property or (iii) advance funds to keep the senior mortgage(s)
current. The Trust will have no source of funds to satisfy the senior
mortgage(s) or to make payments due to the senior mortgagee(s). See "Certain
Legal Aspects of the Loan Assets -- Foreclosure -- Junior Liens" in the
Prospectus. The Servicer may pursue alternative methods of realizing proceeds
from defaulted junior lien Home Loans, such as the sale or modification of such
Home Loans, including the abatement of accrued interest or the reduction of a
portion of the outstanding Principal Balances. Any such sale of a defaulted Home
Loan may be made to an affiliate of the Servicer, as described under
"-- Disposition of Loans to Affiliate of the Servicer" below. Because
substantially all of the Home Loans will have combined loan-to-value ratios at
the time of origination near or in excess of 100%, losses sustained from
defaulted Home Loans are likely to be more severe (and will frequently be total
losses). In fact, no assurance can be given that any proceeds will be recovered
from the liquidation of defaulted Home Loans.
Generally, the underwriting requirements of the Transferor do not require
that a borrower obtain fire and casualty insurance, title insurance or a title
opinion or report as a condition to approving the Home Loan. Accordingly, if a
Mortgaged Property suffers any hazard or casualty losses, or if the borrower is
found not to have clear title to such Mortgaged Property, Securityholders may
bear the risk of loss resulting from a default by the related borrower to the
extent such losses are not covered by foreclosure or liquidation proceeds on
such defaulted Home Loans or by the applicable credit enhancement.
DISPOSITION OF LOANS TO AFFILIATE OF THE SERVICER. In the ordinary course
of servicing the Home Loans, the Servicer periodically determines that, in its
judgment, continued efforts to collect on a particular
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Liquidated Home Loan or to realize on the related collateral would be
unproductive and costly, and elects to sell such Home Loan on behalf of the
Trust to one of several entities that specialize in realizing on defaulted
loans. Such sale will frequently be for less than 7% of the unpaid principal
balance of such Liquidated Home Loan.
Subsequent to the Closing Date, the Servicer may organize an affiliated
company (the "Affiliated Special Servicer") to purchase certain Liquidated Home
Loans from the Trust and from other securitization trusts and other parties.
Amounts collected by the Affiliated Special Servicer in respect of Liquidated
Home Loans in excess of the purchase price paid for such Home Loans will be
retained by the Affiliated Special Servicer and will not be distributed to
Securityholders. Only Home Loans that are Liquidated Home Loans may be sold to
an Affiliated Special Servicer. In the Sale and Servicing Agreement, the
Servicer will certify to the Indenture Trustee that the purchase price to be
paid for such Liquidated Home Loans will be no less than would have been paid by
an independent third party.
In the Sale and Servicing Agreement, the Servicer will undertake to
exercise in servicing the Home Loans the same care that it customarily employs
in servicing loans for its own account. Nevertheless, prospective investors
should consider that sales of Liquidated Home Loans to an Affiliated Special
Servicer create a potential for conflict of interest, in that the Servicer and
its affiliates would benefit indirectly if the Servicer were to sell Liquidated
Loans at a substantial discount to their unpaid principal balance and if
significant proceeds were to be realized by an Affiliated Special Servicer.
ECONOMIC CONDITIONS. For the limited period of time during which loans in
the nature of the Home Loans have been originated, economic conditions
nationally and in most regions of the country have been generally favorable. A
deterioration in economic conditions could be expected to adversely affect the
ability and willingness of borrowers to repay their Home Loans; however, because
of lenders' limited experience with loans similar to the Home Loans, no
prediction can be made as to the severity of the effect of a general economic
downturn on the rate of delinquencies and defaults on the Home Loans. Because
borrowers under the Home Loans generally have little or no equity in the related
Mortgaged Properties, any significant increase in the rate of delinquencies and
defaults could result in substantial losses to holders of Securities, in
particular the Subordinate Securities. See "-- Adequacy of the Mortgaged
Properties as Security for the Home Loans" and "-- Additional Factors Affecting
Delinquencies, Defaults and Losses on Home Loans" above and "Prepayment and
Yield Considerations" herein.
NON-RECORDATION OF ASSIGNMENTS. The Transferor will not be required to
record assignments of the Mortgages to the Indenture Trustee in the real
property records of California and certain other states. The Transferor, in its
capacity as the Servicer, will retain record title to such Mortgages on behalf
of the Indenture Trustee and the Securityholders. See "Description of the
Transfer and Servicing Agreements -- Sale and Assignment of the Home Loans"
herein.
Although the recordation of the assignments of the Mortgages in favor of
the Indenture Trustee is not necessary to effect a transfer of the Home Loans to
the Indenture Trustee, if the Transferor or the Seller were to sell, assign,
satisfy or discharge any Home Loan prior to recording the related assignment in
favor of the Indenture Trustee, the other parties to such sale, assignment,
satisfaction or discharge may have rights superior to those of the Indenture
Trustee. In some states, in the absence of such recordation of the assignments
of the Mortgages, the transfer to the Indenture Trustee of the Home Loans may
not be effective against certain creditors or purchasers from the Transferor or
a trustee in bankruptcy of the Transferor. If such other parties, creditors or
purchasers have rights to the Home Loans that are superior to those of the
Indenture Trustee, Securityholders could lose the right to future payments of
principal and interest from such Home Loans and could suffer a loss of principal
and interest to the extent that such loss is not otherwise covered by the
applicable credit enhancement.
OTHER LEGAL CONSIDERATIONS. The underwriting, origination, servicing and
collection of the Home Loans are subject to a variety of state and federal laws
and regulations. For example, the U.S. District Court for the Eastern District
of Virginia has stated that federal law prohibits lenders from paying
independent mortgage brokers a premium for loans with above-market interest
rates. The Transferor will be required to repurchase or replace any Home Loan
that did not comply as of the date of its assignment to the Trust with
applicable state
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and federal laws and regulations. Depending on the provisions of applicable law
and the specific facts and circumstances involved, violations of these laws and
regulations may limit the ability of the Servicer to collect all or part of the
principal or interest due on the Home Loans, may entitle a borrower to a refund
of amounts previously paid or a rescission of the related Home Loan, and, in
addition, could subject the Servicer or any Subservicer to damages and
administrative sanctions. If the Servicer is unable to collect all or part of
the principal or interest due on any Home Loan because of a violation of the
aforementioned laws and regulations, any related delays or losses not covered by
the applicable credit enhancement will be borne by Securityholders. In addition,
if damages are assessed against the Servicer, any Subservicer or the Transferor,
such violations may materially impact the financial ability of the Servicer or
Subservicer to continue to act in such capacity or the ability of the Transferor
to repurchase or replace Defective Home Loans. See "-- Limitations on Repurchase
or Replacement of Defective Home Loans by Transferor" below and "Risk
Factors -- Certain Factors Affecting Delinquencies, Defaults and Losses on Loan
Assets -- Certain Legal Considerations of the Loan Assets" in the Prospectus.
The National Bankruptcy Review Commission (the "Bankruptcy Commission"), an
independent commission established under the Bankruptcy Reform Act of 1994 to
study issues and make recommendations relating to the United States Bankruptcy
Code (the "Bankruptcy Code"), recently delivered its report to the President and
Congress. The Bankruptcy Commission recommended in its report that the
Bankruptcy Code be amended to treat any claim secured only by a junior lien on a
borrower's principal residence as unsecured to the extent that the amount of
such claim exceeds the appraised value of the mortgaged property at the date of
origination minus the value of all senior liens. If such a change in the
Bankruptcy Code were to be enacted, and if such change were to apply to loans
originated prior to enactment, a substantial majority of the Home Loans would
likely be treated, in whole or in part, as unsecured debt in a case under
Chapter 13 of the Bankruptcy Code. As a consequence, borrowers who become
Chapter 13 debtors would have substantially less incentive to make arrangements
for repayment of their Home Loans, and the likelihood that the Trust Fund would
recover any amounts in respect of the related Home Loans would be remote.
LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE HOME LOANS BY TRANSFEROR
The Transferor will agree to cure in all material respects any breach of
the Transferor's representations and warranties set forth in the Sale and
Servicing Agreement with respect to the Home Loans. If the Transferor does not
cure such breach within a specified period of time, the Transferor is required
to repurchase such Defective Home Loans from the Trust or substitute other
loans. Although a significant portion of the Home Loans will have been acquired
from unaffiliated correspondent lenders, the Transferor will make the same
representations and warranties for all Home Loans. To the extent that the
Transferor has obtained any representations and warranties from such
unaffiliated correspondent lenders, the Transferor, and the Trust, on behalf of
the Securityholders, as the successors to the Transferor's rights with respect
thereto, will have an additional party that is liable for the repurchase of any
Home Loan in breach of the applicable representations and warranties made by
such party. Such representations generally will be made as of the date of
acquisition by the Transferor and not as of the Closing Date. For a summary
description of the Transferor's representations and warranties, see "Description
of the Transfer and Servicing Agreements -- Sale and Assignment of Loan Assets"
in the Prospectus.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing or replacing Defective
Home Loans as described above, or that, at any particular time, any unaffiliated
lender from whom the Transferor obtained the Defective Home Loans will
repurchase any Defective Home Loans from the Transferor. If the Transferor
repurchases, or is obligated to repurchase, defective home loans from any other
series of asset backed securities, the financial ability of the Transferor to
repurchase Defective Home Loans from the Trust may be adversely affected. In
addition, other events relating to the Transferor and its home lending and
consumer finance operations can occur that would adversely affect the financial
ability of the Transferor to repurchase Defective Home Loans from the Trust,
including, without limitation, the termination of borrowing arrangements that
provide funding for its operations, or the sale or other disposition of all or
any significant portion of its assets. If the Transferor does not repurchase or
replace a Defective Home Loan, and if applicable, an unaffiliated lender does
not repurchase or replace a Defective
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Home Loan sold to the Transferor, then the Servicer, on behalf of the Trust,
will make other customary and reasonable efforts to recover the maximum amount
possible with respect to such Defective Home Loan, and any resulting delay or
loss will be borne by the applicable credit enhancement or by Securityholders.
See "-- Adequacy of Credit Enhancement" above and "The Transferor and Servicer"
herein.
LIMITATIONS ON LIQUIDITY OF TRANSFEROR AND SERVICER
As a result of the Transferor's increasing volume of loan originations and
purchases and its securitization activities, the Transferor requires substantial
capital to fund its operations and has operated, and expects to continue to
operate, on a negative operating cash flow basis. Currently, the Transferor
funds substantially all of its operations, including its loan originations and
purchases, from the capital contributed by FP, its parent, and from borrowings
under the Transferor's arrangements with certain third parties, including
warehouse and term credit facilities. See "The Transferor and Servicer" herein.
There can be no assurance that FP will be able to contribute additional capital
or that, as the Transferor's existing borrowing arrangements mature, the
Transferor will have access to the financing necessary for its operations or
that such financing will be available to the Transferor on favorable terms. To
the extent that FP and the Transferor are unable to arrange new or alternative
methods of financing on favorable terms, the Transferor may have to curtail its
loan origination and purchasing activities, which could have a material adverse
effect on the Transferor's financial condition and, in turn, the Servicer's
ability to service the Home Loans and the Transferor's ability to repurchase or
replace any Defective Home Loans.
USE OF PROCEEDS
The proceeds from the sale of the Securities, net of certain expenses, will
be used by the Trust for the purchase of the Initial Home Loans from the Seller
and to fund the Pre-Funding Account. The Seller will use such proceeds from the
sale of the Initial Home Loans to the Trust for the purchase of the Initial Home
Loans from the Transferor. The Transferor in turn will use all or a substantial
portion of such proceeds from the sale of the Initial Home Loans to repay
certain indebtedness under one or more warehouse financing arrangements that
have been utilized to finance the acquisition of such Initial Home Loans and are
secured by such Initial Home Loans, and the remainder will be used for working
capital. See "Underwriting" herein.
DESCRIPTION OF THE TRUST
GENERAL
The Issuer, FIRSTPLUS Home Loan Owner Trust 1998-2, will be a business
trust formed under the laws of the State of Delaware pursuant to the Trust
Agreement for the transactions described in this Prospectus Supplement. After
its formation, the Trust will not engage in any activity other than (i)
acquiring, holding and managing the Home Loans and the other assets of the Trust
and proceeds therefrom, (ii) issuing the Securities, (iii) making payments on
the Securities, and (iv) engaging in related activities.
On the Closing Date, the Trust will purchase home loans, less certain
interest collections as described below (the "Initial Home Loans") having an
aggregate principal balance of approximately $375,001,534 (the "Initial Pool
Principal Balance") as of the February 28, 1998 Cut-Off Date from the Seller
pursuant to a Sale and Servicing Agreement to be dated as of March 1, 1998 (as
amended and supplemented from time to time, the "Sale and Servicing Agreement"),
among the Trust, the Seller, the Servicer and the Indenture Trustee. In
addition, on the Closing Date, the Seller is expected to deposit approximately
$124,998,466 (the "Pre-Funding Account Deposit") into the Pre-Funding Account
for the purchase of Subsequent Home Loans during the Funding Period. The Initial
Pool Principal Balance and the Pre-Funding Account Deposit may vary as described
herein. The sum of the aggregate principal balance of the Initial Home Loans and
the amount expected to be deposited into the Pre-Funding Account on the Closing
Date equals $500,000,000.
The assets of the Trust will consist primarily of Home Loans, which will be
secured by Mortgages. See "The Home Loan Pool" herein. The assets of the Trust
will also include (i) payments of interest and principal
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in respect of the Home Loans received after the Cut-Off Date, less, in the case
of the Initial Home Loans, approximately 36.7% of interest collected thereon
during March 1998; (ii) amounts on deposit in the Pre-Funding Account; (iii)
amounts on deposit in the Collection Account, Note Payment Account and
Certificate Distribution Account and (iv) certain other ancillary or incidental
funds, rights and properties related to the foregoing. The Trust will include
the unpaid principal balance of each Home Loan as of its related Cut-Off Date
(the "Cut-Off Date Principal Balance"). The "Principal Balance" of a Home Loan
on any day is equal to its Cut-Off Date Principal Balance, minus all principal
reductions credited against the Principal Balance of such Home Loan since such
Cut-Off Date; provided, however, that the Principal Balance of a Liquidated Home
Loan will be zero. With respect to any date, the "Pool Principal Balance" will
be equal to the aggregate Principal Balance of the Home Loans as of such date.
The Servicer will be required to service the Home Loans pursuant to the
Sale and Servicing Agreement (collectively, with the Indenture, the
Administration Agreement (as defined herein) and the Trust Agreement, the
"Transfer and Servicing Agreements") and will be compensated for such services
as described under "Description of the Transfer and Servicing
Agreements -- Servicing" herein.
The Trust's principal offices are located in Wilmington, Delaware, in care
of Wilmington Trust Company, as Owner Trustee, at the address set forth below
under "-- The Owner Trustee and Co-Owner Trustee."
THE OWNER TRUSTEE AND CO-OWNER TRUSTEE
Wilmington Trust Company will act as the Owner Trustee under the Trust
Agreement. Wilmington Trust Company is a Delaware banking corporation and its
principal offices are located at Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890.
Certain functions of the Owner Trustee under the Trust Agreement and the
Sale and Servicing Agreement will be performed by U.S. Bank National
Association, in its capacity as Co-Owner Trustee, including maintaining the
Certificate Distribution Account and making distributions therefrom.
U.S. Bank National Association and the Servicer will also perform certain
additional administrative functions on behalf of the Trust pursuant to the terms
of an administration agreement (the "Administration Agreement") among the Trust,
U.S. Bank National Association and the Servicer.
THE HOME LOAN POOL
GENERAL
The Home Loan Pool will consist of the Initial Home Loans together with any
Subsequent Home Loans conveyed to the Trust after the Closing Date. All of the
Home Loans will be Conventional Loans. The Home Loans will consist of loans for
which the related net proceeds were used to finance (i) property improvements,
(ii) debt consolidation, or (iii) a combination of property improvements, debt
consolidation, cash-out, credit insurance premiums or other consumer purposes. A
de minimis number of Home Loans may be evidenced by retail installment sales
contracts that are secured by Mortgages. Substantially all of the Mortgages for
the Home Loans will be junior in priority to one or more senior liens on the
related Mortgaged Properties, which will consist primarily of owner occupied
single family residences. Substantially all of the Home Loans will be secured by
liens on Mortgaged Properties in which the borrowers have little or no equity
(i.e., the related combined loan-to-value ratios approach or exceed 100%).
"Combined loan-to-value ratio" means, with respect to any Home Loan, the
fraction, expressed as a percentage, the numerator of which is the principal
balance of such Home Loan at origination plus, in the case of a junior lien Home
Loan, the aggregate outstanding principal balance of the related senior lien
loans on the date of origination of such Home Loan, and the denominator of which
is the appraised or stated value of the related Mortgaged Property at the time
of origination of such Home Loan (determined as described herein under "The
Transferor and the Servicer -- Underwriting Criteria").
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Generally, the Home Loans will have been originated or acquired by the
Transferor in one of four ways: (i) the wholesale purchase of loans, on a flow
basis, originated by unaffiliated lenders, as correspondents ("correspondent
originations"), including delegated underwriting correspondents; (ii) the
origination of loans directly to consumers, including but not limited to
solicitations through advertising and telemarketing and referrals from home
improvement contractors, mortgage brokers and credit unions ("direct
originations"); (iii) the purchase, on a bulk basis, of loan portfolios
originated by unaffiliated lenders ("portfolio acquisitions"), or (iv) to a more
limited extent, the indirect origination and purchase of retail installment
sales contracts from dealers that professionally install the related property
improvements ("indirect obligations"). A substantial majority of the Home Loans
will have been underwritten or re-underwritten to determine whether such Home
Loans comply with the underwriting standards of the Transferor.
For a description of the underwriting criteria applicable to the Home
Loans, see "The Transferor and Servicer -- Underwriting Criteria" herein. All of
the Home Loans will have been originated or acquired by the Transferor and sold
by the Transferor to the Seller and, pursuant to the Sale and Servicing
Agreement, sold by the Seller to the Trust. Pursuant to the Indenture, the Trust
will pledge and assign the Home Loans to the Indenture Trustee for the benefit
of the Noteholders. The Trust will be entitled to all payments of interest and
principal and all proceeds received in respect of the Home Loans after (i) the
February 28, 1998 Cut-Off Date with respect to the Initial Home Loans and (ii)
the related Cut-Off Date with respect to the Subsequent Home Loans, less, in the
case of the Initial Home Loans, certain interest collections as described above.
PAYMENTS ON THE HOME LOANS
The Home Loans provide for a schedule of payments that will be, if timely
paid, sufficient to amortize fully the principal balance of the related Home
Loan on or before its maturity date. The scheduled monthly payment dates of the
Home Loans vary. Each Home Loan bears interest at a fixed rate (the "Home Loan
Rate"). Interest on the Home Loans will accrue on either an "actuarial interest"
method or a "simple interest" method. A substantial majority of the Home Loans
will accrue interest on the actuarial method. No Home Loan provides for deferred
interest or negative amortization.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day each month that is fixed at the time of
origination, and payments received after a grace period following such scheduled
day are subject to late charges. A scheduled payment on such a Home Loan
received either earlier or later than the scheduled due date thereof will not
affect the amortization schedule or the relative application of such payment to
principal and interest in respect of such Home Loan.
The simple interest method provides for the amortization of the amount of a
Home Loan over a series of equal scheduled payments. However, unlike the monthly
actuarial interest method, each scheduled payment will be applied to interest
calculated on the basis of the outstanding principal balance of the related Home
Loan, the Home Loan Rate and the period elapsed since the preceding payment of
principal was made. As payments are received on the Home Loan, the amount
received is applied first to interest accrued to the date of payment and the
balance, if any, is applied to reduce the unpaid principal balance. Accordingly,
if a borrower pays a fixed monthly installment on such a Home Loan less than one
month after the previous payment, the portion of the payment allocable to
interest for the period since the preceding payment was made will be less than
it would have been had the payment been made as scheduled, and the portion of
the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a fixed monthly
installment on such a Home Loan more than one month after the previous payment,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be greater than it would be had the payment been
made as scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly less. In addition, in certain states a
late charge may be imposed with respect to the past due amount.
With respect to a Home Loan on which interest accrues pursuant to the
simple interest method, if a payment is received on such Home Loan less than one
month after the previous payment, more of such payment will be used on the
related Payment Date to pay principal on the Securities than if such payment was
received as scheduled. If a payment is received on such Home Loan more than one
month after the previous
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payment, less of such payment will be used on the related Payment Date to pay
principal on the Securities than if such payment was received as scheduled. This
allocation will not affect the total amount of principal due over the life of a
Home Loan, but it may affect the weighted average lives of the Securities. See
"Prepayment and Yield Considerations" herein.
Certain of the borrowers may be covered by credit insurance policies and
involuntary unemployment insurance policies, which provide for payment in full
of the outstanding principal balance of the related Home Loans in the event of
the accidental death or disability of the borrower, or for payment of the
applicable monthly payment (up to $500 per month), in the case of employment
interruption. The credit life insurance policies and involuntary unemployment
insurance policies generally have terms of five years. If a borrower covered by
any such policy elects to cancel the policy, the amount of the premium refund
payable in connection with such cancellation will be applied as a principal
payment on the related Home Loan. Any proceeds received by the Trust in respect
of such insurance policies will affect the rate of prepayments on the Home
Loans. See "Prepayment and Yield Considerations" herein.
In connection with a partial prepayment, the Servicer may, at the request
of the borrower, recalculate the amortization schedule of the related Home Loan
to reduce the scheduled payment over the remaining term to maturity.
CHARACTERISTICS OF THE INITIAL HOME LOANS
Set forth below is certain statistical information regarding
characteristics of the Initial Home Loans expected to be included in the Home
Loan Pool as of the date of this Prospectus Supplement. This description does
not take into account any Subsequent Home Loans that may be added to the Home
Loan Pool during the Funding Period. Prior to the Closing Date, the Transferor
may remove any of the Initial Home Loans intended for inclusion in the Home Loan
Pool, substitute comparable loans therefor, or add comparable loans thereto;
provided, however, that the aggregate principal balance of Initial Home Loans so
removed, replaced or added will not exceed 5% of the Initial Pool Principal
Balance. As a result, the statistical information presented below regarding the
characteristics of the Initial Home Loans expected to be included in the Home
Loan Pool may vary in certain respects from comparable information based on the
actual composition of the Home Loan Pool at the Closing Date. In addition, after
the February 28, 1998 Cut-Off Date, the characteristics of the actual Home Loan
Pool may vary from the information below due to a number of factors,
particularly the purchase of Subsequent Home Loans after the Closing Date. See
"-- Conveyance of Subsequent Home Loans" below. A schedule of the Initial Home
Loans included in the Home Loan Pool as of the Closing Date will be attached to
the Sale and Servicing Agreement.
A current report on Form 8-K containing a description of the Home Loans
included in the final Home Loan Pool as of the end of the Funding Period will be
filed with the Commission.
The Initial Home Loans expected to be included in the Initial Home Loan
Pool will consist of approximately 11,693 loans having an Initial Pool Principal
Balance of approximately $375,001,534. Except as provided above, the Home Loans
(by aggregate Cut-Off Date Principal Balance) are expected to have the
approximate characteristics set forth in the tables beginning on the following
page. The sums of the amounts and percentages in the following tables may not
equal the totals shown due to rounding.
Wherever reference is made in this Prospectus Supplement to a percentage of
the Initial Home Loans, such percentage is determined (unless otherwise
specified) on the basis of the Initial Pool Principal Balance.
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HOME LOAN RATES
AGGREGATE PERCENT OF TOTAL
RANGE OF NUMBER OF PRINCIPAL BY AGGREGATE
HOME LOAN RATES (%) HOME LOANS BALANCE PRINCIPAL BALANCE
------------------- ---------- --------- -----------------
9.001 to 10.000..................................... 9 $ 276,735 0.07%
10.001 to 11.000..................................... 59 1,921,598 0.51
11.001 to 12.000..................................... 1,633 56,250,165 15.00
12.001 to 13.000..................................... 2,933 98,501,240 26.27
13.001 to 14.000..................................... 2,980 97,517,594 26.00
14.001 to 15.000..................................... 2,347 72,057,318 19.22
15.001 to 16.000..................................... 1,192 34,596,633 9.23
16.001 to 17.000..................................... 412 10,989,380 2.93
17.001 to 18.000..................................... 103 2,383,302 0.64
18.001 to 19.000..................................... 22 447,256 0.12
19.001 to 20.000..................................... 3 60,313 0.02
------ ------------ ------
Total...................................... 11,693 $375,001,534 100.00%
====== ============ ======
The weighted average Initial Home Loan Rate of the Home Loans as of the February
28, 1998 Cut-Off Date was approximately 13.67% per annum.
CURRENT PRINCIPAL BALANCES
AGGREGATE PERCENT OF TOTAL
RANGE OF CUT-OFF DATE NUMBER OF PRINCIPAL BY AGGREGATE
PRINCIPAL BALANCES ($) HOME LOANS BALANCE PRINCIPAL BALANCE
---------------------- ---------- --------- -----------------
Up to 10,000.00............................. 71 $ 654,408 0.17%
10,000.01 to 20,000.00............................. 1,825 30,037,183 8.01
20,000.01 to 30,000.00............................. 3,936 100,604,986 26.83
30,000.01 to 40,000.00............................. 3,521 122,712,233 32.72
40,000.01 to 50,000.00............................. 1,572 72,361,178 19.30
50,000.01 to 60,000.00............................. 359 19,956,675 5.32
60,000.01 to 70,000.00............................. 265 17,134,692 4.57
70,000.01 to 80,000.00............................. 103 7,694,633 2.05
80,000.01 to 90,000.00............................. 18 1,544,845 0.41
90,000.01 to 100,000.00............................. 22 2,163,157 0.58
100,000.01 or more................................... 1 137,545 0.04
------ ------------ ------
Total...................................... 11,693 $375,001,534 100.00%
====== ============ ======
The average principal balance of the Initial Home Loans as of the February 28,
1998 Cut-Off Date was approximately $32,071.
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ORIGINAL LOAN PRINCIPAL BALANCES
AGGREGATE PERCENT OF TOTAL
RANGE OF PRINCIPAL BALANCES NUMBER OF PRINCIPAL BY AGGREGATE
AT ORIGINATION ($) HOME LOANS BALANCE PRINCIPAL BALANCE
--------------------------- ---------- --------- -----------------
Up to 10,000.00............................. 57 $ 547,329 0.15%
10,000.01 to 20,000.00............................. 1,796 29,369,193 7.83
20,000.01 to 30,000.00............................. 3,942 100,337,384 26.76
30,000.01 to 40,000.00............................. 3,542 123,179,991 32.85
40,000.01 to 50,000.00............................. 1,582 72,637,443 19.37
50,000.01 to 60,000.00............................. 362 20,077,107 5.35
60,000.01 to 70,000.00............................. 268 17,312,908 4.62
70,000.01 to 80,000.00............................. 103 7,694,633 2.05
80,000.01 to 90,000.00............................. 17 1,455,035 0.39
90,000.01 to 100,000.00............................. 23 2,252,967 0.60
100,000.01 or more................................... 1 137,545 0.04
------ ------------ ------
Total...................................... 11,693 $375,001,534 100.00%
====== ============ ======
The average principal balance of the Initial Home Loans at origination was
approximately $32,315.
REMAINING TERMS TO MATURITY
AGGREGATE PERCENT OF TOTAL
RANGE OF REMAINING NUMBER OF PRINCIPAL BY AGGREGATE
TERM TO MATURITY (MONTHS) HOME LOANS BALANCE PRINCIPAL BALANCE
------------------------- ---------- --------- -----------------
1 to 30........................................... 3 $ 33,942 0.01%
31 to 60........................................... 171 3,238,639 0.86
61 to 90........................................... 99 2,335,940 0.62
91 to 120........................................... 931 23,034,868 6.14
121 to 150........................................... 33 790,459 0.21
151 to 180........................................... 2,820 86,632,198 23.10
181 to 210........................................... 7 168,163 0.04
211 to 240........................................... 1,530 49,833,263 13.29
271 to 300........................................... 6,099 208,934,064 55.72
------ ------------ ------
Total...................................... 11,693 $375,001,534 100.00%
====== ============ ======
The weighted average remaining term to maturity of the Initial Home Loans as of
the February 28, 1998 Cut-Off Date was approximately 246 months.
MONTHS SINCE ORIGINATION
AGGREGATE PERCENT OF TOTAL
RANGE OF MONTHS NUMBER OF PRINCIPAL BY AGGREGATE
SINCE ORIGINATION HOME LOANS BALANCE PRINCIPAL BALANCE
----------------- ---------- --------- -----------------
0 to 3............................................. 9,366 $305,954,890 81.59%
4 to 6............................................. 1,149 35,204,449 9.39
7 to 12............................................. 541 16,221,216 4.33
13 to 18............................................. 617 17,143,810 4.57
19 to 24............................................. 13 318,503 0.08
25 to 30............................................. 5 121,499 0.03
37 to 42............................................. 1 28,531 0.01
49 to 54............................................. 1 8,635 0.00
------ ------------ ------
Total...................................... 11,693 $375,001,534 100.00%
====== ============ ======
The weighted average number of months since origination of the Initial Home
Loans as of the February 28, 1998 Cut-Off Date was approximately four months.
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GEOGRAPHIC CONCENTRATION
PERCENTAGE OF TOTAL
NUMBER OF AGGREGATE BY AGGREGATE
STATE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- ---------- ----------------- -------------------
Alabama........................................... 4 91,884 0.02%
Alaska............................................ 21 882,800 0.24
Arizona........................................... 328 9,611,487 2.56
Arkansas.......................................... 7 192,087 0.05
California........................................ 2,186 76,272,478 20.34
Colorado.......................................... 387 11,992,823 3.20
Connecticut....................................... 196 6,563,176 1.75
Delaware.......................................... 28 981,365 0.26
District of Columbia.............................. 1 10,840 0.00
Florida........................................... 948 28,455,829 7.59
Georgia........................................... 459 14,942,469 3.98
Hawaii............................................ 1 39,773 0.01
Idaho............................................. 123 3,981,422 1.06
Illinois.......................................... 251 7,658,865 2.04
Indiana........................................... 432 13,785,822 3.68
Iowa.............................................. 101 3,176,357 0.85
Kansas............................................ 165 5,241,128 1.40
Kentucky.......................................... 134 4,130,463 1.10
Louisiana......................................... 188 6,055,727 1.61
Maine............................................. 33 1,065,282 0.28
Maryland.......................................... 301 9,932,718 2.65
Massachusetts..................................... 345 11,202,579 2.99
Michigan.......................................... 601 19,026,846 5.07
Minnesota......................................... 347 11,752,318 3.13
Mississippi....................................... 81 2,495,879 0.67
Missouri.......................................... 200 5,842,911 1.56
Montana........................................... 39 1,344,977 0.36
Nebraska.......................................... 106 3,226,039 0.86
Nevada............................................ 250 8,245,031 2.20
New Hampshire..................................... 59 1,738,206 0.46
New Jersey........................................ 155 4,420,381 1.18
New Mexico........................................ 147 4,578,622 1.22
New York.......................................... 115 3,665,416 0.98
North Carolina.................................... 321 10,420,015 2.78
North Dakota...................................... 31 922,489 0.25
Ohio.............................................. 309 8,855,083 2.36
Oklahoma.......................................... 226 6,850,741 1.83
Oregon............................................ 99 3,393,816 0.91
Pennsylvania...................................... 146 4,901,469 1.31
Rhode Island...................................... 73 2,359,890 0.63
South Carolina.................................... 374 11,152,438 2.97
South Dakota...................................... 26 854,931 0.23
Tennessee......................................... 219 6,440,948 1.72
Utah.............................................. 134 4,110,393 1.10
Vermont........................................... 24 734,193 0.20
Virginia.......................................... 562 17,509,925 4.67
Washington........................................ 243 7,925,688 2.11
West Virginia..................................... 27 1,017,991 0.27
Wisconsin......................................... 101 3,546,996 0.95
Wyoming........................................... 39 1,400,527 0.37
------ ------------ ------
Total................................... 11,693 $375,001,534 100.00%
====== ============ ======
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CREDIT SCORES
AGGREGATE PERCENT OF TOTAL
RANGE OF NUMBER OF PRINCIPAL BY AGGREGATE
CREDIT SCORES HOME LOANS BALANCE PRINCIPAL BALANCE
------------- ---------- --------- -----------------
600 to 619........................................... 10 $ 224,185 0.06%
620 to 639........................................... 456 10,945,893 2.92
640 to 659........................................... 2,099 60,010,086 16.00
660 to 679........................................... 2,414 79,524,886 21.21
680 to 699........................................... 2,487 83,835,212 22.36
700 to 719........................................... 2,095 70,886,495 18.90
720 to 739........................................... 1,138 37,765,031 10.07
740 to 759........................................... 642 20,559,493 5.48
760 to 779........................................... 267 8,370,820 2.23
780 to 799........................................... 75 2,539,893 0.68
800 or more.......................................... 10 339,540 0.09
------ ------------ ------
Total...................................... 11,693 $375,001,534 100.00%
====== ============ ======
The weighted average Credit Score of the Initial Home Loans as of the February
28, 1998 Cut-Off Date was approximately 690.
DEBT-TO-INCOME RATIOS
AGGREGATE PERCENT OF TOTAL
RANGE OF NUMBER OF PRINCIPAL BY AGGREGATE
DEBT-TO-INCOME RATIOS HOME LOANS BALANCE PRINCIPAL BALANCE
--------------------- ---------- --------- -----------------
5.01 to 10.00....................................... 6 $ 200,188 0.05%
10.01 to 15.00....................................... 56 1,694,658 0.45
15.01 to 20.00....................................... 311 9,201,346 2.45
20.01 to 25.00....................................... 980 30,216,108 8.06
25.01 to 30.00....................................... 1,765 55,612,890 14.83
30.01 to 35.00....................................... 2,609 83,225,059 22.19
35.01 to 40.00....................................... 3,340 108,594,808 28.96
40.01 to 45.00....................................... 2,082 70,024,136 18.67
45.01 to 50.00....................................... 544 16,232,341 4.33
------ ------------ ------
Total...................................... 11,693 $375,001,534 100.00%
====== ============ ======
The weighted average debt-to-income ratio of the Initial Home Loans as of the
February 28, 1998 Cut-Off Date was approximately 34.99%.
CONVEYANCE OF SUBSEQUENT HOME LOANS
Under the Sale and Servicing Agreement, the obligation of the Trust to
purchase Subsequent Home Loans is subject to the requirements described under
"Description of the Transfer and Servicing Agreements -- Conveyance of
Subsequent Loan Assets" in the Prospectus, as well as the following additional
requirements: (i) such Subsequent Home Loans may not be 31 or more days
contractually delinquent as of the related Cut-Off Date; (ii) the original term
to stated maturity of such Subsequent Home Loans may not exceed 25 years, and
the scheduled maturity may not be later than May 11, 2023; (iii) each such
Subsequent Home Loan will have an interest rate of not less than 9.99%; (iv)
such Subsequent Home Loans will be underwritten, re-underwritten or reviewed, as
applicable, in accordance with the underwriting guidelines of the Transferor in
effect at such time (see "the Transferor and Servicer -- Underwriting Criteria")
or originated in a manner similar to the Initial Home Loans; and (v) following
the purchase of such Subsequent Home Loans by the Trust, the Home Loans included
in the Home Loan Pool will have a weighted average interest rate and a weighted
average remaining term to maturity as of each respective Cut-Off Date comparable
to those of the Initial Home Loans included in the initial Home Loan Pool.
Following the transfer of such Subsequent Home
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Loans to the Trust, the aggregate statistical characteristics of the Home Loans
then held in the Home Loan Pool may, and likely will, vary from those of the
Initial Home Loans included in the Initial Home Loan Pool. See "Risk
Factors -- Acquisition of Subsequent Home Loans" herein.
THE SELLER
FIRSTPLUS Investment Corporation (the "Seller") is a Nevada corporation
organized in 1995, formerly known as Remodelers Investment Corporation, and is a
wholly owned subsidiary of FIRSTPLUS Financial Group, Inc. ("FP"). The Seller
was formed as a limited purpose finance company to effect the securitization of
conventional property improvement, debt consolidation and other consumer loans,
property improvement and manufactured housing loans partially insured by the FHA
under the Title I Program, and other types of assets.
The Seller will acquire from the Transferor all of its right, title and
interest (less certain interest collections as described herein) in and to the
Home Loans. In turn, the Seller will sell such Home Loans to the Trust pursuant
to the Sale and Servicing Agreement for the benefit of Securityholders.
THE TRANSFEROR AND SERVICER
GENERAL
FIRSTPLUS Financial, Inc. ("FFI"), a Texas corporation, was organized in
1986. FFI, in its capacity as Transferor, will transfer the Home Loans to the
Seller. FFI, in its capacity as Servicer, also will service the Home Loans under
the Sale and Servicing Agreement. FFI is a wholly-owned subsidiary of FP and is
primarily engaged in the business of originating, purchasing, underwriting,
selling and/or servicing loans including property improvement, debt
consolidation and other consumer loans. As of February 28, 1998 the Transferor
employed 2,064 persons, including 249 persons who work in loan servicing. As of
December 31, 1997 FFI administered and serviced approximately $5.5 billion in
principal balance of property improvement, debt consolidation and other consumer
loans (including loans subserviced by others).
FP is a publicly held, New York Stock Exchange listed company that
completed an initial public offering of its common stock in March 1996 and an
additional public offering of its common stock in January 1997. As of December
31, 1997 the FP Consolidated Financial Statements, as unaudited, which included
FP and its principal subsidiary, FFI, set forth total assets of $2,667,101,000
total liabilities of $2,220,239,000 and total stockholders' equity of
$446,862,000 and for the three months ended December 31, 1997 set forth net
income of $8,617,000. As of September 30, 1997, the FP Consolidated Financial
Statements, as audited, which included FP and FFI, set forth total assets of
$2,447,206,000, total liabilities of $2,017,061,000 and total stockholders'
equity of $430,145,000, and for the fiscal year ended September 30, 1997 set
forth net income of $139,169,000. Any credit or other problems associated with
the large number of loans originated in the recent past will not become apparent
until sometime in the future. Consequently, historical results of operations of
FP and its affiliates may be of limited relevance to an investor seeking to
predict the future financial condition of FP and its affiliates. See "Risk
Factors -- Limitations on Liquidity of Transferor and Servicer" herein.
FFI, as the Servicer, will service the Home Loans pursuant to the Sale and
Servicing Agreement and will be entitled to the Servicing Fee and to certain
additional servicing compensation. See "-- Servicing Experience" below and
"Description of the Transfer and Servicing Agreements -- Servicing" herein.
UNDERWRITING CRITERIA
The Transferor will represent in the Sale and Servicing Agreement that a
substantial majority of the Home Loans underwritten by it will have been
underwritten pursuant to the Transferor's underwriting requirements. Generally,
the underwriting standards of the Transferor place a greater emphasis on the
creditworthiness of the borrower than on the value of the underlying collateral
in evaluating the likelihood that a borrower will be able to repay a
Conventional Loan.
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In many cases, Home Loans will have been made to borrowers that typically
have limited access to mortgage financing for a variety of reasons, such as high
ratios of debt-to-income, unfavorable credit experience, insufficient home
equity value, relatively low income or a limited credit history. Each Home Loan
is subject to various risks, including, without limitation, the risk that the
related borrower will not be able to make payments of interest and principal on
the loan and that the realizable value of the related Mortgaged Property will be
insufficient to repay the outstanding interest and principal owed on such loan.
The Transferor uses its own credit evaluation criteria to classify the loans by
risk class. These criteria include, as a significant component, the credit score
(the "Credit Score") derived on the basis of a methodology developed by Fair,
Isaac and Company, a consulting firm specializing in creating default predictive
models through scoring mechanisms. The Credit Scores, which are based on
information obtained from national credit reporting organizations, are numerical
representations of borrowers' estimated default probability, and can range from
a low of 250 to a high of 950. A borrower with a Credit Score of 700 or higher
would be assigned the highest classification for credit quality by the
Transferor. Additional criteria include the borrower's debt-to-income ratio,
mortgage credit history, consumer credit history, prior bankruptcies, prior
foreclosures, notices of default, deeds-in-lieu of foreclosure and
repossessions. The Transferor believes that the most important credit
characteristics are the borrower's Credit Score and debt-to-income ratio. The
range of the Credit Scores and debt-to-income ratios of the borrowers under the
Home Loans is set forth under "The Home Loan Pool -- Characteristics of the Home
Loans" herein.
The Transferor requires a full appraisal of a Mortgaged Property only for
Home Loans in excess of $75,000. For loans between $35,000 and $75,000, a
drive-by appraisal, broker's price opinion, statistical appraisal or comparable
estimation of value is obtained, and for loans of $35,000 or less the Transferor
relies on the property value stated by the borrower in the loan application.
The Transferor's underwriting guidelines provide for the evaluation of a
loan applicant's creditworthiness through the use of a consumer credit report,
verification of employment and a review of the debt-to-income ratio of the
applicant. The borrower's income is generally verified through various means,
including without limitation applicant interviews, written verifications with
employers and review of pay stubs or tax returns. A borrower must generally
demonstrate sufficient levels of disposable income to satisfy debt repayment
requirements. Notwithstanding the foregoing, the Transferor offers a "no income
verification" program to certain borrowers that have Credit Scores in excess of
680 and that satisfy a minimum disposable income requirement. Under the no
income verification program, the borrower's employment, but not income, is
verified.
The Transferor's underwriting requirements for certain types of home loans
may change from time to time, which in certain instances may result in more
stringent and in other instances less stringent underwriting requirements.
Depending upon the date on which the Home Loans were originated or purchased by
the Transferor, Home Loans included in the Home Loan Pool may have been
originated or purchased by the Transferor under different underwriting
standards, and accordingly, some Home Loans included in the Home Loan Pool may
be of a different credit quality and have different characteristics than other
Home Loans. Furthermore, to the extent that certain Home Loans were originated
or purchased by the Transferor under less stringent underwriting standards, such
Home Loans may be more likely to experience higher rates of delinquencies,
defaults and losses than home loans originated or purchased under more stringent
underwriting standards.
REPURCHASE OR SUBSTITUTION OF HOME LOANS
The Transferor will have the option after the Closing Date to repurchase
any Home Loan incident to foreclosure, default or imminent default thereof. The
Transferor will also be obligated either to repurchase any Defective Home Loan
or to remove such Defective Home Loan and substitute a Qualified Substitute Home
Loan (as defined below). The repurchase of any Home Loan (rather than the
replacement thereof through substitution) will result in accelerated principal
payments on the Securities. See "Description of the Trust Property -- Additions,
Substitution and Withdrawal of Assets" in the Prospectus.
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The Transferor is required (i) within 60 days after discovery or notice
thereof to cure in all material respects any breach of the representations or
warranties made with respect to a Defective Home Loan, or (ii) on or before the
Determination Date next succeeding the end of such 60-day period, to repurchase
such Defective Home Loan at a price (the "Purchase Price") equal to the
Principal Balance of such Defective Home Loan as of the date of repurchase, plus
all accrued and unpaid interest on such Defective Home Loan to and including the
Due Date in the most recent Due Period computed at the applicable Home Loan
Rate. In lieu of repurchasing a Defective Home Loan, the Transferor may replace
such Defective Home Loan with one or more Qualified Substitute Home Loans. If
the aggregate outstanding principal balance of the Qualified Substitute Home
Loan(s) is less than the outstanding principal balance of the Defective Home
Loan(s), the Transferor will also remit for payment to Securityholders an amount
(a "Substitution Adjustment") equal to such shortfall, which will result in a
prepayment of principal on the Securities for the amount of such shortfall. As
used herein, a "Qualified Substitute Home Loan" is a home loan that (i) has an
interest rate that differs from the Home Loan Rate for the Defective Home Loan
it replaces (each, a "Deleted Home Loan") by no more than one percentage point,
(ii) matures not more than one year later than and not more than one year
earlier than that of the Deleted Home Loan, (iii) has a principal balance (after
application of all payments received on or prior to the date of such
substitution) equal to or less than the Principal Balance of the Deleted Home
Loan as of such date, (iv) has a lien priority no lower than the Deleted Home
Loan, (v) complies as of the date of substitution with each representation and
warranty set forth in the Sale and Servicing Agreement with respect to the Home
Loans, and (vi) has a borrower with a comparable credit grade classification to
that of the borrower under the Deleted Home Loan; provided, that with respect to
a substitution of multiple loans, items (i), (ii), (iii) and (vi) above may be
considered on an aggregate or weighted average basis.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing Defective Home Loans or
substituting Qualified Substitute Home Loans for Defective Home Loans in the
manner described above. If the Transferor repurchases, or is obligated to
repurchase, Defective Home Loans from any additional series of asset backed
securities, the financial ability of the Transferor to repurchase Defective Home
Loans from the Trust may be adversely affected. In addition, other events
relating to the Transferor and its mortgage lending and consumer finance
operations can occur that would adversely affect the financial ability of the
Transferor to repurchase Defective Home Loans from the Trust, including without
limitation the sale or other disposition of all or any significant portion of
its assets. If the Transferor is unable to repurchase or replace a Defective
Home Loan, the Servicer, on behalf of the Trust, will pursue other customary and
reasonable efforts, if any, to recover the maximum amount possible with respect
to such Defective Home Loan. If the Servicer is unable to collect all amounts
due to the Trust in respect of such Defective Home Loan, the resulting loss will
be borne by Securityholders to the extent that such loss is not otherwise
covered by amounts available from the applicable credit enhancement. See "Risk
Factors -- Adequacy of Credit Enhancement" and "-- Limitations on Repurchase or
Replacement of Defective Home Loans by Transferor" herein.
SERVICING EXPERIENCE
Since January 1995, the Servicer has substantially increased the volume of
conventional home loans that it has originated, purchased, sold and/or serviced.
The Servicer has limited historical data with respect to the performance,
including the delinquency and loss experience and the rate of prepayments, of
the Conventional Loans included in its portfolio of loans. See "Prepayment and
Yield Considerations" herein. Accordingly, the delinquency experience and loan
default and loss experience set forth below and in the Prospectus may not be
indicative of the performance of the Home Loans included in the Home Loan Pool.
See "The Servicer and the Transferor" in the Prospectus for delinquency and loss
experience with respect to the loans serviced by FFI through March 31, 1997 and
certain factors affecting the delinquency and loss experience of FFI.
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DELINQUENCY EXPERIENCE
AS OF AS OF AS OF
DELINQUENCY DATA JUNE 30, 1997 SEPTEMBER 30, 1997 DECEMBER 31, 1997
---------------- ------------- ------------------ -----------------
Delinquencies in Serviced Loan Portfolio(1):
31-60 days................................. 0.78% 0.90% 0.97%
61-90 days................................. 0.37 0.43 0.46
91 days and over........................... 1.06 1.18 1.19
---------- ---------- ----------
Total................................. 2.21% 2.51% 2.63%
========== ========== ==========
Serviced Loan Portfolio (dollars in
thousands).................................... $3,600,000 $4,700,000 $5,500,000
THREE MONTHS ENDED
------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
DEFAULT DATA 1997 1997 1997 1997 1997
------------ ------------ --------- -------- ------------- ------------
Defaults as a percentage of the
average Serviced Loan
Portfolio(2).......... 0.35% 0.31% 0.35% 0.39% 0.44%
- ---------------
(1) Delinquencies (as a percentage of the total serviced loan portfolio balance)
typically increase in November and December of each calendar year.
(2) The average Serviced Loan Portfolio is calculated by adding the beginning
and ending balances for the period presented and dividing the sum by two.
BECAUSE FFI CALCULATES ITS DELINQUENCY AND DEFAULT RATES BY DIVIDING THE
DOLLAR AMOUNT OF DELINQUENT OR DEFAULTED LOANS IN ITS SERVICING PORTFOLIO FOR
ANY PERIOD BY THE TOTAL DOLLAR AMOUNT OF THE SERVICING PORTFOLIO FOR SUCH
PERIOD, THE ADDITION OF MORE RECENTLY ORIGINATED LOANS WITH SHORTER PAYMENT
HISTORIES HAS THE EFFECT OF REDUCING THE OVERALL RATES OF DELINQUENCY AND
DEFAULT.
Because delinquencies and losses may occur months or years after a loan is
originated, data relating to delinquencies and losses as a percentage of the
current servicing portfolio can understate the risk of future delinquencies,
losses of foreclosures. There is no assurance that the delinquency, foreclosure
and loss experience with respect to the Home Loans will be comparable to the
experience reflected above for assets originated and serviced by FFI or its
affiliates. The actual rates of delinquencies, foreclosures and losses on the
Home Loans, particularly in periods during which the value of the related
Mortgaged Properties has declined, could be higher than those historically
experienced by the mortgage lending industry in general. In addition, the rate
of delinquencies, foreclosures and losses with respect to the Home Loans will be
affected by, among other things, interest rate fluctuations and general and
regional economic conditions. See "Risk Factors -- Certain Factors Affecting
Delinquencies, Foreclosures and Losses on Loan Assets" in the Prospectus.
A substantial portion of the Servicer's entire loan servicing portfolio
consists of loans securitized by the Servicer in its capacity as the Transferor
and sold to various trusts in connection with several prior series of asset
backed securities issued and sold through public offerings and private
placements. The applicable pooling and servicing agreement or sale and servicing
agreement for each of such trusts provides that the trustee of the related trust
may terminate the Servicer's servicing rights if the related loan delinquency or
loss experience exceeds certain standards. As of February 28, 1998, no servicing
rights have been terminated under the related agreements. However, there can be
no assurance that the loan delinquency and loss experience for any of these
trusts will not exceed the applicable standard in the future, and if such
standard is exceeded that the servicing rights of the Servicer will not be
terminated with respect to such trusts.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Notes will be provided by (a) the
subordination of (i) the Residual Interest Certificate to the Notes, and (ii)
the Class B-1, Class M-2 and Class M-1 Notes, respectively, to each Class of
Notes having a higher payment priority, to the extent described below under
"-- Subordination and Allocation of Losses" and (b) the overcollateralization
feature described below under "-- Overcollateralization."
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SUBORDINATION AND ALLOCATION OF LOSSES
On each Payment Date, payments of interest on the Notes will be made first
to the Senior Notes, second to the Class M-1 Notes, third to the Class M-2 Notes
and fourth to the Class B-1 Notes, such that no interest will be paid on the
Class M-1 Notes until all required interest payments have been made on the
Senior Notes, no interest will be paid on the Class M-2 Notes until all required
interest payments have been made on the Senior Notes and the Class M-1 Notes,
and no interest will be paid on the Class B-1 Notes until all required interest
payments have been made on the Senior Notes, the Class M-1 Notes and the Class
M-2 Notes. After all required payments of interest have been made on the Notes
on each Payment Date, distributions of interest will be made to the Residual
Interest Certificate in respect of the applicable Components thereof, first to
the A IO Component and second to the B-1 Component. On each Payment Date,
payments of principal of the Notes will be made first to the Senior Notes, in
order of numerical Class designation, such that no principal will be paid in
respect of any Class of Senior Notes until the principal balance of each Class
of Senior Notes having a prior numerical Class designation has been reduced to
zero, and second to the Class M-1, Class M-2 and Class B-1 Notes and the B-2
Component of the Residual Interest Certificate, in that order, as described
herein. After the Class Principal Balance of each Class of Notes and the
Component Principal Balance of the B-2 Component of the Residual Interest
Certificate has been reduced to zero, distributions will be made on each Payment
Date to the Residual Interest Certificate in respect of the Excess Component
thereof, as described herein.
The rights of the holder of the Residual Interest Certificate to receive
distributions of interest and principal, respectively, on any Payment Date will
be subordinate to such rights of Noteholders. The subordination described above
is intended to enhance the likelihood of the regular receipt of interest and
principal due to the holders of the Notes and to afford such holders protection
against losses on the Home Loans, with the greatest protection being provided to
the Senior Notes, less protection being provided to the Class M-1 Notes, even
less protection being provided to the Class M-2 Notes, and the least protection
being provided to the Class B-1 Notes. See "Risk Factors -- Adequacy of Credit
Enhancement" herein.
On each Payment Date after the Initial Undercollateralization Amount has
been reduced to zero, the "Allocable Loss Amount" will be equal to the excess,
if any, of (a) the aggregate of the outstanding principal balances of the
Securities (after giving effect to all payments on such Payment Date) over (b)
the sum of (i) the Pool Principal Balance as of the end of the preceding Due
Period and (ii) the amount, if any, on deposit in the Pre-Funding Account as of
the end of such Due Period, net of investment income. On each Payment Date prior
to the Payment Date on which the Initial Undercollateralization Amount is
reduced to zero, the Allocable Loss Amount will be zero.
On each Payment Date, any Allocable Loss Amount for such date will be
applied in reduction of the Component Principal Balance of the B-2 Component
until the Component Principal Balance thereof has each been reduced to zero, and
then will be applied first in reduction of the Class Principal Balance of the
Class B-1 Notes, second in reduction of the Class Principal Balance of the Class
M-2 Notes and third in reduction of the Class Principal Balance of the Class M-1
Notes, until the Class Principal Balances thereof have each been reduced to
zero. Allocable Loss Amounts will not be applied to the Senior Notes.
OVERCOLLATERALIZATION
On the Closing Date the aggregate principal balance of the Securities is
expected to exceed the Assumed Pool Principal Balance by approximately
$5,000,000. A limited acceleration of the principal amortization of the
Securities relative to the principal amortization of the Home Loans has been
designed, first, to eliminate such undercollateralization, and then to increase
the Overcollateralization Amount over time by making additional payments of
principal to the Securityholders from Excess Spread, until the
Overcollateralization Amount is equal to the Required Overcollateralization
Amount.
If on any Payment Date an Overcollateralization Shortfall (as defined
herein) exists, Excess Spread, if any, with respect to such Payment Date will be
applied to make additional payments of principal of the Securities in the order
of priority set forth under "Description of the Securities -- Payments" herein.
Such payments of Excess Spread are intended, first, to eliminate the 1%
undercollateralization that will exist on the
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Closing Date, and then to accelerate the amortization of the principal balances
of the Securities relative to the amortization of the Home Loans, thereby
increasing the Overcollateralization Amount. On any Payment Date on which the
Overcollateralization Shortfall is equal to zero, all or a portion of the Excess
Spread may be distributed to the Excess Component of the Residual Interest
Certificate rather than as principal to the Noteholders and the B-2 Component of
the Residual Interest Certificate, until such time as the Overcollateralization
Shortfall is greater than zero (due, for example, to a reduction in the
Overcollateralization Amount as a result of loan losses or delinquencies, or to
an increase in the Required Overcollateralization Amount as a result of the
failure to satisfy certain delinquency criteria as described herein).
On the Overcollateralization Stepdown Date, the holder of the Residual
Interest Certificate will be entitled to distributions of all or a portion of
the Regular Principal Payment Amount, in respect of the Excess Component
thereof, that would otherwise be paid to Noteholders or distributed in respect
of the B-2 Component, as described below. Such amount, the
"Overcollateralization Reduction Amount," will equal the lesser of (x) the
Overcollateralization Surplus (as defined herein) for such Payment Date (after
giving effect to all other payments on such Payment Date), and (y) the Regular
Principal Payment Amount (as determined without deducting the
Overcollateralization Reduction Amount therefrom) on such Payment Date. Prior to
the occurrence of the Overcollateralization Stepdown Date, the
Overcollateralization Reduction Amount will equal zero.
While the payment of Excess Spread to the Noteholders and to the holder of
the Residual Interest Certificate in respect of the B-2 Component thereof, and
the distribution of any Overcollateralization Reduction Amount to the Excess
Component of the Residual Interest Certificate as described above, has been
designed to produce and maintain a particular level of overcollateralization,
there can be no assurance that Excess Spread will be generated in sufficient
amounts to ensure that such overcollateralization level will be achieved or
maintained at all times. For example, while the Class A-1 Notes remain
outstanding, any increase in LIBOR will decrease the amount of Excess Spread for
the related Payment Date. In particular, a high rate of delinquencies on the
Home Loans during any Due Period could cause the amount of interest received on
the Home Loans during such Due Period to be less than the amount of interest
payable on the Securities on the related Payment Date. In such a case, the Class
Principal Balances (or Component Principal Balances) of the Securities would
decrease at a slower rate relative to the Pool Principal Balance, resulting in a
reduction of the Overcollateralization Amount and, in some circumstances, an
Allocable Loss Amount.
DESCRIPTION OF THE SECURITIES
GENERAL
The Trust will issue the Notes pursuant to the Indenture. The Trust will
also issue the Residual Interest Certificate pursuant to the Trust Agreement
dated as of March 1, 1998 (the "Trust Agreement") among the Seller, the Owner
Trustee and the Co-Owner Trustee. The Notes will be secured by the assets of the
Trust pursuant to the Indenture. The Residual Interest Certificate will
represent the ownership interest in the Trust.
On each Payment Date, the Indenture Trustee or its designee and the Owner
Trustee or its designee will pay to the persons in whose names the Securities
are registered on the last day of the month immediately preceding the month of
the related Payment Date (the "Record Date") the portion of the aggregate
payment to be made to each Securityholder as described below. Payments on the
Notes will be made to Beneficial Owners only through DTC and its DTC
Participants (except under certain limited circumstances). See "Certain
Information Regarding the Securities -- Book Entry Registration" in the
Prospectus.
Beneficial ownership interests in each Class of Notes will be held in
minimum denominations of $100,000 and integral multiples of $1,000 in excess
thereof.
PAYMENTS
For the definitions of certain of the defined terms used in the following
subsection, see "-- Related Definitions" below.
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AVAILABLE COLLECTION AMOUNT. Payments on the Securities on each Payment
Date will be made from the Available Collection Amount. The Servicer will
calculate the Available Collection Amount on the third Business Day prior to
each Payment Date (each such day, a "Determination Date"). With respect to each
Payment Date, the "Available Collection Amount" is the sum of (i) all amounts
received in respect of the Home Loans or paid by the Servicer, the Transferor or
the Seller (exclusive of amounts not required to be deposited in the Collection
Account) during the related Due Period (and, in the case of amounts required to
be paid by the Transferor in connection with the purchase or substitution of a
Defective Home Loan, deposited in the Collection Account on or before the
related Determination Date), as reduced by any portion thereof that may not be
withdrawn therefrom pursuant to an order of a United States bankruptcy court of
competent jurisdiction imposing a stay pursuant to Section 362 of the United
States Bankruptcy Code, (ii) in the case of the first Payment Date following the
Due Period in which the Funding Period ends, amounts, if any, remaining in the
Pre-Funding Account at the end of the Funding Period, (iii) with respect to the
final Payment Date, or an early redemption or termination of the Securities by
the Seller, the Termination Price, and (iv) any income or gain from investment
of funds in the Collection Account.
PAYMENTS OF INTEREST. Interest on the Class Principal Balance of each
Class of Notes and on the Component Principal Balance (or Component Notional
Balance) of each applicable Component of the Residual Interest Certificate will
accrue during each Accrual Period at the applicable Interest Rate set forth or
described on the cover hereof (or under "Summary of Terms" in the case of the
applicable Components) and will be payable to Securityholders on each Payment
Date, commencing in April 1998. Distributions of interest on the A IO Component
will be made only up to and including the Payment Date in May 2000. The Interest
Rate applicable to each Class of Notes and the B-2 Component of the Residual
Interest Certificate will be increased by 0.50% with respect to each Payment
Date occurring after the Initial Call Date. See "-- Optional Termination"
herein. The "Accrual Period" for each Class of Securities will be (i) in the
case of the Class A-1 Notes, the period beginning on the Payment Date in the
calendar month preceding the month in which the related Payment Date occurs (or,
in the case of the first Payment Date, beginning on the Closing Date) and ending
on the day preceding the related Payment Date, and (ii) in the case of the other
Classes of Securities, the calendar month preceding the month in which the
related Payment Date occurs (or, in the case of the first Payment Date, the
period from the Closing Date through the end of March). Interest on the Class
A-1 Notes will be calculated on the basis of a 360-day year and the actual
number of days elapsed in each Accrual Period. Interest on the other Classes of
Securities will be calculated on the basis of a 360-day year of twelve 30-day
months.
"LIBOR" for each Accrual Period (other than the initial Accrual Period)
will be the rate for United States dollar deposits for one month that appears on
Telerate Screen Page 3750 as of 11:00 a.m., London time, on the second LIBOR
Business Day before the first day of such Accrual Period. If such rate does not
appear on such page (or such other page as may replace that page on that
service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be reasonably selected by the
Indenture Trustee), LIBOR for the applicable Accrual Period will be the
Reference Bank Rate as defined herein. If no such quotations can be obtained and
no Reference Bank Rate is available, LIBOR will be LIBOR applicable to the
preceding Accrual Period. LIBOR for the initial Accrual Period will be 5.6875%.
The "Net Weighted Average Rate" with respect to any Accrual Period will be
the per annum rate equal to the weighted average (by principal balance) of the
Home Loan Rates as of the first day of the related Due Period, as reduced by the
Servicing Fee Rate.
Payments of interest on the Securities will be made from the Available
Collection Amount remaining after payment of the Servicing Compensation (the
"Available Funds"). Under certain circumstances the amount available to make
interest payments on any Payment Date could be less than the amount of interest
payable on all of the Securities on such date. Such an interest shortfall could
occur, for example, if delinquencies or losses on the Home Loans were
exceptionally high or were concentrated in a particular month. Any such interest
deficiency with respect to the Senior Notes will be allocated among such Notes
pro rata in accordance with the amount of interest otherwise payable on each
such Note. Any such interest deficiency with respect to any Class of Notes or
any Component of the Residual Interest Certificate will be
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paid to holders of each affected Class of Securities on subsequent Payment Dates
to the extent that sufficient funds are available therefor. The Issuer will
remain obligated to pay interest deficiencies on the Securities, which are
carried forward until such deficiencies have been paid. See "-- Rights of
Noteholders Upon Occurrence of Event of Default" herein.
PAYMENTS OF PRINCIPAL. Principal payments will be made to the
Securityholders on each Payment Date in an amount generally equal to the sum of
(a) the Regular Principal Payment Amount and (b) any Excess Spread for such
Payment Date paid to Securityholders in respect of principal, as described
below. In addition, on the Payment Date following the Due Period on which the
Funding Period ends, any amount remaining in the Pre-Funding Account (net of
investment income) will be paid to Securityholders as principal as described
under "Description of the Transfer and Servicing Agreements -- Pre-Funding
Account" herein. Principal payments on the Securities will be made from the
Available Funds remaining after the payment of the Noteholders' Interest Payable
Amount and the Certificateholder's Interest Distributable Amount.
PAYMENT PRIORITIES
(A) On each Payment Date, the Regular Payment Amount will be applied in the
following order of priority:
(i) to the holders of the Senior Notes, pro rata, the portion of the
Noteholders' Interest Payable Amount required to be paid in respect of the
Senior Notes on such Payment Date;
(ii) to the holders of the Class M-1 Notes, the portion of the
Noteholders' Interest Payable Amount required to be paid in respect of the
Class M-1 Notes on such Payment Date;
(iii) to the holders of the Class M-2 Notes, the portion of the
Noteholders' Interest Payable Amount required to be paid in respect of the
Class M-2 Notes on such Payment Date;
(iv) to the holders of the Class B-1 Notes, the portion of the
Noteholder's Interest Payable Amount required to be paid in respect of the
Class B-1 Notes on such Payment Date;
(v) to the holders of the Residual Interest Certificate in respect of
the A IO Component, the portion of the Certificateholder's Interest
Distributable Amount required to be distributed in respect of the A IO
Component on such Payment Date;
(vi) to the holder of the Residual Interest Certificate in respect of
the B-2 Component, the portion of the Certificateholder's Interest
Distributable Amount required to be distributed in respect of the B-2
Component on such Payment Date;
(vii) to the holders of the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6, Class A-7 and Class A-8 Notes, in that order,
until the respective Class Principal Balances thereof are reduced to zero,
the amount necessary to reduce the aggregate of the Class Principal
Balances of the Senior Notes to the Senior Optimal Principal Balance;
(viii) to the holders of the Class M-1 Notes, the amount necessary to
reduce the Class Principal Balance thereof to the Class M-1 Optimal
Principal Balance;
(ix) to the holders of the Class M-2 Notes, the amount necessary to
reduce the Class Principal Balance thereof to the Class M-2 Optimal
Principal Balance;
(x) to the holders of the Class B-1 Notes, the amount necessary to
reduce the Class Principal Balance thereof to the Class B-1 Optimal
Principal Balance;
(xi) to the holder of the Residual Interest Certificate in respect of
the B-2 Component, the amount necessary to reduce the Component Principal
Balance thereof to the B-2 Component Optimal Principal Balance;
(xii) to the holders of the Class M-1 Notes, the applicable Deferred
Amount, if any, until such Deferred Amount has been paid in full;
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(xiii) to the holders of the Class M-2 Notes, the applicable Deferred
Amount, if any, until such Deferred Amount has been paid in full;
(xiv) to the holders of the Class B-1 Notes, the applicable Deferred
Amount, if any, until such Deferred Amount has been paid in full;
(xv) to the holder of the Residual Interest Certificate in respect of
the B-2 Component, the applicable Deferred Amount, if any, until such
Deferred Amount has been paid in full; and
(xvi) any remaining amount to the holder of the Residual Interest
Certificate in respect of the Excess Component.
(B) On each Payment Date, the Excess Spread, if any, will be applied in the
following order of priority (in each case after giving effect to all payments
specified in paragraph (A) above):
(i) in an amount equal to the Overcollateralization Shortfall, if any,
in the order of priority, and in the amounts, specified in clauses (vii)
through (xi) of paragraph (A) above;
(ii) to the holders of the Class M-1 Notes, the applicable Deferred
Amount, if any, until such Deferred Amount has been paid in full;
(iii) to the holders of the Class M-2 Notes, the applicable Deferred
Amount, if any, until such Deferred Amount has been paid in full;
(iv) to the holders of the Class B-1 Notes, the applicable Deferred
Amount, if any, until such Deferred Amount has been paid in full;
(v) to the holder of the Residual Interest Certificate in respect of
the B-2 Component, the applicable Deferred Amount, if any, until such
Deferred Amount has been paid in full; and
(vi) any remaining amount to the holder of the Residual Interest
Certificate in respect of the Excess Component.
RELATED DEFINITIONS
Assumed Pool Principal Balance: As of any date of determination, the sum
of (i) the Initial Pool Principal Balance, (ii) the Cut-Off Date Principal
Balance of each Subsequent Home Loan and (iii) the amount, if any, on deposit in
the Pre-Funding Account as of such date (other than investment earnings).
B-2 Component Optimal Principal Balance: With respect to any Payment Date
prior to the Overcollateralization Stepdown Date, zero; and with respect to any
other Payment Date, the Pool Principal Balance as of the preceding Determination
Date minus the sum of (a) the aggregate of the Class Principal Balances of the
Notes (after taking into account any payments made on such Payment Date in
reduction thereof) and (b) the Required Overcollateralization Amount for such
Payment Date.
Business Day: Any day other than (i) a Saturday or Sunday or (ii) a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Indenture Trustee is located are authorized or
obligated by law or executive order to be closed.
Certificateholder's Interest Carry-Forward Amount: With respect to any
Payment Date, the excess, if any, of the Certificateholder's Monthly Interest
Distributable Amount for the preceding Payment Date and any Certificateholder's
Interest Carry-Forward Amount remaining outstanding with respect to prior
Payment Dates over the amount in respect of interest that was distributed on the
Certificates on such preceding Payment Date.
Certificateholder's Interest Distributable Amount: With respect to any
Payment Date, the sum of the Certificateholder's Monthly Interest Distributable
Amount for such Payment Date and the Certificateholder's Interest Carry-Forward
Amount for such Payment Date; provided, however, that on the Payment Date, if
any, on which the Component Principal Balance of the B-2 Component is reduced to
zero through application of the Allocable Loss Amount, the amount of the
Certificateholder's Interest Distributable Amount will be equal
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to such amount calculated without giving effect to this proviso, minus the
portion, if any, of the Allocable Loss Amount that otherwise would be applied to
any Class of Notes on such Payment Date in the absence of this proviso.
Certificateholder's Monthly Interest Distributable Amount: With respect to
any Payment Date, the aggregate of interest accrued for the related Accrual
Period at the applicable Interest Rate on the Component Principal Balance (or
Component Notional Balance) of each of the A IO and B-2 Components immediately
preceding such Payment Date.
Class B-1 Optimal Principal Balance: With respect to any Payment Date
prior to the Overcollateralization Stepdown Date, zero; and with respect to any
other Payment Date, the Pool Principal Balance as of the preceding Determination
Date minus the sum of (a) the aggregate of the Class Principal Balances of the
Senior Notes, the Class M-1 Notes and the Class M-2 Notes (after taking into
account payments made on such Payment Date in reduction thereof) and (b) the
greater of (i) 5.05% of the Pool Principal Balance as of the preceding
Determination Date plus the Required Overcollateralization Amount for such
Payment Date (calculated without giving effect to the proviso in the definition
thereof) and (ii) 0.50% of the Assumed Pool Principal Balance.
Class M-1 Optimal Principal Balance: With respect to any Payment Date
prior to the Overcollateralization Stepdown Date, zero; and with respect to any
other Payment Date, the Pool Principal Balance as of the preceding Determination
Date minus the sum of (a) the aggregate of the Class Principal Balances of each
Class of the Senior Notes (after taking into account payments made on such
Payment Date in reduction of such Class Principal Balances) and (b) the greater
of (i) 25.25% of the Pool Principal Balance as of the preceding Determination
Date plus the Required Overcollateralization Amount for such Payment Date
(calculated without giving effect to the proviso in the definition thereof) and
(ii) 0.50% of the Assumed Pool Principal Balance.
Class M-2 Optimal Principal Balance: With respect to any Payment Date
prior to the Overcollateralization Stepdown Date, zero; and with respect to any
other Payment Date, the Pool Principal Balance as of the preceding Determination
Date minus the sum of (a) the aggregate of the Class Principal Balances of each
Class of the Senior Notes and the Class M-1 Notes (after taking into account any
payments made on such Payment Date in reduction of such Class Principal
Balances) and (b) the greater of (i) 14.14% of the Pool Principal Balance as of
the preceding Determination Date plus the Required Overcollateralization Amount
for such Payment Date (calculated without giving effect to the proviso in the
definition thereof) and (ii) 0.50% of the Assumed Pool Principal Balance.
Deferred Amount: With respect to any Payment Date, and as to any Class of
Subordinate Notes and the B-2 Component of the Residual Interest Certificate,
the sum of any Allocable Loss Amounts previously applied in reduction of the
Class Principal Balance (or Component Principal Balance) thereof (and not
previously reimbursed) plus, in the case of each Class of Subordinate Notes,
interest thereon at the applicable Interest Rate from the date when so applied
through the end of the Due Period immediately preceding such Payment Date.
Excess Spread: With respect to any Payment Date, the excess of (a) the
Available Funds over (b) the Regular Payment Amount.
Initial Undercollateralization Amount: With respect to any Payment Date,
an amount (not less than zero) equal to the excess, if any, of (a) the aggregate
of the Class Principal Balances of all Classes of Securities, after giving
effect to payments in respect of the Securities on such Payment Date, over (b)
the sum of (i) the Pool Principal Balance as of the end of the preceding Due
Period and (ii) the amount, if any, on deposit in the Pre-Funding Account as of
the end of such Due Period. Notwithstanding the foregoing, on any date after the
Payment Date on which the Initial Undercollateralization Amount is first reduced
to zero, such amount shall be deemed to be zero.
Insurance Proceeds: With respect to any Payment Date and any Home Loan,
the proceeds paid to the Indenture Trustee or the Servicer by any insurer
pursuant to any insurance policy covering a Home Loan, Mortgaged Property or REO
Property or any other insurance policy that relates to a Home Loan, net of any
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expenses incurred by the Indenture Trustee or the Servicer in connection with
the collection of such proceeds and not otherwise reimbursed, but excluding any
such proceeds that are to be applied to the restoration or repair of the
Mortgaged Property or released to the borrower in accordance with customary loan
servicing procedures.
Interest Payment Amount: The sum of the Noteholders' Interest Payable
Amount and the Certificateholder's Interest Distributable Amount.
LIBOR Business Day: Any day on which banks are open for dealing in foreign
currency and exchange in London and New York City.
Liquidated Home Loan: A defaulted Home Loan as to which the Servicer has
determined that all recoverable liquidation and insurance proceeds have been
received, which will be deemed to occur upon the earlier of: (a) the liquidation
of the related Mortgaged Property acquired through foreclosure or similar
proceedings, (b) the Servicer's determination in accordance with customary
servicing practices that no further amounts are collectible from the Home Loan
and any related security, or (c) any portion of a scheduled monthly payment of
principal and interest is in excess of 180 days past due.
Net Delinquency Calculation Amount: With respect to any Payment Date, the
excess, if any, of (x) the product of 1.4 and the Rolling Six-Month Delinquency
Average over (y) the aggregate of the amounts of Excess Spread for the three
preceding Payment Dates.
Net Liquidation Proceeds: With respect to any Payment Date, any cash
amounts received in respect of Liquidated Home Loans, whether through trustee's
sale, foreclosure sale, disposition of REO, whole loan sale or otherwise (other
than Insurance Proceeds and Released Mortgaged Property Proceeds), and any other
cash amounts received in connection with the management of the Mortgaged
Properties related to defaulted Home Loans, in each case, net of any
reimbursements to the Servicer made from such amounts for any unreimbursed
Servicing Advances made and any other fees and expenses paid in connection with
the foreclosure, conservation and liquidation of the related Liquidated Home
Loans or Mortgaged Properties.
Noteholders' Interest Carry-Forward Amount: With respect to any Payment
Date, the excess, if any, of the Noteholders' Monthly Interest Payable Amount
for the preceding Payment Date and any Noteholders' Interest Carry-Forward
Amount remaining outstanding with respect to prior Payment Dates, over the
amount in respect of interest that was paid on the Notes on such preceding
Payment Date.
Noteholders' Interest Payable Amount: With respect to any Payment Date,
the sum of the Noteholders' Monthly Interest Payable Amount for such Payment
Date and the Noteholders' Interest Carry-Forward Amount for such Payment Date.
Noteholders' Monthly Interest Payable Amount: With respect to any Payment
Date, the aggregate of interest accrued for the related Accrual Period at the
applicable Interest Rate on the Class Principal Balance of each Class of Notes
immediately preceding such Payment Date.
Overcollateralization Amount: With respect to any Payment Date, an amount
(not less than zero) equal to the excess, if any, of (a) the sum of (i) the Pool
Principal Balance as of the end of the preceding Due Period and (ii) the amount,
if any, on deposit in the Pre-Funding Account as of the end of such Due Period
(other than investment earnings) over (b) the aggregate of the Class Principal
Balances of all Classes of Securities, after giving effect, unless otherwise
specified, to all payments in respect of the Securities on such Payment Date.
Overcollateralization Shortfall: With respect to any Payment Date, the
excess, if any, of the Required Overcollateralization Amount for such Payment
Date over the Overcollateralization Amount (the Overcollateralization Amount to
be determined, for purposes of this definition, before giving effect to payments
on such Payment Date pursuant to paragraph (B) (i) under "-- Payment Priorities"
above).
Overcollateralization Stepdown Date: The first Payment Date occurring
after March 2001 as to which the aggregate of the Class Principal Balances of
the Senior Notes has been reduced to the excess of (a) the Pool Principal
Balance as of the preceding Determination Date over (b) the greater of (i)
45.45% of the
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Pool Principal Balance as of the preceding Determination Date plus the greater
of (x) 7.0% of the Pool Principal Balance as of the immediately proceeding
Determination Date and (y) the Net Delinquency Calculation Amount and (ii) 0.50%
of the Assumed Pool Principal Balance.
Overcollateralization Surplus: With respect to any Payment Date, the
excess, if any, of the Overcollateralization Amount for such Payment Date over
the Required Overcollateralization Amount.
Reference Bank Rate: With respect to any Accrual Period other than the
initial Accrual Period, the arithmetic mean (rounded upwards, if necessary, to
the nearest one sixteenth of a percent) of the offered rates for United States
dollar deposits for one month that are offered by the Reference Banks as of
11:00 a.m., New York City time, on the second LIBOR Business Day prior to the
first day of such Accrual Period to prime banks in the London interbank market
for a period of one month in amounts approximately equal to the outstanding
Class Principal Balance of the Class A-1 Notes, provided that at least two such
Reference Banks provide such rate. If fewer than two offered rates appear, the
Reference Bank Rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the Indenture Trustee, as of
11:00 a.m., New York City time, on such date for loans in U.S. Dollars to
leading European Banks for a period of one month in amounts approximately equal
to the outstanding Class Principal Balance of the Class A-1 Notes. If no such
quotations can be obtained, the Reference Bank Rate will be the Reference Bank
Rate applicable to the preceding Accrual Period.
Reference Banks: Three money center banks selected by the Indenture
Trustee.
Regular Payment Amount: With respect to any Payment Date, the lesser of
(a) the Available Funds and (b) the sum of (i) the Noteholders' Interest Payable
Amount, (ii) the Certificateholder's Interest Distributable Amount and (iii) the
Regular Principal Payment Amount.
Regular Principal Payment Amount: With respect to each Payment Date, an
amount equal to the lesser of:
(a) the sum of (i) each scheduled payment of principal collected by
the Servicer in the related Due Period, (ii) all partial and full principal
prepayments applied by the Servicer during such Due Period, (iii) the
principal portion of all Net Liquidation Proceeds, Insurance Proceeds and
Released Mortgaged Property Proceeds received by the Servicer during such
Due Period in respect of any Home Loan, to the extent received on or prior
to the date on which such Home Loan became a Liquidated Home Loan, (iv)
that portion of the Purchase Price of any repurchased Home Loan allocable
to principal and (v) the principal portion of any Substitution Adjustments
required to be deposited in the Collection Account as of the related
Determination Date; and
(b) the aggregate of the outstanding principal balances of the
Securities immediately prior to such Payment Date.
Released Mortgaged Property Proceeds: With respect to any Payment Date and
any Home Loan, the proceeds received by the Servicer in connection with (a) a
taking of an entire Mortgaged Property by exercise of the power of eminent
domain or condemnation or (b) any release of part of the Mortgaged Property from
the lien of the related Mortgage, whether by partial condemnation, sale or
otherwise, which in either case are not released to the borrower in accordance
with applicable law, customary mortgage servicing procedures and the Sale and
Servicing Agreement.
Required Overcollateralization Amount: With respect to any Payment Date
occurring prior to the Overcollateralization Stepdown Date, an amount equal to
the greater of (x) 3.5% of the Assumed Pool Principal Balance and (y) the Net
Delinquency Calculation Amount; with respect to any other Payment Date, an
amount equal to the greater of (x) 7.0% of the Pool Principal Balance as of the
end of the related Due Period and (y) the Net Delinquency Calculation Amount;
provided, however, that the Required Overcollateralization Amount will in no
event be less than 0.50% of the Assumed Pool Principal Balance.
Rolling Six-Month Delinquency Average: With respect to any Payment Date,
the average of the applicable 60-Day Delinquency Amounts for each of the six
immediately preceding Due Periods. As used herein, the "60-Day Delinquency
Amount" for any Due Period is the aggregate of the Principal Balances of all
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Home Loans that are 60 or more days delinquent, in foreclosure or REO Property
as of the end of such Due Period, excluding any Liquidated Home Loan.
Senior Optimal Principal Balance: With respect to any Payment Date prior
to the Overcollateralization Stepdown Date, zero; with respect to any other
Payment Date, an amount equal to the Pool Principal Balance as of the preceding
Determination Date minus the greater or (a) 45.45% of the Pool Principal Balance
as of the preceding Determination Date plus the Required Overcollateralization
Amount for such Payment Date (without giving effect to the proviso in the
definition thereof) and (b) 0.50% of the Assumed Pool Principal Balance.
Termination Price: An amount equal to the sum of (a) the aggregate of the
outstanding Class Principal Balances of the Securities plus all accrued and
unpaid interest thereon at the applicable Interest Rates, (b) any Servicing
Compensation due and unpaid, and (c) any unreimbursed Servicing Advances,
including such Servicing Advances deemed to be nonrecoverable.
APPLICATION OF ALLOCABLE LOSS AMOUNTS
Following any reduction of the Overcollateralization Amount to zero, any
Allocable Loss Amount will be applied on each Payment Date in reduction of the
Component Principal Balance of the B-2 Component of the Residual Interest
Certificate and the Class Principal Balances of the Class B-1, Class M-2 and
Class M-1 Notes, in that order, until the Class Principal Balance or Component
Principal Balance of each such Class or Component has been reduced to zero. The
Class Principal Balances of the Senior Notes will not be reduced by any
application of Allocable Loss Amounts. The reduction of the Class Principal
Balance (or Component Principal Balance) of a Class of Subordinate Notes (or the
B-2 Component) by application of the Allocable Loss Amount will entitle such
Class or Component to reimbursement in an amount equal to the applicable
Deferred Amount, in accordance with the payment priorities specified herein.
Payment of Deferred Amounts will not reduce the Class Principal Balance or
Component Principal Balance of the applicable Class or Component.
PAYMENT OF DEFERRED AMOUNTS
Any Deferred Amounts payable to the holders of the Subordinate Securities
as specified under "-- Payment Priorities" above will be paid to the holder of
record of the related Securities as of the applicable Record Date, or, in the
case of Securities that have been redeemed or retired, to the last holder of
record, without regard to when the losses for which such reimbursement is being
paid actually occurred. Amounts attributable to accrued and unpaid interest in
respect of such Deferred Amounts will be paid prior to amounts attributable to
principal.
OPTIONAL TERMINATION
The Seller may, at its option, effect an early redemption or termination of
the Securities on any Payment Date on or after which the Pool Principal Balance
declines to 10% or less of the Assumed Pool Principal Balance by purchasing the
Home Loans for the Termination Price (the first such Payment Date, the "Initial
Call Date"). All proceeds from any such sale of the Home Loans will be paid
first, to the Servicer for payment of outstanding Servicing Compensation,
second, to the Servicer for payment of unreimbursed Servicing Advances,
including such Servicing Advances deemed to be nonrecoverable, third, to the
Noteholders in an amount equal to the aggregate of the outstanding Class
Principal Balances of the Notes, plus all accrued and unpaid interest thereon at
the applicable Interest Rates, fourth, to the holder of the Residual Interest
Certificate in an amount equal to the outstanding Component Principal Balance of
the B-2 Component, plus all accrued and unpaid interest thereon (and on the A IO
Component) at the applicable Interest Rates, and fifth, to the holder of the
Residual Interest Certificate in respect of the Excess Component thereof.
RIGHTS OF NOTEHOLDERS UPON OCCURRENCE OF EVENT OF DEFAULT
Under the Indenture, a failure to pay the full amount of the portion of the
Noteholders' Interest Payable Amount payable to the Senior Notes or, if the
Senior Notes have been paid in full, a failure to pay the portion
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of such amount payable to the Class of Notes then outstanding that has the
highest priority of payment (the "Highest Priority Class") within five days of
the Payment Date on which such payment is due (without regard to the amount of
Available Funds) will constitute an Event of Default. However, an Event of
Default will not occur solely due to (i) the failure to pay the full amount of
the Noteholders' Interest Payable Amount allocable to any Class of Notes not
then having the highest priority of payment (a "Non-Priority Class") or (ii)
allocation of an Allocable Loss Amount to a Non-Priority Class, until all the
Classes of Notes having a higher priority of payment have been paid in full
(including all Noteholders' Interest Carry-Forward Amounts and Deferred Amounts
payable with respect thereto), and then only if all Noteholders' Interest Carry-
Forward Amounts and Deferred Amounts payable to such Non-Priority Class have not
been paid. Until the Notes have been declared due and payable upon an Event of
Default, the holders of any Non-Priority Class may not request the Indenture
Trustee to take any action, other than the application of Available Funds to
principal and interest as provided herein, and may not otherwise take or cause
any action to be taken to enforce the obligation of the Issuer to pay principal
and interest on such Non-Priority Class.
Upon the occurrence of an Event of Default, holders of Senior Notes
representing more than 50% of the aggregate of the Class Principal Balances of
the Senior Notes then outstanding may exercise their remedies under the
Indenture; provided however, that if the aggregate outstanding Class Principal
Balance of the Senior Notes has been reduced to zero, the holders of the Highest
Priority Class representing more than 50% of the Class Principal Balance of such
Class of Notes may exercise their remedies under the Indenture. These remedies
include the right to cause accrued interest to be paid pro rata in accordance
with the amount of unpaid accrued interest, and to cause principal on the
outstanding Notes to be paid (either in lump sum from proceeds of the sale of
the assets pledged to secure the Notes or from monthly collections on the Home
Loans) pro rata out of remaining Available Funds, regardless of the allocation,
or sequential nature, of principal payments that would otherwise apply, based
upon the Principal Balances of the Notes (an "acceleration"). On each Payment
Date on and after any such acceleration of the Notes, and following the
reduction to zero of the Class Principal Balance of all Classes of Notes, any
remaining Available Funds will be applied in repayment first, of Deferred
Amounts on the Notes, and then of any remaining amounts due on the Residual
Interest Certificate. Such remedies will also include the right to direct the
Indenture Trustee's actions under the Indenture unless such right is otherwise
granted to holders of the Notes after an acceleration of the Notes and to
consent to the sale of the assets pledged to secure the Notes. See "Description
of the Notes -- The Indenture" in the Prospectus.
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DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, the Sale
and Servicing Agreement, the Administration Agreement and the Trust Agreement
(collectively, the "Transfer and Servicing Agreements"). Forms of the Transfer
and Servicing Agreements have been filed as exhibits to the Registration
Statement. Copies of the Transfer and Servicing Agreements will be filed with
the Commission following the issuance of the Securities. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Transfer and Servicing Agreements. The
following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the Transfer
and Servicing Agreements set forth under the headings "Description of the
Transfer and Servicing Agreements" in the Prospectus.
SALE AND ASSIGNMENT OF THE HOME LOANS
On the Closing Date, the Transferor will sell the Initial Home Loans to the
Seller, and the Seller will sell the Initial Home Loans to the Trust. The Trust
will, concurrently with such sale of the Initial Home Loans and the deposit of
funds in the Pre-Funding Account, deliver or cause to be delivered the
Securities to the Seller. The Trust will pledge and assign the Initial Home
Loans and the Pre-Funding Account to the Indenture Trustee in exchange for the
Notes. Each Initial Home Loan will be identified in a schedule appearing as an
exhibit to the Sale and Servicing Agreement (the "Home Loan Schedule").
Following the Closing Date, the funds in the Pre-Funding Account will be
used to purchase from the Seller, from time to time prior to the end of the
Funding Period, subject to the availability thereof, Subsequent Home Loans
having characteristics that are generally similar to the characteristics of the
Initial Home Loans. See "The Home Loan Pool -- Conveyance of Subsequent Home
Loans" herein. In connection with each purchase of such Subsequent Home Loans,
the Trust will be required to pay to the Seller from the Pre-Funding Account a
cash purchase price of 100% of the principal balance thereof. The Transferor
will sell such Subsequent Home Loans to the Seller, and the Seller in turn will
sell such Subsequent Home Loans to the Trust. The Trust will pledge and assign
such Subsequent Home Loans to the Indenture Trustee.
In addition, the Seller will, as to each Home Loan, deliver to the
Custodian the related Note endorsed to the order of the Indenture Trustee
without recourse, any assumption and modification agreements and the Mortgage
with evidence of recording indicated thereon (except for any Mortgage not
returned from the public recording office), an assignment of the Mortgage in the
name of the Indenture Trustee in recordable form, and any intervening
assignments of the Mortgage (each, an "Indenture Trustee's Home Loan File").
With respect to the Home Loans secured by Mortgaged Properties located in
certain states, the Transferor and the Seller will not be required to record
assignments of the Mortgages to the Indenture Trustee in the real property
records of such states. See "Risk Factors -- Additional Factors Affecting
Delinquencies, Defaults and Losses on Home Loans -- Non-recordation of
Assignments" herein. In such circumstances, the Transferor and the Seller will
deliver to the Custodian the assignments of the Mortgages in the name of the
Indenture Trustee and in recordable form, and the Transferor, in its capacity as
the Servicer, will retain the record title to such Mortgages under the
applicable real property records, on behalf of the Trust, the Indenture Trustee
and the Securityholders. In all other circumstances, assignments of the
Mortgages to the Indenture Trustee will be recorded in the real property records
for those states in which such recording is deemed necessary to protect the
Trust and the Indenture Trustee's interest in the Home Loans against the claims
of certain creditors of the Transferor or subsequent purchasers. In these
circumstances, the Transferor and the Seller will deliver such assignments to
the Custodian after recordation. In the event that, with respect to any Home
Loan as to which recordation of the related assignment is required, the Seller
cannot deliver the Mortgage or any assignment with evidence of recording thereon
concurrently with the conveyance thereof under the Sale and Servicing Agreement
because they have not yet been returned by the public recording office, the
Seller will deliver or cause to be delivered to the Custodian a certified true
photocopy of such Mortgage or assignment. The Seller will deliver or cause to be
delivered to the Custodian any such Mortgage or assignment with evidence of
recording indicated thereon upon receipt thereof from the public recording
office. The Indenture Trustee or the Custodian will review (or cause to be
reviewed) each Indenture Trustee's Home Loan File within 45 days
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after the conveyance of the related Home Loan to the Trust to ascertain that all
required documents have been executed and received.
PRE-FUNDING ACCOUNT
On the Closing Date, the Pre-Funding Account Deposit will be deposited in
an Eligible Account (the "Pre-Funding Account"), which account will be part of
the Trust and will be maintained as an Eligible Account with the Indenture
Trustee, in its corporate trust department, for the purchase of Subsequent Home
Loans. The Pre-Funding Account Deposit will be increased or decreased by an
amount equal to the aggregate of the principal balances of any home loans
removed from or added to the Home Loan Pool prior to the Closing Date, provided
that any such increase or decrease will not exceed 5% of the Initial Pool
Principal Balance. During the period (the "Funding Period") from the Closing
Date until the earliest of (i) the date on which the amount on deposit in the
Pre-Funding Account is reduced to $50,000 or less and the Transferor directs
that the Funding Period end, (ii) the occurrence of an Event of Default under
the Sale and Servicing Agreement or the Indenture, and (iii) May 11, 1998, the
amount on deposit in the Pre-Funding Account will be reduced in accordance with
the provisions of the Sale and Servicing Agreement by amounts used to purchase
Subsequent Home Loans. Subsequent Home Loans purchased by and added to the Trust
on any Subsequent Transfer Date must satisfy the criteria set forth in the Sale
and Servicing Agreement. See "The Home Loan Pool -- Conveyance of Subsequent
Home Loans" herein.
On the Payment Date following the Due Period in which the Funding Period
ends, if the amount remaining in the Pre-Funding Account at the end of the
Funding Period (net of reinvestment income) is greater than $50,000, such amount
will be applied to reduce on a pro rata basis the outstanding Class Principal
Balances (and Component Principal Balance) of the Securities. If such remaining
amount is less than or equal to $50,000, such amount will be included in the
Regular Principal Payment Amount and will be paid sequentially to each Class of
Notes in reduction of the respective Class Principal Balances thereof.
Notwithstanding the foregoing, if an event of default has occurred under the
Indenture, such remaining amount will be included in the Regular Principal
Payment Amount and will be paid on a pro rata basis to the Classes of Notes in
reduction of their Class Principal Balances. See "Prepayment and Yield
Considerations" herein.
Amounts on deposit in the Pre-Funding Account will be invested in
investments that have been approved by the Rating Agencies ("Permitted
Investments") at the direction of the Transferor.
TRUST FEES AND EXPENSES
The Servicer is entitled to the Servicing Fee and additional servicing
compensation and reimbursement as described under "-- Servicing" below. The fees
and expenses of the Indenture Trustee, Owner Trustee, Co-Owner Trustee and
Custodian will be paid by the Servicer.
SERVICING
In consideration for the performance of the loan servicing functions for
the Home Loans, the Servicer is entitled to a monthly fee (the "Servicing Fee")
equal to 0.75% per annum (the "Servicing Fee Rate") of the Pool Principal
Balance as of the first day of the immediately preceding Due Period. See "Risk
Factors -- Additional Factors Affecting Delinquencies, Defaults and Losses on
Home Loans -- Dependence on Servicer for Servicing Home Loans" herein. The
Servicer may retain Subservicers to service certain of the Home Loans. The
Servicer will remain responsible for the servicing of any such Home Loans and
will pay the fees of any Subservicer out of its own funds. As of the Closing
Date, none of the Initial Home Loans will be serviced by a Subservicer. In
addition to the Servicing Fee, the Servicer is entitled to retain additional
servicing compensation in the form of assumption and other administrative fees,
release fees, insufficient funds charges, prepayment charges, late payment
charges and any other servicing-related penalties and fees, together with any
income or gain from investment of funds in the Collection Account (collectively,
such additional compensation and Servicing Fee, the "Servicing Compensation").
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In the event of a delinquency or default with respect to a Home Loan,
neither the Servicer nor any Subservicer will have an obligation to advance
scheduled monthly payments of principal or interest with respect to such Home
Loan. However, the Servicer or any Subservicer will make reasonable and
customary expense advances with respect to the Home Loans (each, a "Servicing
Advance") and will be entitled to reimbursement for Servicing Advances as
described herein. Servicing Advances may include costs and expenses advanced for
the preservation, restoration and protection of any Mortgaged Property,
including advances to pay delinquent real estate taxes and assessments. Any
Servicing Advances by the Servicer or any Subservicer will be reimbursable from
the Available Collection Amount after all prior payments, as described under
"-- Collection Account, Note Payment Account and Certificate Distribution
Account" below, or with respect to any Liquidated Home Loan from the Liquidation
Proceeds received therefrom.
COLLECTION ACCOUNT, NOTE PAYMENT ACCOUNT AND CERTIFICATE DISTRIBUTION ACCOUNT
The Servicer is required to use its best efforts to deposit in an Eligible
Account (the "Collection Account"), within one Business Day, and in any event to
deposit within two Business Days of receipt, all payments received after each
Cut-Off Date on account of principal and interest on the related Home Loans, all
Net Liquidation Proceeds, Insurance Proceeds, Released Mortgaged Property
Proceeds, any amounts payable in connection with the repurchase or substitution
of any Home Loan and any amount required to be deposited in the Collection
Account in connection with the redemption of the Notes and termination of the
Residual Interest Certificate. The foregoing requirements for deposit in the
Collection Account will be exclusive of payments on account of principal and
interest collected on the Home Loans on or before the applicable Cut-Off Date.
Withdrawals will be made from the Collection Account only for the purposes
specified in the Sale and Servicing Agreement. The Collection Account may be
maintained at any depository institution that satisfies the requirements set
forth in the definition of Eligible Account in the Sale and Servicing Agreement.
Initially, the Collection Account will be maintained with the Indenture Trustee.
Amounts on deposit in the Collection Account will be invested in Permitted
Investments at the direction of the Transferor. All interest and any other
investment earnings on amounts on deposit in the Collection Account will be paid
to the Servicer on each Payment Date as additional servicing compensation.
Any Subservicer will also maintain a collection account for deposit of
payments received with respect to the Home Loans being serviced by such
Subservicer. Such Subservicer's collection account will be an Eligible Account
and will satisfy requirements that are substantially similar to the requirements
for the Collection Account.
The Servicer will establish and maintain with the Indenture Trustee an
account, in the name of the Indenture Trustee on behalf of the Noteholders, into
which amounts released from the Collection Account and the Pre-Funding Account
for payment to the Noteholders will be deposited and from which all payments to
the Noteholders will be made (the "Note Payment Account"). The Servicer will
also establish and maintain with the Indenture Trustee an account, in the name
of the Co-Owner Trustee on behalf of the Certificateholder, into which amounts
released from the Collection Account and the Pre-Funding Account for
distribution to the Certificateholder will be deposited and from which all
distributions to the Certificateholder will be made (the "Certificate
Distribution Account"). The Note Payment Account and the Certificate
Distribution Account are referred to herein collectively as the "Payment
Accounts".
On the Business Day prior to each Payment Date, the Indenture Trustee will
deposit into the Payment Accounts the applicable portions of the Available
Collection Amount by making appropriate withdrawals from the Collection Account
and the Pre-Funding Account, as applicable. On each Payment Date, the Indenture
Trustee will make withdrawals from the Payment Accounts for application of the
amounts specified below in the following order of priority:
(i) to provide for the payment to the Servicer of the Servicing
Compensation and all unpaid Servicing Compensation from prior Due Periods;
(ii) to provide for reimbursement to the Servicer for any voluntary
Servicing Advances previously made by the Servicer and not previously
reimbursed;
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(iii) to the extent of any amounts remaining from the Pre-Funding
Account Deposit at the end of the Funding Period (net of investment
income), to reduce the Class Principal Balances (or Component Principal
Balances) of each Class of Securities as described herein; and
(iv) to provide for payments to the Securityholders of the amounts
specified herein under "Description of the Securities -- Payments."
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Securities in their own names or as pledgees. For the
purpose of meeting the legal requirements of certain jurisdictions, the
Servicer, the Owner Trustee and the Indenture Trustee acting jointly (or in some
instances, the Owner Trustee or the Indenture Trustee acting alone) will have
the power to appoint co-trustees or separate trustees of all or any part of the
Trust. In the event of such an appointment, all rights, powers, duties and
obligations conferred or imposed upon the Owner Trustee by the Sale and
Servicing Agreement and the Trust Agreement and upon the Indenture Trustee by
the Indenture will be conferred or imposed upon the Owner Trustee and the
Indenture Trustee, respectively, and in each such case such separate trustee or
co-trustee, jointly, or, in any jurisdiction in which the Owner Trustee or
Indenture Trustee will be incompetent or unqualified to perform certain acts,
singly upon such separate trustee or co-trustee, which will exercise and perform
such rights, powers, duties and obligations solely at the direction of the Owner
Trustee or the Indenture Trustee, as applicable.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Servicer will be obligated to appoint a successor thereto. The
Servicer may also remove the Owner Trustee or the Indenture Trustee if either
ceases to be eligible to continue as such under the Trust Agreement or the
Indenture, as the case may be, becomes legally unable to act or becomes
insolvent. In such circumstances, the Servicer will be obligated to appoint a
successor Owner Trustee or a successor Indenture Trustee, as applicable. Any
resignation or removal of the Owner Trustee or Indenture Trustee and appointment
of a successor thereto will not become effective until acceptance of the
appointment by such successor.
The Trust Agreement and Indenture will provide that the Owner Trustee and
Indenture Trustee will be entitled to indemnification by the Transferor and the
Seller for, and will be held harmless against, any loss, liability or expense
incurred by the Owner Trustee or Indenture Trustee not resulting from its own
willful misfeasance, bad faith or negligence (other than by reason of a breach
of any of its representations or warranties to be set forth in the Trust
Agreement or Indenture, as the case may be).
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Residual Interest Certificate (other
than the execution and authentication thereof), the Notes or any Home Loans or
related documents, and will not be accountable for the use or application by the
Seller or the Servicer of any funds paid to the Seller or the Servicer in
respect of the Securities or the Home Loans, or the investment of any monies by
the Servicer before such monies are deposited into the Collection Account, the
Note Payment Account or the Certificate Distribution Account. So long as no
Event of Default has occurred and is continuing, the Owner Trustee will be
required to perform only those duties specifically required of it under the
Trust Agreement. Generally, those duties will be limited to the receipt of the
various certificates, reports or other instruments required to be furnished to
the Owner Trustee under the Trust Agreement, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Trust Agreement. The Owner Trustee will not be charged with knowledge of
a failure by the Servicer to perform its duties under the Trust Agreement, Sale
and Servicing Agreement or Administration Agreement, which failure constitutes
an Event of Default, unless the Owner Trustee obtains actual knowledge of such
failure.
The Owner Trustee will be under no obligation to exercise any of the rights
or powers vested in it by the Trust Agreement or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of the
holder of the Residual
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Interest Certificate, unless such Certificateholder has offered to the Owner
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that may be incurred therein or thereby. Subject to the rights or
consent of the Noteholders and Indenture Trustee, the Certificateholder will not
have any right under the Trust Agreement to institute any proceeding with
respect to the Trust Agreement, unless such holder previously has given to the
Owner Trustee written notice of the occurrence of an Event of Default and (i)
the Event of Default arises from the Servicer's failure to remit payments when
due or (ii) the holder of the Residual Interest Certificate has made written
request upon the Owner Trustee to institute such proceeding in its own name as
the Owner Trustee thereunder and have offered to the Owner Trustee reasonable
indemnity, and the Owner Trustee for 30 days has neglected or refused to
institute any such proceedings.
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, the Residual Interest Certificate, the Notes
(other than the execution and authentication thereof) or any Home Loans or
related documents, and will not be accountable for the use or application by the
Seller, the Servicer or the Owner Trustee of any funds paid to the Seller, the
Servicer or the Owner Trustee in respect of the Securities or the Home Loans, or
the investment of any monies by the Servicer before such monies are deposited
into the Collection Account or the Note Payment Account. So long as no Event of
Default under the Indenture or the Sale and Servicing Agreement has occurred or
is continuing, the Indenture Trustee will be required to perform only those
duties specifically required of it under the Transfer and Servicing Agreements.
Generally, those duties will be limited to the receipt of the various
certificates, reports or other instruments required to be furnished to the
Indenture Trustee under the Indenture, in which case it will only be required to
examine them to determine whether they conform to the requirements of the
Indenture. The Indenture Trustee will not be charged with knowledge of a failure
by the Servicer to perform its duties under the Trust Agreement, Sale and
Servicing Agreement or Administration Agreement, which failure constitutes an
Event of Default under the Indenture or the Sale and Servicing Agreement, unless
the Indenture Trustee obtains actual knowledge of such failure.
The Indenture Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Indenture or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Noteholders, unless such Noteholders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. No Noteholder will have any right under
the Indenture to institute any proceeding with respect to the Indenture, unless
such holder previously has given to the Indenture Trustee written notice of the
occurrence of an Event of Default and (i) the Event of Default arises from the
Servicer's failure to remit payments when due or (ii) Noteholders evidencing not
less than 25% of the voting interests of each such Class of Notes, acting
together as a single class, have made written request upon the Indenture Trustee
to institute such proceeding in its own name as the Indenture Trustee thereunder
and have offered to the Indenture Trustee reasonable indemnity, and the
Indenture Trustee for 30 days has neglected or refused to institute any such
proceedings. See "Description of the Securities -- Rights of Noteholders Upon
Occurrence of Event of Default" herein.
PREPAYMENT AND YIELD CONSIDERATIONS
Except in the circumstances described herein, no principal payments will be
made on any Class of Notes until the Class Principal Balance of each Class of
Notes having a higher payment priority has been reduced to zero. See
"Description of the Securities -- Payments" herein. As the rate of payment of
principal of the Securities depends primarily on the rate of payment (including
prepayments) of the principal balance of the Home Loans, final payment of any
Class of Securities could occur significantly earlier than the applicable
Maturity Date. Securityholders will bear the risk of being able to reinvest
principal payments on the Securities at yields at least equal to the yield on
their respective Securities. No prediction can be made as to the rate of
prepayments on the Home Loans in either stable or changing interest rate
environments. Any reinvestment risk due to the rate of prepayment of the Home
Loans will be borne entirely by Securityholders.
The subordination of the Residual Interest Certificate to the Notes and of
each Class of Subordinate Notes to each Class of Notes having a higher payment
priority will provide limited protection to Noteholders
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against losses on the Home Loans. The yields on the Class M-1, Class M-2 and
Class B-1 Notes will be particularly sensitive to the loss experience of the
Home Loans and the timing of any such losses. If the actual rate and amount of
losses experienced on the Home Loans exceed the rate and amount of such losses
anticipated by an investor, the yields to maturity on such Subordinate
Securities may be lower than anticipated.
Each Home Loan is either a (i) "simple interest" or (ii) "actuarial method"
loan. With respect to a Home Loan that is a "simple interest" loan, if a payment
is received more than one month after the previous payment, a smaller portion of
such payment will be applied to principal and a greater portion will be applied
to interest than would have been the case had the payment been received
precisely one month after the previous payment, resulting in such Home Loan
having a longer weighted average life than would have been the case had each
payment been made as scheduled. Conversely, if a payment on a Home Loan is
received less than one month after the previous payment, more of such payment
will be applied to principal and less to interest than would have been the case
had the payment been received precisely one month after the previous payment,
resulting in such Home Loan having a shorter weighted average life than would
have been the case had each payment been made as scheduled. See "The Home Loan
Pool -- Payments on the Home Loans" herein.
Other than with respect to the Class A-1 Notes, the effective yield to
Securityholders will be lower than the yield otherwise produced by the
applicable Interest Rate, because the payment of interest accrued during the
applicable Accrual Period will not be made until the Payment Date occurring in
the month following such Accrual Period. See "Description of the
Securities -- Payments" herein. This delay will result in funds being paid to
such Securityholders approximately 10 days after the end of the applicable
Accrual Period, during which 10-day period no interest will accrue on such
funds.
The initial Accrual Period will consist of less than 30 days, as described
herein.
The yield to maturity of the Class A-1 Notes will be affected by the level
of LIBOR from time to time, and will be subject to a maximum rate equal to the
Net Weighted Average Rate. To the extent that Home Loans bearing relatively high
Home Loan Rates experience a more rapid rate of prepayment than Home Loans with
relatively low rates, the maximum rate applicable to the Class A-1 Notes will be
reduced.
The rate of principal payments on the Notes, the aggregate amount of each
interest payment on the Notes and the yields to maturity of the Notes will be
directly affected by the rate and timing of principal reductions on the Home
Loans. Such principal reductions may be in the form of scheduled amortization
payments or unscheduled payments or reductions, which may include prepayments,
repurchases and liquidations or write-offs due to default, casualty, insurance
or other disposition. On any Payment Date on or after the Payment Date on which
the Pool Principal Balance declines to 10% or less of the Assumed Pool Principal
Balance, the Seller may effect a redemption of the Notes and prepayment of the
Residual Interest Certificate as described herein under "Description of the
Securities -- Optional Termination."
The "weighted average life" of a Class of Securities refers to the average
amount of time that will elapse from the Closing Date to the date each dollar in
respect of principal of such Class is repaid. The weighted average life of each
Class of Securities will be influenced by, among other factors, the rate at
which principal reductions occur on the Home Loans, the rate at which Excess
Spread is paid to Securityholders as described herein, and the extent to which
any Overcollateralization Reduction Amount is distributed to the Excess
Component of the Residual Interest Certificate as described herein. If
substantial principal prepayments on the Home Loans are received as a result of
unscheduled payments, liquidations or repurchases, payments to Securityholders
due to such prepayments may significantly shorten the weighted average lives of
the Securities. If the Home Loans experience delinquencies and defaults in the
payment of principal, then Securityholders will experience a delay in the
receipt of principal payments attributable to such delinquencies and defaults,
which in certain instances may result in longer actual average weighted lives of
the Securities than would otherwise be the case. Interest shortfalls on the Home
Loans due to principal prepayments in full and curtailments, and any resulting
shortfall in amounts payable on the Securities, will be covered to the extent of
amounts available from the applicable credit enhancement. See "Risk
Factors -- Adequacy of Credit Enhancement" herein.
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The rate and timing of principal payments on the Home Loans will be
influenced by a variety of economic, geographic, social and other factors. These
factors may include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity, if any, in the mortgaged properties,
servicing decisions, homeowner mobility, the existence and enforceability of
"due-on-sale" clauses, seasoning of loans, market interest rates for similar
types of loans and the availability of funds for such loans. Substantially all
of the Home Loans contain due-on-sale provisions and the Servicer intends to
enforce such provisions unless (i) the Servicer, in a manner consistent with its
servicing practices, permits the purchaser of the related Mortgaged Property to
assume the Home Loan, or (ii) such enforcement is not permitted by applicable
law. In certain cases, the Servicer may, in a manner consistent with its
servicing practices, permit a borrower who is selling his principal residence
and purchasing a new one to substitute the new Mortgaged Property as collateral
for the related Home Loan, or may simply release its lien on the existing
collateral, leaving the related Home Loan unsecured. In such event, the Servicer
will generally require the borrower to make a partial prepayment in reduction of
the principal balance of the Home Loan to the extent that the borrower has
received proceeds from the sale of the prior residence that will not be applied
to the purchase of the new residence. A majority of the Initial Home Loans are
subject to prepayment penalties during the first three years after origination.
Prepayment penalties may have the effect of reducing the amount or the
likelihood of prepayments on such Home Loans. The majority of the Home Loans
require that the Borrower pay a prepayment penalty of 80% of six months'
interest on the portion of the amount prepaid that exceeds 20% of the original
principal balance of such loan over any twelve month period at the applicable
Home Loan Rate should the Borrower prepay the loan within three years of the
date of origination of such loan. The remaining Initial Home Loans may be
prepaid in full or in part at any time without penalty. To the extent that a
majority of the Subsequent Home Loans are not subject to prepayment penalties,
the current report on Form 8-K containing a description of the Home Loans
included in the final Home Loan Pool will describe the status of prepayment
penalties with respect to such final Home Loan Pool.
As with fixed rate obligations generally, the rate of prepayment on a pool
of loans is affected by prevailing market interest rates for similar types of
loans of a comparable term and risk level. If prevailing interest rates were to
fall significantly below the Home Loan Rates on the Home Loans, the rate of
prepayment would be expected to increase. Conversely, if prevailing interest
rates were to rise significantly above the Home Loan Rates on the Home Loans,
the rate of prepayment on the Home Loans would be expected to decrease. In
addition, any future limitations on the rights of borrowers to deduct interest
payments on mortgage loans for federal income tax purposes may result in a
higher rate of prepayment on the Home Loans. The Seller and the Transferor make
no representations as to the particular factors that will affect the prepayment
of the Home Loans, as to the relative importance of such factors, or as to the
percentage of the principal balance of the Home Loans that will be paid as of
any date.
Payments of principal at a faster rate than anticipated will decrease the
yield on Securities purchased at a premium; payments of principal at a slower
rate than anticipated will decrease the yield on Securities purchased at a
discount. The effect on an investor's yield due to payments of principal
occurring at a rate that is faster (or slower) than the rate anticipated by the
investor during any period following the issuance of the Securities will not be
entirely offset by a subsequent like reduction (or increase) in the rate of
payments of principal during any subsequent period.
The rate of delinquencies and defaults on the Home Loans and of recoveries,
if any, on defaulted Home Loans and foreclosed properties will affect the rate
and timing of principal payments on the Home Loans, and, accordingly, the
weighted average lives of the Securities, and could cause a delay in the payment
of principal to the holders of Securities. Certain factors may influence
delinquencies and defaults, including origination and underwriting standards,
loan-to-value ratios and delinquency history. In general, defaults on Home Loans
are expected to occur with greater frequency in their early years, although
little data is available with respect to the rate of default on similar types of
home loans. The rate of default on Home Loans with high loan-to-value ratios, or
on Home Loans secured by junior liens, may be higher than that of home loans
with lower loan-to-value ratios or secured by first liens on comparable
properties. In addition, the rate and timing of prepayments, defaults and
liquidations on the Home Loans will be affected by the general economic
condition of the area in which the related Mortgaged Properties are located or
the related borrower is residing. See "The
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Home Loan Pool" herein. The risk of delinquencies and losses is greater and
voluntary principal prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
Although certain data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage loans
differ in material respects from the Home Loans and such data may not be
reflective of conditions applicable to the Home Loans. No significant historical
prepayment data is generally available with respect to the types of Home Loans
included in the Home Loan Pool or similar types of loans, and there can be no
assurance that the Home Loans will achieve or fail to achieve any particular
rate of principal prepayment. A number of factors suggest that the prepayment
experience of the Home Loan Pool may be significantly different from that of a
pool of conventional first-lien, single family mortgage loans with equivalent
interest rates and maturities. One such factor is that the principal balance of
the average Home Loan is smaller than that of the average conventional
first-lien mortgage loan. A smaller principal balance may be easier for a
borrower to prepay than a larger balance and, therefore, a higher prepayment
rate may result for the Home Loan Pool than for a pool of first-lien mortgage
loans, irrespective of the relative average interest rates and the general
interest rate environment. In addition, in order to refinance a first-lien
mortgage loan, the borrower must generally repay any junior liens. However, a
small principal balance may make refinancing a Home Loan at a lower interest
rate less attractive to the borrower as the perceived impact to the borrower of
lower interest rates on the size of the monthly payment may not be significant.
Other factors that might be expected to affect the prepayment rate of the Home
Loan Pool include the relative creditworthiness of the borrowers, the amounts of
and interest rates on the underlying senior mortgage loans, and the tendency of
borrowers to use real property mortgage loans as long-term financing for home
purchase and junior liens as shorter-term financing for a variety of purposes,
which may include the direct or indirect financing of home improvement,
education expenses, debt consolidation, purchases of consumer durables such as
automobiles, appliances and furnishings and other consumer purposes.
Furthermore, because at origination the majority of the Home Loans had combined
loan-to-value ratios that approached or exceeded 100%, the related borrowers may
have less opportunity to refinance the indebtedness secured by the related
Mortgaged Properties, including the Home Loans, and a lower prepayment rate may
result for the Home Loan Pool than for a pool of mortgage (including first or
junior lien) loans that have combined loan-to-value ratios less than 100%.
However, the availability of credit from an increased number of lenders making
loans similar to the Home Loans may result in faster rates of prepayment of the
Home Loans than would otherwise be the case. In addition, any increase in the
market values of Mortgaged Properties, and the resulting decrease in the
combined loan-to-value ratios of the related Home Loans, may make alternative
sources of financing available to the related borrowers at lower interest rates.
SUBORDINATION
As described under "Description of the Securities -- Payments -- Payment
Priorities" herein, on each Payment Date, the holders of any Class of Securities
having a higher payment priority will have a preferential right to receive
amounts of interest and principal, respectively, due to them on such Payment
Date before any payments of interest or principal, respectively, are made on any
Class of Securities subordinate to such Class. As a result, the yields to
maturity and the aggregate amount of payments on the Class M-1, Class M-2 and
Class B-1 Notes will be more sensitive than the yields of higher ranking Notes
to the rate of delinquencies and defaults on the Home Loans, and holders of such
Notes could incur a loss on their investments.
As more fully described herein, Allocable Loss Amounts will be allocated to
the Residual Interest Certificate in respect of the B-2 Component thereof until
the Component Principal Balance thereof has been reduced to zero, then to the
Class B-1, Class M-2 and Class M-1 Notes, in that order, until the Class
Principal Balances thereof have been reduced to zero. Any Deferred Amounts will
be paid first to the Class M-1 Notes, second to the Class M-2 Notes, third to
the Class B-1 Notes and fourth to the B-2 Component.
OVERCOLLATERALIZATION
On any Payment Date on which the Overcollateralization Amount equals or
exceeds the Required Overcollateralization Amount, certain amounts otherwise
payable as principal to Securityholders will instead
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49
be paid first to the Subordinate Notes and the B-2 Component in payment of
Deferred Amounts, and thereafter to the Excess Component, thereby slowing the
rate of principal amortization of the Securities, until the
Overcollateralization Amount is reduced to the Required Overcollateralization
Amount. As described herein, the yields to maturity on Notes purchased at a
premium or discount will be affected by the extent to which any Excess Spread is
so applied, or is distributed to the Excess Component, in lieu of payment to
Noteholders or distribution in respect of the B-2 Component. If such Excess
Spread distributions to the Excess Component occur sooner than anticipated by an
investor who purchases Notes at a discount, the actual yield to such investor
may be lower than anticipated. If such Excess Spread distributions to the Excess
Component occur later than anticipated by an investor who purchases Notes at a
premium, the actual yield to such investor may be lower than anticipated.
The amount of Excess Spread, if any, distributable to the Excess Component
in reduction of the Overcollateralization Amount on any Payment Date will be
affected by the default and delinquency experience and principal amortization of
the Home Loans. High rates of delinquencies on the Home Loans during any Due
Period may cause the amount of interest received on the Home Loans during such
Due Period to be less than the amount of interest payable on the Securities on
the related Payment Date. In such event, the principal balances of the
Securities would decrease at a slower rate relative to the Pool Principal
Balance, resulting in a reduction of the Overcollateralization Amount and, in
some circumstances, an Allocable Loss Amount.
REINVESTMENT RISK
During periods of falling interest rates, Noteholders may receive an
increased amount of principal payments at a time when such holders may be unable
to reinvest such payments in investments having a yield and rating comparable to
the Notes. Conversely, during periods of rising interest rates, Noteholders are
likely to receive a decreased amount of principal payments at a time when such
holders may have an opportunity to reinvest such payments in investments having
a yield and rating comparable to the Notes.
MATURITY DATES
The Maturity Date of each Class of Notes is as set forth under "Summary of
Terms" herein. The Maturity Dates of the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6 and Class A-7 Notes were determined by calculating the
final Payment Date with respect to each such Class on the basis of the Modeling
Assumptions (except that it is assumed that no Excess Spread is applied to
reduce the Class Principal Balances of the Securities) and an assumed constant
prepayment rate of 0% of the Prepayment Assumption, and adding one year thereto.
The Maturity Dates of the Class A-8, Class M-1, Class M-2 and Class B-1 Notes
were determined by adding one year to the maturity date of the latest maturing
Home Loan. The actual maturity of any Class of Securities may be significantly
earlier than the applicable Maturity Date.
WEIGHTED AVERAGE LIVES
The following information illustrates the effect of prepayments of the Home
Loans on the weighted average lives of the Notes under certain stated
assumptions and is not a prediction of the prepayment rate that might actually
be experienced on the Home Loans. Weighted average life refers to the average
amount of time that will elapse from the date of delivery of a security until
each dollar of principal of such security will be repaid to the investor. The
weighted average lives of the Notes will be influenced by the rate at which
principal of the Home Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
unscheduled reductions of principal, including without limitation those
resulting from full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions, substitutions and
repurchases by or on behalf of the Transferor or the Seller), the rate at which
Excess Spread is paid to Securityholders as described herein, and the extent to
which any Overcollateralization Reduction Amount is distributed to the Excess
Component of the Residual Interest Certificate as described herein.
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50
Prepayments on loans such as the Home Loans are commonly measured relative
to a prepayment standard or model. The model used in this Prospectus Supplement
(the "Prepayment Assumption") represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of the pool of loans
for the life of such loans. A 100% Prepayment Assumption assumes a constant
prepayment rate ("CPR") of 0.0% per annum of the outstanding principal balance
of such loans in the first month of the life of the loans and an additional
approximately 1.0714% (expressed as a percentage per annum) in each month
thereafter until the fifteenth month; beginning in the fifteenth month and in
each month thereafter during the life of the loans, a CPR of 15% per annum each
month is assumed. As used in the table below, 0% Prepayment Assumption assumes
prepayment rates equal to 0% of the Prepayment Assumption (i.e., no
prepayments), 75% Prepayment Assumption assumes prepayment rates equal to 75% 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 loans, including the Home
Loans. Neither the Transferor nor the Seller makes any representations about the
appropriateness of the Prepayment Assumption or the CPR model.
Modeling Assumptions. For purposes of preparing the tables below, the
following assumptions (the "Modeling Assumptions") have been made.
(i) all scheduled principal payments on the Home Loans are timely
received on the first day of a Due Period, commencing on March 1, 1998, no
delinquencies or losses occur on the Home Loans and all Home Loans have a
first payment date that occurs thirty (30) days after the origination
thereof;
(ii) the scheduled payments on the Home Loans have been calculated on
the basis of the outstanding principal balance (prior to giving effect to
prepayments), the Home Loan Rate and the remaining term to stated maturity
such that the Home Loans will fully amortize by their remaining term to
stated maturity;
(iii) all scheduled payments of interest and principal in respect of
the Home Loans have been made through the applicable Cut-Off Date;
(iv) the Home Loans prepay monthly at the specified percentages of the
Prepayment Assumption, and all prepayments of Home Loans include 30 days of
interest thereon;
(v) the Closing Date for the Securities is March 12, 1998;
(vi) cash payments are received by the Securityholders on the 10th day
of each month, commencing in April 1998;
(vii) the Required Overcollateralization Amount will equal $17,500,000
and will be reduced in accordance with the terms of the Indenture;
(viii) the Interest Rate for each Class of Notes is as set forth or
described on the cover page hereof and the Interest Rate for each of the A
IO and B-2 Components is as set forth herein;
(ix) the Servicing Fee is deducted from the interest collections in
respect of the Home Loans;
(x) all of the Pre-Funding Account Deposit is used to acquire
Subsequent Home Loans in accordance with the schedule set forth below, and
prior to that date, the Pre-Funding Account Deposit accrues interest at
approximately 8.00% per annum;
(xi) no reinvestment income from any Trust account other than the
Pre-Funding Account is available for payment to Securityholders;
(xii) the Home Loan Pool consists of Home Loans having the following
characteristics; and
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(xiii) the Interest Rate on the Class A-1 Notes will remain constant
at 5.7975% per annum.
HOME NET HOME REMAINING
HOME LOAN LOAN TERM ORIGINAL TERM
LOAN PRINCIPAL INTEREST INTEREST TO MATURITY OF AMORTIZATION ASSUMED DELIVERY
NUMBER BALANCE RATE RATE (IN MONTHS) (IN MONTHS) OF HOME LOANS
- ------ --------------- -------- -------- ----------- --------------- ----------------
1 $ 36,545,202.13 13.566% 12.816% 162 164 Closing Date
2 49,271,970.26 13.598% 12.848% 161 164 Closing Date
3 30,248,871.40 13.908% 13.158% 149 158 Closing Date
4 50,001,425.40 13.638% 12.888% 236 240 Closing Date
5 77,545,983.51 13.603% 12.853% 298 300 Closing Date
6 102,016,073.19 13.721% 12.971% 297 300 Closing Date
7 29,372,007.64 13.707% 12.957% 292 300 Closing Date
8 12,181,534.78 13.566% 12.816% 162 164 April 1998
9 16,423,721.43 13.598% 12.848% 161 164 April 1998
10 10,082,792.20 13.908% 13.158% 149 158 April 1998
11 16,666,869.17 13.638% 12.888% 236 240 April 1998
12 25,848,238.35 13.603% 12.853% 298 300 April 1998
13 34,004,801.48 13.721% 12.971% 297 300 April 1998
14 9,790,509.06 13.707% 12.957% 292 300 April 1998
The tables on the following pages indicate the percentage of the Original
Class Principal Balance of each Class of Notes that would be outstanding at each
of the dates shown at the specified percentages of the Prepayment Assumption and
the corresponding weighted average life of each Class of Notes. These tables
have been prepared based on the Modeling Assumptions (including the assumptions
regarding the characteristics and performance of the Home Loans, which will
differ from the actual characteristics and performance thereof) and should be
read in conjunction therewith.
The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each payment of principal thereof by the number of
years from the date of issuance to the related Payment Date, (b) summing the
results and (c) dividing the sum by the aggregate payments of principal referred
to in clause (a) and rounding to two decimal places.
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52
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
CLASS A-1 NOTES CLASS A-2 NOTES
------------------------------------ ------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ------------ -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
Initial Balance........... 100 100 100 100 100 100 100 100 100 100 100 100
March 1999................ 77 59 49 40 31 22 100 100 100 100 100 100
March 2000................ 71 25 3 0 0 0 100 100 100 43 0 0
March 2001................ 64 0 0 0 0 0 100 81 0 0 0 0
March 2002................ 56 0 0 0 0 0 100 0 0 0 0 0
March 2003................ 47 0 0 0 0 0 100 0 0 0 0 0
March 2004................ 36 0 0 0 0 0 100 0 0 0 0 0
March 2005................ 24 0 0 0 0 0 100 0 0 0 0 0
March 2006................ 10 0 0 0 0 0 100 0 0 0 0 0
March 2007................ 0 0 0 0 0 0 83 0 0 0 0 0
March 2008................ 0 0 0 0 0 0 26 0 0 0 0 0
March 2009................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2010................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2011................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2012................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2013................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2014................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2015................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2016................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2017................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2018................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2019................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2020................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2021................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2022................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2023................ 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
Without Optional
Termination......... 4.36 1.36 1.06 0.90 0.79 0.72 9.61 3.36 2.49 2.00 1.69 1.47
With Optional
Termination......... 4.36 1.36 1.06 0.90 0.79 0.72 9.61 3.36 2.49 2.00 1.69 1.47
- ---------------
(1) The percentages in this table have been rounded to the nearest whole number.
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PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
CLASS A-3 NOTES CLASS A-4 NOTES
---------------------------------------- ----------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ------------ ----- ---- ---- ---- ---- ---- ----- ---- ---- ---- ---- ----
Initial Balance........... 100 100 100 100 100 100 100 100 100 100 100 100
March 1999................ 100 100 100 100 100 100 100 100 100 100 100 100
March 2000................ 100 100 100 100 90 60 100 100 100 100 100 100
March 2001................ 100 100 91 47 5 0 100 100 100 100 100 0
March 2002................ 100 94 36 0 0 0 100 100 100 42 0 0
March 2003................ 100 53 0 0 0 0 100 100 54 0 0 0
March 2004................ 100 14 0 0 0 0 100 100 0 0 0 0
March 2005................ 100 0 0 0 0 0 100 22 0 0 0 0
March 2006................ 100 0 0 0 0 0 100 0 0 0 0 0
March 2007................ 100 0 0 0 0 0 100 0 0 0 0 0
March 2008................ 100 0 0 0 0 0 100 0 0 0 0 0
March 2009................ 81 0 0 0 0 0 100 0 0 0 0 0
March 2010................ 45 0 0 0 0 0 100 0 0 0 0 0
March 2011................ 9 0 0 0 0 0 100 0 0 0 0 0
March 2012................ 0 0 0 0 0 0 43 0 0 0 0 0
March 2013................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2014................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2015................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2016................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2017................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2018................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2019................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2020................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2021................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2022................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2023................ 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
Without Optional
Termination......... 11.89 5.13 3.79 3.00 2.49 2.14 13.94 6.81 5.06 4.00 3.30 2.81
With Optional
Termination......... 11.89 5.13 3.79 3.00 2.49 2.14 13.94 6.81 5.06 4.00 3.30 2.81
- ---------------
(1) The percentages in this table have been rounded to the nearest whole number.
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PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
CLASS A-5 NOTES CLASS A-6 NOTES
---------------------------------------- -----------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ------------ -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
Initial Balance........... 100 100 100 100 100 100 100 100 100 100 100 100
March 1999................ 100 100 100 100 100 100 100 100 100 100 100 100
March 2000................ 100 100 100 100 100 100 100 100 100 100 100 100
March 2001................ 100 100 100 100 100 87 100 100 100 100 100 100
March 2002................ 100 100 100 100 55 2 100 100 100 100 100 100
March 2003................ 100 100 100 47 0 0 100 100 100 100 86 40
March 2004................ 100 100 64 0 0 0 100 100 100 90 36 0
March 2005................ 100 100 14 0 0 0 100 100 100 47 0 0
March 2006................ 100 63 0 0 0 0 100 100 73 10 0 0
March 2007................ 100 22 0 0 0 0 100 100 38 0 0 0
March 2008................ 100 0 0 0 0 0 100 84 7 0 0 0
March 2009................ 100 0 0 0 0 0 100 51 0 0 0 0
March 2010................ 100 0 0 0 0 0 100 20 0 0 0 0
March 2011................ 100 0 0 0 0 0 100 0 0 0 0 0
March 2012................ 100 0 0 0 0 0 100 0 0 0 0 0
March 2013................ 93 0 0 0 0 0 100 0 0 0 0 0
March 2014................ 67 0 0 0 0 0 100 0 0 0 0 0
March 2015................ 38 0 0 0 0 0 100 0 0 0 0 0
March 2016................ 4 0 0 0 0 0 100 0 0 0 0 0
March 2017................ 0 0 0 0 0 0 69 0 0 0 0 0
March 2018................ 0 0 0 0 0 0 35 0 0 0 0 0
March 2019................ 0 0 0 0 0 0 5 0 0 0 0 0
March 2020................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2021................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2022................ 0 0 0 0 0 0 0 0 0 0 0 0
March 2023................ 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
Without Optional
Termination......... 16.57 8.37 6.31 5.00 4.12 3.49 19.61 11.09 8.72 7.00 5.78 4.89
With Optional
Termination......... 16.57 8.37 6.31 5.00 4.12 3.49 19.61 11.09 8.72 7.00 5.78 4.89
- ---------------
(1) The percentages in this table have been rounded to the nearest whole number.
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PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
CLASS A-7 NOTES CLASS A-8 NOTES
------------------------------------- -------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ------------ -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
Initial Balance........... 100 100 100 100 100 100 100 100 100 100 100 100
March 1999................ 100 100 100 100 100 100 100 100 100 100 100 100
March 2000................ 100 100 100 100 100 100 100 100 100 100 100 100
March 2001................ 100 100 100 100 100 100 100 100 100 100 100 100
March 2002................ 100 100 100 100 100 100 100 100 100 100 100 100
March 2003................ 100 100 100 100 100 100 100 100 100 100 100 100
March 2004................ 100 100 100 100 100 92 100 100 100 100 100 100
March 2005................ 100 100 100 100 95 50 100 100 100 100 100 100
March 2006................ 100 100 100 100 58 18 100 100 100 100 100 100
March 2007................ 100 100 100 76 28 0 100 100 100 100 100 92*
March 2008................ 100 100 100 47 4 0 100 100 100 100 100 67*
March 2009................ 100 100 76 21 0 0 100 100 100 100 80* 49*
March 2010................ 100 100 48 0 0 0 100 100 100 100* 59* 34*
March 2011................ 100 90 24 0 0 0 100 100 100 77* 44* 24*
March 2012................ 100 67 6 0 0 0 100 100 100 60* 33* 17*
March 2013................ 100 49 0 0 0 0 100 100 91* 48* 25* 13*
March 2014................ 100 32 0 0 0 0 100 100 75* 38* 19* 8*
March 2015................ 100 16 0 0 0 0 100 100 61* 30* 14* 3*
March 2016................ 100 0 0 0 0 0 100 100* 49* 23* 10* 0
March 2017................ 100 0 0 0 0 0 100 81* 37* 17* 4* 0
March 2018................ 100 0 0 0 0 0 100 63* 28* 12* 0 0
March 2019................ 100 0 0 0 0 0 100 49* 21* 7* 0 0
March 2020................ 66 0 0 0 0 0 100 35* 14* 1* 0 0
March 2021................ 21 0 0 0 0 0 100 22* 7* 0 0 0
March 2022................ 0 0 0 0 0 0 58* 8* 0 0 0 0
March 2023................ 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
Without Optional
Termination......... 22.38 15.09 12.07 10.00 8.38 7.13 24.14 21.09 18.38 15.65 13.41 11.61
With Optional
Termination......... 22.38 15.09 12.06 10.00 8.38 7.13 23.41 17.83 14.16 11.83 10.08 8.58
- ---------------
(1) The percentages in this table have been rounded to the nearest whole number.
* Based on the assumption that the Seller does not exercise its option to
repurchase the Home Loans as described under "Description of the
Securities--Optional Termination" herein.
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PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
CLASS M-1 NOTES CLASS M-2 NOTES
------------------------------------------ ------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ------------ ----- ----- ----- ---- ---- ---- ----- ----- ----- ---- ---- ----
Initial Balance......... 100 100 100 100 100 100 100 100 100 100 100 100
March 1999.............. 100 100 100 100 100 100 100 100 100 100 100 100
March 2000.............. 100 100 100 100 100 100 100 100 100 100 100 100
March 2001.............. 100 100 100 100 100 100 100 100 100 100 100 100
March 2002.............. 100 100 100 100 88 75 100 100 100 100 88 75
March 2003.............. 100 100 100 86 70 56 100 100 100 86 70 56
March 2004.............. 100 100 91 71 55 43 100 100 91 71 55 43
March 2005.............. 100 100 78 58 43 32 100 100 78 58 43 32
March 2006.............. 100 91 66 48 34 24 100 91 66 48 34 24
March 2007.............. 100 80 56 39 26 17* 100 80 56 39 26 17*
March 2008.............. 100 69 47 31 20 13* 100 69 47 31 20 13*
March 2009.............. 100 60 39 24 15* 9* 100 60 39 24 15* 9*
March 2010.............. 100 50 31 19* 11* 7* 100 50 31 19* 11* 7*
March 2011.............. 100 42 25 15* 8* 5* 100 42 25 15* 8* 4*
March 2012.............. 100 36 21 11* 6* 3* 100 36 21 11* 6* 0
March 2013.............. 98 31 17* 9* 5* 1* 98 31 17* 9* 5* 0
March 2014.............. 92 27 14* 7* 4* 0 92 27 14* 7* 1* 0
March 2015.............. 84 23 12* 6* 2* 0 84 23 12* 6* 0 0
March 2016.............. 75 19* 9* 4* 0 0 75 19* 9* 4* 0 0
March 2017.............. 65 15* 7* 3* 0 0 65 15* 7* 0 0 0
March 2018.............. 55 12* 5* 1* 0 0 55 12* 5* 0 0 0
March 2019.............. 46 9* 4* 0 0 0 46 9* 2* 0 0 0
March 2020.............. 36 7* 2* 0 0 0 36 7* 0 0 0 0
March 2021.............. 24 4* 0 0 0 0 24 3* 0 0 0 0
March 2022.............. 11* 0 0 0 0 0 11* 0 0 0 0 0
March 2023.............. 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
Without Optional
Termination....... 20.40 13.30 10.77 8.86 7.43 6.35 20.39 13.28 10.73 8.82 7.39 6.30
With Optional
Termination....... 20.26 12.69 9.99 8.17 6.83 5.81 20.26 12.69 9.99 8.17 6.83 5.81
- ---------------
(1) The percentages in this table have been rounded to the nearest whole number.
* Based on the assumption that the Seller does not exercise its option to
repurchase the Home Loans as described under "Description of the
Securities--Optional Termination" herein.
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PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)
CLASS B-1 NOTES
------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150%
- ------------ ----- ----- ----- ---- ---- ----
Initial Balance............... 100 100 100 100 100 100
March 1999.................... 100 100 100 100 100 100
March 2000.................... 100 100 100 100 100 100
March 2001.................... 100 100 100 100 100 100
March 2002.................... 100 100 100 100 88 75
March 2003.................... 100 100 100 86 70 56
March 2004.................... 100 100 91 71 55 43
March 2005.................... 100 100 78 58 43 32
March 2006.................... 100 91 66 48 34 24
March 2007.................... 100 80 56 39 26 17*
March 2008.................... 100 69 47 31 20 13*
March 2009.................... 100 60 39 24 15* 9*
March 2010.................... 100 50 31 19* 11* 4*
March 2011.................... 100 42 25 15* 8* 0
March 2012.................... 100 36 21 11* 3* 0
March 2013.................... 98 31 17* 9* 0 0
March 2014.................... 92 27 14* 6* 0 0
March 2015.................... 84 23 12* 2* 0 0
March 2016.................... 75 19* 9* 0 0 0
March 2017.................... 65 15* 5* 0 0 0
March 2018.................... 55 12* 1* 0 0 0
March 2019.................... 46 9* 0 0 0 0
March 2020.................... 36 5* 0 0 0 0
March 2021.................... 24 0 0 0 0 0
March 2022.................... 11* 0 0 0 0 0
March 2023.................... 0 0 0 0 0 0
Weighted Average Life
Without Optional
Termination............. 20.38 13.23 10.65 8.73 7.30 6.24
With Optional
Termination............. 20.26 12.69 9.99 8.17 6.83 5.81
- ---------------
(1) The percentages in this table have been rounded to the nearest whole number.
* Based on the assumption that the Seller does not exercise its option to
repurchase the Home Loans as described under "Description of the
Securities--Optional Termination" herein.
The paydown scenarios for the Notes set forth in the foregoing tables are
subject to significant uncertainties and contingencies (including those
discussed above under "Prepayment and Yield Considerations"). As a result, there
can be no assurance that any of the foregoing paydown scenarios and the Modeling
Assumptions on which they were made will prove to resemble the actual
performance of the Home Loans and the Notes, or that the actual weighted average
lives of the Notes will not vary substantially from those set forth in the
foregoing tables, which variations may be shorter or longer, and which
variations may be greater with respect to later years. Furthermore, it is not
expected that the Home Loans will prepay at a constant rate or that all of the
Home Loans will prepay at the same rate. Moreover, the Home Loans actually
included in the Home Loan Pool, the payment experience of such Home Loans and
certain other factors affecting the payments on the Notes will not conform to
the Modeling Assumptions made in preparing the above tables. In fact, the
characteristics and payment experience of the Home Loans will differ in many
respects from such Modeling Assumptions. See "The Home Loan Pool" herein. To the
extent that the Home Loans actually included in the Home Loan Pool have
characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the Notes are likely to have weighted average
lives that are shorter or longer than those set forth in the foregoing tables.
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58
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Brown & Wood LLP, for federal income tax purposes, the
Notes will be characterized as debt, and the Trust will not be a business entity
classified as a corporation (or a publicly traded partnership) treated as a
corporation, but will be a grantor trust, and the Residual Interest Certificate
will represent the sole ownership interest in such grantor trust. Each
Noteholder, by the acceptance of a Note, will agree to treat the Notes as
indebtedness for federal income tax purposes. See "Certain Federal Income Tax
Consequences" in the Prospectus for additional information concerning the
application of federal income tax laws to the Trust and the Notes.
The Notes may be treated as having been issued with original issue
discount. As a result, holders of Notes may be required to recognize income with
respect to the Notes in advance of the receipt of cash attributable to that
income. The prepayment assumption that will be used for purpose of computing
original issue discount for federal income tax purposes is 100% of the
Prepayment Assumption.
ERISA CONSIDERATIONS
Except as described below, the Notes may be purchased by an employee
benefit plan or an individual retirement account (a "Plan") subject to ERISA or
Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"). A
fiduciary of a Plan must determine that the purchase of a Note is consistent
with its fiduciary duties under ERISA and does not result in a nonexempt
prohibited transaction as defined in Section 406 of ERISA or Section 4975 of the
Code. For additional information regarding treatment of the Notes under ERISA,
See "ERISA Considerations" in the Prospectus.
The Notes may not be purchased with the assets of a Plan if the Seller, the
Servicer, the Indenture Trustee, the Owner Trustee or any of their affiliates
(a) has investment or administrative discretion with respect to such Plan
assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets, for a fee and pursuant to an
agreement or understanding that such advice (i) will serve as a primary basis
for investment decisions with respect to such Plan assets and (ii) will be based
on the particular investment needs for such Plan; or (c) is an employer
maintaining or contributing to such Plan.
S-54
59
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement
(the "Underwriting Agreement"), the Seller has agreed to sell to each of the
Underwriters named below (collectively, the "Underwriters"), and each of the
Underwriters has severally agreed to purchase, the principal amount of Notes set
forth opposite its name in the tables below:
PRINCIPAL AMOUNT OF:
------------------------------------------------------
UNDERWRITER CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
----------- ------------ ----------- ----------- -----------
PaineWebber Incorporated................. $ 31,420,750 $ 9,929,000 $20,858,750 $ 5,900,750
Deutsche Morgan Grenfell Inc. ........... 31,420,750 9,929,000 20,858,750 5,900,750
J.P. Morgan Securities Inc. ............. 31,420,750 9,929,000 20,858,750 5,900,750
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................ 31,420,750 9,929,000 20,858,750 5,900,750
------------ ----------- ----------- -----------
Total.......................... $125,683,000 $39,716,000 $83,435,000 $23,603,000
============ =========== =========== ===========
PRINCIPAL AMOUNT OF:
-----------------------------------------------------
UNDERWRITER CLASS A-5 CLASS A-6 CLASS A-7 CLASS A-8
----------- ----------- ----------- ----------- -----------
PaineWebber Incorporated.................. $ 7,691,250 $ 8,783,750 $ 7,630,250 $ 5,629,250
Deutsche Morgan Grenfell Inc. ............ 7,691,250 8,783,750 7,630,250 5,629,250
J.P. Morgan Securities Inc. .............. 7,691,250 8,783,750 7,630,250 5,629,250
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................. 7,691,250 8,783,750 7,630,250 5,629,250
----------- ----------- ----------- -----------
Total........................... $30,765,000 $35,135,000 $30,521,000 $22,517,000
=========== =========== =========== ===========
PRINCIPAL AMOUNT OF:
-------------------------------------------------------
UNDERWRITER CLASS M-1 CLASS M-2 CLASS B-1
----------- ----------- ----------- -----------
PaineWebber Incorporated................. $12,625,000 $ 6,943,750 $ 5,681,250
Deutsche Morgan Grenfell Inc. ........... 12,625,000 6,943,750 5,681,250
J.P. Morgan Securities Inc. ............. 12,625,000 6,943,750 5,681,250
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................ 12,625,000 6,943,750 5,681,250
----------- ----------- -----------
Total.......................... $50,500,000 $27,775,000 $22,725,000
=========== =========== ===========
The Seller has been advised by the Underwriters that they propose initially
to offer the Notes to the public at the prices set forth herein, and to certain
dealers at such prices less the initial concession set forth below for each
Class. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of that set forth below for each Class. After the initial public
offering of the Notes, the public offering price and such concessions and
reallowances may be changed.
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6
--------- --------- --------- --------- --------- ---------
Concessions.......................... .0600% .0750% .1050% .1200% .1500% .1800%
Reallowances......................... .0420% .0525% .0735% .0840% .1050% .1260%
CLASS A-7 CLASS A-8 CLASS M-1 CLASS M-2 CLASS B-1
--------- --------- --------- --------- ---------
Concessions.................................. .2100% .2700% .4200% .4620% .5100%
Reallowances................................. .1470% .1890% .2940% .3234% .3570%
Until the distribution of the Notes is completed, rules of the Commission
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the Notes. As an exception to these rules, the Underwriters
are permitted to engage in certain transactions that stabilize the price of the
Notes.
S-55
60
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Notes.
If the Underwriters create a short position in the Notes in connection with
the offering, i.e., if they sell more Notes than are set forth on the cover page
of this Prospectus Supplement, the Underwriters may reduce that short position
by purchasing Notes in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Seller nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes. In addition, neither the
Seller nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Underwriters expect to make a secondary market in the Notes, but have
no obligation to do so. There can be no assurance that any such secondary market
will develop or, if it does develop, that it will continue.
In addition to the purchase of the Notes pursuant to the Underwriting
Agreement, the Underwriters and their affiliates have several business
relationships with the Transferor and Servicer and its affiliates, including its
parent, FP. Affiliates of the Underwriters provide warehouse financing and
repurchase arrangements to the Transferor for its consumer and mortgage loans,
including property improvement, debt consolidation and combination loans. See
"Use of Proceeds" herein. In addition, affiliates of certain Underwriters may
provide other term financing arrangements to the Transferor for the Residual
Interest Certificate, or an interest therein, retained by it, and other residual
interest securities retained by it that were issued in connection with one of
the prior series of asset backed securities involving the Transferor. Certain of
the Underwriters, or affiliates of such Underwriters, also render certain
services to FP in connection with the public offering of FP's debt and equity
securities from time to time.
LEGAL INVESTMENT MATTERS
The Notes will not constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Accordingly, many
institutions with legal authority to invest in "mortgage related securities" may
not be legally authorized to invest in the Notes.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Notes or to purchase Notes
representing more than a specified percentage of the investor's assets.
Investors should consult their own legal advisors in determining whether and to
what extent the Notes constitute legal investments for such investors.
RATINGS
It is a condition to the issuance of the Notes that (i) each of the Senior
Notes be rated "AAA" by each of DCR and Fitch and "Aaa" by Moody's, (ii) the
Class M-1 Notes be rated "AA" by each of DCR and Fitch and "Aa2" by Moody's,
(iii) the Class M-2 Notes be rated "A" by each of DCR and Fitch and "A2" by
Moody's and (iv) the Class B-1 Notes be rated "BBB" by each of DCR and Fitch and
"Baa3" by Moody's.
The ratings on the Notes address the likelihood of the receipt by
Noteholders of all payments on the Home Loans to which they are entitled. The
ratings on the Notes also address the structural, legal and issuer-related
aspects associated with the Notes, including the nature of the Home Loans. In
general, the ratings on the Notes address credit risk and not prepayment risk.
The ratings on the Notes do not represent any assessment of the likelihood that
principal prepayments of the Home Loans will be made by borrowers or the degree
to which the rate of such prepayments might differ from that originally
anticipated. As a result, the initial ratings assigned to the Notes do not
address the possibility that Noteholders might suffer a lower than anticipated
yield in the event of principal payments on the Notes resulting from funds
remaining in the Pre-
S-56
61
Funding Account at the end of the Funding Period or rapid prepayments of the
Home Loans, or in the event that the Trust is terminated prior to the applicable
Maturity Dates of the Notes.
The Seller has not solicited ratings on the Notes from any rating agency
other than the Rating Agencies. However, there can be no assurance as to whether
any other rating agency will rate the Notes, or, if it does, what rating would
be assigned by any such other rating agency. Any rating on the Notes by another
rating agency, if assigned at all, may be lower than the ratings assigned to the
Notes by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to any
of the Notes by the Rating Agencies are subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to such Notes.
LEGAL OPINIONS
In addition to the legal opinions described in the Prospectus, certain
legal matters relating to the issuance of the Notes will be passed upon for the
Seller, the Transferor and the Servicer by Brown & Wood LLP, Washington, D.C.,
and for the Underwriters by Stroock & Stroock & Lavan LLP, New York, New York.
Brown & Wood LLP will also pass on certain federal income tax and other legal
matters for the Trust.
S-57
62
INDEX OF TERMS
PAGE
----
A IO Component.............................................. ii
Accrual Period.............................................. S-29
Administration Agreement.................................... S-16
Affiliated Special Servicer................................. S-13
Allocable Loss Amount....................................... S-6
Assumed Pool Principal Balance.............................. S-31
Available Collection Amount................................. S-29
Available Funds............................................. S-29
B-2 Component............................................... ii
B-2 Component Optimal Principal Balance..................... S-31
Bankruptcy Code............................................. S-14
Bankruptcy Commission....................................... S-31
Business Day................................................ S-32
Certificate Distribution Account............................ S-32
Certificateholder........................................... ii
Certificateholder's Interest Carry-Forward Amount........... S-31
Certificateholder's Interest Distributable Amount........... S-31
Certificateholders' Monthly Interest Distributable Amount... S-32
Class B-1 Optimal Principal Balance......................... S-32
Class M-1 Optimal Principal Balance......................... S-32
Class M-2 Optimal Principal Balance......................... S-32
Class Principal Balance..................................... S-1
Code........................................................ S-7
Collection Account.......................................... S-39
Commission.................................................. iv
Component................................................... ii
Component Notional Balance.................................. S-2
Conventional Loans.......................................... ii
Co-Owner Trustee............................................ S-1
CPR......................................................... S-46
Credit Score................................................ S-24
Custodian................................................... S-1
Cut-Off Date................................................ S-1
Cut-Off Date Principal Balance.............................. S-16
DCR......................................................... S-7
Defective Home Loan......................................... S-4
Deferred Amount............................................. S-32
Definitive Notes............................................ S-3
Deleted Home Loan........................................... S-25
Determination Date.......................................... S-1
DTC......................................................... S-3
Due Period.................................................. S-1
ERISA....................................................... S-7
Excess Component............................................ ii
Excess Spread............................................... S-32
FFI......................................................... S-1
Fitch....................................................... S-7
FP.......................................................... S-1
Funding Period.............................................. S-5
S-58
63
PAGE
----
Highest Priority Class...................................... S-36
Home Loan Pool.............................................. S-4
Home Loan Rate.............................................. S-17
Home Loan Schedule.......................................... S-37
Home Loans.................................................. S-4
Indenture................................................... Cover
Indenture Trustee........................................... S-1
Indenture Trustee's Home Loan File.......................... S-37
Initial Call Date........................................... S-2
Initial Home Loans.......................................... S-15
Initial Pool Principal Balance.............................. S-4
Initial Undercollateralization Amount....................... S-32
Insurance Proceeds.......................................... S-32
Interest Payment Amount..................................... S-33
Interest Rate............................................... S-2
Issuer...................................................... S-1
LIBOR....................................................... S-29
LIBOR Business Day.......................................... S-33
Liquidated Home Loan........................................ S-33
Maturity Date............................................... S-3
Modeling Assumptions........................................ S-46
Moody's..................................................... S-7
Mortgaged Properties........................................ S-4
Mortgages................................................... S-4
Net Delinquency Calculation Amount.......................... S-33
Net Liquidation Proceeds.................................... S-33
Net Weighted Average Rate................................... S-29
Non-Priority Class.......................................... S-36
Note Payment Account........................................ S-39
Noteholders................................................. ii
Noteholders' Interest Carry-Forward Amount ................. S-3
Noteholders' Interest Payable Amount........................ S-33
Noteholders' Monthly Interest Payable Amount................ S-33
Note Owners................................................. S-5
Notes....................................................... Cover
Original Class Principal Balance............................ S-1
Original Component Principal Balance........................ S-2
Original Component Notional Balance......................... S-2
Overcollateralization Amount................................ S-33
Overcollateralization Reduction Amount...................... S-28
Overcollateralization Shortfall............................. S-33
Overcollateralization Stepdown Date......................... S-33
Overcollateralization Surplus............................... S-34
Owner Trustee............................................... S-1
Payment Accounts............................................ S-39
Payment Date................................................ ii
Permitted Investments....................................... S-38
Plan........................................................ S-7
Pool Principal Balance...................................... S-16
Pre-Funding Account......................................... S-38
Pre-Funding Account Deposit................................. S-5
S-59
64
PAGE
----
Prepayment Assumption....................................... S-46
Principal Balance........................................... S-16
Purchase Price.............................................. S-25
Qualified Substitute Home Loan.............................. S-25
Rating Agencies............................................. S-7
Record Date................................................. S-1
Reference Bank Rate......................................... S-34
Reference Banks............................................. S-34
Registration Statement...................................... iv
Regular Payment Amount...................................... S-34
Regular Principal Payment Amount............................ S-34
Released Mortgaged Property Proceeds........................ S-34
Required Overcollateralization Amount....................... S-34
Residual Interest Certificate............................... Cover
Rolling Six-Month Delinquency Average....................... S-34
Sale and Servicing Agreement................................ S-34
Securities.................................................. Cover
Securityholders............................................. ii
Seller...................................................... S-1
Senior Notes................................................ ii
Senior Optimal Principal Balance............................ S-34
Servicer.................................................... S-1
Servicing Advance........................................... S-39
Servicing Compensation...................................... S-38
Servicing Fee............................................... S-38
Servicing Fee Rate.......................................... S-38
SMMEA....................................................... S-7
Subordinate Notes........................................... ii
Subordinate Securities...................................... ii
Subsequent Home Loans....................................... S-5
Subsequent Transfer Date.................................... S-6
Subservicer................................................. S-25
Substitution Adjustment..................................... S-34
Termination Price........................................... S-34
Transfer and Servicing Agreements........................... S-16
Transferor.................................................. S-1
Trust....................................................... S-1
Trust Agreement............................................. S-1
Underwriters................................................ S-55
Underwriting Agreement...................................... S-55
S-60
65
PROSPECTUS
ASSET BACKED NOTES
ASSET BACKED CERTIFICATES
FIRSTPLUS INVESTMENT CORPORATION,
AND CERTAIN TRUSTS, ALL OF THE BENEFICIAL
OWNERSHIP INTEREST IN WHICH IS OWNED BY
FIRSTPLUS INVESTMENT CORPORATION
The Asset Backed Notes (the "Notes") and the Asset Backed Certificates (the
"Certificates" and, together with the Notes, the "Securities") described herein
may be sold from time to time in one or more series (each, a "Series"), in
amounts, at prices and on terms to be determined at the time of sale and to be
set forth in a supplement to this Prospectus (a "Prospectus Supplement"). Each
Series of Securities, which may include one or more classes (each, a "Class") of
Notes and/or Certificates, will be issued by either FIRSTPLUS INVESTMENT
CORPORATION ("FIC") or a separate entity (each, a "Trust") formed by FIC solely
for the purpose of issuing the Notes of the related Series (either such entity,
as applicable, the "Issuer"). Each Trust will be formed pursuant to either (i) a
Trust Agreement (each, a "Trust Agreement") to be entered into among FIC, as
Seller (in its capacity as Seller, the "Seller") and the owner trustee specified
in the related Prospectus Supplement (the "Owner Trustee") or (ii) a Pooling and
Servicing Agreement (each, a "Pooling and Servicing Agreement") to be entered
into among the Seller, FIRSTPLUS FINANCIAL, INC., as Servicer (the "Servicer")
and the trustee specified in the related Prospectus Supplement (the "Trustee").
If a Series of Securities includes Notes, such Notes of a Series will be issued
and secured pursuant to an Indenture (each, an "Indenture") between the Issuer
and the Indenture Trustee specified in the related Prospectus Supplement (the
"Indenture Trustee") and will represent indebtedness of the related Issuer. If a
Series of Securities includes Certificates, such Certificates of a Series will
represent undivided ownership interest in the related Trust. The related
Prospectus Supplement will specify which Class or Classes of Notes, if any, and
which Class or Classes of Certificates, if any, of the related Series are being
offered thereby.
(Continued on next page)
See "ERISA Considerations" herein and in the related Prospectus Supplement
for a discussion of restrictions on the acquisition of Securities by "plan
fiduciaries."
BEFORE PURCHASING ANY OFFERED SECURITIES, PROSPECTIVE INVESTORS SHOULD
REVIEW THE INFORMATION SET FORTH HEREIN UNDER THE CAPTION "RISK FACTORS" AND
SUCH INFORMATION AS MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE
RELATED PROSPECTUS SUPPLEMENT.
NOTES OF A SERIES WILL CONSTITUTE NON-RECOURSE OBLIGATIONS OF THE RELATED
ISSUER. CERTIFICATES OF A SERIES WILL EVIDENCE INTERESTS ONLY IN THE RELATED
TRUST. EXCEPT AS OTHERWISE SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT, THE SECURITIES WILL NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE SERVICER, ANY ORIGINATOR, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE SECURITIES NOR THE UNDERLYING LOAN ASSETS WILL BE GUARANTEED OR
INSURED BY ANY GOVERNMENTAL AGENCY OR ANY OTHER PERSON OR ENTITY, EXCEPT AS SET
FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Securities offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is September 10, 1997
66
(Continued from prior page)
The primary assets securing or backing each Series, as applicable (the
"Trust Property") will consist primarily of a segregated pool (a "Loan Asset
Pool") of one or more of the following mortgage related assets (the "Loan
Assets"): (i) pools (each, a "Mortgage Pool") of single family (one- to
four-unit) residential mortgage loans, timeshare mortgage loans and loans
evidenced by retail installment sales or installment loan agreements that are
secured by first or junior liens on real property (the "Mortgage Loans"); and
(ii) pools (each, a "Contract Pool") of loans evidenced by retail installment
sales or installment loan agreements, including loans secured by new or used
Manufactured Homes (as defined herein) that are not considered to be interests
in real property because such Manufactured Homes are not permanently affixed to
real estate ("Secured Contracts") and loans evidenced by retail installment
sales or installment loan agreements which are not secured by any interest in
real or personal property ("Unsecured Contracts" and, together with the Secured
Contracts, the "Contracts"). To the extent specified in the related Prospectus
Supplement, the Loan Assets may include Title I Mortgage Loans and Title I
Contracts. If specified in the related Prospectus Supplement, the Trust Property
for a Series of Securities may include the rights or other ancillary or
incidental assets (together with the Loan Assets, collectively, the "Assets")
that are intended (i) to provide credit enhancement for the ultimate or timely
distributions of proceeds from the Loan Assets to holders of the Securities
("Securityholders") or (ii) to assure the servicing of the Loan Assets. The Loan
Assets will consist of loans for which the related proceeds were used to finance
(i) property improvements, (ii) the acquisition of personal property such as
home appliances or furnishings, (iii) debt consolidation, (iv) the purchase or
refinancing of single family residential property, or (v) a combination of
property improvements, debt consolidation and other consumer purposes, which
loans are marketed by the Transferor under the name "BusterPlus(TM) Loans".
Unless otherwise provided in the related Prospectus Supplement, the Loan Assets
will be serviced by FIRSTPLUS FINANCIAL, INC., as Servicer (the "Servicer")
pursuant to a sale and servicing agreement (each, as amended and supplemented
from time to time, a "Sale and Servicing Agreement") between (i) FIC, the
Transferor, the Servicer and the related Indenture Trustee if FIC is the Issuer
or (ii) the Issuer, the Seller, the Servicer and the related Indenture Trustee,
if a Trust is the Issuer.
Each Class of Securities of a Series will represent the right to receive
specified payments in respect of collections of principal and interest on the
related Assets, at the rates, on the dates and in the manner described herein
and in the related Prospectus Supplement. If a Series includes multiple Classes
of Securities, the rights of one or more Classes of Securities to receive
payments may be senior or subordinate to the rights of one or more of the other
Classes of such Series. Distributions on Certificates of a Series may be
subordinated in priority to payments due on any related Notes of such Series to
the extent described herein and in the related Prospectus Supplement. A Series
may include one or more Classes of Notes and/or Certificates which differ as to
the timing and priority of payment, interest rate or amount of distributions in
respect of principal or interest or both. A Series may include one or more
Classes of Notes or Certificates entitled to distributions in respect of
principal with disproportionate, nominal or no interest distributions, or to
interest distributions, with disproportionate, nominal or no distributions in
respect of principal. The rate of payment in respect of principal of any Class
of Notes and distributions in respect of principal of the Certificates of any
Class will depend on the priority of payment of such Class and Certificates and
the rate and timing of payments (including prepayments, defaults, liquidations
and repurchases of Assets) on the related Assets. A rate of payment lower or
higher than that anticipated may affect the weighted average life of each Class
of Securities in the manner described herein and in the related Prospectus
Supplement. See "Risk Factors -- Effect of Prepayments on Average Life".
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described herein and in
the related Prospectus Supplement. See "Plan of Distribution" herein. There will
have been no public market for any Series of Securities prior to the offering
thereof. There can be no assurance that a secondary market will develop for the
Securities of any Series or, if it does develop, that such market will continue.
ii
67
PROSPECTUS SUPPLEMENT
As further described herein, the Prospectus Supplement relating to each
Series of Securities offered thereby (the "Offered Securities") will, among
other things, set forth, as and to the extent appropriate: (i) a description of
each Class of such Offered Securities, including with respect to each such Class
the following (A) the applicable payment or distribution provisions, (B) the
aggregate principal amount, if any, (C) the rate at which interest accrues from
time to time, if at all, or the method of determining such rate, and (D) whether
interest will accrue from time to time on its aggregate principal amount, if
any, or on a specified notional amount, if at all; (ii) information with respect
to any other Classes of Securities of the same Series; (iii) the respective
dates on which payments or distributions are to be made; (iv) information as to
the Assets, including the Loan Assets and Credit Enhancement, constituting the
related Trust Property; (v) the circumstances, if any, under which the
Securities may be subject to redemption or early termination; (vi) additional
information with respect to the method of payment or distribution in respect of
such Offered Securities; (vii) the initial percentage ownership interest in the
related Trust to be evidenced by each Class of Certificates of such Series;
(viii) information concerning the Trustee (as defined herein) of the related
Trust; (ix) if the related Trust Property consists of Mortgage Loans or
Contracts, information concerning the Servicer and any Master Servicer (each as
defined herein) of such Mortgage Loans or Contracts; (x) information as to the
nature and extent of subordination of any Class of Securities of such Series,
including a Class of Offered Securities; and (xi) whether such Offered
Securities will be initially issued in definitive or book-entry form.
The actual characteristics of the Loan Assets relating to a Series will not
deviate in any material respect from the parameters specified in the related
Prospectus Supplement; provided, however, that if the characteristics described
therein materially differ from the actual characteristics, a supplement to such
Prospectus Supplement will be distributed.
AVAILABLE INFORMATION
FIC has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments and
exhibits thereto, referred to herein as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities to be offered from time to time pursuant to this Prospectus. For
further information, reference is made to the Registration Statement which may
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
Commission's regional offices at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, New York, New York
10048. Copies of the Registration Statement may also be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, the Commission maintains a Web site
on the Internet that contains reports, proxy and information statements and
other information regarding the Seller. The address of such Web site is
http://www.sec.gov.
iii
68
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by FIC 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 and prior to the termination of the offering of the Securities shall
be deemed to be incorporated by reference in this Prospectus. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
FIC will provide without charge to each person, including any beneficial
owner of Securities, to whom a copy of this Prospectus is delivered, on the
written or oral request of any such person, a copy of any or all of the
documents incorporated herein or in any related Prospectus Supplement by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to FIC at 3773 Howard Hughes Parkway, Suite 300N, Las
Vegas, Nevada 89109 (Telephone: (702) 866-2236), Attention: Russell D. Ungerman.
iv
69
TABLE OF CONTENTS
PAGE
-----
PROSPECTUS SUPPLEMENT................................................................. iii
AVAILABLE INFORMATION................................................................. iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... iv
SUMMARY OF TERMS...................................................................... 1
RISK FACTORS.......................................................................... 9
Limited Liquidity and Fluctuation in Value from Market Conditions................... 9
General.......................................................................... 9
Lack of a Secondary Market....................................................... 9
Book Entry Registration.......................................................... 9
Limited Nature of Ongoing Information............................................ 9
Sensitivity to Fluctuations in Prevailing Interest Rates......................... 10
Limited Assets...................................................................... 10
Additions, Substitutions and Withdrawals of Assets............................... 10
Effect of Prepayments on Average Life............................................... 11
Effect of Prepayments on Yield...................................................... 12
Limitations of Credit Enhancement................................................... 12
Limitations Regarding Types of Losses Covered.................................... 12
Disproportionate Benefits to Certain Classes and Series.......................... 13
Limitations Regarding the Amount of Credit Enhancement........................... 13
Limitations on FHA Insurance for Title I Loans................................... 13
Limited Nature of Ratings........................................................... 14
Adverse Tax Consequences............................................................ 14
Original Issue Discount.......................................................... 14
Certain Factors Affecting Delinquencies, Foreclosures and Losses on Loan Assets..... 15
General.......................................................................... 15
Geographic Concentration......................................................... 15
Decline in Value of a Loan Asset................................................. 15
Limitations on Realizations of Junior Liens...................................... 15
Certain Legal Considerations of the Loan Assets.................................. 16
Risks Associated with Certain Loan Assets........................................... 16
No Hazard Insurance for Title I Mortgage Loans................................... 16
Contracts Secured by Manufactured Homes.......................................... 17
Unsecured Contracts.............................................................. 17
Consumer Protection Laws Related to Contracts.................................... 17
Reliance on Management of Timeshare Units........................................ 18
Recharacterization of Sale of Loan Assets as Borrowing.............................. 18
Risks Relating to Indexed Securities................................................ 18
DESCRIPTION OF THE NOTES.............................................................. 19
General............................................................................. 19
Principal and Interest on the Notes................................................. 19
The Indenture....................................................................... 20
Modification of Indenture........................................................ 20
Events of Default; Rights upon Event of Default.................................. 21
Certain Covenants................................................................ 22
Annual Compliance Statement...................................................... 23
Indenture Trustee's Annual Report................................................ 23
Satisfaction and Discharge of Indenture.......................................... 23
The Indenture Trustee............................................................... 23
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PAGE
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Administration Agreement............................................................ 23
DESCRIPTION OF THE CERTIFICATES....................................................... 23
General............................................................................. 23
Distributions of Principal and Interest............................................. 24
POOL FACTORS AND TRADING INFORMATION.................................................. 24
CERTAIN INFORMATION REGARDING THE SECURITIES.......................................... 25
General............................................................................. 25
Fixed Rate Securities and Floating Rate Securities.................................. 26
Indexed Securities.................................................................. 26
Book-Entry Registration............................................................. 27
Definitive Securities............................................................... 30
THE TRUSTS............................................................................ 31
THE TRUSTEE........................................................................... 31
DESCRIPTION OF THE TRUST PROPERTY..................................................... 32
General............................................................................. 32
Mortgage Loans...................................................................... 33
Contracts........................................................................... 34
Additions, Substitution and Withdrawal of Assets.................................... 35
Pre-Funding Arrangements............................................................ 36
CREDIT ENHANCEMENT.................................................................... 37
General............................................................................. 37
Subordination....................................................................... 37
Overcollateralization............................................................... 38
Cross-Support....................................................................... 38
Guaranty Insurance.................................................................. 38
Mortgage Pool Insurance............................................................. 39
Special Hazard Insurance............................................................ 39
Reserve Funds....................................................................... 39
SERVICING OF THE LOAN ASSETS.......................................................... 40
Enforcement of Due-on-Sale Clauses.................................................. 40
Realization Upon Defaulted Loan Assets.............................................. 41
Waivers and Deferments of Certain Payments.......................................... 41
Subservicers........................................................................ 41
Removal and Resignation of Servicer................................................. 41
Advances............................................................................ 42
Servicing Procedures................................................................ 42
Mortgage Loans................................................................... 42
Contracts........................................................................ 43
Administration and Servicing Compensation and Payment of Expenses................ 43
THE SELLER AND THE ISSUER............................................................. 44
THE SERVICER AND THE TRANSFEROR....................................................... 44
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS.................................. 46
Sale and Assignment of Loan Assets.................................................. 46
Conveyance of Subsequent Loan Assets................................................ 47
Repurchase or Substitution of Loan Assets........................................... 48
Evidence as to Compliance........................................................... 48
List of Securityholders............................................................. 49
Administration of the Distribution Account.......................................... 49
Reports to Securityholders.......................................................... 50
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PAGE
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Events of Default................................................................... 50
Rights Upon Event of Default........................................................ 50
Amendment........................................................................... 51
CERTAIN LEGAL ASPECTS OF THE LOAN ASSETS.............................................. 52
General Legal Considerations........................................................ 52
Mortgages........................................................................ 52
Cooperative Loans................................................................ 53
Foreclosure......................................................................... 53
Mortgages........................................................................ 53
Cooperative Loans................................................................ 55
Junior Liens..................................................................... 56
Right of Redemption.............................................................. 56
Anti-Deficiency Legislation and Other Limitations on Lenders..................... 57
Enforceability of Certain Provisions............................................. 58
Adjustable Rate Loans............................................................ 59
Environmental Legislation........................................................ 59
Truth in Lending Act................................................................ 60
Applicability of Usury Laws......................................................... 61
Soldiers' and Sailors' Civil Relief Act............................................. 61
The Title I Program................................................................. 61
General.......................................................................... 61
Requirements for Title I Property Improvement Loans and Contracts................ 64
Requirements for Title I Manufactured Home Contracts............................. 66
Title I Underwriting Requirements................................................ 67
Claims Procedures Under Title I.................................................. 68
No Rights of Securityholders Against FHA......................................... 69
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................... 69
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE....................................... 70
Tax Characterization of the Trust as a Partnership.................................. 70
Tax Consequences to Holders of the Notes............................................ 70
Treatment of the Notes as Indebtedness........................................... 70
OID, Indexed Securities, etc. ................................................... 71
Interest Income on the Notes..................................................... 71
Sale or Other Disposition........................................................ 71
Foreign Holders.................................................................. 71
Backup Withholding............................................................... 72
Possible Alternative Treatments of the Notes..................................... 72
Tax Consequences to Holders of the Certificates..................................... 72
Treatment of the Trust as a Partnership.......................................... 72
Indexed Securities, etc. ........................................................ 72
Partnership Taxation............................................................. 73
Discount and Premium............................................................. 73
Section 708 Termination.......................................................... 74
Disposition of Certificates...................................................... 74
Allocations Between Transferors and Transferees.................................. 74
Section 754 Election............................................................. 74
Administrative Matters........................................................... 74
Tax Consequences to Foreign Certificateholders................................... 75
Backup Withholding............................................................... 76
TRUSTS TREATED AS GRANTOR TRUSTS...................................................... 76
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PAGE
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Tax Characterization of the Trust as a Grantor Trust................................ 76
Characterization................................................................. 76
Premium.......................................................................... 77
Stripped Notes and Stripped Coupons................................................. 77
Original Issue Discount.......................................................... 77
Market Discount.................................................................. 78
Premium.......................................................................... 79
Election to Treat All Interest as OID............................................ 79
Sale or Exchange of a Grantor Trust Certificate.................................. 79
Non-U.S. Persons................................................................. 79
Information Reporting and Backup Withholding..................................... 80
NOTES ISSUED BY FIC................................................................... 80
ERISA CONSIDERATIONS.................................................................. 80
LEGAL INVESTMENT MATTERS.............................................................. 81
PLAN OF DISTRIBUTION.................................................................. 81
USE OF PROCEEDS....................................................................... 82
LEGAL OPINIONS........................................................................ 82
INDEX OF TERMS........................................................................ 83
viii
73
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any Series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used herein are
defined elsewhere in this Prospectus on the pages indicated in the "Index of
Terms".
ISSUER........................ With respect to each Series of Securities,
FIRSTPLUS INVESTMENT CORPORATION ("FIC") or a
separate entity (each, a "Trust") formed by
FIC solely for the purpose of issuing such
Notes. Each Trust will be formed pursuant to
either a Trust Agreement (as amended and
supplemented from time to time, a "Trust
Agreement") between the Seller and the
applicable Owner Trustee for such Trust (the
"Trust") or a Pooling and Servicing Agreement
(as amended and supplemented from time to
time, the "Pooling and Servicing Agreement")
among the Seller, the Servicer and the
Trustee for such Trust.
SELLER........................ With respect to each Series in which the Issuer
is a Trust, FIRSTPLUS INVESTMENT CORPORATION
(the "Seller").
SERVICER...................... FIRSTPLUS FINANCIAL, INC. ("FFI" or the
"Transferor" or the "Servicer").
PASS THROUGH TRUSTEE.......... With respect to each Series of Securities that
is issued by a grantor trust, the
Pass-Through Trustee specified in the related
Prospectus Supplement.
OWNER TRUSTEE................. With respect to each Series of Securities that
is issued by an owner trust, the Owner
Trustee specified in the related Prospectus
Supplement.
INDENTURE TRUSTEE............. With respect to any applicable Series of
Securities that includes one or more Classes
of Notes, the Indenture Trustee specified in
the related Prospectus Supplement.
TRUSTEE....................... As used herein, the term "Trustee" shall refer
to the Indenture Trustee with respect to a
Series of Notes, the Owner Trustee under the
applicable Trust Agreement with respect to a
Series of Certificates, or the Pass Through
Trustee under the applicable Pooling and
Servicing Agreement with respect to a Series
of Certificates. The Trustees with respect to
each Series will be specified in the related
Prospectus Supplement.
ADMINISTRATOR................. The entity or entities named as Administrator,
if any, in the related Prospectus Supplement
(the "Administrator"), will act as
administrator with respect to one or more
aspects related to any Loan Assets included
as Trust Property. The Administrator may be
an affiliate of the Issuer, the Seller and/or
the Servicer.
MASTER SERVICER............... If the related Trust Property consists of
Mortgage Loans or Contracts, the entity or
entities, if any, named as the master
servicer in the related Prospectus Supplement
(the "Master Servicer"), that will act as
master servicer with respect to such
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74
Mortgage Loans or Contracts. The Master
Servicer may be an affiliate of the Seller
and/or Servicer.
THE NOTES..................... A Series of Securities may include one or more
Classes of Notes, which will be issued
pursuant to an Indenture between the Issuer
and the Indenture Trustee (as amended and
supplemented from time to time, an
"Indenture"). The related Prospectus
Supplement will specify which Class or
Classes, if any, of Notes of the related
Series are being offered thereby.
To the extent specified in the related
Prospectus Supplement, Notes will be
available for purchase in denominations of
$1,000 and integral multiples thereof and
will be available in book-entry form only.
Noteholders will be able to receive
Definitive Notes only in the limited
circumstances described herein or in the
related Prospectus Supplement. See "Certain
Information Regarding the
Securities -- Definitive Securities".
To the extent specified in the related
Prospectus Supplement, each Class of Notes
will have a stated principal amount and will
bear interest at a specified rate or rates
(with respect to each Class of Notes, the
"Interest Rate"). Each Class of Notes may
have a different Interest Rate, which may be
a fixed, variable or adjustable Interest
Rate, or any combination of the foregoing.
The related Prospectus Supplement will
specify the Interest Rate for each Class of
Notes, or the method for determining the
Interest Rate.
With respect to a Series that includes two or
more Classes of Notes, each Class may differ
as to the timing and priority of payments,
seniority, allocations of losses, Interest
Rate or amount of payments of principal or
interest, or payments of principal or
interest in respect of any such Class or
Classes may or may not be made upon the
occurrence of specified events or on the
basis of collections from designated portions
of the Trust Property.
In addition, a Series may include one or more
Classes of Notes entitled to (i) principal
payments with disproportionate, nominal or no
interest payments or (ii) interest payments
with disproportionate, nominal or no
principal payments.
To the extent specified in the related
Prospectus Supplement, the Seller, the
Servicer or a successor thereto may have an
option to purchase the Trust Property in the
manner and on the respective terms and
conditions as set forth in the related
Prospectus Supplement.
THE CERTIFICATES.............. A Series may include one or more Classes of
Certificates and may or may not include any
Notes. The related Prospectus Supplement will
specify which Class or Classes, if any, of
the Certificates are being offered thereby.
To the extent specified in the related
Prospectus Supplement, Certificates will be
available for purchase in a minimum
denomination of $1,000 and in integral
multiples thereof and will be available in
book-entry form only. Certificateholders will
be able
2
75
to receive Definitive Certificates only in
the limited circumstances described herein or
in the related Prospectus Supplement. See
"Certain Information Regarding the
Securities -- Definitive Securities".
To the extent specified in the related
Prospectus Supplement, each Class of
Certificates will have a stated Certificate
Balance specified in the related Prospectus
Supplement (the "Certificate Balance") and
will accrue interest on such Certificate
Balance at a specified rate (with respect to
each Class of Certificates, the "Pass Through
Rate"). Each Class of Certificates may have a
different Pass Through Rate, which may be a
fixed, variable or adjustable Pass Through
Rate, or any combination of the foregoing.
The related Prospectus Supplement will
specify the Pass Through Rate for each Class
of Certificates or the method for determining
the Pass Through Rate.
With respect to a Series that includes two or
more Classes of Certificates, each Class may
differ as to timing and priority of
distributions, seniority, allocations of
losses, Pass Through Rate or amount of
distributions in respect of principal or
interest, or distributions in respect of
principal or interest in respect of any such
Class or Classes may or may not be made upon
the occurrence of specified events or on the
basis of collections from designated portions
of the Trust Property.
In addition, a Series may include one or more
Classes of Certificates entitled to (i)
distributions in respect of principal with
disproportionate, nominal or no interest
distributions or (ii) interest distributions
with disproportionate, nominal or no
distributions in respect of principal.
If a Series of Securities includes Classes of
Notes, distributions in respect of the
Certificates may be subordinated in priority
of payment to payments on the Notes to the
extent specified in the related Prospectus
Supplement.
To the extent specified in the related
Prospectus Supplement, the Seller, the
Servicer or a successor thereto may have an
option to purchase the Trust Property in the
manner and on the respective terms and
conditions as set forth in the related
Prospectus Supplement.
THE TRUST PROPERTY............ As specified in the related Prospectus
Supplement, the property securing or backing
each Series (the "Trust Property") will
include Loan Assets consisting of one or more
of the following:
(i) a pool (a "Mortgage Pool") of single
family (one- to four-unit)
residential mortgage loans, including
mortgage loans that are secured by
first or junior liens on the related
mortgaged properties, timeshare
mortgage loans and loans evidenced by
retail installment sales or
installment loan agreements that are
secured by first or junior liens on
real property ("Mortgage Loans"); and
(ii) a pool (a "Contract Pool") of loans
evidenced by retail installment sales
or installment loan agreements,
includ-
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76
ing loans secured by new or used
Manufactured Homes (as defined herein)
that are not considered to be interests
in real property because such
Manufactured Homes are not permanently
affixed to real estate ("Secured
Contracts") and loans evidenced by
retail installment sales or installment
loan agreements which are not secured by
any interest in real or personal
property ("Unsecured Contracts" and,
together with the Secured Contracts, the
"Contracts").
The Trust Property may also include, or the
related Securities may also have the benefits
of, certain rights and other ancillary or
incidental assets (together with the Loan
Assets, collectively, the "Assets"), that are
intended (i) to enhance the likelihood of
ultimate or timely payments or distributions
of proceeds from the Loan Assets to
Securityholders, including letters of credit,
insurance policies, guaranties, reserve funds
or other types of credit enhancement or any
combination thereof (the "Credit
Enhancement"), or (ii) to assure the
servicing of the Loan Assets, including
interest rate exchange agreements,
reinvestment income and cash accounts. The
Loan Assets will consist of loans for which
the related proceeds were used to finance (i)
property improvements, (ii) the acquisition
of personal property such as home appliances
or furnishings, (iii) debt consolidation,
(iv) the purchase or refinancing of single
family residential property, or (v) a
combination of property improvements, debt
consolidation and other consumer purposes,
which loans are marketed by the Transferor
under the name "BusterPlus(TM) Loans".
The Securities of any Series will be entitled
to payment only from the Trust Property and
any other Assets pledged or otherwise
available for the benefit of the holders of
such Securities as specified in the related
Prospectus Supplement.
The Trust Property of each Series may also
include amounts on deposit in certain trust
accounts, including the related Collection
Account, Distribution Account and any Yield
Maintenance Account, Reserve Fund or other
account identified in the applicable
Prospectus Supplement.
A. Mortgage Loans............. As specified in the related Prospectus
Supplement for a Series, "Mortgage Loans" may
include: (i) loans secured by first liens on
one-to-four family residential properties;
(ii) loans secured by security interests in
shares issued by private, non-profit,
cooperative housing corporations
("Cooperatives") and in the related
proprietary leases or occupancy agreements
granting exclusive rights to occupy specific
dwelling units in such Cooperatives'
buildings; (iii) loans secured by junior
(i.e., second, third, etc.) liens on the
related mortgaged properties (which may be
evidenced by retail installment sales
contracts and installment loan agreements);
(iv) loans secured by timeshare estates
representing an ownership interest in common
with other owners in one or more vacation
units entitling the owner thereof to the
exclusive use of unit and access to the
accompanying recrea-
4
77
tional facilities for the week or weeks
owned; and (v) loans evidenced by retail
installment sales and installment loan
agreements that are secured by first or
junior liens on real property. See
"Description of the Trust
Property -- Mortgage Loans". Certain of the
junior lien Mortgage Loans may be
conventional (i.e., not insured or guaranteed
by a governmental agency) mortgage loans
("Conventional Mortgage Loans"), while other
junior lien Mortgage Loans that are property
improvement loans may be partially insured by
the Federal Housing Administration under the
Title I Program ("Title I Mortgage Loans").
The related Prospectus Supplement for a
Series will describe any Mortgage Loans
included in the related Trust Property and
will specify certain information regarding
the payment terms of such Mortgage Loans. See
"Description of the Trust Property --
Mortgage Loans."
B. Contracts.................. As specified in the related Prospectus
Supplement for a Series, "Contracts" may
include: (i) loans evidenced by retail
installments sales or loan agreements,
including loans secured by new or used
Manufactured Homes (as defined herein) that
are not considered to be interests in real
property because such Manufactured Homes are
not permanently affixed to real estate
("Secured Contracts") and (ii) loans
evidenced by retail installment sales or
installment loan agreements which are not
secured by any interest in real or personal
property ("Unsecured Contracts"). See
"Description of the Trust
Property -- Contracts". Certain Contracts may
be conventional (i.e., not insured or
guaranteed by a governmental agency)
contracts (the "Conventional Contracts"),
while other Contracts may be partially
insured by the FHA under the Title I Program
(the "Title I Contracts"). The related
Prospectus Supplement for a Series will
further describe the type of Contracts, if
any, included in the related Trust Property.
See "Description of the Trust Property --
Contracts."
C. Pre-Funding Arrangements... If so specified in the related Prospectus
Supplement, the related Sale and Servicing
Agreement or Pooling and Servicing Agreement
will contain provisions pursuant to which the
related Transferor will agree to transfer
additional Loan Assets (the "Subsequent Loan
Assets") into the related Loan Asset Pool for
a specified period of time following the date
on which the related Securities are issued
(such provisions being referred to herein as
a "Pre-Funding Arrangement"). Any such
Pre-Funding Arrangement will require that any
Loan Assets so transferred conform to the
requirements specified in the related Sale
and Servicing Agreement or Pooling and
Servicing Agreement, as applicable. See
"Description of the Trust
Property -- Pre-Funding Arrangements."
TRANSFER OF LOAN ASSETS....... On or before the date of initial issuance of a
Series of Securities (the related "Closing
Date"), the Loan Assets having an aggregate
principal balance specified in the related
Prospectus Supplement as of the dates
specified therein (the "Cut-off Date") will
be transferred pursuant to (i) the related
Sale and Servicing
5
78
Agreement if the Issuer is to be treated as
an owner trust, or (ii) the related Pooling
and Servicing Agreement if the Issuer is to
be treated as a grantor trust for federal
income tax purposes.
The Loan Assets will have been (i) originated
by the Transferor in accordance with the
Transferor's underwriting criteria or (ii)
originated by the Transferor's correspondents
in accordance with the Transferor's
underwriting criteria and subsequently
purchased by the Transferor. The Loan Assets
to be included in the Trust Property will be
selected based on the underwriting criteria
specified in the related Sale and Servicing
Agreement or Pooling and Servicing Agreement,
as applicable, and described herein and in
the related Prospectus Supplement.
CREDIT ENHANCEMENT............ If and to the extent specified in the related
Prospectus Supplement, credit enhancement
with respect to a Series or any Class or
Classes of Securities may include any one or
more of the following: subordination of one
or more other Classes of Securities, a
Reserve Fund, a Yield Maintenance Account,
overcollateralization, letters of credit,
credit or liquidity facilities, surety bonds,
guaranteed investment contracts, swaps or
other interest rate protection agreements,
repurchase obligations, cash deposits or
other agreements or arrangements with respect
to third party payments or other support. Any
form of credit enhancement may have certain
limitations and exclusions from coverage
thereunder and, if so, such limitations and
exclusions from coverage will be described in
the related Prospectus Supplement. See "Risk
Factors -- Limitations of Credit Enhancement"
and "Credit Enhancement".
TRANSFER AND SERVICING
AGREEMENTS.................... The Assets for a given Series of Securities
will be transferred to the related Issuer
pursuant to a Sale and Servicing Agreement or
a Pooling and Servicing Agreement. The rights
and benefits of any Issuer under a Sale and
Servicing Agreement will be assigned to the
Indenture Trustee as collateral for the Notes
of the related Series. The Servicer will
agree with such Issuer to be responsible for
servicing, managing, maintaining custody of
and making collections on the Assets. If and
to the extent set forth in the related
Prospectus Supplement, FFI will undertake
certain administrative duties under an
Administration Agreement with respect to any
Issuer that has issued Notes.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES................ Unless the Prospectus Supplement specifies that
the related Issuer will be treated as a
grantor trust and, except as otherwise
provided in such Prospectus Supplement, upon
the issuance of the related Series of
Securities, Tax Counsel to such Issuer will
deliver an opinion to the effect that for
federal income tax purposes (a) any Notes of
such Series will be characterized as debt and
(b) such Issuer, if a Trust, will not be
characterized as an association (or a
publicly traded partnership) taxable as a
corporation. In respect of any such Series,
each Noteholder, if any, by the acceptance of
a Note of such Series, will agree to treat
such Note as indebtedness, and each
Certificateholder, by the acceptance of a
Certificate of such Series, will agree to
treat such Issuer, if a Trust, as a
partnership in which such Certifi-
6
79
cateholder is a partner for federal income
tax purposes. Alternative characterizations
of such Trusts and such Certificates are
possible, but would not result in materially
adverse tax consequences to
Certificateholders.
If the Prospectus Supplement specifies that the
related Trust will be treated as a grantor
trust and except as otherwise provided in
such Prospectus Supplement, upon the issuance
of the related Series of Certificates, Tax
Counsel to such Trust will deliver an opinion
to the effect that such Trust will be treated
as a grantor trust for federal income tax
purposes and will not be subject to federal
income tax.
For federal income tax purposes, Notes
generally will be treated as debt obligations
of the related Issuer. Holders of Notes will
not be required to report income with respect
to such Notes under an accrual method, unless
the Noteholders otherwise use the accrual
method. Notes will not represent "real estate
assets" for purposes of Section 856(c)(5)(A)
of the Code or "[l]oans principally secured
by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the
Code.
See "Certain Federal Income Tax Consequences"
for additional information concerning the
application of federal tax laws to the
Securities.
ERISA CONSIDERATIONS.......... A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
or the Code should carefully review with its
own legal advisors whether the purchase or
holding of Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code. See
"ERISA Considerations." To the extent
described in the Prospectus Supplement for a
Series, certain Classes of Securities of such
Series may not be transferred unless the
applicable Trustee and FIC are furnished with
a letter of representation or an opinion of
counsel to the effect that such transfer will
not result in a violation of the prohibited
transaction provisions of ERISA and the Code
and will not subject the applicable Trustee,
the Issuer, the Seller, the Servicer, the
Master Servicer, if any, or the
Administrator, if any, to additional
obligations. If specified in the related
Prospectus Supplement, the United States
Department of Labor may have issued to the
Underwriter an administrative exemption for
certain Classes of Securities. See "Certain
Information Regarding the
Securities -- General" and "ERISA
Considerations."
LEGAL INVESTMENT MATTERS...... The Securities of each Series will not
constitute "mortgage related securities"
under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") because, to
the extent specified in the related
Prospectus Supplement, a substantial number
of the Mortgage Loans will be secured by
liens on real estate that are not first
liens, as required by SMMEA. Accordingly,
many institutions with legal authority to
invest in "mortgage related securities" may
not be legally authorized to invest in the
Securities of any Series. Investors should
consult their own legal
7
80
advisors in determining whether and to what
extent the Securities of any particular
Series constitute legal investments for such
investors.
USE OF PROCEEDS............... Substantially all of the net proceeds from the
sale of a Series will be applied to the
simultaneous purchase of the Loan Assets
included in the related Trust Property or to
reimburse the amounts previously used to
effect such purchase, the costs of carrying
the Loan Assets until sale of such Series and
to pay other expenses connected with pooling
the Loan Assets and issuing such Series. See
"Use of Proceeds."
RATING........................ It is a condition to the issuance of each Class
of a Series specified as being offered by the
related Prospectus Supplement that the
Securities of such Class be rated in one of
the four highest rating categories
established for such Securities by a
nationally recognized statistical rating
agency (a "Rating Agency").
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81
RISK FACTORS
In considering an investment in the Offered Securities of any Series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement.
LIMITED LIQUIDITY AND FLUCTUATION IN VALUE FROM MARKET CONDITIONS
General. The Offered Securities of any Series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Securities for an indefinite period of time.
Furthermore, except to the extent described herein and in the related Prospectus
Supplement, Securityholders will have no redemption rights, and the Offered
Securities of each Series are subject to early retirement only under certain
specified circumstances described in the related Prospectus Supplement.
Lack of a Secondary Market. There can be no assurance that a secondary
market for the Offered Securities of any Series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Offered Securities remain outstanding. The
Prospectus Supplement for any Series of Offered Securities may indicate that an
underwriter specified therein intends to establish a secondary market in such
Offered Securities; however, no underwriter will be obligated to do so. Any such
secondary market may provide less liquidity to investors than any comparable
market for securities that evidence interests in single-family mortgage loans.
To the extent provided in the related Prospectus Supplement, the Securities may
be listed on any securities exchange.
Book Entry Registration. To the extent specified in the related Prospectus
Supplement, persons acquiring beneficial ownership interests in the Securities
of any Series or Class will hold their Securities through DTC, in the United
States, or Cedel or Euroclear in Europe. Transfers within DTC, Cedel or
Euroclear, as the case may be, will be in accordance with the usual rules and
operating procedures of the relevant system. So long as the Securities are
Book-Entry Securities, such Securities will be evidenced by one or more
certificates registered in the name of Cede & Co., as the nominee of DTC, or
Citibank N.A. or Morgan Guaranty Trust Company of New York, the relevant
depositaries of Cedel and Euroclear, respectively, and each a participating
member of DTC. No Securityholder will be entitled to receive a definitive
certificate representing such person's interest, except in the event that
Definitive Securities are issued under the limited circumstances described
herein. See "Certain Information Regarding the Securities -- Book-Entry
Registration". Unless and until Definitive Securities for such Series are
issued, holders of such Securities will not be recognized by the Trustee or any
applicable Indenture Trustee as "Certificateholders", "Noteholders" or
"Securityholders", as the case may be (as such terms are used herein or in the
related Pooling and Servicing Agreement or related Indenture and Trust
Agreement, as applicable). Hence, until Definitive Securities are issued,
holders of such Securities will only be able to exercise the rights of
Securityholders indirectly through DTC (if in the United States) and its
participating organizations, or Cedel and Euroclear (in Europe) and their
respective participating organizations. See "Certain Information Regarding the
Securities -- Book-Entry Registration".
Since transactions in the Securities can be effected only through DTC,
Cedel, Euroclear, participating organizations, indirect participants and certain
banks, the ability of the beneficial owner thereof to pledge such Securities to
persons or entities that do not participate in the DTC, Cedel or Euroclear
system, or otherwise to take actions in respect of such Securities, may be
limited due to lack of a physical certificate representing such Securities.
Beneficial owners of Securities may experience some delay in their receipt
of payments or distributions of interest of and principal since such
distributions will be forwarded by the Trustee or Indenture Trustee to DTC and
DTC will credit such payments or distributions to the accounts of its
Participants (as defined herein) which will thereafter credit them to the
accounts of the beneficial owners thereof either directly or indirectly through
indirect participants.
Limited Nature of Ongoing Information. The primary source of ongoing
information regarding the Offered Securities of any Series, including
information regarding the status of the related Loan Assets and any
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Credit Enhancement for such Offered Securities, will be the periodic reports to
Securityholders to be delivered pursuant to the related Indenture or Pooling and
Servicing Agreement as described herein under the heading "Description of the
Transfer and Servicing Agreements -- Reports to Securityholders". There can be
no assurance that any additional ongoing information regarding the Offered
Securities of any Series will be available through any other source. The limited
nature of such information in respect of a Series of Offered Securities may
adversely affect the liquidity thereof, even if a secondary market for such
Offered Securities does develop.
Sensitivity to Fluctuations in Prevailing Interest Rates. Insofar as a
secondary market does develop with respect to any Series of Offered Securities
or Class thereof, the market value of such offered securities will be affected
by several factors, including the perceived liquidity thereof, the anticipated
cash flow thereon (which may vary widely depending upon the prepayment and
default assumptions applied in respect of the underlying Loan Assets) and
prevailing interest rates. The price payable at any given time in respect of
certain Classes of Offered Securities (in particular, a Class with a relatively
long average life, or a Class of Interest only Securities or Principal Only
Securities) may be extremely sensitive to small fluctuations in prevailing
interest rates; and the relative change in price for an Offered Security in
response to an upward or downward movement in prevailing interest rates may not
necessarily equal the relative change in price for such Offered Security in
response to an equal but opposite movement in such rates. Accordingly, the sale
of Offered Securities by a holder in any secondary market that may develop may
be at a discount from the price paid by such holder. FIC is not aware of any
source through which price information about the Offered Securities will be
generally available on an ongoing basis.
LIMITED ASSETS
The Offered Securities and Loan Assets for a Series will be guaranteed or
insured, if at all, to the extent specified in the related Prospectus
Supplement; otherwise neither the Offered Securities of any Series nor the Loan
Assets in the related Trust Property will be guaranteed or insured by, or be
recourse obligations of, the Issuer, the Seller, the Servicer or any of their
respective affiliates, by any governmental agency or instrumentality or by any
other person, and no Offered Security of any Series will represent a claim
against or security interest in the Trust Property for any other Series.
Accordingly, if the related Trust Property includes insufficient assets to make
payments on a Series of Offered Securities, no other assets will be available
for payment of the deficiency, and the holders of one or more Classes of such
Offered Securities will be required to bear the consequent loss. To the extent
provided in the related Prospectus Supplement for a Series that consists of one
or more Classes of Subordinate Securities, on any Distribution Date in respect
of which losses or shortfalls in collections on the Loan Assets have been
incurred, all or a portion of the amount of such losses or shortfalls will be
borne first by one or more Classes of the Subordinate Securities, and,
thereafter, by the remaining Classes of Securities in the priority and manner
and subject to the limitations specified in such Prospectus Supplement. Because
payments and distributions of principal on the Securities of a Series may, if
provided in the related Prospectus Supplement, be applied to outstanding Classes
of such Series in the priority specified in the related Prospectus Supplement, a
deficiency that arises after Securities of a Class of any such Series having
higher priority in payment or distribution have been fully or partially repaid
will have a disproportionately greater effect on the Securities of Classes of
such Series having lower priority in payment. The disproportionate effect of any
such deficiency is further increased in the case of Classes of Compound Interest
Securities of any Series because, prior to the retirement of all Classes of such
Series having higher priority in payment than such Compound Interest Securities,
interest is not payable, to the extent provided in the related Prospectus
Supplement, but is accrued and added to the principal of such Compound Interest
Securities.
Additions, Substitutions and Withdrawals of Assets. To the extent provided
in the related Prospectus Supplement for a Series, the Seller or the Issuer may,
subsequent to the issuance of such a Series, deliver additional Assets or
withdraw Assets previously included in the Trust Property for such Series,
substituting assets therefore or depositing additional Assets or withdrawing
Assets previously deposited in a Reserve Fund for such Series. The effect of
delivery or substitution of other Assets may be to alter the characteristics and
composition of the Assets underlying such Series, either of which may alter the
timing and amount of
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payments or distributions on, or the date of the final payment or distribution
in respect of, the Securities of such Series. See "Description of the Trust
Property -- Additions, Substitution and Withdrawal of Assets". Furthermore,
certain amounts on deposit from time to time in certain funds or accounts
constituting part of the Trust Property for a Series, including the Distribution
Account and any accounts maintained as Credit Enhancement, may be withdrawn
under certain conditions, if and to the extent described in the related
Prospectus Supplement, for purposes other than the payment of principal of or
interest on the related Series of Securities.
EFFECT OF PREPAYMENTS ON AVERAGE LIFE
As a result of prepayments on the Loan Assets, the amount and timing of
payments or distributions of principal and/or interest on the Offered Securities
of the related Series may be highly unpredictable. Prepayments on the Loan
Assets included in the Trust Property will result in a faster rate of principal
payments on one or more Classes of the related Series of Securities than if
payments on such Loan Assets were made as scheduled. Thus, the prepayment
experience on the Loan Assets included in the Trust Property may affect the
average life of one or more Classes of Securities of the related Series,
including a Class of Offered Securities. The rate of principal payments on pools
of mortgage loans and installment loan contracts varies among pools and from
time to time is influenced by a variety of economic, demographic, geographic,
social, tax and legal factors. For example, if prevailing interest rates fall
significantly below the interest rates borne by the Loan Assets included in the
Trust Property, then, subject to the particular terms of the Loan Assets (e.g.,
provisions that prohibit voluntary prepayments during specified periods or
impose penalties in connection therewith) and the ability of borrowers to obtain
new financing, principal prepayments on such Loan Assets are likely to be higher
than if prevailing interest rates remain at or above the rates borne by those
Loan Assets. Conversely, if prevailing interest rates rise significantly above
the interest rates borne by the Loan Assets included in the Trust Property, then
principal prepayments on such Loan Assets are likely to be lower than if
prevailing interest rates remain at or below the interest rates borne by those
Loan Assets. In addition to fluctuations in prevailing interest rates, the rate
of prepayments on the Loan Assets may be influenced by changes and developments
in the types and structures of loan products being offered to consumers within
the mortgage banking and consumer finance industry and by technological
developments and innovations to the loan underwriting and origination process.
Accordingly, there can be no assurance as to the actual rate of prepayment
on the Loan Assets included in any given Trust Property or that such rate of
prepayment will conform to any model described herein or in any Prospectus
Supplement. As a result, depending on the anticipated rate of prepayment for the
Loan Assets included in the Trust Property with respect to a Series, the
retirement of any Class of Securities of such Series could occur significantly
earlier or later, and the average life thereof could be significantly shorter or
longer, than expected.
In comparison to first lien single family mortgage loans, FIC is not aware
of any reliable publicly available statistical information regarding the rates
of prepayment of loans such as the Loan Assets that is based upon the historical
loan performance of this segment of the mortgage banking and consumer finance
industry. In fact, this segment of the mortgage banking and consumer finance
industry has undergone significant growth and expansion, including an increase
in new loan originations, as a result of certain social and economic factors,
including recent tax law changes that limit the deductibility of consumer
interest to indebtedness secured by an individual's principal residence and
changes and developments in the types and structures of loan products being
offered to consumers. Therefore, no assurance can be given as to the level of
prepayments that the Loan Assets will experience. In fact, a number of factors
suggest that the prepayment experience of the Loan Assets may be significantly
different from that of any first lien Mortgage Loans with equivalent interest
rates and maturities.
Additional prepayment, yield and weighted average life considerations with
respect to a Series of Securities will be set forth in the related Prospectus
Supplement.
The extent to which prepayments on the Loan Assets included in the Trust
Property of any Series ultimately affect the average life of any Class of
Securities of such Series will depend on the terms and
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provisions of such Securities. A Class of Securities, including a Class of
Offered Securities, may provide that on any Distribution Date the holders of
such Securities are entitled to a pro rata share of the prepayments on the Loan
Assets included in the related Trust Property that are distributable on such
date, to a disproportionately large share (which, in some cases, may be all) of
such prepayments, or to a disproportionately small share (which, in some cases,
may be none) of such prepayments. A Class of Securities that entitles the
holders thereof to a disproportionately large share of the prepayments on the
Loan Assets included in the related Trust Property increases the likelihood of
early retirement of such Class ("Call Risk") if the rate of prepayment is
relatively fast; while a Class of Securities that entitles the holders thereof
to a disproportionately small share of the prepayments on the Loan Assets
included in the related Trust Property increases the likelihood of an extended
average life of such Class ("Extension Risk") if the rate of prepayment is
relatively slow. To the extent described in the related Prospectus Supplement,
the respective entitlement of the various Classes of Securityholders of such
Series to receive payments (and, in particular, prepayments) of principal of the
Loan Assets included in the related Trust Property may vary based on the
occurrence of certain events (e.g., the retirement of one or more Classes of
Securities of such Series) or whether certain contingencies do or do not occur
(e.g., prepayment and default rates with respect to such Loan Assets).
A Series of Securities may include one or more Classes of scheduled
amortization Securities (each, a "Scheduled Amortization Security"), which will
entitle the holders thereof to receive principal payments or distributions
according to a specified principal payment schedule. Although prepayment risk
cannot be eliminated entirely from any Class of Securities, a Class of Scheduled
Amortization Securities will generally provide a relatively stable cash flow so
long as the actual rate of prepayment on the Loan Assets included in the related
Trust Property remains relatively constant at the rate, or within the range of
rates, of prepayment used to establish the specific principal payment schedule
for such Securities. Prepayment risk with respect to a given pool of Loan Assets
does not disappear, however, and the stability afforded to Scheduled
Amortization Securities comes at the expense of one or more companion Classes of
the same Series (each, a "Companion Class"), any of which Companion Classes may
also be a Class of Offered Securities. In general, and as more specifically
described in the related Prospectus Supplement, a Companion Class may entitle
the holders thereof to a disproportionately large share of prepayments on the
Loan Assets included in the related Trust Property when the rate of prepayment
is relatively fast, and/or may entitle the holders thereof to a
disproportionately small share of prepayments on the Loan Assets included in the
related Trust Property when the rate of prepayment is relatively slow. As and to
the extent described in the related Prospectus Supplement, a Companion Class
absorbs some (but not all) of the Call Risk and/or Extension Risk that would
otherwise belong to the related Scheduled Amortization Securities if all
payments of principal of the Loan Assets included in the related Trust Property
were allocated on a pro rata basis.
EFFECT OF PREPAYMENTS ON YIELD
A Series of Securities may include one or more Classes of Offered
Securities offered at a premium or discount. Yields on such Classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on the Loan Assets included in the related Trust Property and, where
the amount of interest payable with respect to a Class is disproportionately
large, as compared to the amount of principal, as with a Class of Interest Only
Securities, a holder might fail to recover its original investment under some
prepayment scenarios. The extent to which the yield to maturity of any Class of
Offered Securities may vary from the anticipated yield will depend upon the
degree to which such Offered Securities are purchased at a discount or premium
and the amount and timing of distributions thereon. An investor should consider,
in the case of any Offered Security purchased at a premium, the risk that a
faster than anticipated rate of principal payments could result in an actual
yield to such investor that is lower than the anticipated yield.
LIMITATIONS OF CREDIT ENHANCEMENT
Limitations Regarding Types of Losses Covered. The related Prospectus
Supplement for a Series of Securities will describe any Credit Enhancement
provided with respect thereto. Use of Credit Enhancement will be subject to the
conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Enhancement may not cover all potential losses
or delays; for example, Credit
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Enhancement may or may not cover loss by reason of fraud or negligence by a
mortgage loan originator or other parties. Any such losses or delays not covered
by Credit Enhancement may, at least in part, be allocated to, or affect payments
or distributions to, one or more Classes of Offered Securities.
Disproportionate Benefits to Certain Classes and Series. A Series of
Securities may include one or more Classes of Subordinate Securities (which may
include Offered Securities), if provided in the related Prospectus Supplement.
Although subordination is intended to reduce the likelihood of temporary
shortfalls and ultimate losses to holders of the related senior Securities, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more Classes of
Offered Securities of a Series are made in a specified order of priority, any
related Credit Enhancement may be exhausted before the principal of the later
paid Classes of Offered Securities of such Series has been repaid in full. As a
result, the impact of losses and shortfalls experienced with respect to the Loan
Assets may fall primarily upon those Classes of Offered Securities having a
later right of payment. Moreover, if a form of Credit Enhancement covers the
Offered Securities of more than one Series and losses on the related Loan Assets
exceed the amount of such Credit Enhancement, it is possible that the holders of
Offered Securities of one (or more) such Series will be disproportionately
benefited by such Credit Enhancement to the detriment of the holders of Offered
Securities of one (or more) other such Series.
Limitations Regarding the Amount of Credit Enhancement. The amount of any
applicable Credit Enhancement supporting one or more Classes of Offered
Securities, including the subordination of one or more other Classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such Classes of Securities based on an assumed level of
defaults, delinquencies and losses on the Loan Assets and certain other factors.
There can be no assurance that the default, delinquency and loss experience on
such Loan Assets will not exceed such assumed levels. See "Credit Enhancement".
If the defaults, delinquencies and losses on such Loan Assets do exceed such
assumed levels, the holders of one or more Classes of Offered Securities will be
required to bear such additional defaults, delinquencies and losses. Regardless
of the form of Credit Enhancement provided with respect to a Series, the amount
of coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula.
Limitations on FHA Insurance for Title I Loans. The related Prospectus
Supplement will specify the number and percentage of the Title I Mortgage Loans
and/or Title I Contracts, if any, included in the related Trust Property that
are partially insured by the FHA pursuant to Title I Program. Since the FHA
Insurance Amount for the Title I Mortgage Loans and Title I Contracts is limited
as described herein and in the related Prospectus Supplement, and since the
adequacy of such FHA Insurance Amount is dependent upon future events, including
reductions for the payment of FHA claims, no assurance can be given that the FHA
Insurance Amount is or will be adequate to cover 90% of all potential losses on
the Title I Mortgage Loans and Title I Contracts included in the related Trust
Property. If the FHA Insurance Amount for the Title I Mortgage Loans and Title I
Contracts is reduced to zero, such loans and contracts will be effectively
uninsured from and after the date of such reduction. Under the Title I Program,
until a claim for insurance reimbursement is submitted to the FHA, the FHA does
not review or approve for qualification for insurance the individual Title I
Mortgage Loan or Title I Contract insured thereunder (as is typically the case
with other federal loan insurance programs). Consequently, the FHA has not
acknowledged that any of the Title I Mortgage Loans and Title I Contracts are
eligible for FHA insurance, nor has the FHA reviewed or approved the
underwriting and qualification by the originating lenders of any individual
Title I Mortgage Loans and Title I Contracts. See "Certain Legal Aspects of the
Loan Assets -- The Title I Program".
The availability of FHA Insurance reimbursement following a default on a
Title I Mortgage Loan or Title I Contract is subject to a number of conditions,
including strict compliance by the originating lender of such loan, FIC, the FHA
Claims Administrator, the Servicer and any subservicer with the FHA Regulations
in originating and servicing such Title I Mortgage Loan or Title I Contract, and
limits on the aggregate insurance coverage available in FIC's FHA Reserve. For
example, the FHA Regulations provide that, prior to originating a Title I
Mortgage Loan or Title I Contract, a Title I lender must exercise prudence and
diligence in determining whether the borrower and any co-maker or co-signer is
solvent and an acceptable credit risk with a reasonable ability to make payments
on the loan. Although the related Transferor will represent and
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warrant that the Title I Mortgage Loans and Title I Contracts have been
originated and serviced in compliance with all FHA Regulations, these
regulations are susceptible to substantial interpretation. Failure to comply
with all FHA Regulations may result in a denial of FHA Claims, and there can be
no assurance that the FHA's enforcement of the FHA Regulations will not become
stricter in the future. See "Certain Legal Aspects of the Loan Assets -- The
Title I Program -- General".
The FHA will not recognize any Issuer or any Securityholders as the owners
of the Title I Mortgage Loans or Title I Contracts, or any portion thereof,
entitled to submit FHA Claims. Accordingly, neither the Issuer nor the
Securityholders will have a direct right to receive insurance payments from the
FHA. FIC will contract with the Servicer (or another person specified in the
Prospectus Supplement) to serve as the Administrator for FHA Claims (the "FHA
Claims Administrator") pursuant to an FHA claims administration agreement (the
"FHA Claims Administration Agreement"), which will provide for the FHA Claims
Administrator to handle all aspects of administering, processing and submitting
FHA Claims with respect to the Title I Mortgage Loans or Title I Contracts, in
the name and on behalf of FIC. The Securityholders will be dependent on the FHA
Claims Administrator to (i) make claims on the Title I Mortgage Loans or Title I
Contracts in accordance with FHA Regulations and (ii) remit all FHA Insurance
proceeds received from the FHA in accordance with the related Sale and Servicing
Agreement or Pooling and Servicing Agreement, as applicable. The
Securityholders' rights relating to the receipt of payment from and the
administration, processing and submission of FHA Claims by FIC or any FHA Claims
Administrator are limited and governed by the related Sale and Servicing
Agreement or Pooling and Servicing Agreement, as applicable, and the FHA Claims
Administration Agreement and these functions are obligations of FIC and the FHA
Claims Administrator, but not the FHA. See "Certain Legal Aspects of the Loan
Assets -- The Title I Program -- Claims Procedures under Title I".
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a Class of Offered Securities
will reflect only its assessment of the likelihood that holders of such Offered
Securities will receive payments or distributions to which such Securityholders
are entitled under the related Indenture, Trust Agreement or Pooling and
Servicing Agreement. Such rating will not constitute an assessment of the
likelihood that principal prepayments on the Loan Assets will be made, the
degree to which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional redemption or termination of the
Securities. Furthermore, such rating will not address the possibility that
prepayment of the Loan Assets at a higher or lower rate than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor that purchases an Offered Security at a significant premium
might fail to recover its initial investment under certain prepayment scenarios.
Hence, a rating assigned by a Rating Agency does not guarantee or ensure the
realization of any anticipated yield on a Class of Offered Securities.
The amount, type and nature of Credit Enhancement, if any, provided with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating a Class of Securities of such Series.
Those criteria are sometimes based upon an actuarial analysis of the behavior of
similar types of loans in a larger group. However, there can be no assurance
that the historical data supporting any such actuarial analysis will accurately
reflect future experience, or that the data derived from a large pool of similar
types of loans will accurately predict the delinquency, default or loss
experience of any particular pool of Loan Assets. In other cases, such criteria
may be based upon determination of the values of the Mortgaged Properties or
other properties, if any, that provide security for the Loan Assets. However, no
assurance can be given that those values will not decline in the future. As a
result, the Credit Enhancement required in respect of the Offered Securities of
any Series may be insufficient to fully protect the holders thereof from losses
on the related Loan Assets. See "-- Limitations of Credit Enhancement" and
"Credit Enhancement".
ADVERSE TAX CONSEQUENCES
Original Issue Discount. Certain of the Offered Securities may be issued
with original issue discount for federal income tax purposes. A holder of a
Security issued with original issue discount will be required to
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include original issue discount in ordinary gross income for federal income tax
purposes as it accrues, in advance of receipt of the cash, or a portion of the
cash, attributable to such income. Accrued but unpaid interest on the Compound
Interest Securities generally will be treated as original issue discount for
this purpose. At certain rapid Loan Asset prepayment rates, original issue
discount may accrue on certain Classes of Securities that may never receive
payments or distributions of cash in respect thereof, resulting in a loss to the
related Securityholder. See "Certain Federal Income Tax Consequences".
CERTAIN FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON LOAN ASSETS
General. The payment performance of the Offered Securities of any Series
will be directly related to the payment performance of the Loan Assets included
as part of the related Trust Property. Set forth below is a discussion of
certain factors that will affect the full and timely payment of the Loan Assets
included as part of any Trust Property.
Geographic Concentration. Certain geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency on mortgage loans generally. Any concentration of Loan Assets in
such a region may present risk considerations in addition to those generally
present for similar mortgage-backed or asset-backed securities without such
concentration.
Decline in Value of a Loan Asset. An investment in Securities secured by or
evidencing an interest in a pool of Mortgage Loans may be adversely affected by,
among other things, a decline in one-to-four family residential property values.
No assurance can be given that values of the Mortgaged Properties have remained
or will remain at the levels existing on the dates of origination of the related
Mortgage Loans. If the residential real estate market should experience an
overall decline in property values such that the outstanding balances of the
Mortgage Loans in a particular Mortgage Pool, and any other financing on the
Mortgaged Properties, become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, defaults and losses could be
higher than those now generally experienced with respect to similar types of
loans within the mortgage lending industry. To the extent that such losses are
not covered by applicable insurance policies, if any, or by any Credit
Enhancement as described in the related Prospectus Supplement, holders of
Securities secured by or evidencing interests in such Mortgage Loans will bear
all risk of loss resulting from defaults by borrowers and will have to look
primarily to the value of the related Mortgaged Properties for recovery of the
outstanding principal and unpaid interest of the defaulted Mortgage Loans. See
"Description of the Trust Property -- Mortgage Loans".
An investment in Securities secured by or evidencing interests in Contracts
may be affected by, among other things, a downturn in regional or local economic
conditions. These regional or local economic conditions are often volatile, and
historically have affected the delinquency, loan loss and repossession
experience of Contracts. To the extent that losses on Contracts are not covered
by applicable insurance policies, if any, or by any Credit Enhancement, holders
of the Securities secured by or evidencing interests in such Contracts will bear
all risk of loss resulting from default by borrowers and will have to look
primarily to the value of the underlying asset, if any, for recovery of the
outstanding principal and unpaid interest of the defaulted Contracts. See
"Description of the Trust Property -- Contracts".
Limitations on Realizations of Junior Liens. The primary risk with respect
to defaulted Mortgage Loans secured by junior liens is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related Mortgaged Property to satisfy fully both the related senior lien(s) and
the Mortgage Loan and that other insurance providing for reimbursement for
losses from such default (i.e., the FHA Insurance Amount for a Title I Mortgage
Loan) is not available. The claims of the related senior lienholder(s) will be
satisfied in full out of proceeds of the liquidation of the Mortgaged Property,
if such proceeds are sufficient, before the related Issuer, as the junior
lienholder, receives any payments in respect of the defaulted Mortgage Loan. If
the Servicer or a Subservicer, if any, were to foreclose on any junior lien
Mortgage Loan, it would do so subject to any related senior lien(s). In order
for a junior lien Mortgage Loan to be paid in full at such sale, a bidder at the
foreclosure sale of such Mortgage Loan would have to bid an amount sufficient to
pay off all sums due under the Mortgage Loan and the senior lien(s) or purchase
the
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Mortgaged Property subject to the senior lien(s). If proceeds from a foreclosure
and liquidation of the related Mortgaged Property are insufficient to satisfy
the costs of foreclosure and liquidation and the amounts owed under the loans
secured by the senior lien(s) and the junior lien Mortgage Loan in the
aggregate, the Issuer, as the junior lienholder, will bear (i) the risk of delay
in payments and distributions while a deficiency judgment (which may not be
available in certain jurisdictions) against the borrower is obtained and
realized and (ii) the risk of loss if the deficiency judgment is not obtained or
realized. Any such delays or losses will be borne by the Securityholders of a
Series to the extent that such delays or losses are not otherwise covered by
amounts available from any Credit Enhancement provided for the related
Securities, as specified in the related Prospectus Supplement. See "Certain
Legal Aspects of the Loan Assets -- Foreclosure -- Junior Liens".
Certain Legal Considerations of the Loan Assets. Applicable state laws
generally regulate interest rates and other charges that may be assessed on
borrowers, require certain disclosures to borrowers, and may require licensing
of FIC, the Trustee, the Indenture Trustee, the Servicer, the Administrator, if
any, the Master Servicer, if any, and any Subservicer. In addition, most states
have other laws, public policies and general principles of equity relating to
the protection of consumers and the prevention of unfair and deceptive practices
which may apply to the origination, servicing and collection of the Loan Assets.
The Loan Assets may also be subject to federal laws, including, if applicable,
the following: (i) the federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Loan Assets; (ii) the Real Estate Settlement Procedures Act and
Regulation X promulgated thereunder, which require certain disclosures to the
borrowers regarding the settlement and servicing of the Mortgage Loans; (iii)
the Equal Credit Opportunity Act and Regulation B promulgated thereunder, which
prohibit discrimination on the basis of age, race, color, sex, religion, marital
status, national origin, receipt of public assistance or the exercise of any
right under the Consumer Credit Protection Act; (iv) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to the
borrower's credit experience; (v) the Federal Trade Commission Preservation of
Consumers' Claims and Defenses Rule, 16 C.F.R. Part 433, regarding the
preservation of a consumer's rights; (vi) the Fair Housing Act, 42 U.S.C. 3601
et seq., relating to the creation and governance of the Title I Program; (vii)
the Home Ownership and Equity Protection Act; and (viii) the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"). In addition,
Federal and state environmental laws and regulations may also impact the
Servicer's or any Subservicer's ability to realize value with respect to the
Mortgaged Properties. See "Certain Legal Aspects of the Loan Assets".
Depending on the provisions of applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicer or any Subservicer to collect all or part of
the principal of or interest on the Loan Assets, may entitle the borrower to a
refund of amounts previously paid, and, in addition, could subject the Servicer
or any Subservicer to damages and administrative sanctions. Further, violations
of state law can affect the insurability of the Title I Mortgage Loans and Title
I Contracts under FHA Regulations. See "Certain Legal Aspects of the Loan
Assets -- The Title I Program." If the Servicer or any Subservicer is unable to
collect all or part of the principal or interest on any Loan Asset because of a
violation of the aforementioned laws, public policies or general principles of
equity, payments on or distributions in respect of the Securities may be delayed
or the Trustee may be unable to make all payments or distributions owed to the
Securityholders to the extent any related losses are not otherwise covered by
amounts available from any Credit Enhancement provided for the related Series of
Securities. Furthermore, depending upon whether damages and sanctions are
assessed against the Servicer, the Master Servicer, if any, or any Subservicer,
such violations may materially impact the financial ability of the Master
Servicer, if any, the Servicer or Subservicer to continue to act in such
capacity.
To the extent specified in the related Prospectus Supplement, the Seller or
the Transferor will be required to repurchase or replace any Loan Asset which,
at the time of origination, did not comply with applicable federal and state
laws or regulations.
RISKS ASSOCIATED WITH CERTAIN LOAN ASSETS
No Hazard Insurance for Title I Mortgage Loans. With respect to any Title I
Mortgage Loans, the FHA Regulations do not require that a borrower obtain title
or fire and casualty insurance as a condition to
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obtaining a property improvement loan. With respect to both manufactured home
contracts that are Title I Contracts and property improvement loans that are
Title I Mortgage Loans, if the related Mortgage Property is located in a flood
hazard area, however, flood insurance in an amount at least equal to the loan
amount is required. In addition, the FHA Regulations do not require that the
borrower obtain insurance against physical damage arising from earth movement
(including earthquakes, landslides and mudflows) as a condition to obtaining a
property improvement loan insured under the Title I Program. Accordingly, if a
Mortgaged Property that secures a Title I Mortgage Loan suffers any uninsured
hazard or casualty losses, holders of any Offered Securities secured in whole or
in part by Title I Mortgage Loans may bear the risk of loss resulting from a
default by the borrower to the extent such losses are not recovered by
foreclosure on the defaulted loans or from any FHA Claims payments. Such loss
may be otherwise covered by amounts available from the Credit Enhancement
provided for the Offered Securities, as specified in the related Prospectus
Supplement.
Contracts Secured by Manufactured Homes. The Secured Contracts will be
secured by security interests in Manufactured Homes that are not considered to
be real property because they are not permanently affixed to real estate.
Perfection of security interests in such Manufactured Homes and enforcement of
rights to realize upon the value of such Manufactured Homes as collateral for
the Secured Contracts are subject to a number of Federal and state laws,
including the Uniform Commercial Code as adopted in each state and each state's
certificate of title statutes. The steps necessary to perfect the security
interest in a Manufactured Home will vary from state to state. Because of the
expense and administrative inconvenience involved, the Servicer of a Secured
Contract will not amend any certificate of title to change the lienholder
specified therein from such Servicer to the Issuer or the applicable Trustee and
will not deliver any certificate of title to such Issuer or Trustee or note
thereon such Issuer's or Trustee's interest. Consequently, in some states, in
the absence of such an amendment, the assignment to such Issuer or Trustee of
the security interest in the Manufactured Home may not be effective or such
security interest may not be perfected and, in the absence of such notation or
delivery to such Issuer or Trustee, the assignment of the security interest in
the Manufactured Home may not be effective against creditors of the Servicer or
a trustee in bankruptcy of the Servicer. If any related Credit Enhancement is
exhausted and a Secured Contract is in default, then recovery of amounts due on
such Secured Contracts is dependent on repossession and resale of the
Manufactured Home securing such Secured Contract. Certain other factors may
limit the ability of the Servicer to realize upon the Manufactured Homes or may
limit the amount realized to less than the amount due.
Unsecured Contracts. The obligations of the borrower under any Unsecured
Contract included as part of the related Trust Property will not be secured by
an interest in the related real estate or otherwise, and the related Issuer, as
the owner of such Unsecured Contract and the related Indenture Trustee, as
assignee for the benefit of the Noteholders, of the Issuer's interest in such
Unsecured Contract, will be a general unsecured creditor as to such obligations.
As a consequence, in the event of a default under an Unsecured Contract, the
related Issuer or Indenture Trustee, as applicable, will have recourse only
against the borrower's assets generally, along with all other general unsecured
creditors of the borrower. In a bankruptcy or insolvency proceeding relating to
an borrower on an Unsecured Contract, the obligations of the borrower under such
Unsecured Contract may be discharged in their entirety, notwithstanding the fact
that the portion of such borrower's assets made available to the related Trustee
as a general unsecured creditor to pay amounts due and owing thereunder are
insufficient to pay all such amounts. A borrower on an Unsecured Contract may
not demonstrate the same degree of concern over performance of its obligations
under such Unsecured Contract as if such obligations were secured by a single
family residence owned by such borrower.
Consumer Protection Laws Related to Contracts. Numerous federal and state
consumer protection laws impose requirements on lending under retail installment
sales contracts and installment loan agreements such as the Contracts, and the
failure by the lender or seller of goods to comply with such requirements could
give rise to liabilities of assignees for amounts due under such agreements and
claims by such assignees may be subject to set-off as a result of such lender's
or seller's noncompliance. These laws would apply to a Trustee as an assignee of
Contracts. FIC will warrant that each Contract complies with all requirements of
law and, with respect to any Secured Contract, will make certain warranties
relating to the validity, subsistence, perfection and priority of the security
interest in each Manufactured Home securing such Secured Contract. A breach of
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any such warranty that materially adversely affects the interests of the
Securityholders in any Contract would create an obligation of the Seller to
repurchase or replace such Contract unless such breach is cured.
Reliance on Management of Timeshare Units. Unlike most conventional
single-family residential properties, the value of a timeshare unit is
substantially dependent on the management of the resort property in which it is
located. Management of timeshare resort properties includes operation of a
reservation system, maintenance of the physical structure, refurbishing of
individual units, maintenance and management of common areas and recreational
facilities, and facilitating the rental of individual units on behalf of
timeshare owners. In addition, timeshare units, which are purchased for
intervals of one or more specified weeks each year, are marketed as the owner's
purchase of future vacation opportunities rather than as a primary residence,
a second home or an investment. Accordingly, while borrowers are obligated to
make payments under their Mortgage Loans irrespective of any defect in, damage
to or change in conditions (such as poor management, faulty construction or
physical, social or environmental conditions) relating to the timeshare
properties, any such defect, damage or change in conditions could result in
delays in payment or in defaults by borrowers whose timeshare units are
affected.
RECHARACTERIZATION OF SALE OF LOAN ASSETS AS BORROWING
In the event of the bankruptcy or insolvency of an affiliate of the Issuer
it is possible that a creditor, receiver, trustee in bankruptcy or other party
in interest may claim that the transactions through which the Issuer acquired
the Loan Assets were pledges of the Loan Assets rather than true sales, and
that, accordingly, the Loan Assets should be part of such affiliate's bankruptcy
estate. The transactions have been structured applying principles such that
following the bankruptcy of such affiliate, a court, in a proceeding considering
the transfers of the Loan Assets from such affiliate to the Issuer, should treat
the transfers of the Loan Assets as a true sale and, therefore, the Loan Assets
should not be part of such affiliate's bankruptcy estate. The Issuer and any
such affiliate will treat transfers of the Loan Assets as sales from the
affiliate to the Issuer for tax and accounting purposes, but such treatment will
not preclude a creditor, receiver, trustee in bankruptcy or other party in
interest of any such affiliate from pursuing such claim. If such transactions
are determined to be sales to the Issuer, the Loan Assets would not be part of
any such affiliate's bankruptcy estate and would not be available for
distribution to any such affiliate's creditors or equity security holders.
Additionally, in the event of the bankruptcy or insolvency of any of the
Issuer's affiliates, a creditor, receiver, trustee in bankruptcy or other party
in interest may seek a court order consolidating the assets and liabilities of
the Issuer with the estate of such affiliate ("substantive consolidation") with
the result that their combined estate will be made subject to their combined
liabilities. This transaction has been structured applying principles such that
following the bankruptcy of an affiliate of the Issuer, a court, upon motion of
a creditor, receiver, trustee in bankruptcy or other party in interest, should
not consolidate the assets and liabilities of the Issuer and such affiliate on
the basis of any legal theories regarding substantive consolidation previously
recognized by courts of competent jurisdiction in bankruptcy proceedings. The
foregoing statement is based on and subject to a number of assumptions
concerning facts and circumstances that have been noted, cited or acknowledged
by courts adjudicating similar claims in prior cases and certain other
assumptions regarding the separate corporate identities of the Issuer and its
affiliates, many of which relate to the manner in which the Issuer and its
affiliates have conducted and will conduct their respective businesses.
If either of the foregoing positions is argued before a court, such
argument could prevent, even if ultimately unsuccessful, timely payments of
amounts due on the Securities, and could result, if ultimately successful, in
payment of reduced amounts on the Securities.
RISKS RELATING TO INDEXED SECURITIES
An investment in Securities indexed, as to principal, premium and/or
interest, to one or more values of currencies (including exchange rates and swap
indices between currencies), commodities, interest rates or other indices
entails significant risks that are not associated with similar investments in a
conventional fixed-rate debt security. If the interest rate of such a Security
is so indexed, it may result in an interest rate that is less than that payable
on a conventional fixed-rate debt security issued at the same time, including
the
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possibility that no interest will be paid, and, if the principal amount of such
a Security is so indexed, the principal amount payable on the related final
Distribution Date may be less than the original purchase price of such Security
if allowed pursuant to the terms of such Security, including the possibility
that no principal will be paid. The secondary market for such Securities will be
affected by a number of factors, independent of the characteristics of the Loan
Assets, structure of the cash flows and the value of the applicable currency,
commodity, interest rate or other index, including the volatility of the
applicable currency, commodity, interest rate or other index, the time remaining
to the maturity of such Securities, the amount outstanding of such Securities
and market interest rates. The value of the applicable currency, commodity,
interest rate or other index depends on a number of interrelated factors,
including economic, financial and political events. Additionally, if the formula
used to determine the principal amount, premium, if any, or interest payable
with respect to such Securities contains a multiple or leverage factor, the
effect of any change in the applicable currency, commodity, interest rate or
other index may be increased. The historical experience of the relevant
currencies, commodities, interest rates or other indices should not be taken as
an indication of future performance of such currencies, commodities, interest
rates or other indices during the term of any Security. The credit ratings
assigned to any Series or Class of Securities, in no way, are reflective of the
potential impact of the factors discussed above, or any other factors, on the
market value of the Securities. Accordingly, prospective investors should
consult their own financial and legal advisors as to the risks entailed by an
investment in such Securities and the suitability of such Securities in light of
their particular circumstances.
DESCRIPTION OF THE NOTES
GENERAL
With respect to each Series, one or more Classes of Notes may be issued
pursuant to the terms of an Indenture, a form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. The
following summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Notes and
the Indenture.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Notes will initially be represented by one or more Notes, in each case
registered in the name of the nominee of DTC (together with any successor
depository selected by the Issuer, the "Depository") except as set forth below.
Unless otherwise specified in the related Prospectus Supplement, the Notes will
be available for purchase in denominations of $1,000 and integral multiples
thereof in book-entry form only. FIC has been informed by DTC that DTC's nominee
will be Cede, unless another nominee is specified in the related Prospectus
Supplement. Accordingly, such nominee is expected to be the holder of record of
the Notes of each Class. Unless and until Definitive Notes are issued under the
limited circumstances described herein or in the related Prospectus Supplement,
no Noteholder will be entitled to receive a physical certificate representing a
Note. All references herein and in the related Prospectus Supplement to actions
by Noteholders refer to actions taken by DTC upon instructions from its
participating organizations (the "DTC Participants") and all references herein
and in the related Prospectus Supplement to distributions, notices, reports and
statements to Noteholders refer to payments, notices, reports and statements to
DTC or its nominee, as the registered holder of the Notes, for payment or
distribution to Noteholders in accordance with DTC's procedures with respect
thereto. See "Certain Information Regarding the Securities -- Book-Entry
Registration" and "-- Definitive Securities".
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
Interest Rate and amount of or method of determining payments of principal and
interest on each Class of Notes of a given Series will be described in the
related Prospectus Supplement. The rights of holders of any Class of Notes to
receive payments of principal and interest may be senior or subordinate to the
rights of holders of any other Class or Classes of Notes of such Series, as
described in the related Prospectus Supplement. See "Certain Information
Regarding the Securities -- General". Unless otherwise provided in the related
Prospectus Supplement, payments of interest on the Notes of such Series will be
made prior to payments of principal thereon. Each Class of Notes may have a
different Interest Rate, which may be a fixed, variable or adjustable Interest
Rate
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(and which may be zero for Principal Only Securities), or any combination of the
foregoing. The related Prospectus Supplement will specify the Interest Rate for
each Class of Notes of a given Series or the method for determining such
Interest Rate. See "Certain Information Regarding the Securities -- Fixed Rate
Securities and Floating Rate Securities". One or more Classes of Notes of a
Series may be redeemable in whole or in part under the circumstances specified
in the related Prospectus Supplement, including as a result of the Servicer's
exercising its option to purchase the related Loan Assets Pool.
One or more Classes of Notes of a given Series may have fixed principal
payment schedules, as set forth in such Prospectus Supplement. Holders of such
Notes would be entitled to receive as payments of principal on any given
Distribution Date the applicable amounts set forth on such schedule with respect
to such Notes, in the manner and to the extent set forth in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, payments
to Noteholders of all Classes within a Series in respect of interest will have
the same priority. Under certain circumstances, the amount available for such
payments could be less than the amount of interest payable on the Notes on any
of the dates specified for payments in the related Prospectus Supplement (each,
a "Distribution Date"), in which case each Class of Noteholders will receive its
ratable share (based upon the aggregate amount of interest due to such Class of
Noteholders) of the aggregate amount available to be paid in respect of interest
on the Notes of such Series.
In the case of a Series of Notes which includes two or more Classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such Class will be set forth in the related
Prospectus Supplement. Payments in respect of principal and interest of any
Class of Notes will be made on a pro rata basis among all the Noteholders of
such Class.
THE INDENTURE
Modification of Indenture. The related Indenture Trustee and the Issuer
may, with the consent of Noteholders of not less than a majority of the
outstanding principal amount of the Notes of the related Series, enter into a
supplemental indenture for the purpose of adding any provisions to, or changing
in any manner or eliminating any of the provisions of, the related Indenture, or
modifying in any manner the rights of the related Noteholders (except as
provided below).
Unless otherwise specified in the related Prospectus Supplement with
respect to a Series of Notes, without the consent of the holder of each
outstanding Note affected thereby no supplemental indenture will: (i) change the
date of any installment of principal of or interest on any such Note or reduce
the principal amount thereof, the interest rate thereon or the redemption price
with respect thereto or change the provisions of the related Indenture relating
to the application of collections on, or the proceeds of the sale of, the Trust
Property to payment of principal or interest on the Notes or change any place of
payment where, or the coin or currency in which, any such Note or any interest
thereon is payable or impair the right to institute suit for the enforcement of
certain provisions of the related Indenture regarding payment; (ii) reduce the
percentage of the aggregate principal amount of the outstanding Notes of such
Series, the consent of the holders of which is required for any such
supplemental indenture or the consent of the holders of which is required for
any waiver of compliance with certain provisions of the related Indenture or
certain defaults thereunder and their consequences as provided for in such
Indenture; (iii) modify or alter the provisions of the related Indenture
regarding the definition of the term "outstanding"; (iv) reduce the percentage
of the aggregate principal amount of the outstanding Notes of such Series, the
consent of the holders of which is required to direct the related Indenture
Trustee to sell or liquidate the Loan Assets if the proceeds of such sale would
be insufficient to pay the principal amount and accrued but unpaid interest on
the outstanding Notes of such Series; (v) modify the sections of the related
Indenture which specify the applicable percentage of the aggregate principal
amount of the outstanding Notes of such Series necessary to amend such Indenture
or certain other related agreements; (vi) modify the provisions of the related
Indenture in such a manner as to affect the calculation of the amount of any
payment of interest or principal due on any Note on any Distribution Date or to
affect the rights of the Noteholders to the benefit of any provisions for the
mandatory redemption of the
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Notes; or (vii) permit the creation of any lien ranking prior to or on a parity
with the lien of the related Indenture with respect to any part of the Trust
Property or, except as otherwise permitted or contemplated in such Indenture,
terminate the lien of such Indenture on any such property or deprive the holder
of any such Note of the security provided by the lien of such Indenture.
To the extent provided in the applicable Prospectus Supplement, the related
Indenture Trustee and the Issuer may also enter into supplemental indentures,
without the consent of the Noteholders of the related Series, for the purpose
of, among other things, adding any provisions to or changing in any manner or
eliminating any of the provisions of, the related Indenture or modifying in any
manner the rights of the Noteholders; provided that such action shall not
adversely affect in any material respect the interests of any Noteholder.
Events of Default; Rights upon Event of Default. With respect to the Notes
of a given Series, unless otherwise specified in the related Prospectus
Supplement, "Events of Default" under the related Indenture will consist of: (i)
a default in the payment of any interest on any such Note when the same becomes
due and payable, and such default shall continue for a period of five days; (ii)
a default in the payment of the principal of or any installment of the principal
of any such Note when the same becomes due and payable; (iii) a default in the
observance or performance of any covenant or agreement of the applicable Issuer
made in the related Indenture or any representation or warranty of the Issuer
made in the related Indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith having been proven incorrect in any
material respect as of the time made, and such default shall have continued and
not been cured, or the circumstance or condition in respect of which such
misrepresentation or warranty was incorrect shall not have been eliminated or
otherwise cured for a period of 30 days after notice thereof is given to the
Issuer by the applicable Indenture Trustee or to such Issuer and such Indenture
Trustee by the holders of at least 25% of the aggregate principal amount of all
Notes then outstanding; or (iv) certain events of bankruptcy, insolvency,
receivership or liquidation of the applicable Issuer or any substantial portion
of the Trust Property. However, the amount of principal required to be paid to
Noteholders of such Series under the related Indenture will generally be limited
to amounts available to be deposited in the Collection Account. Therefore,
unless otherwise specified in the related Prospectus Supplement, the failure to
pay principal on a Class of Notes generally will not result in the occurrence of
an Event of Default until the final scheduled Distribution Date for such Class
of Notes.
If an Event of Default should occur and be continuing with respect to the
Notes of any Series, the related Indenture Trustee or holders of a majority in
principal amount of such Notes then outstanding (or such Noteholders as may be
specified in the related Prospectus Supplement) may declare the principal of
such Notes to be immediately due and payable. And such declaration may, under
certain circumstances, be rescinded by the holders of a majority in principal
amount of such Notes then outstanding (or such Noteholders as may be specified
in the related Prospectus Supplement).
If an Event of Default shall have occurred and be continuing, the Indenture
Trustee may, and at the direction of a majority of the Noteholders (or such
Noteholders as may be specified in the related Prospectus Supplement) shall, do
one or more of the following: (i) institute proceedings to collect amounts due,
(ii) foreclose on property included in the Trust Property; (iii) exercise
remedies as a secured party and the UCC; and (iv) sell the related Loan Assets.
Unless otherwise specified in the related Prospectus Supplement, however, such
Indenture Trustee is prohibited from selling the related Loan Assets following
an Event of Default, unless (i) the holders of all such outstanding Notes (or
such Noteholders as may be specified in the related Prospectus Supplement)
consent to such sale, (ii) the proceeds of such sale are sufficient to discharge
in full all amounts then due and unpaid upon such Notes for principal and
interest, or (iii) such Indenture Trustee determines that the Trust Property
will not continue to provide sufficient funds for payment of principal of and
interest on the Notes as they would become due if the Notes were not declared
due and payable and the Indenture Trustee obtains the consent of holders of
66 2/3% of the aggregate principal amount of all Notes then outstanding (or such
Noteholders as may be specified in the related Prospectus Supplement). If the
Notes have been declared to be due and payable following an Event of Default,
the Indenture Trustee may, but need not, elect to maintain possession of the
Trust Property.
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Subject to the provisions for indemnification and certain limitations
contained in the related Indenture, the holders of a majority of the aggregate
principal amount of the outstanding Notes of a given Series (or such Noteholders
as may be specified in the related Prospectus Supplement) will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the applicable Indenture Trustee, and the holders of a majority of
the aggregate principal amount of such Notes then outstanding (or such
Noteholders as may be specified in the related Prospectus Supplement) may, in
certain cases, waive any past default and its consequences, except a default in
the payment of principal of or interest on any of the Notes or in respect of a
covenant or provision of such Indenture that cannot be modified or amended
without the consent of the holders of each such outstanding Note.
Unless otherwise specified in the related Prospectus Supplement, no holder
of a Note of any Series will have the right to institute any proceeding,
judicial or otherwise, with respect to the related Indenture, unless (i) such
holder has previously given written notice to the applicable Indenture Trustee
of a continuing Event of Default, (ii) the holders of not less than 25% of the
aggregate principal amount of the outstanding Notes of such Series (or such
Noteholders as may be specified in the related Prospectus Supplement) have made
written request to such Indenture Trustee to institute such proceeding in
respect of such Event of Default in its own name as Indenture Trustee, (iii)
such holder or holders have offered to such Indenture Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
complying with such request, (iv) such Indenture Trustee for 60 days after its
receipt of such notice, request and offer of indemnity failed to institute such
proceeding and (v) no direction inconsistent with such written request has been
given to such Indenture Trustee during such 60-day period by the holders of a
majority of the aggregate principal amount of the outstanding Notes of such
Series.
In addition, each Indenture Trustee, by entering into the related
Indenture, and the related Noteholders, by accepting the related Notes, will
covenant that they will not at any time institute against the applicable Issuer
or the Servicer, or join in any institution against the applicable Issuer or the
Servicer of any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceeding under any United States federal or
state bankruptcy or similar law in connection with any obligations relating to
the Notes, the related Indenture or certain related documents.
The Notes shall be non-recourse obligations of the Issuer and shall be
limited in right of payment to amounts available from the Trust Property and any
amounts received by the Indenture Trustee under any Credit Enhancement in
respect of the Notes, as provided in the related Indenture. The Issuer shall not
otherwise be liable for payments on the Notes.
Certain Covenants. Each Indenture will provide that the related Issuer will
not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the laws
of the United States, any state or the District of Columbia, (ii) such entity
expressly assumes such Issuer's obligation to make due and punctual payments
upon the Notes of the related Series and the performance or observance of every
agreement and covenant of the Issuer under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) such Issuer has been advised that the rating of the Notes or
the Certificates of such Series then outstanding would not be reduced or
withdrawn by the Rating Agencies as a result of such merger or consolidation and
(v) such Issuer has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Issuer or to any related Noteholder or Certificateholder.
Each Issuer will not, among other things, (i) except as expressly permitted
by the applicable Indenture or the applicable Sale and Servicing Agreements,
sell, transfer, exchange or otherwise dispose of any of the properties or assets
of the Issuer, including those included in the Trust Property unless directed to
do so by the Indenture Trustee, (ii) claim any credit on, or make any deduction
from the principal or interest payable in respect of, the Notes of the related
Series (other than amounts properly withheld under the Code or applicable state
law) or assert any claim against any present or former Noteholder by reason of
the payment of taxes levied or assessed upon any part of the Trust Property,
(iii) engage in any business or activity other than as permitted by the Issuer's
charter documents, (iv) permit the validity or effectiveness of the related
Indenture to be amended, hypothecated, subordinated, terminated or discharged or
permit any person to be released
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from any covenants or obligations with respect to such Notes under such
Indenture except as may be expressly permitted thereby or (v) permit any lien,
charge, excise, claim, security interest, mortgage or other encumbrance (other
than the lien of the related Indenture) to be created on or extend to or
otherwise arise upon or burden the Trust Property or any part thereof, or any
interest therein or the proceeds thereof.
Annual Compliance Statement. The Issuer will be required to deliver to the
Indenture Trustee, within 120 days after the end of each fiscal year of such
Issuer, an officer's certificate with respect to the fulfillment of the Issuer's
obligations under the Indenture during the immediately preceding fiscal year.
Indenture Trustee's Annual Report. If required by Section 313(a) of the
Trust Indenture Act (the "TIA"), within 60 days after each February 1, the
Indenture Trustee shall mail to each Noteholder, as required by TIA Section
313(c), a brief report dated as of such date that complies with TIA Section
313(a). The Indenture Trustee also shall comply with TIA Section 313(b).
Satisfaction and Discharge of Indenture. An Indenture will cease to be of
further effect with respect to the Notes of any Series, upon the delivery to the
related Indenture Trustee for cancellation of all Notes of such Series or, with
certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
THE INDENTURE TRUSTEE
The Indenture Trustee for a Series of Notes will be specified in the
related Prospectus Supplement. The Indenture Trustee for any Series may resign
at any time, in which event the Issuer will be obligated to appoint a successor
thereto for such Series. The holders of a majority of the aggregate principal
amount of the related Notes outstanding may remove any such Indenture Trustee
and the Issuer shall remove the Indenture Trustee if (i) such Indenture Trustee
ceases to be eligible to continue as such under the related Indenture; (ii) such
Indenture Trustee becomes insolvent; (iii) a receiver or other public official
takes charge of such Indenture Trustee or its property; or (iv) such Indenture
Trustee otherwise becomes incapable of acting. In such circumstances, the Issuer
will be obligated to appoint a successor thereto for the applicable Series of
Notes. No resignation or removal of the Indenture Trustee and no appointment of
a successor thereto for any Series of Notes will become effective until the
acceptance of appointment by such successor.
ADMINISTRATION AGREEMENT
If and to the extent specified in the related Prospectus Supplement, FFI,
in its capacity as administrator (the "Administrator"), will enter into an
agreement (as amended and supplemented from time to time, an "Administration
Agreement") with each Issuer that issues Notes and the related Indenture Trustee
pursuant to which the Administrator will agree, to the extent provided in such
Administration Agreement, to provide the notices and to perform other
administrative obligations required by the related Indenture. To the extent
specified in the related Prospectus Supplement, as compensation for the
performance of the Administrator's obligations under the applicable
Administration Agreement and as reimbursement for its expenses related thereto,
the Administrator will be entitled to a monthly administration fee of such
amount as may be set forth in the related Prospectus Supplement (the
"Administration Fee"), which fee will be paid by the Servicer.
DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Series, one or more Classes of Certificates may be
issued pursuant to the terms of a Trust Agreement or a Pooling and Servicing
Agreement, a form of each of which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The following
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Certificates and the
Trust Agreement or Pooling and Servicing Agreement, as applicable.
Unless otherwise specified in the related Prospectus Supplement and except
for the Certificates, if any, of a given Series purchased by the Seller, each
Class of Certificates will initially be represented by one or more
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Certificates registered in the name of the nominee for DTC, except as set forth
below. Unless otherwise specified in the related Prospectus Supplement and
except for the Certificates, if any, of a given Series purchased by the Seller,
the Certificates will be available for purchase in minimum denominations of
$1,000 and integral multiples thereof in book-entry form only. The Seller has
been informed by DTC that DTC's nominee will be Cede, unless another nominee is
specified in the related Prospectus Supplement. Accordingly, such nominee is
expected to be the holder of record of the Certificates of any Series that are
not purchased by the Seller. Unless and until Definitive Certificates are issued
under the limited circumstances described herein or in the related Prospectus
Supplement, no Certificateholder (other than the Issuer) will be entitled to
receive a physical certificate representing a Certificate. All references herein
and in the related Prospectus Supplement to actions by Certificateholders refer
to actions taken by DTC upon instructions from the Participants and all
references herein and in the related Prospectus Supplement to distributions,
notices, reports and statements to Certificateholders refer to distributions,
notices, reports and statements given, made or sent to DTC or its nominee, as
the case may be, as the registered holder of the Certificates, for distribution
to Certificateholders in accordance with DTC's procedures with respect thereto.
See "Certain Information Regarding the Securities -- Book-Entry Registration"
and "-- Definitive Securities". Any Certificates of a given Series owned by the
Seller or its affiliates will be entitled to equal and proportionate benefits
under the applicable Trust Agreement or Pooling and Servicing Agreement, except
that such Certificates will be deemed not to be outstanding for the purpose of
determining whether the requisite percentage of Certificateholders have given
any request, demand, authorization, direction, notice, consent or other action
under the Related Documents (other than the commencement by the related Trust of
a voluntary proceeding in bankruptcy as described under "Description of the
Transfer and Servicing Agreements -- Insolvency Event").
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
The timing and priority of distributions, seniority, allocations of losses,
Pass Through Rate and amount of or method of determining distributions with
respect to principal and interest of each Class of Certificates will be
described in the related Prospectus Supplement. Distributions of interest on
such Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") and will be made prior to distributions
with respect to principal of such Certificates.
Each Class of Certificates may have a different Pass Through Rate, which
may be a fixed, variable or adjustable Pass Through Rate (and which may be zero
for certain Classes of Certificates) or any combination of the foregoing. The
related Prospectus Supplement will specify the Pass Through Rate for each Cass
of Certificates of a given Series or the method for determining such Pass
Through Rate. See also "Certain Information Regarding the Securities -- Fixed
Rate Securities Floating Rate Securities". Unless otherwise provided in the
related Prospectus Supplement, distributions in respect of the Certificates of a
given Series that includes Notes may be subordinate to payments in respect of
the Notes of such Series as more fully described in the related Prospectus
Supplement. Distributions in respect of interest on and principal of any Class
of Certificates will be made on a pro rata basis among all the
Certificateholders of such Class.
In the case of a Series of Certificates which includes two or more Classes
of Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of interest and principal, and any schedule or formula
or other provisions applicable to the determination thereof, of each such Class
shall be as set forth in the related Prospectus Supplement.
If and as provided in the related Prospectus Supplement, certain amounts
remaining on deposit in the Collection Account after all required distributions
to the related Securityholders have been made may be released to the Seller, FFI
or one or more third party credit or liquidity enhancement providers.
POOL FACTORS AND TRADING INFORMATION
The "Note Pool Factor" for each Class of Notes will be a seven-digit
decimal which the Servicer will compute prior to each distribution with respect
to such Class of Notes indicating the remaining outstanding principal balance of
such Class of Notes, as of the applicable Distribution Date (after giving effect
to payments to be made on such Distribution Date), as a fraction of the initial
outstanding principal balance of
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such Class of Notes. The "Certificate Pool Factor" for each Class of
Certificates will be a seven-digit decimal which the Servicer will compute prior
to each distribution with respect to such Class of Certificates indicating the
remaining Certificate Balance of such Class of Certificates, as of the
applicable Distribution Date (after giving effect to distributions to be made on
such Distribution Date), as a fraction of the initial Certificate Balance of
such Class of Certificates. Each Note Pool Factor and each Certificate Pool
Factor will initially be 1.0000000 and thereafter will decline to reflect
reductions in the outstanding principal balance of the applicable Class of
Notes, or the reduction of the Certificate Balance of the applicable Class of
Certificates, as the case may be. A Noteholder's portion of the aggregate
outstanding principal balance of the related Class of Notes is the product of
(i) the original denomination of such Noteholder's Note and (ii) the applicable
Note Pool Factor. A Certificateholder's portion of the aggregate outstanding
Certificate Balance for the related Class of Certificates is the product of (a)
the original denomination of such Certificateholder's Certificate and (b) the
applicable Certificate Pool Factor.
Unless otherwise provided in the related Prospectus Supplement, the
Securityholders will receive reports on or about each Distribution Date
concerning (i) with respect to the Collection Period immediately preceding such
Distribution Date, payments received on the Loan Assets, the Pool Balance (as
such term is defined in the related Prospectus Supplement, the "Pool Balance"),
each Certificate Pool Factor or Note Pool Factor, as applicable, and various
other items of information, and (ii) with respect to the Collection Period
second preceding such Distribution Date, as applicable, amounts allocated or
distributed on the preceding Distribution Date and any reconciliation of such
amounts with information provided by the Servicer prior to such current
Distribution Date. In addition, Securityholders of record during any calendar
year will be furnished information for tax reporting purposes not later than the
latest date permitted by law. See "Description of the Transfer and Servicing
Agreements -- Reports to Securityholders".
CERTAIN INFORMATION REGARDING THE SECURITIES
GENERAL
To the extent provided in the related Prospectus Supplement, a Series may
include one or more Classes of Securities entitled only to (i) payments
allocable to interest ("Interest Only Securities"); (ii) payments allocable to
principal ("Principal Only Securities") and allocable as between scheduled
payments of principal and Principal Prepayments (as defined below); or (iii)
payments allocable to both principal (and allocable as between scheduled
payments of principal and Principal Prepayments) and interest. A Series of
Securities may include one or more Classes as to which payments or distributions
will be allocated (i) on the basis of collections from designated portions of
the Trust Property, (ii) in accordance with a schedule or formula, (iii) in
relation to the occurrence of events, or (iv) otherwise, in each case as
specified in the related Prospectus Supplement. The timing and amounts of such
payments or distributions may vary among Classes, over time or otherwise, in
each case as specified in the related Prospectus Supplement.
To the extent provided in the related Prospectus Supplement, one or more
Classes of Securities may provide for interest that accrues, but is not
currently payable ("Compound Interest Securities"). With respect to any Class of
Compound Interest Securities, if specified in the related Prospectus Supplement,
any interest that has accrued but is not paid on a given Distribution Date will
be added to the aggregate principal balance of such Class on that Distribution
Date.
To the extent provided in the related Prospectus Supplement, a Series of
Securities may include one or more Classes of Scheduled Amortization Securities
and Companion Securities. "Scheduled Amortization Securities" are Securities
with respect to which payments or distributions of principal are to be made in
specified amounts on specified Distribution Dates, to the extent of funds
available on such Distribution Date. "Companion Securities" are Securities which
receive payments or distributions of all or a portion of any funds available on
a given Distribution Date which are in excess of amounts required to be applied
to payments or distributions on Scheduled Amortization Securities on such
Distribution Date. Because of the manner of application of payments or
distributions of principal to Companion Securities, the weighted average lives
of Companion Securities of a Series may be expected to be more sensitive to the
actual rate of prepayments on
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the Loan Assets included in the related Trust Property than will the Scheduled
Amortization Securities of such Series.
To the extent provided in the related Prospectus Supplement, one or more
Series of Securities may constitute a Series of "Special Allocation Securities"
which may include Senior Securities, Subordinated Securities, Priority
Securities and Non-Priority Securities. As more fully described in the related
Prospectus Supplement for a Series of Special Allocation Securities, Special
Allocation Securities are Securities for which the timing and/or priority of
payments or distributions of principal and/or interest may favor one or more
Classes of such Securities over one or more other Classes of such Securities.
Such timing and/or priority may be modified or reordered upon the occurrence of
one or more specified events. To the extent specified in the related Prospectus
Supplement for a Series of Special Allocation Securities, losses on the Assets
included in the related Trust Property may be disproportionately borne by one or
more Classes of such Series, and the proceeds, payments and distributions from
such Assets may be applied to the payment in full of one or more Classes of such
Series before the balance, if any, of such proceeds is applied to one or more
other Classes within such Series. For example, Special Allocation Securities in
a Series may be comprised of one or more Classes of Senior Securities ("Senior
Securities") having a priority in right to payments or distributions of
principal and interest over one or more Classes of Subordinated Securities
("Subordinated Securities"), to the extent described in the related Prospectus
Supplement, as a form of Credit Enhancement. See "Credit
Enhancement -- Subordination". Typically, Subordinated Securities of a Series
will carry a rating by the rating agencies rating the Securities of such Series
lower than that of the Senior Securities of such Series. In addition, one or
more Classes of Securities of a Series ("Priority Securities") may be entitled
to a priority of payments or distributions of principal or interest from Assets
included in the related Trust Property over another Class of Securities of such
Series ("Non-Priority Securities"), but only after the exhaustion of other
Credit Enhancement applicable to such Series. Priority Securities and
Non-Priority Securities nonetheless may be within the same rating category.
FIXED RATE SECURITIES AND FLOATING RATE SECURITIES
Any Class of Securities (other than Principal Only Securities) may bear
interest at a fixed rate per annum ("Fixed Rate Securities") or at a variable or
adjustable rate per annum ("Floating Rate Securities"), as more fully described
in the applicable Prospectus Supplement. Each Class of Fixed Rate Securities
will bear interest at the applicable per annum Interest Rate or Pass Through
Rate, as the case may be, specified in the applicable Prospectus Supplement.
Unless otherwise set forth in the applicable Prospectus Supplement, interest on
each Class of Fixed Rate Securities will be computed on the basis of a 360-day
year of twelve 30-day months. See "Description of the Notes -- Principal and
Interest on the Notes" and "Description of the Certificates -- Distributions of
Principal and Interest".
INDEXED SECURITIES
To the extent so specified in any Prospectus Supplement, any Class of
Securities of a given Series may consist of Securities ("Indexed Securities") in
which the principal amount payable on the final Distribution Date for such Class
(the "Indexed Principal Amount") and/or the interest payable on any Distribution
Date is determined by reference to a measure (the "Index") which will be related
to the exchange rates of one or more currencies or composite currencies (the
"Index Currencies"); the price or prices of specified commodities; or specified
stocks, which may be based on U.S. or foreign stocks, on specified dates
specified in the applicable Prospectus Supplement, or such other price, interest
rate, exchange rate or other financial index or indices as are described in the
applicable Prospectus Supplement. Holders of Indexed Securities may receive a
principal amount on the related final Distribution Date that is greater than or
less than the face amount of the Indexed Securities depending upon the relative
value on the related final Distribution Date of the specified indexed item.
Information as to the method for determining the principal amount payable on the
related final Distribution Date, if any, and, where applicable, certain
historical information with respect to the specific indexed item or items and
special tax considerations associated with investment in Indexed Securities,
will be set forth in the applicable Prospectus Supplement. Notwithstanding
anything to the contrary herein, for purposes of determining the rights of a
holder of a Security indexed as to principal in respect of voting for or
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against amendments to the related Trust Agreement, Indenture or Pooling and
Servicing Agreement, as the case may be, and modifications and the waiver of
rights thereunder, the principal amount of such Indexed Security shall be deemed
to be the face amount thereof upon issuance.
If the determination of the Indexed Principal Amount of an Indexed Security
is based on an Index calculated or announced by a third party and such third
party either suspends the calculation or announcement of such Index or changes
the basis upon which such Index is calculated (other than changes consistent
with policies in effect at the time such Indexed Security was issued and
permitted changes described in the applicable Prospectus Supplement), then such
Index shall be calculated for purposes of such Indexed Security by an
independent calculation agent named in the applicable Prospectus Supplement on
the same basis, and subject to the same conditions and controls, as applied to
the original third party. If for any reason such Index cannot be calculated on
the same basis and subject to the same conditions and controls as applied to the
original third party, then the Indexed Principal Amount of such Indexed Security
shall be calculated in the manner set forth in the applicable Prospectus
Supplement. Any determination of such independent calculation agent shall, in
the absence of manifest error, be binding on all parties.
The applicable Prospectus Supplement will describe whether the principal
amount of the related Indexed Security, if any, that would be payable upon
redemption or repayment prior to the applicable final scheduled Distribution
Date will be the Face Amount of such Indexed Security, the Indexed Principal
Amount of such Indexed Security at the time of redemption or repayment or
another amount described in such Prospectus Supplement. See "Risk
Factors -- Risks Relating to Indexed Securities".
BOOK-ENTRY REGISTRATION
Unless otherwise specified in the related Prospectus Supplement, each Class
of Securities offered hereby will be represented by one or more certificates
registered in the name of Cede, as nominee of DTC. Unless otherwise specified in
the related Prospectus Supplement, Securityholders may hold beneficial interests
in Securities through DTC (in the United States) or Cedel or Euroclear (in
Europe) directly if they are participants of such systems, or indirectly through
organizations which are participants in such systems.
No Securityholder will be entitled to receive a certificate representing
such person's interest in the Securities, except as set forth below. Unless and
until Securities of a Class are issued in fully registered certificated form
("Definitive Securities") under the limited circumstances described below, all
references herein to actions by Noteholders, Certificateholders or
Securityholders shall refer to actions taken by DTC upon instructions from DTC
Participants, and all references herein to payments, distributions, notices,
reports and statements to Noteholders, Certificateholders or Securityholders
shall refer to distributions, notices, reports and statements to Cede, as the
registered holder of the Securities, for distribution to Securityholders in
accordance with DTC procedures. As such, it is anticipated that the only
Noteholder, Certificateholder or Securityholder will be Cede, as nominee of DTC.
Securityholders will not be recognized by the related Trustee as Noteholders,
Certificateholders or Securityholders as such terms will be used in the relevant
agreements, and Securityholders will only be permitted to exercise the rights of
holders of Securities of the related Class indirectly through DTC and DTC
Participants, as further described below.
Cedel and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in their respective names on
the books of their respective Depositaries which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel or
Euroclear participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
its Depositary. However, each such cross-market transaction will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
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and within its established deadlines. The relevant European international
clearing system will, if the transaction meets its settlement requirements,
deliver instructions to its Depositary to take action to effect final settlement
on its behalf by delivering or receiving securities in DTC, and making or
receiving payment 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 Depositaries.
Because of time-zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a DTC Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel participant on such business day. Cash received in Cedel or
Euroclear as a result of sales of Securities by or through a Cedel Participant
or a Euroclear Participant to a DTC Participant will be received with value on
the DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold securities
for its participating members ("DTC Participants") and to facilitate the
clearance and settlement of securities transactions between DTC Participants
through electronic book-entries, thereby eliminating the need for physical
movement of certificates. DTC Participants include securities brokers and
dealers, banks, trust companies and clearing corporations which may include
underwriters, agents or dealers with respect to the Securities of any Class or
Series. Indirect access to the DTC system also is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly
(the "Indirect DTC Participants"). The rules applicable to DTC and DTC
Participants are on file with the Commission.
Unless otherwise specified in the related Prospectus Supplement,
Securityholders that are not DTC Participants or Indirect DTC Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities may do so only through DTC Participants and Indirect DTC
Participants. DTC Participants will receive a credit for the Securities on DTC's
records. The ownership interest of each Securityholder will in turn be recorded
on respective records of the DTC Participants and Indirect DTC Participants.
Securityholders will not receive written confirmation from DTC of their
purchase, but Securityholders are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the DTC Participant or Indirect DTC Participant through which the
Securityholder entered into the transaction. Transfers of ownership interests in
the Securities of any Class will be accomplished by entries made on the books of
DTC Participants acting on behalf of Securityholders.
To facilitate subsequent transfers, all Securities deposited by DTC
Participants with DTC will be registered in the name of Cede, a nominee of DTC.
The deposit of Securities with DTC and their registration in the name of Cede
will effect no change in beneficial ownership. DTC will have no knowledge of the
actual Securityholders and its records will reflect only the identity of the DTC
Participants to whose accounts such Securities are credited, which may or may
not be the Securityholders. DTC Participants and Indirect DTC Participants will
remain responsible for keeping account of their holdings on behalf of their
customers. While the Securities of a Series are held in book-entry form,
Securityholders will not have access to the list of Securityholders of such
Series, which may impede the ability of Securityholders to communicate with each
other.
Conveyance of notices and other communications by DTC to DTC Participants,
by DTC Participants to Indirect DTC Participants and by DTC Participants and
Indirect DTC Participants to Securityholders will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
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Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among DTC
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. DTC Participants and Indirect DTC Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders.
DTC's practice is to credit DTC Participants' accounts on each Distribution
Date in accordance with their respective holdings shown on its records, unless
DTC has reason to believe that it will not receive payment on such Distribution
Date. Payments by DTC Participants and Indirect DTC Participants to
Securityholders will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name", and will be the responsibility of
such DTC Participant and not of DTC, the related Indenture Trustee or Trustee
(or any paying agent appointed thereby), the Seller, the Issuer or the Servicer,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of principal of and interest on each Class of Securities
to DTC will be the responsibility of the related Indenture Trustee or Trustee
(or any paying agent), disbursement of such payments to DTC Participants will be
the responsibility of DTC and disbursement of such payments to the related
Securityholders will be the responsibility of DTC Participants and Indirect DTC
Participants. As a result, under the book-entry format, Securityholders may
experience some delay in their receipt of payments. DTC will forward such
payments to its DTC Participants which thereafter will forward them to Indirect
DTC Participants or Securityholders.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC has advised FIC that it will take any action permitted to be taken by a
Securityholder only at the direction of one or more DTC Participants to whose
account with DTC the Securities are credited. Additionally, DTC has advised FIC
that it will take such actions with respect to specified percentages of the
Securityholders' interest only at the direction of and on behalf of DTC
Participants whose holdings include undivided interests that satisfy such
specified percentages. DTC may take conflicting actions with respect to other
undivided interests to the extent that such actions are taken on behalf of DTC
Participants whose holdings include such undivided interests.
Neither DTC nor Cede will consent or vote with respect to the Securities.
Under its usual procedures, DTC will mail an "Omnibus Proxy" to the related
Indenture Trustee or Trustee as soon as possible after any applicable Record
Date for such a consent or vote. The Omnibus Proxy will assign Cede's consenting
or voting rights to those DTC Participants to whose accounts the related
Securities are credited on that record date (which record date will be
identified in a listing attached to the Omnibus Proxy).
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws of
Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the clearance
and settlement of securities transactions between Cedel Participants through
electronic book entry changes in accounts of Cedel Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in Cedel in any of 28 currencies, including United States dollars. Cedel
provides to Cedel Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedel interfaces with domestic markets in
several countries. As a professional depository, Cedel is subject to regulation
by the Luxembourg Monetary Institute. Cedel Participants are recognized
financial institutions around the world including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include any underwriters, agents or dealers with
respect to any Class or Series of Securities offered hereby. Indirect access to
Cedel is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a Cedel
Participant, either directly or indirectly.
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The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 27
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance System S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for the Euroclear System on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include any
underwriters, agents or dealers with respect to any Class or Series of
Securities offered hereby. Indirect access to the Euroclear System is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants, and has no record
of or relationship with persons holding through Euroclear Participants.
Payments and distributions with respect to 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 its Depositary. Such payments and
distributions will be subject to tax withholding in accordance with relevant
United States tax laws and regulations. See "Certain Federal Income Tax
Considerations". Cedel or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Securityholder on behalf of a Cedel
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to its Depositary's ability to effect such actions on
its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, Cedel
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
DEFINITIVE SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the Notes,
if any, and the Certificates, if any, of a given Series will be issued in fully
registered, certificated form ("Definitive Notes" and "Definitive Certificates",
respectively, and collectively referred to herein as "Definitive Securities") to
Noteholders or Certificateholders or their respective nominees, rather than to
DTC or its nominee, only if (i) DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to such Securities and
such Administrator or Trustee is unable to locate a qualified successor (and if
it is an Administrator that has made such determination, such Administrator so
notifies the applicable Trustee in writing), (ii) the Issuer,
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the Seller the Administrator or the Trustee, as applicable, at its option,
elects to terminate the book-entry system through DTC or (iii) after the
occurrence of an Event of Default or a Servicer Default with respect to such
Securities, holders representing at least a majority of the outstanding
principal amount of the Notes or the Certificates, as the case may be, of such
Series, acting together as a single Class, advise the applicable Trustee through
DTC in writing that the continuation of a book-entry system through DTC (or a
successor thereto) with respect to such Notes or Certificates is no longer in
the best interest of the holders of such Securities.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable Trustee or Indenture Trustee will be required to
notify all applicable Securityholders of a given Series through Participants of
the availability of Definitive Securities. Upon surrender by DTC of the
definitive certificates representing the corresponding Securities and receipt of
instructions for re-registration, the applicable Trustee or Indenture Trustee
will reissue such Securities as Definitive Securities to such Securityholders.
Payments and distributions of principal of, and interest on, such
Definitive Securities will thereafter be made by the applicable Trustee or
Indenture Trustee in accordance with the procedures set forth in the related
Indenture or the related Trust Agreement or Pooling and Servicing Agreement, as
applicable, directly to holders of Definitive Securities in whose names the
Definitive Securities were registered at the close of business on the applicable
Record Date specified for such Securities in the related Prospectus Supplement.
Such payments and distributions will be made by check mailed to the address of
such holder as it appears on the register maintained by the applicable Trustee
or Indenture Trustee. The final payment or distribution on any such Definitive
Security, however, will be made only upon presentation and surrender of such
Definitive Security at the office or agency specified in the notice of final
distribution to the applicable Securityholders. The applicable Trustee or the
Indenture Trustee will provide such notice to the applicable Securityholders not
less than 15 nor more than 30 days prior to the date on which such final payment
or distribution is expected to occur.
Definitive Securities will be transferable and exchangeable at the offices
of the applicable Trustee or of a registrar named in a notice delivered to
holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the applicable Trustee or Indenture
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
THE TRUSTS
With respect to each Series of Securities with respect to which a Trust is
the Issuer, the Seller will establish a separate Trust pursuant to the
respective Trust Agreement or Pooling and Servicing Agreement, as applicable,
for the transactions described herein and in the related Prospectus Supplement.
On the applicable Closing Date, the Seller will sell the Loan Assets to the
Trust as specified in the related Prospectus Supplement. With respect to each
Series of Securities, the Issuer will pledge the Loan Assets to the Indenture
Trustee, for the benefit of the Noteholders, as specified in the related
Prospectus Supplement.
The Servicer will service the Loan Assets included in the Trust Property
and will receive fees for such services as specified in the related Prospectus
Supplement. To the extent specified in the related Prospectus Supplement, in
order to facilitate the servicing of the Loan Assets, the Seller, the Issuer and
each Trustee will authorize the Servicer to retain physical possession of the
applicable Loan Assets and other documents relating thereto as custodian with
respect to such Loan Assets and related documents.
The principal offices of each Issuer that is not a grantor trust and the
related Owner Trustee, if any, will be specified in the applicable Prospectus
Supplement.
THE TRUSTEE
As used herein, the term "Trustee" shall refer to the Indenture Trustee
with respect to a Series of Notes, the Owner Trustee under the applicable Trust
Agreement with respect to a Series of Certificates or the Pass-Through Trustee
under the applicable Pooling and Servicing Agreement with respect to a Series of
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Certificates. The Trustees with respect to each Series will be specified in the
related Prospectus Supplement. The Trustee's liability in connection with the
issuance and sale of the related Securities is limited solely to the express
obligations of such Trustee set forth in the related Trust Agreement, Indenture
or Pooling and Servicing Agreement, as applicable.
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Issuer, the Seller or the Servicer. In addition,
the Trustee will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust Property
relating to a particular Series of Securities. At any time, for the purpose of
meeting any legal requirements of any jurisdiction in which any part of the
Trust Property may at the time be located, the Seller, or the Issuer, together
with the Trustee, acting jointly, shall have the power and shall execute and
deliver all instruments to appoint one or more Persons approved by the Trustee
to act as co-trustee or co-trustees, jointly with the Trustee, or separate
trustee or separate trustees, of all or any part of the Trust Property, and to
vest in such Person or Persons, in such capacity, such title to the Trust
Property, or any part thereof, and, subject to the provisions of the applicable
Indenture, Trust Agreement or Pooling and Servicing Agreement, such powers,
duties, obligations, rights and trusts as the Seller, or the Issuer, together
with the Trustee, may consider necessary or desirable. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the applicable Indenture, Trust Agreement or Pooling and
Servicing Agreement will be conferred or imposed upon the Trustee and such
separate trustee or co-trustee jointly, or in any jurisdiction in which the
Trustee shall be incompetent or unqualified to perform certain acts, singly upon
such separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or sufficiency
of the applicable Indenture, Trust Agreement or Pooling and Servicing Agreement,
the related Securities, or of any Loan Asset or related document, and will not
be accountable for the use or application by the Seller or a Transferor of any
funds paid to the Seller or such Transferor in respect of the Securities or the
related Assets, or amounts deposited in the related Distribution Account or
deposited into any other account for purposes of making payments or
distributions to Securityholders. If no Event of Default has occurred, the
Trustee will be required to perform only those duties specifically required of
it under the applicable Indenture, Trust Agreement or Pooling and Servicing
Agreement. However, upon receipt of the various certificates, reports or other
instruments required to be furnished to it, the Trustee will be required to
examine them to determine whether they conform to the requirements of the
applicable Indenture, Trust Agreement or Pooling and Servicing Agreement.
The Trustee may resign at any time and the Seller, the Servicer or the
Administrator, as applicable, may remove the Trustee if the Trustee ceases to be
eligible to continue as such under the applicable Indenture, Trust Agreement or
Pooling and Servicing Agreement, if the Trustee becomes insolvent or in such
other instances, if any, as are set forth in the applicable Indenture, Trust
Agreement or Pooling and Servicing Agreement. Following any resignation or
removal of the Trustee, the Seller or Servicer, as applicable, will be obligated
to appoint a successor Trustee. Any resignation or removal of the Trustee and
appointment of a successor Trustee does not become effective until acceptance of
the appointment by the successor Trustee.
DESCRIPTION OF THE TRUST PROPERTY
GENERAL
The Trust Property for a Series of Securities may include (i) Loan Assets
and payments or distributions thereon (subject, if specified in the Prospectus
Supplement, to certain exclusions); (ii) if specified in the Prospectus
Supplement, reinvestment income on such payments or distributions; (iii) all
property acquired by foreclosure or deed in lieu of foreclosure with respect to
any Mortgage Loan or Secured Contract included in the Trust Property and certain
rights of the Administrator, if any, and the Servicer under any policies
required to be maintained in respect of the related Loan Assets; and (iv) if
specified in the Prospectus Supplement, one or more forms of Credit Enhancement.
The Trust Property will consist primarily of Loan Assets.
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With respect to a Series, FIC will acquire the Loan Assets in the open
market or in privately negotiated transactions from one or more entities, and
each such entity from whom FIC so acquires a significant portion of the Loan
Assets (individually or collectively, the "Transferor") will be described in the
related Prospectus Supplement, including a description of any affiliation
between the Transferor and FIC. To the extent specified in the related
prospectus supplement, the Loan Assets will have been originated or acquired by
the Transferor in one of four ways: (i) the indirect origination and purchase of
retail installment sales contracts from a network of independent contractors or
dealers professionally installing property improvements ("indirect
originations"); (ii) the origination of loans directly to consumers, including
solicitations through direct mail and telemarketing ("direct originations");
(iii) the wholesale purchase of loans, on a flow basis, originated by other
unaffiliated lenders, as correspondents ("correspondent originations"); or (iv)
the purchase, on a bulk basis, of loan portfolios originated by other
unaffiliated lenders ("portfolio acquisitions"). In acquiring the Loan Assets
from a Transferor, FIC will rely on the representations and warranties made by
the Transferor with respect to such Loan Assets. For a summary description of
the expected representations and warranties with respect to such Loan Assets,
See "Description of the Transfer and Servicing Agreements -- Sale and Assignment
of Loan Assets". As further described in the related Prospectus Supplement for a
Series, the Transferor will be obligated to repurchase or replace any Loan
Assets that, subject to the lapse of any applicable cure period, are in breach
of a representation or warranty made by the Transferor and such breach has a
material and adverse affect on the value of such Loan Assets or the interest of
Securityholders therein. To the extent that FIC has any obligation to repurchase
or replace any Loan Assets for a material breach of any representations or
warranties made by FIC, FIC is not expected to have the financial capability to
repurchase or replace such defective Loan Assets, but rather FIC will be relying
on the related Transferor of such defective Loan Assets to repurchase or replace
them. See "The Seller".
The following is a brief description of the Loan Assets expected to be
included in the Trust Property for each Series. If specific information
respecting the Loan Assets is not known at the time a Series is initially
offered, more general information of the nature described below will be provided
in the related Prospectus Supplement, and specific information will be set forth
in a report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Series. A copy of the
related Sale and Servicing Agreement or Pooling and Servicing Agreement with
respect to each Series will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the related Trustee specified in
the related Prospectus Supplement. A schedule of the Loan Assets relating to
each Series, will be attached to the related Sale and Servicing Agreement or
Pooling and Servicing Agreement delivered to the applicable Trustee upon
delivery of such Series.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes, retail
installment sales contracts or other evidences of indebtedness (the "Mortgage
Notes") and will be secured by mortgages, deeds of trust or other similar
security instruments (the "Mortgages") creating a lien or security interest on
single family (one-to-four unit) residences, units in planned unit developments,
units in condominium developments, town homes and Manufactured Homes (as defined
herein) (the "Mortgaged Properties") located in various states. If specified in
the Prospectus Supplement, the Mortgage Loans may include cooperative apartment
or manufactured housing loans ("Cooperative Loans") secured by security
interests in shares issued by private, non-profit, cooperative housing
corporations ("Cooperatives") and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific units in such
Cooperatives. To the extent specified in the related Prospectus Supplement, all
or a portion of the Mortgages will be junior liens on the related Mortgaged
Properties, and the related superior liens will not be included in the related
Loan Asset Pool. Certain of the Mortgage Loans may be partially insured to the
extent described in the related Prospectus Supplement (and subject to the
conditions described herein and in the related Prospectus Supplement) by the FHA
under the Title I Program (the "Title I Mortgage Loans"). To the extent
specified in the related Prospectus Supplement, the Mortgage Loans will have
scheduled monthly payment dates throughout a month, and no Mortgage Loan will
provide for deferred interest or negative amortization, and no commercial or
multifamily loans will be included in any Mortgage Loan Pool.
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The payment terms of the Mortgage Loans to be included in the Trust
Property for a Series will be described in the related Prospectus Supplement and
may include any of the following features or combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a period of
time or under certain circumstances and is followed by an adjustable rate,
a rate that otherwise varies from time to time, 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 such limitations. Accrued interest may be
deferred and added to the principal of a loan for such periods and under
such circumstances as may be specified in the related Prospectus
Supplement. Mortgage Loans may provide for the payment of interest at a
rate lower than the specified mortgage rate for a period of time or for the
life of the Mortgage Loan with the amount of any difference contributed
from funds supplied by the seller of the Mortgaged Property or another
source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
amortization schedule that is significantly longer than the original term
to maturity or on an interest rate that is different from the interest rate
on the Mortgage Loan or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity. Principal may include interest that has been deferred
and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may
change from period to period. Mortgage 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.
(d) 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, and may be
prohibited for the life of the loan or for certain periods ("lockout
periods"). Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee
in connection with any such 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 which
permit the mortgagee to demand payment of the entire mortgage loan in
connection with the sale or certain transfers of the related mortgaged
property. Other Mortgage Loans may be assumable by persons meeting the then
applicable underwriting standards of the Transferor.
With respect to a Series for which the related Trust Property includes
Mortgage Loans the related Prospectus Supplement may specify, among other
things, information regarding the interest rates (the "Mortgage Rates"), the
average principal balance and the aggregate principal balance of such Mortgage
Loans, the years of origination, geographic dispersion and original principal
balances and the loan-to-value ratios of such Mortgage Loans.
CONTRACTS
As specified in the related Prospectus Supplement for a Series, "Contracts"
may include: (i) loans evidenced by retail installments sales or loan
agreements, including loans secured by new or used Manufactured Homes (as
defined herein) that are not considered to be interests in real property because
such Manufactured Homes are not permanently affixed to real estate ("Secured
Contracts") and (ii) loans evidenced by retail installments sales or loan
agreements which are not secured by any interest in real or personal property
("Unsecured Contracts"). To the extent described in the related Prospectus
Supplement, certain Contracts will be conventional (i.e., not insured or
guaranteed by a governmental agency) contracts (the "Conventional Contracts"),
while other Contracts will be partially insured by the FHA under the Title I
Program (the "Title I Contracts"). To the extent specified in the related
Prospectus Supplement, the Contracts included as part of the Trust Property for
a Series will be fully amortizing and will bear interest at a fixed annual
percentage rate ("APR"). The Secured Contracts differ from Mortgage Loans in
that the
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Secured Contracts are not secured by an interest in real property, but rather by
an interest in a Manufactured Home that is not permanently affixed to real
estate. In addition, the Contracts differ from Mortgage Loans in that they are
generally originated by a network of independent contractors or dealers that
professionally install property improvements, rather than by financial
institutions or other traditional mortgage lenders.
While the Unsecured Contracts are not secured by a security interest in any
related real or personal property, such contracts are still subject to the same
underwriting criteria as the Mortgage Loans and the Secured Contracts. For
example, in underwriting an Unsecured Contract, the Transferor will consider the
borrower's credit history and ability to repay the related debt as well as the
value of real or personal property owned by the borrower which could be the
subject of a junior lien in favor of the Transferor; however, because the
Unsecured Contracts generally have smaller principal amounts than the Mortgage
Loans or the Secured Contracts, a junior lien with respect to such real or
personal property will not be obtained because the costs associated with
obtaining and perfecting such a junior lien will not justify the benefits
provided by such a lien, including any realization from the enforcement of such
lien.
The Manufactured Homes securing the Secured Contracts consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6),
which defines a "Manufactured Home" as "a structure, transportable in one or
more sections, which in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without permanent foundation when
connected to the required utilities, and includes the plumbing, heating,
air-conditioning, and electrical systems contained therein; except that such
term shall include any structure which meets all the requirements of [this]
paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter."
To the extent specified in the Prospectus Supplement with respect to a
Series for which the related Trust Property includes Secured Contracts, for
purposes of calculating the loan-to-value ratio of a Secured Contract relating
to a new Manufactured Home, the "Collateral Value" is no greater than the sum of
a fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. To the extent specified in the related Prospectus Supplement, the
Collateral Value of a used Manufactured Home is the least of the sales price,
the appraised value, and the National Automobile Dealer's Association book value
plus prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
The related Prospectus Supplement may specify for the Contracts contained
in the related Contract Pool, among other things, the date of origination of the
Contracts; the APRs on the Contracts; the Contract Loan-to-Value Ratios; the
minimum and maximum outstanding principal balance as of the cut-off date and the
average outstanding principal balance; the outstanding principal balances of the
Contracts included in the Contract Pool; and the original maturities of the
Contracts and the last maturity date of any Contract.
ADDITIONS, SUBSTITUTION AND WITHDRAWAL OF ASSETS
With respect to a Series, as described in the related Prospectus
Supplement, the related Transferor, Seller or Issuer may, subsequent to the
issuance of a Series, (i) deliver additional Assets to be included in the
related Trust Property, (ii) withdraw Assets previously included in the Trust
Property for such Series and substitute comparable assets therefor, or (iii)
withdraw Assets previously included in a Reserve Fund for such Series. Assets
may be added to the Trust Property for a Series subsequent to the issuance of
such Series in the manner described under "Pre-Funding Arrangements" below. In
addition, Assets may be withdrawn from or substituted into the Trust Property
for a Series for the following reasons: (a) curing any breaches of
representations and warranties with respect to such Assets, (b) curing certain
immaterial irregularities with
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respect to such Assets that do not constitute a breach of such representations
and warranties, or (c) achieving certain targeted or desired Loan Asset Pool
characteristics with respect to the Loan Assets of a particular Series,
including, without limitation, those characteristics that accommodate the
requests of a Rating Agency, the Underwriters or a third party provider of
Credit Enhancement. Any such additions, withdrawals or substitutions of Assets
by the related Transferor or the Seller or the Issuer will be subject to the
applicable limitations, requirements and conditions provided in the related Sale
and Servicing Agreement or Pooling and Servicing Agreement (and described in the
related Prospectus Supplement) for such Series.
PRE-FUNDING ARRANGEMENTS
To the extent provided in the related Prospectus Supplement for a Series,
the related Sale and Servicing Agreement or Pooling and Servicing Agreement will
provide for a commitment by the related Trust or Issuer, as applicable, to
subsequently purchase additional Loan Assets ("Subsequent Loan Assets")
following the date on which the related Securities are issued (a "PreFunding
Arrangement"). With respect to a Series, the Pre-funding Arrangement will
require that any Subsequent Loan Assets included in the Trust Property conform
to the requirements and conditions provided in the related Sale and Servicing
Agreement or Pooling and Servicing Agreement. If a Pre-Funding Arrangement is
utilized in connection with the issuance of the Series of Securities, on the
closing date for the issuance of such Series the related Trustee will be
required to deposit in a segregated account (a "Pre-Funding Account") all or a
portion of the proceeds received by such Trustee in connection with the sale of
one or more Classes of Securities of such Series; and, subsequently, the Issuer
will acquire Subsequent Loan Assets in exchange for the release of money from
the Pre-Funding Account for such Series. In addition, the Pre-Funding
Arrangement will be limited to a specified period, not to exceed three months,
during which time any transfers of Subsequent Loan Assets must occur and to a
maximum deposit to the related Pre-Funding Account of no more than thirty-five
percent (35%) of the aggregate proceeds received from the sale of all Classes of
Securities of such Series.
If all of the funds originally deposited in the such Pre-Funding Account
are not used by the end of such specified period, then any remaining amount of
such funds will be applied as a mandatory prepayment of a Class or Classes of
Securities as specified in the related Prospectus Supplement. Although it is
intended that the principal amount of Subsequent Loan Assets to be included as
Trust Property after the closing date for the issuance of any particular Series
will require application of substantially all of the Pre-Funding Account, and it
is not anticipated that there will be any material amount of principal
distributions from amounts remaining on deposit in the Pre-Funding Account in
reduction of the principal balances of any Securities, no assurance can be given
that such a distribution with respect to the Securities will not occur on the
Distribution Date following the Due Period in which the Pre-Funding Arrangement
ends. In any event, it is unlikely that the Transferor will be able to deliver
Subsequent Loan Assets with aggregate principal balances that exactly equal the
Pre-Funding Account, and the portion of the Pre-Funding Account remaining at the
end of the Pre-Funding Arrangement, if any, will be distributed in reduction of
the principal balance of the Securities of the related Series, as set forth in
related Prospectus Supplement.
As may be further specified in the related Prospectus Supplement, amounts
on deposit in the Pre-Funding Account will be invested in short-term debt
obligations of, or debt obligations guaranteed by, the United States, repurchase
agreements that satisfy the criteria specified in the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement, certificates of deposit,
time deposits and bankers acceptances of any United States depository
institution or trust company, FDIC insured deposits, including deposits with the
related Trustee, commercial paper, debt obligations, and money market funds;
provided such investments are acceptable to each Rating Agency rating the Series
of Offered Securities at the time at which the investments are made
(collectively "Permitted Investments"); and provided further that an investment
in such Permitted Investments will not require the Issuer for a Series to be
registered as an "investment company" under the Investment Company Act of 1940,
as amended. Permitted Investments will consist of short term investments that
convert into cash or mature within a short period of time, have minimal or no
exposure to fluctuations in value as a result of market changes in prevailing
interest rates and are acceptable to each Rating Agency rating the applicable
Series of Offered Securities.
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The utilization of a Pre-Funding Arrangement is intended to improve the
efficiency of the issuance of a Series of Securities and the sale and assignment
of the Loan Assets to the related Issuer through the incremental delivery of the
Loan Assets on the closing date and during the three month period following the
closing date for such Series, which allows for a more even accumulation of the
Loan Assets by the Seller, the Issuer and the related Transferor and the
issuance of a larger principal amount of Securities for such Series than would
be the case without a Pre-Funding Arrangement.
CREDIT ENHANCEMENT
GENERAL
The amount and types of credit and cash flow enhancement arrangements
("Credit Enhancement") and the provider thereof, if applicable, with respect to
each Class of Securities of a given Series, if any, will be set forth in the
related Prospectus Supplement. If and to the extent provided in the related
Prospectus Supplement, Credit Enhancement may be in the form of the
subordination of one or more Classes of Securities of such Series, the
overcollateralization of the Trust Property with respect to a Series, the
establishment of one or more Reserve Funds, the use of a cross-support feature,
the use of a Mortgage Pool Insurance Policy, Guaranty Policy, Special Hazard
Insurance Policy, bankruptcy bond, surety bond, letter of credit, credit or
liquidity facility, guaranteed investment contract, swap or other interest rate
protection agreement, repurchase obligation, yield maintenance agreement, other
agreements with respect to third party payments or other support, cash deposits
or such other form of Credit Enhancement as may be described in the related
Prospectus Supplement, or any combination of two or more of the foregoing. If
specified in the related Prospectus Supplement, Credit Enhancement for a Class
of Securities may cover one or more other Classes of Securities of the same
Series, and Credit Enhancement for a Series of Securities may cover one or more
other Series of Securities.
The presence of Credit Enhancement for the benefit of any Class or Series
of Securities is intended to enhance the likelihood of receipt by the
Securityholders of such Class or Series of the full amount of principal and
interest due thereon and to decrease the likelihood that such Securityholders
will experience losses. To the extent specified in the related Prospectus
Supplement, any Credit Enhancement with respect to a Series will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal balance of the Securities of such Series and interest thereon.
If losses occur which exceed the amount covered by such Credit Enhancement or
which are not covered by the Credit Enhancement, holders will bear their
allocable share of deficiencies, as described in the related Prospectus
Supplement. In addition, if a form of Credit Enhancement covers more than one
Class or Series of Securities, Securityholders of any such Class or Series will
be subject to the risk that such credit enhancement will be exhausted by the
claims of Securityholders of other Classes or Series.
SUBORDINATION
If specified in the related Prospectus Supplement, payments and
distributions in respect of scheduled principal, interest or any combination
thereof that otherwise would have been payable or distributable to one or more
Classes of a Series (the "Subordinated Securities") will instead be payable to
one or more other Classes of such Series (the "Senior Securities") under the
circumstances and to the extent provided in such Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled payments
on the Loan Assets and losses on defaulted Loan Assets will be borne first by
the various Classes of Subordinated Securities and thereafter by the various
Classes of Senior Securities, in each case under the circumstances and subject
to the limitations specified in the Prospectus Supplement. The aggregate
payments and distributions in respect of delinquent payments or distributions on
the Loan Assets over the lives of the Securities of a Series or at any time, the
aggregate losses in respect of defaulted Loan Assets which must be borne by the
Subordinated Securities by virtue of subordination and the amount of the
payments and distributions otherwise due to the Subordinated Securities that
will be distributable to holders of Senior Securities on any Distribution Date
may be limited as specified in the related Prospectus Supplement. If aggregate
payments and distributions in respect of delinquent payments or distributions on
the Loan Assets or aggregate losses in
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respect of such Loan Assets were to exceed the total amounts distributable and
available for distribution to holders of Subordinated Securities were to exceed
the specified maximum amount, holders of Senior Securities could experience
losses on their Securities.
In addition to or in lieu of the foregoing, if specified in the related
Prospectus Supplement, all or any portion of payments or distributions otherwise
due to holders of Subordinated Securities on any Distribution Date may instead
be deposited into one or more Reserve Funds (as defined below) established by
the related Trustee. If specified in the related Prospectus Supplement, such
deposits may be made (i) on each Distribution Date, (ii) on each Distribution
Date for specified periods, or (iii) on each Distribution Date until the balance
in the Reserve Fund has reached a specified amount and, following payments from
the Reserve Fund to holders of Senior Securities or otherwise, thereafter to the
extent necessary to restore the balance in the Reserve Fund to required levels,
in each case as specified in such Prospectus Supplement. If specified in the
related Prospectus Supplement, amounts on deposit in the Reserve Fund may be
released to the Seller or Issuer or the holders of any Class of Securities at
the times and under the circumstances specified in such 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 certain payments and distributions to other Classes of
Senior and Subordinated Securities, respectively, through a cross-support
mechanism or otherwise.
As between Classes of Senior Securities and as between Classes of
Subordinated Securities, payments and distributions may be allocated among such
Classes (i) in the order of their Stated Maturity or Assumed Final Distribution
Dates, (ii) in accordance with a schedule or formula, (iii) in relation to the
occurrence of events, or (iv) otherwise, in each case as specified in the
related Prospectus Supplement. As between Classes of Subordinated Securities,
payments and distributions to holders of Senior Securities on account of
delinquencies or losses and payments to any Reserve Fund will be allocated as
specified in the related Prospectus Supplement.
OVERCOLLATERALIZATION
If provided in the related Prospectus Supplement, the aggregate principal
balance of the Loan Assets included in the Trust Property may exceed the
aggregate original principal balance of the Securities of a Series thereby
creating an "Excess Spread" on each Distribution Date. If provided in the
related Prospectus Supplement, such Excess Spread may be distributed to holders
of Senior Securities to produce and maintain a specified level of
overcollateralization. With respect to a Series of Securities, the
overcollateralization level may be fixed or may increase or decrease over time,
subject to certain floors, caps and triggers, as set forth in the related
Prospectus Supplement and the related Indenture, Sale and Servicing Agreement or
Pooling and Servicing Agreement.
CROSS-SUPPORT
If specified in the related Prospectus Supplement, separate Classes of
related Series of Securities may represent the beneficial ownership of or be
separately secured by, separate groups of Assets included in the Trust Property
for a Series or otherwise available for the benefit of such Securities. In such
case, Credit Enhancement may be provided by a cross-support feature which may
require that payments and distributions be made with respect to Securities
evidencing beneficial ownership of or secured by one or more groups of Assets
prior to payments or distributions to Subordinated Securities evidencing a
beneficial ownership interest in or secured by other groups of Assets included
in the same Trust Property. The Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
GUARANTY INSURANCE
If specified in the Prospectus Supplement, one or more financial guaranty
insurance policies (each, a "Guaranty Policy") will be obtained. Each such
Guaranty Policy with respect to a Series will, subject to limitations described
in the related Prospectus Supplement, provide to the holders of the insured
Securities of
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a Series a guarantee of payment of any interest and/or principal payments due to
such holders on each Distribution Date. The related Prospectus Supplement will
describe the terms of any Guaranty Policy and will set forth certain information
with respect to the applicable insurer.
MORTGAGE POOL INSURANCE
With respect to a Series for which the related Trust Property includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, a Series
for which the related Trust Property includes Contracts), in order to decrease
the likelihood that holders of the Securities of such Series will experience
losses in respect of such Mortgage Loans, if specified in the related Prospectus
Supplement, one or more mortgage pool insurance policies (each, a "Mortgage Pool
Insurance Policy") will be obtained. Each such Mortgage Pool Insurance Policy
will, subject to the limitations described below and in the Prospectus
Supplement, cover loss by reason of default in payments on such Mortgage Loans
up to the amounts specified in the Prospectus Supplement or reported on Form 8-K
and for the periods specified in the Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, the Servicer under the related
Sale and Servicing Agreement or Pooling and Servicing Agreement will agree to
use its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to file claims thereunder to the issuer of
such Mortgage Pool Insurance Policy (the "Pool Insurer"). A Mortgage Pool
Insurance Policy, however, is not a blanket policy against loss, since claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent set forth in such policy
as described in the related Prospectus Supplement. To the extent specified in
the related Prospectus Supplement, no Mortgage Pool Insurance Policy, if any,
will cover losses due to a failure to pay or denial of a claim under a primary
mortgage insurance policy, irrespective of the reason therefor. The related
Prospectus Supplement will describe the terms of any applicable Mortgage Pool
Insurance Policy and will set forth certain information with respect to the
related Pool Insurer.
SPECIAL HAZARD INSURANCE
With respect to a Series for which the related Trust Property includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, each
Series for which the related Trust Property includes Contracts), in order to
decrease the likelihood that holders of the Securities of such Series will
experience losses in respect of such Mortgage Loans, if specified in the related
Prospectus Supplement, one or more Special Hazard Insurance Policies (each, a
"Special Hazard Insurance Policy") will be obtained. Each such Special Hazard
Insurance Policy with respect to a Series will, subject to limitations described
below and in the related Prospectus Supplement, protect holders of the
Securities of such Series from loss caused by reason of damage to Mortgaged
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage) not covered by the standard form
of hazard insurance policy for the respective states in which the Mortgaged
Properties are located or under flood insurance policies, if any, covering the
Mortgaged Properties and (ii) the application of the coinsurance clause
contained in hazard insurance policies. Any Special Hazard Insurance Policy may
not cover losses occasioned by war, civil insurrection, certain governmental
actions, errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, flood (if the Mortgaged Property is located in
a federally designated flood area), chemical contamination and certain other
risks. Aggregate claims under each Special Hazard Insurance Policy will be
limited as described in the related Prospectus Supplement. Any Special Hazard
Insurance Policy may also provide that no claim may be paid unless hazard and if
applicable, flood insurance on the Mortgaged Property has been kept in force and
other protection and preservation expenses have been paid.
The related Prospectus Supplement will describe the terms of any applicable
Special Hazard Insurance Policy and will set forth certain information with
respect to the related special hazard insurer.
RESERVE FUNDS
If specified in the Prospectus Supplement with respect to a Series, assets
such as cash, U.S. Treasury securities, instruments evidencing ownership of
principal or interest payments thereon, letters of credit,
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demand notes, certificates of deposit or a combination thereof in the aggregate
amount specified in such Prospectus Supplement will be deposited by the Seller
or Issuer in one or more accounts (each, a "Reserve Fund") established and
maintained with the related Trustee. Such cash and the payments on such other
assets will be used to enhance the likelihood of timely payment and distribution
of principal of, and interest on, or, if specified in the related Prospectus
Supplement, to provide additional protection against losses in respect of the
Assets included in the related Trust Property, to pay the expenses of the
related Issuer or for such other purposes specified in such Prospectus
Supplement. Whether or not the Seller or Issuer has any obligation to make such
a deposit, certain amounts to which the holders of the Subordinated Securities
of such Series, if any, the Seller or Issuer would otherwise be entitled may
instead be deposited into the Reserve Fund from time to time and in the amounts
as specified in the related Prospectus Supplement. Any cash in any Reserve Fund
and the proceeds of any other instrument upon maturity will be invested in
Permitted Investments. If a letter of credit is deposited with the applicable
Trustee, such letter of credit will be irrevocable. To the extent specified in
the Prospectus Supplement with respect to a Series, any instrument deposited
therein will name the related Trustee, in its capacity as trustee for the
holders of the Securities of such Series, as beneficiary and will be issued by
an entity acceptable to each rating agency that rates such Securities.
Additional information with respect to such instruments deposited in the Reserve
Funds may be set forth in the Prospectus Supplement.
SERVICING OF THE LOAN ASSETS
Except as otherwise noted in the applicable Prospectus Supplement, the
description set forth below of the servicing of Loan Assets is applicable to
Loan Assets included in the Trust Property with respect to a Series of
Securities.
To the extent provided in the related Prospectus Supplement, the Loan
Assets included in the Trust Property for a Series of Securities will be
serviced by (i) the related Servicer as sole servicer, (ii) the related Master
Servicer as administrator or master servicer, (iii) one or more loan servicing
institutions as servicers or (iv) by another institution as master servicer. If
an institution other than the Servicer acts as the sole servicer or as the
master servicer for a Series, the Servicer may have no servicing obligations
with respect to such Series. Generally, the discussion in this section of the
Prospectus is applicable under circumstances when the Servicer is an affiliate
of the Seller or Issuer. If the Servicer is not an affiliate of the Seller or
Issuer, the discussion relating to the servicing of the Loan Assets as set forth
below may be modified or superseded by any discussion relating to the servicing
of the Loan Assets set forth in the Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, the Loan
Assets will be serviced by one or more loan servicing institutions, which may
include the Servicer or a Subservicer, pursuant to a subservicing agreement
between each Subservicer and the Servicer (each, a "Subservicing Agreement"),
which may be entered into only with the prior written consent of the applicable
Trustee and the Administrator, if any.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
borrower, the Servicer, on behalf of the Trustee, shall, to the extent it has
knowledge of such conveyance or prospective conveyance, enforce the rights of
the Trustee as the mortgagee of record to accelerate the maturity of the related
Mortgage Loan under any "due-on-sale" clause contained in the related Mortgage;
provided, however, that the Servicer shall not exercise any such right if the
"due-on-sale" clause, in the reasonable belief of the Servicer, is not
enforceable under applicable law. In such event or in the event the related
Mortgage does not contain a "due-on-sale" clause, the Servicer shall enter into
an assumption and modification Agreement with the person to whom such property
has been or is about to be conveyed, pursuant to which such person becomes
liable under such Mortgage and, unless prohibited by applicable law or the
mortgage documents, the borrower remains liable thereon. The Servicer is also
authorized to enter into a substitution of liability agreement with such person,
pursuant to which the original borrower is released from liability and such
person is substituted as borrower and becomes liable under the Mortgage.
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REALIZATION UPON DEFAULTED LOAN ASSETS
With respect to any defaulted Loan Asset as to which no satisfactory
arrangements can be made for collection of delinquent payments or the cure of
any other event of default, the Servicer will take such action as it shall deem
to be in the best interest of the Securityholders. Without limiting the
generality of the preceding sentence, the Servicer will, in accordance with the
servicing standard described above, (i) in the case of Title I Mortgage Loans
and Title I Contracts only, direct the Trustee (or any Administrator) to submit
an FHA Claim to the FHA, in accordance with FHA Regulations, or (ii) in the case
of Mortgage Loans and Contracts, take such other action as the Servicer deems to
be in the best interests of the Securityholders, which, if no superior lien
exists on the related Mortgaged Property, could include a foreclosure upon such
Mortgaged Property in the name of the Trustee for the benefit of the
Securityholders, provided such action is economically justified. Typically,
however, the Servicer has chosen not to pursue foreclosures of defaulted loans
comparable to the Loan Assets due to the costs involved. In servicing mortgage
loans and contracts secured by junior liens in their portfolios, it will not be
the Servicer's or any Subservicer's practice to satisfy the senior mortgage(s)
at or prior to the foreclosure sale of the related Mortgaged Property, or to
advance funds to keep the senior mortgage(s) current. In addition, if a
defaulted Loan Asset (together with any senior lien indebtedness) has a high
loan-to-value ratio, then the Servicer will be less likely to foreclose on the
related Mortgaged Property, even if the Servicer has a first-lien position for
such defaulted Loan Asset. In the event an FHA Claim is rejected by the FHA due
to circumstances that constitute a breach of the Transferor's representations
and warranties in the applicable Sale and Servicing Agreement or Pooling and
Servicing Agreement, the Transferor will be required to repurchase the related
Title I Mortgage Loan or Title I Contract at the purchase price and in the
manner set forth in such Sale and Servicing Agreement or Pooling and Servicing
Agreement.
In connection with any collection activities or foreclosure, the Servicer
is required to exercise collection and foreclosure procedures with the same
degree of care and skill in its exercise or use, as it would exercise or use
under the circumstances in the conduct of its own affairs.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
Each Sale and Servicing Agreement and each Pooling and Servicing Agreement
will require the Servicer to make reasonable efforts to collect all payments
called for under the terms and provisions of the Loan Assets. Consistent with
the foregoing, the Servicer may at its own discretion waive any late payment
charge, assumption fee or any penalty interest in connection with the payment of
a Loan Asset or any other fee or charge which the Servicer would be entitled to
retain as servicing compensation and may waive, vary or modify any term of any
Loan Asset or consent to the postponement of strict compliance with any such
term or in any matter grant indulgence to any borrower, subject to the
limitations set forth in the applicable Sale and Servicing Agreement or Pooling
and Servicing Agreement and the FHA Regulations, if applicable.
SUBSERVICERS
The Servicer is permitted under the applicable Sale and Servicing Agreement
or Pooling and Servicing Agreement to enter into servicing arrangements from
time to time with subservicers (each, a "Subservicer") meeting the requirements
of such Sale and Servicing Agreement or Pooling and Servicing Agreement,
provided that the applicable Trustee gives written consent thereto.
Notwithstanding any subservicing arrangements, the Servicer shall not be
relieved of its obligations under the applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement to the applicable Trustee and the
Securityholders, and the Servicer shall be obligated to the same extent and
under the same terms and conditions as if it alone were servicing and
administering the related Loan Assets.
REMOVAL AND RESIGNATION OF SERVICER
To the extent specified in the Prospectus Supplement, the applicable
Trustee may remove the Servicer upon the occurrence and continuation beyond the
applicable cure period of certain events described in the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement. To the extent specified
in the
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Prospectus Supplement, the Servicer will not be permitted to resign from its
obligations and duties except by mutual consent of the Servicer, the Seller, the
Issuer the applicable Trustee and any other persons so specified in the
applicable Sale and Servicing Agreement or Pooling and Servicing Agreement, or
upon the determination that the Servicer's duties are no longer permissible
under applicable law and such incapacity cannot be cured by the Servicer. No
such resignation shall become effective until a qualified successor has assumed
the Servicer's responsibilities and obligations. Upon removal or resignation of
the Servicer, a successor servicer will be appointed pursuant to the terms and
conditions set forth in the applicable Sale and Servicing Agreement or Pooling
and Servicing Agreement.
ADVANCES
To the extent specified in the Prospectus Supplement, neither the Servicer,
nor any Subservicer on behalf of the Servicer, shall have any obligation to
advance its own funds for any delinquent scheduled payments of principal or
interest on any Loan Asset or to satisfy or keep current the indebtedness
secured by any superior liens on the related Mortgaged Property. To the extent
specified in the Prospectus Supplement, no costs incurred by the Servicer or any
Subservicer in respect of servicing advances shall, for the purposes of payments
or distributions to Securityholders, be added to the amount owing under the
related Loan Asset.
SERVICING PROCEDURES
To the extent specified in the related Prospectus Supplement, the Servicer
and each Subservicer will service the Loan Assets pursuant to written guidelines
promulgated by the Seller, the Issuer or the Servicer. The Servicer will
exercise its best reasonable efforts to insure that any Subservicers service the
Loan Assets in compliance with such guidelines and in a manner consistent with
industry standards.
Mortgage Loans. To the extent specified in the related Prospectus
Supplement, the Servicer and each Subservicer will be required to service and
administer the Mortgage Loans and will have full power and authority, acting
alone, to do any and all things in connection with such servicing and
administration which the Servicer may deem necessary or desirable and consistent
with the terms of the applicable Sale and Servicing Agreement or Pooling and
Servicing Agreement. The Servicer, in servicing and administering the Mortgage
Loans, will be required to employ or cause to be employed procedures (including
collection, foreclosure, liquidation and REO Property management and liquidation
procedures) and exercise the same care that it customarily employs and exercises
in servicing and administering loans of the same type as the Mortgage Loans for
its own account, all in accordance with accepted servicing practices of prudent
lending institutions and servicers of loans of the same type as the Mortgage
Loans and giving due consideration to the Securityholders' reliance on the
Servicer. With respect to any Title I Mortgage Loan, the foregoing servicing
standard also shall include the requirement that the Servicer will and will
cause any Subservicer to, comply with FHA Regulations in servicing the Title I
Mortgage Loans so that the FHA Insurance remains in full force and effect with
respect to the Title I Mortgage Loans, except for good faith disputes relating
to FHA Regulations or such FHA Insurance, unless such disputes would result in
the termination or suspension of such FHA Insurance. The Servicer will be
required to maintain the facilities, procedures and experienced personnel
necessary to comply with such servicing standard and the duties of the Servicer
set forth in the applicable Sale and Servicing Agreement or Pooling and
Servicing Agreement.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds of liquidation of the Mortgage Loan
after the reimbursement to the Servicer of its expenses and after the
satisfaction of any senior liens.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the Loan
Assets -- General Legal Considerations -- Cooperative Loans". This approval is
usually based on the purchaser's income and net worth and numerous other
factors. Although the Cooperative's approval is unlikely to be
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unreasonably withheld or delayed, the necessity of acquiring such approval could
limit the number of potential purchasers for those shares and otherwise limit
the ability to sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Code Section requires, among other things, that at
least 80% of the gross income of the corporation be derived from its
tenant-stockholders (as defined in Code Section 216(b)(2). By virtue of this
requirement, the status of a corporation for purposes of Code Section 216(b)(1)
must be determined on a year-to-year basis. Consequently, there can be no
assurance that Cooperatives relating to the Cooperative Loans will qualify under
such Code Section for any particular year. In the event that such a Cooperative
fails to qualify for one or more years, the value of the collateral securing any
related Cooperative Loans could be significantly impaired because no deduction
would be allowable to tenant-stockholders under Code Section 216(a) with respect
to those years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
So long as it acts as servicer of the Mortgage Loans, the Servicer will be
required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
Contracts. With respect to Trust Property that includes Contracts, pursuant
to the applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement, the Servicer will service and administer the Contracts assigned to
the Trustee as more fully set forth below. The Servicer, either directly or
through Subservicers subject to general supervision by the Servicer, will
perform diligently all services and duties specified in each Sale and Servicing
Agreement or Pooling and Servicing Agreement in the same manner as prudent
lending institutions of property improvement and/or manufactured housing
installment sales contracts of the same type as the Contracts in those
jurisdictions where the related borrowers are located. The Servicer will monitor
the performance of each Subservicer, if any, and, unless the related Prospectus
Supplement states otherwise, will remain liable for the servicing of the
Contracts in accordance with the terms of the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement. The duties to be performed by the
Servicer or the Subservicer, if any, will include collection and remittance of
principal and interest payments, collection of insurance claims and, if
necessary, repossession.
ADMINISTRATION AND SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Loan Asset, the Servicer may receive compensation with
respect to each interest payment thereon in an amount specified in the related
Prospectus Supplement. As compensation for its servicing duties, each
Subservicer, if any, will be entitled to a monthly servicing fee in the amount
specified in the related Prospectus Supplement. In addition to the primary
compensation, each Servicer or Subservicer, if any, will retain all assumption
underwriting fees and late payment charges, to the extent collected from
borrowers if provided in the related Prospectus Supplement.
The Servicer and any Subservicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Loan Assets. No loss will be suffered on the Securities by reason of such
expenses to the extent claims for such expenses are paid directly under any
applicable Mortgage Pool Insurance Policy, any primary mortgage insurance
policy, or from any other forms of Credit Enhancement. In the event, however,
that the defaulted Mortgage Loans are not covered by a Mortgage Pool Insurance
Policy, any primary mortgage insurance policy, or another form of Credit
Enhancement, or claims are either not made or not paid under such policies or
Credit Enhancement, or if coverage thereunder has ceased, a loss will occur on
the Securities of the affected Series to the extent that the proceeds from the
liquidation of a defaulted Loan
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Asset, after reimbursement of the Servicer's and the Subservicer's expenses, are
less than the then outstanding principal balance of such defaulted Loan Asset.
THE SELLER AND THE ISSUER
FIRSTPLUS INVESTMENT CORPORATION ("FIC") or a Trust formed by FIC for such
purpose, will act as Issuer with respect to each Series of Securities, and with
respect to each Series of Securities in which a Trust is the Issuer, FIC will
act as Seller. FIC, a Nevada corporation, was incorporated in 1995 as a limited
purpose finance corporation. All of the outstanding capital stock of FIC is
owned by RAC Financial Group, Inc., the common stock of which is traded in the
over-the-counter market on the Nasdaq National Market. The Seller maintains its
principal office at 3773 Howard Hughes Parkway, Suite 300N, Las Vegas, Nevada
89109, and its telephone number is (702) 892-3772.
As a limited purpose finance corporation under the Rating Agency
guidelines, the business operations of FIC will be limited to functions relating
to the issuance of one or more Series of Securities or similar series of
asset-backed or mortgage-backed securities, the acquisition and resale of Loan
Assets and other incidental activities related thereto. FIC does not have, and
is not expected in the future to have, any significant assets. If FIC were
required to repurchase a Loan Asset included in the Trust Property for a Series,
its only sources of funds to make such repurchase would be funds obtained from
the enforcement of a corresponding obligation, if any, on the part of the
Transferor of such Loan Asset or the related Servicer, as the case may be, or
from a Reserve Fund, if any, established to provide funds for such repurchases.
Neither FIC nor any of its affiliates will insure or guarantee the
Securities of any Series or the Loan Assets backing any such Series. See "Risk
Factors -- Limited Assets."
THE SERVICER AND THE TRANSFEROR
To the extent specified in the related Prospectus Supplement, the Servicer
with respect to any Series of Securities may be FIRSTPLUS FINANCIAL, INC.
("FFI"), an affiliate of FIC. In addition, to the extent specified in the
related Prospectus Supplement for a Series, the related Transferor of the Loan
Assets to the Seller or the Issuer, as applicable, for such Series may also be
FFI. See "Description of the Trust Property -- General".
The delinquency and loss experience of FFI for the periods indicated is set
forth below. In the event that FFI is not the Servicer with respect to a Series,
or if an entity other than FFI acts as Servicer with respect to a Series, the
delinquency experience of such Servicer will be set forth in the related
Prospectus Supplement.
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DELINQUENCY EXPERIENCE
THREE MONTHS ENDED
------------------------------------------------------
1994 1995
------- -------------------------------------------
DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- -------- --------
DELINQUENCY DATA:
Delinquencies in Serviced Loan Portfolio
(at period end) (1):
31-60 days............................... 3.7% 2.3% 1.7% 1.8% 1.5%
61-90 days............................... 1.4 1.0 0.7 0.7 0.5
91 days and over......................... 3.2 3.3 1.9 2.2 2.1
------- ------- -------- -------- --------
Total............................ 8.3% 6.6% 4.3% 4.7% 4.1%
======= ======= ======== ======== ========
Serviced Loan Portfolio
(at period end) (dollars in thousands)... $60,850 $70,410 $177,358 $238,584 $387,343
THREE MONTHS ENDED
--------------------------------------------------------------
1996 1997
------------------------------------------------ ----------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
-------- -------- ---------- ---------- ----------
Delinquencies in Serviced Loan
Portfolio
(at period end) (1):
31-60 days........................ 1.4% 1.1% 0.8% 1.0% 0.9%
61-90 days........................ 0.6 0.5 0.4 0.4 0.4
91 days and over.................. 2.2 1.9 1.5 1.3 1.1
-------- -------- ---------- ---------- ----------
Total..................... 4.2% 3.5% 2.7% 2.7% 2.4%
======== ======== ========= ========= =========
Serviced Loan Portfolio
(at period end) (dollars in
thousands)........................ $506,287 $750,529 $1,267,147 $1,882,187 $2,713,137
YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- -------------
1994 1995 1996
----- ----- -------------
LOSS AND DEFAULT DATA:
Net Losses as a percentage of the average Serviced Loan Portfolio
(2)............................................................ 0.44% 0.04% 0.12%
Defaults as a percentage of the average Serviced Loan Portfolio
(2)............................................................ 2.64% 0.69% 1.29%
- ---------------
(1) Delinquencies (as a percentage of the total serviced loan portfolio balance)
typically increase in November and December of each calendar year.
(2) The average serviced loan portfolio is calculated by adding the beginning
and ending balances for the period presented and dividing the sum by two.
While the preceding tables generally indicate that FFI is experiencing
declining delinquency, loss and default rates on its serviced loan portfolio as
a whole, such rates have been increasing on a pool-by-pool basis. Although such
increases to date have been within the parameters anticipated by FFI at the time
of the issuance of each Series of Securities, there can be no assurance that
such rates will not continue to increase. Loan Assets that will be conveyed to
the Seller or Issuer in connection with the issuance of a Series of Securities
will generally possess reduced delinquency, default and loss rates due to
certain requirements of the Underwriters and Rating Agencies for such Series.
THE OVERALL DECLINE IN THE DELINQUENCY RATES ON THE SERVICED LOAN PORTFOLIO IS
PRINCIPALLY DUE TO THE INCREASED VOLUME OF LOANS ORIGINATED BY FFI. FFI
CALCULATES ITS DELINQUENCY AND DEFAULT RATES BY DIVIDING THE AMOUNT OF
DELINQUENT OR DEFAULTED LOANS IN THE SERVICED LOAN PORTFOLIO BY THE TOTAL
SERVICED LOAN PORTFOLIO. SINCE FFI AND ITS AFFILIATES ARE ORIGINATING HIGHER
VOLUMES OF NEW LOANS THAT, DUE TO THEIR LACK OF SEASONING, TEND TO HAVE LOWER
DELINQUENCY AND DEFAULT RATES, FFI'S OVERALL DELINQUENCY AND DEFAULT RATES HAVE
DECREASED.
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Because delinquencies and losses typically occur months or years after a
loan is originated, data relating to delinquencies and losses as a percentage of
the current portfolio can understate the risk of future delinquencies, losses or
foreclosures. There is no assurance that the delinquency, foreclosure and loss
experience with respect to any of the Loan Assets or with respect to any pool of
Loan Assets will be comparable to the experience reflected above for assets
originated and serviced by FFI or its affiliates. Because certain Loan Assets
may have been underwritten pursuant to standards that rely primarily on the
value of the related Mortgaged Properties rather than the creditworthiness of
the related mortgagor, the actual rates of delinquencies, foreclosures and
losses on such Loan Assets, particularly in periods during which the value of
the related Mortgage Properties has declined, could be higher than those
historically experienced by the mortgage lending industry in general. In
addition, the rate of delinquencies, foreclosures and losses with respect to the
Loan Assets will also be affected by, among other things, interest rate
fluctuations and general and regional economic conditions. See "Risk
Factors -- Certain Factors Affecting Delinquencies, Foreclosures and Losses on
Loan Assets."
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of each Sale and Servicing
Agreement or Pooling and Servicing Agreement pursuant to which an Issuer will
purchase Loan Assets from the Seller or Transferor, as applicable, and the
Servicer will agree to service such Loan Assets, each Trust Agreement (in the
case of a grantor trust, the Pooling and Servicing Agreement) pursuant to which
a Trust will be created and Securities will be issued and each Administration
Agreement pursuant to which FFI will undertake certain administrative duties
with respect to a Trust that issues Notes (collectively, the "Transfer and
Servicing Agreements"). Forms of the Transfer and Servicing Agreements have been
filed as exhibits to the Registration Statement of which this Prospectus forms a
part. This summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all the provisions of the Transfer
and Servicing Agreements.
SALE AND ASSIGNMENT OF LOAN ASSETS
On or prior to the Closing Date specified with respect to any given Series
of Securities in the related Prospectus Supplement (the "Closing Date"), the
Transferor will sell and assign to the Seller or Issuer without recourse, its
entire interest in the Loan Assets comprising the related Loan Asset Pool,
together with all principal and interest on such Loan Assets (subject to
exclusions or adjustments, specified in the related Prospectus Supplement, on or
with respect to such Loan Assets on or after the Cut-off Date), other than
principal and interest due and payable in respect of such Loan Assets on or
before the date specified in the related Prospectus Supplement. On the Closing
Date, the Seller or Issuer will transfer and assign to the applicable Trustee,
without recourse, pursuant to a Sale and Servicing Agreement, a Pooling and
Servicing Agreement or an Indenture, as applicable, its entire interest in the
Loan Assets comprising the related Loan Asset Pool, together with all principal
and interest on such Loan Assets (subject to exclusions or adjustments specified
in the related Prospectus Supplement, on or with respect to such Loan Assets on
or after the Cut-off Date), other than principal and interest due and payable in
respect of such Loan Assets on or before the date specified in the related
Prospectus Supplement. Each such Loan Asset will be identified in a schedule
appearing as an exhibit to such Sale and Servicing Agreement or such Pooling and
Servicing Agreement (a "Schedule of Loan Assets"). The applicable Trustee will,
concurrently with such transfer and assignment, execute and deliver the related
Securities. Unless otherwise provided in the related Prospectus Supplement, the
net proceeds received from the sale of the Securities of a given Series will be
applied to the purchase of the related Loan Assets from the Seller or Transferor
and, to the extent specified in the related Prospectus Supplement, to provide
for the funding of the applicable Credit Enhancement.
In addition, as to each Loan Asset that is a Mortgage Loan, the Seller or
Issuer, as applicable, will deliver to the applicable Trustee or its custodian,
as specified in the related Prospectus Supplement, the related mortgage note
("Mortgage Note") and mortgage ("Mortgage"), any assumption and modification
agreement, an assignment of the Mortgage in recordable form, evidence of title
insurance and, if applicable, the certificate of private mortgage insurance. In
instances where recorded documents cannot be delivered due to
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delays in connection with recording, the Seller or Issuer, as applicable, may
deliver copies thereof and deliver the original recorded documents promptly upon
receipt.
With respect to each Loan Asset that is a Cooperative Loan, the Seller or
Issuer will cause to be delivered to the applicable Trustee or its custodian, as
specified in the related Prospectus Supplement, the related original Cooperative
note endorsed to the order of such Trustee, the original security agreement, the
proprietary lease or occupancy agreement, the recognition agreement, an executed
financing agreement and the relevant stock certificate and related blank stock
powers. The Seller or Issuer will file in the appropriate office an assignment
and a financing statement evidencing such Trustee's security interest in each
Cooperative Loan.
With respect to each Loan Asset that is a Contract for a Manufactured Home,
the Seller or Issuer will deliver or cause to be delivered to the applicable
Trustee, the original Contract and copies of documents and instruments related
to each Contract and the security interest in the Manufactured Home securing
each Contract. To give notice of the right, title and interest of the
Securityholders to the Contracts, the Seller or Issuer will cause a UCC-1
financing statement to be filed identifying such Trustee as the secured party
and identifying all Contracts as collateral. To the extent specified in the
related Prospectus Supplement, the Contracts will not be stamped or otherwise
marked to reflect their assignment from the Seller or Issuer to such Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment, the interest of the holders of
the Securities of the applicable Series in the Contracts could be defeated. See
"Certain Legal Aspects of the Loan Assets."
To the extent specified in the related Prospectus Supplement, in the
applicable Sale and Servicing Agreement, Pooling and Servicing Agreement or
Indenture, as applicable, the Seller or Issuer generally will represent and
warrant to the applicable Trustee, among other things, that (i) the information
with respect to each Loan Asset set forth in the Schedule of Loan Assets
attached thereto is true and correct in all material respects; (ii) at the date
of initial issuance of the Securities, the Seller or Issuer, as applicable, has
good and marketable title to the Loan Assets included in the Trust Property and
such other items comprising the corpus of the Trust Property are free and clear
of any lien, mortgage, pledge, charge, security interest or other encumbrance;
(iii) at the date of initial issuance of the Securities, no payment in respect
of a Loan Asset is 30 or more days delinquent and there are no delinquent tax or
assessment liens against the related Mortgaged Property, if any; and (iv) at
origination, each Mortgage Loan complied in all material respects with
applicable state and federal laws, including, without limitation, consumer,
usury, truth-in-lending, consumer credit protection, equal credit opportunity
and disclosure laws and with respect to any Title I Mortgage Loans, the FHA
Regulations.
In the event that the Seller or Issuer has acquired the Loan Assets for a
Series, if specified in the related Prospectus Supplement, the Seller or Issuer,
as applicable, may, in lieu of making the representations set forth in the
preceding paragraph, cause the entity from which such Loan Assets were acquired
to make such representations (other than those regarding such Seller's or
Issuer's title to the Loan Assets, which will in all events be made by such
Seller or Issuer, as applicable), in the agreement pursuant to which such Loan
Assets are acquired, or if such entity is acting as Servicer, in the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement, or if such
entity is acting as a Subservicer, in its Subservicing Agreement. In such event,
such representations, and the Seller's rights against such entity in the event
of a breach thereof, will be assigned to the Trustee for the benefit of the
Securityholders of such Series.
CONVEYANCE OF SUBSEQUENT LOAN ASSETS
With respect to a Series of Securities for which a Pre-Funding Arrangement
is provided, in connection with any conveyance of Subsequent Loan Assets to the
Issuer, as applicable, after the issuance of such Series, the related Sale and
Servicing Agreement or Pooling and Servicing Agreement will require the
Transferor and Seller to satisfy the following conditions, among others: (i)
each Subsequent Loan Asset purchased after the Closing Date must satisfy the
representations and warranties contained in the subsequent transfer agreement to
be entered into by the Transferor, the applicable Trustee and the Seller or
Issuer (the "Subsequent Transfer Agreement") and in the related Sale and
Servicing Agreement or Pooling and Servicing Agreement; (ii) the
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Transferor will not select such Subsequent Loan Assets in a manner that it
believes is adverse to the interests of the Securityholders; (iii) as of the
related Cut-off date, all of the Loan Assets in the Loan Asset Pool at that
time, including the Subsequent Loan Assets purchased after the closing date will
satisfy the criteria set forth in the related Sale and Servicing Agreement or
Pooling and Servicing Agreement; (iv) the Subsequent Loan Assets will have been
approved by any third party provider of Credit Enhancement, if applicable; and
(v) prior to the purchase of each Subsequent Loan Asset the applicable Trustee
will perform an initial review of certain related loan file documentation for
such Loan Asset and issue an initial certification for which the required
documentation in such loan file has been received with respect to each such
Subsequent Loan Asset. The Subsequent Loan Assets, on an aggregate basis, will
have characteristics similar to the characteristics of the pool of Initial Loan
Assets as described in the related Prospectus Supplement. Each acquisition of
any Subsequent Loan Assets will be subject to the review by any third party
provider of Credit Enhancement, if applicable, the Rating Agencies and the
Transferor's accountants of the aggregate statistical characteristics of the
related Loan Asset Pool for compliance with the applicable statistical criteria
set forth in the related Sale and Servicing Agreement or Pooling and Servicing
Agreement.
REPURCHASE OR SUBSTITUTION OF LOAN ASSETS
The Trustee (or its custodian as specified in the related Prospectus
Supplement) will review the documents delivered to it with respect to the Loan
Assets included in the related Trust Property. To the extent specified in the
related Prospectus Supplement, if any document is not delivered or is found to
be defective in any material respect and the Seller or Issuer cannot deliver
such document or cure such defect within 60 days after notice thereof (which the
applicable Trustee will undertake to give within 45 days of the delivery of such
documents), and if any other party obligated to deliver such document or cure
such defect has not done so and has not substituted or repurchased the affected
Loan Asset, then the Seller or Issuer, as applicable, will, not later than the
Determination Date next succeeding the end of such 60-day period (a) if provided
in the Prospectus Supplement remove the affected Loan Asset from the Trust
Property and substitute one or more other Loan Assets therefor or (b)
repurchase, or cause the Transferor to repurchase the Loan Asset for a price
equal to 100% of its principal balance plus interest thereon as of the date
specified in the related Prospectus Supplement, plus the amount of unreimbursed
servicing advances made by the Servicer or any Subservicer with respect to such
Loan Asset. To the extent specified in the related Prospectus Supplement, such
purchase price will be deposited in the Collection Account on such Determination
Date and such repurchase and, if applicable, substitution obligation will
constitute the sole remedy available to holders of the Securities of the
applicable Series or the related Trustee against the Seller or the Issuer for a
material defect in a document relating to a Loan Asset.
If the Prospectus Supplement for a Series of Securities so provides, then
in lieu of agreeing to repurchase or substitute Loan Assets as described above,
the Seller or the Issuer may obtain such an agreement from the entity which sold
such Loan Assets to the Seller or Issuer, as applicable, which agreement will be
assigned to the applicable Trustee for the benefit of the holders of the
Securities of such Series.
EVIDENCE AS TO COMPLIANCE
The related Sale and Servicing Agreement or Pooling and Servicing Agreement
will provide that on or before a specified date after the end of each of the
Servicer's fiscal years elapsing during the term of its appointment, beginning
with the first fiscal year ending after the Closing Date, the Servicer, at its
expense, will furnish to the applicable Trustee and certain other Persons (i) an
opinion by a firm of independent certified public accountants on the financial
position of the Servicer at the end of the relevant fiscal year and the results
of operations and changes in financial position of the Servicer for such year
then ended on the basis of an examination conducted in accordance with generally
accepted auditing standards, and (ii) if the Servicer is then servicing any
Mortgage Loans, a statement from such independent certified public accountants
to the effect that based on an examination of certain specified documents and
records relating to the servicing of the Servicer's mortgage loan portfolio
conducted substantially in compliance with the audit program for mortgages
serviced for the United States Department of Housing and Urban Development
Mortgage Audit Standards, or the Uniform Single Audit Program for Mortgage
Bankers (the "Applicable Accounting Standards"), such
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firm is of the opinion that such servicing has been conducted in compliance with
the Applicable Accounting Standards except for (a) such exceptions as such firm
shall believe to be immaterial and (b) such other exceptions as shall be set
forth in such statement.
LIST OF SECURITYHOLDERS
Upon written request of the applicable Trustee, the Registrar for a Series
of Securities will provide to the Trustee, within fifteen days after receipt of
such request, a list of the names and addresses of all holders of record of the
Securities of such Series as of the most recent Record Date for payment or
distributions to holders of Securities of that Series. Upon written request of
three or more holders of record of a Series of Securities for purposes of
communicating with other holders with respect to their rights under the
applicable Indenture, Trust Agreement or Pooling and Servicing Agreement for
such Series, the applicable Trustee will afford such holders access during
business hours to the most recent list of holders of such Series held by such
Trustee. With respect to Book Entry Securities, the only named holder on the
Certificate Register will be the Clearing Agency.
No Indenture, Trust Agreement or Pooling and Servicing Agreement will
provide for the holding of any annual or other meetings of holders of
Securities.
ADMINISTRATION OF THE DISTRIBUTION ACCOUNT
The applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement with respect to a Series will require the Servicer to maintain a
Distribution Account that is either: (i) an account maintained with a depository
institution the debt obligations of which (or, in the case of a depository
institution which is a part of a holding company structure, the debt obligations
of the holding company of which) have a long-term or short-term rating
acceptable to each rating agency that rated the Securities; (ii) an account or
accounts the deposits in which are fully insured by either the Bank Insurance
Fund (the "BIF"), the Federal Deposit Insurance Corporation (the "FDIC") or the
Savings Association Insurance Fund (as successor to the Federal Savings and Loan
Insurance Corporation) ("SAIF") of the FDIC; (iii) a trust account (which shall
be a "segregated trust account") maintained with the corporate trust department
of a federal or state chartered depository institution or trust company with
trust powers and acting in its fiduciary capacity for the benefit of the
applicable Trustee which depository institution or trust company will be
required to have capital and surplus of not less than the amount specified in
the related Indenture, Trust Agreement, Sale and Servicing Agreement or Pooling
and Servicing Agreement; or (iv) an account that will not cause any rating
agency rating the Securities of such Series to downgrade or withdraw its
then-current rating assigned to the Securities, as evidenced in writing by such
rating agency. The instruments in which amounts in the Distribution Account may
be invested are limited to Permitted Investments. To the extent specified in the
related Prospectus Supplement, a Distribution Account may be maintained as an
interest bearing account, or the funds held therein may be invested pending each
succeeding Distribution Date in Permitted Investments. To the extent specified
in the related Prospectus Supplement, the Seller, the Issuer or the Trustee will
be entitled to receive any such interest or other income earned on funds in the
Distribution Account as additional compensation. To the extent specified in the
related Prospectus Supplement, the following payments and collections received
subsequent to the cut-off date will be deposited in the Distribution Account:
(i) all payments on account of scheduled principal;
(ii) all payments on account of interest accruing and collected on and
after the date specified in the related Prospectus Supplement, subject to
exclusions or adjustments described in such Prospectus Supplement;
(iii) all Liquidation Proceeds net of certain amounts reimbursed to
the Subservicers or the Servicer, as described in the related Sale and
Servicing Agreement or Pooling and Servicing Agreement;
(iv) all Insurance Proceeds;
(v) all proceeds of any Loan Asset or property acquired in respect
thereof repurchased by the Servicer, the Seller or the Transferor or
otherwise as described herein;
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(vi) all amounts, if any, required to be transferred to the
Distribution Account from any Credit Enhancement for the related Series;
and
(vii) all other amounts required to be deposited in the Distribution
Account pursuant to the related Indenture, Trust Agreement, Sale and
Servicing Agreement or Pooling and Servicing Agreement.
REPORTS TO SECURITYHOLDERS
Concurrently with each payment or distribution on the Securities of a
Series, to the extent specified in the related Prospectus Supplement, the
applicable Trustee will furnish to the related Securityholders a statement
generally setting forth, to the extent applicable to such Series, among other
things:
(i) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each Class;
(ii) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each Class;
(iii) the aggregate principal balance of each Class of the Securities
after giving effect to payments and distributions on such Distribution
Date;
(iv) if applicable, the aggregate principal balance of any Class of
Securities which are Compound Interest Securities after giving effect to
any increase in such principal balance that results from the accrual of
interest that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to holders of
any Class of Securities that were distributed to holders of other Classes
of Securities;
(vi) if any Class of Securities has priority in the right to receive
Principal Prepayments, the amount of Principal Prepayments received by the
related Trustee in respect of the related Loan Assets;
(vii) certain performance information regarding the Loan Assets,
including delinquency and foreclosure information, specified in the related
Sale and Servicing Agreement or Pooling and Servicing Agreement;
(viii) the amount of coverage then remaining under any Credit
Enhancement; and
(ix) all other information required to be provided pursuant to the
related Indenture, Trust Agreement, Sale and Servicing Agreement or Pooling
and Servicing Agreement.
The Servicer or the applicable Trustee will also furnish annually customary
information deemed necessary for holders of such Securities to prepare their tax
returns.
EVENTS OF DEFAULT
"Events of Default" under the applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement with respect to a Series will consist of (i) any
failure by the Servicer to duly observe or perform in any material respect any
of its covenants or agreements in such Sale and Servicing Agreement or such
Pooling and Servicing Agreement materially affecting the rights of holders of
the Securities of such Series which continues unremedied for 60 days after the
giving of written notice of such failure to the Servicer by the applicable
Trustee or to the Servicer or the applicable Trustee by the holders of such
Securities evidencing interests aggregating not less than 25% of the then
outstanding principal balance of the affected Class of Securities; and (ii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under a Sale and Servicing Agreement or
Pooling and Servicing Agreement remains unremedied by the Servicer, the
applicable Trustee, or holders of Securities of each
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Class affected thereby evidencing, as to each such Class, interests aggregating
not less than 51% of the then outstanding principal balance of such Class, may
terminate all of the rights and obligations of the Servicer under the applicable
Sale and Servicing Agreement or Pooling and Servicing Agreement, whereupon the
applicable Trustee, or a new Servicer appointed pursuant to such Sale and
Servicing Agreement or such Pooling and Servicing Agreement, will succeed to all
the responsibilities, duties and liabilities of the Servicer under such Sale and
Servicing Agreement or such Pooling and Servicing Agreement and will be entitled
to similar compensation arrangements. Notwithstanding its termination as
Servicer, the Servicer will be entitled to receive amounts earned by it under
the applicable Sale and Servicing Agreement or Pooling and Servicing Agreement
prior to such termination. If at the time of any such termination the Servicer
is also servicing as the Administrator, the Servicer's status as Administrator
will be simultaneously terminated by the Trustee and the Servicer's
responsibilities as such shall be transferred to the successor servicer, if such
person is then qualified to so act), or to another successor Administrator
retained by the applicable Trustee, or to the applicable Trustee itself if a
successor Administrator cannot be retained in a timely manner. To the extent
provided in the related Prospectus Supplement, unless and until a successor
servicer is appointed, the applicable Trustee will be required to fulfill the
duties of the Servicer.
No Securityholder will have any right under the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement to institute any
proceeding with respect to such Sale and Servicing Agreement or such Pooling and
Servicing Agreement, unless such holder previously has given to the applicable
Trustee written notice of default and unless the holders of Securities as
specified in the applicable Sale and Servicing Agreement or Pooling and
Servicing Agreement have made written request to the applicable Trustee to
institute such proceeding in its own name as trustee thereunder and have offered
to the applicable Trustee reasonable indemnity and the Trustee for 60 days has
neglected or refused to institute any such proceedings. However, no Trustee will
be under any obligation to exercise any of the trusts or powers vested in it by
the applicable Indenture, Trust Agreement or 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 Securityholders, unless such Securityholders have
offered to such Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
AMENDMENT
Each of the Sale and Servicing Agreement with respect to a Series and the
Pooling and Servicing Agreement with respect to a Series may be amended by the
Issuer, or the Seller, as applicable, the Servicer and the applicable Trustee
without the consent of the Securityholders of such Series, to cure any error or
ambiguity, to correct or supplement any provision therein which may be defective
or inconsistent with any other provision therein or to add any other provisions
with respect to matters or questions arising under such Sale and Servicing
Agreement or such Pooling and Servicing Agreement provided that such action will
not adversely affect in any material respect the interests of any
Securityholders of such Series. An amendment described above shall not be deemed
to adversely affect in any material respect the interests of the Securityholders
of a Series if either (a) an opinion of counsel satisfactory to the applicable
Trustee is obtained to such effect, or (b) the person requesting the amendment
obtains a letter from each of the rating agencies then rating the Securities of
that Series to the effect that the amendment, if made, would not result in a
downgrading or withdrawal of the rating then assigned by it to such Securities.
To the extent specified in the Prospectus Supplement, each of the Sale and
Servicing Agreement with respect to a Series and the Pooling and Servicing
Agreement with respect to a Series may also be amended by the Issuer, or the
Seller, as applicable, the Servicer, and the applicable Trustee with the consent
of the Securityholders evidencing interests aggregating in excess of 50% of the
then outstanding principal balance of the Securities of the applicable Series
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Sale and Servicing Agreement or such
Pooling and Servicing Agreement or of modifying in any manner the rights of
Securityholders of that Series; provided, however, that no such amendment may
(i) reduce in any manner the amount of, or delay the timing of, collections of
payments received on the related Loan Assets or distributions which are required
to be made on any Security
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without the consent of the holder of such Security, (ii) adversely affect in any
material respect the interests of the holders of any Class of Securities in any
manner other than as described in clause (i), without the consent of the holders
of Securities evidencing 100% of the then outstanding principal balance of such
Class or (iii) reduce the aforesaid percentage of Securities of any Class
required to consent to any such amendment, without the consent of the holders of
Securities evidencing 100% of the then outstanding principal balance of such
Class.
CERTAIN LEGAL ASPECTS OF THE LOAN ASSETS
The following discussion contains summaries of certain legal aspects of the
Loan Assets which are general in nature. Because such legal aspects are governed
primarily by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the Loan Assets is situated. The summaries are qualified in their entirety
by reference to the applicable federal and state laws governing the Loan Assets.
In addition, the following discussion also contains a summary of the Title
I Program, which may be applicable to certain of the Loan Assets. With respect
to each Series for which the related Trust Property includes Contracts, the
related Prospectus Supplement will contain a discussion of certain legal aspects
of manufactured housing contracts.
GENERAL LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges
that may be assessed on borrowers, require certain disclosures to borrowers, and
may require licensing of the Transferor, the Seller, the Issuer, the Trustee,
the Administrator, the Servicer and any Subservicer. In addition, most states
have other laws, public policies and general principles of equity relating to
the protection of consumers and the prevention of unfair and deceptive practices
which may apply to the origination, servicing and collection of the Loan Assets.
The Loan Assets may also be subject to federal laws, including: (i) the
federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Loan
Assets; (ii) the Real Estate Settlement Procedures Act and Regulation X
promulgated thereunder, which require certain disclosures to the borrowers
regarding the settlement and servicing of the Mortgage Loans; (iii) the Equal
Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit
discrimination on the basis of age, race, color, sex, religion, marital status,
national origin, receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act; (iv) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience; (v) the Federal Trade Commission Preservation of Consumers' Claims
and Defenses Rule, 16 C.F.R. Part 433, regarding the preservation of a
consumer's rights; (vi) the Fair Housing Act, 42 U.S.C. 3601 et seq., relating
to the creation and governance of the Title I Program; (vii) the Home Ownership
and Equity Protection Act; and (viii) if applied, the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "Relief Act").
Mortgages. The Mortgage Loans will be secured by either deeds of trust,
mortgages, deeds to secure debt or chattel mortgages, depending upon the
prevailing practice in the state in which the Mortgaged Property subject to a
Mortgage Loan is located. In some states, a mortgage creates a lien upon the
real property encumbered by the mortgage. In other states, the mortgage conveys
legal title to the property to the mortgagee subject to a condition subsequent,
i.e., the payment of the indebtedness secured thereby. There are two parties to
a mortgage, the borrower, who is the owner of the property and usually the
borrower, and the mortgagee, who is the lender. Under the mortgage instrument,
the borrower 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 has three parties, the
owner of the property and usually the borrower, called the trustor (similar to a
borrower), a lender called the beneficiary (similar to a mortgagee), 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
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trustee to secure payment of the obligation. The trustee's authority under a
deed of trust and the mortgagee's authority under a mortgage are governed by
applicable state law, the express provisions of the deed of trust or mortgage,
and, in some cases, with respect to deeds of trust, the directions of the
beneficiary. Some states use a security deed or deed to secure debt which is
similar to a deed of trust except that it has only two parties: a grantor
(similar to a borrower) and a grantee (similar to a mortgagee). Mortgages, deeds
of trust and deeds to secure debt generally are not prior to liens for real
estate taxes and assessments and other charges imposed under governmental police
powers. Priority with respect to mortgages, deeds of trust and deeds to secure
debt and other encumbrances depends on their terms, the knowledge of the parties
to such instrument and generally on the order of recordation of the mortgage,
deed of trust or the deed to secure debt in the appropriate recording office.
Cooperative Loans. Certain of the Mortgage Loans may be Cooperative Loans.
The private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling units
and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative apartment
building and/or underlying land, as is generally the case, the cooperative, as
project borrower, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the blanket mortgage on a cooperative may provide financing in the
form of a mortgage that does not fully amortize with a significant portion of
principal being due in one lump sum at final maturity. The inability of the
cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a pool of Mortgage Loans including
Cooperative Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing such tenant-stockholder's pro rata share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights is financed through
a cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement and a
financing statement covering the proprietary lease or occupancy agreement and
the cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
FORECLOSURE
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. Generally, the action is initiated by the service of legal pleadings
upon all parties having an interest of record in the real property. Delays in
completion of the foreclosure may occasionally result from difficulties in
locating necessary parties defendant. Judicial foreclosure proceedings are often
not contested by any of the parties defendant. However, when the mortgagee's
right to foreclose is contested, the legal proceedings necessary to resolve the
issue can be
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time consuming. After the completion of a judicial foreclosure, the court
generally issues a judgment of foreclosure and appoints a referee or other court
officer to conduct the sale of the property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. Foreclosure is regulated
by statutes and rules and is subject to the court's equitable powers. Generally,
a borrower is bound by the terms of the mortgage note and the mortgage as made
and cannot be relieved from his default if the mortgagee has exercised his
rights in a commercially reasonable manner. However, since a foreclosure action
historically was equitable in nature the court may exercise equitable powers to
relieve a borrower of a default and deny the mortgagee foreclosure on proof that
either the borrower's default was neither willful nor in bad faith or the
mortgagee's action established a waiver, fraud, bad faith or oppressive or
unconscionable conduct such as to warrant a court of equity to refuse
affirmative relief to the mortgagee. Under certain circumstances a court of
equity may relieve the borrower from an entirely technical default where such
default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than
reasonably equivalent value and such sale occurred while the borrower was
insolvent and within one year (or within the state statute of limitations if the
trustee in bankruptcy elects to proceed under state fraudulent conveyance law)
of the filing of bankruptcy. Similarly, a suit against the debtor on the
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In some states, mortgages may also be foreclosed by advertisement pursuant
to a power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or deed to secure debt which authorizes the trustee to sell the
property upon default by the borrower under the terms of the note, deed of trust
or deed to secure debt. In some states, prior to such sale, the trustee must
record a notice of default and send a copy to the borrower-trustor and to any
person who has recorded a request for a copy of a notice of default and notice
of sale. In addition, in some states, prior to such sale, the trustee must
provide notice to any other individual having an interest of record in the real
property, including any junior lienholders. In some states, the borrower, or any
other person having a junior encumbrance on the real estate, may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligations, including
attorney's and trustee's fees to the extent allowed by applicable law. Certain
states may require notices of sale to be published periodically for a prescribed
period in a specified manner prior to the date of the trustee's sale. 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 in the real property. In
certain states, foreclosure under a deed of trust may also be accomplished by
judicial action in the manner provided for foreclosure of mortgages.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is generally a
public sale. Because of the difficulty a potential buyer at the sale might have
in determining the exact status of title and because the physical condition of
the property may have deteriorated during the foreclosure proceedings, a third
party may be unwilling to purchase the property at a foreclosure sale. For these
and other reasons, it is common for the lender to purchase the property from the
trustee, referee or other court officer for an amount equal to the principal
amount of the indebtedness secured by the mortgage or deed of trust, plus
accrued and unpaid interest and the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses, including attorneys'
and trustee's fees, which may be recovered by a lender. In some states there is
a statutory minimum purchase price which the lender may offer for the property.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume ownership of the
mortgaged property and, therefore, the burdens of ownership, including the
obligation to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will
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commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be mitigated by the receipt of
any mortgage insurance proceeds.
A second mortgagee may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage and any other prior
liens, in which case it must either pay the entire amount due on the first
mortgage and such other liens, prior to or at the time of the foreclosure sale
or undertake the obligation to make payments on the first mortgage and such
liens, in either event adding the amounts expended to the balance due on the
second loan, and may be subrogated to the rights of the first mortgagee. In
addition, in the event that the foreclosure of a second mortgage triggers the
enforcement of a "due-on-sale" clause, the second mortgagee may be required to
pay the full amount of the first mortgage to the first mortgagee. Accordingly,
with respect to those Mortgage Loans which are second mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the borrower or trustor. The payment of the proceeds to the
holders of junior mortgages may occur in the foreclosure action of the senior
mortgagee; however, a junior lienholder whose rights in the property are
terminated pursuant to foreclosure by a senior lienholder will not share in the
proceeds from the subsequent disposition of the property. Junior lienholders may
also institute legal proceedings separate from the foreclosure proceedings of
the senior lienholders.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the borrower. See
"-- Anti-Deficiency Legislation and Other Limitations on Lenders" below.
Cooperative Loans. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owned by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring
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the cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted. Article 9 of the UCC provides that the
proceeds of the sale will be applied first to pay the costs and expenses of the
sale and then to satisfy the indebtedness secured by the lender's security
interest. The recognition agreement, however, generally provides that the
lender's right to reimbursement is subject to the right of the cooperative
corporation to receive sums due under the proprietary lease or occupancy
agreement. If there are proceeds remaining, the lender must account to the
tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness
remains unpaid, the tenant-stockholder is generally responsible for the
deficiency. See "-- Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
Junior Liens. Certain of the Mortgage Loans, including the Title I Mortgage
Loans, may be secured by junior lien mortgages or deeds of trust. Second
mortgages or deeds of trust are generally junior to first mortgages or deeds of
trust held by other lenders, and third mortgages or deeds of trust are generally
junior to first and second mortgages or deeds of trust held by other lenders,
and so forth. The rights of the Securityholders as the holders of a junior deed
of trust or a junior mortgage, are subordinate in lien and in payment to those
of the holder of the senior mortgage or deed of trust, including the prior
rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the borrower, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage, the junior mortgagee's or junior
beneficiary's lien will be extinguished unless the junior mortgagee satisfies
the defaulted senior loan or asserts its subordinate interest in a property in
foreclosure proceedings. A junior mortgagee or beneficiary in some states may
satisfy a defaulted senior lien in full and in some states may cure such 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 to the contrary, no notice of default is required to
be given to a junior mortgagee or beneficiary.
Furthermore, the terms of a junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will generally govern. Upon a failure of the borrower or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the senior mortgagee
or beneficiary become part of the indebtedness secured by the senior mortgage or
deed of trust. To the extent a senior mortgagee expends such sums, such sums
will generally have priority over all sums due under the junior mortgage.
Right of Redemption. The purposes of a foreclosure action are to enable the
mortgagee to realize upon its security and to bar the borrower, and all persons
who have an interest in the property which is subordinate to the foreclosing
mortgagee, from their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and duly summoned
to the foreclosure action in order for their equity of redemption to be barred.
The equity of redemption which is a non-statutory right that must be
exercised prior to foreclosure sale should be distinguished from statutory
rights of redemption. In some states, after sale pursuant to a deed of trust or
foreclosure of a mortgage, the borrower and foreclosed junior lienors are given
a statutory period in
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which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale price.
In other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The exercise
of a right of redemption would defeat the title of any purchaser subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the borrower. Finally, other statutory
provisions limit any deficiency judgment against the former borrower following a
judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Relief
Act and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon collateral and/or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule or forgiving all or a portion of the debt. Additionally, a
federal bankruptcy court in a Chapter 11 bankruptcy case may be able to reduce
the lender's security interest to the value of the residence, thus leaving the
lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan; however, the United States
Supreme Court has recently eliminated such a risk in Chapter 7 and Chapter 13
bankruptcy cases.
The Internal Revenue Code of 1986, as amended provides priority to certain
tax liens over the lien of a mortgage or deed of trust. In addition, substantive
requirements are imposed upon lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. These laws include the federal Truth-in-Lending Act, Real
Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Billing Act, Fair Credit Reporting Act, and related statutes and regulations.
These federal laws impose specific statutory liabilities upon lenders who
originate mortgage loans
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and who fail to comply with the provisions of the applicable laws. In some
cases, this liability may affect assignees of the Mortgage Loans.
Enforceability of Certain Provisions. Certain of the Mortgage Loans will
contain a debt-acceleration clause, which permits the lender to accelerate the
debt upon a monetary default of the borrower, after the applicable cure period.
Courts will generally enforce clauses providing for acceleration in the event of
a material payment default. However, courts, exercising equity jurisdiction, may
refuse to allow a lender to foreclose a mortgage or deed of trust when an
acceleration of the indebtedness would be inequitable or unjust and the
circumstances would render the acceleration unconscionable.
Some courts have imposed general equitable principles to limit the remedies
available in connection with foreclosure. These equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. For example, some courts have required that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lenders' judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
lenders to foreclose if the default under the mortgage instrument or deed of
trust is not monetary, such as the borrower's failure to adequately maintain the
property or the borrower's execution of a second mortgage or deed of trust
affecting the property. The exercise by the court of its equity powers will
depend on the individual circumstances of each case. Finally, some courts have
been faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
deeds of trust receive notices in addition to those prescribed statutorily. For
the most part, these cases have upheld the statutory notice provisions as being
reasonable or have found that the sale by a trustee under a deed of trust or
under a mortgage having a power of sale does not involve sufficient state action
to afford constitutional protection to the borrower.
Some of the Mortgage Loans may not restrict secondary financing, thereby
permitting the borrower to use the Mortgaged Property as security for one or
more additional loans. Where the borrower encumbers the Mortgaged Property with
one or more junior liens, the senior lender is subjected to additional risk.
First, the borrower may have difficulty servicing and repaying multiple loans.
Second, acts of the senior lender which prejudice the junior lender or impair
the junior lender's security may create a superior equity in favor of the junior
lender. For example, if the borrower and the senior lender agree to an increase
in the principal amount of or the interest rate payable on the senior loan, the
senior lender may lose its priority to the extent any existing junior lender is
harmed or the borrower is additionally burdened. Third, if the borrower defaults
on the senior loan and/or any junior loan or loans, the existence of junior
loans and actions taken by junior lenders can impair the security available to
the senior lender and can interfere with or delay the taking of action by the
senior lender. The bankruptcy of a junior lender may operate to stay foreclosure
or similar proceedings by the senior lender.
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. In certain states, there are or may be specific limitations upon
the late charges which a lender may collect from a borrower for delinquent
payments. Late charges are typically retained by servicers as additional
servicing compensation.
A portion of the Mortgage Loans contain "due-on-sale" clauses. These
clauses permit the lender to accelerate the maturity of the loan if the borrower
sells, transfers or coveys the property. The enforceability of these clauses has
been the subject of legislation or litigation in many states, and in some cases
the enforceability of these clauses was limited or denied. However, the Garn-St.
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act")
preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. The
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
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Exempted from the general rule of enforceability of due-on-sale clauses
were mortgage loans (originated other than by federal savings and loan
associations and federal savings banks) that were made or assumed during the
period beginning on the date a state, by statute or final appellate court
decision having statewide effect, prohibited the exercise of due-on-sale clauses
and ending on October 15, 1982 ("Window Period Loans"). However, this exception
applied only to transfers of property underlying Window Period Loans occurring
between October 15, 1982 and October 15, 1985 and does not restrict enforcement
of a due-on-sale clause in connection with current transfers of property
underlying Window Period Loans. Due-on-sale clauses contained in mortgage loans
originated by federal savings and loan associations or federal savings banks are
fully enforceable pursuant to regulations of the Office of Thrift Supervision
(the "OTS"), as successor to the Federal Home Loan Bank Board which preempt
state law restrictions on the enforcement of due-on-sale clauses.
The Garn-St. Germain Act also sets forth nine instances in which a mortgage
lender covered by the Garn-St. Germain Act may not exercise a due-on-sale
clause, notwithstanding the fact that transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. The Garn-St. Germain Act also grants the Director of the Office of
Thrift Supervision (successor to the Federal Home Loan Bank Board) authority to
prescribe by regulation further instances in which a due-on-sale clause may not
be exercised upon the transfer of the property. To date no such regulations have
been issued. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a "due-on-sale" clause.
If interest rates were to rise above the interest rates on the Mortgage
Loans, then any inability of the Servicer or the subservicer to enforce
due-on-sale clauses may result in the Trust Property including a greater number
of Mortgage Loans bearing below-market interest rates than would otherwise be
the case, since a transferee of the property underlying a Mortgage Loan would
have a greater incentive in such circumstances to assume the seller's Mortgage
Loan. Any inability to enforce due-on-sale clauses may affect the average life
of the Mortgage Loans and the number of Mortgage Loans that may be outstanding
until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disability. In other cases, courts have limited the right of the lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower failing to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. Finally,
some courts have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under deeds of trust or mortgages receive notices in
addition to the statutorily-prescribed minimum. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
Adjustable Rate Loans. The laws of certain states may provide that mortgage
notes relating to adjustable rate loans are not negotiable instruments under the
Uniform Commercial Code. In such event, the Trustee will not be deemed to be a
"holder in due course" within the meaning of the Uniform Commercial Code and may
take such a mortgage note subject to certain restrictions on its ability to
foreclose and to certain contractual defenses available to a borrower.
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
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addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trustee or a Trust)
to homeowners. In the event that title to a property securing a Mortgage Loan in
a pool of Mortgage Loans was acquired by a Trustee or a Trust and cleanup costs
were incurred in respect of the property, the holders of the related Securities
might realize a loss if such costs were required to be paid. In addition, the
presence of certain environmental contamination, including, but not limited to,
lead-based paint, asbestos and leaking underground storage tanks could result in
the holders of the related Securities realizing a loss if associated costs were
required to be paid. The Seller, the Issuer, the Administrator, the
Underwriters, the Transferors, the Servicers, and any of their respective
affiliates (i) have not caused any environmental site assessments or evaluations
to be conducted with respect to any properties securing the Mortgage Loans, (ii)
are not required to make any such assessments or evaluations and (iii) make no
representations or warranties and assume no liability with respect to the
absence or effect of hazardous wastes or hazardous substances on any property or
any casualty resulting from the presence or effect of hazardous wastes or
hazardous substances.
In the event that title to a Mortgaged Property is acquired by a Trustee or
Issuer and cleanup costs are incurred in respect of such property, the related
Securityholders might realize a loss if such costs are required to be paid. In
addition, the presence of certain environmental contamination, including, but
not limited to, lead-based paint, asbestos and leaking underground storage tanks
could result in the Securityholders realizing a loss if any associated remedial
costs are required to be paid. The Transferor, the Seller, the Issuer, the
Servicer, any subservicer and any of their respective affiliates (i) have not
caused any environmental site assessments or evaluations to be conducted with
respect to any Mortgaged Property, (ii) are not required to make any such
assessments or evaluations and (iii) make no representations or warranties and
assume no liability with respect to the absence or effect of hazardous wastes or
hazardous substances on any property or any casualty resulting from the presence
or effect of hazardous wastes or hazardous substances.
TRUTH IN LENDING ACT
In September 1994, the Reigle Community Development and Regulatory
Improvement Act of 1994 (the "Reigle Act") was enacted which incorporates the
Home Ownership and Equity Protection Act of 1994, and which adds certain
additional provisions to Regulation Z, the implementing regulation of the
Truth-in-Lending Act ("TILA"). 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 ("covered
loans"). In general, mortgage loans within the purview of the Reigle Act have
annual percentage rates over 10% greater than the yield on Treasury Securities
of comparable maturity and/or fees and points which exceed the greater of 8% of
the total loan amount or $400. The provisions of the Reigle Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of a creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage loan.
A substantial majority of the loans originated or purchased by the Transferor
are covered by the Reigle Act.
The Reigle Act provisions impose additional disclosure requirements on
lenders originating covered loans and prohibit lenders from originating covered
loans that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan. The Transferor
believes that only a small portion of its loans originated in fiscal 1994 and
fiscal 1995 are of the type that, unless modified, would be prohibited by the
Reigle Act. As a result of the Reigle Act provisions, with respect to all
covered loans, the Transferor applies loan underwriting criteria that take into
consideration the borrower's ability to repay.
The Reigle Act provisions also prohibit lenders from including prepayment
fee clauses in covered loans to borrowers with debt-to-income ratios in excess
of 50% or covered loans used to refinance existing loans originated by the same
lender. The Transferor reported immaterial amounts of prepayment fee revenues in
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fiscal 1993, 1994 and 1995, respectively. The Transferor will continue to
collect prepayment fees on loans originated prior to effectiveness of the Reigle
Act provisions and on non-covered loans, as well as on covered loans in
permitted circumstances following the effectiveness of the Reigle Act
provisions. The Reigle Act provisions impose other restrictions on covered
loans, including restrictions on balloon payments and negative amortization
features, which the Transferor does not believe will have a material effect on
its operations.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of home improvement first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits and/or to
limit discount points or other charges.
A similar federal statute, adopted in 1976, provides federal usury
preemption with respect to Title I Mortgage Loans, such as the Title I Mortgage
Loans. This statute also permits states to reimpose interest rate limits by
passing legislation at any time after June 30, 1976. To date, no state has
enacted any reported statute to reimpose interest rate limits with respect to
any loans, mortgage or advance that is insured under Title I.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation or similar limitations
under state law could have an effect, for an indeterminate period of time, on
the ability of the Servicer or the subservicer to collect full amounts of
interest on certain of the Mortgage Loans. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation, which
would not be recoverable from the related Mortgage Loans, would result in a
reduction of the amounts available for distribution to the holders of the
Offered Securities, but the Offered Securities would receive the full amount
otherwise distributable to such holders to the extent that amounts are available
from the credit enhancement provided for the Offered Securities. See "Risk
Factors -- Limitations of Credit Enhancement". In addition, the Relief Act
imposes limitations which would impair the ability of the Servicer or
subservicer to foreclose on an affected Mortgage Loan during the borrower's
period of active duty status. Thus, in the event that such a Mortgage Loan goes
into default there may be delays and losses occasioned by the inability to
realize upon the related Mortgaged Property in a timely fashion.
THE TITLE I PROGRAM
General. Sections 1 and 2(a) of the National Housing Act of 1934, as
amended (the "Act"), authorize the creation of the Federal Housing
Administration (which is an agency within the United States Department of
Housing and Urban Development; such agency and department are referred to
together herein as the "FHA") and the Title I Program. Certain of the Mortgage
Loans or Contracts included in the Trust Property may be loans insured under the
Title I Program. FHA Regulations contain the requirements under which approved
Title I Lenders may obtain insurance against a portion of losses incurred with
respect to eligible loans that have been originated and serviced in accordance
with FHA regulations, up to the amount of such Title I Lender's FHA Reserve, as
described below, and subject to the terms and conditions established under the
Act and FHA Regulations. While FHA Regulations permit the Secretary of HUD,
subject to statutory
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limitations, to waive a Title I Lender's noncompliance with FHA Regulations if
enforcement would impose an injustice on the lender (provided the Title I Lender
has acted in good faith, is in substantial compliance with FHA Regulations and
has credited the borrower for any excess charges), in general, an insurance
claim against the FHA will be denied if the Title I loan to which it relates
does not strictly satisfy the requirements of the Act and FHA Regulations.
Unlike certain other government loan insurance programs, loans under the
Title I Program (other than loans in excess of $25,000) are not subject to prior
review by the FHA. Under the Title I Program, the FHA disburses insurance
proceeds with respect to defaulted loans for which insurance claims have been
filed by a Title I Lender prior to any review of such loans. A Title I Lender is
required to repurchase a Title I loan from the FHA that is determined to be
ineligible for insurance after insurance claim payments for such loan have been
paid to such lender. Under the FHA Regulations, if the Title I Lender's
obligation to repurchase the Title I loan is unsatisfied, the FHA is permitted
to offset the unsatisfied obligation against future insurance claim payments
owed by the FHA to such lender. FHA Regulations permit the FHA to disallow an
insurance claim with respect to any loan that does not qualify for insurance for
a period of up to two years after the claim is made and to require the Title I
Lender that has submitted the insurance claim to repurchase the loan. Pursuant
to a letter ruling issued by the FHA in October 1994, the FHA has stated that,
as a policy, the FHA will strive to review all insurance claim submissions in a
timely manner and limit the period of time within which it will request the
repurchase of a loan to a period of one year after claim submission. The letter
further states, however, that the FHA may find it necessary with respect to some
claim submissions to apply the foregoing two-year incontestability provision
strictly.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase of
both a manufactured home loan and the lot (or cooperative interest therein) on
which such home is placed. Title I Program loans may be made directly to the
owners of the property to be improved or purchased ("direct loans") or with the
assistance of a dealer or home improvement contractor that will have an interest
in the proceeds of the loan ("dealer loans").
Subject to certain limitations described below, eligible Title I loans are
insured by the FHA for 90% of an amount equal to the sum of (i) the net unpaid
principal amount and the uncollected interest earned to the date of default,
(ii) interest on the unpaid loan obligation from the date of default to the date
of the initial submission of the insurance claim, plus 15 calendar days (the
total period not to exceed nine months) at a rate of 7% per annum, (iii)
uncollected court costs, (iv) title examination costs, (v) fees for required
inspections by the lenders or its agents, up to $75, and (vi) origination fees
up to a maximum of 5% of the loan amount. However, the insurance coverage
provided by the FHA is limited to the extent of the balance in the Title I
Lender's FHA Reserve maintained by the FHA. Accordingly if sufficient insurance
coverage is available in such FHA Reserve, then the Title I Lender bears the
risk of losses on a Title I loan for which a claim for reimbursement is paid by
the FHA of at least 10% of the unpaid principal, uncollected interest earned to
the date of default, interest from the date of default to the date of the
initial claim submission and certain expenses.
Under the Title I Program, the FHA maintains an FHA insurance coverage
reserve account (a "FHA Reserve") for each Title I Lender. The amount in each
Title I Lender's FHA Reserve is a maximum of 10% of the amounts disbursed,
advanced or expended by a Title I Lender in originating or purchasing eligible
loans registered with the FHA for Title I Insurance, with certain adjustments
permitted or required by FHA Regulations. The balance of such FHA Reserve is the
maximum amount of insurance claims the FHA is required to pay to the related
Title I Lender. Mortgage loans to be insured under the Title I Program will be
registered for insurance by the FHA, and the increase in Title I insurance
coverage to which the Title I Lender is entitled by reason of the reporting of
such loans under the Title I Lender's contract of insurance will be included in
the FHA Reserve for the originating Title I Lender following the receipt and
acknowledgment by the FHA of a transfer of note report on the prescribed form
(the "Transfer Report") pursuant to FHA Regulations.
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Under the Title I Program the FHA will reduce the insurance coverage
available in a Title I Lender's FHA Reserve with the respect to loans insured
under such Title I Lender's contract of insurance by (i) the amount of FHA
Insurance claims approved for payment related to such loans, (ii) prior to
October 1, 1995, after a Title I Lender has held its Title I contract of
insurance for five years, the amount of the annual reduction (the "Annual
Reduction") equal to 10% of the amount of insurance coverage contained in the
related FHA Reserve as of that date, and (iii) the amount of reduction of the
Title I Lender's FHA Reserve by reason of the sale, assignment or transfer of
loans registered under the Title I Lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I Lender that are subsequently rejected by the FHA. On
June 5, 1995, the FHA announced the elimination of Annual Reductions, effective
as of October 1, 1995.
Upon the receipt and acknowledgment by the FHA of a Transfer Report,
originations of new loans will increase a Title I Lender's insurance coverage
reserve account balance by 10% of the amount disbursed, advanced or expended in
originating such loans registered with the FHA for insurance under the Title I
Program. A Title I Lender is permitted to sell or otherwise transfer loans
reported for insurance under the Title I Program only to another Title I Lender.
Upon any such transfer, except a transfer with recourse or under a guaranty or
repurchase Agreement, the seller is required to file a Transfer Report with the
FHA reporting the transfer of such loans. Upon notification and approval of such
transfer, the FHA Reserve of the selling Title I Lender is reduced, and the FHA
Reserve of the purchasing Title I Lender is increased, by an amount equal to the
lesser of 10% of the actual purchase price of the loans or the net unpaid
principal balance of the loans, up to the total amount of the selling Title I
Lender's FHA Reserve. Thus, in the event the selling Title I Lender's FHA
Reserve was less than 10% of the unpaid principal balance of its portfolio of
loans reported for insurance under the Title I Program prior to the sale, the
seller's FHA Reserve may be exhausted as the result of a sale of only a portion
of its total portfolio, with the result that its remaining Title I Program
portfolio may be ineligible for Title I Program benefits until the lender
originates or otherwise acquires additional loans reported for insurance under
the Title I Program. Accordingly, the insurance coverage reserves transferred to
the purchasing Title I Lender in such case will be less than 10% of the lesser
of the purchase price or the principal balance of the portfolio of loans
purchased, which may be the case with respect to the Transferor's purchase of
certain Title I Mortgage Loans and Title I Contracts from certain Title I
lenders and the transfer of the related insurance coverage from such lenders'
FHA Reserves. Additionally, pursuant to FHA Regulations, not more than $5,000 in
insurance coverage shall be transferred to or from a Title I Lender's insurance
coverage reserve account during any October 1 to September 30 fiscal year
without the approval of the Secretary of HUD. Such HUD approval is generally
viewed as automatic, provided the formal requirements for transfer are
satisfied, but HUD does have the right under FHA Regulations to withhold
approval.
Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a Title I Lender for losses in the portfolio of insured loans held by
such Title I Lender is limited to the amount in an FHA Reserve maintained on a
lender-by-lender basis and not on a loan-by-loan basis. Except when to do so
would be in HUD's best interest, the FHA does not track or "earmark" the loans
within a Title I Lender's portfolio to determine whether a reduction in such
lender's FHA Reserve as the result of an insurance claim by such lender are, in
fact, attributable to the insured loan with respect to which the claim was made.
For this reason, if a Title I Lender is holding insured loans as a fiduciary on
behalf of multiple non-affiliated beneficiaries, in order for such a lender to
cause its FHA Reserve to be reduced only by an amount to which a particular
beneficiary is entitled by reason of the insured loans beneficially held by it,
the Title I Lender must segregate or "earmark" its FHA Reserve on its own books
and records according to which beneficiary is entitled to what portion of the
insurance coverage in the Title I Lender's FHA Reserve as if the insurance
coverage were not commingled by the FHA in such FHA Reserve. If such Title I
Lender continues to submit claims with respect to loans held on behalf of a
beneficiary whose portion of insurance coverage in its FHA Reserve has been
exhausted, the FHA will continue to honor such claims until all insurance
coverage in such Title I Lender's FHA Reserve has been exhausted, even though
such FHA Reserve may, in fact, be held by the Title I Lender for the benefit of
a different beneficiary than the beneficiary of the insured loans to which the
claims relate under a separate contractual agreement. In addition, under certain
FHA administrative offset regulations, the FHA may offset an unsatisfied
obligation of a Title I Lender to repurchase loans that are
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determined to be ineligible for insurance against future insurance claim
payments owed by the FHA to such lender. In the case of a given Series, if the
related Trustee were to hold loans insured under the Seller's or Issuer's FHA
Reserve on behalf of another entity, the FHA were to determine that insurance
claims were paid in respect of loans ineligible for insurance that related to
such other entity, and the Trustee, on behalf of such other entity, was unable
or otherwise failed to repurchase the ineligible loans, then the FHA could
offset the amount of the repurchase obligation against insurance proceeds
payable with respect to one or more Title I Mortgage Loans or Title I Contracts
included in the Trust Property of such Series. If the Trustee were unable to
recover the amount of such offset from the entity, the Securityholders with
respect to such Series could experience a loss as a result.
Accordingly, claims paid to the Trustee (or the Administrator, if any) by
the FHA with respect to Title I loans insured under FIC's FHA Reserve other than
the Title I Mortgage Loans and Title I Contracts may reduce the FHA Insurance
Amount. In the applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement, FIC and the Trustee (or the Administrator, if any) will agree not to
submit claims to the FHA with respect to Title I loans other than the Title I
Mortgage Loans and Title I Contracts if the effect thereof would be to reduce
the FHA Insurance Amount. FIC has committed to use its FHA contract of insurance
under the Title I Program only to report the record ownership of loans
transferred and assigned to the Trustee pursuant to the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement and similar such
agreements that may be entered into by FIC in the future.
On the final Transfer Date, such FHA Insurance Amount will be the maximum
amount of insurance coverage in FIC's FHA Reserve that will be available for the
submission of claims on the Title I Mortgage Loans, and thereafter, such FHA
Insurance Amount will be decreased as a result of payments by the FHA in respect
of FHA Claims submitted for the Title I Mortgage Loans and Title I Contracts
after the Transfer Dates and as a result of the repurchase or substitution of
Title I Mortgage Loans and Title I Contracts by the Transferor. Except in
connection with the conveyance of any Subsequent Mortgage Loans that are Title I
Mortgage Loans and the substitution of Title I Mortgage Loans and Title I
Contracts, the FHA Insurance Amount for the Title I Mortgage Loans and Title I
Contracts will not be increased for any other Title I loans, either previously
or subsequently owned by the Seller or the Issuer and reported for insurance in
FIC's FHA Reserve.
On the final Transfer Date, the amount of FHA insurance coverage that will
have been transferred from the Transferor's FHA Reserve to FIC's FHA Reserve may
be less than the maximum amount of insurance coverage transferrable which would
otherwise equal 10% of the unpaid principal balance or the purchase price, if
less. However, if individual Title I Mortgage Loans and Title I Contracts are
repurchased from the applicable Trustee, by the Transferor, the Servicer and/or
any Subservicer, then with respect to any individual Title I Mortgage Loan or
Title I Contract the amount of FHA insurance coverage that will be transferred
from the Trustee's FHA Reserve, in all likelihood, will be the maximum amount of
insurance coverage of 10% of the unpaid principal balance or the purchase price,
if less, until such time as FIC's FHA Reserve has been reduced to a balance
which is less than such maximum amount. Accordingly, the transfer of insurance
coverage from FIC's FHA Reserve as the result of the repurchase of Title I
Mortgage Loans and Title I Contracts will cause a disproportionately larger
reduction to the FHA Insurance Amount for each individual Title I Mortgage Loan
and Title I Contract and if a significant amount of Title I Mortgage Loans and
Title I Contracts are repurchased, could result in a substantial reduction of
such FHA Insurance Amount and the relative percentage of such FHA Insurance
Amount to the principal balance of the Title I Mortgage Loans and Title I
Contracts remaining in the Trust Property.
Requirements for Title I Property Improvement Loans and Contracts. The
proceeds of loans originated under the Title I Program for property improvements
may be used only for improvements that substantially protect or improve the
basic habitability or utility of an eligible property. Although Title I loans
are available for several types of properties, the Title I Mortgage Loans will
include primarily one-to four-family property improvement loans. FHA Regulations
require that the borrower have at least a one-half interest in (i) fee simple
title to the real property to be improved with the loan proceeds ("Secured
Property"), (ii) a lease on the Secured Property for a fixed term that expires
no sooner than six months after the maturity date of the property improvement
loan or (iii) a properly recorded land installment contract for the purchase of
the
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Secured Property. Any Title I property improvement loan originated after August
1994 in excess of $7,500 must be secured by a recorded lien on the improved
property which is evidenced by a mortgage or deed of trust executed by the
borrower and all other owners in fee simple. Prior to August 1994, any Title I
property improvement loan in excess of $5,000 was required to be secured by such
a recorded lien.
The maximum principal amount of an eligible loan under the Title I Program,
must not exceed the actual cost of the project plus any authorized fees and
charges under the Title I Program as provided below; provided that such maximum
principal amount does not exceed $25,000 for a single family property
improvement loan. No single borrower is permitted to have more than an aggregate
of $25,000 in unpaid principal obligations with respect to Title I loans without
prior approval of HUD. Generally, the term of a Title I loan that is a property
improvement loan may not be less than six months nor greater than 20 years and
32 days. A borrower may obtain multiple Title I loans with respect to multiple
properties (subject to the aforementioned limit on loans to a single borrower),
and a borrower may obtain more than one Title I loan with respect to a single
property, in each case as long as the total outstanding balance of all Title I
loans on the same property does not exceed the maximum loan amount for the type
of Title I loan thereon having the highest permissible loan amount. If a
property improvement loan (or combination of loans on a single property) exceeds
$15,000, and either (i) the property is not owner occupied or (ii) the structure
on the property was completed within six months prior to the application for the
loan, the borrower is required to have equity in the property at least equal to
the loan amount. In all other cases, there is no requirement that the owner
contribute equity to the property other than fees and costs that may not be
added to the balance of the loan as described below.
Fees and charges that may be added to the balance of property improvement
loans include (i) architectural and engineering fees, (ii) building permit
costs, (iii) credit report costs, (vi) fees for required appraisals (if
applicable), (iv) title examination costs and (v) fees for required inspections
by the lender or its agent, up to $75. The Title I Lender is entitled to recover
the following fees and charges in connection with a property improvement loan
from the borrower as part of the borrower's initial payment: (i) an origination
fee not to exceed 1% of the loan amount, (ii) discount points, however, after
July 5, 1995, only to the extent a lender can demonstrate a clear relationship
between the charging of discount points and some tangible benefit to the
borrower such as a compensating decrease in the interest rate being charged,
(iii) recording fees, recording taxes, filing fees and documentary stamp taxes,
(iv) title insurance costs, (v) current year tax and insurance escrow payments,
(vi) fees necessary to establish the validity of the lien, (vii) appraisal fees
that are not eligible to be financed, (viii) survey costs, (ix) handling charges
for refinancing or modification of an existing loan, up to $100, (x) fees for
approving assumption or preparing assumption agreements, not to exceed 5%, (xi)
certain fees of closing agents and (xii) such other items as may be specified by
the FHA. FHA Regulations prohibit the advancement of such fees and charges to
the borrower by any party to the transaction.
FHA Regulations distinguish between "direct loans" and "dealer loans." A
loan is a "dealer loan" if an approved dealer having a direct or indirect
financial interest in the transaction assists the borrower in obtaining the
loan. A loan made by the lender to the borrower without the assistance of any
party with a financial interest in the loan transaction (other than the lender)
is a "direct loan."
With respect to dealer loans, the dealer-contractor typically enters into a
consumer credit contract or note with the borrower and, after completion of the
financed improvements, assigns the contract or note to the Title I Lender. The
dealer-contractor presents the loan application to the Title I Lender, receives
the check or money order representing the loan proceeds and may accompany the
borrower to the institution for the purpose of receiving payment. As a condition
to the disbursement of the proceeds of a dealer loan, the Title I Lender is
required to obtain a completion certificate signed by the borrower and the
dealer certifying that the improvements have been completed in accordance with
the contract and that the borrower has received no inducement from the dealer to
enter into the transaction other than discount points. The Title I Lender may
enter into an agreement under which the lender has full or partial recourse
against the dealer for a period of three years in the event the Title I Lender
sustains losses with respect to loans originated by such dealer and such loans
do not satisfy FHA Regulations. FHA Regulations require that each dealer meet
certain net worth and experience requirements and be approved by the FHA on an
annual basis. Any Title I Lender that makes dealer loans is required to
supervise and monitor the dealer's activities with respect to loans insured
under the
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Title I Program and to terminate a dealer's approval if the dealer does not
satisfactorily perform its contractual obligations or comply with Title I
Program requirements.
The note evidencing a property improvement loan insured under the Title I
Program is required to bear a genuine signature of the borrower and any co-maker
and co-signer, must be valid and enforceable, must be complete and regular on
its face and must have interest and principal stated separately. The interest
rate must be negotiated and agreed to by the borrower and the lender and must be
fixed for the term of the loan and recited in the note. Interest on the Title I
loan must accrue from the date of the loan and be calculated according to the
actuarial method, which allocates payments on the loan between principal and
interest such that a payment is applied first to accrued interest and any
remainder is subtracted from, or any deficiency is added to, the unpaid
principal balance.
Principal and interest on the note is required to be payable in equal
installments at least monthly except where the borrower has irregular cash flow.
The first and last payments may vary in amount from the regular installment
amount but may not exceed 150% of the regular installment amount. The first
payment may be due no later than two months from the date of the loan (i.e., the
date upon which proceeds are disbursed by the lender). Late charges may be
assessed only after fifteen days and cannot exceed the lesser of 5% of the
installment, up to a maximum of $10 and must be billed as an additional charge
to the borrower. In lieu of late charges, the note may provide for interest to
accrue on late installments on a daily basis at the note rate. The note must
include a provision for acceleration of maturity, at the option of the holder,
upon a default by the borrower and a provision permitting prepayment in part or
in full without penalty. The Title I Lender must assure that the note and all
other documents evidencing the loan are in compliance with applicable Federal,
state and local laws.
A written but unrecorded modification agreement executed by the borrower
may be used in lieu of refinancing a delinquent or defaulted loan to reduce or
increase the installment payment, but not to increase the term or interest rate.
A written modification agreement may also be used to refinance a loan in order
to reduce the interest rate, provided the loan is current. Alternatively, the
lender may negotiate an informal repayment plan for the borrower to cure a
temporary delinquency within a short period of time by sending a letter to the
borrower reciting the terms of the agreement. The lender may not release any
party from liability under the note or any lien securing an insured loan without
prior FHA approval.
FHA Regulations do not require that the borrower obtain title or fire and
casualty insurance as a condition to obtaining loan, except with respect to
manufactured home loans. If the property is located in a flood hazard area,
however, flood insurance in an amount at least equal to the loan amount is
required at the date of loan disbursement. The Borrower is required to maintain
flood insurance of at least the unpaid balance of the loan (or the value of the
property if state law so limits the amount of flood insurance).
Requirements for Title I Manufactured Home Contracts. The maximum principal
amount for any Title I Contract for a Manufactured Home must not exceed the sum
of certain itemized amounts, which include a specified percentage of the
purchase price of the manufactured home depending on whether it is a new or
existing home; provided that such maximum amount does not exceed the following
loan amounts: (i) $48,600 for a new or existing manufactured home purchase loan;
(ii) $16,200 for a manufactured home lot purchase; and (iii) $64,800 for a
combination loan (i.e. a loan to purchase a new or existing manufactured home
and the lot for such home). Generally, the term of a Title I Contract for a
Manufactured Home may not be less than six months nor greater than 20 years and
32 days, except that the maximum term of a manufactured home lot loan is limited
to 15 years and 32 days and the maximum term of a multimodule manufactured home
and lot in combination is limited to 25 years and 32 days.
Borrower eligibility for a Title I Contract for a Manufactured Home
requires that the borrower become the owner of the property to be financed with
such loan and occupy the manufactured home as the borrower's principal
residence, except for a manufactured home lot loan which allows six months from
the date of the loan to occupy the home as the borrower's principal residence.
If a manufactured home is classified as realty, then ownership of the home must
be in fee simple, and also, the ownership of the manufactured home lot must be
in fee simple, except for a lot which consists of a share in a cooperative
association that owns and operates a manufactured home park. The borrower's
minimum cash down payment requirement to obtain financing
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through a Title I Contract for a Manufactured Home is as follows: (i) at least
5% of the first $5,000 and 10% of the balance of the purchase price of a new
manufactured home and at least 10% of the purchase price of an existing
manufactured home for a manufactured home purchase loan, or in lieu of a full or
partial cash down payment, the trade-in of the borrower's equity in an existing
manufactured home; (ii) at least 10% of the purchase price and development costs
of a lot for a manufactured home lot loan; and (iii) at least 5% of the first
$5,000 and 10% of the balance of the purchase price of the manufactured home and
lot for a combination loan.
Any manufactured home financed by a Title I Contract must be certified by
the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
sec.sec. 5401-5426), so as to conform to all applicable Federal construction and
safety standards, and with respect to the purchase of a new manufactured home,
the manufacturer must furnish the borrower with a one year written warranty on a
HUD approved form which obligates the manufacturer to correct any nonconformity
with all applicable Federal construction and safety standards or any defects in
materials or workmanship which become evident within one year after the date of
delivery. The regulations under the Title I Program set forth certain additional
requirements relating to the construction, transportation and installation of
any manufactured home and standards for the manufactured homesite financed by
any Title I Contract. The proceeds from a Title I Contract for a Manufactured
Home may be used as follows: the purchase or refinancing of a manufactured home,
a suitably developed lot for a manufactured home already owned by the borrower
or a manufactured home and suitably developed lot for the home in combination;
or the refinancing of an existing manufactured home already owned by the
borrower in connection with the purchase of a manufactured home lot or an
existing lot already owned by the borrower in connection with the purchase of a
manufactured home. In addition, the proceeds for a Title I Contract for a
Manufactured Home which is a manufactured home purchase loan may be used for the
purchase, construction or installation of a garage, carport, patio or other
comparable appurtenance to the manufactured home, and the proceeds for a Title I
Contract for a Manufactured Home which is a combination loan may be used for the
purchase, construction or installation of a foundation, garage, carport, patio
or other comparable appurtenance to the manufactured home. The proceeds from a
Title I Contract for a Manufactured Home cannot be used for the purchase of
furniture or the financing of any items and activities which are set forth on
the list published by the Secretary of HUD as amended from time to time.
Any Title I Contract for a Manufactured Home must be secured by a recorded
lien on the manufactured home (or lot or home and lot, as appropriate), its
furnishings, equipment, accessories and appurtenance, which lien must be a first
lien, superior to any other lien on the property which is evidenced by a
properly recorded financing statement, a properly recorded security instrument
executed by the borrower and any other owner of the property or other acceptable
instrument. With respect to any Title I Contract involving a manufactured home
purchase loan or combination loan and the sale of the manufactured home by a
dealer, the lender or its agent (other than a manufactured home dealer) must
conduct a site-of-placement inspection within 60 days after the date of the loan
to verify that the terms and conditions of the purchase contract have been met,
the manufactured home and any options and appurtenances included in the purchase
price or financed with the loan have been delivered and installed and the
placement certificate executed by the borrower and the dealer is in order.
Title I Underwriting Requirements. FHA Regulations require that, before
making a loan insured under the Title I Program, a Title I Lender exercise
prudence and diligence in determining whether the borrower and any co-maker or
co-signer is solvent and an acceptable credit risk with a reasonable ability to
make payments on the loan obligation. Prior to loan approval, the Title I Lender
is required to satisfy specified credit underwriting requirements and to keep
documentation supporting its credit determination. As part of its credit
underwriting, the Title I Lender must obtain the following: (i) a dated credit
application executed by the borrower, any co-maker and any co-signer, (ii)
written verification of current employment and current income of the borrower
and any co-maker or co-signer, (iii) a consumer credit report stating the credit
accounts and payment history of the borrower and any co-maker or cosigner, (iv)
on loans in excess of $5,000, written evidence that the borrower is not over 30
days delinquent on any senior lien instruments encumbering the improved
property, (v) verification whether the borrower is in default on any obligation
owed to or insured or
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guaranteed by the Federal Government and (vi) written verification of the source
of funds for any initial payment required of the borrower if such payment is in
excess of 5% of the loan. Before making a final credit determination, the lender
is required to conduct a face-to-face or telephone interview with the borrower
and any co-maker or co-signer to resolve any discrepancies in the information on
the credit application and to assure that the information is accurate and
complete. The Title I Lender's files must contain, among other things, the note
or other debt instrument, the lien instrument and a copy of the property
improvement contract (in the case of a dealer loan) or a detailed written
description of the work to be performed, the materials to be furnished and the
estimated cost (for a loan not involving a dealer or contractor).
The Title I Lender is required to satisfy itself that the borrower's income
is adequate to make the payments required under the loan and to pay the
borrower's housing and other recurring expenses. The borrower's housing and
other recurring expenses generally may not exceed a maximum percentage of gross
income as published from time to time in the Federal Register. The Title I
Lender is required to document any compensating factors that support the
approval of the loan if such expense-to-income ratios are not satisfied. A Title
I Lender is prohibited from approving a loan under the Title I Program without
the approval of the FHA if the lender has knowledge that the borrower is past
due more than 30 days under the original terms of an obligation owed to or
insured or guaranteed by the Federal Government or the borrower has made
material misstatements of fact on applications for loans or other assistance.
UNDER THE TITLE I PROGRAM, THE FHA DOES NOT REVIEW OR APPROVE FOR
QUALIFICATION FOR INSURANCE THE INDIVIDUAL LOAN INSURED THEREUNDER AT THE TIME
OF APPROVAL BY THE LENDING INSTITUTION (AS IS TYPICALLY THE CASE WITH OTHER
FEDERAL LOAN INSURANCE PROGRAMS). If, after a loan has been made and reported
for insurance under the Title I Program, a Title I Lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, such Title I Lender is required promptly to
report such finding to the FHA. In such case, provided that the validity of any
lien on the property has not been impaired, the insurance of the loan under the
Title I Program will not be affected unless such material misstatement of facts
or misuse of loan proceeds was caused by (or was knowingly sanctioned by) such
Title I Lender or its employees.
Claims Procedures Under Title I. The term "default" is defined under FHA
Regulations as the failure of the borrower to make any payment due under the
note for a period of 30 days after such payment is due. The "date of default" is
considered to be the date 30 days after the borrower's first failure to make an
installment payment on the note that is not covered by subsequent payments
applied to overdue installments in the order they became due. When a loan
reported for insurance under the Title I Program goes into default, a Title I
Lender is required to contact the borrower and any co-maker and co-signer by
telephone or in person to determine the reasons for the default and to seek a
cure. If such Title I Lender is not able to effect a cure after diligent
efforts, it may provide the borrower with a notice of default stating that the
loan will be accelerated in 30 days if the loan is not brought current or the
borrower does not enter into a loan modification agreement or repayment plan.
The notice of default must meet certain requirements set forth in the FHA
Regulations and must conform to applicable state law provisions. Such Title I
Lender is permitted to rescind the acceleration of maturity of the loan only if
the borrower brings the loan current, executes a modification agreement or
agrees to an acceptable repayment plan.
Following acceleration of maturity of a secured property improvement loan,
a Title I Lender has the option to proceed against the security or make a claim
under its contract of insurance. If a Title I Lender chooses to proceed against
the Secured Property under a security instrument (or if it accepts a voluntary
conveyance or surrender of the Secured Property), (i) the Title I Lender must
proceed against the loan security by foreclosure and acquire good, marketable
title to the property securing the loan and (ii) the Title I Lender must take
all actions necessary under applicable law to preserve its rights, if any, to
obtain a deficiency judgment against the borrower, provided however, the Title I
Lender may still file an FHA Insurance claim, but only with the prior approval
of the Secretary of HUD.
If a Title I Lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file, certification of
compliance with applicable state and local laws in carrying out any foreclosure
or repossession, and where the borrower is in bankruptcy or deceased, evidence
that the lender
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has properly filed proofs of claims. Generally, a Title I Lender must file its
claim of insurance with the FHA not later than nine months after the date of
default. Concurrently with filing the insurance claim, such Title I Lender is
required to assign to the United States of America it's entire interest in the
note (or a judgment in lieu of the note), in any securities held and in any
claims filed in any legal proceedings. If, at the time the note is assigned to
the United States, the Secretary of HUD has reason to believe that the note is
not valid or enforceable against the borrower, the FHA may deny the claim and
reassign the note to the Title I Lender. If either such defect is discovered
after the FHA has paid a claim, the FHA may require the Title I Lender to
repurchase the paid claim and to accept an assignment of the loan note. If the
Title I Lender subsequently obtains a valid and enforceable judgment against the
borrower, it may resubmit a new insurance claim with an assignment of the
judgment. The FHA may contest any insurance claim previously paid by it and make
a demand for repurchase of the loan with respect to which the claim was paid at
any time up to two years from the date the claim was certified for payment and
may do so thereafter in the event of fraud or misrepresentation on the part of
the Title I Lender.
A claim for reimbursement of loss with respect to a loan eligible for
insurance under the Title I Program is required to be made on an FHA-approved
form executed by a duly qualified officer of the Title I Lender and must be
accompanied by copies of certain relevant documents and documentation specified
in the FHA Regulations to support the claim. The Title I Lender is required,
among other things, to document its efforts to effect recourse against any
dealer in accordance with any recourse agreement with such dealer. If the loan
is subject to an unsatisfied dealer recourse agreement claim, the Title I Lender
is also required to assign its rights under such recourse agreement. The FHA has
the right to deny any claim for insurance in whole or in part based upon a
violation of the FHA Regulations unless a waiver of compliance is granted. The
Title I Lender is permitted to appeal any such claim denial and resubmit the
claim within six months of the date of the claim denial, subject to a
reprocessing fee. The applicable Sale and Servicing Agreement or Pooling and
Servicing Agreement provides that the Trustee (or the Administrator) shall
submit an FHA Claim with respect to any Title I Mortgage Loan or Title I
Contract that goes into default if the default cannot be cured.
If, as a result of the delay in the transfer of the FHA Insurance described
above, FHA Insurance is not available with respect to any defaulted Title I
Mortgage Loan or Title I Contract at the time it goes into default, then the
amount required to make interest payments to the Securityholders with respect to
the principal amount thereof, until such FHA Insurance becomes available and a
claim for insurance can be made, if at all, will be paid from other amounts, if
any, available in the Distribution Account.
No Rights of Securityholders Against FHA. Because the Trust and the
Securityholders will not hold an FHA contract of insurance, the FHA will not
recognize the Trust or the Securityholders as the owners of the Title I Mortgage
Loans, Title I Contracts or any portion thereof, entitled to submit FHA Claims
to the FHA. Accordingly, the Trust and the Securityholders will have no direct
right to receive insurance payments from the FHA. In the event the Trustee (or
the Administrator, if any) submits an FHA Claim to the FHA and the FHA approves
payment of such FHA Claim, the related FHA Insurance Proceeds will be payable
only to the Trustee or to the Administrator, if any, as agent and
attorney-in-fact for the Trustee. The Securityholders' rights relating to the
receipt of payment from and the administration, processing and submissions of
FHA Claims by the Trustee or the Administrator, if any, are limited and governed
by the related Sale and Servicing Agreement or Pooling and Servicing Agreement
and FHA Claims Administration Agreement and these functions are obligations of
the Trustee and the Administrator, if any, not the FHA.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of the Notes and the
Certificates of any Series, to the extent it relates to matters of law or legal
conclusions with respect thereto, represents the opinion of tax counsel to each
Trust with respect to the related Series on the material matters associated with
such consequences, subject to the qualifications set forth herein. "Tax Counsel"
with respect to each Issuer will be Brown & Wood LLP. The summary does not
purport to deal with federal income tax consequences applicable to all
categories of investors, some of which may be subject to special rules. For
example, it does not discuss the tax treatment of
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Noteholders or Certificateholders that are insurance companies, regulated
investment companies or dealers in securities. Moreover, there are no cases or
Internal Revenue Service ("IRS") rulings on similar transactions involving both
debt and equity interests issued by a trust with terms similar to those of the
Notes and the Certificates. As a result, the IRS may disagree with all or a part
of the discussion below. Prospective investors are urged to consult their own
tax advisors in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the Notes and
the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Issuer will be provided
with an opinion of Tax Counsel regarding certain federal income tax matters
discussed below. An opinion of Tax Counsel, however, is not binding on the IRS
or the courts. No ruling on any of the issues discussed below will be sought
from the IRS. For purposes of the following summary, references to the Issuer
shall be deemed to refer to either FIC or the related Trust for the applicable
Series and references to the Trust, the Notes, the Certificates and related
terms, parties and documents shall be deemed to refer, unless otherwise
specified herein, to each Trust, if any, and the Notes, Certificates and related
terms, parties and documents applicable to the related Series. The federal
income tax consequences to Certificateholders will vary depending on whether an
election is made to treat the Trust as a partnership under the Code or whether
the Trust will be treated as a grantor trust. The Prospectus Supplement for each
Series of Securities will specify whether a partnership election will be made or
the Trust will be treated as a grantor trust.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates of a Trust for which a partnership election will be made, to the
extent it relates to matters of law or legal conclusions with respect thereto,
represents the opinion of Tax Counsel to each Trust with respect to the related
Series on the material matters associated with such consequences, subject to the
qualifications set forth herein. In addition, Tax Counsel has prepared or
reviewed the statements in the Prospectus under the heading "Trusts for Which a
Partnership Election is Made", and is of the opinion that such statements are
correct in all material respects. Such statements are intended as an explanatory
discussion of the related tax matters affecting investors generally, but do not
purport to furnish information in the level of detail or with the attention to
an investor's specific tax circumstances that would be provided by an investor's
own tax advisor. Accordingly, each investor is advised to consult its own tax
advisors with regard to the tax consequences to it of investing in Notes or
Certificates.
Tax Counsel will deliver its opinion that a Trust for which a partnership
election is made will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion will be
based on the assumption that the terms of the Trust Agreement and related
documents will be complied with, and on counsel's conclusions that (1) the Trust
will not have certain characteristics necessary for a business trust to be
classified as an association taxable as a corporation and (2) the nature of the
income of the Trust will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income on the Loan Assets, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Securityholders could be liable for any
such tax that is unpaid by the Trust.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Tax Counsel will, except as otherwise provided
in the related Prospectus Supplement, advise the Trust that the Notes will be
classified as
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debt for federal income tax purposes. The discussion below assumes this
characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities, Interest Only Securities or Principal Only Securities.
Moreover, the discussion assumes that the interest formula for the Notes meets
the requirements for "qualified stated interest" under Treasury regulations (the
"OID regulations") relating to original issue discount ("OID"), and that any OID
on the Notes (i.e., any excess of the principal amount of the Notes over their
issue price) does not exceed a de minimis amount (i.e., 1/4% of their principal
amount multiplied by the number of full years included in their term), 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 such 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 thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
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 such OID in income, on
a pro rata basis, as principal payments are made on the Note. 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 such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, 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 holders 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 holder 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. Certain
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 holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium, if any, previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such 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 nonresident alien, foreign corporation or other non-United States person (a
"foreign person") 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 person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Seller (including a holder of 10% of the outstanding
Securities) or a "controlled foreign corporation" with respect to which the
Trust or the Seller is a "related person" within the meaning of the Code and
(ii) 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
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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 such 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 person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder such
as 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) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust will be required to withhold 31
percent of the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Tax Counsel, the IRS successfully asserted that one or more of the Notes did
not represent debt for federal income tax purposes, the Notes might be treated
as equity interests in the Trust. If so treated, the Trust might be taxable as a
corporation with the adverse consequences described above (and the taxable
corporation would not be able to reduce its taxable income by deductions for
interest expense on Notes recharacterized as equity). Alternatively, and most
likely in the view of Tax Counsel, the Trust might be treated as a publicly
traded partnership that would not be taxable as a corporation because it would
meet certain qualifying income tests. Nonetheless, treatment of the Notes as
equity interests in such a publicly traded partnership could have adverse tax
consequences to certain holders. For example, income to certain 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 certain limitations on their ability to deduct their share of Trust
expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust as a Partnership. The Seller and the Servicer will
agree, and the Certificateholders will agree by their purchase of Certificates,
to treat the Trust as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Trust, the
partners of the partnership being the Certificateholders (including the Seller
in its capacity as recipient of distributions from the Reserve Fund), and the
Notes being debt of the partnership. However, the proper characterization of the
arrangement involving the Trust, the Certificates, the Notes, the Seller and the
Servicer is not clear because there is no authority on transactions closely
comparable to that contemplated herein.
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 Seller or the Trust. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
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, Principal Only Securities or Interest Only Securities,
and that a Series of Securities includes a single Class of Certificates. If
these
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conditions are not satisfied with respect to any given Series of Certificates,
additional tax considerations with respect to such Certificates will be
disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest earned on the Loan Assets (including appropriate
adjustments for market discount, OID and bond premium) and any gain upon
foreclosure of Loan Assets. The Trust's deductions will consist primarily of
interest accruing with respect to the Notes, servicing and other fees, and
losses or deductions upon foreclosure of the Loan Assets.
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 for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Loan Assets that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
of premium on Loan Assets that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the Seller. Based on the economic arrangement of the
parties, this approach for allocating Trust income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
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 might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
income even if they have not received cash from the Trust to pay such 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.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees to
the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Receivable, the Trust
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loan Assets were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust for the Loan Assets may be greater or less than
the remaining principal balance of the Loan Assets at the time of purchase. If
so, the Loan Assets will have been acquired at a premium or discount, as the
case may be. (As indicated above, the Trust will make this calculation on an
aggregate basis, but might be required to recompute it on an asset-by-asset
basis.)
If the Trust acquires the Loan Assets at a market discount or premium, the
Trust will elect to include any such discount in income currently as it accrues
over the life of the Loan Assets or to offset any such premium
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against interest income on the Loan Assets. As indicated above, a portion of
such market discount income or premium deduction may be allocated to
Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust, as a new partnership. The Trust will
not comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Trust may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust might not be able to
comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust. A holder acquiring Certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Loan Assets would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid those
special reporting requirements, the Trust will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of 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 might be reallocated among the Certificateholders. The Seller is
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust's assets will not be adjusted to reflect that higher
(or lower) basis unless the Trust were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis
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and the fiscal year of the Trust will be set forth in the related Prospectus
Supplement. The Trustee will file a partnership information return (IRS Form
1065) with the IRS for each taxable year of the Trust and will report each
Certificateholder's allocable share of items of Trust income and expense to
holders and the IRS on Schedule K-1. The Trust will provide the Schedule K-1
information to nominees that fail to provide the Trust with the information
statement described below and such nominees will be required to forward such
information to the beneficial owners of the Certificates. Generally, holders
must file tax returns that are consistent with the information return filed by
the Trust or be subject to penalties unless the holder notifies the IRS of all
such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
The Seller will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. 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.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust would be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged in order to
protect the Trust from possible adverse consequences of a failure to withhold.
The Trust expects to withhold on the portion of its taxable income that is
allocable to foreign Certificateholders pursuant to Section 1446 of the Code, as
if such 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 to change
its withholding procedures. In determining a holder's withholding status, the
Trust may rely on IRS Form W-8, IRS Form W-9 or the holder'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 (including, in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust 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, taking the
position that no taxes were due because the Trust was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust. If these interest payments are properly characterized
as guaranteed payments, then the interest will not be considered
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"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such 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 certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
TRUSTS TREATED AS GRANTOR TRUSTS
TAX CHARACTERIZATION OF THE TRUST AS A GRANTOR TRUST
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates of a Trust for which a partnership election will not be made, to
the extent it relates to matters of law or legal conclusions with respect
thereto, represents the opinion of Tax Counsel to each Trust with respect to the
related Series on the material matters associated with such consequences,
subject to the qualifications set forth herein. In addition, Tax Counsel has
prepared or reviewed the statements in the Prospectus under the heading "Trusts
Treated as Grantor Trusts", and is of the opinion that such statements are
correct in all material respects. Such statements are intended as an explanatory
discussion of the possible effects of the classification of any Trust as a
grantor trust for federal income tax purposes on investors generally and of
related tax matters affecting investors generally, but do not purport to furnish
information in the level of detail or with the attention to an investor's
specific tax circumstances that would be provided by an investor's own tax
advisor. Accordingly, each investor is advised to consult its own tax advisors
with regard to the tax consequences to it of investing in Notes or Certificates.
If a partnership election is not made, Tax Counsel will deliver its opinion
that the Trust will not be classified as an association taxable as a corporation
and that such Trust will be classified as a grantor trust under subpart E, Part
I of subchapter J of Chapter 1 of Subtitle A of the Code. In this case, owners
of Certificates (referred to herein as "Grantor Trust Certificateholders") will
be treated for federal income tax purposes as owners of a portion of the Trust's
assets as described below. The Certificates issued by a Trust that is treated as
a grantor trust are referred to herein as "Grantor Trust Certificates".
Characterization. Each Grantor Trust Certificateholder will be treated as
the owner of a pro rata undivided interest in the interest and principal
portions of the Trust represented by the Grantor Trust Certificates and will be
considered the equitable owner of a pro rata undivided interest in each of the
Loan Assets in the Trust. Any amounts received by a Grantor Trust
Certificateholder in lieu of amounts due with respect to any Loan Asset because
of a default or delinquency in payment will be treated for federal income tax
purposes as having the same character as the payments they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Loan Assets in the Trust represented by Grantor Trust Certificates,
including interest, OID, if any, prepayment fees, assumption fees, any gain
recognized upon an assumption and late payment charges received by the Servicer.
Under Sections 162 or 212 each Grantor Trust Certificateholder will be entitled
to deduct its pro rata share of servicing fees, prepayment fees, assumption
fees, any loss recognized upon an assumption and late payment charges retained
by the Servicer, provided that such amounts are reasonable compensation for
services rendered to the Trust. Grantor Trust Certificateholders that are
individuals, estates or trusts will be entitled to deduct their share of
expenses only to the extent such expenses plus all other Section 212 expenses
exceed two percent of its adjusted gross income. A Grantor Trust
Certificateholder using the cash method of accounting must take into account its
pro rata share of income and deductions as and when collected by or paid to the
Servicer. A Grantor Trust Certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions as
they become due or are paid to the Servicer, whichever is earlier. If the
servicing fees paid to the Servicer are deemed to exceed reasonable
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servicing compensation, the amount of such excess could be considered as an
ownership interest retained by the Servicer (or any person to whom the Servicer
assigned for value all or a portion of the servicing fees) in a portion of the
interest payments on the Loan Assets. The Loan Assets would then be subject to
the "coupon stripping" rules of the Code discussed below.
Premium. The price paid for a Grantor Trust Certificate by a holder will be
allocated to such holder's undivided interest in each Loan Asset based on each
Loan Asset's relative fair market value, so that such holder's undivided
interest in each Loan Asset will have its own tax basis. A Grantor Trust
Certificateholder that acquires an interest in Loan Assets at a premium may
elect to amortize such premium under a constant interest method. Amortizable
bond premium will be treated as an offset to interest income on such Grantor
Trust Certificate. The basis for such Grantor Trust Certificate will be reduced
to the extent that amortizable premium is applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be used in
computing amortization of premium allowable under Section 171. A Grantor Trust
Certificateholder that makes this election for a Grantor Trust Certificate 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 such Grantor Trust Certificateholder acquires during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Grantor Trust Certificate acquired at a premium
should recognize a loss if a Loan Asset prepays in full, equal to the difference
between the portion of the prepaid principal amount of such Loan Asset that is
allocable to the Grantor Trust Certificate and the portion of the adjusted basis
of the Grantor Trust Certificate that is allocable to such Loan Asset. If a
reasonable prepayment assumption is used to amortize such premium, it appears
that such a loss would be available, if at all, only if prepayments have
occurred at a rate faster than the reasonable assumed prepayment rate. It is not
clear whether any other adjustments would be required to reflect differences
between an assumed prepayment rate and the actual rate of prepayments.
STRIPPED NOTES AND STRIPPED COUPONS
Although the tax treatment of stripped bonds is not entirely clear, based
on recent guidance by the IRS, each purchaser of a Grantor Trust Certificate
will be treated as the purchaser of a stripped bond which generally should be
treated as a single debt instrument issued on the day it is purchased for
purposes of calculating any original issue discount. Generally, under applicable
Treasury regulations (the "Section 1286 Treasury Regulations"), if the discount
on a stripped bond is larger than a de minimis amount (as calculated for
purposes of the OID rules of the Code) such stripped bond will be considered to
have been issued with OID. See "-- Original Issue Discount" below. Based on the
preamble to the Section 1286 Treasury Regulations, Tax Counsel is of the opinion
that, although the matter is not entirely clear, the interest income on the
Certificates at the sum of the Pass Through Rate and the portion of the
Servicing Fee Rate that does not constitute excess servicing will be treated as
"qualified stated interest" within the meaning of the Section 1286 Treasury
Regulations and such income will be so treated in the Trustee's tax information
reporting.
Original Issue Discount. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
relating to "original issue discount" (currently Sections 1271 through 1273 and
1275) will be applicable to a Grantor Trust Certificateholder's interest in
those Loan Assets meeting the conditions necessary for these sections to apply.
Generally, a Grantor Trust Certificateholder that acquires an undivided interest
in a Loan Asset issued or acquired with OID must include in gross income the sum
of the "daily portions," as defined below, of the OID on such Loan Asset for
each day on which it owns a Certificate, including the date of purchase but
excluding the date of disposition. In the case of an original Grantor Trust
Certificateholder, the daily portions of OID with respect to a Loan Asset
generally would be determined as follows. A calculation will be made of the
portion of OID that accrues on the Loan Asset during each successive monthly
accrual period (or shorter period in respect of the date of original issue or
the final Distribution Date). This will be done, in the case of each full
monthly accrual period, by adding (i) the present value of all remaining
payments to be received on the Loan Asset under the prepayment assumption used
in respect of the Loan Assets and (ii) any payments received during such accrual
period, and subtracting
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from that total the "adjusted issue price" of the Loan Asset at the beginning of
such accrual period. No representation is made that the Loan Assets will prepay
at any prepayment assumption. The "adjusted issue price" of a Loan Asset at the
beginning of the first accrual period is its issue price (as determined for
purposes of the OID rules of the Code) and the "adjusted issue price" of a Loan
Asset at the beginning of a subsequent accrual period is the "adjusted issue
price" at the beginning of the immediately preceding accrual period plus the
amount of OID allocable to that accrual period and reduced by the amount of any
payment (other than "qualified stated interest") made at the end of or during
that accrual period. The OID accruing during such accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of OID must be
determined according to a reasonable method, provided that such method is
consistent with the method used to determine the yield to maturity of the Loan
Assets.
With respect to the Loan Assets, the method of calculating OID as described
above will cause the accrual of OID to either increase or decrease (but never
below zero) in any given accrual period to reflect the fact that prepayments are
occurring at a faster or slower rate than the prepayment assumption used in
respect of the Loan Assets. Subsequent purchasers that purchase Loan Assets at
more than a de minimis discount should consult their tax advisors with respect
to the proper method to accrue such OID.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Loan Assets may be subject to the market discount rules of
Sections 1276 through 1278 to the extent an undivided interest in a Loan Asset
is considered to have been purchased at a "market discount." Generally, the
amount of market discount is equal to the excess of the portion of the principal
amount of such Loan Asset allocable to such holder's undivided interest over
such holder's tax basis in such interest. Market discount with respect to a
Grantor Trust Certificate will be considered to be zero if the amount allocable
to the Grantor Trust Certificate is less than 0.25% of the Grantor Trust
Certificate's stated redemption price at maturity multiplied by the weighted
average maturity remaining after the date of purchase. Treasury regulations
implementing the market discount rules have not yet been issued; therefore,
investors should consult their own tax advisors regarding the application of
these rules and the advisability of making any of the elections allowed under
Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond shall be
treated as ordinary income to the extent that it does not exceed the accrued
market discount at the time of such payment. The amount of accrued market
discount for purposes of determining the tax treatment of subsequent principal
payments or dispositions of the market discount bond is to be reduced by the
amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of (i) the total
remaining market discount and (ii) a fraction, the numerator of which is the OID
accruing during the period and the denominator of which is the total remaining
OID at the beginning of the accrual period. For Grantor Trust Certificates
issued without OID, the amount of market discount that accrues during a period
is equal to the product of (i) the total remaining market discount and (ii) a
fraction, the numerator of which is the amount of stated interest paid during
the accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the accrual period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the Grantor Trust Certificates) that provide for
payments that may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
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A holder who acquired a Grantor Trust Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Grantor Trust Certificate purchased with market discount. For these
purposes, the de minimis rule referred above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includible in income. If such holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
Premium. To the extent a Grantor Trust Certificateholder is considered to
have purchased an undivided interest in a Loan Asset for an amount that is
greater than its stated redemption price at maturity of such Loan Asset, such
Grantor Trust Certificateholder will be considered to have purchased the Loan
Asset with "amortizable bond premium" equal in amount to such excess. A Grantor
Trust Certificateholder (who does not hold the Certificate for sale to customers
or in inventory) may elect under Section 171 of the Code to amortize such
premium. Under the Code, premium is allocated among the interest payments on the
Loan Assets to which it relates and is considered as an offset against (and thus
a reduction of) such interest payments. With certain exceptions, such an
election would apply to all debt instruments held or subsequently acquired by
the electing holder. Absent such an election, the premium will be deductible as
an ordinary loss only upon disposition of the Certificate or pro rata as
principal is paid on the Loan Assets.
Election to Treat All Interest as OID. The OID regulations permit a Grantor
Trust Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a Grantor Trust Certificate with market discount, the
Certificateholder 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 such Grantor Trust Certificateholder acquires during the
year of the election or thereafter. Similarly, a Grantor Trust Certificateholder
that makes this election for a Grantor Trust Certificate 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 such
Grantor Trust Certificateholder owns or acquires. See "-- Premium". The election
to accrue interest, discount and premium on a constant yield method with respect
to a Grantor Trust Certificate is irrevocable.
Sale or Exchange of a Grantor Trust Certificate. Sale or exchange of a
Grantor Trust Certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount received and the owner's
adjusted basis in the Grantor Trust Certificate. Such adjusted basis generally
will equal the seller's purchase price for the Grantor Trust Certificate,
increased by the OID included in the seller's gross income with respect to the
Grantor Trust Certificate, and reduced by principal payments on the Grantor
Trust Certificate previously received by the seller. Such gain or loss will be
capital gain or loss to an owner for which a Grantor Trust Certificate is a
"capital asset" within the meaning of Section 1221, and will be long-term or
short-term depending on whether the Grantor Trust Certificate has been owned for
the long-term capital gain holding period (currently more than one year).
Grantor Trust Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1), so that gain or loss recognized from the sale of a
Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
Non-U.S. Persons. Generally, interest or OID paid by the person required to
withhold tax under Section 1441 or 1442 to (i) an owner that is not a U.S.
Person (as defined below) or (ii) a Grantor Trust Certificateholder holding on
behalf of an owner that is not a U.S. Person and accrued OID recognized by the
owner on the sale or exchange of such a Grantor Trust Certificate will not be
subject to withholding to the extent that a Grantor Trust Certificate evidences
ownership in Loan Assets issued after July 18, 1984 by natural persons if such
Grantor Trust Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Grantor Trust
Certificateholder under penalties of perjury, certifying that such Grantor Trust
Certificateholder is not a U.S. Person and providing the name and address
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of such Grantor Trust Certificateholder). Additional restrictions apply to Loan
Assets where the obligor is not a natural person in order to qualify for the
exemption from withholding.
As used herein, a "U.S. Person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof, an
estate, the income of which is subject to United States federal income taxation
regardless of its source or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more United States fiduciaries have authority to control all substantial
decisions of the trust.
Information Reporting and Backup Withholding. The Servicer will furnish or
make available, within a reasonable time after the end of each calendar year, to
each person who was a Grantor Trust Certificateholder at any time during such
year, such information as may be deemed necessary or desirable to assist Grantor
Trust Certificateholders in preparing their federal income tax returns, or to
enable holders to make such information available to beneficial owners or
financial intermediaries that hold Grantor Trust Certificates as nominees on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
NOTES ISSUED BY FIC
Notes issued by FIC, as Issuer, will be subject to the same rules of
taxation as Notes issued by a Trust for which a partnership election is made, as
described above under the heading "Trusts for Which a Partnership Election Is
Made -- Tax Consequences to Holders of the Notes."
THE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL INFORMATION
ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S PARTICULAR TAX
SITUATION. PROSPECTIVE PURCHASERS OF THE SECURITIES SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan"), from engaging
in certain transactions involving "plan assets" with persons that are "parties
in interest" under ERISA or "disqualified persons" under the Code with respect
to such Benefit Plan. ERISA also imposes certain duties on persons who are
fiduciaries of Benefit Plans subject to ERISA and prohibits certain transactions
between a Benefit Plan and parties in interest with respect to such Benefit
Plans. Under ERISA, any person who exercises any authority or control with
respect to the management or disposition of the assets of a Benefit Plan is
considered to be a fiduciary of such Benefit Plan (subject to certain exceptions
not here relevant). A violation of these "prohibited transaction" rules may
result in an excise tax or other penalties and liabilities under ERISA and the
Code for such persons.
Certain transactions involving an Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchased Notes or Certificates if assets of the Issuer were deemed to be
assets of the Benefit Plan. Under a regulation issued by the United States
Department of Labor (the "Plan Assets Regulation"), the assets of an Issuer
would be treated as plan assets of a Benefit Plan for the purposes of ERISA and
the Code only if the Benefit Plan acquired an "equity interest" in the Issuer
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and none of the exceptions contained in the Plan Assets Regulation was
applicable. An equity interest is defined under the Plan Assets Regulation as an
interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The likely
treatment in this context of Notes and Certificates of a given Series will be
discussed in the related Prospectus Supplement.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements. Due to the complexities of the
"prohibited transaction" rules and the penalties imposed upon persons involved
in prohibited transactions, it is important that the fiduciary of any Benefit
Plan considering the purchase of Securities consult with its tax and/or legal
advisors regarding whether the assets of the related Issuer would be considered
plan assets, the possibility of exemptive relief from the prohibited transaction
rules and other issues and their potential consequences.
LEGAL INVESTMENT MATTERS
To the extent specified in the related Prospectus Supplement, the
Securities of a Series will not constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because a
substantial number of the Mortgage Loans are secured by liens on real estate
that are not first liens, as required by SMMEA. Accordingly, many institutions
with legal authority to invest in "mortgage related securities" may not be
legally authorized to invest in the Offered Securities.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain Classes of the Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision
("OTS"), the National Credit Union Administration ("NCUA"), or other federal or
state agencies with similar authority should review any applicable rules,
guidelines and regulations prior to purchasing the Securities. The Federal
Financial Institutions Examination Council, for example, has issued a
Supervisory Policy Statement on Securities Activities effective February 10,
1992 (the "Policy Statement"). The Policy Statement has been adopted by the
Comptroller of the Currency, the Federal Reserve Board, the FDIC, the OTS, and
the NCUA (with certain modifications), with respect to the depository
institutions that they regulate. The Policy Statement prohibits depository
institutions from investing in certain "high-risk mortgage securities"
(including securities such as certain Classes of Securities), except under
limited circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying", or in securities which are issued in book-entry
form.
Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
PLAN OF DISTRIBUTION
Securities are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The related
Prospectus Supplement will set forth the terms of offering of a Series of
Securities, including the public offering or purchase price of each Class of
Securities of such Series being offered thereby or the method by which such
price will be determined and the net proceeds to the Issuer from the sale of
each such Class of Securities. Such Securities will be acquired by the
Underwriters for their own account and may be resold from time to time in one or
more transactions including negotiated transactions, at fixed public offering
prices or at varying prices to be determined at the time of sale or at the time
of
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commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular Series of Securities will be set forth on the
cover of the Prospectus Supplement relating to such Series and the members of
the underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Securities, Underwriters may receive
compensation from the related Issuer or from purchasers of the Securities in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Securities may be deemed to be
Underwriters in connection with such Securities, and any discounts or
commissions received by them from the related Issuer or the Seller and any
profit on the resale of Securities by them may be deemed to be underwriting
discounts and commissions under the Securities Act. The Prospectus Supplement
will describe any such compensation paid by the related Issuer.
It is anticipated that the underwriting agreement pertaining to the sale of
any Series of Securities will provide that the obligations of the Underwriters
will be subject to certain conditions precedent, that the Underwriters will be
obligated to purchase all such Securities if any are purchased and that the
related Issuer or the Seller will indemnify the underwriters against certain
civil liabilities, including liabilities under the Securities Act.
USE OF PROCEEDS
To the extent specified in an applicable Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Securities will be applied to the simultaneous purchase of the Loan
Assets related to such Series or to reimburse the amounts previously used to
effect such a purchase, the costs of carrying such Loan Assets until sale of the
Securities and other expenses connected with pooling the Loan Assets and issuing
the Securities.
LEGAL OPINIONS
Certain legal matters relating to the Securities of any Series will be
passed upon for the related Issuer, the Seller and the Servicer by Brown & Wood
LLP, Washington, D.C. In addition, certain United States federal tax and other
matters will be passed upon for the related Issuer by Brown & Wood LLP.
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INDEX OF TERMS
PAGE
-----------------
"Act"....................................................................... 74
"Administration Agreement".................................................. 28
"Administration Fee"........................................................ 28
"Administrator"............................................................. 2, 28
"Applicable Accounting Standards"........................................... 58
"Assets".................................................................... ii, 5
"Benefit Plan".............................................................. 96
"BIF"....................................................................... 59
"Call Risk"................................................................. 14
"Certificates".............................................................. i
"Closing Date".............................................................. 7, 55
"Code"...................................................................... 83
"Cooperatives".............................................................. 5, 40
"Credit Enhancement"........................................................ 5, 7, 16, 17, 44
"Cut-off Date".............................................................. 7
"Definitive Securities"..................................................... 32, 36
"Depository"................................................................ 23
"Distribution Date"......................................................... 24, 29
"DTC Participants".......................................................... 23, 33
"ERISA"..................................................................... 9
"Events of Default"......................................................... 25, 61
"Excess Spread"............................................................. 45
"Extension Risk"............................................................ 14
"FDIC"...................................................................... 59, 97
"FHA Claims Administration Agreement"....................................... 17
"FHA Claims Administrator".................................................. 17
"FHA Reserve"............................................................... 75
"FHA"....................................................................... 74
"Garn-St. Germain Act"...................................................... 70
"Guaranty Policy"........................................................... 46
"Indenture Trustee"......................................................... i
"Indenture"................................................................. i, 2
"Indirect DTC Participants"................................................. 33
"Interest Rate"............................................................. 2
"IRS"....................................................................... 83
"Issuer".................................................................... i
"Loan Asset Pool"........................................................... ii
"Loan Assets"............................................................... ii
"Master Servicer"........................................................... 2
"Mortgage Notes"............................................................ 40
"Mortgaged Properties"...................................................... 40
"Mortgages"................................................................. 40
"NCUA"...................................................................... 97
"Notes"..................................................................... i
"OID regulations"........................................................... 85
"OID"....................................................................... 85
"OTS"....................................................................... 71, 97
"Owner Trustee"............................................................. i
"Pass Through Rate"......................................................... 3
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PAGE
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"Permitted Investments"..................................................... 43
"Plan Assets Regulation".................................................... 96
"Policy Statement".......................................................... 97
"Pre-Funding Account"....................................................... 43
"Pre-Funding Arrangement"................................................... 7, 43
"Rating Agency"............................................................. 10
"Reigle Act"................................................................ 72
"Relief Act"................................................................ 19, 63, 73
"Reserve Fund".............................................................. 47
"SAIF"...................................................................... 59
"Sale and Servicing Agreement".............................................. ii
"Schedule of Loan Assets"................................................... 56
"Secured Property".......................................................... 77
"Seller".................................................................... i, 1
"Senior Securities"......................................................... 31, 45
"Servicer".................................................................. i, ii, 1
"SMMEA"..................................................................... 9, 97
"Subordinated Securities"................................................... 31, 44
"Subsequent Loan Assets".................................................... 6, 43
"Subsequent Transfer Agreement"............................................. 57
"Subservicer"............................................................... 49
"TILA"...................................................................... 72
"Title V"................................................................... 73
"Transfer and Servicing Agreements"......................................... 55
"Transfer Report"........................................................... 75
"Transferor"................................................................ 1, 39
"Trust Agreement"........................................................... i, 1
"Trust Property"............................................................ ii, 4
"Trustee"................................................................... i, 1, 38
"Trust"..................................................................... i, 1, 1
"Window Period Loans"....................................................... 70
84
157
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
OFFERED HEREBY, NOR AN OFFER OF THE SECURITIES IN ANY STATE OR JURISDICTION IN
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Available Information......................... iv
Reports to Noteholders........................ iv
Summary of Terms.............................. S-1
Risk Factors.................................. S-8
Use of Proceeds............................... S-15
Description of the Trust...................... S-15
The Home Loan Pool............................ S-16
The Seller.................................... S-23
The Transferor and Servicer................... S-23
Description of Credit Enhancement............. S-26
Description of the Securities................. S-28
Description of the Transfer and Servicing
Agreements.................................. S-37
Prepayment and Yield Considerations........... S-41
Certain Federal Income Tax Consequences....... S-54
ERISA Considerations.......................... S-54
Underwriting.................................. S-55
Legal Investment Matters...................... S-56
Ratings....................................... S-56
Legal Opinions................................ S-57
Index of Terms................................ S-58
PROSPECTUS
Prospectus Supplement......................... iii
Available Information......................... iii
Incorporation of Certain Documents by
Reference................................... iv
Table of Contents............................. v
Summary of Terms.............................. 1
Risk Factors.................................. 9
Description of the Notes...................... 19
Description of the Certificates............... 23
Pool Factors and Trading Information.......... 24
Certain Information Regarding the
Securities.................................. 25
The Trusts.................................... 31
The Trustee................................... 31
Description of the Trust Property............. 32
Credit Enhancement............................ 37
Servicing of the Loan Assets.................. 40
The Seller and the Issuer..................... 44
The Servicer and the Transferor............... 44
Description of the Transfer and Servicing
Agreements.................................. 46
Certain Legal Aspects of the Loan Assets...... 52
Certain Federal Income Tax Consequences ...... 69
Trusts For Which a Partnership Election is
Made........................................ 70
Trusts Treated as Grantor Trusts.............. 76
Notes Issued by FIC........................... 80
ERISA Considerations.......................... 80
Legal Investment Matters...................... 81
Plan of Distribution.......................... 81
Use of Proceeds............................... 82
Legal Opinions................................ 82
Index of Terms................................ 83
$492,375,000
FIRSTPLUS HOME LOAN OWNER TRUST 1998-2
[FIRSTPLUS FINANCIAL LOGO]
FIRSTPLUS INVESTMENT CORPORATION
(SELLER)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
-----------------------
PROSPECTUS SUPPLEMENT
-----------------------
PAINEWEBBER INCORPORATED
DEUTSCHE MORGAN GRENFELL
J.P. MORGAN & CO.
MERRILL LYNCH & CO.
-----------------------
MARCH 5, 1998
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