As Filed Pursuant to Rule 424B5
Registration File No.: 333-100319
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 14, 2003
$289,950,522
(APPROXIMATE)
[VANDERBILT LOGO OMITTED]
VANDERBILT MORTGAGE AND FINANCE, INC.
SELLER AND SERVICER
MANUFACTURED HOUSING CONTRACT
SENIOR/SUBORDINATE PASS-THROUGH CERTIFICATES, SERIES 2003-A
--------------------
- -------------------------------
|YOU SHOULD CONSIDER THE RISK | THE TRUST FUND, AS ISSUER, WILL:
|FACTORS STARTING ON PAGE S-10 |
|OF THIS PROSPECTUS SUPPLEMENT | o Issue ten classes of certificates, nine
|AND PAGE 4 OF THE PROSPECTUS. | of which are offered hereby and
| | described herein.
|The certificates represent |
|obligations of the trust only | o Consist primarily of manufactured
|and do not represent an | housing installment sales contracts,
|interest in or obligation of | installment loan agreements and mortgage
|Vanderbilt Mortgage and | loans.
|Finance, Inc., JPMorgan Chase |
|Bank or any of their | o Make an election to be treated as a
|affiliates (except to the | REMIC for federal income tax purposes.
|extent of the limited |
|guarantee of the Class B-2 |
|Certificates by Clayton Homes,| THE CERTIFICATES:
|Inc.). | o Represent ownership interests in a trust
| | fund.
|This prospectus supplement may|
|be used to offer and sell the | o Currently have no trading market.
|certificates only if |
|accompanied by the prospectus.| o Receive distributions on the 7th day of
- ------------------------------- each month (or if that day is not a
business day, the next business day)
beginning on March 7, 2003.
ORIGINAL
CLASS
UNDERWRITTEN PRINCIPAL PRICE TO UNDERWRITING PROCEEDS TO
CERTIFICATES BALANCE PUBLIC(1) DISCOUNT VANDERBILT(1)(2)
- -------------------------------- -------------- --------------- -------------- -----------------
Class AV Certificates ........ $ 70,000,000 100.00000% 0.280% 99.72000%
Class A-1 Certificates ....... $ 50,893,000 100.00000% 0.150% 99.85000%
Class A-2 Certificates ....... $ 49,723,000 99.97360% 0.250% 99.72360%
Class A-3 Certificates ....... $ 26,043,000 99.97492% 0.300% 99.67492%
Class A-4 Certificates ....... $ 32,402,000 99.96003% 0.355% 99.60503%
Class A-5 Certificates ....... $ 15,947,000 99.93603% 0.450% 99.48603%
Class M-1 Certificates ....... $ 13,048,000 93.62144% 0.580% 93.04144%
Class B-1 Certificates(3) .... $ 3,500,000 95.65693% 0.600% 95.05693%
------------ ------------ -------- ------------
Total ........................ $261,556,000 $260,528,907 $758,243 $259,770,664
(1) Plus accrued interest, if any, at the applicable rate from February 1, 2003.
(2) Before deducting expenses, estimated to be $400,000.
(3) Applies only to the Class B-1 Certificates offered by the underwriters
hereby. See the second paragraph below and "Underwriting" in the prospectus
supplement with respect to the remaining $9,548,000 of Class B-1
Certificates.
The Trust Fund will also issue Class B-2 Certificates.
The underwriters named below will offer the eight classes of certificates
listed in the table above to the public at the price to public set forth above
and they will receive the discount listed above. Vanderbilt Mortgage and
Finance, Inc. or one of its affiliates may offer the remaining Class B-1
Certificates with an original principal balance of $9,548,000 and the Class B-2
Certificates with an original class principal balance of $18,846,522 from time
to time as more fully described in "Underwriting" in this prospectus
supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
BEAR, STEARNS & CO. INC. CREDIT SUISSE FIRST BOSTON
February 14, 2003
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
WE PROVIDE INFORMATION ABOUT THE CERTIFICATES TO YOU THROUGH THIS DOCUMENT
WHICH CONSISTS OF TWO PARTS: (A) THE ACCOMPANYING PROSPECTUS, WHICH PROVIDES
GENERAL INFORMATION, SOME OF WHICH MAY NOT APPLY TO YOUR CERTIFICATES AND (B)
THIS PROSPECTUS SUPPLEMENT, WHICH DESCRIBES THE SPECIFIC TERMS OF YOUR
CERTIFICATES. THIS PROSPECTUS SUPPLEMENT MAY BE USED TO OFFER AND SELL THE
CERTIFICATES ONLY IF ACCOMPANIED BY THE PROSPECTUS.
IF THERE IS A CONFLICT BETWEEN THE TERMS OF THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS
PROSPECTUS SUPPLEMENT.
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS INCLUDE
CROSS-REFERENCES TO CAPTIONS IN THESE MATERIALS WHERE YOU CAN FIND FURTHER
RELATED DISCUSSIONS. THE FOLLOWING TABLE OF CONTENTS AND THE TABLE OF CONTENTS
INCLUDED IN THE ACCOMPANYING PROSPECTUS PROVIDE THE PAGES ON WHICH THESE
CAPTIONS ARE LOCATED.
WE HAVE DEFINED SOME SIGNIFICANT TERMS IN THE "GLOSSARY" FOUND ON PAGE
S-66 OF THIS PROSPECTUS SUPPLEMENT. CAPITALIZED TERMS USED IN THIS PROSPECTUS
SUPPLEMENT BUT NOT DEFINED IN THIS PROSPECTUS SUPPLEMENT SHALL HAVE THE
MEANINGS ASSIGNED TO THEM IN THE ACCOMPANYING PROSPECTUS.
WE HAVE FILED PRELIMINARY INFORMATION REGARDING THE TRUST'S ASSETS AND THE
CERTIFICATES WITH THE SECURITIES AND EXCHANGE COMMISSION. THE INFORMATION
CONTAINED IN THIS DOCUMENT SUPERSEDES ALL OF THAT PRELIMINARY INFORMATION,
WHICH WAS PREPARED FOR PROSPECTIVE INVESTORS.
TABLE OF CONTENTS
PAGE PAGE
------ ------
PROSPECTUS SUPPLEMENT PROSPECTUS
Summary Information .............................. S-3 Important Notice About Information in this
Risk Factors ..................................... S-10 Prospectus and the Accompanying
The Contract Pool ................................ S-14 Prospectus Supplement .......................... 2
Vanderbilt Mortgage and Finance, Inc. ............ S-22 Reports to Holders of the Certificates ........... 2
Ratio of Earnings to Fixed Charges for Where You Can Find More Information .............. 2
Clayton ......................................... S-27 Risk Factors ..................................... 4
Yield and Prepayment Considerations .............. S-28 The Trust Fund ................................... 7
Description of the Certificates .................. S-42 Use of Proceeds .................................. 9
Use of Proceeds .................................. S-58 Vanderbilt Mortgage and Finance, Inc. ............ 9
Material Federal Income Tax Consequences S-58 Underwriting Policies ............................ 9
State Tax Considerations ......................... S-62 Yield Considerations ............................. 12
ERISA Considerations ............................. S-62 Maturity and Prepayment Considerations ........... 13
Legal Investment Considerations .................. S-63 Description of the Certificates .................. 13
Certificate Rating ............................... S-63 Description of FHA Insurance and VA
Underwriting ..................................... S-64 Guarantees ..................................... 28
Legal Matters .................................... S-65 Some Legal Aspects of the Contracts .............. 29
Glossary ......................................... S-66 ERISA Considerations ............................. 35
Annex I .......................................... I-1 Material Federal Income Tax Consequences ......... 38
State and Local Tax Considerations ............... 61
Legal Investment Considerations .................. 61
Ratings .......................................... 62
Underwriting ..................................... 62
Legal Matters .................................... 63
Experts .......................................... 63
Glossary ......................................... 64
S-2
SUMMARY INFORMATION
THIS SUMMARY HIGHLIGHTS SOME INFORMATION FROM THIS DOCUMENT AND DOES NOT
CONTAIN ALL OF THE INFORMATION TO MAKE YOUR INVESTMENT DECISION. PLEASE READ
THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS CAREFULLY FOR
ADDITIONAL INFORMATION ABOUT THE CERTIFICATES OFFERED TO THE PUBLIC.
MANUFACTURED HOUSING CONTRACT
SENIOR/SUBORDINATE PASS-THROUGH CERTIFICATES,
SERIES 2003-A
INITIAL RATING OF
CERTIFICATES(2)
ORIGINAL REMITTANCE -------------------
CLASS PRINCIPAL RATE MOODY'S S&P
CLASS BALANCE(1) (PER ANNUM) RATING RATING
- ------------------------ ----------------- ------------------------- --------- -------
OFFERED CERTIFICATES
Class AV ............... $70,000,000 1M LIBOR + 0.65%(4) Aaa AAA
Class A-1 .............. $50,893,000 1M LIBOR + 0.25%(3) Aaa AAA
Class A-2 .............. $49,723,000 3.48%(3) Aaa AAA
Class A-3 .............. $26,043,000 4.70%(3) Aaa AAA
Class A-4 .............. $32,402,000 6.21%(3) Aaa AAA
Class A-5 .............. $15,947,000 8.00%(3) Aa2 AA
Class M-1 .............. $13,048,000 7.47%(3) A2 A
Class B-1(5) ........... $13,048,000 8.00%(3) Baa2 BBB
Class B-2(5) ........... $18,846,522 8.00%(3) Baa2 BBB
NON-OFFERED CERTIFICATES
Class R ................ N/A N/A N/A N/A
- ----------
(1) This amount is subject to a variance of plus or minus 5%.
(2) A description of the ratings of the certificates is set forth under the
heading "Certificate Rating" in this prospectus supplement.
(3) In each case, subject to a maximum rate equal to (a) the weighted average
contract rate of the Contracts less (b) (i) if Vanderbilt is the
servicer, the senior servicing fee of 1.00% per annum and (ii) if
Vanderbilt is no longer the servicer, the servicing fee of 1.25% per
annum.
(4) Interest will accrue at a variable rate based on one-month LIBOR plus the
indicated spread, subject to a maximum rate equal to the lesser of (i)
15.00% per annum and (ii) (a) the weighted average contract rate of the
Contracts less (b) if Vanderbilt is the servicer, the senior servicing
fee of 1.00% per annum and if Vanderbilt is no longer the servicer, the
servicing fee of 1.25% per annum.
(5) See "Underwriting" in this prospectus supplement.
S-3
THE TRUST FUND
A trust fund will be established in accordance with a pooling and
servicing agreement, dated as of January 24, 2003, among Vanderbilt Mortgage
and Finance, Inc., as seller and servicer, Clayton Homes, Inc., as provider of
the limited guarantee, and JPMorgan Chase Bank, as trustee.
SELLER
Vanderbilt Mortgage and Finance, Inc. maintains its principal office at
500 Alcoa Trail, Maryville, Tennessee 37804. Its telephone number is (865)
380-3000. Vanderbilt is an indirect subsidiary of Clayton Homes, Inc.
We refer you to "Vanderbilt Mortgage and Finance, Inc." in the prospectus for
more detail.
SERVICER
Vanderbilt Mortgage and Finance, Inc. The servicer will service all of
the contracts either directly or through one or more sub-servicers.
TRUSTEE
JPMorgan Chase Bank.
LIMITED GUARANTOR
Clayton Homes, Inc. maintains its principal office at 5000 Clayton
Road, Maryville, Tennessee 37804. Clayton's telephone number is (865) 380-3000.
YIELD MAINTENANCE AGREEMENT PROVIDER
Bear Stearns Financial Products Inc.
CUT-OFF DATE
January 24, 2003.
CLOSING DATE
February 26, 2003.
REMITTANCE DATE
The 7th day of each month or if that day is not a business day, the next
business day. The first remittance date will be March 7, 2003.
DESIGNATIONS
o Offered Certificates--Class AV, Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5, Class M-1, Class B-1 and Class B-2.
o Senior Certificates--Class AV, Class A-1, Class A-2, Class A-3 and Class
A-4.
o Subordinate Certificates--Class A-5, Class M-1, Class B-1 and Class B-2.
THE CONTRACTS
As of the closing date, the trust fund will consist of a pool of
manufactured housing installment sales contracts, installment loan agreements
and mortgage loans, consisting of 7,105 contracts, with an aggregate unpaid
principal balance of approximately $289,952,317.99 as of the cut-off date.
Fixed rate contracts represent 100.00% of the aggregate unpaid principal
balance of the contract pool as of the cut-off date.
5,157 contracts, with an aggregate unpaid principal balance of
approximately $214,110,111.12 as of the cut-off date, are manufactured housing
installment sales contracts, installment loan agreements and mortgage loans
originated by manufactured housing dealers and purchased by the seller from
those dealers or originated by the seller. Some of the dealers are affiliates
of Clayton.
The seller purchased 1,266 contracts, with an aggregate unpaid principal
balance of approximately $46,895,959.95 as of the cut-off date, from 21st
Mortgage Corporation, a corporation in which a Clayton subsidiary owns a 50%
equity interest.
The contract pool includes a total of 682 contracts having an aggregate
unpaid principal balance as of the cut-off date of approximately $28,946,246.92
that were originated or acquired by Conseco Finance Corp. and subsequently
purchased from Conseco by either Vanderbilt (approximately $24,244,849.86) or
21st Mortgage (approximately $4,701,397.06).
For additional information with respect to the contracts, we refer you to the
table below and "The Contract Pool" in this prospectus supplement for more
detail.
S-4
SUMMARY OF CONTRACTS
CHARACTERISTICS AS OF THE CUT-OFF DATE
(APPROXIMATE)
Pool Balance $ 289,952,317.99
Number of Contracts 7,105
Average Contract Balance $40,809.62
Location of Homes 47 states
Percentage by Outstanding Principal Balance with Monthly Payments 74.97%
Percentage by Outstanding Principal Balance with Bi-Weekly Payments 25.03%
Weighted Average Annual Percentage Rate of Interest 10.092%
Range of Annual Percentage Rates of Interest 5.490% -- 18.250%
Weighted Average Original Term to Scheduled Maturity (at origination) 230 months
Weighted Average Remaining Term to Scheduled Maturity (at the Cut-off Date) 228 months
Latest Maturity Date of any Contract March 1, 2033
We refer you to "The Contract Pool" in this prospectus supplement for more
detail.
S-5
FINAL SCHEDULED REMITTANCE DATES
The final scheduled remittance date of each class of certificates is as
follows:
FINAL SCHEDULED
CLASS REMITTANCE DATE
- ---------------------- ------------------
Class AV(1) .......... May 7, 2026
Class A-1(1) ......... March 7, 2010
Class A-2(1) ......... September 7, 2015
Class A-3(1) ......... June 7, 2019
Class A-4(1) ......... May 7, 2026
Class A-5(2) ......... April 7, 2033
Class M-1(2) ......... April 7, 2033
Class B-1(1) ......... August 7, 2018
Class B-2(2) ......... April 7, 2033
(1) Determination of the final scheduled remittance dates is based on the
following assumptions: (i) there are no defaults, prepayments or
delinquencies with respect to payments due based on the assumed contract
characteristics (described in "Yield and Prepayment Considerations" in
this prospectus supplement) and (ii) the seller or servicer does not
exercise its right to purchase the contracts and the related trust
property when the current balance of the contracts declines below 10% of
the balance of the contracts as of the cut-off date.
(2) The final scheduled remittance date for these classes is the remittance
date in the month after the month in which the contracts with the latest
scheduled maturity date in the contract pool amortize according to their
terms.
It is anticipated that the actual final remittance date for each class
may occur earlier than the final scheduled remittance date. In the event of
large losses and delinquencies on the contracts, however, the actual payment on
some of the subordinated classes of certificates may occur later than the final
scheduled remittance date and in some scenarios, holders of those classes may
incur a loss on their investment.
We refer you to "Yield and Prepayment Considerations" in this prospectus
supplement for more detail.
PRIORITY OF DISTRIBUTIONS
Funds available from payments and other amounts received on the
contracts (less expenses and reimbursements which the servicer is entitled to)
on any remittance date will be distributed in the following order:
(i) to pay the senior servicing fee (equal to 1/12th of the product of
1.00% and the Pool Scheduled Principal Balance as long as Vanderbilt is the
Servicer or 1.25% and the Pool Scheduled Principal Balance if Vanderbilt is not
the Servicer);
(ii) to pay interest on the Senior Certificates, at their respective
remittance rates together with any previously undistributed shortfalls in
interest due, on a pro rata basis;
(iii) to pay principal on the Senior Certificates in an amount equal to
the applicable class percentage of the principal amount payable for the
remittance date, pro rata, to:
o the Class AV Certificates; and
o the group of certificates comprised of Classes A-1, A-2, A-3 and
A-4 (and, within such group, the principal will be paid
sequentially to Classes A-1, A-2, A-3, and A-4);
(iv) to pay interest and then principal, in an amount equal to the
applicable class percentage of the principal amount payable for that remittance
date, on the classes of certificates listed below, in the following order of
priority:
o interest, then principal on Class A-5
o interest, then principal on Class M-1
o interest, then principal on Class B-1
o interest, then principal on Class B-2 (subject to a floor set
forth in this prospectus supplement).
After payment of the amounts above, the remaining amounts received on
the contracts will be distributed to pay any undistributed basis risk shortfall
amounts on the Class AV Certificates and to pay Vanderbilt (if it is the
servicer) the subordinated servicing fee and to reimburse Clayton with respect
to any guarantee or enhancement payments, in the
S-6
order of priority described in this prospectus supplement. Remaining amounts
will be paid to the holder of the Class R Certificate.
On each remittance date, any amounts on deposit in the yield maintenance
account will be paid in the following order of priority: (a) an amount equal to
the basis risk shortfall amount, if any, to the Class AV Certificates, together
with any previously undistributed basis risk shortfall amount due on the Class
AV Certificates in respect of prior remittance dates; (b) an amount equal to
the collection shortfall, if any, to the certificates in the order of priority
provided in clauses (ii) through (iv) above; and (c) any remaining amount to
the seller.
We refer you to "Description of the Certificates--Distributions" in this
prospectus supplement for more detail.
INTEREST DISTRIBUTIONS
For the Class AV and Class A-1 Certificates, interest accrues on the
certificates from the remittance date in the prior month (with the exception of
the first distribution date, with respect to which interest will accrue from
the closing date) to the day preceding the related remittance date on the basis
of the actual number of days elapsed and a 360-day year. For the Class A-2,
Class A-3, Class A-4, Class A-5, Class M-1, Class B-1 and Class B-2
Certificates, interest accrues on the certificates during the calendar month
prior to the related remittance date on the basis of an assumed 360-day year
consisting of twelve 30-day months.
On each remittance date, you will be entitled to interest which has
accrued during the related accrual period plus interest due on any prior
remittance date that has not been paid.
Your interest entitlement may be reduced as a result of prepayments or
losses on the contracts.
We refer you to "Description of the Certificates--Distributions--Interest
Distributions" in this prospectus supplement for more information.
PRINCIPAL DISTRIBUTIONS
On each remittance date, you will be entitled to receive principal
distributions in an amount equal to the applicable class principal percentage
of the formula amount of principal payable on the contracts for that remittance
date.
Prior to the remittance date in March 2008, the applicable class
principal percentage for Class A Certificates is expected to be 100% and the
class principal percentage for the Class M-1 and Class B Certificates is
expected to be 0%. During this period, the Class A Certificates will receive
distributions of principal in the order of priority described in this
prospectus supplement.
Thereafter, assuming delinquencies, defaults and losses on the contracts
remain below the specified thresholds, principal is expected to be paid on the
Class A Certificates, Class M-1 Certificates and Class B Certificates in
proportion to their outstanding principal balances as further described in this
prospectus supplement.
Payments on the Class B-2 Certificates are subject to a floor described
in this prospectus supplement. If principal payments on the Class B-2
Certificates would reduce the balance of the Class B-2 Certificates below the
floor, those principal payments will be reallocated to the more senior classes
as described in this prospectus supplement.
We refer you to "Description of the Certificates--Distributions" in this
prospectus supplement for more detail.
SUBORDINATION
There are two types of subordination with respect to the certificates:
1. On any distribution date, distributions on the Senior Certificates will
be made prior to distributions on the Subordinate Certificates. Among the
Senior Certificates, interest will be distributed pro-rata and then
principal will be distributed in order of priority. Among the Subordinate
Certificates, each class of certificates will receive both interest and
principal, in that order, prior to certificates of a lower priority. If
specified distribution tests are met, limited distributions of principal
may be made to the Subordinate Certificates prior to the reduction of the
principal balances of the Senior Certificates to zero; and
S-7
2. Losses resulting from the liquidation of defaulted contracts will be
absorbed by the Subordinate Certificates in the following order: Class
B-2, Class B-1, Class M-1 and Class A-5.
This subordination is intended to enhance the likelihood of receipt by
the holders of more senior classes of certificates of their monthly payments of
interest and the ultimate receipt by those holders of principal equal to the
related initial certificate balance of their certificates.
We refer you to "Description of the Certificates--Senior/Subordinate Structure"
and "--Losses on Liquidated Contracts" in this prospectus supplement for more
detail.
LIMITED GUARANTEE OF CLAYTON
Clayton will guarantee the payment of interest and principal on the
Class B-2 Certificates. No other certificates have the benefit of this
guarantee.
The limited guarantee will be an unsecured general obligation of Clayton
and will not be supported by any letter of credit or other enhancement
arrangement.
We refer you to "Where You Can Find More Information" in the Prospectus.
At Clayton's option and subject to some conditions, the limited
guarantee may be replaced by an alternate credit enhancement. The alternate
credit enhancement may consist of cash or securities deposited by Clayton, or
any other person, in a segregated escrow, trust or collateral account or a
letter of credit, certificate insurance policy or surety bond provided by a
third party.
We refer you to "Description of the Certificates-- Limited Guarantee of
Clayton" and "-- Alternate Credit Enhancement" in this prospectus supplement for
more detail.
YIELD MAINTENANCE AGREEMENT
The holders of the Class AV Certificates (and to the limited extent
described herein, the other certificateholders) will benefit from any payments
made by Bear Stearns Financial Products Inc. pursuant to the yield maintenance
agreement. The yield maintenance agreement is intended to partially mitigate
the interest rate risk that could result from the difference between one-month
LIBOR plus the related margin on the Class AV Certificates and the weighted
average of the net contract rates of the contracts as described in this
prospectus supplement. The yield maintenance agreement is scheduled to
terminate on the remittance date occurring in November 2014. Any amounts on
deposit in the yield maintenance account will be the property of the trust but
will not be property of the REMIC.
See "Description of the Certificates--Basis Risk Shortfall; Yield Maintenance
Agreement" in this prospectus supplement.
ADVANCES
If the servicer reasonably believes that cash advances can be recovered
from a delinquent obligor then the servicer will make cash advances to the
trust fund to cover delinquent scheduled payments on the contracts. The
servicer will make those advances to maintain a regular flow of scheduled
interest and principal payments on the certificates, not to guarantee or insure
against losses. The trust fund will reimburse the servicer for those advances.
We refer you to "Description of the Certificates--Advances" in this prospectus
supplement for more detail.
OPTIONAL REPURCHASE
If the aggregate scheduled principal balance of the contracts at the end
of the related due period declines below 10% of the pool principal balance as
of the cut-off date, then the servicer and the seller (if the seller is no
longer the servicer) each have the option to purchase all of the contracts and
the other property in the trust fund. If the servicer or seller purchases all
of the contracts, you will receive a final distribution and then the trust fund
will be terminated.
We refer you to "Description of the Certificates--Optional Termination" in
this prospectus supplement for more detail.
S-8
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes:
o An election will be made to treat the trust fund, excluding the yield
maintenance account and yield maintenance agreement, as a "real estate
mortgage investment conduit," or REMIC.
o Each class of certificates, other than the Class R Certificate and
excluding the rights of the Class AV Certificates to receive payments
from the yield maintenance account, will be "regular interests" in the
REMIC and will be treated as debt instruments of the REMIC.
o The Class R Certificate will represent the beneficial ownership of the
sole class of "residual interest" in the REMIC.
We refer you to "Material Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus for more detail.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of the Employee Retirement
Income Security Act of 1974 and section 4975 of the Internal Revenue Code of
1986 can limit investments by some pension and other employee benefit plans.
For example, the acquisition of certificates by some plans may be considered a
"prohibited transaction" under ERISA; however, there are exemptions from the
prohibited transactions rules that could apply. If you are a fiduciary of a
pension or other employee benefit plan which is subject to ERISA or section
4975 of the Code, you should consult with your counsel regarding the
application of the provisions of ERISA and the Code before purchasing a
certificate.
Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus supplement and in the prospectus, it is
expected that pension and employee benefit plans subject to ERISA or section
4975 of the Code may purchase the Underwritten Certificates. However, persons
acquiring certificates in the initial issuance with assets of employee benefit
plans or individual retirement accounts will be deemed to make the
representations described under "ERISA Considerations" in this prospectus
supplement.
We refer you to "ERISA Considerations" in this prospectus supplement and in the
prospectus.
LEGAL INVESTMENT
The certificates will not be "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984.
We refer you to "Legal Investment Considerations" in this prospectus supplement
and in the prospectus for more detail.
CERTIFICATE RATING
The trust fund will not issue the Offered Certificates unless they have
been assigned ratings at least as high as those designated on page S-3.
A rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by either rating agency.
We refer you to "Certificate Rating" in this prospectus supplement for more
detail.
S-9
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of certificates. You should also carefully consider the information
described under "Risk Factors" in the prospectus.
PREPAYMENTS ON CONTRACTS MAY ADVERSELY AFFECT YIELD OF OFFERED CERTIFICATES
The rate of principal distributions and the average life of your
certificates will be directly related to the rate of principal payments on the
contracts. Obligors may prepay a contract in full or in part at any time. The
contracts generally do not impose any prepayment penalties. For example, the
rate of principal payments on the contracts will be affected by the following:
o the amortization schedules of the contracts;
o partial prepayments and prepayments resulting from refinancing by
obligors;
o liquidations of defaulted contracts by the servicer;
o repurchases of contracts by the seller due to defective documentation
or breaches of representations and warranties in the pooling and
servicing agreement; and
o the optional purchase by the seller or servicer of all of the
contracts in connection with the termination of the trust fund.
Prepayments on the contracts are influenced by a variety of economic,
geographic, social and other factors. For example, if interest rates for
similar types of contracts fall below the interest rates on the contracts, the
rate of prepayment would generally be expected to increase. Conversely, if
interest rates on similar contracts rise above the interest rates on the
contracts, the rate of prepayment would generally be expected to decrease.
We cannot predict the rate at which obligors will repay their contracts.
Please consider the following:
o If you are purchasing a certificate at a discount to par, your yield
may be lower than expected if principal payments on the contracts
occur at a slower rate than you expected.
o If you are purchasing a certificate at a premium to par, your yield
may be lower than expected if principal payments on the contracts
occur at a faster rate than you expected.
o The earlier a payment of principal occurs, the greater the impact on
your yield. For example, if you purchase a certificate at a premium to
par, although the average rate of principal payments is consistent
with your expectations, if the rate of principal payments occurs
initially at a rate higher than expected, which would adversely impact
your yield, a subsequent reduction in the rate of principal payments
may not offset any adverse yield effect.
o In addition, in the event a contract is prepaid in full, interest on
that contract will cease to accrue on the date of prepayment. If those
prepayments and related interest shortfalls are sufficiently high in a
month, with respect to a group of certificates, the amount available
for the next remittance date could be less than the amount of
principal and interest that would be distributable to the applicable
certificateholders, in the absence of those shortfalls.
We refer you to "Yield and Prepayment Considerations" in this prospectus
supplement for more detail.
RISKS OF HOLDING SUBORDINATE CERTIFICATES
The protections afforded the Senior Certificates in this transaction
create risks for the Subordinate Certificates. Before purchasing Subordinate
Certificates, you should consider the following factors that may have an
adverse impact on your yield:
o Because the Subordinate Certificates receive distributions after the
Senior Certificates, there is a greater likelihood that one or more
classes of Subordinate Certificates will not receive the distributions
to which they are entitled on any remittance date.
S-10
o If the servicer determines not to advance a delinquent payment because
the servicer believes that amount is not recoverable from an obligor,
there will be a shortfall in distributions on the certificates which
will initially impact the Subordinate Certificates.
o The Subordinate Certificates are not entitled to a proportionate share
of principal payments on the contracts until (a) the beginning of the
fifth year after the first remittance date and (b) the satisfaction of
delinquency and performance tests described in this prospectus
supplement.
o Losses resulting from the liquidation of defaulted contracts will
initially be absorbed by the Subordinate Certificates. The liquidation
losses on the contracts and resulting deficiencies in the amount
available to pay the certificates will, in effect, be absorbed by the
Subordinate Certificates in the following order: Class B-2, Class B-1,
Class M-1 and Class A-5.
o The earlier a loss on a contract occurs, the greater the impact on
your yield.
o The risks presented in this section are more severe for the more
subordinate classes of certificates (i.e., Class B-1 and Class B-2
Certificates). No class of Subordinate Certificates will receive a
distribution on any remittance date prior to the class or classes of
Subordinate Certificates of a higher priority. With limited
exceptions, losses on the contracts are allocated to the most junior
classes of certificates outstanding and amounts that these classes
would otherwise receive will be distributed to the classes of
Subordinate Certificates with a higher priority.
Please review "Description of the Certificates" and "Yield and Prepayment
Considerations" in this prospectus supplement for more detail.
LIMITED SOURCE OF PAYMENTS -- NO RECOURSE TO SELLER, SERVICER OR TRUSTEE
The contracts are the sole source of distributions for the certificates
(except to the extent of payments received under the yield maintenance
agreement and, with respect to the Class B-2 Certificates, the limited
guarantee or alternate credit enhancement). The certificates do not represent
an interest in or obligation of the seller, the servicer, the trustee or any of
their affiliates, except for (i) the limited obligations of the seller with
respect to breaches of its representations and warranties that materially
adversely effect the trust fund's interest in a contract, (ii) the servicer
with respect to its servicing obligations and (iii) Clayton, as the provider of
the limited guarantee with respect to the Class B-2 Certificates. Neither the
certificates nor the contracts will be guaranteed by or insured by any
governmental agency or instrumentality, the seller, the servicer, the trustee
or any of their affiliates (except to the extent of the limited guarantee of
Clayton in respect of the Class B-2 Certificates). Consequently, if payments on
the contracts are insufficient to make all payments required on the
certificates, you may incur a loss on your investment.
LIMITED GUARANTEE OF CLAYTON IS AN UNSECURED GENERAL OBLIGATION OF CLAYTON
The limited guarantee with respect to the Class B-2 Certificates will be
an unsecured general obligation of Clayton and will not be supported by any
letter of credit or other enhancement arrangement.
See "Where You Can Find More Information" in the prospectus.
ALTERNATE CREDIT ENHANCEMENT MAY BE EXHAUSTED AND RESULT IN LOSSES
If Clayton replaces the limited guarantee with an alternate credit
enhancement and the alternate credit enhancement is exhausted, Clayton has no
obligation to provide additional credit enhancements. Consequently, the Class
B-2 Certificates may bear a greater risk relating to losses on the contracts
than if the limited guarantee was in place and Clayton was able to make
payments in accordance with the limited guarantee.
LACK OF SECONDARY MARKET FOR THE OFFERED CERTIFICATES
The underwriters named on the cover of this prospectus supplement intend
to make a market for the purchase and sale of the Offered Certificates after
their initial issuance but have no obligation to do so.
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There is currently no secondary market for the Offered Certificates and the
Offered Certificates will not be listed on any securities exchange. We cannot
give you any assurance that a secondary market will develop or, if it develops,
that it will continue. Absent a secondary market for the Offered Certificates,
you may not be able to sell your certificates readily and the price you receive
may be less than what you would receive for a comparable security with an
active trading market. Your ability to resell your certificates may be limited
and could adversely affect the market value of your certificates and result in
losses to you.
The secondary markets for asset backed securities have experienced periods
of illiquidity and can be expected to do so in the future. Illiquidity can have
a severely adverse effect on the prices of securities that are especially
sensitive to prepayment, credit or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.
In addition, the certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984. Accordingly, many institutions with legal authority to invest in SMMEA
securities will not be able to invest in the certificates, limiting the market
for the certificates.
THE RETURN ON YOUR CERTIFICATES COULD BE REDUCED BY SHORTFALLS DUE TO THE
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
The Soldiers' and Sailors' Civil Relief Act of 1940, or Relief Act,
provides relief to obligors who enter active military service and to obligors
in reserve status who are called to active duty after the origination of their
manufactured housing contract or mortgage loan. The response of the United
States to the terrorist attacks on September 11, 2001 has included rescue
efforts and may involve military operations that will increase the number of
citizens who are in active military service, including persons in reserve
status who have been called or will be called to active duty. The Relief Act
provides generally that a obligor who is covered by the Relief Act may not be
charged interest on a contract in excess of 6% per annum during the period of
the obligor's active duty. These shortfalls are not required to be paid by the
obligor at any future time. The servicer is not required to advance these
shortfalls as delinquent payments. As a result, interest shortfalls on the
contracts due to the application of the Relief Act or similar legislation or
regulations will be applied to reduce accrued interest on each related class of
certificates on a pro rata basis.
The Relief Act also limits the ability of the servicer to foreclose on a
manufactured housing contract or mortgage loan during the obligor's period of
active duty and, in some cases, during an additional three month period
thereafter. As a result, there may be delays in payment and increased losses on
the contracts. Those delays and increased losses will be borne primarily by the
outstanding class or classes of certificates with the lowest level of payment
priority.
It is unknown how many contracts have been or may be affected by the
application of the Relief Act.
GEOGRAPHIC CONCENTRATION
An investment in the certificates evidencing interests in the 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 manufactured housing installment sales contracts.
The geographic location of the manufactured homes securing the contracts is
described in "The Contract Pool" in this prospectus supplement.
See "The Contract Pool" in this prospectus supplement.
DEPRECIATION IN VALUE OF MANUFACTURED HOMES
The market value of a manufactured home generally declines faster than the
outstanding principal balance of the loan for that home and the market value of
the manufactured homes can be or become lower than the principal balances of
the related contracts. This can result in losses in the event of default
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or repossession. If the value of the manufactured homes securing the contracts
declines at a rate which is faster than expected, losses on the contracts will
increase in the event defaults or repossessions occur under the contracts.
See "The Contract Pool--The Contracts" in this prospectus supplement.
CONSEQUENCES OF OWNING BOOK-ENTRY CERTIFICATES
Limit on Liquidity of Certificates. Issuance of the Offered Certificates
in book-entry form may reduce the liquidity of those certificates in the
secondary trading market since investors may be unwilling to purchase
certificates for which they cannot obtain physical certificates.
Limit on Ability to Transfer or Pledge. Since transactions in the
book-entry certificates can be effected only though DTC, Clearstream,
Euroclear, participating organizations, indirect participants and some banks,
your ability to transfer or pledge a book-entry certificate to persons or
entities that do not participate in the DTC, Clearstream or Euroclear system or
otherwise to take actions in respect of your certificates, may be limited due
to lack of a physical certificate.
Delays in Distributions. You may experience some delay in the receipt of
distributions on the book-entry certificates since the distributions will be
forwarded by the trustee to Cede & Co. for DTC to credit the accounts of its
participants which will thereafter credit them to your account either directly
or indirectly through indirect participants, as applicable.
Please review "Description of the Certificates--Registration of the
Offered Certificates" in this prospectus supplement for more detail.
RISK REGARDING CHANGES IN INTEREST RATES
No prediction can be made as to future levels of one-month LIBOR or as to
the timing of any changes therein, each of which will directly affect the
yields of the Class AV and Class A-1 Certificates. Holders of the Class AV
Certificates will bear the risk that the interest rates on their certificates
will be limited to the lesser of the weighted average net contract rate and
15.00%, even if LIBOR plus the related margin would have yielded a higher rate.
Holders of the Class A-1 Certificates will bear the risk that the interest
rates on their Certificates will be limited to the weighted average net
contract rate.
Some protection from this yield risk will be provided to Class AV
certificateholders by the yield maintenance agreement as described in "Basis
Risk Shortfall; Yield Maintenance Agreement" in this prospectus supplement.
The Class A-2, Class A-3, Class A-4, Class A-5, Class M-1, Class B-1 and
Class B-2 Certificates may not always receive interest at the fixed rates of
interest described in this prospectus supplement. If the weighted average net
contract rate is less than the fixed rate of interest otherwise payable on the
Class A-2, Class A-3, Class A-4, Class A-5, Class M-1, Class B-1 or Class B-2
Certificates, as applicable, the interest rate will be reduced to the weighted
average net contract rate. The prepayment of loans with higher interest rates
will reduce the weighted average net contract rate.
Capitalized terms used in this prospectus supplement have the meanings
given in this prospectus supplement under "Glossary of Defined Terms" or in the
prospectus under "Glossary of Defined Terms."
S-13
THE CONTRACT POOL
The "contracts" will consist of fixed rate manufactured housing
installment sales contracts, installment loan agreements and mortgage loans.
The manufactured housing installment sales contracts and installment loan
agreements are secured by security interests in manufactured homes, purchased
with the proceeds of the contracts and, with respect to Land-and-Home
Contracts, secured by liens on the real estate on which the related
manufactured homes are located. The mortgage loans are secured by one-to
four-family residential properties. All of the contracts in the trust fund have
been purchased or originated by Vanderbilt. The contracts, as of origination,
were secured by manufactured homes or mortgaged properties located in 47
states.
A description of Vanderbilt's general practice with respect to the
origination or purchase, on an individual basis, of manufactured housing
contracts is set forth under "Underwriting Policies" in the prospectus.
Vanderbilt believes the underwriting and servicing standards employed by the
originators and servicers of the acquired contracts prior to the sale of such
contracts to Vanderbilt are consistent with the general standards utilized in
the manufactured housing finance industry but the acquired contracts were not
originated using Vanderbilt's underwriting criteria and there can be no
assurance that the losses and delinquencies on the acquired contracts will not
be higher than those on the contracts originated by Vanderbilt.
Under the pooling and servicing agreement dated as of January 24, 2003,
among Vanderbilt, as seller and servicer, Clayton, as provider of the limited
guarantee, and the trustee, the manufactured homes are required to comply with
the requirements of federal statutes which generally require the manufactured
homes to have a minimum of 400 square feet of living space and a minimum width
of 102 inches and to be of a kind customarily used at a fixed location. Federal
statutes also require the manufactured homes to be transportable in one or more
sections, built on a permanent chassis and designed to be used as dwellings,
with or without permanent foundations, when connected to the required
utilities. The manufactured homes also must include plumbing, heating, air
conditioning and electrical systems. Management of Vanderbilt estimates that in
excess of 98% of the manufactured homes are used as primary residences by the
obligors under the contracts secured by those manufactured homes.
The pooling and servicing agreement requires the servicer to maintain
hazard insurance policies with respect to each manufactured home (other than a
manufactured home in repossession) in the amounts and manner described under
"Description of the Certificates--Servicing" in the prospectus. Generally, no
other insurance will be maintained with respect to the manufactured homes or
the contracts.
On the Closing Date, Vanderbilt will cause to be conveyed to the trustee
the contracts and all rights to receive payments on the contracts that have not
been received prior to the Cut-off Date, including any payments that were due
prior to the Cut-off Date but were not received prior to that date. Payments
due on or after the Cut-off Date, that have been received by Vanderbilt prior
to the Cut-off Date, will be the property of Vanderbilt and will not be part of
the trust fund. The servicer will retain physical possession of the contract
documents (other than some of the documents related to the Land-and-Home
Contracts and the mortgage loans which will be held by a custodian on behalf of
the trustee). See "Description of the Certificates--Conveyance of Contracts" in
this prospectus supplement.
THE CONTRACTS
The contract pool will consist of 7,105 contracts having an aggregate
outstanding principal balance as of the Cut-off Date of $289,952,317.99
(subject to a permitted variance of plus or minus 5%). Each contract was
originated on or after February 17, 1988. As of the Cut-off Date:
o Approximately 73.84% (by aggregate outstanding principal balance) of
the contracts having an aggregate outstanding principal balance of
approximately $214,110,111.12 as of the Cut-off Date, are manufactured housing
installment sales contracts, installment loan agreements and mortgage loans
originated by manufactured housing dealers and purchased by the seller from
those dealers or originated by the seller. Some of the dealers are affiliates
of Clayton.
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o Approximately 16.17% (by aggregate outstanding principal balance) of
the contracts having an aggregate outstanding principal balance as of the
Cut-off Date of approximately $46,895,959.95 were originated or acquired by
21st Mortgage Corporation, a Delaware corporation, and subsequently purchased
by Vanderbilt.
o Approximately 12.37% of the contracts having an aggregate outstanding
principal balance as of the Cut-off Date of approximately $35,879,715.13 are
Land-and-Home Contracts or mortgage loans.
o Approximately 9.98% of the contracts having an aggregate outstanding
principal balance as of the Cut-off Date of approximately $28,946,246.92 were
originated or acquired by Conseco Finance Corp. ("Conseco") and subsequently
purchased from Conseco by either Vanderbilt (approximately $24,244,849.86) or
21st Mortgage (approximately $4,701,397.06). While Vanderbilt and 21st Mortgage
(as subservicer) utilize the same servicing standards and procedures in the
servicing of the Conseco contracts they service as they do for other acquired
loan portfolios which they service, there can be no assurance that losses and
deliquencies on the Conseco contracts will not be higher than those on the
other contracts.
o Approximately 13.27% of the contracts as of the Cut-off Date are
re-financed contracts and an additional 0.04% of the contracts are cash-out
refinancings.
As referenced above, cash-out refinancings are loans in which the obligor, in
addition to re-financing the existing loan balance secured by the collateral,
receives a limited amount of additional cash proceeds dependent upon the
obligor's equity in the collateral and other standard underwriting criteria.
The additional amount of cash proceeds is added to the re-financed loan balance
and secured by the collateral.
Each contract fully amortizes the principal balance of the contract over
the term of the contract. The portion of each scheduled payment for any
contract allocable to principal is equal to the total amount thereof less the
portion allocable to interest. The portion of each scheduled payment due in a
particular month that is allocable to interest is a precomputed amount equal to
one month's interest (or 14 days' interest in the case of a bi-weekly contract)
on the principal balance of the contract, which principal balance is determined
by reducing the initial principal balance by the principal portion of all
scheduled payments that were due in prior months (whether or not those
scheduled payments were timely made) and all prior partial principal
prepayments. All of the contracts are actuarial obligations, and thus, each
payment allocated to a scheduled monthly or bi-weekly payment of a contract
will be applied to interest and to principal in accordance with that
precomputed allocation whether scheduled payments are received in advance of or
subsequent to the day of the month (or in the case of a bi-weekly contract,
each day in the month) on the Due Date. All payments received on the contracts
(other than payments allocated to items other than principal and interest or
payments sufficient to pay the outstanding principal balance of and all accrued
and unpaid interest on the contracts) will be applied when received to current
and any previously unpaid scheduled monthly payments in the order of the Due
Dates of those payments and any payments that exceed the amount necessary to
bring the contract current are applied to the partial prepayment of principal
of the contract.
In some instances, Vanderbilt finances the purchase of the manufactured
home and takes as additional security a mortgage on the real property on which
the manufactured home is located or, in some cases, a mortgage on other
property pledged on behalf of the obligor. Vanderbilt may also take a mortgage
on the real property on which the manufactured home is located in lieu of a
down payment in the form of cash or the value of a trade-in unit, or as
additional security. Approximately 12.37% of the contracts by outstanding
principal balance as of the Cut-off Date are secured by a mortgage on the real
property on which the manufactured home is located in lieu of a down payment in
the form of cash or the value of a trade-in unit. See "Some Legal Aspects of
the Contracts" in the prospectus.
As of the Cut-off Date:
o The aggregate outstanding principal balance of the contracts will
equal $289,952,317.99 (subject to a permitted variance of plus or minus 5%).
S-15
o 100.00% of the contracts, by aggregate outstanding principal balance,
have fixed interest rates.
o 69.92% of the contracts by aggregate outstanding principal balance are
secured by manufactured homes or mortgaged properties which were new at the
time the related contracts were originated.
o 15.08% of the contracts by aggregate outstanding principal balance are
secured by manufactured homes or mortgaged properties which were used at the
time the related contracts were originated.
o 15.00% of the contracts by aggregate outstanding principal balance are
secured by manufactured homes or mortgage properties which were previously
repossessed and then financed with a new borrower at the time the related
contracts were originated.
o 62.74% of the contracts by aggregate outstanding principal balance are
secured by multi-wide manufactured homes or mortgage properties on which
multi-wide manufactured homes are situated.
o 37.26% of the contracts by aggregate outstanding principal balance are
secured by single-wide manufactured homes or mortgage properties on which
single-wide manufactured homes are situated.
o Each contract has an APR of at least 5.490% and not more than 18.250%.
o The weighted average APR of the contracts is approximately 10.092% per
annum.
o The contracts have remaining maturities of at least 10 months but not
more than 360 months and original maturities of at least 12 months but not more
than 360 months.
o The contracts had a weighted average original term to scheduled
maturity of approximately 230 months, and a weighted average remaining term to
scheduled maturity of approximately 228 months.
o The average outstanding principal balance of the contracts was
$40,809.62.
o The weighted average loan-to-value ratio at the time of origination of
the contracts was approximately 81.98%.
Generally, "value" in the calculation above is equal to the sum of the down
payment (which includes the value allocated to any trade-in unit or land
pledged as additional security or in lieu of a down payment), the original
amount financed on the related contract, which may include sales and other
taxes, and, in the case of a Land-and-Home Contract, the value of the land
securing the contract as estimated by the dealer.
Manufactured homes, unlike site-built homes, generally depreciate in
value, and it has been Vanderbilt's experience that, upon repossession, the
market value of a manufactured home securing a manufactured housing contract is
generally lower than the principal balance of the related manufactured housing
contract.
CONTRACT REPAYMENT FEATURES
Each fixed rate contract will bear a fixed APR. Most of the contracts
provide for level payments over the entire term of the contract. Generally,
there are no material differences between the underwriting standards that
Vanderbilt applies to level payment loans compared to the Equity Builder
Contracts.
Bi-Weekly Contracts
Approximately 25.03% of the contracts by aggregate outstanding principal
balance as of the Cut-off Date have bi-weekly scheduled payments of principal
and interest. The remainder of the contracts have monthly scheduled payments of
principal and interest. Under a bi-weekly contract the obligor authorizes
Vanderbilt to automatically debit the obligor's account for the payment of each
scheduled payment. If the obligor terminates that account or the authorization
of Vanderbilt to debit that account, then that bi-weekly contract is converted
to a contract with scheduled monthly payments.
Equity Builder Contracts
An equity builder loan is an installment loan agreement requiring
interest-only payments during its first year. After the first year, the payment
amount steps up annually in order to amortize the loan
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principal. The amount of that increase is based upon a percentage of the
required interest payment during the first year. An obligor under an equity
builder loan has the option during the term of the loan to convert the unpaid
loan balance to a 20-year total amortization schedule. There are 273 equity
builder loans in the contract pool, having an aggregate outstanding principal
balance of approximately $12,900,381.01 representing approximately 4.45% of the
contract pool by aggregate outstanding principal balance as of the Cut-off
Date.
GEOGRAPHIC LOCATION
The contracts are secured by manufactured homes and/or real estate located
in 47 states. Approximately 15.73%, 12.55%, 10.59%, 5.91%, 5.40%, 5.11% and
5.00% of the contracts by aggregate outstanding principal balance as of the
Cut-off Date were secured by manufactured homes or real estate located in
Texas, Tennessee, North Carolina, South Carolina, Virginia, Kentucky and
Florida, respectively. No other location represented more than 4.75% of the
contracts by aggregate outstanding principal balance as of the Cut-off Date.
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POOL STATISTICS
Described below is a description of some additional characteristics of the
contracts as of the Cut-off Date. Percentages may not add to 100.00% due to
rounding. Totals may not add to aggregate balances due to rounding.
GEOGRAPHICAL DISTRIBUTION OF MANUFACTURED HOMES AS OF ORIGINATION
PERCENTAGE OF
CONTRACTS BY
NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING
CONTRACTS BALANCE OUTSTANDING PRINCIPAL BALANCE
LOCATION AS OF CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE
- ------------------------ -------------------- --------------------- -------------------
Alabama ................ 237 $ 7,808,166.13 2.69%
Arizona ................ 109 4,919,435.79 1.70
Arkansas ............... 132 5,188,213.32 1.79
California ............. 298 13,760,252.67 4.75
Colorado ............... 146 6,352,943.76 2.19
Connecticut ............ 1 50,516.43 0.02
Delaware ............... 24 1,365,912.30 0.47
Florida ................ 345 14,494,821.45 5.00
Georgia ................ 129 5,325,622.59 1.84
Illinois ............... 53 1,836,198.80 0.63
Idaho .................. 9 300,082.78 0.10
Indiana ................ 79 3,192,708.07 1.10
Iowa ................... 28 1,028,387.89 0.35
Kansas ................. 37 1,426,552.22 0.49
Kentucky ............... 374 14,828,897.25 5.11
Louisiana .............. 236 8,481,336.22 2.93
Maine .................. 2 115,701.80 0.04
Maryland ............... 19 950,545.92 0.33
Massachusetts .......... 1 78,022.85 0.03
Michigan ............... 245 11,359,805.10 3.92
Minnesota .............. 60 2,468,493.80 0.85
Mississippi ............ 171 5,856,991.79 2.02
Missouri ............... 144 4,747,701.32 1.64
Montana ................ 11 508,792.03 0.18
Nebraska ............... 3 107,076.25 0.04
Nevada ................. 18 849,789.69 0.29
New Hampshire .......... 8 314,803.45 0.11
New Jersey ............. 4 148,440.55 0.05
New Mexico ............. 71 2,522,819.29 0.87
New York ............... 27 1,633,747.36 0.56
North Carolina ......... 740 30,704,472.07 10.59
North Dakota ........... 2 117,124.09 0.04
Ohio ................... 144 5,660,207.00 1.95
Oklahoma ............... 155 5,970,426.77 2.06
Oregon ................. 33 1,341,719.44 0.46
Pennsylvania ........... 88 3,492,269.21 1.20
South Carolina ......... 423 17,142,664.27 5.91
South Dakota ........... 7 270,804.07 0.09
Tennessee .............. 867 36,388,006.90 12.55
Texas .................. 1,148 45,618,702.36 15.73
Utah ................... 19 818,237.30 0.28
Vermont ................ 3 164,332.86 0.06
Virginia ............... 331 15,659,761.68 5.40
Washington ............. 25 1,048,295.68 0.36
West Virginia .......... 63 2,218,728.73 0.77
Wisconsin .............. 8 238,011.87 0.08
Wyoming ................ 28 1,075,774.82 0.37
----- ---------------- ------
Total ................. 7,105 $ 289,952,317.99 100.00%
===== ================ ======
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YEARS OF ORIGINATION OF CONTRACTS
PERCENTAGE OF
CONTRACTS BY
NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING
CONTRACTS BALANCE OUTSTANDING PRINCIPAL BALANCE
YEAR OF ORIGINATION AS OF CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE
- --------------------- -------------------- --------------------- -------------------
1988 ................ 7 $ 44,398.34 0.02%
1989 ................ 2 10,003.91 0.00
1990 ................ 3 30,641.94 0.01
1991 ................ 4 28,044.35 0.01
1992 ................ 8 96,210.53 0.03
1993 ................ 13 172,727.61 0.06
1994 ................ 3 55,681.76 0.02
1995 ................ 4 125,721.13 0.04
1996 ................ 20 790,937.66 0.27
1997 ................ 4 231,356.31 0.08
1998 ................ 33 1,082,211.60 0.37
1999 ................ 19 908,107.07 0.31
2000 ................ 14 846,024.56 0.29
2001 ................ 20 1,274,723.69 0.44
2002 ................ 6,412 263,694,535.05 90.94
2003 ................ 539 20,560,992.48 7.09
----- ---------------- ------
Total .............. 7,105 $ 289,952,317.99 100.00%
===== ================ ======
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS
PERCENTAGE OF
CONTRACTS BY
NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING
CONTRACTS BALANCE OUTSTANDING PRINCIPAL BALANCE
ORIGINAL CONTRACT AMOUNT AS OF CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE
- ----------------------------------- -------------------- --------------------- -------------------
$ 0.01 -- $ 10,000.00......... 105 $ 821,029.01 0.28%
$ 10,000.01 -- $ 20,000.00......... 771 12,128,368.06 4.18
$ 20,000.01 -- $ 30,000.00......... 1,614 40,474,141.78 13.96
$ 30,000.01 -- $ 40,000.00......... 1,583 54,740,804.31 18.88
$ 40,000.01 -- $ 50,000.00......... 1,028 45,875,845.56 15.82
$ 50,000.01 -- $ 60,000.00......... 805 44,106,516.79 15.21
$ 60,000.01 -- $ 70,000.00......... 526 33,952,958.20 11.71
$ 70,000.01 -- $ 80,000.00......... 311 23,214,648.78 8.01
$ 80,000.01 -- $ 90,000.00......... 179 15,147,052.42 5.22
$ 90,000.01 -- $100,000.00......... 88 8,310,792.51 2.87
$100,000.01 -- $110,000.00......... 42 4,407,402.83 1.52
$110,000.01 -- $120,000.00......... 24 2,725,874.75 0.94
$120,000.01 -- $130,000.00......... 9 1,110,074.54 0.38
$130,000.01 -- $140,000.00......... 6 746,209.80 0.26
$140,000.01 and up................. 14 2,190,598.65 0.76
----- ---------------- ------
Total ............................ 7,105 $ 289,952,317.99 100.00%
===== ================ ======
S-19
DISTRIBUTION OF ORIGINAL LOAN-TO-VALUE RATIOS(1)
PERCENT OF
CONTRACTS BY
OUTSTANDING
PRINCIPAL
NUMBER OF AGGREGATE PRINCIPAL BALANCE
CONTRACTS AS BALANCE OUTSTANDING AS AS OF
ORIGINAL LOAN-TO-VALUE RATIOS OF CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE
- ------------------------------- ----------------- ------------------------ -------------
0.01% -- 40.00% ............. 97 $ 2,179,662.58 0.75%
40.01% -- 50.00% ............. 127 4,004,176.39 1.38
50.01% -- 60.00% ............. 343 13,296,875.15 4.59
60.01% -- 70.00% ............. 766 32,128,122.14 11.08
70.01% -- 80.00% ............. 1,073 50,192,195.41 17.31
80.01% -- 90.00% ............. 2,086 83,052,879.61 28.64
90.01% -- 100.00% ............. 2,613 105,098,406.71 36.25
----- ---------------- ------
Total ...................... 7,105 $ 289,952,317.99 100.00%
===== ================ ======
- ----------
(1) The definition of "value" is described in the text above these tables.
Manufactured homes, unlike site-built homes, generally depreciate in
value, and it should generally be expected, especially with contracts
with high loan-to-value ratios at origination, that at any time after the
origination of a contract, the market value of the manufactured home
securing that contract may be lower than the outstanding principal
balance of the contract.
S-20
CUT-OFF DATE CONTRACT RATES(1)
PERCENT OF
CONTRACTS BY
OUTSTANDING
PRINCIPAL
NUMBER OF AGGREGATE PRINCIPAL BALANCE
CONTRACTS AS BALANCE OUTSTANDING AS AS OF
CONTRACT RATE OF CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE
- ---------------------------- ----------------- ------------------------ -------------
5.001% -- 6.000% ......... 104 $ 7,354,229.62 2.54%
6.001% -- 7.000% ......... 280 20,359,752.31 7.02
7.001% -- 8.000% ......... 374 23,911,260.93 8.25
8.001% -- 9.000% ......... 879 42,859,618.91 14.78
9.001% -- 10.000% ......... 1,313 58,530,034.36 20.19
10.001% -- 11.000% ......... 1,972 66,669,532.14 22.99
11.001% -- 12.000% ......... 856 29,538,284.78 10.19
12.001% -- 13.000% ......... 506 15,247,708.84 5.26
13.001% -- 14.000% ......... 468 14,631,390.28 5.05
14.001% -- 15.000% ......... 215 6,252,195.32 2.16
15.001% -- 16.000% ......... 80 2,738,782.20 0.94
16.001% -- 17.000% ......... 39 1,326,062.78 0.46
17.001% -- 18.000% ......... 16 490,562.35 0.17
18.001% -- 19.000% ......... 3 42,903.17 0.01
----- ---------------- ------
Total ..................... 7,105 $ 289,952,317.99 100.00%
===== ================ ======
- ----------
(1) This table reflects the Contract Rates for both the fixed rate contracts
and the adjustable rate contracts as of the Cut-off Date. It does not
reflect any subsequent changes in the Contract Rates of the adjustable
rate contracts.
REMAINING MONTHS TO MATURITY
PERCENT OF
CONTRACTS BY
OUTSTANDING
PRINCIPAL
NUMBER OF AGGREGATE PRINCIPAL BALANCE
CONTRACTS AS BALANCE OUTSTANDING AS AS OF
REMAINING MONTHS TO MATURITY OF CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE
- ------------------------------ ----------------- ------------------------ -------------
0 -- 60 ................... 149 $ 1,653,143.74 0.57%
61 -- 120 ................... 1,145 27,043,345.41 9.33
121 -- 180 ................... 2,052 64,984,805.41 22.41
181 -- 240 ................... 2,127 98,347,597.14 33.92
241 -- 300 ................... 843 51,342,481.66 17.71
301 -- 360 ................... 789 46,580,944.63 16.07
----- ---------------- ------
Total ....................... 7,105 $ 289,952,317.99 100.00%
===== ================ ======
S-21
VANDERBILT MORTGAGE AND FINANCE, INC.
GENERAL
The following information supplements the information under the headings
"Vanderbilt Mortgage and Finance, Inc." and "Underwriting Policies" in the
prospectus.
The volume of manufactured housing contracts originated by Vanderbilt for
the periods indicated below and some additional information at the end of those
periods are as follows:
VANDERBILT CONTRACT ORIGINATION
SIX MONTH
YEAR ENDED JUNE 30, PERIOD ENDED
----------------------------------------------------------------------- DECEMBER 31,
1998 1999 2000 2001 2002 2002
------------- --------------- ------------- ------------- ------------- -------------
Principal Balance of
Contracts Originated
(in thousands) .................. $ 801,865 $ 1,085,484 $ 982,570 $ 815,058 $ 912,508 $ 439,467
Number of Contracts
Originated ...................... 24,304 30,165 26,161 21,720 23,204 10,545
Average Contract Size(1) ......... $ 32,993 $ 35,985 $ 37,559 $ 37,526 $ 39,325 $ 41,675
Average Interest Rate(1) ......... 10.51% 10.40% 10.85% 11.67% 10.10% 9.59%
- ----------
(1) As of period end.
The following table shows the size of the portfolio of manufactured
housing contracts serviced by Vanderbilt on the dates indicated:
VANDERBILT CONTRACT SERVICING PORTFOLIO(1)
AT JUNE 30, AT
--------------------------------------------------------- DECEMBER 31,
1998 1999 2000 2001 2002 2002
--------- --------- --------- --------- --------- -------------
Total Number of Contracts
Being Serviced ................. 108,045 119,396 129,814 137,494 152,787 160,488
Originated by Vanderbilt(2)..... 86,245 98,963 108,887 114,317 121,506 124,166
Acquired from other
institutions ................. 21,800 20,433 20,927 23,177 31,281 36,322
- ----------
(1) Excludes (i) contracts serviced by Vanderbilt on behalf of third parties
other than Vanderbilt-sponsored trusts and (ii) contracts serviced for
Vanderbilt by 21st Mortgage as sub-servicer.
(2) Includes contracts purchased from dealers affiliated with Clayton.
S-22
VANDERBILT DELINQUENCY EXPERIENCE(1)
AT JUNE 30, AT
----------------------------------------------------------- DECEMBER 31,
1998 1999 2000 2001 2002 2002
----------- ----------- ----------- ----------- ----------- -------------
Total Number of Contracts Outstanding....... 108,045 119,396 129,814 137,494 152,787 160,488
Vanderbilt Originations ................... 86,245 98,963 108,887 114,317 121,506 124,166
Acquisitions from other institutions ...... 21,800 20,433 20,927 23,177 31,281 36,322
Number of Contracts Delinquent(2):
Total 30 to 59 days past due .............. 2,045 1,274 1,510 1,881 2,250 3,521
Vanderbilt Originations ................. 1,048 1,016 962 1,245 1,403 2,387
Acquisitions from other institutions..... 997 258 548 636 847 1,134
Total 60 to 89 days past due .............. 568 453 511 693 833 1,050
Vanderbilt Originations ................. 268 332 339 496 586 742
Acquisitions from other institutions..... 300 121 172 197 247 308
Total 90 days or more past due ............ 1,486 1,222 1,522 1,994 2,509 3,064
Vanderbilt Originations ................. 547 610 809 1,219 1,315 1,735
Acquisitions from other institutions..... 939 612 713 775 1,194 1,329
Total Contracts Delinquent(3) ............. 4,099 2,949 3,543 4,568 5,592 7,635
Vanderbilt Originations ................. 1,863 1,958 2,110 2,960 3,304 4,864
Acquisitions from other institutions..... 2,236 991 1,433 1,608 2,288 2,771
Total Contracts Delinquent(4) ............. 3,603 2,467 2,841 3,561 4,338 6,251
Vanderbilt Originations ................. 1,711 1,825 1,820 2,428 2,785 4,260
Acquisitions from other institutions..... 1,892 642 1,021 1,133 1,553 1,991
Total Delinquencies as a Percent(5) of
Contracts Outstanding(3) .................. 3.79% 2.47% 2.73% 3.32% 3.66% 4.76%
Vanderbilt Originations ................... 2.16% 1.98% 1.94% 2.59% 2.72% 3.92%
Acquisitions from other institutions ...... 10.26% 4.85% 6.85% 6.94% 7.31% 7.63%
Total Delinquencies as a Percent(5) of
Contracts Outstanding(4) .................. 3.34% 2.07% 2.19% 2.59% 2.84% 3.90%
Vanderbilt Originations ................... 1.98% 1.84% 1.67% 2.12% 2.29% 3.43%
Acquisitions from other institutions ...... 8.68% 3.14% 4.88% 4.89% 4.96% 5.48%
- ----------
(1) Includes data on contracts originated by Vanderbilt and portfolios
acquired by Vanderbilt from other financial institutions. Excludes data
on contracts acquired from or serviced by 21st Mortgage and also excludes
data on contracts serviced by Vanderbilt on behalf of third parties other
than Vanderbilt-sponsored trusts.
(2) Including contracts that were repossessed during the prior 30-day period,
and based on number of days payments are contractually past due (assuming
30-day months). Consequently, a payment due on the first day of a month
is not 30 days delinquent until the first day of the following month.
(3) Including contracts that were repossessed during the prior 30-day period.
(4) Excluding contracts that were repossessed during the prior 30-day period.
(5) By number of contracts.
S-23
The following table sets forth the loan loss/repossession experience of
Vanderbilt and its affiliates for the manufactured housing contracts serviced
by Vanderbilt.
VANDERBILT LOAN LOSS/REPOSSESSION EXPERIENCE(1)
AT OR FOR THE
(DOLLARS IN THOUSANDS) SIX MONTH
AT OR FOR THE YEAR ENDED JUNE 30, PERIOD ENDED
------------------------------------------------------------------------------- DECEMBER 31,
1998 1999 2000 2001 2002 2002
--------------- --------------- --------------- --------------- --------------- --------------
Total Number of Contracts
Serviced ........................ 99,819 119,396 129,814 137,494 152,787 160,488
Vanderbilt Originations ......... 86,245 98,963 108,887 114,317 121,506 124,166
Other Acquisitions .............. 13,574 20,433 20,927 23,177 31,281 36,322
Aggregate Principal Balance of
Contracts Serviced(2) ........... $ 2,340,583 $ 3,204,787 $ 3,713,688 $ 4,120,308 $ 4,813,367 $ 4,994,427
Vanderbilt Originations ......... $ 2,190,183 $ 2,787,204 $ 3,262,055 $ 3,541,402 $ 3,834,366 $ 3,936,870
Other Acquisitions .............. $ 150,400 $ 417,583 $ 451,633 $ 578,906 $ 979,001 $ 1,057,557
Net Losses from Contract
Liquidations:
Total Dollars ................... $ 17,861 $ 39,764 $ 49,751 $ 69,371 $ 96,011 $ 59,423
Vanderbilt Originations ......... $ 15,099 $ 24,671 $ 37,552 $ 56,266 $ 76,353 $ 41,895
Other Acquisitions .............. $ 2,762 $ 15,093 $ 12,199 $ 13,105 $ 19,658 $ 17,529
Percentage of Average Principal
Balance(3) ...................... 0.84% 1.37% 1.44% 1.77% 2.15% 2.42%
Vanderbilt Originations ......... 0.77% 0.99% 1.24% 1.65% 2.07% 2.16%
Other Acquisitions .............. 1.70% 3.68% 2.81% 2.54% 2.52% 3.44%
Total Number of Contracts in
Repossession .................... 1,682 1,857 2,231 2,652 2,790 3,415
Vanderbilt Originations ......... 1,229 1,374 1,774 2,191 2,061 2,676
Other Acquisitions .............. 453 483 457 461 729 739
- ----------
(1) Includes data on contracts originated by Vanderbilt and portfolios
acquired and serviced by Vanderbilt from other financial institutions
(from date of acquisition). Excludes data on contracts acquired from or
serviced by 21st Mortgage and also excludes data on contracts serviced by
Vanderbilt on behalf of third parties other than Vanderbilt-sponsored
trusts.
(2) As of period end.
(3) As a percentage of the average principal balance of all contracts being
serviced during the period. Percentages have been annualized.
The data in the tables above are presented for illustrative purposes only,
and there is no assurance that the delinquency, loan loss and repossession
experience of the assets will be similar to the tables nor can we assure you
that the loan loss and delinquency experience of the trust fund will be similar
to the loan loss and delinquency levels for Vanderbilt's portfolio as shown in
the tables above. The delinquency, loan loss and repossession experience of
manufactured housing contracts historically has been sharply affected by
downturns in regional or local economic conditions. Regional and local economic
conditions are often volatile, and no predictions can be made regarding their
effects on future economic losses that may be incurred as a result of any
repossessions of or foreclosures on assets. See "Risk Factors--The contracts
may have higher than expected delinquencies, defaults or losses" in the
prospectus.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Vanderbilt's loan loss/repossession experience has shown an increase since
1998, and its delinquency experience also has generally trended upward during
that time. Delinquency and loan loss experience may be influenced by a variety
of economic, social and other factors. The mix of the credit quality of the
obligors will vary from time to time and will affect losses and delinquencies.
Although Vanderbilt reviews and revises its underwriting standards from time to
time, Vanderbilt does not believe that its underwriting standards on the whole
have changed materially since 1998 except that there has been an increase in
the loan-to-value ratios over the past several years.
S-24
Management believes that its historical loss experience has been favorably
affected by Vanderbilt's ability to resell repossessed units through Clayton's
dealer network. A replacement servicer may not have similar access and, as a
consequence, the loan loss and repossession experience could be adversely
affected.
21ST MORTGAGE CORPORATION
Vanderbilt has been acquiring loans from 21st Mortgage since 1996 and has
been including these acquired loans in the loan pools sold to Vanderbilt-
sponsored trusts for securitization since that date. 21st Mortgage was founded
in 1995 for the origination, acquisition and servicing of manufactured housing
contracts. Some of the officers of 21st Mortgage were previously officers of
Vanderbilt and the president of Vanderbilt is a member of the board of directors
of 21st Mortgage. Clayton is a 50% stockholder of 21st Mortgage. 21st Mortgage
will act as subservicer for the 21st Mortgage contracts. The servicer, however,
will remain primarily liable for the servicing of the 21st Mortgage contracts.
The underwriting standards employed by 21st Mortgage are similar to the
standards used by Vanderbilt.
While the 21st Mortgage contracts were originated using underwriting
guidelines similar to those of Vanderbilt, there can be no assurance that the
losses and delinquencies on the 21st Mortgage contracts will not be higher than
those on the other contracts.
Contracts sub-serviced for Vanderbilt by 21st Mortgage are tracked
separately from contracts directly serviced by Vanderbilt, and are not included
in the tables for Vanderbilt above. The tables below reflect 21st Mortgage's
servicing portfolio in Vanderbilt--sponsored trusts for which Vanderbilt is the
servicer and 21st Mortgage is the sub-servicer.
S-25
21ST MORTGAGE DELINQUENCY EXPERIENCE
AS OF MAY 31, AS OF JUNE 30, AS OF
----------------------- ------------------------------------ DECEMBER 31,
1998 1999 2000 2001 2002 2002
---------- ---------- ---------- ---------- ---------- -------------
Number of Contracts ..................... 6,494 9,827 10,842 11,471 22,149 25,828
Number of Contracts Delinquent(1):
Total 30 to 59 days past due ........... 66 93 152 212 508 512
Total 60 to 89 days past due ........... 19 55 63 100 142 238
Total 90 days or more past due ......... 52 176 205 302 128 460
Total Contracts Delinquent(2) ........... 137 324 420 614 778 1,210
Total Contracts Delinquent(3) ........... 97 205 231 348 650 875
Total Delinquencies as a Percent (4) of
Contracts (2) .......................... 2.11% 3.30% 3.87% 5.35% 3.51% 4.68%
Total Delinquencies as a Percent (4) of
Contracts (3) .......................... 1.49% 2.09% 2.13% 3.03% 2.93% 3.39%
- ----------
(1) Including contracts that were repossessed during the prior 30-day period,
and based on number of days payments are contractually past due (assuming
30-day months). Consequently, a payment due on the first day of a month
is not 30 days delinquent until the first day of the following month.
(2) Including contracts that were repossessed during the prior 30-day period.
(3) Excluding contracts that were repossessed during the prior 30-day period.
(4) By number of contracts.
21ST MORTGAGE LOAN LOSS/REPOSSESSION EXPERIENCE
AS OF MAY 31,
-----------------------------------
1998 1999
----------------- -----------------
Number of Contracts .................... 6,494 9,827
Aggregate Principal Balance(1) ......... $240,531,461 $385,941,633
Net Losses from Contract
Liquidations .......................... $ 956,563 $ 2,467,310
Percentage of Average(2) ............... 0.58% 0.79%
AS OF JUNE 30, AS OF
----------------------------------------------------- DECEMBER 31,
2000 2001 2002 2002
----------------- ----------------- ----------------- -----------------
Number of Contracts .................... 10,842 11,471 22,149 25,828
Aggregate Principal Balance(1) ......... $426,181,133 $443,348,987 $863,093,326 $990,922,637
Net Losses from Contract
Liquidations .......................... $ 4,260,611 $ 6,587,271 $ 8,779,034 $ 9,009,898
Percentage of Average(2) ............... 0.97% 1.52% 1.34% 1.94%
- ----------
(1) As of period end.
(2) As a percentage of the average principal balance of all contracts being
serviced during the period. Percentages have been annualized. The data in
the tables above are presented for illustrative purposes only, and there
is no assurance that the delinquency, loan loss and repossession
experience of the assets will be similar to the tables nor can we assure
you that the loan loss and delinquency experience of the trust fund will
be similar to the loan loss and delinquency levels for Vanderbilt's
portfolio as shown in the tables above. The delinquency, loan loss and
repossession experience of manufactured housing contracts historically
has been sharply affected by downturns in regional or local economic
conditions. Regional and local economic conditions are often volatile,
and no predictions can be made regarding their effects on future economic
losses that may be incurred as a result of any repossessions of or
foreclosures on assets. See "Risk Factors--The contracts may have higher
than expected delinquencies, defaults or losses" in the prospectus.
S-26
RATIO OF EARNINGS TO FIXED CHARGES FOR CLAYTON
Described below are Clayton's ratios of earnings to fixed charges for the
past five years ended June 30, 2002 and the six-month period ended December 31,
2002. For the purposes of compiling these ratios, earnings consist of earnings
before income taxes plus fixed charges. Fixed charges consist of interest
expense and the interest portion of rent expense.
FOR THE
SIX MONTH
FOR YEAR ENDED JUNE 30, PERIOD ENDED
-------------------------------------------------------------- DECEMBER 31,
1998 1999 2000 2001 2002 2002
---------- ---------- ---------- ---------- ---------- -------------
Ratio of Earnings to Fixed Charges* ......... 41.23 12.48 28.65 22.89 19.26 18.04
- ----------
* For additional financial information we refer you to Clayton's annual
10-K report for fiscal years ended June 30, 2000, June 30, 2001 and June
30, 2002 and the quarterly 10-Q reports for the three month period ended
September 30, 2002 and the six month period ended December 31, 2002,
which have been filed with the SEC.
S-27
YIELD AND PREPAYMENT CONSIDERATIONS
The contracts have maturities at origination ranging from 12 to 360
months, but may be prepaid in full or in part at any time. The prepayment
experience of the contracts (including prepayments due to liquidations of
defaulted contracts) will affect the average life of the certificates. The
weighted average life of, and, if purchased at other than par, the yield to
maturity on, the Offered Certificates will relate to the rate of payment of
principal of the contracts, including, for this purpose, prepayments,
liquidations due to defaults, casualties and condemnations. Based on
Vanderbilt's experience with the portfolio of conventional manufactured housing
contracts that it services, Vanderbilt anticipates that a number of contracts
will be prepaid in full prior to their maturity. A number of factors, including
homeowner mobility, general and regional economic conditions and prevailing
interest rates may influence prepayments. In addition, repurchases of contracts
on account of breaches of representations and warranties as described in the
prospectus under "Description of the Certificates--Conveyance of Contracts"
will have the effect of prepayment of those contracts and therefore will affect
the life of the certificates. Most of the contracts contain provisions that
prohibit the owner from selling the manufactured home without the prior consent
of the holder of the related contract. Those provisions are similar to
"due-on-sale" clauses and may not be enforceable in some states. See "Some
Legal Aspects of the Contracts--Transfers of Manufactured Homes; Enforceability
of `Due-on-Sale' Clauses" in the prospectus. The initial servicer's policy is
to permit most sales of manufactured homes where the proposed buyer meets the
initial servicer's then current underwriting standards and enters into an
assumption agreement. See "--Weighted Average Lives of the Offered
Certificates" below and "Maturity and Prepayment Considerations" in the
prospectus.
Each monthly accrual of interest on a contract is calculated at
one-twelfth of the product of the Contract Rate and the principal balance
outstanding on the scheduled payment date for that contract in the preceding
month. The remittance rate with respect to each certificate will be calculated
similarly.
The rate of prepayment on fixed rate obligations (such as the fixed rate
contracts) is affected by prevailing market rates for contracts of a comparable
term and risk level. When the market interest rate is below the contract APR,
obligors may have an increased incentive to refinance their contracts.
Depending on prevailing market rates, the future outlook for market rates and
economic conditions generally, some obligors may sell or refinance their
contracts in order to realize their equity in the manufactured house, to meet
cash flow needs or to make other investments. However, no assurance can be
given as to the level of prepayments that the fixed rate contracts will
experience.
The allocation of distributions to the certificateholders in accordance
with the pooling and servicing agreement will have the effect of accelerating
the amortization of the Senior Certificates in the sequence indicated under
"Description of the Certificates--Distributions" from the amortization that
would be applicable if distributions in respect of the applicable Formula
Principal Distribution Amount were made pro rata according to the respective
principal balances of each class of certificates. As described under
"Description of the Certificates--Senior/Subordinate Structure" in this
prospectus supplement, to the extent that, on any remittance date, the
Available Distribution Amount is not sufficient to permit a full distribution
of the applicable Formula Principal Distribution Amount or the portion due to
the class of certificates entitled to it, the effect will be to delay the
amortization of that class of certificates. If a purchaser of Offered
Certificates purchases them at a discount and calculates its anticipated yield
to maturity based on an assumed rate of payment of principal on those Offered
Certificates that is faster than the rate actually realized, that purchaser's
actual yield to maturity will be lower than the yield so calculated by that
purchaser.
The effective yield to each holder of an Offered Certificate (other than
Class AV and Class A-1) will be below that otherwise produced by the applicable
remittance rate and the purchase price of that holder's certificate because,
while interest will accrue in respect of each calendar month, the distribution
of that interest to the holders will be made on the 7th day (or, if that day is
not a business day, the next succeeding business day) of the month following
the Due Period in which it accrues.
The rate of distributions of principal of the Offered Certificates and the
yield to maturity of the Offered Certificates also will be directly related to
the rate of payment of principal (including
S-28
prepayments) of the contracts. The rate of principal distributions on the
Offered Certificates will be affected by the amortization schedules of the
contracts and the rate of principal payments on the contracts (including
prepayments due to liquidations upon default). In general, the contracts may be
prepaid by the obligors at any time without payment of any prepayment fee or
penalty.
The rate of principal payments on the Class M-1 Certificates and the Class
B Certificates, the aggregate amount of distributions on the Class M-1
Certificates and the Class B Certificates and the yield to maturity of the
Class M-1 Certificates and the Class B Certificates will be affected by the
rate of obligor defaults resulting in losses on Liquidated Contracts, by the
severity of those losses and by the timing of those losses. If a purchaser of
Class M-1 Certificates or Class B Certificates calculates its anticipated yield
based on an assumed rate of payment of principal on the Class M-1 Certificates
or the Class B Certificates that is faster than the rate actually realized, the
purchaser's actual yield to maturity will be lower than that so calculated. The
timing of losses on liquidated contracts will also affect an investor's actual
yield to maturity, even if the rate of defaults and severity of losses are
consistent with the investor's expectations. If the protection afforded to the
Class M-1 Certificate holders by the subordination of the Class B Certificates
is exhausted, the Class M-1 Certificate holders will bear all losses and
delinquencies on the contracts and will incur a loss on their investment. If
the protection afforded to the Class B-1 Certificate holders by the
subordination of the Class B-2 Certificates is exhausted, the Class B-1
Certificate holders will bear all losses and delinquencies on the contracts and
will incur a loss on their investment. If the protection afforded to the Class
B-2 Certificate holders by the limited guarantee is unavailable or the
alternate credit enhancement is exhausted, the Class B-2 Certificate holders
will bear all losses and delinquencies on the contracts and will incur a loss
on their investment.
There can be no assurance that the delinquency or repossession experience
described in this prospectus supplement under "Vanderbilt Mortgage and Finance,
Inc." will be representative of the results that may be experienced with
respect to the contracts. There can be no assurance as to the delinquency,
repossession or loss experience with respect to the contracts.
As described in this prospectus supplement under "Description of the
Certificates--Senior/Subordinate Structure" and "--Losses on Liquidated
Contracts" on any remittance date on or after the remittance date, if any, on
which the Class A Certificate principal balance is greater than the Pool
Scheduled Principal Balance, if the Available Distribution Amount is not
sufficient to permit a full distribution of the Formula Principal Distribution
Amount to the class of Senior Certificate holders then entitled to that amount,
the Class A-5 Certificate holders will absorb:
o all losses on each liquidated contract in the amount by which its
liquidation proceeds (net of some liquidation expenses and applicable Advances)
are less than its unpaid principal balance plus accrued and unpaid interest
thereon at the weighted average remittance rate plus the percentage rate used
to calculate the Monthly Servicing Fee;
o other shortfalls in the Available Distribution Amount; and
o will incur a loss on their investments. See "Description of the
Certificates--Distributions" in this prospectus supplement.
On any remittance date on or after the remittance date, if any, on which
the principal balance of the Senior Certificates is greater than the Pool
Scheduled Principal Balance, if the Available Distribution Amount is not
sufficient to permit a full distribution of the Formula Principal Distribution
Amounts to the Senior Certificate holders, the Senior Certificate holders will
absorb:
o all losses on each liquidated contract in the amount by which its
liquidation proceeds (net of liquidation expenses and applicable Advances) are
less than its unpaid principal balance plus accrued and unpaid interest thereon
at the weighted average remittance rate plus the percentage rate used to
calculate the Monthly Servicing Fee;
o other shortfalls in the Available Distribution Amount; and
o a loss on their investments. See "Description of the
Certificates--Distributions" in this prospectus supplement.
S-29
Vanderbilt (if it is no longer the servicer) and the servicer each have
the option to repurchase the contracts then outstanding and any other property
constituting the trust fund if on any remittance date the aggregate scheduled
principal balances of the contracts at the end of the related due period are
less than 10% of the Cut-off Date Pool Principal Balance. See "Description of
the Certificates--Optional Termination" in this prospectus supplement. The
exercise of that option would effect the early retirement of the then
outstanding certificates.
In the event that there were a sufficiently large number of delinquencies
on the contracts in any Due Period that were not covered by Monthly Advances as
described in this prospectus supplement, the amounts paid to certificateholders
could be less than the amount of principal and interest that would otherwise be
payable on the Offered Certificates with respect to that Due Period. In that
event, even if delinquent payments on the contracts were eventually recovered
upon liquidation, since the amounts received would not include interest on
delinquent interest payments, the effective yield on the contracts would be
reduced, and under some circumstances it is possible that sufficient amounts
might not be available for the ultimate payment of all principal of the Offered
Certificates plus accrued interest thereon at the related remittance rate, thus
also reducing the effective yield on the Offered Certificates.
While partial prepayments of the principal of the contracts are applied on
Due Dates, obligors are not required to pay interest on the contracts after the
date of a full prepayment of principal. As a result, full prepayments in
advance of the related Due Dates for those contracts in any Due Period will
reduce the amount of interest received from obligors during that Due Period to
less than one month's interest. On the other hand, when a contract (other than
a bi-weekly contract) is prepaid in full during any period, but after the Due
Date for that Contract in that Due Period, the effect will be to increase the
amount of interest received from the related obligor during that Due Period to
more than one month's interest. If a sufficient number of contracts are prepaid
in full in a given Due Period in advance of their respective Due Dates,
interest payable on all of the contracts during that Due Period may be less
than the interest payable on the related classes of certificates with respect
to that Due Period. In addition, because the principal balance of the bi-weekly
contracts are reduced on a bi-weekly basis, the amount of interest due from
obligors on those contracts is less than that which would have accrued if those
contracts were amortized on a monthly basis. As a result, the trust fund may
not receive sufficient monies to pay the interest on those certificates in the
amounts described in this prospectus supplement under "Description of the
Certificates--Distributions" and to make a full distribution to the related
certificateholders of the Formula Principal Distribution Amounts allocable to
them. Although no assurance can be given in this matter, Vanderbilt does not
anticipate that the net shortfall of interest received because of prepayments
in full or the amortization of the bi-weekly contracts in any Due Period would
be great enough, in the absence of delinquencies and Liquidation Losses, to
reduce the Available Distribution Amount for a remittance date below the amount
required to be distributed to the certificateholders on that remittance date in
the absence of prepayment interest shortfalls.
Each scheduled payment on a bi-weekly contract in any Due Period will
contain only two weeks of interest rather than one month's interest. In
addition, the second, and in some Due Periods the third scheduled payment in
each Due Period will be calculated on a principal balance that is lower than
the principal balance at the beginning of that Due Period. These
characteristics may result in the interest due on a bi-weekly contract in a
particular Due Period being less than thirty days' interest on the principal
balance thereof at the beginning of the Due Period.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the contracts on the weighted average lives of the Offered
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the contracts.
Weighted average life refers to the average amount of time from the date
of issuance of a security until each dollar of principal of that security will
be repaid to the investor. The weighted average lives of the Offered
Certificates will be affected by the rate at which principal on the contracts
is paid. Principal payments on contracts may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
repayments and liquidations due to default or other dispositions of
S-30
contracts). Prepayments on contracts may be measured by a prepayment standard
or model. The prepayment model used in this prospectus supplement is based on
an assumed rate of prepayment each month of the then unpaid principal balance
of a pool of new contracts. 100% of the prepayment model assumes prepayment
rates of 3.7% per annum of the then unpaid principal balance of those contracts
in the first month of the life of the contracts and an additional 0.1% per
annum in each month thereafter until the 24th month. Beginning in the 24th
month and in each month thereafter during the life of the contracts, 100% of
the prepayment model assumes a constant prepayment rate of 6.0% per annum.
As used in the following tables, "175% of the prepayment model" assumes
the contracts will prepay at rates equal to 175% of the prepayment model
assumed prepayment rates; "200% of the prepayment model" assumes the contracts
will prepay at rates equal to 200% of the prepayment model assumed prepayment
rates; "225% of the prepayment model" assumes the contracts will prepay at
rates equal to 225% of the prepayment model assumed prepayment rates; "250% of
the prepayment model" assumes the contracts will prepay at rates equal to 250%
of the prepayment model assumed prepayment rates; and "275% of the prepayment
model" assumes the contracts will prepay at rates equal to 275% of the
prepayment model assumed prepayment rates.
There is no assurance, however, that prepayments of the contracts will
conform to any level of the prepayment model, and no representation is made
that the contracts will prepay at the prepayment rates shown or any other
prepayment rate. The rate of principal payments on pools of manufactured
housing contracts is influenced by a variety of economic, geographic, social
and other factors, including the level of interest rates and the rate at which
manufactured homeowners sell their manufactured homes or default on their
contracts. Other factors affecting prepayment of contracts include changes in
obligors' housing needs, job transfers, unemployment and obligors' net equity
in the manufactured homes. In the case of mortgage loans secured by site-built
homes, in general, if prevailing interest rates fall significantly below the
interest rates on those mortgage loans, the mortgage loans are likely to be
subject to higher prepayment rates than if prevailing interest rates remain at
or above the rates borne by those mortgage loans. Conversely, if prevailing
interest rates rise above the interest on those mortgage loans, the rate of
prepayment would be expected to decrease. In the case of manufactured housing
contracts, the outstanding principal balances are, in general, much smaller
than mortgage loan balances and the reduction or increase in the size of the
monthly payments on contracts of the same maturity and principal balance
arising from a change in the interest rate on those contracts is generally much
smaller. Consequently, changes in prevailing interest rates may not have a
similar effect, or may have a similar effect, but to a smaller degree, on the
prepayment rates on manufactured housing contracts.
ASSUMPTIONS
The tables described below assume that there are no delinquencies on the
contracts and that there will be a sufficient Available Distribution Amount to
distribute interest on the certificates and the Formula Principal Distribution
Amount to the certificateholders then entitled to the interest.
The percentages and weighted average lives in the following tables were
determined assuming that:
o scheduled interest and principal payments on the contracts are
received in a timely manner and prepayments on the contracts are made at the
indicated percentages of the prepayment model;
o the servicer or seller exercises its right of optional termination
described herein on the first permissible date;
o the contracts will, as of the Cut-off Date, be grouped into 5 pools
having the characteristics described below under "Assumed Contract
Characteristics";
o LIBOR remains constant at 1.34% per annum;
o none of the contracts provides for bi-weekly payments;
o none of the contracts are equity builder loans;
o the original class principal balance and the remittance rate of each
class of certificates is as described under "Summary Information";
S-31
o no interest shortfalls will arise in connection with prepayment in
full of the contracts;
o there will be no losses on the contracts;
o the Contract Pool Performance Tests are satisfied;
o the certificates are purchased on February 26, 2003;
o the certificates pay on the 7th day of each month, regardless of
whether the 7th is a Business Day, commencing in March 2003; and
o no Deficiency Event occurs.
No representation is made that the contracts will experience delinquencies
or losses at the respective rates assumed above or at any other rates.
ASSUMED CONTRACT CHARACTERISTICS
LEVEL PAY CONTRACTS
REMAINING ORIGINAL
CURRENT TERM TO TERM TO
PRINCIPAL CURRENT MATURITY MATURITY
POOL BALANCE APR (MONTHS) (MONTHS)
- ----------- ------------------- ------------ ----------- ---------
1 ......... $ 28,710,711.29 10.904% 98 102
2 ......... $ 65,358,231.06 10.707% 163 165
3 ......... $ 98,060,476.75 9.962% 222 223
4 ......... $ 50,744,550.15 8.689% 280 281
5 ......... $ 47,076,552.95 10.555% 350 354
Since the following tables were prepared on the basis of the assumptions
in the preceding paragraphs, there may be discrepancies between the
characteristics of the actual contracts and the characteristics of the
contracts assumed in preparing the tables. Any discrepancy may have an effect
upon the percentages of the original principal balances of the Offered
Certificates, set forth in the tables. In addition, since the actual contracts
and the trust fund have characteristics which differ from those assumed in
preparing the tables set forth below, the distributions of principal on each
class of certificates may be made earlier or later than as indicated in the
tables.
It is not likely the contracts will prepay at any constant percentage of
the prepayment model to maturity or that all contracts will prepay at the same
rate. In addition, the diverse remaining terms to maturity of the contracts
(which include recently originated contracts) could produce slower
distributions of principal than as indicated in the tables at the various
percentages of the prepayment model specified even if the weighted average
remaining term to maturity of the contracts is the same as the weighted average
remaining term to maturity of the assumed contract characteristics.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed in this prospectus supplement.
Based on the assumptions discussed above, the following tables indicate
the resulting weighted average lives of the certificates and set forth the
percentage of the original class principal balance of each certificate that
would be outstanding after each of the remittance dates shown at the indicated
percentages of the prepayment model. In each of the tables the weighted average
life of a class of certificates is determined by multiplying the amounts of
each principal distribution by the number of years from the initial date of
issuance of that class of certificates to the related remittance date, summing
the results, and dividing that sum by the principal balance of that class of
certificates at issuance.
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PERCENT OF THE ORIGINAL CLASS PRINCIPAL BALANCE OF THE CLASS AV
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
PREPAYMENT (% OF PREPAYMENT MODEL)
----------------------------------------------------
REMITTANCE DATE 175% 200% 225% 250% 275%
- -------------------------------- -------- -------- -------- -------- --------
Initial ........................ 100 100 100 100 100
February 7, 2004 ............... 87 86 84 83 82
February 7, 2005 ............... 73 70 68 65 62
February 7, 2006 ............... 60 56 52 49 45
February 7, 2007 ............... 48 43 39 35 31
February 7, 2008 ............... 37 32 28 23 19
February 7, 2009 ............... 30 26 21 17 14
February 7, 2010 ............... 24 20 16 13 9
February 7, 2011 ............... 19 15 12 8 6
February 7, 2012 ............... 15 11 8 5 3
February 7, 2013 ............... 11 8 5 3 1
February 7, 2014 ............... 8 5 3 0 0
February 7, 2015 ............... 5 3 0 0 0
February 7, 2016 ............... 3 0 0 0 0
February 7, 2017 ............... 0 0 0 0 0
Weighted Average Life ......... 4.7 4.2 3.8 3.5 3.2
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PERCENT OF THE ORIGINAL CLASS PRINCIPAL BALANCE OF THE CLASS A-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
PREPAYMENT (% OF PREPAYMENT MODEL)
----------------------------------------------------
REMITTANCE DATE 175% 200% 225% 250% 275%
- -------------------------------- -------- -------- -------- -------- --------
Initial ........................ 100 100 100 100 100
February 7, 2004 ............... 60 55 51 47 43
February 7, 2005 ............... 15 7 0 0 0
February 7, 2006 ............... 0 0 0 0 0
February 7, 2007 ............... 0 0 0 0 0
February 7, 2008 ............... 0 0 0 0 0
February 7, 2009 ............... 0 0 0 0 0
February 7, 2010 ............... 0 0 0 0 0
February 7, 2011 ............... 0 0 0 0 0
February 7, 2012 ............... 0 0 0 0 0
February 7, 2013 ............... 0 0 0 0 0
February 7, 2014 ............... 0 0 0 0 0
February 7, 2015 ............... 0 0 0 0 0
February 7, 2016 ............... 0 0 0 0 0
February 7, 2017 ............... 0 0 0 0 0
Weighted Average Life ......... 1.2 1.1 1.0 0.9 0.9
S-34
PERCENT OF THE ORIGINAL CLASS PRINCIPAL BALANCE OF THE CLASS A-2
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
PREPAYMENT (% OF PREPAYMENT MODEL)
----------------------------------------------------
REMITTANCE DATE 175% 200% 225% 250% 275%
- -------------------------------- -------- -------- -------- -------- --------
Initial ........................ 100 100 100 100 100
February 7, 2004 ............... 100 100 100 100 100
February 7, 2005 ............... 100 100 98 90 82
February 7, 2006 ............... 73 61 49 38 27
February 7, 2007 ............... 34 20 7 0 0
February 7, 2008 ............... * 0 0 0 0
February 7, 2009 ............... 0 0 0 0 0
February 7, 2010 ............... 0 0 0 0 0
February 7, 2011 ............... 0 0 0 0 0
February 7, 2012 ............... 0 0 0 0 0
February 7, 2013 ............... 0 0 0 0 0
February 7, 2014 ............... 0 0 0 0 0
February 7, 2015 ............... 0 0 0 0 0
February 7, 2016 ............... 0 0 0 0 0
February 7, 2017 ............... 0 0 0 0 0
Weighted Average Life ......... 3.6 3.3 3.0 2.8 2.6
- ----------
* Indicates an amount greater than zero but less than 0.5% of the Initial
Principal Balance of such Class.
S-35
PERCENT OF THE ORIGINAL CLASS PRINCIPAL BALANCE OF THE CLASS A-3
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
PREPAYMENT (% OF PREPAYMENT MODEL)
----------------------------------------------------
REMITTANCE DATE 175% 200% 225% 250% 275%
- -------------------------------- -------- -------- -------- -------- --------
Initial ........................ 100 100 100 100 100
February 7, 2004 ............... 100 100 100 100 100
February 7, 2005 ............... 100 100 100 100 100
February 7, 2006 ............... 100 100 100 100 100
February 7, 2007 ............... 100 100 100 88 65
February 7, 2008 ............... 100 71 44 18 0
February 7, 2009 ............... 60 32 6 0 0
February 7, 2010 ............... 24 0 0 0 0
February 7, 2011 ............... 0 0 0 0 0
February 7, 2012 ............... 0 0 0 0 0
February 7, 2013 ............... 0 0 0 0 0
February 7, 2014 ............... 0 0 0 0 0
February 7, 2015 ............... 0 0 0 0 0
February 7, 2016 ............... 0 0 0 0 0
February 7, 2017 ............... 0 0 0 0 0
Weighted Average Life ......... 6.3 5.6 5.0 4.5 4.2
S-36
PERCENT OF THE ORIGINAL CLASS PRINCIPAL BALANCE OF THE CLASS A-4
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
PREPAYMENT (% OF PREPAYMENT MODEL)
-----------------------------------------------------
REMITTANCE DATE 175% 200% 225% 250% 275%
- -------------------------------- --------- -------- -------- -------- --------
Initial ........................ 100 100 100 100 100
February 7, 2004 ............... 100 100 100 100 100
February 7, 2005 ............... 100 100 100 100 100
February 7, 2006 ............... 100 100 100 100 100
February 7, 2007 ............... 100 100 100 100 100
February 7, 2008 ............... 100 100 100 100 95
February 7, 2009 ............... 100 100 100 86 68
February 7, 2010 ............... 100 98 79 62 46
February 7, 2011 ............... 93 74 57 41 28
February 7, 2012 ............... 73 55 40 26 15
February 7, 2013 ............... 55 39 25 14 4
February 7, 2014 ............... 39 25 13 0 0
February 7, 2015 ............... 25 13 0 0 0
February 7, 2016 ............... 13 0 0 0 0
February 7, 2017 ............... 0 0 0 0 0
Weighted Average Life ......... 10.5 9.5 8.6 7.8 7.0
S-37
PERCENT OF THE ORIGINAL CLASS PRINCIPAL BALANCE OF THE CLASS A-5
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
PREPAYMENT (% OF PREPAYMENT MODEL)
---------------------------------------------------------
REMITTANCE DATE 175% 200% 225% 250% 275%
- -------------------------------- --------- --------- --------- --------- ---------
Initial ........................ 100 100 100 100 100
February 7, 2004 ............... 100 100 100 100 100
February 7, 2005 ............... 100 100 100 100 100
February 7, 2006 ............... 100 100 100 100 100
February 7, 2007 ............... 100 100 100 100 100
February 7, 2008 ............... 100 100 100 100 100
February 7, 2009 ............... 100 100 100 100 100
February 7, 2010 ............... 100 100 100 100 100
February 7, 2011 ............... 100 100 100 100 100
February 7, 2012 ............... 100 100 100 100 100
February 7, 2013 ............... 100 100 100 100 100
February 7, 2014 ............... 100 100 100 0 0
February 7, 2015 ............... 100 100 0 0 0
February 7, 2016 ............... 100 0 0 0 0
February 7, 2017 ............... 0 0 0 0 0
Weighted Average Life ......... 13.4 12.5 11.7 10.9 10.3
S-38
PERCENT OF THE ORIGINAL CLASS PRINCIPAL BALANCE OF THE CLASS M-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
PREPAYMENT (% OF PREPAYMENT MODEL)
----------------------------------------------------
REMITTANCE DATE 175% 200% 225% 250% 275%
- -------------------------------- -------- -------- -------- -------- --------
Initial ........................ 100 100 100 100 100
February 7, 2004 ............... 100 100 100 100 100
February 7, 2005 ............... 100 100 100 100 100
February 7, 2006 ............... 100 100 100 100 100
February 7, 2007 ............... 100 100 100 100 100
February 7, 2008 ............... 100 100 100 100 100
February 7, 2009 ............... 85 83 82 81 79
February 7, 2010 ............... 71 69 67 64 62
February 7, 2011 ............... 59 56 54 51 48
February 7, 2012 ............... 50 47 44 41 38
February 7, 2013 ............... 42 38 35 32 29
February 7, 2014 ............... 34 31 28 0 0
February 7, 2015 ............... 28 25 0 0 0
February 7, 2016 ............... 22 0 0 0 0
February 7, 2017 ............... 0 0 0 0 0
Weighted Average Life ......... 9.4 9.0 8.6 8.3 8.0
S-39
PERCENT OF THE ORIGINAL CLASS PRINCIPAL BALANCE OF THE CLASS B-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
PREPAYMENT (% OF PREPAYMENT MODEL)
----------------------------------------------------
REMITTANCE DATE 175% 200% 225% 250% 275%
- -------------------------------- -------- -------- -------- -------- --------
Initial ........................ 100 100 100 100 100
February 7, 2004 ............... 100 100 100 100 100
February 7, 2005 ............... 100 100 100 100 100
February 7, 2006 ............... 100 100 100 100 100
February 7, 2007 ............... 100 100 100 100 100
February 7, 2008 ............... 100 100 100 100 100
February 7, 2009 ............... 63 60 56 53 49
February 7, 2010 ............... 30 24 19 13 8
February 7, 2011 ............... 1 0 0 0 0
February 7, 2012 ............... 0 0 0 0 0
February 7, 2013 ............... 0 0 0 0 0
February 7, 2014 ............... 0 0 0 0 0
February 7, 2015 ............... 0 0 0 0 0
February 7, 2016 ............... 0 0 0 0 0
February 7, 2017 ............... 0 0 0 0 0
Weighted Average Life ......... 6.4 6.3 6.2 6.1 6.0
S-40
PERCENT OF THE ORIGINAL CLASS PRINCIPAL BALANCE OF THE CLASS B-2
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT MODEL
PREPAYMENT (% OF PREPAYMENT MODEL)
----------------------------------------------------------
REMITTANCE DATE 175% 200% 225% 250% 275%
- -------------------------------- --------- --------- --------- -------- --------
Initial ........................ 100 100 100 100 100
February 7, 2004 ............... 100 100 100 100 100
February 7, 2005 ............... 100 100 100 100 100
February 7, 2006 ............... 100 100 100 100 100
February 7, 2007 ............... 100 100 100 100 100
February 7, 2008 ............... 100 100 100 100 100
February 7, 2009 ............... 100 100 100 100 100
February 7, 2010 ............... 100 100 100 100 100
February 7, 2011 ............... 100 96 91 86 82
February 7, 2012 ............... 84 79 74 69 64
February 7, 2013 ............... 70 65 59 54 50
February 7, 2014 ............... 58 52 47 0 0
February 7, 2015 ............... 47 42 0 0 0
February 7, 2016 ............... 37 0 0 0 0
February 7, 2017 ............... 0 0 0 0 0
Weighted Average Life ......... 11.4 10.8 10.3 9.8 9.3
S-41
DESCRIPTION OF THE CERTIFICATES
The certificates will be issued in accordance with the pooling and
servicing agreement. A copy of a general form of a pooling and servicing
agreement has been filed with the SEC. A copy of the execution form of the
pooling and servicing agreement (without some exhibits) will be filed with the
SEC after the initial issuance of the certificates. The following summaries
together with the information in the prospectus under "Description of the
Certificates" describe the material provisions of the pooling and servicing
agreement. The description of the material provisions of the pooling and
servicing agreement does not purport to be complete and is subject to, and are
qualified in its entirety by reference to, the provisions of the pooling and
servicing agreement. When particular provisions or terms used in the pooling
and servicing agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference.
GENERAL
The trust fund will issue ten classes of certificates. Each class (other
than the Class R Certificate) will be issued in fully registered form only, in
denominations of $50,000 and integral multiples of $1 in excess of $50,000,
except for a denomination representing the remainder of a class of
certificates. The undivided percentage interest of each class of certificates
in the distributions on those certificates will be equal to the percentage
obtained from dividing the denomination of that certificate by the original
class principal balance of that class of certificates. Physical certificates,
if issued, will be transferable and exchangeable at the corporate trust office
of the trustee. No service charge will be made for any registration of exchange
or transfer, but the trustee may require payment of a sum sufficient to cover
any tax or other governmental charge.
The certificates evidence undivided interests in the contract pool and
other property held in the trust fund for the benefit of the
certificateholders. The certificates will consist of ten classes of
certificates consisting of five classes of Senior Certificates (the Class AV
Certificates, the Class A-1 Certificates, the Class A-2 Certificates, the Class
A-3 Certificates and the Class A-4 Certificates), four classes of Subordinated
Certificates (the Class A-5 Certificates, the Class M-1 Certificates, the Class
B-1 Certificates and the Class B-2 Certificates), and one class of Residual
Certificates (the Class R Certificate). The Class AV Certificates, Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates and Class A-4
Certificates will evidence in the aggregate approximate initial 24.14%, 17.55%,
17.15%, 8.98% and 11.18% undivided interests, respectively, in the contract
pool. The Class A-5 Certificates, Class M-1 Certificates, Class B-1
Certificates and Class B-2 Certificates will evidence in the aggregate
approximate initial 5.50%, 4.50%, 4.50% and 6.50% undivided interests,
respectively, in the contract pool.
The trust fund includes:
o the contract pool, including all rights to receive payments on the
contracts received on or after the Cut-off Date,
o the amounts held from time to time in the Certificate Account and the
yield maintenance account maintained by the trustee in accordance with
the pooling and servicing agreement,
o any property which initially secured a contract and which is acquired
in the process of realizing on the contract,
o the right to payments under the yield maintenance agreement, and
o the proceeds of all insurance policies described in this prospectus
supplement.
Vanderbilt will cause the contracts to be assigned to the trustee or a
co-trustee. Vanderbilt, as servicer, will service the contracts in accordance
with the pooling and servicing agreement. The servicer may perform any of its
servicing obligations under the pooling and servicing agreement through one or
more subservicers. In spite of any subservicing arrangement, the servicer will
remain liable for its servicing duties and obligations under the pooling and
servicing agreement as if the servicer alone were servicing
S-42
the contracts. The contract documents will be held for the benefit of the
trustee or a co-trustee by the servicer (other than some documents related to
the Land-and-Home Contracts and the mortgage loans which will be held by a
custodian on behalf of the trustee).
Distributions of principal and interest on the certificates will be made
on the 7th day of each month, or, if that day is not a Business Day, the next
succeeding Business Day beginning in March 2003 to the persons in whose names
the certificates are registered at the close of business on the related Record
Date. The final distribution in retirement of the certificates will be made
only upon presentation and surrender of the certificates at the office or
agency of the trustee in New York, New York specified in the final distribution
notice to certificateholders.
CONVEYANCE OF THE CONTRACTS
In addition to the representations and warranties described in the
prospectus under "Description of the Certificates--Conveyance of Contracts,"
Vanderbilt has also made some warranties with respect to the contracts in the
aggregate, including that:
o the aggregate principal amount payable by the obligors as of the
Cut-off Date equals the Cut-off Date Pool Principal Balance;
o approximately 69.92% of the Cut-off Date Principal Balance is
attributable to loans to purchase new manufactured homes or mortgaged
properties, approximately 15.08% of the Cut-off Date Principal Balance
is attributable to loans to purchase used manufactured homes and
approximately 15.00% of the Cut-off Date Principal Balance is
attributable to loans to purchase repossessed manufactured homes;
o no contract has a remaining maturity of more than 360 months; and
o the date of origination of each contract is on or after February 17,
1988.
PAYMENTS ON CONTRACTS
The trustee will establish and maintain the Certificate Account at an
Eligible Institution. Funds in the Certificate Account will be invested in one
or more of the investments specified in the pooling and servicing agreement,
that will mature or be subject to redemption not later than the Business Day
preceding the applicable monthly remittance date. The above-mentioned
investments include obligations of the United States or of any agency backed by
the full faith and credit of the United States; federal funds, certificates of
deposit, time deposits and bankers' acceptances sold by eligible financial
institutions; commercial paper rated P-1 by Moody's and A-1+ by S&P; money
market funds acceptable to the rating agencies; and other obligations
acceptable to the rating agencies.
All payments in respect of principal and interest on the contracts
received by the servicer, including principal prepayments and liquidation
proceeds (net of liquidation expenses), will be paid into the Certificate
Account no later than the second Business Day following receipt of those
payments. Amounts received as late payment fees, extension fees, assumption
fees or similar fees will be retained by the servicer as part of its Servicing
Fees. See "Description of the Certificates--Servicing--Servicing Compensation
and Payment of Expenses" in the prospectus. In addition, amounts paid by
Vanderbilt for contracts repurchased as a result of breach of a representation
or warranty under the pooling and servicing agreement and amounts required to
be deposited upon substitution of an Eligible Substitute Contract because of
breach of a representation or warranty, as described under "Description of the
Certificates--Conveyance of Contracts" in the prospectus, will be paid into the
Certificate Account. The servicer will deposit the Monthly Advance (described
under "--Advances" below), if any, in the Certificate Account on or before each
Determination Date.
On each Determination Date, the servicer will determine the Available
Distribution Amount and the amounts to be distributed on the certificates for
the following remittance date.
The trustee or its paying agent will withdraw funds from the Certificate
Account (but only to the extent of the Available Distribution Amount) to make
payments to certificateholders as specified under
S-43
"--Distributions" below. From time to time, as provided in the pooling and
servicing agreement, the servicer will also withdraw funds from the Certificate
Account to make payments to it as permitted by the pooling and servicing
agreement and described in clauses (b) (2), (3), (4), (5) and (6) in the
definition of Available Distribution Amount in the Glossary of this prospectus
supplement.
DISTRIBUTIONS
Distributions of principal and interest to holders of a class of
certificates will be made on each remittance date in an amount equal to the
respective Percentage Interests multiplied by the aggregate amount distributed
on that class of certificates on that remittance date.
Each distribution with respect to a book-entry certificate will be paid to
DTC, which will credit the amount of the distribution to the accounts of its
Participants in accordance with its normal procedures. Each Participant will be
responsible for disbursing the distribution to the Certificate Owners that it
represents and to each indirect participating brokerage firm for which it acts
as agent. Each brokerage firm will be responsible for disbursing funds to the
Certificate Owners that it represents. All credits and disbursements with
respect to book-entry certificates are to be made by DTC and the participants
in accordance with DTC's rules.
Interest Distributions:
With respect to each remittance date, the Class AV and Class A-1
Certificates will accrue interest during the period commencing from the
remittance date in the prior month (or the Closing Date in the case of the
first remittance date) to the day preceding the related remittance date on the
basis of the actual number of days elapsed and a 360 day year. With respect to
each remittance date, the Class A-2, Class A-3, Class A-4, Class A-5, Class
M-1, Class B-1 and Class B-2 Certificates will accrue interest in respect of
each calendar month preceding that remittance date. Interest on the Class A-2,
Class A-3, Class A-4, Class A-5, Class M-1, Class B-1 and Class B-2
Certificates will be calculated on the basis of an assumed 360-day year
consisting of twelve 30-day months.
On each remittance date, holders of each class of certificates will be
entitled to receive, to the extent of the Available Distribution Amount,
(1) interest accrued during the related Interest Period at the then
applicable remittance rate on the principal balance of that class
immediately prior to the remittance date, plus
(2) any amounts distributable on that class under clause (1) above or
this clause (2) on the previous remittance date but not previously
distributed, together with, to the extent legally permissible, interest
accrued on any of that amount during the related Interest Period at the
then applicable remittance rate.
If an Interest Deficiency Event occurs on any remittance date with respect
to the Class A-5 Certificates, the Class M-1 Certificates or the Class B-1
Certificates, collections received after the end of the related Due Period and
prior to that remittance date will be applied, up to a limited amount as
described in the pooling and servicing agreement, to remedy the deficiency in
order of class seniority.
In addition, to the extent there is any Basis Risk Shortfall with respect
to the Class AV Certificates for a given payment date, any amounts on deposit
in the yield maintenance account will be applied to payment of such Basis Risk
Shortfall in accordance with the priorities described in "Priority of
Distributions" below.
Remittance Rates of the Certificates:
The remittance rates on all of the certificates listed below are subject
to a maximum rate equal to the Weighted Average Net Contract Rate for the
applicable remittance date:
The Class A-1 remittance rate shall equal one-month LIBOR plus 0.25%;
The Class A-2 remittance rate shall equal 3.48%;
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The Class A-3 remittance rate shall equal 4.70%;
The Class A-4 remittance rate shall equal 6.21%;
The Class A-5 remittance rate shall equal 8.00%;
The Class M-1 remittance rate shall equal 7.47%;
The Class B-1 remittance rate shall equal 8.00%; and
The Class B-2 remittance rate shall equal 8.00%.
The Class AV remittance rate shall equal the least of (i) one-month LIBOR
plus 0.65%, (ii) the Weighted Average Net Contract Rate and (iii) 15.00% per
annum.
With respect to the Class AV and Class A-1 Certificates, one-month LIBOR
for each interest accrual period will be determined on the second London
business day prior to the first day of the related interest accrual period.
Priority of Distributions:
A. On each remittance date on which the Class M-1 and Class B Principal
Distribution Test is not met, the Available Distribution Amount will be
distributed in the following amounts in the following order of priority:
(i) As long as Vanderbilt is the servicer, the amount equal to 1/12th
of the product of 1.00% and the Pool Scheduled Principal Balance to the
servicer; if Vanderbilt is not the servicer, then the amount equal to
1/12th of the product of 1.25% and the Pool Scheduled Principal Balance to
the servicer;
(ii) interest accrued during the related Interest Period on the Class
AV, Class A-1, Class A-2, Class A-3 and Class A-4 Certificates, at their
respective remittance rates on the outstanding Class AV, Class A-1, Class
A-2, Class A-3 and Class A-4 principal balances, respectively, together
with any previously undistributed shortfalls in interest due on the Class
AV, Class A-1, Class A-2, Class A-3 and Class A-4 Certificates,
respectively, in respect of prior remittance dates; if the Available
Distribution Amount is not sufficient to distribute the full amount of
interest due on the Class AV, Class A-1, Class A-2, Class A-3 and Class A-4
Certificates, the Available Distribution Amount will be distributed on
those classes of certificates pro rata on the basis of the interest due on
those classes of certificates;
(iii) the Formula Principal Distribution Amount, pro rata based upon
principal balances outstanding:
(1) to the Class AV Certificates until the Class AV principal
balance is reduced to zero; and
(2) to the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates in the following order of priority:
(a) to the Class A-1 Certificates until the Class A-1
principal balance is reduced to zero;
(b) to the Class A-2 Certificates until the Class A-2
principal balance is reduced to zero;
(c) to the Class A-3 Certificates until the Class A-3
principal balance is reduced to zero;
and
(d) to the Class A-4 Certificates until the Class A-4
principal balance is reduced to zero;
(iv) interest accrued during the related Interest Period on the Class
A-5 principal balance to the Class A-5 Certificates at the related
remittance rate, together with any previously undistributed shortfalls in
interest due on the Class A-5 Certificates in respect of prior remittance
dates;
(v) the remainder of the Formula Principal Distribution Amount, if any,
to the Class A-5 Certificates until the Class A-5 principal balance is
reduced to zero;
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(vi) interest accrued during the related Interest Period on the Class
M-1 principal balance to the Class M-1 Certificates at the related
remittance rate, together with any previously undistributed shortfalls in
interest due on the Class M-1 Certificates in respect of prior remittance
dates;
(vii) the remainder of the Formula Principal Distribution Amount, if
any, to the Class M-1 Certificates until the Class M-1 principal balance is
reduced to zero;
(viii) interest accrued during the related Interest Period on the Class
B-1 principal balance to the Class B-1 Certificates at the related
remittance rate, together with any previously undistributed shortfalls in
interest due on the Class B-1 Certificates in respect of prior remittance
dates;
(ix) the remainder of the Formula Principal Distribution Amount, if
any, to the Class B-1 Certificates until the Class B-1 principal balance is
reduced to zero;
(x) interest accrued during the related Interest Period on the Class
B-2 principal balance to the Class B-2 Certificates at the related
remittance rate, together with any previously undistributed shortfalls in
interest due on the Class B-2 Certificates in respect of prior remittance
dates;
(xi) the remainder of the Formula Principal Distribution Amount, if
any, to the Class B-2 Certificates until the Class B-2 principal balance is
reduced to zero;
(xii) to the extent not paid from amounts in the yield maintenance
account for that remittance date, the Basis Risk Shortfall Amount, if any,
to the Class AV Certificates, together with any previously undistributed
Basis Risk Shortfall Amounts due on the Class AV Certificates in respect of
prior remittance dates;
(xiii) the amount of any reimbursement to Clayton for Enhancement
Payments with respect to the Class B-2 Certificates as provided in the
pooling and servicing agreement;
(xiv) so long as Vanderbilt is the servicer, any remaining available
funds up to 1/12th of the product of 0.25% and the Pool Scheduled Principal
Balance to the servicer; and
(xv) any remaining available funds to the holder of the Class R
Certificate, which will initially be a special purpose subsidiary of
Vanderbilt.
B. On each remittance date on which the Class M-1 and Class B Principal
Distribution Test is met, the Available Distribution Amount will be distributed
in the following amounts in the following order of priority:
(i) As long as Vanderbilt is the servicer, the amount equal to 1/12th
of the product of 1.00% and the Pool Scheduled Principal Balance to the
servicer; if Vanderbilt is not the servicer, then the amount equal to
1/12th of the product of 1.25% and the Pool Scheduled Principal Balance to
the servicer;
(ii) interest accrued during the related Interest Period on the Class
AV, Class A-1, Class A-2, Class A-3 and Class A-4 Certificates, at their
respective remittance rates on the outstanding Class AV, Class A-1, Class
A-2, Class A-3 and Class A-4 principal balances, respectively, together
with any previously undistributed shortfalls in interest due on the Class
AV, Class A-1, Class A-2, Class A-3 and Class A-4 Certificates,
respectively, in respect of prior remittance dates; if the Available
Distribution Amount is not sufficient to distribute the full amount of
interest due on the Class AV, Class A-1, Class A-2, Class A-3 and Class A-4
Certificates, the Available Distribution Amount will be distributed on
those classes of certificates pro rata on the basis of the interest due on
those classes of certificates;
(iii) the Class A Percentage of the Formula Principal Distribution
Amount, pro rata based upon principal balances outstanding:
(1) to the Class AV Certificates until the Class AV principal
balance is reduced to zero; and
(2) to the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates in the following order of priority:
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(a) to the Class A-1 Certificates until the Class A-1
principal balance is reduced to zero;
(b) to the Class A-2 Certificates until the Class A-2
principal balance is reduced to zero;
(c) to the Class A-3 Certificates until the Class A-3
principal balance is reduced to zero;
and
(d) to the Class A-4 Certificates until the Class A-4
principal balance is reduced to zero;
(iv) interest accrued during the related Interest Period on the Class
A-5 principal balance to the Class A-5 Certificates at the related
remittance rate, together with any previously undistributed shortfalls in
interest due on the Class A-5 Certificates in respect of prior remittance
dates;
(v) the remainder of the Class A Percentage of the Formula Principal
Distribution Amount, if any, to the Class A-5 Certificates until the Class
A-5 principal balance is reduced to zero;
(vi) interest accrued during the related Interest Period on the Class
M-1 principal balance to the Class M-1 Certificates at the related
remittance rate, together with any previously undistributed shortfalls in
interest due on the Class M-1 Certificates in respect of prior remittance
dates;
(vii) the Class M-1 Percentage of the Formula Principal Distribution
Amount to the Class M-1 Certificates until the Class M-1 principal balance
is reduced to zero;
(viii) interest accrued during the related Interest Period on the Class
B-1 principal balance to the Class B-1 Certificates at the related
remittance rate, together with any previously undistributed shortfalls in
interest due on the Class B-1 Certificates in respect of prior remittance
dates;
(ix) the Class B Percentage of the Formula Principal Distribution
Amount to the Class B-1 Certificates until the Class B-1 principal balance
is reduced to zero;
(x) interest accrued during the related Interest Period on the Class
B-2 principal balance to the Class B-2 Certificates at the related
remittance rate, together with any previously undistributed shortfalls in
interest due on the Class B-2 Certificates in respect of prior remittance
dates;
(xi) the remainder of the Formula Principal Distribution Amount to the
Class B-2 Certificates until the Class B-2 principal balance is reduced to
zero; provided, however, if the principal balances of the Class A
Certificates and the Class M-1 Certificates have not been reduced to zero
on or before a remittance date, to the extent that allocations in respect
of principal to the Class B-2 Certificates would reduce the Class B-2
principal balance below the Class B-2 Floor Amount, then the amount of that
excess principal will instead be distributed, pro rata, to (1) the Class A
Certificates and (2) the Class M-1 Certificates based on the respective
principal balances of those classes of certificates prior to distributions
in accordance with clauses B(iii), (v) and (vii) above with respect to that
remittance date. Any allocations of this excess principal to the Class A
Certificates will be in the order of priority set forth in clauses B(iii)
and (v) above;
(xii) to the extent not paid from amounts in the yield maintenance
account for that remittance date, the Basis Risk Shortfall Amount, if any,
to the Class AV Certificates, together with any previously undistributed
Basis Risk Shortfall Amounts due on the Class AV Certificates in respect of
prior remittance dates;
(xiii) the amount of any reimbursement to Clayton for Enhancement
Payments with respect to the Class B-2 Certificates as provided in the
pooling and servicing agreement;
(xiv) so long as Vanderbilt is the servicer, any remaining available
funds up to 1/12th of the product of 0.25% and the Pool Scheduled Principal
Balance to the servicer; and
(xv) any remaining available funds to the holder of the Class R
Certificate.
On each remittance date, any amounts on deposit in the yield maintenance
account will be paid in the following order of priority: (a) an amount equal to
the Basis Risk Shortfall Amount, if any, to the Class AV Certificates, together
with any previously undistributed Basis Risk Shortfall Amount due on the
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Class AV Certificates in respect of prior remittance dates; (b) an amount equal
to the Collection Shortfall, if any, to the certificates in the order of
priority provided in clauses (ii) through (xi) under paragraph A. above or
clauses (ii) through (xi) under paragraph B. above, as applicable; and (c) any
remaining amount to the seller.
In no event will the aggregate distributions of principal to any class of
certificates (including, in the case of the Class B-2 Certificates, any
principal amounts included in any Enhancement Payments) exceed the original
class principal balance of that class of certificates.
However, regardless of the priority of the distribution of the Formula
Principal Distribution Amount among the Senior Certificates in accordance with
clauses A(iii) and B(iii) above, on each remittance date on and after the
remittance date, if any, on which the Deficiency Event occurs, the Available
Distribution Amount remaining after making the distributions of interest to the
Senior Certificates required by clauses A(ii) and B(ii) above will be applied
to distribute the applicable Formula Principal Distribution Amount on each
class of Senior Certificates pro rata in accordance with the outstanding
Principal Balance of that class.
BASIS RISK SHORTFALL; YIELD MAINTENANCE AGREEMENT
The trust will enter into a yield maintenance agreement with Bear Stearns
Financial Products Inc. (the "Yield Maintenance Agreement Counterparty") which
is intended to partially mitigate the risk that the pass-through rate on the
Class AV Certificates may be limited to the Weighted Average Net Contract Rate.
Bear Stearns Financial Products Inc. is rated "AAA" by S&P and "Aaa" by
Moody's.
On each remittance date, payments under the yield maintenance agreement
will be made to the trustee for deposit into a separate yield maintenance
account principally for the benefit of the Class AV Certificates. The amount to
be paid to the trustee under the yield maintenance agreement on any remittance
date will be equal to the interest accrued during the related accrual period at
a rate equal to the excess of one-month LIBOR over 5.50% on a notional balance
as set forth in the table below. The accrual period under the yield maintenance
agreement will track the related Interest Period for the Class AV Certificates.
The notional balance on the yield maintenance agreement with respect to
any remittance date is set forth in the following table:
REMITTANCE DATE NOTIONAL BALANCE REMITTANCE DATE NOTIONAL BALANCE
March 2003 .............. $ 70,000,000.00 December 2004 ........... $ 50,223,894.63
April 2003 .............. $ 69,144,384.89 January 2005 ............ $ 49,230,119.53
May 2003 ................ $ 68,277,270.39 February 2005 ........... $ 48,241,182.05
June 2003 ............... $ 67,399,095.07 March 2005 .............. $ 47,264,727.35
July 2003 ............... $ 66,510,302.07 April 2005 .............. $ 46,300,603.34
August 2003 ............. $ 65,611,338.77 May 2005 ................ $ 45,348,659.76
September 2003 .......... $ 64,702,656.37 June 2005 ............... $ 44,408,748.17
October 2003 ............ $ 63,784,709.51 July 2005 ............... $ 43,480,721.92
November 2003 ........... $ 62,857,955.86 August 2005 ............. $ 42,564,436.12
December 2003 ........... $ 61,922,855.77 September 2005 .......... $ 41,659,747.64
January 2004 ............ $ 60,979,871.82 October 2005 ............ $ 40,766,515.06
February 2004 ........... $ 60,029,468.48 November 2005 ........... $ 39,884,598.69
March 2004 .............. $ 59,072,111.64 December 2005 ........... $ 39,013,860.51
April 2004 .............. $ 58,108,268.30 January 2006 ............ $ 38,154,164.16
May 2004 ................ $ 57,138,406.11 February 2006 ........... $ 37,305,374.95
June 2004 ............... $ 56,162,992.98 March 2006 .............. $ 36,467,359.79
July 2004 ............... $ 55,182,496.74 April 2006 .............. $ 35,639,987.21
August 2004 ............. $ 54,197,384.66 May 2006 ................ $ 34,823,127.31
September 2004 .......... $ 53,208,123.14 June 2006 ............... $ 34,016,651.79
October 2004 ............ $ 52,215,177.30 July 2006 ............... $ 33,220,433.88
November 2004 ........... $ 51,219,010.56 August 2006 ............. $ 32,434,348.32
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REMITTANCE DATE NOTIONAL BALANCE REMITTANCE DATE NOTIONAL BALANCE
September 2006 ........... $ 31,658,271.40 December 2010 ............ $ 8,817,421.32
October 2006 ............. $ 30,892,080.88 January 2011 ............. $ 8,566,203.10
November 2006 ............ $ 30,135,656.00 February 2011 ............ $ 8,318,301.54
December 2006 ............ $ 29,388,877.46 March 2011 ............... $ 8,073,675.73
January 2007 ............. $ 28,651,627.39 April 2011 ............... $ 7,832,285.29
February 2007 ............ $ 27,923,789.37 May 2011 ................. $ 7,594,090.29
March 2007 ............... $ 27,205,248.36 June 2011 ................ $ 7,386,257.84
April 2007 ............... $ 26,495,890.71 July 2011 ................ $ 7,181,133.05
May 2007 ................. $ 25,795,604.16 August 2011 .............. $ 6,978,682.62
June 2007 ................ $ 25,104,277.79 September 2011 ........... $ 6,778,873.64
July 2007 ................ $ 24,421,802.03 October 2011 ............. $ 6,581,673.60
August 2007 .............. $ 23,748,068.62 November 2011 ............ $ 6,387,050.38
September 2007 ........... $ 23,082,970.63 December 2011 ............ $ 6,194,972.27
October 2007 ............. $ 22,426,402.39 January 2012 ............. $ 6,005,407.91
November 2007 ............ $ 21,778,259.53 February 2012 ............ $ 5,818,326.34
December 2007 ............ $ 21,138,438.94 March 2012 ............... $ 5,633,696.99
January 2008 ............. $ 20,506,838.74 April 2012 ............... $ 5,451,489.61
February 2008 ............ $ 19,883,358.30 May 2012 ................. $ 5,271,674.38
March 2008 ............... $ 19,267,898.19 June 2012 ................ $ 5,094,221.79
April 2008 ............... $ 18,880,662.92 July 2012 ................ $ 4,919,102.71
May 2008 ................. $ 18,498,415.22 August 2012 .............. $ 4,746,288.36
June 2008 ................ $ 18,121,094.01 September 2012 ........... $ 4,575,750.32
July 2008 ................ $ 17,748,638.91 October 2012 ............. $ 4,407,460.48
August 2008 .............. $ 17,380,990.29 November 2012 ............ $ 4,241,391.12
September 2008 ........... $ 17,018,089.24 December 2012 ............ $ 4,077,514.80
October 2008 ............. $ 16,659,877.55 January 2013 ............. $ 3,915,804.46
November 2008 ............ $ 16,306,297.73 February 2013 ............ $ 3,756,233.34
December 2008 ............ $ 15,957,292.98 March 2013 ............... $ 3,598,775.02
January 2009 ............. $ 15,612,807.18 April 2013 ............... $ 3,443,403.39
February 2009 ............ $ 15,272,784.89 May 2013 ................. $ 3,290,092.66
March 2009 ............... $ 14,937,171.34 June 2013 ................ $ 3,138,817.36
April 2009 ............... $ 14,605,912.43 July 2013 ................ $ 2,989,552.30
May 2009 ................. $ 14,278,954.70 August 2013 .............. $ 2,842,272.64
June 2009 ................ $ 13,956,245.36 September 2013 ........... $ 2,696,953.80
July 2009 ................ $ 13,637,732.22 October 2013 ............. $ 2,553,571.53
August 2009 .............. $ 13,323,363.76 November 2013 ............ $ 2,412,101.84
September 2009 ........... $ 13,013,089.07 December 2013 ............ $ 2,272,521.07
October 2009 ............. $ 12,706,857.84 January 2014 ............. $ 2,134,805.82
November 2009 ............ $ 12,404,620.38 February 2014 ............ $ 1,998,932.98
December 2009 ............ $ 12,106,327.61 March 2014 ............... $ 1,864,879.72
January 2010 ............. $ 11,811,931.04 April 2014 ............... $ 1,732,623.49
February 2010 ............ $ 11,521,382.75 May 2014 ................. $ 1,602,142.01
March 2010 ............... $ 11,234,635.42 June 2014 ................ $ 1,473,413.27
April 2010 ............... $ 10,951,642.29 July 2014 ................ $ 1,346,415.54
May 2010 ................. $ 10,672,357.17 August 2014 .............. $ 1,221,127.33
June 2010 ................ $ 10,396,734.43 September 2014 ........... $ 1,097,527.42
July 2010 ................ $ 10,124,728.99 October 2014 ............. $ 975,594.87
August 2010 .............. $ 9,856,296.31 November 2014 (Termination
September 2010 ........... $ 9,591,392.41 Date) ................. $ 855,308.96
October 2010 ............. $ 9,329,973.81
November 2010 ............ $ 9,071,997.59
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Any amounts on deposit in the yield maintenance account will be property
of the trust but will not be part of any REMIC. On each remittance date, the
trustee shall withdraw from the yield maintenance account first to cover any
Basis Risk Shortfall Amount with respect to the Class AV Certificates for such
remittance date and any Basis Risk Shortfall Amounts with respect to the Class
AV Certificates that remain unpaid from prior remittance dates. There can be no
assurance, however, that funds will be available to pay any such shortfall
amounts to Class AV certificateholders. After making distributions in respect
of any Basis Risk Shortfalls, any amount remaining in the yield maintenance
account on such remittance date will be applied to cover any Collection
Shortfalls for that remittance date and then distributed to Vanderbilt.
The yield maintenance agreement is scheduled to remain in effect until the
remittance date occurring in November 2014. The yield maintenance agreement
will be subject to early termination only in limited circumstances. Such
circumstances include certain insolvency or bankruptcy events in relation to
the Yield Maintenance Agreement Counterparty or the trust, the failure by the
Yield Maintenance Agreement Counterparty (after a grace period of three Local
Business Days, as defined in the yield maintenance agreement, after notice of
such failure is received by the Yield Maintenance Agreement Counterparty) to
make a payment due under such yield maintenance agreement, the failure by the
Yield Maintenance Agreement Counterparty or the trustee (after a cure period of
30 days after notice of such failure is received) to perform any other
agreement made by it under the yield maintenance agreement and such yield
maintenance agreement becoming illegal or subject to certain kinds of taxation.
If the yield maintenance agreement is terminated, future distributions in
respect of Basis Risk Shortfalls on the Class AV Certificates could be subject
to limitation. However, if any such termination occurs, the Yield Maintenance
Agreement Counterparty will owe a termination payment to the trustee with
respect to such yield maintenance agreement, payable in a lump sum, which if
collected by the trustee will mitigate the adverse effect of the change.
The Yield Maintenance Agreement Counterparty is an affiliate of one of the
underwriters.
SENIOR/SUBORDINATE STRUCTURE
The rights of the holders of the Subordinate Certificates to receive
distributions of amounts collected on the contracts will be subordinated, to
the extent described in this prospectus supplement, to those rights of the
holders of the Senior Certificates. This subordination is intended to enhance
the likelihood of receipt by the holders of the Senior Certificates of the full
amount of their scheduled monthly payments of interest and the ultimate receipt
by those holders of principal equal to the applicable original class principal
balance of the Senior Certificates.
The protection afforded to the Senior Certificates by means of the
subordination of the Subordinate Certificates will be accomplished by the
application of the Available Distribution Amount in the order specified under
"--Distributions" above. In addition, if the Available Distribution Amount on
any remittance date is not sufficient to permit the distribution of the entire
specified portion of the Formula Principal Distribution Amount to the holders
of the Senior Certificates and any Subordinate Certificates of a higher
relative priority, the subordination feature will protect the Senior
Certificate holders and those Subordinate Certificates of a higher relative
priority, by the right of those certificateholders to receive, until, if ever,
any of that shortfall is distributed, a portion of the future distributions of
Available Distribution Amounts that would otherwise have been distributable to
the holders of the Subordinate Certificates of a lower relative priority.
The relative priority of the classes of Subordinate Certificates, from
highest to lowest, is as follows:
(1) Class A-5
(2) Class M-1
(3) Class B-1
(4) Class B-2
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However, the Class B-2 Certificates will have the benefit of the limited
guarantee from Clayton or any alternate credit enhancement. Neither the limited
guarantee nor any alternate credit enhancement will benefit or result in any
payments on any other offered certificates.
LOSSES ON LIQUIDATED CONTRACTS
In general, a liquidated contract is a defaulted contract as to which all
amounts that the servicer expects to recover through the date of disposition of
the manufactured home and/or any real property securing that contract have been
received.
As described above, the distribution of principal to the holders of the
Senior Certificates is intended to include the Scheduled Principal Balance of
each contract that became a liquidated contract during the Due Period
immediately preceding the month of that distribution. If the liquidation
proceeds, net of related liquidation expenses, from that liquidated contract
are less than the Scheduled Principal Balance of that liquidated contract, and
accrued and unpaid interest of that liquidated contract, then to the extent
that deficiency is not covered by any excess interest collections on
non-defaulted contracts, the deficiency may, in effect, be absorbed by the
Subordinate Certificates since a portion of future Available Distribution
Amounts funded by future principal collections on the contracts, up to the
aggregate amount of those deficiencies, that would otherwise have been
distributable to them may be paid to the holders of the Senior Certificates. If
the protection afforded to the holders of a class of Subordinate Certificates
by the subordination of one or more classes of more junior Subordinate
Certificates is exhausted, the holders of that class of Subordinate
Certificates will incur a loss on their investment.
If the Available Distribution Amount, for any remittance date is not
sufficient to cover interest and the entire specified portion of the Formula
Principal Distribution Amount distributable to the Senior Certificate holders
then the amount of the Pool Scheduled Principal Balance available to the
Subordinate Certificates (i.e., the Pool Scheduled Principal Balance less the
sum of the Principal Balances of the Senior Certificates) on future remittance
dates will be reduced. If, because of liquidation losses, the Pool Scheduled
Principal Balance were to decrease proportionately faster than distributions to
the certificateholders reduce the Principal Balance of the certificates, the
level of protection afforded by the subordination of the Subordinate
Certificates (i.e., the percentage of the Pool Scheduled Principal Balance
available to the certificates) would be reduced. On each remittance date, if
any, on or after the date on which the sum of the Principal Balances of the
Senior Certificates equals or becomes greater than the Pool Scheduled Principal
Balance and so long as any Subordinate Certificates are outstanding, those
Subordinate Certificates will bear all losses on liquidated contracts (with no
ability to recover the amount of any liquidation loss from future principal
collections on the contracts) and incur a loss on the investment in those
Subordinate Certificates. On each remittance date, if any, on or after the date
on which the Deficiency Event occurs, the Senior Certificate holders, will
receive only their respective percentage interest of liquidation proceeds (net
of liquidation expenses) realized in respect of liquidated contracts, rather
than the Scheduled Principal Balances thereof, and will therefore bear all
losses on liquidated contracts (with no ability to recover the amount of any
liquidation loss from future principal collections on the contracts) and incur
a loss on the investment in the Senior Certificates. See "Description of the
Certificates--the Senior/Subordinate Structure" above and "Yield and Prepayment
Considerations" in this prospectus supplement.
But for the subordination of the Class B-2 Certificates, the Class B-1
Certificate holders would absorb (i) all losses on each liquidated contract (to
the extent that loss is not covered by excess interest collections) and (ii)
other shortfalls in the applicable Available Distribution Amount. If, on any
remittance date, the sum of the Principal Balances of the Senior Certificates,
the Class A-5 Certificates and the Class M-1 Certificates becomes equal to or
greater than the Pool Scheduled Principal Balance, then the Class B-1
Certificate holders will bear all losses on liquidated contracts (with no
ability to recover the amount of any liquidation loss from future principal
collections on the contracts) and incur a loss on their investment in the Class
B-1 Certificates.
LIMITED GUARANTEE OF CLAYTON
In order to mitigate the effect of the subordination of the Class B-2
Certificates and liquidation losses and delinquencies on the contracts borne by
the Class B-2 Certificates, Clayton will initially provide a
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limited guarantee against losses that would otherwise be absorbed by the Class
B-2 Certificates. That limited guarantee may be replaced by an alternate credit
enhancement. See "--Alternate Credit Enhancement" below.
Each payment required to be made under the limited guarantee is referred
to as an Enhancement Payment. For any remittance date, the Enhancement Payment
generally, will be equal to the amount, if any, by which the Class B-2 Formula
Distribution Amount (which will include both interest and principal) for that
remittance date, exceeds the amount of the Available Distribution Amount
(exclusive of the Enhancement Payment), if any, remaining for distribution to
the Class B-2 Certificates on that remittance date.
In the event that, on a particular remittance date, the Class B-2
Distribution Amount in the Certificate Account plus any amounts actually paid
under the limited guarantee are not sufficient to make a full distribution of
interest to the Class B-2 Certificate holders, the amount of the deficiency
will be carried forward as an amount that the Class B-2 Certificate holders are
entitled to receive on the next remittance date.
The limited guarantee will be an unsecured general obligation of Clayton
and will not be supported by any letter of credit or other enhancement
arrangement.
The limited guarantee is for the benefit of the Class B-2 Certificates
only and will not result in any payments on the other offered certificates.
As reimbursement to Clayton for Enhancement Payments made by Clayton in
accordance with the limited guarantee, Clayton will be entitled to receive on
each remittance date an amount equal to the lesser of:
o the Available Distribution Amount, less the portion of the Available
Distribution Amount distributed on the certificates (other than the
Class R Certificate), and
o the aggregate amount of Enhancement Payments outstanding which remain
unreimbursed as of that remittance date.
ALTERNATE CREDIT ENHANCEMENT
Clayton may substitute alternate credit enhancement for its limited
guarantee upon:
o prior written notice to the rating agencies, the rating agencies shall
have notified Clayton, Vanderbilt, the servicer and the trustee that
substitution of the alternate credit enhancement for the limited
guarantee will not result in the downgrade or withdrawal of the then
current rating of any class of the certificates, and
o the delivery by Clayton to the trustee of an opinion of counsel,
acceptable to the trustee, that that action would not cause the trust
fund to fail to qualify as a REMIC, the limited guarantee shall be
released and shall terminate.
The alternate credit enhancement may consist of cash or securities
deposited by Clayton or any other person in a segregated escrow, trust or
collateral account or a letter of credit, certificate insurance policy or
surety bond provided by a third party. On each remittance date after delivery
of the alternate credit enhancement, an Enhancement Payment, if applicable,
equal to the lesser of the amount which would have been payable under the
limited guarantee and the amount available under that alternate credit
enhancement, shall be transferred from that account to the Certificate Account
to make payments to the Class B-2 Certificate holders. Clayton shall have no
obligation to replace that credit enhancement once it has been exhausted.
ADVANCES
For each remittance date, the servicer will make Monthly Advances in
respect of delinquent scheduled payments on the contracts that were due in the
preceding Due Period and that would, in the servicer's judgment, be recoverable
from related late payments, liquidation proceeds or otherwise.
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On or prior to each Determination Date, the servicer will either:
(1) deposit from its own funds, the Monthly Advance, into the
Certificate Account,
(2) cause appropriate entries to be made in the records of the
Certificate Account that funds in the Certificate Account that are not part
of the Available Distribution Amount for the related remittance date have
been used to make the Monthly Advance, or
(3) make the Monthly Advance through any combination of clauses (1) and
(2) of this sentence. Any funds held for future distribution and used in
accordance with clause (2) must be restored by the servicer from its own
funds or advance payments on the contracts when they become part of a
future Available Distribution Amount. The Monthly Advance is the sum of
delinquent scheduled payments due in the related Due Period, exclusive of
all Nonrecoverable Advances, except that the Monthly Advance will not
exceed the amount necessary to bring the Available Distribution Amount up
to the sum of the amounts specified in clauses A(ii)-(xi) or B(ii)-(xi), as
the case may be, under "--Distributions--Priority of Distributions" above.
Monthly Advances are intended to maintain a regular flow of scheduled
interest and principal payments to certificateholders rather than to guarantee
or insure against losses. The servicer will reimburse itself for Monthly
Advances out of collections of the late scheduled payments. In addition, upon
the determination that a Nonrecoverable Advance has been made in respect of a
contract or upon a contract becoming a liquidated contract, the servicer will
reimburse itself out of funds in the Certificate Account for the delinquent
scheduled payments on that contract (exclusive of any scheduled payment (i) for
which no advance was made because the servicer determined that an advance would
be a Nonrecoverable Advance if an advance were made or (ii) that was recovered
out of net liquidation proceeds for the related contract).
The servicer will also be obligated to make Advances, to the extent
recoverable out of liquidation proceeds or otherwise, in respect of applicable
taxes and insurance premiums not paid by an obligor on a timely basis. Funds so
advanced are reimbursable to the servicer as provided in the pooling and
servicing agreement.
REPORTS TO CERTIFICATEHOLDERS
The trustee will furnish each certificateholder a monthly statement as of
that remittance date setting forth, among other things:
o the Available Distribution Amount;
o the aggregate amount distributed to each class of offered certificates
on that remittance date;
o the amount of that distribution to each class of offered certificates
which constitutes principal;
o the amount of that distribution to each class of offered certificates
which constitutes interest;
o the remaining principal balance of each class of offered certificates;
o the amount, if any, by which the Class B-2 Formula Distribution Amount
exceeds the remaining Available Distribution Amount for the remittance
date;
o the Class B-2 Liquidation Loss Amount, if any, for the remittance date;
o the Enhancement Payment, if any, for the remittance date;
o the number of and aggregate unpaid principal balance of contracts with
payments delinquent 31 to 59, 60 to 89 and 90 or more days,
respectively; and
o the amount of fees payable out of the Trust Fund.
In addition, within a reasonable period of time after the end of each
calendar year, the trustee will furnish a report to each certificateholder of
record at any time during that calendar year as to the aggregate of these
amounts for that calendar year.
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OPTIONAL TERMINATION
The pooling and servicing agreement provides that on any remittance date on
which the aggregate scheduled principal balances of the contracts at the end of
the related due period are less than 10% of the Cut-off Date Pool Principal
Balance, Vanderbilt (if it is no longer the servicer) and the servicer will each
have the option to repurchase, upon Vanderbilt or the servicer giving notice
mailed no later than the first day of the month next preceding the month of the
exercise of that option, all outstanding contracts at a price equal to the
greater of:
(a) the sum of:
o 100% of the outstanding principal balance of each contract (other than
any contract as to which the related manufactured home has been
acquired in realizing upon those contracts and whose fair market value
is included in accordance with the clause below) as of the final
remittance date, and
o the fair market value of the acquired property (as determined by
Vanderbilt or the servicer, as the case may be), and
(b) the aggregate fair market value (as determined by Vanderbilt or the
servicer, as the case may be) of all of the assets of the Trust Fund,
plus, in each case, any unpaid interest on the certificates due on prior
remittance dates as well as one month's interest at the rate specified in the
pooling and servicing agreement on the Scheduled Principal Balance of each
contract (including any contract as to which the related manufactured homes
have been repossessed and not yet disposed of).
In spite of the discussions above, the option referred to in this
paragraph shall not be exercisable unless there will be distributed to the
certificateholders an amount equal to 100% of the outstanding principal balance
of each certificate plus one month's interest on that certificate at the
related remittance rate, and any previously undistributed shortfalls in
interest due on that certificate.
THE TRUSTEE
JPMorgan Chase Bank, a New York banking corporation, has its corporate
trust offices at 4 New York Plaza, 6th Floor, New York, New York 10004-2413.
Vanderbilt and its affiliates may engage in commercial transactions with the
trustee from time to time.
The trustee may resign at any time, in which event Vanderbilt will be
obligated to appoint a successor trustee. Vanderbilt may also remove the
trustee if the trustee ceases to be eligible to continue as trustee under the
pooling and servicing agreement or if the trustee becomes insolvent. In those
circumstances, Vanderbilt will also be obligated to appoint a successor
trustee. Any resignation or removal of the trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee.
REGISTRATION OF THE OFFERED CERTIFICATES
The Offered Certificates will initially be issued as book-entry
certificates. Certificate Owners may elect to hold their Offered Certificates
through DTC in the United States, or Clearstream or the Euroclear system, in
Europe, through Participants of those systems, or indirectly through
organizations which are participants in those systems. The book-entry
certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Offered Certificates and will initially be
registered in the name of Cede & Co., the nominee of DTC. Clearstream and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Clearstream's and Euroclear's names on the
books of their respective depositaries which in turn will hold those positions
in customers' securities accounts in the depositaries' names on the books of
DTC. Citibank N.A. will act as depositary for Clearstream and JPMorgan Chase
Bank will act as depositary for Euroclear. Investors may hold those beneficial
interests in the book-entry certificates in minimum denominations of $50,000.
Except as described below, no person acquiring an interest in a book-entry
certificate (each a beneficial owner) will
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be entitled to receive a physical certificate. Unless and until physical
certificates are issued, it is anticipated that the only certificateholder of
the Offered Certificates will be Cede & Co., as nominee of DTC. Certificate
Owners will not be certificateholders as that term is used in the pooling and
servicing agreement. Certificate Owners are only permitted to exercise their
rights indirectly through Participants and DTC.
The beneficial owner's ownership of a book-entry certificate will be
recorded on the records of the Financial Intermediary that maintains the
beneficial owner's account for that purpose. In turn, the Financial
Intermediary's ownership of that book-entry certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Offered Certificates from the trustee through DTC and
Participants. While the Offered Certificates are outstanding (except under
those circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers among participants and to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Offered Certificates are similarly required to make
book-entry transfers and receive and transmit those distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess physical certificates representing their respective interests
in the Offered Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest
in the Offered Certificates.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances. Unless and until physical certificates are
issued, certificateholders who are not Participants may transfer ownership of
Offered Certificates only through Participants and indirect participants by
instructing those Participants and indirect participants to transfer Offered
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of those Offered Certificates, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Offered Certificates will be
executed through DTC and the accounts of the respective Participants at DTC
will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing certificateholders.
Because of time zone differences, the securities account of a Clearstream
or Euroclear Participant as a result of a transaction with a DTC Participant
(other than a depository holding on behalf of Clearstream or Euroclear) will be
credited during the subsequent securities settlement processing day which is
the Business Day immediately following the DTC settlement date. Those credits
or any transactions in those securities settled during that processing will be
reported to the relevant Euroclear or Clearstream Participants on that Business
Day. Cash received in Clearstream or Euroclear as a result of sales of
securities by or through a Clearstream Participant (as defined below) or
Euroclear Participant (as defined below) to a DTC Participant (other than a
depository holding on behalf of Clearstream or Euroclear) will be received with
value on the DTC settlement date but will be available in the relevant
Clearstream or Euroclear cash account only as of the Business Day following
settlement in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "Material Federal Income Tax
Consequences--REMIC Series--Taxation of Some Foreign Investors" and "--Backup
Withholding" in the prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures--Material U.S. Federal Income Tax Documentation
Requirements" in Annex I to this prospectus supplement.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be
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effected by DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the Relevant Depositary; however, those cross
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in that system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
Relevant 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. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participating organizations
and facilitates the clearance and settlement of securities transactions between
DTC Participants through electronic book-entry changes in the accounts of DTC
Participants. DTC Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and may include some other
organizations. Other institutions that are not DTC Participants but clear
through or maintain a custodial relationship with DTC Participants (those
institutions, "indirect participants") have indirect access to DTC's clearance
system.
Clearstream is incorporated under the laws of Luxembourg as a professional
depository. Clearstream holds securities for its participants and facilitates
the clearance and settlement of securities transactions between its participants
through electronic book-entry changes in accounts of Clearstream participants,
thereby eliminating the need for physical movement of certificates. Transactions
may be settled in Clearstream in any of 36 currencies, including U.S. dollars.
Clearstream provides to its participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream interfaces with
domestic markets in several countries. As a professional depository, Clearstream
is subject in Luxembourg to regulation and supervision by the Commission for the
Supervision of the Financial Sector. Clearstream participants are recognized
financial institutions around the world, including the underwriters specified in
each prospectus supplement, securities brokers and dealers, banks, trust
companies, clearing corporations and some other organizations. Indirect access
to Clearstream is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Clearstream participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants and
to clear and settle transactions between its participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and the risk from transfers of securities and
cash that are not simultaneous. Transactions may be settled in any of 34
currencies, including U.S. dollars. In addition to safekeeping (custody) and
securities clearance and settlement, the Euroclear system includes securities
lending and borrowing and money transfer services. On December 31, 2000,
Euroclear Bank S.A./N.V. was launched and replaced Morgan Guaranty Trust Company
of New York as the operator of and banker to the Euroclear system. Euroclear
Bank has capital of approximately EUR 1 billion. All operations are conducted by
the Euroclear operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator. They are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear system and applicable Belgian law. These
govern all transfers of securities and cash, both within the Euroclear system,
and receipts and withdrawals of securities and cash. All securities in the
Euroclear system are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. Euroclear participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the underwriters
specified in each prospectus supplement. 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 acts under the Terms and Conditions, the Operating Procedures
of the Euroclear system and Belgian law only on behalf of Euroclear participants
and has no record of or relationship with persons holding through Euroclear
participants.
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Distributions on the book-entry certificates will be made on each
remittance date by the trustee to DTC. DTC will be responsible for crediting the
amount of those payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing those payments to the beneficial owners of the
book-entry certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each of the Financial Intermediary will be
responsible for disbursing funds to the beneficial owners of the book-entry
certificates that it represents.
Under a book-entry format, beneficial owners of the book-entry certificates
may experience some delay in their receipt of payments, since those payments
will be forwarded by the trustee to Cede & Co. Distributions with respect to
certificates held through Clearstream or Euroclear will be credited to the cash
accounts of Clearstream Participants or Euroclear Participants in accordance
with the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Those distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Material
Federal Income Tax Consequences--REMIC Series--Taxation of Some Foreign
Investors" and "--Backup Withholding" in the prospectus. Because DTC can only
act on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge book-entry certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of those book-entry
certificates, may be limited due to the lack of physical certificates for those
book-entry certificates. In addition, issuance of the book-entry certificates in
book-entry form may reduce the liquidity of those certificates in the secondary
market since some potential investors may be unwilling to purchase certificates
for which they cannot obtain physical certificates.
Monthly and annual reports on the trust will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the book-entry certificates of those beneficial owners are credited.
Under DTC's procedures, DTC will take any action permitted to be taken by
the holders of the book-entry certificates under the pooling and servicing
agreement only at the direction of one or more Participants to whose DTC
accounts the book-entry certificates are credited, to the extent that those
actions are taken on behalf of Participants whose holdings include those
book-entry certificates and whose aggregate holdings represent no less than any
minimum amount of percentage interests or voting rights required for those
holdings. DTC may take conflicting actions with respect to any action of
certificateholders of any class to the extent that Participants authorize those
actions.
Physical certificates will be issued to beneficial owners of the book-entry
certificates, or their nominees, rather than to DTC or its nominee, only if (a)
DTC or Vanderbilt advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the book-entry certificates and Vanderbilt is unable
to locate a qualified successor, (b) Vanderbilt, at its sole option, elects to
terminate a book-entry system through DTC or (c) after the occurrence of an
Event of Default, beneficial owners having Percentage Interests aggregating not
less than 51% of the book-entry certificates advise the trustee and DTC through
the Financial Intermediaries and the DTC Participants in writing that the
continuation of a book-entry system through DTC (or a successor to DTC) is no
longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee is required to notify, through DTC, all
Participants who have ownership of the book-entry certificates as indicated on
the records of DTC of the occurrence of that event and the availability through
DTC of physical certificates for their book-entry certificates. Upon surrender
by DTC of the global certificate or certificates representing the book-entry
certificates and upon receipt of instructions for re-registration, the trustee
will issue physical certificates in the respective principal amounts owned by
individual Certificate Owners, and after that the trustee will recognize the
holders of those physical certificates as certificateholders under the pooling
and servicing agreement.
Although DTC, Clearstream and Euroclear have agreed to the above-mentioned
procedures in order to facilitate transfers of Offered Certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform those procedures and those procedures may be
discontinued at any time. See Annex I to this prospectus supplement.
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None of Vanderbilt, the servicer and the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
According to DTC, the above-mentioned information with respect to DTC has
been provided to the industry for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of any
kind.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of the
offered certificates will be used by Vanderbilt for general corporate purposes,
including the purchase of the contracts and the payment of other expenses
connected with pooling the contracts and issuing the certificates.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
As of the Closing Date, assuming:
o an election is made with respect to this REMIC created in accordance
with the pooling and servicing agreement,
o compliance with changes in the law, including any amendments to the
Code or applicable Treasury regulations under the Code, and
o compliance with the pooling and servicing agreement,
Sidley Austin Brown & Wood LLP is of the opinion that the trust fund (exclusive
of the yield maintenance agreement and the assets held in the yield maintenance
account) will qualify as a REMIC within the meaning of Section 860D of the
Code, the Senior and Subordinate Certificates will represent ownership of
"regular interests" in the REMIC, the Class R Certificates will represent
ownership of the sole class of "residual interest" in the REMIC and the rights
of the holders of the Class AV Certificates to receive payments from the yield
maintenance account, pursuant to the yield maintenance agreement, represent,
for federal income tax purposes, contractual rights coupled with regular
interests within the meaning of Treasury regulations Section 1.860G-2(i). The
term "Interest Rate Cap Agreement" refers to the rights of the Class AV
Certificates to receive Basis Risk Shortfall Amounts.
TAXATION OF REGULAR INTERESTS
The following discussion assumes that the rights and obligations of the
Class AV certificateholders under the yield maintenance agreement will be
treated as rights and obligations under a notional principal contract rather
than as a partnership for federal income tax purposes. If these rights and
obligations were treated as representing the beneficial interests in an entity
taxable as a partnership for federal income tax purposes, then payments of
Basis Risk Shortfalls could be treated as "excess inclusions" to all such
certificateholders, taxable to certain tax exempt certificateholders and
subject to withholding to Foreign Investors. See "Material Federal Tax
Consequences--Taxation of Residual Interests". Prospective investors in the
Class AV Certificates should consult their tax advisors regarding their
appropriate tax treatment.
A holder of a Class AV Certificate must allocate the purchase price for
such Certificate between two components--the REMIC regular interest component
and the Interest Rate Cap Agreement component. For information reporting
purposes, the Trustee will assume that, with respect to any Class AV
Certificate, the Interest Rate Cap Agreement component will have an
insubstantial value relative to the value of the regular interest component.
The IRS could, however, argue that the Interest Rate Cap Agreement component
has a greater value, and if that argument were to be sustained, the regular
interest component could be viewed as having been issued with either an
additional amount of original issue discount ("OID") (which could cause the
total amount of discount to exceed a statutorily defined de minimis amount) or
with less premium (which would reduce the amount of premium available to be
used as an offset against interest income).
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Upon the sale, exchange, or other disposition of a Class AV Certificates,
the holder must allocate the amount realized between the two components of
these Certificates (that is, the regular interest component and the Interest
Rate Cap Agreement component) based on the relative fair market values of those
components at the time of sale. Assuming that these Certificates are held as
"capital assets" within the meaning of section 1221 of the Code, gain or loss
on the disposition of an interest in the Interest Rate Cap Agreement component
should be capital gain or loss, and gain or loss on the disposition of the
regular interest component should, subject to the limitation described below,
be capital gain or loss. Gain attributable to the regular interest component of
such a Certificate will be treated as ordinary income, however, to the extent
such gain does not exceed the excess, if any, of:
(1) the amount that would have been includable in the holder's gross
income with respect to the regular interest component had income thereon
accrued at a rate equal to 110% of the applicable federal rate as defined
in section 1274(d) of the Code determined as of the date of purchase of the
Certificate
over
(2) the amount actually included in such holder's income.
As indicated above, a portion of the purchase price paid by a holder to
acquire a Class AV Certificate will be attributable to the Interest Rate Cap
Agreement component of such Certificate. The portion of the overall purchase
price attributable to the Interest Rate Cap Agreement component must be
amortized over the life of such Certificate, taking into account the declining
balance of the related regular interest component. Treasury regulations
concerning notional principal contracts provide alternative methods for
amortizing the purchase price of an interest rate cap contract. Under one
method--the level yield constant interest method--the price paid for an
interest rate cap agreement is amortized over the life of the cap as though it
were the principal amount of a loan bearing interest at a reasonable rate.
Investors are urged to consult their tax advisors concerning the methods that
can be employed to amortize the portion of the purchase price paid for the
Interest Rate Cap Agreement component of such a Certificate.
Any payments received by a holder of a Class AV Certificate from the yield
maintenance account, will be treated as periodic payments on an interest rate
cap agreement. To the extent the sum of such periodic payments for any year
exceeds that year's amortized price of the Interest Rate Cap Agreement
component, such excess is ordinary income. If for any year the amount of that
year's amortized price exceeds the sum of the periodic payments, such excess is
allowable as an ordinary deduction. In the case of an individual, such
deduction will be subject to the 2-percent floor imposed on miscellaneous
itemized deductions under section 67 of the Code and may be subject to the
overall limitation on itemized deductions imposed under section 68.
Interest on a regular interest must be included in income by a holder
under the accrual method of accounting, regardless of the holder's regular
method of accounting. The Class M-1 Certificates and Class B-1 Certificates
will be treated as having been issued with OID and the other Classes of Offered
Certificates may be treated as having been issued with OID for federal income
tax purposes. For purposes of determining the amount and the rate of accrual of
original issue discount and market discount, Vanderbilt intends to assume that
there will be prepayments on the contracts at a rate equal to 225% of the
prepayment model (as defined in this prospectus supplement) for the fixed rate
contracts and 225% of the prepayment model for the adjustable rate contracts.
No representation is made as to whether the contracts will prepay at those
respective rates or any other rate. See "Yield and Prepayment Considerations"
in this prospectus supplement and "Material Federal Income Tax Consequences" in
the prospectus.
The Offered Certificates, exclusive of the Interest Rate Cap Agreement
component of the Class AV Certificates, will be treated as regular interests in
a REMIC under section 860G of the Code. Accordingly, the Offered Certificates,
exclusive of the Interest Rate Cap Agreement component of the Class AV
Certificates, will be treated as:
o assets described in section 7701(a)(19)(C) of the Code, and
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o "real estate assets" within the meaning of section 856(c)(5)(B) of the
Code, in each case to the extent described in the prospectus.
Interest on the Offered Certificates, exclusive of the Interest Rate Cap
Agreement component of the Class AV Certificates, will be treated as interest
on obligations secured by mortgages on real property within the meaning of
section 856(c)(3)(B) of the Code to the same extent that the Offered
Certificates are treated as real estate assets. The entitlement to Basis Risk
Shortfall Amounts in respect of the Class AV Certificates is not an appropriate
asset for resecuritization in a REMIC. See "Material Federal Income Tax
Consequences" in the prospectus.
EFFECT OF LOSSES AND DELINQUENCIES
As described under "Description of the Certificates" in this prospectus
supplement the Subordinate Certificates are subordinated to the Senior
Certificates. In the event there are losses or delinquencies on the contracts,
amounts that otherwise would be distributed on the Subordinate Certificates may
instead be distributed on the Senior Certificates. Holders of the Subordinate
Certificates nevertheless will be required to report interest with respect to
those Subordinate Certificates under an accrual method without giving effect to
delays and reductions in distributions on those certificates attributable to
losses and delinquencies on the contracts, except to the extent it can be
established, for tax purposes, that those amounts are uncollectible. As a
result, the amount of income reported by holders of the Subordinate
Certificates in any period could significantly exceed the amount of cash
distributed to those holders in that period. The holders of the Subordinate
Certificates will eventually be allowed a loss (or will be allowed to report a
lesser amount of income) to the extent that the aggregate amount of
distributions on those certificates is reduced as a result of losses and
delinquencies on the contracts in the contract pool. However, the timing and
character of those losses or reductions in income are uncertain. Although not
entirely clear, it appears that holders of the Subordinate Certificates that
are corporations should in general be allowed to deduct as an ordinary loss any
loss sustained during the taxable year on account of any those certificates
becoming wholly or partially worthless, and that, in general, holders of
certificates that are not corporations should be allowed to deduct as
short-term capital loss any loss sustained during the taxable year on account
of any of those certificates becoming wholly worthless. Although the matter is
unclear, non-corporate holders of certificates may be allowed a bad debt
deduction at that time that the principal balance of any of that certificate is
reduced to reflect realized losses resulting from any liquidated contracts. The
IRS, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all
contracts remaining in the related trust fund have been liquidated or the
certificates have been otherwise retired. Potential investors and
certificateholders are urged to consult their own tax advisors regarding the
appropriate timing, amount and character of any loss sustained with respect to
those certificates, including any loss resulting from the failure to recover
previously accrued interest or discount income. Special loss rules are
applicable to banks and thrift institutions, including rules regarding reserves
for bad debts. Taxpayers are advised to consult their tax advisors regarding
the treatment of losses on certificates.
BACKUP WITHHOLDING
Some Certificate Owners may be subject to backup withholding with respect
to interest paid on the Offered Certificates if the Certificate Owners, upon
issuance, fail to supply the trustee or their broker with their taxpayer
identification number, furnish an incorrect taxpayer identification number,
fail to report interest, dividends, or other "reportable payments" (as defined
in the Code) properly, or, under some circumstances, fail to provide the
trustee or their broker with a certified statement, under penalty of perjury,
that they are not subject to backup withholding.
The trustee will be required to report annually to the IRS, and to each
Offered Certificate holder of record, the amount of interest paid (and OID
accrued, if any) on the Offered Certificates (and the amount of interest
withheld for federal income taxes, if any) for each calendar year, except as to
exempt holders (generally, holders that are corporations, some tax-exempt
organizations or nonresident aliens who provide certification as to their
status as nonresidents). As long as the only "Class A Certificate holder" of
record is Cede & Co., as nominee for DTC, Certificate Owners and the IRS will
receive tax and other
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information including the amount of interest paid on those certificates owned
from Participants and indirect Participants rather than from the trustee. (The
trustee, however, will respond to requests for necessary information to enable
Participants, indirect Participants and some other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a statement that he
or she is not subject to backup withholding. Should a non-exempt Certificate
Owner fail to provide the required certification, the Participants or indirect
Participants (or the paying agent) will be required to backup withhold on the
interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Any amounts withheld under the backup withholding rules from a payment to
a Certificate Owner will be deemed distributed to the affected Certificate
Owner for all purposes of the certificates and the pooling and servicing
agreement. In addition, any of that amount would be allowed as a refund or
credit against that owner's United States federal income tax provided that the
required information is furnished to the IRS.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income tax
treatment of holders that are Foreign Investors.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless that rate is
reduced by an applicable treaty). The withholding tax, however, is eliminated
with respect to some "portfolio debt investments" issued to Foreign Investors.
Portfolio debt investments include debt instruments issued in registered form
for which the United States payor receives a statement that the beneficial
owner of the instrument is a Foreign Investor. The Offered Certificates will be
issued in registered form, therefore if the information required by the Code is
furnished and no other exceptions to the withholding tax exemption are
applicable, there will be no withholding tax on interest paid to a Foreign
Investor.
For the Offered Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Certificate Owner who is an individual or corporation holding
the Offered Certificates on its own behalf an executed IRS Form W-8 BEN signed
under penalty of perjury by the Certificate Owner stating that the Certificate
Owner is a Foreign Investor and providing that Certificate Owner's name and
address. Generally, this statement is effective for the remainder of the year
of signature plus three full calendar years unless a change in circumstances
makes any information on the form incorret. Notwithstanding the preceding
sentence, a W-8BEN with a U.S. taxpayer identification number will remain
effective until a change in circumstances makes any information on the form
incorrect, provided that the withholding agent reports at least annually to the
beneficial owner on IRS Form 1042-S. The beneficial owner must inform the
withholding agent within 30 days of such change and furnish a new W-8BEN. A
Foreign Investor who is not an individual or corporation (or an entity treated
as a corporation for federal income tax purposes) holding the Offered
Certificates on its own behalf may have substantially increased reporting
requirements. In particular, in the case of Offered Certificates held by a
foreign partnership (or foreign trust), the partnership (or trust) will be
required to provide the certification from each of its partners (or
beneficiaries), and the partnership (or trust) will be required to provide
certain additional information.
A Certificate Owner that is a nonresident alien or foreign corporation
will not be subject to United States federal income tax on gain realized on the
sale, exchange, or redemption of that Offered Certificate, provided that:
o that gain is not effectively connected with a trade or business carried
on by the Certificate Owner in the United States, and
o in the case of a Certificate Owner that is an individual, that
Certificate Owner is not present in the United States for 183 days or
more during the taxable year in which that sale, exchange or redemption
occurs and some other requirements are met.
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For further information regarding the federal income tax consequences of
investing in the certificates, see "Material Federal Income Tax Consequences"
in the prospectus.
REPORTABLE TRANSACTIONS
As currently written, recent temporary and proposed U.S. Treasury
regulations (the "Temporary Regulations") meant to require the reporting of
certain tax shelter transactions ("Reportable Transactions") appear broad
enough to cover transactions generally not regarded as tax shelters, including
certain securitizations of financial assets. Transactions may be characterized
as Reportable Transactions for a variety of reasons (such as the existence of
book-tax differences or contractual protections against the possibility that
part or all of the intended tax consequences will not be sustained), one or
more of which may apply to an investment in the certificates. Organizers and
sellers of Reportable Transactions must maintain certain records, including
lists of investors and their related identifying information and make them
available to the IRS on demand. It is possible that the U.S. Congress will
enact legislation similar to previous legislative proposals that would impose
significant penalties for failure to comply with these requirements. Investors
should assume that the "material advisors" (as defined in the Temporary
Regulations) will comply with any applicable investor list maintenance and
retention requirements with respect to this transaction. The provisions of
Temporary Regulations regarding tax return disclosure generally are effective
for transactions occurring on or after January 1, 2003. Recently, the Internal
Revenue Service (the "IRS") announced that it is considering how the disclosure
and listing rules in the Temporary Regulations can be revised to exclude
transactions for which such rules are unnecessary while preserving the ability
to obtain information about potentially abusive transactions. The IRS also
announced that it will postpone the effective date of the listing requirements
to the date the revised regulations are issued and that, although the
disclosure requirements of the Temporary Regulations would continue to apply
effective January 1, 2003, the revised regulations will permit taxpayers to
elect to apply the disclosure provisions of the revised regulations
retroactively. Investors should consult their own tax advisers to determine
their disclosure obligations, if any, with respect to their investment in the
certificates, including any requirement to file IRS Form 8886 (Reportable
Transaction Disclosure Statement).
STATE TAX CONSIDERATIONS
Neither Vanderbilt nor any affiliate of Vanderbilt makes any
representations regarding the tax consequences of purchase, ownership or
disposition of the Offered Certificates under the tax laws of any state.
Investors considering an investment in the Offered Certificates should consult
their own tax advisors regarding those tax consequences.
All investors should consult their own tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Offered Certificates.
ERISA CONSIDERATIONS
ERISA imposes restrictions on Plans and on persons who are fiduciaries
with respect to those Plans. See "ERISA Considerations" in the prospectus.
As further discussed in the prospectus under "ERISA Considerations" and
subject to the limitations stated in that discussion, Vanderbilt believes that
the exemption from certain prohibited transaction rules of ERISA and the Code
granted to Bear, Stearns & Co. Inc. and Credit Suisse First Boston Corporation
will apply to the acquisition and holding by Plans of Offered Certificates sold
by the underwriters and that all conditions of the exemption other than those
within the control of the investors have been met. See "ERISA Considerations"
in the prospectus. In addition, as of the date of this prospectus supplement,
there is no obligor with respect to contracts included in the trust fund
constituting more than 5% of the aggregate unamortized principal balance of the
assets of the trust fund. In order to assure the inapplicability of certain
prohibitions imposed by Section 406(b)(1) and (2) of ERISA and Section
4975(a)(1)(E) of the Code in connection with the initial issuance of the
certificates, each Plan or person using Plan Assets that acquires offered
certificates from the underwriters named in this prospectus
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supplement or from Vanderbilt Mortgage and Finance, Inc. or any of its
affiliates shall be deemed to represent and warrant that no person who has
discretionary authority or renders investment advice with respect to such
acquisition (and no affiliate of such a person) is an obligor with respect to
any of the contracts.
Employee benefit plans that are governmental plans (as defined in section
3(32) of ERISA) and church plans (as defined in section 3(33) of ERISA) are not
subject to ERISA requirements. Accordingly, assets of those plans may be
invested in the Offered Certificates without regard to the ERISA restrictions
described above, subject to applicable provisions of other federal and state
laws.
Any Plan fiduciary who proposes to cause a Plan to purchase Offered
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership
of Offered Certificates. Assets of a Plan or individual retirement account
should not be invested in the Offered Certificates unless it is clear that the
assets of the trust fund will not be plan assets or unless it is clear that the
exemption or a prohibited transaction class exemption will apply and exempt all
potential prohibited transactions, including prohibited transactions that may
arise from the acquisition, holding and disposition of the Offered Certificates
or from the operations of the trust fund. In particular, a Plan fiduciary who
proposes to cause a Plan to purchase an Offered Certificate must consider
whether the investment will meet the requirements imposed under the exemption
that the Plan be an accredited investor within the meaning of Rule 501(a)(1) of
Regulation D of the SEC under the Securities Act, that the security be
underwritten or privately placed by one of the underwriters or by a syndicate
managed by one of the underwriters, and that the securities be rated in one of
the four highest generic rating categories by a rating agency. The rating of a
security may change. If a class of securities no longer has a rating of at
least BBB- or its equivalent, securities of that class will no longer be
eligible for relief under the exemption, and consequently may not be purchased
by or sold to a Plan, although a Plan that had purchased the security when it
had an investment-grade rating would not be required by the exemption to
dispose of it.
Vanderbilt and the underwriters make no representation that the sale of
any of the Offered Certificates to a Plan or other purchaser acting on its
behalf meets any relevant legal requirement for investments by Plans generally
or any particular Plan, or that the investment is appropriate for Plans
generally or any particular Plan.
LEGAL INVESTMENT CONSIDERATIONS
The certificates will not constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984. The appropriate
characterization of the certificates under various legal investment
restrictions, and thus the ability of investors subject to these restrictions
to purchase certificates, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the certificates will constitute legal investments for them.
Neither Vanderbilt nor any affiliate of Vanderbilt makes any
representations as to the proper characterization of the certificates for legal
investment or financial institution regulatory purposes, or as to the ability
of particular investors to purchase certificates under applicable legal
investment restrictions. The uncertainties described above (and any unfavorable
future determinations concerning legal investment or financial institution
regulatory characteristics of the certificates) may adversely affect the
liquidity of the certificates. See "Legal Investment Considerations" in the
prospectus.
CERTIFICATE RATING
It is a condition to the issuance of each class of Offered Certificates
that they receive from Moody's and S&P the investment grade ratings specified
in "Summary Information" in this prospectus supplement. Vanderbilt has not
requested a rating on the Offered Certificates by any rating agency other than
Moody's or S&P. However, there can be no assurance as to whether any other
rating agency will rate the certificates, or if it does, what rating would be
assigned by any of that other rating agency. A rating on any or all of the
certificates by some other rating agencies, if assigned at all, may be lower
than the ratings assigned to those certificates by the rating agencies. A
security rating is not a recommendation to buy, sell
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or hold securities and may be subject to revision or withdrawal at any time.
The rating of the Class B-2 Certificates is based in part on an assessment of
Clayton's ability to make payments under the limited guarantee. Any change in
Moody's or S&P's assessment of Clayton's ability to make payments under the
limited guarantee may result in a reduction of the rating of the Class B-2
Certificates.
UNDERWRITING
Each of the underwriters has severally agreed, subject to the terms and
conditions of the underwriting agreement, to purchase from Vanderbilt the
respective principal amounts of the Certificates set forth opposite its name
below.
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS AV CLASS A-1 CLASS A-2 CLASS A-3
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- ----------------------------------------- ------------------- ------------------- ------------------- -------------------
Bear, Stearns & Co. Inc. ............... $ 59,500,000.00 $ 43,259,050.00 $ 42,264,550.00 $ 22,136,550.00
Credit Suisse First Boston LLC ......... 10,500,000.00 7,633,950.00 7,458,450.00 3,906,450.00
---------------- ---------------- ---------------- ----------------
Total .................................. $ 70,000,000.00 $ 50,893,000.00 $ 49,723,000.00 $ 26,043,000.00
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-4 CLASS A-5 CLASS M-1 CLASS B-1
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- ----------------------------------------- ------------------- ------------------- ------------------- ------------------
Bear, Stearns & Co. Inc. ............... $ 27,541,700.00 $ 15,947,000.00 $ 13,048,000.00 $ 3,500,000.00
Credit Suisse First Boston LLC ......... 4,860,300.00 -- -- --
---------------- --------------- --------------- --------------
Total .................................. $ 32,402,000.00 $ 15,947,000.00 $ 13,048,000.00 $ 3,500,000.00
In the underwriting agreement, the underwriters have agreed, subject to
the terms and conditions described in the underwriting agreement, to purchase
all of the Underwritten Certificates described above if any Underwritten
Certificates are purchased. In the event of default by an underwriter, the
underwriting agreement provides that, in some circumstances, the underwriting
agreement may be terminated.
Vanderbilt has been advised that the underwriters propose initially to
offer the Underwritten Certificates described above to some dealers at the
respective offering prices described on the cover page less a selling
concession not to exceed the percentage of the certificate denomination
described below, and that the underwriters may allow and those dealers may
reallow a reallowance discount not to exceed the percentage of the certificate
denomination described below:
SELLING REALLOWANCE
CLASS OF CERTIFICATE CONCESSION CONCESSION
- -------------------------------- ------------ ------------
Class AV Certificates .......... 0.165% 0.125%
Class A-1 Certificates ......... 0.090% 0.060%
Class A-2 Certificates ......... 0.150% 0.100%
Class A-3 Certificates ......... 0.180% 0.125%
Class A-4 Certificates ......... 0.215% 0.175%
Class A-5 Certificates ......... 0.270% 0.200%
Class M-1 Certificates ......... 0.360% 0.250%
Class B-1 Certificates ......... 0.360% 0.250%
Until the distribution of the Underwritten Certificates described above is
completed, rules of the SEC may limit the ability of the underwriters and some
selling group members to bid for and purchase the Underwritten Certificates. As
an exception to these rules, the underwriters are permitted to engage in
transactions that stabilize the price of the Underwritten Certificates. Those
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Underwritten Certificates.
If the underwriters create a short position in the Underwritten
Certificates described above in connection with the offering, i.e., if they
sell more Underwritten Certificates than are described on the cover page of
this prospectus supplement, the underwriters may reduce that short position by
purchasing the Underwritten Certificates in the open market.
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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 those purchases.
Neither Vanderbilt nor any of the underwriters or their respective
affiliates makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
prices of the Underwritten Certificates. In addition, neither Vanderbilt nor
any of the underwriters or any of the respective affiliates makes any
representation that the underwriters will engage in those transactions or that
those transactions, once commenced, will not be discontinued without notice.
After the initial public offering of the Underwritten Certificates
described above, the public offering price and those concessions may be
changed.
The remaining Class B-1 Certificates with original principal balances of
$9,548,000 and the Class B-2 Certificates with an original class principal
balance of $18,846,522 may be offered by Vanderbilt or one of its affiliates
from time to time directly or through one or more underwriters or agents in one
or more negotiated transactions, or otherwise, at varying prices to be
determined at the time of sale. However, there is currently no underwriting
agreement in effect for these securities. Proceeds to Vanderbilt or one of its
affiliates from the sale of the remaining Class B-1 Certificates and the Class
B-2 Certificates will equal the purchase price paid by the purchaser, net of
any expenses payable by Vanderbilt or one of its affiliates and any
compensation payable to any underwriter or agent.
Bear, Stearns & Co. Inc. is an affiliate of the yield maintenance
agreement provider.
In the ordinary course of business, the underwriters and their affiliates
have engaged in and continue to engage in investment banking and commercial
banking transactions with Vanderbilt and its affiliates.
In accordance with the underwriting agreement, Vanderbilt has agreed to
indemnify the underwriters against some liabilities, including civil
liabilities under the Securities Act, or contribute to payments which the
underwriters may require to make in respect of the underwriting agreement.
Vanderbilt has agreed that for a period of 30 days from the date of this
prospectus supplement it will not offer or sell publicly any other manufactured
housing contract pass-through certificates without the underwriters' consent.
LEGAL MATTERS
The validity of the Offered Certificates will be passed upon for
Vanderbilt by Boult, Cummings, Conners & Berry, PLC, Nashville, Tennessee. Some
legal matters will be passed upon for the underwriters by Sidley Austin Brown &
Wood LLP, New York, New York. The material federal income tax consequences of
the Offered Certificates will be passed upon for Vanderbilt by Sidley Austin
Brown & Wood LLP.
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GLOSSARY
There follows abbreviated definitions of some capitalized terms used in
this prospectus supplement. The pooling and servicing agreement may contain a
more complete definition of some of the terms defined in this prospectus
supplement and reference should be made to the pooling and servicing agreement
for a more complete definition of all of those terms.
"APR" means, with respect to any contract and any time, the per annum rate
of interest then being borne by that contract, as described on the face of that
contract.
"Available Distribution Amount" for any remittance date is the sum of:
(a) the Monthly Advance, if any, relating to the contracts for that
remittance date and
(b) the amount in the Certificate Account on the close of business on
the last day of the immediately preceding Due Period less the sum of:
(1) scheduled payments for contracts that are due in a Due Period
subsequent to that Due Period;
(2) payments on contracts that have been repurchased as a result of a
breach of a representation or warranty and any other payments not
required to be deposited in the Certificate Account;
(3) reimbursements to the servicer in the amount of liquidation
expenses incurred and taxes and insurance premiums advanced by
the servicer in respect of contracts;
(4) reimbursements to the servicer for Nonrecoverable Advances and
Monthly Advances relating to the contracts in respect of
liquidated contracts, to the extent permitted by the pooling and
servicing agreement; and
(5) expenses reimbursable to Vanderbilt as provided in the pooling
and servicing agreement.
"Average Sixty-Day Delinquency Ratio" is, in general, the ratios of the
average of the aggregate principal balance of contracts delinquent 60 days or
more for the preceding three Due Periods (determined as of the last day of each
Due Period) to the average Pool Scheduled Principal Balance for those periods.
"Basis Risk Shortfall Amount" means, with respect to the Class AV
Certificates at any remittance date, the excess, if any, of:
(1) the amount of interest the Class AV Certificates would have been
entitled to receive on such remittance date had the interest rate for
the Class AV Certificates been the lesser of (i) LIBOR plus 0.65% and
(ii) 15.00% per annum, over
(2) the amount of interest accrued on the Class AV Certificates on such
remittance date based on the least of (i) the Weighted Average Net
Contract Rate, (ii) LIBOR plus 0.65% and (iii) 15.00% per annum.
"Certificate Account" is a trust account or accounts maintained by the
trustee in accordance with the pooling and servicing agreement.
"Certificate Owners" are persons acquiring beneficial ownership interests
in the Offered Certificates.
"Class A Certificates" means the Class AV, Class A-1, Class A-2, Class
A-3, Class A-4 and Class A-5 Certificates.
"Class A Percentage" for a remittance date is the percentage derived from
the fraction (which shall not be greater than 1), the numerator of which is the
aggregate Principal Balance of the Class A Certificates immediately prior to
that remittance date and the denominator of which is the aggregate Principal
Balance of the certificates immediately prior to that remittance date.
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"Class B Certificates" means the Class B-1 and Class B-2 Certificates.
"Class B Percentage" is 100% less the sum of the Class A Percentage and
Class M-1 Percentage.
"Class B-2 Floor Amount" equals, with respect to any remittance date,
approximately $5,799,010.44 which represents approximately 2.00% of the Cut-off
Date Pool Principal Balance.
"Class B-2 Formula Distribution Amount" with respect to a remittance date
is equal to interest accrued during the related Interest Period on the Class
B-2 Principal Balance plus the greater of the Class B-2 Principal Liquidation
Loss Amount and the formula amount of principal specified in the pooling and
servicing agreement as distribution on the Class B-2 Certificates on that
remittance date.
"Class B-2 Principal Liquidation Loss Amount" for any remittance date will
equal the amount, if any, by which:
(1) the Formula Principal Distribution Amount (exclusive of the
portion specified in clause (6) of the definition of Formula
Principal Amount) for that remittance date exceeds
(2) the amount (exclusive of the Enhancement Payment) distributed on
the certificates on account of principal on that remittance date.
The Class B-2 Principal Liquidation Loss Amount represents future
principal payments on the contracts that, because of the
subordination of the Class B-2 Certificates and liquidation
losses on the contracts, will not be paid to the Class B-2
Certificate holders from the assets of the trust fund but may be
paid in the form of an Enhancement Payment.
"Class M-1 Percentage" for a remittance date is the percentage derived
from the fraction (which shall not be greater than 1), the numerator of which
is the aggregate Principal Balance of the Class M-1 Certificates immediately
prior to that remittance date and the denominator of which is the aggregate
Principal Balance of the certificates immediately prior to that remittance
date.
"Class M-1 and Class B Principal Distribution Test" is met in respect of a
remittance date on which each of the following requirements is satisfied:
o the remittance date is on or after the March 2008 remittance date;
o the Class M-1 Percentage plus the Class B Percentage for that
remittance date is equal to at least approximately 27.125% (which is
1.75 times the sum of the original Class M-1 Percentage and the
original Class B Percentage);
o the Contract Pool Performance Tests are satisfied; and
o the Class B-2 Principal Balance is not less than the Class B-2 Floor
Amount.
"Clearstream" means Clearstream Banking, societe anonyme.
"Code" means the Internal Revenue Code of 1986, as amended, and any
regulations promulgated under the Internal Revenue Code.
"Collection Shortfall" means for any remittance date the amount, if any,
by which the Available Distribution Amount would be insufficient to make all
payments due pursuant to clauses (i) through (xi) under paragraph A. or clauses
(i) through (xi) under paragraph B., as applicable, under "Description of the
Certificates--Distributions--Priority of Distributions" in this prospectus
supplement.
"Contract Pool Performance Tests" are satisfied in respect of a remittance
date if all of the following conditions with respect to the contract pool are
met:
o the Average Sixty-Day Delinquency Ratio (as defined in the pooling and
servicing agreement) as of that remittance date does not exceed 5.00%
for the contracts;
o the Cumulative Realized Losses for the contracts as of that remittance
date do not exceed a certain specified percentage of the Cut-off Date
Pool Principal Balance, depending on the year in which that remittance
date occurs; and
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o the Current Realized Loss Ratio (as defined in the pooling and
servicing agreement) as of the remittance date does not exceed 2.75%
for the contracts.
"Contract Rate" means, with respect to each contract, the interest rate,
fixed or variable annual percentage rate, specified in the contract.
"Cumulative Realized Losses" for any remittance date is the aggregate net
liquidation losses for the period from the Cut-off Date through the end of the
related Due Period.
"Current Realized Loss Ratio" for any remittance date is the annualized
percentage derived from the fraction, the numerator of which is the sum of the
aggregate net liquidation losses for the three preceding Due Periods and the
denominator of which is the arithmetic average of the Pool Scheduled Principal
Balances for that remittance date and the preceding two remittance dates.
"Cut-off Date" is the date from which principal and interest payments on
the contracts are included in the trust fund.
"Cut-off Date Pool Principal Balance" means the aggregate outstanding
principal balance of the contract pool as of the Cut-off Date, subject to a
permitted variance of plus or minus 5%, as of the Cut-off Date.
"Deficiency Event" will occur if the sum of the Principal Balances of the
Senior Certificates becomes equal to or greater than the Pool Scheduled
Principal Balance.
"Determination Date" means the fifth Business Day prior to each remittance
date.
"DTC" means the Depository Trust Company.
"Due Date" is the date on which each scheduled payment of principal and
interest is due on a contract, exclusive of any days of grace.
"Due Period" means, with respect to any remittance date, the period
beginning on the 26th day of the second month preceding the month of that
remittance date and ending on the 25th day of the month preceding the month of
that remittance date.
"Eligible Institution" means:
o a depository institution organized under the laws of the United States
or any state, the deposits of which are insured to the full extent
permitted by law by the FDIC, the commercial paper or unsecured
short-term debt of which has a rating of P-1 by Moody's and A-1+ by
S&P, and which is subject to examination by federal or state
authorities or a depository institution otherwise acceptable to Moody's
and S&P,
o the corporate trust department of the trustee or
o an institution otherwise acceptable to Moody's and S&P.
"Enhancement Payment" means a payment required to be made under the
Limited Guarantee.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Financial Intermediary" means a brokerage firm, bank, thrift institution,
or other financial intermediary that maintains the beneficial owner's account
and where the beneficial owner's ownership of a book-entry certificate is
recorded.
"Foreign Holder" is a certificateholder who holds a Regular Certificate
and who is not:
o a citizen or resident of the United States,
o a corporation, partnership or other entity treated as a corporation or
partnership for United States federal income tax purposes, organized in
or under the laws of the United States, any state of the United States
or the District of Columbia (unless, in the case of a partnership,
Treasury regulations provide otherwise),
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o an estate, the income of which is included in gross income for United
States tax purposes regardless of its source, or
o a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United
States persons have the authority to control all substantial decisions
of the trust.
"Foreign Investors" means any person other than:
o a citizen or resident of the United States,
o a corporation, partnership or other entity treated as a corporation or
partnership for U.S. federal income tax purposes organized in or under
the laws of the United States or any state of the United States or the
District of Columbia (other than a partnership that is not treated as
United States person under any applicable Treasury regulations),
o an estate, the income of which is includible in gross income for U.S.
federal income tax purposes, regardless of its source, or
o a trust, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have authority to control all substantial
decisions of the trust. In spite of the preceding sentence, to the
extent provided in Treasury regulations, some trusts in existence on
August 20, 1996 which were treated as United States persons prior to
that date that elect to continue to be treated as United States persons
will not be considered a Foreign Investor.
"Formula Principal Distribution Amount" in respect of a remittance date
equals the sum of:
(1) all scheduled payments of principal due on each outstanding contract
during the Due Period preceding the month in which the remittance
date occurs,
(2) the Scheduled Principal Balance of each contract which, during the
Due Period preceding the month of that remittance date, was purchased
by Vanderbilt in accordance with the pooling and servicing agreement
on account of a representation or warranty breach,
(3) all partial prepayments (as defined in the pooling and servicing
agreement) of contracts received during the preceding Due Period,
(4) the Scheduled Principal Balance of each contract that was prepaid in
full during that preceding Due Period,
(5) the Scheduled Principal Balance of each contract that became a
liquidated contract during the preceding Due Period, and
(6) any previously undistributed shortfalls in the amounts in clauses
(1) and (5) in respect of the prior remittance dates (other than any
shortfall with respect to which an Enhancement Payment has been made
to the Class B-2 Certificate holders).
"Interest Deficiency Event" means, with respect to a class and a
remittance date, that after distribution of the related Available Distribution
Amount in the order of priority set forth in the pooling and servicing
agreement, there remains unpaid:
(1) any of the amount of interest accrued on a class during the related
Interest Period at the then applicable remittance rate on the
Principal Balance of that class immediately prior to the remittance
date and
(2) any amounts distributable on that class under clause (1) above or
this clause on the previous remittance date but not previously
distributed, together with, to the extent legally permissible,
interest accrued on that amount during the related Interest Period at
the then applicable remittance rate.
"Interest Period" will be, with respect to any remittance date for the
Class AV and Class A-1 Certificates, the period commencing from the remittance
date in the prior month (or the Closing Date in the case of the first
remittance date) to the day preceding the related remittance date on the basis
of the
S-69
actual number of days elapsed and a 360 day year. With respect to any
remittance date for the Class A-2, Class A-3, Class A-4, Class A-5, Class M-1,
Class B-1 and the Class B-2 Certificates, the Interest Period will be from the
first day of the calendar month preceding the month of the remittance date
through the last day of that calendar month on the basis of an assumed 360-day
year consisting of twelve 30-day months.
"Land-and-Home Contracts" are those contracts that are secured by liens on
the real estate on which the related manufactured homes are located.
"Monthly Advances" are those advances the servicer makes in respect of
delinquent scheduled payments on the contracts that were due in the preceding
Due Period and would, in the servicer's judgment, be recoverable from related
late payments, liquidation proceeds or otherwise.
"Monthly Servicing Fee" for any remittance date is the amount equal to
1/12th of the product of 1.25% and the Pool Scheduled Principal Balance for the
immediately preceding remittance date.
"Moody's" means Moody's Investors Service, Inc. or its successor in
interest.
"Nonrecoverable Advance" is an advance made or proposed to be made that
the servicer believes is not, or if made would not be, ultimately recoverable
from related liquidation proceeds or otherwise.
"Non-U.S. Person" means any person who is not a U.S. Person.
"Offered Certificates" are the Class AV, Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5, Class M-1, Class B-1 and Class B-2 Certificates.
"OID" means original issue discount.
"Participants" are members or participants of DTC, Clearstream or
Euroclear.
"Percentage Interest" with respect to any certificate of any class, the
percentage obtained by dividing the denomination of the certificate by the
original Principal Balance of all certificates of that class.
"Plans" means employee benefit plans and other plans and arrangements or
to Section 4975 of the Code that are subject to ERISA.
"Pool Scheduled Principal Balance" for the contracts for any remittance
date is equal to:
(1) the Cut-off Date Pool Principal Balance less
(2) the Formula Principal Distribution Amounts for all prior remittance
dates.
"Principal Balance" of each class of certificates is its original class
principal balance reduced by all distributions on that class in respect of
principal. The "Class A Principal Balance" is the sum of the Class AV, Class
A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Principal Balances. The
"Class B Principal Balance" is the sum of the Class B-1 Principal Balance and
the Class B-2 Principal Balance.
"Record Date" means:
(1) with respect to the initial remittance date, the closing date, and
(2) with respect to any remittance date after that, the last Business
Day of the month preceding the month of the related remittance date,
except that, with respect to the Class AV and Class A-1 Certificates,
after the initial remittance date, the Record Date will be the
Business Day preceding the related remittance date.
"Residual Certificates" means the certificate of any series identified in
the related prospectus supplement as "residual interest" in the REMIC within
the meaning of Section 860(G)(a)(2) of the Code.
"Scheduled Principal Balance" of a contract as of any remittance date is
its principal balance (before any adjustment by reason of bankruptcy,
moratorium or similar waiver or grace period) as of the Due Date (or latest
occurring Due Date, in the case of a bi-weekly contract) in the Due Period next
preceding that remittance date, after giving effect to any previous partial
prepayments and after giving effect to all previous scheduled principal
payments and to the scheduled payment of principal due on that Due Date
(whether or not paid and before any adjustment by reason of bankruptcy,
moratorium or similar waiver or grace period).
S-70
"SEC" means the Securities Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Certificates" are Class AV, Class A-1, Class A-2, Class A-3 and
Class A-4.
"Servicing Fee" means the amount equal to the product of 1.25% and the
Pool Schedule Principal Balance.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. or its successor in interest.
"Subordinate Certificates" are Class A-5, Class M-1, Class B-1 and Class
B-2.
"Underwritten Certificates" means the Class AV, Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class M-1 Certificates and the Class B-1
Certificates set forth in the table on the cover page of this prospectus
supplement.
"U.S. Person" means:
o a citizen or resident of the United States,
o a corporation, partnership or other entity treated as a corporation or
partnership for U.S. federal income tax purposes organized in or under
the laws of the United States or any state of the United States,
including for this purpose the District of Columbia (unless in the case
of a partnership, future Treasury regulations provide otherwise),
o an estate that is subject to U.S. federal income tax, regardless of its
income, or
o a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States Persons have authority to control all substantial decisions of
the trust. Some trusts not described in this clause in existence on
August 20, 1996 that elect to be treated as a United States Person will
also be a U.S. Person.
"Weighted Average Net Contract Rate" shall be equal to:
(1) the weighted average of the Contract Rates applicable to the
scheduled payments due on the outstanding fixed rate contracts in the
Due Period preceding the remittance date minus
(2) if Vanderbilt is the servicer, 1.00% or if Vanderbilt is no longer
the servicer, 1.25%.
For purposes of this calculation, the Contract Rates in respect of the
bi-weekly contracts shall be calculated by reference to the interest
collections in respect of scheduled payments for the Due Period preceding the
remittance date and adjusted to be calculated on the basis of an assumed 360
day year consisting of twelve 30-day months.
"Yield Maintenance Account" is a trust account or accounts maintained by
the trustee separate and apart from the REMIC, in accordance with the pooling
and servicing agreement.
"Yield Maintenance Amount" is the amount on deposit in the Yield
Maintenance Account for any remittance date.
"Yield Maintenance Excess Amount" is the amount, if any, by which the
Yield Maintenance Amount for any remittance date exceeds the aggregate amount
of any Basis Risk Shortfall Amount and Collection Shortfalls for that
remittance date.
S-71
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the Global Securities will be
available only in book-entry form. Investors in the Global Securities may hold
those Global Securities through any of DTC, Clearstream or Euroclear. Initial
settlement and all secondary trades will settle in same-day funds. Capitalized
Terms used but not defined in this Annex I have the meanings assigned to them
in the prospectus supplement and the prospectus.
Secondary market trading between investors holding interests in Global
Securities through Clearstream and Euroclear will be conducted in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice.
Secondary market trading between investors holding interests in Global
Securities through DTC will be conducted according to the rules and procedures
applicable to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and
investors holding interests in Global Securities through DTC Participants will
be effected on a delivery-against-payment basis through the respective
depositaries of Clearstream and Euroclear (in that capacity) and other DTC
Participants.
Although DTC, Euroclear and Clearstream are expected to follow the
procedures described in the following paragraphs in order to facilitate
transfers of interests in the Global Securities among participants of DTC,
Euroclear and Clearstream, they are under no obligation to perform or continue
to perform those procedures, and those procedures may be discontinued at any
time. None of Vanderbilt, the servicer and the trustee will have any
responsibility for the performance by DTC, Euroclear and Clearstream or their
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their obligations.
Non-U.S. holders of Global Securities will be subject to U.S. withholding
taxes unless those holders meet some requirements and deliver appropriate U.S.
tax documents to the securities clearing organizations or their participants.
INITIAL SETTLEMENT
The Global Securities will be registered in the name of Cede & Co. as
nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect Participants in DTC. Clearstream and Euroclear will hold positions on
behalf of their participants through their respective depositaries, which in
turn will hold those positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC
Participants, rather than through Clearstream or Euroclear accounts, will be
subject to the settlement practices applicable to similar issues of
pass-through certificates. Investors' securities custody accounts will be
credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their Global Securities through Clearstream or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Interests in Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the DTC procedures applicable to similar
issues of pass-through certificates in same-day funds.
I-1
Trading between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream Participants or Euroclear Participants
and/or investors holding interests in Global Securities through them will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Clearstream or Euroclear purchaser. When
interests in Global Securities are to be transferred on behalf of a seller from
the account of a DTC Participant to the account of a Clearstream Participant or
a Euroclear Participant for a purchaser, the purchaser will send instructions
to Clearstream or Euroclear through a Clearstream Participant or Euroclear
Participant at least one Business Day prior to settlement. Clearstream or the
Euroclear operator will instruct its respective depositary to receive an
interest in the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last
distribution date to and excluding the settlement date. Payment will then be
made by the respective depositary to the DTC Participant's account against
delivery of an interest in the Global Securities. After that settlement has
been completed, that interest will be credited to the respective clearing
system, and by the clearing system, in accordance with its usual procedures, to
the Clearstream Participant's or Euroclear Participant's account. The credit of
that interest will appear the next Business Day and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed through DTC on the intended value date
(i.e., the trade fails), the Clearstream or Euroclear cash debit will be valued
instead as of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement from cash on hand, in which case those Clearstream
Participants or Euroclear Participants will take on credit exposure to
Clearstream or the Euroclear operator until interests in the Global Securities
are credited to their accounts one day later.
As an alternative, if Clearstream or the Euroclear operator has extended a
line of credit to them, Clearstream Participants or Euroclear Participants can
elect not to preposition funds and allow that credit line to be drawn upon.
Under this procedure, Clearstream Participants or Euroclear Participants
receiving interests in Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, the investment income on the interest in
the Global Securities earned during that one-day period would tend to offset
the amount of those overdraft charges, although this result will depend on each
Clearstream Participant's or Euroclear Participant's particular cost of funds.
Since the settlement through DTC will take place during New York business
hours, DTC Participants are subject to DTC procedures for transferring
interests in Global Securities to the respective depositary of Clearstream or
Euroclear for the benefit of Clearstream Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the seller settling the sale through a DTC
Participant, a cross-market transaction will settle no differently than a sale
to a purchaser settling through a DTC Participant.
Finally, intra-day traders that use Clearstream or Euroclear Participants
and that purchase interests in Global Securities from DTC Participants or
sellers settling through them for delivery to Clearstream Participants or
Euroclear Participants should note that these trades will automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential condition:
(a) borrowing interests in Global Securities through Clearstream or
Euroclear for one day (until the purchase side of the intra-day trade is
reflected in the relevant Clearstream or Euroclear accounts) in accordance
with the clearing system's customary procedures;
(b) borrowing interests in the Global Securities in the United States
from a DTC Participant no later than one day prior to settlement, which
would give sufficient time for those interests to be reflected in the
relevant Clearstream or Euroclear account in order to settle the sale side
of the trade; or
I-2
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Clearstream Participant
or Euroclear Participant.
Transfers between Clearstream or Euroclear seller and DTC purchaser. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
interests in Global Securities are to be transferred by the respective clearing
system, through the respective depository, to a DTC Participant. The seller
will send instructions to Clearstream or the Euroclear Operator through a
Clearstream Participant or Euroclear Participant at least one Business Day
prior to settlement. Clearstream or Euroclear will instruct its respective
depository, to credit an interest in the Global Securities to the DTC
Participant's account against payment. Payment will include interest accrued on
the Global Securities from and including the last remittance date to but
excluding the settlement date. The payment will then be reflected in the
account of the Clearstream Participant or Euroclear Participant the following
Business Day, and receipt of the cash proceeds in the Clearstream Participant's
or Euroclear Participant's account would be back-valued to the value date
(which would be the preceding day, when settlement occurred through DTC in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
SOME U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons (as defined below), unless (i) each
clearing system, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business in the chain of
intermediaries between that beneficial owner and the U.S. entity required to
withhold tax complies with applicable certification requirements and (ii) that
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8BEN). Beneficial owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8BEN (Certificate
of Foreign Status of Beneficial Owner for United States Tax Withholding).
Non-U.S. Persons residing in a country that has a tax treaty with the United
States may be able to obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form W-8BEN (Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding). If the information shown
on Form W-8BEN changes, a new Form W-8BEN must be filed within 30 days of that
change. After December 31, 2000, only Form W-8BEN will be acceptable.
Exemption for Non-U.S. Persons with effectively connected income (Form
W-8ECI). A Non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form W-8ECI (Certificate of Foreign Person's
Claim for exemption from Withholding on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds the security (the clearing agency, in the case of persons holding
directly on the books of the clearing agency). Form W-8BEN and Form W-8ECI are
effective until the third succeeding calendar year from the date the form is
signed.
I-3
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to Foreign Holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
I-4
PROSPECTUS
VANDERBILT MORTGAGE AND FINANCE, INC.
MANUFACTURED HOUSING CONTRACT PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
[SIDEBAR]
- ---------------------------------
|YOU SHOULD CONSIDER THE RISK | We are offering certificates representing
|FACTORS STARTING PAGE 4 OF | primarily an interest in manufactured
|THIS PROSPECTUS. | housing contracts as further specified in
| | this prospectus and a prospectus
|The certificates will | supplement. Vanderbilt Mortgage and
|represent obligations of the | Finance, Inc. will form a trust for each
|related trust and will not | separate series of certificates, and the
|represent any interest in or | trust will issue the certificates of that
|obligation of Vanderbilt | series. The certificates of any series may
|Mortgage and Finance, Inc. or, | consist of several different classes. A
|unless specified in the | trust may also issue one or more other
|prospectus supplement relating | interests in the trust that will not be
|to a series, any of its | offered under this prospectus and the
|affiliates. | related prospectus supplement.
| |
|The certificates will not be | The right of each class of certificates
|insured or guaranteed by any | within a series to receive payments may be
|government agency or | senior or subordinate to the rights of one
|instrumentality. | or more of the other classes of
| | certificates. In addition, a series of
|This prospectus may not be | certificates may include one or more
|used to offer or sell any | classes which on the one hand are
|certificates unless | subordinated to one or more classes of
|accompanied by a prospectus | certificates, while on the other hand are
|supplement relating to that | senior to one or more classes of
|series. | certificates. The rate of principal and
- --------------------------------- interest payments on the certificates of
[END SIDEBAR] any class will depend on the priority of
payment of that class and the rate and
timing of payment of the related contracts. The prospectus supplement will list
the remittance rate that holders of certificates will receive for each class in
that series. The prospectus supplement will specify whether the remittance rate
will be fixed, variable or adjustable.
Before the offering of the certificates under this prospectus, there was no
public market for the certificates. The underwriters named in the prospectus
supplement relating to a series may from time to time buy and sell certificates
of that series.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
February 14, 2003
IMPORTANT NOTICE ABOUT INFORMATION IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We tell you about the certificates in two separate documents that
progressively provide more detail: (a) this prospectus, which provides general
information, some of which may not apply to a particular series of certificates,
including your series; and (b) the prospectus supplement related to the
particular terms of your series of certificates.
If the terms of your series of certificates described in the prospectus
supplement varies from this prospectus, you should rely on the information in
your prospectus supplement.
You should rely only on the information contained in this document or
information to which we have referred you. We have not authorized anyone to
provide you with information that is different. This document may only be used
where it is legal to sell these securities. The information in this document may
only be accurate on the date of this document.
REPORTS TO HOLDERS OF THE CERTIFICATES
We will provide to the holders of certificates of each series monthly and
annual reports concerning the certificates and the related trust fund. For a
more complete description of the reports you will receive, please read the
section entitled "Description of the Certificates -- Reports to
Certificateholders" in the prospectus supplement relating to your series.
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of some information with the
SEC, including annual, quarterly and special reports, proxy statements and
other information. Vanderbilt Mortgage and Finance, Inc., Vanderbilt ABS Corp.
and Clayton Homes, Inc. have filed a registration statement with the SEC under
the Securities Act. You can read and copy the registration statement, as well
as other filed documents, at the SEC's public reference facilities located at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the public reference facilities by calling the
SEC at 1-800-SEC-0330. You may also visit the SEC's web site at
http://www.sec.gov to access available filings.
Clayton Homes, Inc. has securities other than the certificates listed on
the NYSE. You may inspect reports and other information concerning those
securities at the NYSE.
The SEC allows us to "incorporate by reference" some of the information we
file with it, which means that we can disclose important information to you by
referring you to those documents. The information that we incorporate by
reference is considered to be part of this prospectus, and later information
that we file with the SEC will automatically update and supersede this
information. With respect to any class of certificates that is supported by a
guarantee of Clayton Homes, Inc., we are incorporating by reference the
following documents into this prospectus and the related prospectus supplement:
o Clayton Homes, Inc.'s Annual Report on Form 10-K for the year ended
June 30, 2002; and
o Clayton Homes, Inc.'s Quarterly Reports on Form 10-Q for the quarterly
periods ended September 30, 2002 and December 31, 2002.
We are also incorporating by reference into this prospectus and the related
prospectus supplement:
o any document filed by Vanderbilt Mortgage and Finance, Inc. or
Vanderbilt ABS Corp. in accordance with Section 13(a), 13(c), 14 or
15(d) of the Securities and Exchange Act of 1934, as amended, after the
date of this prospectus and prior to the termination of the offering of
the certificates issued by that trust; and
o any document: (i) that relates to a class of certificates supported by
a guarantee of Clayton Homes, Inc. and (ii) that is filed by Clayton
Homes, Inc. in accordance with Section 13(a), 13(c), 14 or 15(d) of the
Securities and Exchange Act of 1934, as amended, after the date of this
prospectus and prior to the termination of the offering of the
certificates issued by that trust.
2
We will provide to you, upon your written or oral request, without charge,
a copy of any or all of the documents incorporated by reference in this
prospectus (other than some exhibits to those documents). Please direct your
requests for copies of documents filed by Vanderbilt Mortgage and Finance, Inc.
to its principal executive office at 500 Alcoa Trail, Maryville, Tennessee
37804, Attention: David Jordan, Secretary, telephone number: (865) 380-3515.
Please direct your requests for copies of documents filed by Vanderbilt ABS
Corp. to its principal executive office at 500 Alcoa Trail, Maryville, Tennessee
37804, Attention: David Jordan, Secretary, telephone number: (865) 380-3000.
Please direct your requests for copies of documents filed by Clayton Homes, Inc.
to its principal executive office at 5000 Clayton Road, Maryville, Tennessee
37804, Attention: Kevin T. Clayton, President, telephone number: (865) 380-3000.
3
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the certificates. You should also consider the risk factors described
in your prospectus supplement.
THE CONTRACTS MAY HAVE HIGHER THAN EXPECTED DELINQUENCIES, DEFAULTS OR LOSSES.
Your investment in the certificates may be affected by various factors,
including:
General Economic Conditions. Downturns in regional or local economic
conditions historically have caused increased delinquency, defaults and losses
on manufactured housing contracts. An economic downturn in any region where a
number of the obligors on the contracts are located might cause higher
delinquencies, defaults and losses on the contracts. If delinquencies, defaults
or losses on the contracts are higher than expected, you could suffer a loss on
your investment.
Depreciation in Value of Manufactured Homes. A manufactured home generally
depreciates over time. As a result, the market value of a manufactured home may
decline faster than the outstanding principal balance of the loan for that home.
If the value of the manufactured homes securing the contracts declines faster
than expected, then defaults and losses on the contracts may rise. If the losses
on the contracts are not covered by the subordination of other classes of
certificates, or by another form of credit enhancement, you will bear all the
risk of loss of default by obligors and will need to look primarily to the value
of the manufactured home. The proceeds from the liquidation of any contract and
sale of the related manufactured home may not be sufficient to cover the
outstanding principal and unpaid interest on the defaulted contract.
Please review "The Trust Fund -- The Contract Pools" in this prospectus for
more detail.
THE CONTRACTS MAY BE PREPAID BEFORE THEIR SCHEDULED MATURITY.
There is a risk that the contracts may be prepaid in full or in part at any
time before their scheduled maturity due to various factors, such as:
o homeowner mobility;
o general and regional economic conditions;
o competition among manufactured housing lenders; and
o prevailing interest rates.
The prepayment experience on manufactured housing contracts varies greatly
and may affect the average life of the certificates. If a contract is prepaid in
full, the interest on the contract will accrue only to the date of prepayment.
If you purchase a certificate at a discount, then slower than expected
prepayments on the contracts will reduce the yield on your certificate. If you
purchase a certificate at a premium, then faster than expected prepayments on
the contracts will reduce the yield on your certificate. You should not assume
that the contracts will prepay at any particular rate or at a constant rate.
You will also be subject to reinvestment risk in connection with the
average life of your certificates. When prevailing interest rates are lower than
at the time of your investment, prepayments are likely to increase and the
average life of your certificates is likely to decrease. You may only be able to
reinvest the proceeds from your certificates in investments of similar risk
bearing a lower rate of interest than your certificates.
THE CERTIFICATES ARE NOT AN OBLIGATION OF THE SELLER OR THE SERVICER AND THEY
ARE NOT INSURED.
The certificates will not represent an interest in, or obligation of, the
depositor, the seller or the servicer. The certificates are not insured or
guaranteed by the government, any underwriter, Vanderbilt Mortgage and Finance,
Inc., Vanderbilt ABS Corp. or, unless specified in the related prospectus
supplement, any of their affiliates, and will be payable only from amounts
collected on the contracts.
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THE CERTIFICATES MAY HAVE LIMITED LIQUIDITY.
There is a risk that a secondary market will not develop for the
certificates of any series. There is also a risk that if a secondary market does
develop:
o it may not be sufficiently liquid to allow you to sell your
certificates; and/or
o it may not continue for the term of any series of certificates.
RISKS RELATING TO ENFORCEABILITY OF THE CONTRACTS.
The security interest in the manufactured homes may not be perfected.
Every manufactured home contract will be secured by a security interest in
either:
o the manufactured home; or
o if it is a land-and-home contract, the mortgage or deed of trust on the
real estate where the manufactured home is permanently affixed.
State laws, such as the UCC and motor vehicle titling statutes, govern the
perfection of security interests in manufactured homes and the enforcement of
rights to realize upon the value of manufactured homes as collateral for the
contracts. The steps required to create and perfect a security interest in a
manufactured home vary from state to state. Some laws may also limit the
servicer's ability to repossess, foreclose or liquidate the contracts.
Vanderbilt will represent and warrant that each contract is secured by a
perfected security interest in a manufactured home. If there is a material
breach of any of these representations and warranties with respect to any
contract, Vanderbilt must repurchase the contract, subject to the conditions of
the pooling and servicing agreement. Nevertheless, a failure by Vanderbilt to
perfect its security interest in the manufactured homes securing a number of
contracts could cause an increase in losses on the contracts, and you could
suffer a loss on your investment as a result.
The security interest in the manufactured homes may not have been assigned to
the trustee.
Vanderbilt will not:
o amend a certificate of title to a manufactured home to name the
depositor or the trustee as the lienholder;
o note the depositor or the trustee's interest on the certificate of
title;
o deliver the certificate of title to the depositor or the trustee; or
o record the assignment to the depositor or the trustee of the mortgage
or deed of trust securing Land-and-Home Contracts.
As a result, in some states the assignment of the security interest in the
manufactured home, or of the mortgage or deed of trust, to the trustee may not
be effective against our creditors or a trustee in the event we enter
bankruptcy, or the security interest may not be perfected. If Vanderbilt is no
longer the servicer and the trustee or a successor servicer is unable to enforce
the security interest in the manufactured home following a default on a
contract, losses on the contracts would increase, and you could suffer a loss on
your investment as a result.
Federal and state consumer protection laws apply to the contracts.
If Vanderbilt or the seller of a manufactured home did not comply with
federal or state consumer protection laws with respect to a contract relating to
a manufactured home, the trust fund may be liable for amounts due under the
contracts.
Vanderbilt will represent and warrant that each contract complies with
applicable federal and state consumer protection laws. If there is a material
breach of these representations and warranties with
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respect to any contract, Vanderbilt must repurchase the contract, subject to the
conditions of the pooling and servicing agreement. Nevertheless, a failure by
Vanderbilt to comply with these laws could cause an increase in losses on the
contracts, and you could suffer a loss on your investment as a result.
Please review "Some Legal Aspects of the Contracts" in this prospectus for
more detail.
IF THE SELLER BECOMES INSOLVENT, THERE MAY BE DELAYS OR REDUCTIONS IN
DISTRIBUTIONS ON YOUR CERTIFICATES.
Each transfer of contracts to a trust fund is intended to constitute a
sale, rather than a pledge of the contracts to secure indebtedness. However, if
either the seller or the depositor becomes a debtor under the federal bankruptcy
code, it is possible that creditors or a bankruptcy trustee may argue that the
transfer of the contracts was a pledge rather than a sale. If this position is
presented to or accepted by a court, it could result in a delay in, or reduction
of, distributions on your certificates.
SUBORDINATION MAY NOT PROTECT HOLDERS OF SENIOR CERTIFICATES FROM LOSSES.
If the rights of your class of certificates are senior to the rights of one
or more other classes of certificates:
o the protection given to you by subordination may be depleted due to
some losses on the contracts; and
o any reserve fund established for your series of certificates could be
depleted in some circumstances.
In either case, shortfalls could affect you as well as the holders of
certificates subordinate to your class of certificates. You should carefully
review the credit risks to be absorbed by your class of certificates on account
of subordination or the timing of the distributions intended to be made on your
class of certificates.
RATING OF THE SECURITIES RELATE TO CREDIT RISK ONLY AND DOES NOT ASSURE PAYMENT
ON THE SECURITIES
The ratings of the securities will be based on, among other things, the
adequacy of the value of the primary assets and any enhancement with respect to
those securities. A rating should not be deemed a recommendation to purchase,
hold or sell securities, since it does not address market price or suitability
for a particular investor. There is also no assurance that any rating will
remain in effect for any given period of time or may not be lowered or withdrawn
entirely by the rating agency if in its judgment circumstances in the future so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the primary assets, the rating on the securities might
also be lowered or withdrawn, among other reasons, because of an adverse change
in the financial or other condition of a credit enhancer or a change in the
rating of the enhancer's long term debt. Any reduction or withdrawal of a rating
will have an adverse effect on the value of the securities.
TENNESSEE TAX LIEN MAY HAVE PRIORITY OVER THE TRUST FUND
Under Tennessee law, a tax is due in connection with the public recordation
of instruments evidencing indebtedness. Both of the seller and the depositor
will treat the transfer of the contracts to each trust fund as a sale rather
than a loan, and therefore neither the seller nor the depositor will pay any tax
in respect of the recordation of instruments evidencing those transfers.
Nonpayment or underpayment of the Tennessee indebtedness tax does not affect or
impair the effectiveness, validity, priority or enforceability of the security
interest created or evidenced by the instrument, but (a) subjects the holder of
the indebtedness to a penalty, in addition to the tax, in the amount of the
greater of $250 or double the unpaid tax due, (b) results in the imposition of a
tax lien in favor of the Tennessee Department of Revenue, in the amount of any
tax and penalties unpaid and owing that attaches to the collateral until the
lien or security interest is released and thereafter attaches to the proceeds,
and (c) precludes the holder of the indebtedness from maintaining an action on
the indebtedness (other than an action limited to the enforcement of the
security interests or lien) against the debtor until the nonpayment is cured. In
that
6
event, and in addition to the statutory disability described above, collections
on the contracts could be applied to pay that tax and penalty prior to being
applied to make distributions on your certificates and the Tennessee Department
of Revenue would have a lien on the contracts prior to the security interests
and liens of the trust fund.
THE TRUST FUND
GENERAL
Each trust fund will include:
o a contract pool (which may consist of sub-pools),
o a Certificate Account maintained by the trustee in accordance with the
pooling and servicing agreement,
o proceeds from hazard insurance policies on individual manufactured
homes or mortgaged properties, if any, and manufactured homes acquired
by repossession,
o any letter of credit, limited guarantee of Clayton Homes, Inc., surety
bond, pool insurance policy, cash reserve fund or any other form of
credit enhancement, or any combination of credit enhancements, and
o other property as may be specified in the related prospectus
supplement.
If so specified in the related prospectus supplement, a limited guarantee
of Clayton may exist and may not be a part of the trust fund. The trust fund
will be held by the trustee for the benefit of the certificateholders.
Each certificate will evidence the interest specified in the related
prospectus supplement in one trust fund, containing one contract pool (which may
consist of sub-pools) comprised of contracts having the aggregate principal
balance as of the Cut-off Date, specified in the related prospectus supplement.
Holders of certificates of a series will have interests only in that contract
pool and will have no interest in the contract pool created with respect to any
other series of certificates.
All of the contracts will have been originated or purchased by Vanderbilt
or an affiliate of Vanderbilt in the open market or in privately negotiated
transactions, including transactions with affiliates of Vanderbilt. The
following is a brief description of the contracts expected to be included in the
trust fund. Specific information respecting the contracts will be provided in
the prospectus supplement or in a report on Form 8-K to be filed with the SEC
after the initial issuance of those certificates. A copy of the pooling and
servicing agreement among the depositor, the servicer, the trustee and any other
party specified in the related prospectus supplement with respect to each series
of certificates will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the trustee specified in the related
prospectus supplement. A schedule of the contracts relating to those series will
be attached to the pooling and servicing agreement delivered to the trustee upon
delivery of the certificates.
Whenever in this prospectus terms such as contract pool, trust fund,
pooling and servicing agreement or remittance rate are used, those terms
respectively apply, unless the context otherwise indicates, to one specific
contract pool, trust fund, each pooling and servicing agreement and the
remittance rate applicable to the related series of certificates.
THE CONTRACT POOLS
Each pool of contracts with respect to a series of certificates will
consist primarily of manufactured housing installment sales contracts and
installment loan agreements and may include modular home installment sales
contracts and installment loan agreements originated by either Vanderbilt, a
manufactured housing dealer or a lender in the ordinary course of business and
purchased by Vanderbilt. The contracts will be conventional manufactured housing
contracts or contracts insured by the FHA or partially guaranteed by the VA.
Each manufactured housing contract will be secured by a new or used
7
manufactured home or modular home and, in some instances, by a mortgage or deed
of trust on real estate to which the manufactured home is permanently affixed,
the Land-and-Home Contracts. Each contract secured by a modular home and some of
the contracts secured by a manufactured home may be further secured by a
mortgage or deed of trust on real estate. Generally, the contracts will be fully
amortizing and will bear interest at their respective Contract Rate or at a
Contract Rate which steps up on a particular date. The prospectus supplement
will indicate contracts with other amortization or interest rate provisions.
If so specified in the prospectus supplement, the contract pool will
include notes or other evidences of indebtedness secured by a mortgage or deed
of trust on one- to four-family residential properties. The mortgage loans were
originated or acquired by Vanderbilt in the ordinary course of business.
Vanderbilt will represent that the manufactured homes securing the
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 a permanent foundation when connected
to the required utilities, and includes the plumbing, heating,
air-conditioning, and electrical systems contained therein; except that
that 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."
For each series of certificates, the depositor will assign the contracts
constituting the contract pool to the trustee named in the related prospectus
supplement. Vanderbilt, as servicer, will service the contracts in accordance
with the pooling and servicing agreement. See "Description of the Certificates
- -- Servicing."
Each contract pool will be composed of contracts bearing interest at the
annual fixed and/or variable Contract Rates and/or step-up rates specified in
the prospectus supplement. The Monthly Payments for contracts bearing interest
at a step-up rate (sometimes referred to in this prospectus as Step-up Rate
Contracts) will increase on the dates on which the Contract Rates are stepped
up. Each registered holder of a certificate will be entitled to receive periodic
distributions, which will typically be monthly, of all or a portion of principal
on the underlying contracts or interest on the principal balance of that
certificate at the remittance rate, or both.
The prospectus supplement will disclose in summary form for the contracts
contained in the related contract pool, among other things, the year of
origination; the range and the weighted average of Contract Rates; the range of
loan-to-value ratios; the range and average of outstanding principal balances as
of the Cut-off Date; the weighted average term to scheduled maturity as of
origination and as of the Cut-off Date; the geographic location of the
manufactured homes securing the contracts; the percentage and amount of
contracts secured by new or used manufactured homes; the aggregate principal
balance of the contracts; and the last maturity date of any contract. The trust
fund may include a Pre-Funding Account to be established with the trustee, which
would be used to purchase subsequent contracts from the depositor during the
funding period specified in the related prospectus supplement. The related
prospectus supplement will specify the conditions that must be satisfied prior
to any transfer of subsequent contracts, including the requisite characteristics
of the subsequent contracts.
Vanderbilt will make representations and warranties as to the types and
geographical distribution of the contracts included in a contract pool and as to
the accuracy in all material respects of some information furnished to the
trustee in respect of that contract. Upon a breach of any representation or
warranty that materially and adversely affects the interests of the
certificateholders in a contract, Vanderbilt will be obligated either to cure
the breach in all material respects, to purchase the contract or
8
to substitute another contract. This repurchase or substitution obligation
constitutes the sole remedy available to the certificateholders or the trustee
for a breach of a representation or warranty by Vanderbilt. See "Description of
the Certificates -- Conveyance of Contracts."
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of each
series of certificates will be paid to the depositor as payment for the
contracts (and if the depositor is not the seller, paid by the depositor to the
seller as payment for the contracts) and used by the seller for general
corporate purposes, including the purchase of the contracts, cost of carrying
the contracts until sale of the related certificates and to pay other expenses
connected with pooling the contracts and issuing the certificates.
VANDERBILT MORTGAGE AND FINANCE, INC.
Vanderbilt was incorporated in 1977 in the State of Tennessee. As of June
30, 2002, Vanderbilt had total assets of approximately $1.16 billion and
stockholder's equity of approximately $493 million. Vanderbilt, an indirect
subsidiary of Clayton Homes, Inc., is engaged in the business of, among other
things, purchasing, originating, selling and servicing installment sales
contracts and installment loan agreements for manufactured housing and modular
housing. Clayton, through its affiliates, manufactures and sells manufactured
homes and modular homes, and owns, manages and markets manufactured housing
communities. Vanderbilt's principal office is located at 500 Alcoa Trail,
Maryville, Tennessee 37804, telephone number (865) 380-3000. An affiliate of
Clayton acts as an insurance broker for some types of insurance, including
hazard and credit life insurance policies, some of which may cover some of the
contracts. Other affiliates of Clayton reinsure hazard and credit life insurance
policies, including policies that may cover some of the contracts. Four separate
indirect subsidiaries of Clayton, Vanderbilt Life and Casualty Insurance Co.,
Ltd., Vanderbilt Property and Casualty Insurance Co., Ltd., Eastern States Life
Insurance Co. and Midland States Life Insurance Co. may act as reinsurer of
insurance coverage relating to the contracts.
Vanderbilt purchases and originates manufactured housing contracts on an
individual basis from its principal office. Vanderbilt arranges to purchase
manufactured housing installment sales contracts originated by manufactured
housing dealers located in approximately 28 states, primarily southern and
midwestern. Most of these purchases are from dealers indirectly owned by
Clayton. Dealers which are not owned by Clayton must make an application to
Vanderbilt for dealer approval. Upon satisfactory results of Vanderbilt's
investigation of the dealer's creditworthiness and general business reputation,
Vanderbilt and the dealer enter into a dealer agreement.
In addition, Vanderbilt purchases portfolios of manufactured housing
contracts and provides servicing on behalf of other owners of manufactured
housing contracts that were not originally purchased or originated by
Vanderbilt. Those purchases may be from, and those servicing arrangements may be
made with respect to, the portfolios of other lenders or finance companies, the
portfolios of governmental agencies or instrumentalities or the portfolios of
other entities that purchase and hold manufactured housing contracts.
Vanderbilt is actively seeking arrangements by which it would service
and/or acquire manufactured housing contracts originated by other lenders.
Vanderbilt's management currently anticipates it will only seek servicing
responsibilities which relate to manufactured housing contracts.
UNDERWRITING POLICIES
GENERAL
Customers that desire to obtain financing from Vanderbilt complete a credit
application form. In the case of those dealers owned by Clayton, the manager
initially evaluates the application and then forwards it to Vanderbilt for
consideration. In the case of dealers that are not owned by Clayton, the
application is transmitted to Vanderbilt for consideration.
9
Credit applications are then evaluated by Vanderbilt's credit managers.
With respect to those customers determined to be creditworthy, Vanderbilt
requires a down payment in the form of cash, the trade-in value of a previously
owned manufactured home, and/or the estimated value of equity in real property
pledged as additional collateral. For previously owned homes, the trade-in
allowance accepted by the dealer must be consistent with the value of that home
determined by Vanderbilt in light of current market conditions. The value of
real property pledged as additional collateral is generally estimated by an
independent third party appraiser. Occasionally, such values are estimated by
personnel of the dealer, who are not appraisers but are familiar with the area
in which the property is located. The minimum amount of the down payment is
typically 5% of the purchase price. The purchase price includes the stated cash
sale price of the manufactured home, sales or other taxes and some fees and
set-up costs. The balance of the purchase price which may include property
improvements, points and some insurance premiums (including up to five years of
premiums on required hazard insurance) are financed by an installment sales
contract providing for a purchase money security interest in the manufactured
home and a mortgage on real property, if any, pledged as additional collateral.
Normally, the fixed rate contracts originated by Vanderbilt provide for equal
monthly payments, generally over a period of five to thirty years.
Vanderbilt's underwriting guidelines generally require that each
applicant's credit history, residence history, employment history and income to
debt payment ratios be examined. There are no requirements on the basis of
which, if met, credit is routinely approved; or if they are not met, credit is
routinely denied. If in the judgment of Vanderbilt's credit manager an applicant
does not meet minimum underwriting criteria, there generally must be
compensating higher ratings with respect to other criteria in order for an
applicant to be approved. Credit managers must confirm that the credit
investigation gave a complete and up-to-date accounting of the applicant's
creditworthiness. Credit managers are encouraged to obtain second opinions on
loans for relatively larger dollar amounts or those which, in their judgment,
tend to rank lower in terms of underwriting criteria. Generally, the sum of the
monthly obligation for installment obligations, including the manufactured home
loan payment and monthly site costs, should not exceed 50% of the applicant's
gross monthly income. Since January 1989 Vanderbilt has, in addition to the
above considerations, used a credit scoring system to evaluate credit
applicants. The credit score of an applicant is used as a further guide in
determining whether to extend credit to the applicant. All of the mortgage loans
originated or acquired by Vanderbilt are underwritten or reunderwritten by
Vanderbilt in a manner generally consistent with the above-mentioned guidelines.
In the case of a contract pool containing contracts originated by other
originators and acquired by Vanderbilt, the related prospectus supplement will
describe those contracts.
During the last six fiscal years, Vanderbilt has become a significant
source of financing for purchasers of Clayton's homes through the Clayton dealer
network. For the fiscal year 2002, Vanderbilt originated 23,204 contracts.
At June 30, 2002, Vanderbilt was servicing approximately 161,000 contracts
and an aggregate dollar amount of approximately $4.9 billion, of which
Vanderbilt either originated, purchased from dealers or acquired from other
lenders approximately 153,000 contracts with an aggregate dollar amount of
approximately $4.8 billion. Vanderbilt expects it will continue to originate a
significant portion of the financing for purchasers of homes sold by Clayton
owned retail centers, consistent with the overall level of Clayton's retail
sales.
VARIOUS FINANCING TERMS
In addition to level payment, fixed rate contracts, Vanderbilt offers
various other financing arrangements, including the following:
o 7 year term loans (compared to the industry norm of 15 to 30 years),
which provide financing to customers at a relatively low cost.
o Bi-weekly payment contracts which provide for 26 payments a year, which
are made by electronically debiting the purchaser's checking account.
10
o Variable rate contracts which provide for periodic Contract Rate
adjustments. In general, the Contract Rate equals the sum of a fixed
margin and an index rate.
o Escalating Principal Payment Contracts with financing terms which
provide for an annual increase in monthly payments over the first five
years of the term of the contracts. An Escalating Principal Payment
Contract provides initially for lower monthly payments than if the
contract were of a shorter term. Each year for a period of five years,
the term of the Escalating Principal Payment Contract automatically
converts to a shorter term, and the monthly payment increases
accordingly. At year six, the monthly payment increases to a level
monthly payment which fully amortizes the remaining principal over a
specified term which is shorter than the original term of the
Escalating Principal Payment Contract. There are no periods in which
the Escalating Principal Payment Contracts have negative amortization.
o Step-up Rate Contracts which provide for Contract Rates that
periodically increase over a period of time. Step-up Rate Contracts
provide for periodic increases in the applicable interest rate at the
end of specified intervals during the term of the contracts, including
at the end of each twelve month interval during the first three years
following origination and at the end of each six month interval during
the first eighteen months following origination. After the applicable
interest rate increase period, the Contract Rates are fixed. The total
amount and principal portion of each monthly payment that is due on a
Step-up Rate Contract at the time of each adjustment to its Contract
Rate will be determined on a basis that would cause the contract (which
bear interest at an increased rate after that adjustment) to be fully
amortized over its remaining term on a level payment basis. There are
no periods in which the Step-up Rate Contracts have negative
amortization.
o Equity Builder Loans, which are installment loan agreements requiring
interest-only payments during the first year. After the first year, the
payment amount steps up annually in order to amortize the loan
principal. The amount of that increase is based upon a percentage of
the required interest payment during the first year. An obligor under
an Equity Builder Loan has the option during the term of the loan to
convert the unpaid loan balance to a 20-year total amortization
schedule.
The contracts will accrue interest on a self-amortizing basis or a simple
interest basis. Substantially all of the contracts relating to each series of
certificates will provide for the amortization of the amount financed over a
series of monthly payments (assuming each payment for a simple interest contract
is made and received as scheduled).
Actuarial Contracts
Unless otherwise specified in the prospectus supplement, all of the
contracts relating to a series of certificates will be self-amortizing (known as
actuarial contracts). For actuarial contracts, interest will be calculated on a
360-day year of twelve 30-day months. When a full prepayment of principal is
made on an actuarial contract during a month, the obligor generally is charged
interest only on the days of the month actually elapsed up to the date of such
prepayment. For actuarial contracts, scheduled monthly payments made and
received either earlier or later than the scheduled due dates thereof will not
affect the amortization schedule or the relative application of such payments to
principal and interest.
Simple Interest Contracts
As specified in the prospectus supplement, a portion of the contracts
relating to each series of certificates may accrue interest on a simple interest
basis (known as simple interest contracts). For simple interest contracts, the
contract is amortized over a series of equal monthly payments. Each monthly
payment for a simple interest contract consists of an installment of interest
which is calculated on the basis of the outstanding principal balance of the
contract multiplied by its Contract Rate and further multiplied by a fraction,
the numerator of which is equal to the number of days elapsed since the
preceding payment of interest was made and the denominator of which is the
number of days in the annual period for which interest accrues on the contract.
As payments are received on simple interest contracts, the amount
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received is generally applied as follows: first to payment of required escrow
amounts (such as insurance premiums), if any, then to payment of interest
accrued to the date payment is received, and then to reduction of principal
under the contract. Accordingly, if a borrower pays a fixed monthly installment
on a simple interest contract before its scheduled due date, the portion of the
payment allocable to interest for the period since the preceding payment was
made will be less than it would have been had the payments 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 after its scheduled due date or does not make a monthly
payment pursuant to an agreement with the servicer to defer a scheduled monthly
payment, the portion of the payment allocable to interest for the period since
the preceding payment was made will be greater than it would have been had the
payments been made as scheduled, and the remaining portion, if any, of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. If each scheduled payment under a simple interest contract is made prior
to its scheduled due date, the principal balance of the contract will amortize
more quickly than scheduled. However, if the borrower consistently makes
scheduled payments after the scheduled due date, the contract will amortize more
slowly than scheduled. If a simple interest contract is prepaid, the borrower is
required to pay interest only to the date of prepayment. Any remaining unpaid
principal is payable on the final maturity of the contract. As a result, based
on the payment characteristics of a particular obligor, the principal due on the
final due date of a simple interest contract may vary from the principal payment
that would be due if payments for the contract were always made and received on
their due dates. By contrast, the date on which a payment is made on an
actuarial contract would not affect the portion of such payment that is applied
to interest.
YIELD CONSIDERATIONS
The remittance rates and the weighted average Contract Rate of the
contracts relating to each series of certificates will be described in the
related prospectus supplement.
The prospectus supplement for each series will indicate that a lower rate
of principal prepayments than anticipated would negatively affect the total
return to investors of any class or that sub-class of certificates that is
offered at a discount to its principal amount, and a higher rate of principal
prepayments than anticipated would negatively affect the total return to
investors of any that class or sub-class of certificates that is offered at a
premium to its principal amount or without any principal amount.
If a series of certificates contains classes or sub-classes of certificates
entitled to receive distributions of principal or interest or both, in a
specified order other than as a specified percentage of each distribution of
principal or interest or both, the prospectus supplement will set forth
information, measured relative to a prepayment standard or model specified in
that prospectus supplement, with respect to the projected weighted average life
of each class or sub-class and the percentage of the original Stated Balance of
each of that class or sub-class that would be outstanding on specified
remittance dates for those series. The projected performance relative to a
prepayment model is based on the assumptions stated in the prospectus
supplement.
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MATURITY AND PREPAYMENT CONSIDERATIONS
MATURITY
Generally, the contracts will have maturities at origination of not more
than 30 years. The prospectus supplement will indicate the amount of contracts
with maturities at origination of more than 30 years.
PREPAYMENT CONSIDERATIONS
Contracts generally may be prepaid in full or in part without penalty.
Based on Vanderbilt's experience with the portfolio of manufactured housing
contracts which it services, Vanderbilt anticipates that some of the contracts
will be prepaid prior to their maturity. A number of factors, including
homeowner mobility, general and regional economic conditions, competition among
manufactured housing lenders and prevailing interest rates, may influence
prepayments. The refinancing of any contract will result in a prepayment in full
of that contract. Declining interest rates and some other factors may result in
an increased number of refinancings which would affect the average life of the
certificates. In addition, the repurchase of contracts from a trust fund on
account of breaches of representations and warranties in the pooling and
servicing agreement has the effect of prepaying those contracts. Most of the
contracts contain a due-on-sale clause that would permit the servicer to
accelerate the maturity of a contract upon the sale of the related manufactured
home. In the case of those contracts that do contain due-on-sale clauses, the
servicer may permit assumptions of those contracts if the purchaser of the
related manufactured home satisfies Vanderbilt's then-current underwriting
standards.
Information regarding the prepayment models or any other rate of assumed
prepayment, as applicable, will be described in the prospectus supplement with
respect to a series of certificates.
See "Description of the Certificates -- Termination of the Agreement" for a
description of Vanderbilt's or the servicer's option to repurchase the contracts
comprising part of a trust fund when the aggregate outstanding principal balance
of those contracts is less than a specified percentage of the initial aggregate
outstanding principal balance of those contracts as of the related Cut-off Date.
See also "The Trust Fund -- The Contract Pools" for a description of the
obligations of Vanderbilt to repurchase a contract in case of a breach of a
representation or warranty relative to that contract.
DESCRIPTION OF THE CERTIFICATES
The certificates of one or more series may be offered and sold from time to
time under this prospectus and a prospectus supplement. Each series of
certificates will be issued in accordance with a separate pooling and servicing
agreement to be entered into among the depositor, the servicer, the trustee
named in the related prospectus supplement and other parties, if any, as are
described in the applicable prospectus supplement. The following summaries
describe some provisions expected to be common to each pooling and servicing
agreement and the related certificates, but do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, the
provisions of the related pooling and servicing agreement and the description
set forth in the related prospectus supplement. The provisions of the form of
pooling and servicing agreement filed as an exhibit to the registration
statement that are not described in this prospectus may differ from the
provisions of any actual pooling and servicing agreement. The material
differences will be described in the related prospectus supplement. Capitalized
terms used in this prospectus and not otherwise defined in this prospectus shall
have the meanings assigned to them in the form of pooling and servicing
agreement filed as an exhibit to the registration statement.
GENERAL
The certificates may be issued in one or more classes or sub-classes. If
the certificates of a series are issued in more than one class, the certificates
of all or less than all of those classes may be sold in accordance with this
prospectus, and there may be separate prospectus supplements relating to one or
more of those classes so sold. Any reference in this prospectus to the
prospectus supplement relating to a series comprised of more than one class
should be understood as a reference to any of the prospectus
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supplements relating to the classes sold in those prospectus supplements. Any
reference in this prospectus to the certificates of a class should be understood
to refer to the certificates of a class within a series, the certificates of a
sub-class within a series or all of the certificates of a single-class series,
as the context may require.
The certificates of each series will be issued in fully registered form
only and will represent the interest specified in the related prospectus
supplement in a separate trust fund created in accordance with the related
pooling and servicing agreement. No service charge will be made for any
registration of exchange or transfer of certificates, but the trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
Ownership of each contract pool may be evidenced by one or more classes of
certificates, each representing the interest in the contract pool specified in
the related prospectus supplement. One or more classes of certificates
evidencing interests in contracts may be Subordinated Certificates, evidencing
the right of the holders of those Subordinated Certificates to receive any or a
portion of distributions of principal or interest or both on the Contracts
subordinate to the rights of the holders of Senior Certificates as provided in
the related prospectus supplement. If a series of certificates contains more
than one class of Subordinated Certificates, distributions and losses will be
allocated among those classes in the manner described in the prospectus
supplement.
A series of certificates may consist of classes of certificates evidencing
the right to receive distributions of principal or interest or both in the order
specified in the related prospectus supplement. A class of certificates of a
series may be divided into two or more sub-classes. The related prospectus
supplement will specify whether a class has been so divided and the terms of
each sub-class. The holders of each sub-class of a class of certificates will be
entitled to the percentages (which may be 0%) of principal or interest payments
or both on the related contracts as specified in the related prospectus
supplement. The related prospectus supplement will specify the minimum
denomination or initial principal amount of contracts evidenced by a single
certificate of each class of certificates of a series.
Distributions of principal and interest on the certificates will be made on
the payment dates described in the related prospectus supplement to the persons
in whose names the certificates are registered on the Record Date. Distributions
will be made by check mailed to the address of the person entitled to the
distributions as it appears on the certificate register, or, to the extent
described in the related pooling and servicing agreement, by wire transfer,
except that the final distribution in retirement of certificates will be made
only upon presentation and surrender of the certificates at the office or agency
of the trustee specified in the final distribution notice to certificateholders.
GLOBAL CERTIFICATES
The certificates of a class may be issued in whole or in part in the form
of one or more Global Certificates, that will be deposited with, or on behalf
of, and registered in the name of a nominee for, a depositary identified in the
related prospectus supplement. The description of the certificates contained in
this prospectus assumes that the certificates will be issued in definitive form.
If the certificates of a class are issued in the form of one or more Global
Certificates, the term certificateholder should be understood to refer to the
beneficial owners of the Global Certificates, and the rights of those
certificateholders will be limited as described under this subheading.
Global Certificates will be issued in registered form. Unless and until it
is exchanged in whole or in part for certificates in definitive form, a Global
Certificate may not be transferred except as a whole by the depositary for that
Global Certificate to a nominee of that depositary or by a nominee of that
depositary to that depositary or another nominee of that depositary or by that
depositary or that nominee to a successor of that depositary or a nominee of
that successor.
The specific terms of the depositary arrangement with respect to any
certificates of a class will be described in the related prospectus supplement.
It is anticipated that the following provisions will apply to all depositary
arrangements:
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Upon the issuance of a Global Certificate, the depositary for that global
certificate will credit, on its book-entry registration and transfer system, the
respective denominations of the certificates represented by that global
certificate to the accounts of institutions that have accounts with that
depositary. Ownership of beneficial interests in a Global Certificate will be
limited to participants or persons that may hold interests through participants.
Ownership of beneficial interests in that Global Certificate will be shown on,
and the transfer of that ownership will be effected only through, records
maintained by the depositary for that Global Certificate or by participants or
persons that hold through participants. The laws of some states require that
some purchasers of securities take physical delivery of those securities in
definitive form. Those limits and those laws may impair the ability to transfer
beneficial interests in a Global Certificate.
So long as the depositary for a Global Certificate, or its nominee, is the
owner of that Global Certificate, the depositary or nominee, as the case may be,
will be considered the sole owner or holder of the certificates represented by
that Global Certificate for all purposes under the pooling and servicing
agreement relating to those certificates. Except as described below, owners of
beneficial interests in a Global Certificate will not be entitled to have
certificates of the series represented by that Global Certificate registered in
their names, will not receive or be entitled to receive physical delivery of
certificates of those series in definitive form and will not be considered the
owners or holders of those certificates under the pooling and servicing
agreement governing those certificates.
Distributions or payments on certificates registered in the name of or held
by a depositary or its nominee will be made to the depositary or its nominee, as
the case may be, as the registered owner for the holder of the Global
Certificate representing those certificates. In addition, all reports required
under the applicable pooling and servicing agreement to be made to
certificateholders (as described under "Reports to Certificateholders") will be
delivered to the depositary or its nominee, as the case may be. None of the
seller, the depositor, the servicer, the trustee or any agent of the trustee
(including any applicable certificate registrar or paying agent) will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interest in a Global
Certificate or for maintaining, supervising or reviewing any records relating to
those beneficial ownership interests or for providing reports to the related
beneficial owners.
Vanderbilt expects that the depositary for certificates of a class, upon
receipt of any distribution or payment in respect of a Global Certificate, will
credit immediately participants' accounts with payments in amounts proportionate
to their respective beneficial interest in that Global Certificate as shown on
the records of that depositary. Vanderbilt also expects that payments by
participants to owners of beneficial interests in that Global Certificate held
through those participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers registered in "street name," and will be the responsibility of those
participants.
If a depositary for certificates of a class is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
or on behalf of the depositor within the time period specified in the pooling
and servicing agreement, the depositor will cause to be issued certificates of
that class in definitive form in exchange for the related Global Certificate or
certificates. In addition, the depositor may at any time and in its sole
discretion determine not to have any certificates of a class represented by one
or more Global Certificates and, in that event, will cause to be issued
certificates of that class in definitive form in exchange for the related Global
Certificate or certificates. Further, if the depositor so specifies with respect
to the certificates of a class, an owner of a beneficial interest in a Global
Certificate representing certificates of that class may, on terms acceptable to
the depositor and the depositary for that Global Certificate, receive
certificates of that class in definitive form. In any of that instance, an owner
of a beneficial interest in a Global Certificate will be entitled to physical
delivery in definitive form of certificates of the class represented by that
Global Certificate equal in denominations to that beneficial interest and to
have those certificates registered in its name.
CONVEYANCE OF CONTRACTS
Vanderbilt will transfer, assign, set over and otherwise convey to the
trustee or will cause the depositor to transfer, assign, set over and otherwise
convey to the trustee all right, title and interest in the
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contracts, including all security interests created by those contracts and any
related mortgages or deeds of trust, all principal and interest received on or
with respect to the contracts (other than receipts of principal and interest due
on the contracts before the Cut-off Date), all rights under hazard insurance
policies on the related manufactured homes, modular homes or mortgaged
properties, if any, all documents contained in the contract files, Land-and-Home
Contract files or mortgage loan files, as applicable, and all proceeds derived
from any of the above-mentioned files. On behalf of the trust fund, as the
issuer of the related series of certificates, the trustee, concurrently with
that conveyance, will execute and deliver the certificates to the order of the
depositor. The contracts will be as described on a list attached to the pooling
and servicing agreement. That list will include the respective loan number,
obligor name and address for each contract and may also include the current
monthly payment amount due on each contract as of the date of issuance of the
certificates and the Contract Rate on each contract. That list will be available
for inspection by any certificateholder at the principal executive office of the
servicer. Prior to the conveyance of the contracts to the trustee, Vanderbilt's
operations department will complete a review of all of the contract files,
Land-and-Home Contract files and mortgage loan files, as applicable, including
the certificates of title to, or other evidence of a perfected security interest
in, the manufactured homes, confirming the accuracy of the list of contracts
delivered to the trustee. Any contract discovered not to agree with that list in
a manner that is materially adverse to the interests of the certificateholders
will be repurchased by Vanderbilt or replaced with another contract, or, if the
discrepancy relates to the unpaid principal balance of a contract, Vanderbilt
may deposit cash in the Certificate Account, in an amount sufficient to offset
that discrepancy.
The pooling and servicing agreement will designate the servicer as
custodian to maintain possession, as the trustee's agent, of the contracts and
any other documents related to the manufactured homes or modular homes (other
than the principal documents relating to Land-and-Home Contracts and mortgage
loans). To facilitate servicing and save administrative costs, the documents
will not be physically segregated from other similar documents that are in
Vanderbilt's possession. In order to give notice of the right, title and
interest of the certificateholders to the contracts, Vanderbilt will cause a
UCC-1 financing statement to be executed and filed reflecting the sale and
assignment of the contracts from the seller to the depositor (unless the seller
and the depositor are the same entity) and from the depositor to the trustee.
Vanderbilt's accounting records and computer systems will also reflect that sale
and assignment. In addition, within one week after the initial delivery of the
certificates, the contracts will be stamped to reflect their assignment to the
trustee. However, if through fraud, negligence or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without
knowledge of the assignment, the trustee's interest in the contracts could be
defeated. See "Risk Factors -- Risks relating to enforceability of the
contracts."
Vanderbilt will make representations and warranties in the pooling and
servicing agreement with respect to each contract as of the Closing Date, to the
effect that:
o as of the Cut-off Date, or the date of origination, if later, the most
recent scheduled payment was made or was not delinquent more than 59
days (or other number of days specified in the related prospectus
supplement). As of the Closing Date, Vanderbilt has not taken any
material steps toward foreclosure in respect of such contract;
o no provision of a contract has been waived, altered or modified in any
respect, except by instruments or documents contained in the contract
file, the Land-and-Home Contract file or the mortgage loan file, as
applicable;
o each contract is a legal, valid and binding obligation of the obligor
and is enforceable in accordance with its terms (except as may be
limited by laws affecting creditors' rights generally);
o no contract is subject to any right of rescission, set-off,
counterclaim or defense;
o each contract is covered by hazard insurance described under "--
Servicing -- Hazard Insurance";
o each contract has been originated by a manufactured housing dealer or
lender or Vanderbilt in the ordinary course of that dealer's or
lender's or Vanderbilt's business and, if originated by a manufactured
housing dealer or other lender, was purchased by Vanderbilt in the
ordinary course of business;
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o no contract was originated in or is subject to the laws of any
jurisdiction whose laws would make the transfer of the contract or an
interest in the contract to the trustee or a separate trustee in
accordance with the pooling and servicing agreement unlawful;
o each contract complies with all requirements of law;
o no contract has been satisfied, subordinated in whole or in part or
rescinded and the manufactured home securing the contract has not been
released from the lien of the contract in whole or in part;
o each manufactured housing contract creates a valid and enforceable
first priority security interest in favor of Vanderbilt in the
manufactured home covered by the manufactured housing contract and,
with respect to each Land-and-Home Contract and each mortgage loan, the
lien created by the mortgage loan has been recorded, and that security
interest or lien has been assigned to the trustee;
o all parties to each contract had capacity to execute that contract;
o no contract has been sold, assigned or pledged to any other person, and
prior to the transfer of the contracts by the depositor to the trustee,
the depositor had good and marketable title to each contract free and
clear of any encumbrance, equity, loan, pledge, charge, claim or
security interest, and was the sole owner and had full right to
transfer that contract to the trustee;
o as of the Closing Date there was no default, breach, violation or event
permitting acceleration under any contract (except for payment
delinquencies permitted by clause (a) above), no event which with
notice and the expiration of any grace or cure period would constitute
a default, breach, violation or event permitting acceleration under
that contract, and Vanderbilt has not waived any of the
above-mentioned;
o as of the Closing Date there were, to the best of Vanderbilt's
knowledge, no liens or claims which have been filed for work, labor or
materials affecting a manufactured home or any related mortgaged
property securing a contract, which are or may be liens prior or equal
to the lien of the contract;
o each contract other than a Step-up Rate Contract and an Escalating
Payment Contract is:
(i) a fully-amortizing loan with a fixed Contract Rate and provides
for level payments over the term of that contract or
(ii) a loan with a variable interest rate;
o each contract contains customary and enforceable provisions such as to
render the rights and remedies of the holder of that contract adequate
for realization against the collateral of the benefits of the security;
o the description of each contract set forth in the list delivered to the
trustee is true and correct;
o there is only one original of each contract;
o none of the contracts had a loan-to-value ratio at origination greater
than 100% (or other percentage amount described in the related
prospectus supplement);
o at the time of origination of each contract, for the percentage of
contracts described in the prospectus supplement, the obligor was the
primary resident of the related manufactured home;
o other than the Land-and-Home Contracts or the mortgage loans, if any,
the related manufactured home is not considered or classified as part
of the real estate on which it is located under the laws of the
jurisdiction in which it is located as would render unperfected or
impair the priority of the security interest in the manufactured home,
and as of the Closing Date the manufactured home was, to the best of
Vanderbilt's knowledge, free of damage and in good repair;
o the related manufactured home is a "manufactured home" within the
meaning of 42 United States Code, Section 5402(6); and
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o each contract is a "qualified mortgage" under Section 860G(a)(3) of the
Code and each manufactured home is "manufactured housing" within the
meaning of Section 25(e)(10) of the Code.
Under the terms of the pooling and servicing agreement, and subject to
Vanderbilt's option to effect a substitution as described in the next paragraph,
Vanderbilt will be obligated to repurchase for the Repurchase Price (as defined
below) any contract on the first Business Day after the first Determination Date
which is more than 90 days after Vanderbilt becomes aware, or should have become
aware, or Vanderbilt's receipt of written notice from the trustee or the
servicer, of a breach of any representation or warranty of Vanderbilt in the
pooling and servicing agreement that materially adversely affects the trust
fund's interest in any contract if that breach has not been cured. Vanderbilt's
repurchase obligation is subject to additional conditions in the pooling and
servicing pooling and servicing agreement. This repurchase obligation
constitutes the sole remedy available to the trust fund and the
certificateholders for a breach of a representation or warranty under the
pooling and servicing agreement with respect to the contracts (but not with
respect to any other breach by Vanderbilt of its obligations under the pooling
and servicing agreement). If a prohibited transaction tax under the REMIC
provisions of the Code is incurred in connection with that repurchase,
distributions otherwise payable to Residual Certificate holders will be applied
to pay that tax. Vanderbilt will be required to pay the amount of the prohibited
transaction tax that is not funded out of those distributions otherwise payable
to Residual Certificate holders.
In lieu of purchasing a contract as specified in the preceding paragraph,
during the two-year period following the Closing Date, Vanderbilt may, at its
option, substitute an Eligible Substitute Contract for the Replaced Contract. In
the event that more than one contract is substituted, the requirements with
respect to Scheduled Principal Balance, Contract Rate and remaining term to
scheduled maturity for Eligible Substitute Contracts may be satisfied on an
aggregate or weighted average basis, as applicable. Vanderbilt will be required
to deposit in the Certificate Account cash in the amount, if any, by which the
Scheduled Principal Balance of the Replaced Contract exceeds the Scheduled
Principal Balance of the contract being substituted. That deposit will be deemed
to be a partial principal prepayment.
PAYMENTS ON CONTRACTS
The applicable prospectus supplement will specify the arrangements in
accordance with which contract collections are held pending distribution to
certificateholders. A portion of the contract collections will be applied to pay
the servicer's servicing compensation and to reimburse it for some expenses, as
described in each prospectus supplement and as described in this prospectus
under "-- Servicing Compensation and Payment of Expenses" below.
The servicer will deposit in the Certificate Account the following payments
and collections received or made by it after the Cut-off Date:
o all obligor payments on account of principal, including principal
prepayments, on the contracts;
o all obligor payments on account of interest on the contracts;
o net liquidation proceeds;
o all proceeds received under any hazard or other insurance policy
covering any contract, other than proceeds to be applied to the
restoration or repair of the manufactured home or released to obligor;
o any Advances made as described under "Advances" and some other amounts
required under the pooling and servicing agreement to be deposited in
the Certificate Account;
o all amounts received from any credit enhancement provided with respect
to a series of certificates;
o all proceeds of any contract or property acquired in respect of a
contract repurchased by the servicer, or Vanderbilt, or otherwise as
described above or under "Termination" below; and
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o all amounts, if any, required to be transferred to the Certificate
Account from a reserve fund in accordance with the pooling and
servicing agreement.
DISTRIBUTIONS ON CERTIFICATES
On each remittance date, the trustee will withdraw the Available
Distribution Amount from the applicable Certificate Account and distribute that
amount to the certificateholders of each class or other specified persons in the
amounts and order of priority specified in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the Available
Distribution Amount will not include:
o scheduled payments of principal and interest due on a date or dates
subsequent to the Due Period preceding the Determination Date;
o amounts representing reimbursement for Advances as described in the
related prospectus supplement; and
o amounts representing reimbursement for any unpaid Servicing Fee and
expenses from liquidation proceeds, condemnation proceeds and proceeds
of insurance policies with respect to the related contracts.
Interest on the certificates will be paid on the dates specified in the
related prospectus supplement, commencing on the date specified in the related
prospectus supplement. The related prospectus supplement will set forth for each
class or sub-class of certificates the interest rate, if any, for each of that
class or sub-class or the method of determining that interest rate. As specified
in the related prospectus supplement, classes of a series of certificates or
sub-classes within a class may not be entitled to receive interest or may
receive interest which is not proportionate to the principal allocable to those
certificates. Principal collected on each contract, including any principal
prepayments, will be passed through on each remittance date, unless that
principal has previously been passed through. With respect to a class or
sub-class of a series having a Stated Balance, those distributions may be made
in the reduction of the Stated Balance, or in reduction of other amounts
specified in the related prospectus supplement.
Within the time specified in the pooling and servicing agreement and
described in the related prospectus supplement, the servicer will furnish a
statement to the trustee setting forth the amount to be distributed on the
related remittance date on account of principal and interest, stated separately,
and a statement setting forth information with respect to the contracts.
If there are not sufficient funds in the Certificate Account to make the
full distribution to certificateholders described above on any remittance date,
the servicer will distribute the funds available for distribution to the
certificateholders of each class in accordance with the respective interests in
the Certificate Account, subject to the limitations described in the related
prospectus supplement. Unless otherwise provided in the related prospectus
supplement, the difference between the amount which the certificateholders would
have received if there had been sufficient eligible funds in the Certificate
Account and the amount actually distributed, will be added to the amount which
the certificateholders are entitled to receive on the next remittance date.
A class or sub-class of certificates may be certificates on which interest
will accrue, but not be paid for the period described in the related prospectus
supplement.
Special Distributions. To the extent specified in the prospectus supplement
relating to a series of certificates, one or more classes or subclasses which
have been assigned a Stated Balance having remittance dates less frequent than
monthly may receive special distributions in reduction of the Stated Balance.
The trustee may determine there is insufficient cash to make special
distributions in any month, if, as a result of principal prepayments on the
contracts in the contract pool or low reinvestment yields, based on assumptions
specified in the related pooling and servicing agreement, the amount of cash
available to be distributed to the holders of the certificates of those classes
or sub-classes is anticipated to be less than the sum of:
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(1) the interest scheduled to be distributed to holders of those classes
or sub-classes of certificates and
(2) the amount to be distributed in reduction of Stated Balance of those
certificates on that remittance date.
Any of those special distributions will be made in the same priority and
manner as distributions in reduction of Stated Balance would be made on the next
remittance date.
Subordinated Certificates and Reserve Fund. The rights of a class of
certificateholders of a series to receive any or a specified portion of
distributions of principal or interest or both with respect to the contracts, to
the extent specified in the related pooling and servicing agreement and
described in the related prospectus supplement, may be subordinated to those
rights of other certificateholders. The prospectus supplement with respect to a
series of certificates having a class of Subordinated Certificates will
describe, among other things:
o the extent to which that class is subordinated (which may include a
formula for determining the subordinated amount or for determining the
allocation of the Available Distribution Amount among Senior
Certificates and Subordinated Certificates),
o the allocation of losses among the classes of Subordinated Certificates
(which may include a reduction of the principal balance of the classes
of Subordinated Certificates in the event of those losses),
o the period or periods of that subordination, the minimum subordinated
amount, if any, and
o any distributions or payments which will not be affected by that
subordination.
This subordination feature is intended to enhance the likelihood of regular
receipt by Senior Certificate holders of the full amount of scheduled monthly
payments of principal and interest due them and to protect the Senior
Certificate holders against losses. If specified in the related prospectus
supplement, some rights of the Subordinated Certificate holders, to the extent
not subordinated, may be on a parity with those Senior Certificate holders.
If specified in the related prospectus supplement, the protection afforded
to the Senior Certificate holders from the subordination feature described above
will be effected by the preferential right of those certificateholders to
receive current distributions from the contract pool prior to Subordinate
Certificateholders. In addition, to the extent specified in the related
prospectus supplement, a reserve fund may be established. The reserve fund may
be funded, to the extent specified in the related prospectus supplement, by an
initial cash deposit, the retention of specified periodic distributions of
principal or interest otherwise payable to Subordinated Certificate holders, or
both.
The subordination features and the reserve fund described above are
intended to enhance the likelihood of timely payment of principal and interest
and to protect the Senior Certificate holders and, to the extent specified in
the related prospectus supplement, Subordinated Certificate holders against
loss. However, in some circumstances the reserve fund, if established, could be
depleted and shortfalls could result. If, on a particular date when a
distribution is due those certificateholders, the aggregate amount of payments
received from the obligors on the contracts and Advances by the servicer, if
any, and from the reserve fund of a series, if any, do not provide sufficient
funds to make full distributions to those certificateholders of a series, the
amount of the shortfall may be added to the amount those certificateholders are
entitled to receive on the next remittance date. In the event the reserve fund,
if any, is depleted, those Senior Certificate holders and, to the extent
specified in the related prospectus supplement, Subordinated Certificate holders
nevertheless will have a preferential right to receive current distributions
from the contract pool. Those certificateholders will bear their proportionate
share of losses realized on contracts to the extent any reserve fund or
subordination features are exhausted.
ADVANCES
If the amount eligible for distribution to the certificateholders of a
series of certificates (or to Senior Certificate holders, only if so specified,
in the case of a series of certificates having a class of Subordinated
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Certificates) on any remittance date is less than the amount which is due those
certificateholders on that remittance date, the related pooling and servicing
agreement will provide that the servicer, under some circumstances, will make
Advances of cash from its own funds or from excess funds in the Certificate
Account not then required to be distributed to certificateholders, for
distribution to the certificateholders. The Advance is generally an amount equal
to the difference between the amount due to them and the amount in the
Certificate Account eligible for distribution to them in accordance with the
pooling and servicing agreement, but only to the extent that difference is due
to delinquent payments of principal and interest for the preceding Due Period
and only to the extent the servicer determines those Advances are recoverable
from future payments and collections on the contracts or otherwise, as specified
in the pooling and servicing agreement. The servicer's obligation to make
Advances, if any, may, be limited in amount and the servicer may not be
obligated to make Advances until all or a specified portion of the reserve fund,
if any, is depleted. Advances are intended to maintain a regular flow of
scheduled interest and principal payments to the Senior Certificate holders, not
to guarantee or insure against losses. Accordingly, any funds so advanced are
recoverable by the servicer out of amounts received on particular contracts
which represent late recoveries of principal or interest with respect to which
any of those Advances were made or from other funds in the Certificate Account.
The servicer is not required to make an Advance if it believes the Advance would
not ultimately be recoverable and if the servicer determines, in its good faith
judgment, that a prior Advance has become non-recoverable, the servicer may
reimburse itself out of funds in the Certificate Account.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of the flow of funds for the
remittance date occurring in June 2002 for a class with a fixed remittance rate
in a hypothetical series of certificates with a Cut-off Date of April 26, 2002:
April 26, 2002 ............. (A) Cut-off Date.
April 26 to May 25 ......... (B) Due Period. Servicer receives scheduled payments
on the contracts and any principal prepayments
made by obligors and applicable interest on those
contracts.
May 31 ..................... (C) Record Date.
June 4 ..................... (D) Determination Date. Distribution amounts
determined.
June 7 ..................... (E) Remittance date. (Each remittance date is the 7th
day of each month or, if the 7th day is not a Business
Day, the next Business Day.)
The original contract pool principal balance will be the aggregate
Scheduled Principal Balance of the contracts on April 26, 2002 after deducting
principal payments received before that date. Principal payments received before
April 26, 2002 and the accompanying interest payments, are not part of the trust
fund and will not be passed through to certificateholders. Scheduled payments,
principal prepayments and net liquidation proceeds may be received at any time
during this period and will be distributed to certificateholders on June 7. When
a contract is prepaid in full, interest on the amount prepaid is collected from
the obligor only to the date of payment. The Available Distribution Amount for
the distribution on June 7 is described under "-- Payments on Contracts" and "--
Distributions on the Certificates" above. Distributions on June 7 will be made
to certificateholders of record at the close of business on May 31. On June 4
(three Business Days prior to the remittance date), the servicer will determine
the amounts of principal and interest which will be passed through on June 7 to
certificateholders. On June 7, the amounts determined on June 4 will be
distributed to certificateholders. If a payment due in the Due Period ending May
25 is received in the Due Period ending in June, that late payment will be taken
into account in determining the Available Distribution Amount for July 7.
The flow of funds with respect to any series of certificates may differ
from the above example, as specified in the related prospectus supplement.
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INDEMNIFICATION
The pooling and servicing agreement requires the servicer to defend and
indemnify the trust fund, the trustee (including any agent of the trustee) and
the certificateholders (which indemnification will survive any removal of the
servicer as servicer of the contracts) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and expenses
of counsel and expenses of litigation arising from third party claims or actions
in respect of any action taken or failed to be taken by the servicer or a prior
owner of acquired contracts or servicer on behalf of that owner with respect to
any contract or manufactured home any failure by the servicer to perform its
obligations in compliance with the standard of care described in the pooling and
servicing agreement. The pooling and servicing agreement requires Vanderbilt to
indemnify, defend and hold harmless the trust fund, the trustee and the
certificate holders for any taxes and related penalties which may at any time be
asserted with respect to, and as of the date of, the conveyance of the contracts
to the trust fund (but not including any income or franchise taxes or any
federal, state or other tax arising out of the creation of the trust fund and
the issuance of the certificates or distributions with respect to the trust
fund).
SERVICING
In accordance with the pooling and servicing agreement, the servicer will
service and administer the contracts assigned to the trustee. The servicer will
perform diligently all services and duties specified in each pooling and
servicing agreement, in the same manner as prudent lending institutions of
manufactured housing installment sales contracts of the same type as the
contracts in those jurisdictions where the related manufactured homes are
located or as otherwise specified in the pooling and servicing agreement. The
duties to be performed by the servicer will include collection and remittance of
principal and interest payments, collection of insurance claims and, if
necessary, repossession. The pooling and servicing agreement provides that the
servicer may delegate its duties under that agreement to one or more entities,
each a subservicer that agrees to conduct those duties in accordance with the
pooling and servicing agreement. In spite of any delegation, the servicer will
continue to be liable for all of its obligations under the pooling and servicing
agreement.
The servicer will make reasonable efforts to collect all payments called
for under the contracts and, consistent with the pooling and servicing agreement
and any FHA insurance and VA guaranty, will follow those collection procedures
as it follows with respect to mortgage loans or contracts serviced by it that
are comparable to the contracts.
Hazard Insurance. The terms of the pooling and servicing agreement will
generally require the servicer to cause to be maintained with respect to each
contract one or more hazard insurance policies which provide, at a minimum, the
same coverage as a standard form fire and extended coverage insurance policy
that is customary for manufactured housing or one- to four-family residential
properties, as applicable, issued by a company authorized to issue those
policies in the state in which the manufactured home, modular home or mortgaged
property is located, and in an amount which is not less than the maximum
insurable value of that manufactured home, modular home or mortgaged property or
the principal balance due from the obligor on the related contract, whichever is
less; provided, however, that the amount of coverage provided by each hazard
insurance policy shall be sufficient to avoid the application of any coinsurance
clause contained in that policy. When a manufactured home or modular home's
location was, at the time of origination of the related contract, within a
federally-designated special flood hazard area, the servicer shall also cause
flood insurance to be maintained, which coverage shall be at least equal to the
minimum amount specified in the preceding sentence or the lesser amount as may
be available under the federal flood insurance program. Each hazard insurance
policy caused to be maintained by the servicer shall contain a standard loss
payee clause in favor of the servicer and its successors and assigns. If any
obligor is in default in the payment of premiums on its hazard insurance policy
or policies, the servicer shall pay those premiums out of its own funds, and may
add separately that premium to the obligor's obligation as provided by the
contract, but may not add that premium to the remaining principal balance of the
contract.
The servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each manufactured home, modular home
or mortgaged property, and shall maintain, to the
22
extent that the related contract does not require the obligor to maintain a
hazard insurance policy with respect to the related manufactured home, modular
home or mortgaged property, one or more blanket insurance policies covering
losses on the obligor's interest in the contracts resulting from the absence or
insufficiency of individual hazard insurance policies. The servicer shall pay
the premium for that policy on the basis described in that pooling and servicing
agreement and shall pay any deductible amount with respect to claims under that
policy relating to the contracts. If the insurer under the policy shall cease to
be acceptable to the servicer, the servicer shall exercise its best reasonable
efforts to obtain from another insurer a placement policy comparable to that
policy.
If the servicer shall have repossessed a manufactured home on behalf of the
trustee, the servicer shall either (a) maintain, at its expense, hazard
insurance with respect to that manufactured home, or (b) indemnify the trustee
against any damage to that manufactured home prior to resale or other
disposition.
Evidence as to Compliance. Each pooling and servicing agreement will
require the servicer to deliver to the trustee a monthly report prior to each
remittance date, setting forth information regarding the contract pool and
certificates of those series as is specified in the related prospectus
supplement. The report to the trustee will be accompanied by a statement from an
appropriate officer of the servicer certifying the accuracy of that report and
stating that the servicer has not defaulted in the performance of its
obligations under the pooling and servicing agreement. The servicer will deliver
to the trustee an annual report of a nationally recognized accounting firm
stating that that firm has examined documents and records relating to the
servicing of manufactured housing contracts serviced by the servicer under
pooling and servicing agreements similar to the pooling and servicing agreement
and stating that, on the basis of those procedures, that servicing has been
conducted in compliance with the pooling and servicing agreement, except for any
exceptions described in that report.
Some Matters Regarding the Servicer. The servicer may not resign from its
obligations and duties under a pooling and servicing agreement except upon a
determination that its duties under that pooling and servicing agreement are no
longer permissible under applicable law. No resignation will become effective
until the trustee or a successor servicer has assumed the servicer's obligations
and duties under that pooling and servicing agreement. The servicer can only be
removed as servicer in accordance with an Event of Termination as discussed
below.
Each pooling and servicing agreement will also generally provide that
neither the servicer, nor any director, officer, employee or agent of the
servicer, will be under any liability to the trustee or the certificateholders
for any action taken or for restraining from the taking of any action in good
faith in accordance with the pooling and servicing agreement, or for errors in
judgment; provided, however, that neither the servicer nor any of those persons
will be protected against any liability which would otherwise be imposed by
reason of the failure to perform its obligations in strict compliance with the
standards of care described in the pooling and servicing agreement. The servicer
may, in its discretion, undertake any of that action which it may deem necessary
or desirable with respect to the pooling and servicing agreement and the rights
and duties of the parties under that pooling and servicing agreement and the
interests of the certificateholders under that pooling and servicing agreement.
In that event, the servicer will be entitled to be reimbursed for any legal
expenses and costs of that action and any liability resulting out of the
Certificate Account.
The servicer's obligations with respect to the certificates are limited to
its contractual servicing obligations and any additional obligations specified
in the prospectus supplement.
The servicer shall keep in force throughout the term of this pooling and
servicing agreement a policy or policies of insurance covering errors and
omissions for failure to maintain insurance as required by this pooling and
servicing agreement, and a fidelity bond. The insurance policy or policies and
that fidelity bond shall be in a form and amount as is generally customary among
persons which service a portfolio of manufactured housing contracts having an
aggregate principal amount of $100 million or more and which are generally
regarded as servicers acceptable to institutional investors.
The servicer, to the extent practicable, shall cause the obligors to pay
all taxes and similar governmental charges when and as due. To the extent that
nonpayment of any taxes or charges would
23
result in the creation of a lien upon any manufactured home having a priority
equal or senior to the lien of the related contract, the servicer shall advance
any of that delinquent tax or charge. The servicer will be entitled to recover
any taxes or similar governmental charges advanced directly from the obligor or
from any liquidation proceeds.
Servicing Compensation and Payment of Expenses. For its servicing of the
contracts, the servicer will receive Servicing Fees which include a Monthly
Servicing Fee (which the servicer may assign) for each Due Period (paid on the
next succeeding remittance date).
The Monthly Servicing Fee provides compensation for customary manufactured
housing contract third-party servicing activities to be performed by the
servicer for the trust fund and for additional administrative services performed
by the servicer on behalf of the trust fund. Customary servicing activities
include collecting and recording payments, communicating with obligors,
investigating payment delinquencies, providing billing and tax records to
obligors and maintaining internal records with respect to each contract.
Administrative services performed by the servicer on behalf of the trust fund
include calculating distributions of certificateholders and providing related
data processing and reporting services for certificateholders and on behalf of
the trustee. Expenses incurred in connection with the servicing of the contracts
and paid by the servicer from its Servicing Fees include, without limitation,
payment of fees and expenses of accountants, payments of all fees and expenses
incurred in connection with the enforcement of contracts (except liquidation
expenses and some other advances) and payment of expenses incurred in connection
with distributions and reports to certificateholders. The servicer will be
reimbursed out of the liquidation proceeds of a liquidated contract for all
ordinary and necessary liquidation expenses incurred by it in realization upon
the related manufactured home.
As part of its servicing fees the servicer will also be entitled to retain,
as compensation for the additional services provided, any fees for late payments
made by obligors, extension fees paid by obligors for the extension of scheduled
payments and assumption fees for permitted assumptions of contracts by
purchasers of the related manufactured homes.
So long as Vanderbilt is the servicer, the servicer, in its sole
discretion, may, but is not obligated to, liquidate a defaulted contract by
depositing into the Certificate Account an amount equal to the outstanding
principal balance of that contract plus accrued and unpaid interest on that
contract to the Due Date in the Due Period in which that deposit is made minus
$2,000. Vanderbilt will not be reimbursed for any liquidation expenses incurred
in the liquidation of that contract and will retain any liquidation proceeds in
respect of that contract. Vanderbilt has the option to liquidate defaulted
contracts in this manner because it may be more compatible with its record
keeping systems to do so. Vanderbilt is under no obligation to liquidate any
defaulted contract pursuant to this option and, if Vanderbilt elects to use this
option in the case of a particular contract, it is under no obligation to do so
for any other contract. Certificateholders should expect no benefit from this
option or any exercise thereof.
Any person with which the servicer is merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
servicer is a party, or any person succeeding to the business of the servicer,
will be the successor to the servicer under the pooling and servicing agreement
so long as the successor has a net worth of at least $10 million and has
serviced at least $100 million of manufactured housing contracts for at least
one year. The servicer may assign its rights and delegate its duties under the
pooling and servicing agreement (with the prior written consent of Vanderbilt if
Vanderbilt is not the servicer), provided that any rating of the certificates
then in effect will not be reduced because of that assignment and delegation.
Upon any assignment and delegation, the assigning servicer will not be liable
for obligations of the servicer after that assignment.
Events of Termination. Events of Termination under each pooling and
servicing agreement will include:
o any failure by the servicer to distribute to the certificateholders any
required payment which continues unremedied for 5 days (or other period
specified in the related prospectus supplement) after the giving of
written notice;
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o any failure by the servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the pooling and
servicing agreement that materially and adversely affects the interests
of certificateholders, which, in either case, continues unremedied for
30 days after the giving of written notice of that failure or breach;
and
o some events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings regarding the servicer.
Notice for an Event of Termination means notice to the servicer by the
trustee, or to Vanderbilt, the servicer, if any, and the trustee by the holders
of certificates representing interests aggregating not less than 25% of the
trust fund.
Rights Upon Event of Termination. So long as an Event of Termination
remains unremedied, the trustee may, and at the written direction of the
certificateholders of a series evidencing interests aggregating 25% or more of
the related trust fund, shall terminate all of the rights and obligations of the
servicer under the related pooling and servicing agreement and in and to the
contracts and the proceeds of those contracts (subject to applicable law
regarding the trustee's ability to make Advances), and the trustee or a
successor servicer under the pooling and servicing agreement will succeed to all
the responsibilities, duties and liabilities of the servicer under the pooling
and servicing agreement and will be entitled to similar compensation
arrangements; provided, however, that neither the trustee nor any successor
servicer will assume any obligation of Vanderbilt to repurchase contracts for
breaches of representations or warranties, and the trustee will not be liable
for any acts or omissions of the servicer occurring prior to a transfer of the
servicer's servicing and related functions or for any breach by the servicer of
any of its obligations contained in the pooling and servicing agreement. In
spite of that termination, the servicer shall be entitled to payment of some
amounts accrued or payable to it prior to that termination, for services
rendered and for unreimbursed Advances made prior to that termination. No
termination will affect in any manner Vanderbilt's obligation to repurchase some
contracts for breaches of representations or warranties related to the contracts
under the pooling and servicing agreement. In the event that the trustee would
be obligated to succeed the servicer but is unwilling or unable so to act, it
may appoint, or petition to a court of competent jurisdiction for the
appointment of a servicer. Pending that appointment, the trustee is obligated to
act in that capacity. The trustee and that successor may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation to the servicer under the pooling and servicing agreement. If the
trustee in bankruptcy or similar official is appointed for the servicer, and no
Event of Termination other than the servicer's insolvency has occurred, that
trustee or other official may have the power to prevent the trustee from
effecting a transfer of servicing.
No certificateholder will have any right under a pooling and servicing
agreement to institute any proceeding with respect to that pooling and servicing
agreement unless (a) that holder previously has given to the trustee written
notice of default, (b) the holders of certificates evidencing interests
aggregating not less than 25% of the related trust fund requested the trustee in
writing to institute that proceeding in its own name as trustee, (c) those
Certificateholders have offered to the trustee reasonable indemnity and (d) the
trustee for 60 days has neglected or refused to institute any of that
proceeding. The trustee will be under no obligation to take any action or
institute, conduct or defend any litigation under the pooling and servicing
agreement at the request, order or direction of any of the holders of
certificates, unless those certificateholders have offered to the trustee
reasonable security or indemnity against the costs, expenses and liabilities
which the trustee may incur.
REPORTS TO CERTIFICATEHOLDERS
The servicer or the trustee, as applicable, will forward to each
certificateholder on each remittance date, or as soon thereafter as is
practicable, as specified in the related prospectus supplement, a statement
setting forth, among other things:
(1) the amount of that distribution allocable to principal on the
certificates;
(2) the amount of that distribution allocable to interest on the
certificates;
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(3) if the distribution to the certificateholders is less than the full
amount that would be distributable to those certificateholders if there were
sufficient eligible funds in the Certificate Account, the difference between
the aggregate amounts of principal and interest which certificateholders
would have received if there were sufficient eligible funds in the
Certificate Account and the amounts actually distributed;
(4) the aggregate amount of Advances, if any, by the servicer included in
the amounts actually distributed to the certificateholders;
(5) the outstanding principal balance of the contracts; and
(6) the approximate weighted average interest rate of the contracts during
the Due Period immediately preceding that remittance date.
In addition, not more than 90 days after the end of each calendar year, the
servicer will furnish a report to each certificateholder of record at any time
during that calendar year: (a) as to the aggregate of amounts reported in
accordance with clauses (1) and (2) above for that calendar year or, in the
event that person was a certificateholder of record during a portion of that
calendar year, for the applicable portion of that year, and (b) other
information as the servicer deems necessary or desirable for certificateholders
to prepare their tax returns. Information in the monthly and annual reports
provided to the certificateholders will not have been examined and reported upon
by an independent public accountant. However, the servicer will provide to the
trustee annually a report by independent public accountants with respect to the
servicing of the contracts as described under "Evidence as to Compliance" above.
AMENDMENT
The pooling and servicing agreement may be amended by Vanderbilt and the
trustee without the consent of the certificateholders:
o to cure any ambiguity,
o to correct or supplement any provision of the pooling and servicing
agreement that may be inconsistent with any other provision of the
pooling and servicing agreement,
o if a REMIC Election has been made, to maintain the REMIC status of the
trust fund and to avoid the imposition of certain taxes on the REMIC,
or
o to make any other provisions with respect to matters or questions
arising under the pooling and servicing agreement that are not
inconsistent with the provisions of the pooling and servicing
agreement, provided that action will not adversely affect in any
material respect the interests of the certificateholders of the related
series. The pooling and servicing agreement may also be amended by
Vanderbilt, the servicer and the trustee with the consent of the
certificateholders (other than holders of Residual Certificates)
evidencing interests aggregating not less than 51% of the trust fund
for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the pooling and servicing
agreement or of modifying in any manner the rights of the
certificateholders; provided, however, that no amendment which reduces
in any manner the amount of, or delays the timing of, any payment
received on or with respect to contracts which are required to be
distributed on any certificate may be effective without the consent of
the holders of that certificate.
TERMINATION OF THE AGREEMENT
The obligations created by each pooling and servicing agreement will
terminate upon the date calculated as specified in the pooling and servicing
agreement, generally upon (a) the later of the final payment or other
liquidation of the last contracts subject to the pooling and servicing agreement
and the disposition of all property acquired upon foreclosure of any
Land-and-Home Contract or mortgage loan or repossession of any manufactured home
and (b) the payment to the certificateholders of all amounts held by the
servicer or the trustee and required to be paid to it in accordance with the
pooling and servicing agreement. In addition, Vanderbilt or the servicer may at
its option with respect to any series of
26
certificates, repurchase all contracts remaining outstanding at the time the
aggregate unpaid principal balance of those contracts is less than the
percentage of the aggregate unpaid principal balance of the contracts on the
Cut-off Date specified with respect to those series in the related prospectus
supplement.
THE TRUSTEE
The prospectus supplement for a series of certificates will specify the
trustee under the related pooling and servicing agreement. The trustee may have
normal banking relationships with Vanderbilt or its affiliates and the servicer
or its affiliates.
The trustee may resign at any time, in which event Vanderbilt will be
obligated to appoint a successor trustee. Vanderbilt may also remove the trustee
if the trustee ceases to be eligible to continue as that under the pooling and
servicing agreement or if the trustee becomes insolvent. The trustee may also be
removed at any time by the holders of certificates evidencing interests
aggregating over 50% of the related trust fund as specified in the pooling and
servicing agreement. Any resignation or removal of the trustee and appointment
of a successor trustee will not become effective until acceptance of the
appointment by the successor trustee.
The trustee will make no representation as to the validity or sufficiency
of the pooling and servicing agreement, the certificates, any contract, contract
file, Land-and-Home Contract file, mortgage loan file or related documents, and
will not be accountable for the use or application by the seller or the
depositor of any funds paid to the seller or the depositor in consideration of
the conveyance of the contracts, or deposited into or withdrawn from the
Certificate Account by Vanderbilt, as servicer. If no Event of Termination has
occurred, the trustee will be required to perform only those duties specifically
required of it under the 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 as to form to the requirements of the pooling and servicing
agreement. Whether or not an Event of Termination has occurred, the trustee is
not required to expend or risk its own funds or otherwise incur any financial
liability in the performance of its duties or the exercise of its powers if it
has reasonable grounds to believe that repayment of those funds or adequate
indemnity against that risk or liability is not reasonably assured to it.
Under the pooling and servicing agreement, the servicer, agrees to pay to
the trustee from time to time:
(1) reasonable compensation for all services rendered by it under the
pooling and servicing agreement (which compensation shall not be limited by
any provision of law in regard to the compensation of a trustee of any
express trust) and
(2) reimbursement for all reasonable expenses, disbursements and advances
incurred or made by the trustee in accordance with any provision of the
pooling and servicing agreement (including the reasonable compensation and
the expenses and disbursements of its agents and counsel), except any
expense, disbursement or advance as may be attributable to the trustee's
negligence or bad faith. The servicer has agreed to indemnify the trustee
for, and to hold it harmless against, any loss, liability or expense incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of the trust fund and the trustee's
duties under the pooling and servicing agreement, including the costs and
expenses of defending itself against any claim or liability in connection
with the exercise or performance of any of the trustee's powers or duties
under the pooling and servicing agreement.
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DESCRIPTION OF FHA INSURANCE AND VA GUARANTEES
Some of the contracts, may be FHA-insured or VA-guaranteed, the payments
upon which, subject to the following discussion, are insured by the FHA under
Title I of the National Housing Act or partially guaranteed by the VA.
The regulations governing FHA manufactured home insurance provide that
insurance benefits are payable upon the repossession and resale of the
collateral and assignment of the contract to HUD. With respect to a defaulted
FHA contract, the servicer must follow applicable regulations before initiating
repossession procedures. These regulations include requirements that the lender
arrange a face-to-face meeting with the borrower, initiate a modification or
repayment plan, if feasible, and give the borrower 30 days' notice of default
prior to any repossession. The insurance claim is paid in cash by HUD. For
manufactured housing contracts, the amount of insurance benefits generally paid
by FHA is equal to 90% of the sum of:
o the unpaid principal amount of the contract at the date of default and
uncollected interest earned to the date of default computed at the
Contract Rate, after deducting the best price obtainable for the
collateral (based in part on a HUD-approved appraisal) and all amounts
retained or collected by the lender from other sources with respect to
the contract,
o accrued and unpaid interest on the unpaid amount of the contract from
the date of default to the date of submission of the claim plus 15
calendar days (but in no event more than nine months) computed at a
rate of 7% per annum,
o costs paid to a dealer or other third party to repossess and preserve
the manufactured home,
o the amount of any sales commission paid to a dealer or other third
party for the resale of the property,
o with respect to a Land-and-Home Contract, property taxes, special
assessments and other similar charges and hazard insurance premiums,
prorated to the date of disposition of the property,
o uncollected court costs,
o legal fees, not to exceed $500, and
o expenses for recording the assignment of the lien on the collateral to
the United States.
The insurance available to a lender under FHA Title I insurance is subject
to the limit of a reserve amount equal to ten percent of the original principal
balance of all Title I insured loans originated by the lender, which amount is
reduced by all claims paid to the lender and by an annual reduction in the
reserve amount of ten percent of the reserve amount, and which is increased by
an amount equal to ten percent of the original principal balance of insured
loans subsequently originated by the lender. As of August 31, 2002, Vanderbilt's
Title I reserve amount was approximately $10,983,234, which amount was available
to pay claims in respect of approximately $114,382,520 of FHA-insured
manufactured housing contracts serviced by Vanderbilt. If Vanderbilt were
replaced as servicer of the contracts under the pooling and servicing agreement,
it is not clear from the FHA regulations what portion of this reserve amount
would be available for claims in respect of the FHA-insured Contracts. The
obligation to pay insurance premiums to FHA is the obligation of Vanderbilt, as
servicer of the FHA-insured Contracts.
The maximum guarantee that may be issued by the VA for a VA-guaranteed
contract is the lesser of (a) the lesser of $20,000 and 40% of the principal
amount of the contract and (b) the maximum amount of guaranty entitlement
available to the obligor veteran (which may range from $20,000 to zero). The
amount payable under the guarantee will be a percentage of the VA contract
originally guaranteed applied to indebtedness outstanding as of the applicable
date of computation specified in the VA regulations, interest accrued on the
unpaid balance of the loan to the appropriate date of computation and limited
expenses of the contract holder, but in each case only to the extent that those
amounts have not been recovered through resale of the manufactured home. The
amount payable under the guarantee may in no event exceed the original
guarantee.
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SOME LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries of some legal aspects of
manufactured housing contracts, Land-and-Home Contracts and mortgage loans,
which are general in nature. Because those legal aspects are governed by
applicable state law (which laws may differ substantially), the summaries do not
purport to be complete nor reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the manufactured
housing contracts, Land-and-Home Contracts or mortgage loans is situated. The
summaries are qualified in their entirety by reference to the applicable federal
and state laws governing the manufactured housing contracts, Land-and-Home
Contracts or mortgage loans.
THE MANUFACTURED HOUSING CONTRACTS
General. As a result of the assignment of the contracts to the trustee, the
trust fund will succeed collectively to all of the rights (including the right
to receive payment on the contracts) and will assume the obligations of the
obligee under the contracts. Each manufactured housing contract evidences both
(a) the obligation of the obligor to repay the loan evidenced by the contract,
and (b) the grant of a security interest in the manufactured home to secure
repayment of that loan. Some aspects of both features of the manufactured
housing contracts are described more fully below.
The manufactured housing contracts generally are "chattel paper" as defined
in the UCC in effect in the states in which the manufactured homes initially
were registered. In accordance with the UCC, the sale of chattel paper is
treated in a manner similar to perfection of a security interest in chattel
paper. Under the pooling and servicing agreement, the servicer will retain
possession of the manufactured housing contracts (other than the Land-and-Home
Contracts) as custodian for the trustee, and will make an appropriate filing of
a UCC-1 financing statement in the applicable jurisdiction under the UCC to give
notice of the trustee's ownership of the manufactured housing contracts. The
manufactured housing contracts will be stamped to reflect their assignment to
the trustee. However, if through negligence, fraud, or otherwise, a subsequent
purchaser were able to take physical possession of the manufactured housing
contracts without notice of that assignment, the trustee's interest in those
contracts could be defeated.
Security Interests in the manufactured homes. The manufactured homes
securing the manufactured housing contracts may be located in all 50 states and
the District of Columbia and Puerto Rico. Security interests in manufactured
homes may be perfected either by notation of the secured party's lien on the
certificate of title or by delivery of the required documents and payment of a
fee to the state motor vehicle authority, depending on state law. In some
nontitle states, perfection in accordance with the provisions of the UCC is
required. Vanderbilt effects notation or delivery of the required documents and
fees, and obtains possession of the certificate of title, as appropriate under
the laws of the state in which a manufactured home is registered. In the event
Vanderbilt fails, due to clerical errors, to effect that notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the trustee
on behalf of the certificateholders may not have a first priority security
interest in the manufactured home securing a manufactured housing contract. As
manufactured homes have become larger and have been attached to their sites
without any apparent intention to move them, courts in many states have held
that manufactured homes, under some circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provision of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. See "Land-and-Home Contracts and
Mortgage Loans" below. These filings must be made in the real estate records
office of the county where the home is located. Substantially all of the
manufactured housing contracts contain provisions prohibiting the borrower from
attaching the manufactured home to its site. So long as the borrower does not
violate this covenant, a security interest in the manufactured home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of the UCC financing
statement will be effective to maintain the priority of the security interest in
the manufactured home. If, however, a
29
manufactured home becomes attached to its site, other parties could obtain an
interest in the manufactured home which is prior to the security interest
originally retained by the seller of the manufactured housing contracts and
transferred to Vanderbilt. Vanderbilt will represent that at the date of the
initial issuance of the related certificates it has obtained a perfected first
priority security interest by proper notation or delivery of the required
documents and fees with respect to substantially all of the manufactured homes
securing the manufactured housing contracts.
The security interest in the manufactured homes will be assigned to the
trustee on behalf of the certificateholders, but the certificates of title will
not be amended to identify the trustee as the new secured party. Neither the
depositor nor the servicer will deliver the certificates of title to the trustee
or note the interest of the trustee on the certificates of title. Accordingly,
Vanderbilt, or other originator of the manufactured housing contracts as
provided in this prospectus or the prospectus supplement, will continue to be
named as the secured party on the certificates of title relating to the
manufactured homes. In some states, the assignment to the trustee is an
effective conveyance of that security interest without amendment of any lien
noted on the related certificate of title and the new secured party succeeds to
the depositor's rights as the secured party. However, in some states in the
absence of an amendment to the certificate of title, the assignment of the
security interest in the manufactured home may not be held effective or those
security interests may not be perfected. In such a case, the absence of a
notation of the trustee's security interest or delivery to the trustee, the
assignment of the security interest in the manufactured home may not be
effective against creditors of Vanderbilt or the depositor or a trustee in
bankruptcy of Vanderbilt or the depositor.
In the absence of fraud, forgery or affixation of the manufactured home to
its site by the manufactured home owner, or administrative error by state
recording officials, the notation of the lien of Vanderbilt on the certificate
of title or delivery of the required documents and fees will be sufficient, in
some states, to protect the certificateholders against the rights of subsequent
purchasers of a manufactured home or subsequent lenders who take a security
interest in the manufactured home. If there are any manufactured homes as to
which Vanderbilt's security interest is not perfected, that security interest
would be subordinate to, among others, subsequent purchasers for value of the
manufactured homes and holders of perfected security interests. There also
exists a risk in not identifying the trustee as the new secured party on the
certificate of title that, through fraud or negligence, the security interest of
the trustee could be released.
In the event that the owner of a manufactured home moves it to a state
other than the state in which that manufactured home initially is registered,
under the laws of some states the perfected security interest in the
manufactured home would continue for four months after the relocation and
thereafter only if and after the owner re-registers the manufactured home in
that state and re-perfects the trustee's security interest in the manufactured
home. If the owner were to relocate a manufactured home to another state and not
re-register the manufactured home in that state, and if steps were not taken to
re-perfect the trustee's security interest in that state, the security interest
in the manufactured home could cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
manufactured home; accordingly, Vanderbilt must surrender possession if it holds
the certificate of title to that manufactured home or, in the case of
manufactured homes registered in states which provide for notation of lien,
Vanderbilt would receive notice of surrender if the security interest in the
manufactured home is noted on the certificate of title. Accordingly, Vanderbilt
would have the opportunity to re-perfect its security interest in the
manufactured home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, Vanderbilt takes steps to effect that
re-perfection upon receipt of notice of re-registration or information from the
obligor as to relocation. Similarly when an obligor under a contract sells a
manufactured home, Vanderbilt must surrender possession of the certificate of
title or will receive notice as a result of its lien noted on the certificate of
title and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under the pooling and servicing agreement, Vanderbilt is obligated to take
those steps, at Vanderbilt's expense, as are necessary to maintain perfection of
security interests in the manufactured homes.
30
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over
perfected security interests. The depositor, and, if Vanderbilt is not the
depositor, Vanderbilt will represent in the pooling and servicing agreement that
it has no knowledge of any of those liens with respect to any manufactured home
securing payment on any contract. However, those liens could arise at any time
during the term of the contract. No notice will be given to the trustee or
certificateholders in the event that a lien arises.
Enforcement of Security Interests in manufactured homes. The servicer on
behalf of the trustee, to the extent required by the related pooling and
servicing agreement, may take action to enforce the trustee's security interest
with respect to contracts in default by repossession and resale of the
manufactured homes securing those defaulted contracts. So long as the
manufactured home has not become subject to real estate laws, a creditor can
repossess a manufactured home securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting that sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before the resale. In the event of the repossession and resale of a
manufactured home, the trustee would be entitled to be paid out of the sale
proceeds before those proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, after that, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing a debtor's loan. However, some states
impose prohibitions or limitations on definitions or limitations on deficiency
judgments, and in many cases the defaulting borrower would have no assets with
which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
Under the terms of the Soldier's and Sailor's Civil Relief Act, an obligor
who enters military service after the origination of that obligor's contract
(including an obligor who is a member of the National Guard or is in reserve
status at the time of the origination of the contract and is later called to
active duty) may not be charged interest above an annual rate of 6% during the
period of the obligor's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that action could have an effect, for
an indeterminate period of time, on the ability of the servicer to collect full
amounts of interest on some of the contracts. Any shortfall in interest
collections resulting from the application of the Soldier's and Sailor's Civil
Relief Act, to the extent not covered by the subordination of a class of
Subordinated Certificates, could result in losses to the holders of a series of
certificates. In addition, the Soldier's and Sailor's Civil Relief Act imposes
limitations which would impair the ability of the servicer to foreclose on an
affected contract during the obligor's period of active duty status. Thus, in
the event that a contract goes into a default in which the obligor is subject to
the Soldier's and Sailor's Civil Relief Act, there may be delays and losses
occasioned by the inability to realize upon the manufactured home in a timely
fashion.
LAND-AND-HOME CONTRACTS AND MORTGAGE LOANS
General. The Land-and-Home Contracts and mortgage loans will be secured by
either first mortgages or deeds of trust, depending upon the applicable law in
the state in which the underlying property is located. A mortgage creates a lien
upon the real property described in the mortgage. There are two parties to a
mortgage: the mortgagor, who is the borrower, and the mortgagee, who is the
lender. In a mortgage state, the mortgagor delivers to the mortgagee a note,
bond or other instrument evidencing the loan and the mortgage. Although a deed
of trust is similar to a mortgage, a deed of trust has three parties: the
borrower, a lender as beneficiary, and a third-party grantee called the trustee.
Under the deed
31
of trust, the borrower conveys title to the property, irrevocably until the debt
is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the loan. The trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by the express provisions of
the deed of trust or mortgage, applicable law, and, in some cases, with respect
to the deed of trust, the directions of the beneficiary.
Foreclosure. Foreclosure of a mortgage is generally accomplished by
judicial action. Generally, the action is initiated by service of legal
pleadings upon all parties having an interest of record in the real property.
Delays in completion of the foreclosure occasionally may result from
difficulties in locating necessary parties. When the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time-consuming and expensive. After the completion of a judicial
foreclosure proceeding, the court may issue a judgment of foreclosure and
appoint a receiver or other officer to conduct the sale of the property. In some
states, mortgages may also be foreclosed by advertisement, in accordance with a
power of sale provided in the mortgage. Foreclosure of mortgage by advertisement
is essentially similar to foreclosure of a deed of trust by non-judicial power
of sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In some states, a
foreclosure also may be accomplished by judicial action in the manner provided
for by foreclosure of mortgages. In some states 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 sale. In addition, the trustee must
provide notice in some states to any other individual having an interest of
record in the real property, including any junior lienholders. If the deed of
trust is not reinstated within any applicable cure period, a notice of sale must
be posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period cure the default by paying the entire
amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Some state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, that may be recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
not common for a third party to purchase the property at the foreclosure sale.
Rather, the lender generally purchases the property from the trustee or
receiver. After that, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burden of ownership, including obtaining hazard insurance and making repairs at
its own expense as are necessary to render the property suitable for sale. The
lender commonly will obtain the services of a real estate broker and pay the
broker a commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property.
Rights of Redemption. In some states, after the sale in accordance with a
deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. In some other states, this right of redemption may be waived,
or applies only to sale following judicial foreclosure, and not a sale in
accordance with a non-judicial power of sale. In most states where the right of
redemption is available, statutory redemption may occur upon payment of the
foreclosure purchase price, accrued interest and taxes. In some states the right
to redeem is an equitable right. A right of redemption diminishes the ability of
the lender to sell the foreclosed property. The exercise of a right of
redemption would defeat the title of any purchaser at a foreclosure
32
sale, or of any purchaser from the lender subsequent to judicial 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 run.
Anti-Deficiency Legislation and Other Limitations on Lenders. Some states
have imposed statutory restrictions that limit the remedies of a beneficiary
under a deed of trust or a mortgagee under a mortgage relating to a single
family residence. In some states, statutes limit or restrict 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 borrower equal in most cases to the difference
between the amount due to the lender and the net amount realized upon the
foreclosure sale.
Some state statutes may require the 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 some other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting that security;
however, in some of these states, the lender, following judgment on a personal
action against the borrower, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against a
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of the foreclosure
sale. The purpose of these statutes is to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in some instances where the value of the lender's security has been impaired by
acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the Soldier's and Sailor's Civil Relief Act and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage lender
to realize upon its security. For example, with respect to a Land-and-Home
Contract or a mortgage loan, in a Chapter 13 proceeding under the federal
bankruptcy code, when a court determines that the value of a home is less than
the principal balance of the loan, the court may prevent a lender from
foreclosing on the home, and, as part of the rehabilitation plan, reduce the
amount of the secured indebtedness to the value of the home as it exists at the
time of the proceeding, leaving the lender as a general unsecured creditor for
the difference between that value and the amount of outstanding indebtedness. A
bankruptcy court may grant the debtor a reasonable time to cure a payment
default, and in the case of a mortgage loan not secured by the debtor's
principal residence, also may reduce the monthly payments due under that
mortgage loan, change the rate of interest and alter the mortgage loan repayment
schedule. Some court decisions also have applied this relief to claims secured
by the debtor's principal residence.
The Code provides priority to some tax liens over the lien of the mortgage
or the deed of trust. The laws of some states provide priority to some tax liens
over the lien of the mortgage or the deed of trust. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing and the enforcement of mortgage
loans. These laws include the federal Truth in Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act, the Fair Debt Collection Practices Act and
related statutes and regulations. These federal laws and state laws impose
specific statutory liabilities upon lenders who originate or service mortgage
loans and who fail to comply with the provisions of the law. In some cases, this
liability may affect assignees of the contracts.
SOME MATTERS RELATING TO INSOLVENCY
Vanderbilt intends that each transfer of the contracts to a trust fund will
constitute a sale rather than a pledge of the contracts to secure indebtedness
of Vanderbilt. However, if Vanderbilt (or one of its
33
affiliates) were to become a debtor under the federal bankruptcy code, it is
possible that a creditor, receiver, conservator or trustee in bankruptcy of
Vanderbilt (or one of its affiliates) or Vanderbilt as a debtor-in-possession
may argue the sale of the contracts by Vanderbilt (or one of its affiliates) was
a pledge of the contracts rather than a sale. This position, if argued or
accepted by a court, could result in a delay or reduction of distributions to
the related certificateholders.
CONSUMER PROTECTION LAWS
The so-called holder-in-due-course rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and related
lenders and assignees) to transfer that contract free of notice of claims by the
debtor under that contract. The effect of this rule is to subject the assignee
of that contract (such as the trust fund) to all claims and defenses which the
obligor could assert against the seller of the manufactured home. Liability
under this rule is limited to amounts paid under a contract; however, the
obligor also may be able to assert the rule to set off remaining amounts due as
a defense against a claim brought by the trust fund against the obligor.
Numerous other federal and state consumer protection laws impose requirements
applicable to lending and origination of contracts, including the Truth in
Lending Act, the Federal Trade Commission Act, the Fair Credit Billing Act, the
Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt
Collection Practices Act and the Uniform Consumer Credit Code. In the case of
some of these laws, the failure to comply with their provisions may affect the
enforceability of the related contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes or modular homes without the consent of the lender or the
servicer and permit the acceleration of the maturity of the contracts by the
lender or the servicer upon any sale or transfer that is not consented to. The
servicer expects that it will permit most transfers and not accelerate the
maturity of the related contracts. In some cases, the transfer may be made by a
delinquent obligor in order to avoid a repossession, foreclosure proceeding or
trustee's sale.
In the case of a transfer of a manufactured home or modular home after
which the servicer desires to accelerate the maturity of the related contract,
the servicer's ability to do so will depend on the enforceability under state
law of the "due-on-sale" clause. The Garn-St. Germain Depository Institutions
Act of 1982 preempts, subject to exceptions and conditions, state laws
prohibiting enforcement of "due-on-sale" clauses applicable to the manufactured
homes or modular homes. Consequently, in some states the servicer may be
prohibited from enforcing a "due-on-sale" clause in respect of some manufactured
homes or modular homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended, provides that, subject to the following conditions,
state usury limitations shall not apply to any loan which is secured by a first
lien on some manufactured housing and mortgaged properties. The contracts would
be covered if they satisfy some conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects its application. Fifteen states adopted laws
prior to the April 1, 1983 deadline which reject some or all of Title V. In
addition, even where the Title V was not so rejected, any state is authorized by
law to adopt a provision limiting discount points or other charges on loans
covered by Title V. Vanderbilt will represent in the applicable pooling and
servicing agreement that all of the contracts comply with applicable usury laws.
34
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans subject to ERISA and
on persons who are fiduciaries with respect to those Plans. Generally, ERISA
applies to investments made by Plans. Among other requirements, ERISA mandates
that the assets of Plans be held in trust and that the trustee, or other duly
authorized fiduciary, have exclusive authority and discretion to manage and
control the assets of those Plans. ERISA also imposes some duties on persons who
are fiduciaries of those Plans. Under ERISA (subject to exceptions), any person
who exercises any authority or control with respect to the management or
disposition of the assets of a Plan is considered to be a fiduciary of that
Plan, subject to the standards of fiduciary conduct under ERISA. These standards
include the requirements that the assets of Plans be invested and managed for
the exclusive benefit of Plan participants and beneficiaries, a determination by
the Plan fiduciary that any of that investment is permitted under the governing
Plan instruments and is prudent and appropriate for the Plan in view of its
overall investment policy and the composition and diversification of its
portfolio. Some employee benefit plans, such as governmental plans (as defined
in ERISA Section 3(32)) and church plans (as defined in ERISA Section 3(33)),
are not subject to ERISA. Accordingly, assets of those plans may be invested in
certificates without regard to the ERISA considerations described above and
below, subject to the provisions of applicable state law. Any plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code,
however, is subject to the prohibited transaction rules set forth in Section 503
of the Code.
Any Plan fiduciary considering the purchase of a certificate should consult
with its counsel with respect to the application of ERISA and the Code to that
investment. Moreover, each Plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the certificates is appropriate for the Plan, taking into account
the overall investment policy of the Plan and composition of the Plan's
investment portfolio.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification under ERISA, other provisions of ERISA, and the
corresponding provisions of the Code, prohibit a broad range of transactions
involving assets of Plans (including for these purposes individual retirement
accounts and Keogh plans) and persons having some specified relationships to a
Plan ("parties in interest" within the meaning of ERISA and "disqualified
persons" within the meaning of the Code). Those transactions are treated as
"prohibited transactions" under Sections 406 and 407 of ERISA and excise taxes
are imposed upon those persons by Section 4975 of the Code. An investment in the
certificates by a Plan might constitute a prohibited transaction under the
above-mentioned ERISA sections unless an administrative exemption applies. In
addition, if any investing Plan's assets were deemed to include an interest in
the assets of the contract pool and not merely an interest in the certificates,
transactions occurring in the operation of the contract pool might constitute
prohibited transactions unless an administrative exemption applies. Some
exemptions which may be applicable to the acquisition and holding of the
certificates or to the servicing and operation of the contract pool are noted
below.
The Department of Labor, or the DOL, has issued a regulation (29 C.F.R.
Section 2510.3-101) concerning the definition of what constitutes the assets of
a Plan. The regulation provides that, as a general rule, the underlying assets
and properties of corporations, partnerships, trusts and some other entities in
which a Plan makes an "equity" investment will be deemed for purposes of ERISA
to be assets of the investing plan unless some exceptions apply. However, the
regulation provides that, generally, the assets of a corporation or partnership
in which a Plan invests will not be deemed for purposes of ERISA to be assets of
that Plan if the equity interest acquired by the investing Plan is a
publicly-offered security. A publicly offered security, as defined in DOL Reg.
Section 2510.3-101, is a security that is widely held, freely transferable and
either registered under the Securities Exchange Act of 1934 or sold to the Plan
as part of a public offering under the Securities Act that then becomes
registered. The certificates are not expected to be publicly-offered securities
under the terms of the Regulation, and it is not anticipated that any other
exception to the regulation will apply.
As a result, an investing Plan's assets could be considered to include an
undivided interest in the contracts and any other assets held in the contract
pool. In the event that assets of a contract pool are considered assets of an
investing plan, Vanderbilt, the servicer, the trustee, other persons, in
providing
35
services with respect to the contracts, or some affiliates of any of the
above-mentioned parties, may be considered, or might become, parties in interest
or disqualified persons with respect to a Plan. If so, the acquisition or
holding of certificates by or on behalf of that Plan could give rise to a
prohibited transaction within the meaning of ERISA and the Code unless a
statutory, regulatory or administrative exemption applies.
Special caution should be exercised before the assets of a Plan (including
assets that may be held in an insurance company's separate or general accounts
where assets in those accounts may be deemed to be Plan assets for purposes of
ERISA) are used to purchase a certificate if, with respect to those assets,
Vanderbilt, the servicer, the trustee, the underwriters named in the prospectus
supplement or an affiliate of any of those parties:
o has investment discretion with respect to the investment of those
assets of that Plan, or
o has authority or responsibility to give, or regularly gives, investment
advice with respect to those assets for a fee and in accordance with a
pooling and servicing agreement or understanding that that advice will
serve as a primary basis for investment decisions with respect to those
assets and that that advice will be based on the particular investment
needs of the Plan, or
o is an employer maintaining or contributing to the Plan.
The DOL has granted to the lead underwriter named in the prospectus
supplement an exemption from some of the prohibited transaction rules of ERISA
with respect to the initial purchase, the holding and the subsequent resale by
Plans of securities, including certificates, underwritten or placed by the lead
underwriter or a syndicate managed by it and issued by entities holding
investment pools that consist only of receivables, loans and other obligations
that meet the conditions and requirements of the exemption. The receivables
covered by the exemption include fully secured manufactured housing installment
sales contracts and installment loan agreements such as the contracts. The
exemption will apply to the acquisition, holding and resale of the certificates,
other than Residual Certificates, by a Plan, provided that a number of
conditions are met.
Among the conditions which must be satisfied for the exemption to apply to
the certificates are the following:
o The acquisition of the certificates by a Plan is on terms (including
the price for the certificates) that are at least as favorable to the
Plan as they would be in an arm's length transaction with an unrelated
party;
o Except when the trust fund holds certain types of obligations, the
rights and interests evidenced by the certificates acquired by the Plan
are not subordinated to the rights and interests evidenced by other
certificates of the trust fund;
o The certificates acquired by the Plan have received a rating at the
time of the acquisition that is in one of the three (four, when the
trust holds certain types of obligations) highest generic rating
categories from either Standard & Poor's, a Division of The McGraw-Hill
Companies, Moody's Investors Service, Inc. or Fitch Ratings;
o The trustee is not an affiliate of any other member of the Restricted
Group other than an underwriter;
o The sum of all payments made to and retained by the underwriter in
connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting the certificates;
the sum of all payments made to and retained by Vanderbilt in
accordance with the sale of the contracts to the issuer represents not
more than the fair market value of those contracts; and the sum of all
payments made to and retained by the servicer represents not more than
reasonable compensation for the servicer's services under the pooling
and servicing agreement and reimbursement of the servicer's reasonable
expenses in connection with those services;
36
o The Plan investing in the certificates is an "accredited investor" as
defined in Rule 501 (a)(1) of Regulation D of the SEC under the
Securities Act; and
o For some types of issuers, the documents establishing the issuer and
governing the transaction contain some provisions intended to protect
the assets of the issuer from creditors of the sponsor.
Moreover, the exemption would provide relief from some
self-dealing/conflict of interest prohibited transactions that may occur if a
Plan fiduciary causes a Plan to acquire securities of an issuer that holds
obligations on which the fiduciary (or an affiliate) is obligor only if, among
other requirements:
o in the case of the acquisition of certificates in connection with the
initial issuance, at least fifty (50) percent of each class of
certificates is acquired by persons independent of the Restricted Group
and at least fifty (50) percent of the aggregate interest in the
issuing entity is acquired by persons independent of the Restricted
Group,
o the Plan's investment in a class of certificates does not exceed
twenty-five percent of all of the certificates of that class
outstanding at the time of the acquisition,
o immediately after the acquisition, no more than twenty-five percent of
the assets of any Plan with respect to which the person is a fiduciary
are invested in securities representing an interest in one or more
issuers containing assets sold or serviced by the same entity, and
o the fiduciary or its affiliate is obligor on obligations representing
no more than five percent of the fair market value of obligations held
by the issuer.
The exemption provides limited relief to Plans sponsored by members of the
Restricted Group.
Employee benefit plans that are governmental plans (as defined in section
3(32) of ERISA) and church plans (as defined in section 3(33) of ERISA) are not
subject to ERISA requirements. Accordingly, assets of those plans generally may
be invested in the certificates without regard to the ERISA restrictions
described above, subject to applicable provisions of other federal and state
laws.
Any Plan fiduciary who proposes to cause a Plan to purchase certificates
should consult with its own counsel with respect to the potential consequences
under ERISA and the Code of the Plan's acquisition and ownership of
certificates. Assets of a Plan or individual retirement account should not be
invested in the certificates unless it is clear that the assets of the trust
fund will not be plan assets or unless it is clear that the exemption or a
prohibited transaction class exemption will apply and exempt all potential
prohibited transactions. In this regard, a Plan fiduciary proposing to invest in
certificates should consider that the rating of a security may change. If a
class of certificates no longer has a rating of at least BBB- or its equivalent,
certificates of that class will no longer be eligible for relief under the
exemption, and may not be purchased or sold to a Plan, although a Plan that had
purchased the certificate when it had an investment-grade rating would not be
required by the exemption to dispose of it.
No transfer of a certificate with a rating below BBB- shall be registered
unless the prospective transferee provides the trustee and Vanderbilt with (a) a
certification to the effect that (1) that transferee is not an employee benefit
or other plan subject to section 406 or section 407 of ERISA or to section 4975
of the Code, the trustee of any of those Plans, a person acting on behalf of any
of those Plans, or a person using the assets of any of those Plans; or (2) if
the transferee is an insurance company, it is purchasing the certificates with
funds contained in an insurance company general account (as that term is defined
in Section V(e) of the Prohibited Transaction Class Exemption 95-60, PTCE 95-60)
and the purchase and holding of the certificates are covered under Sections I
and III of PTCE 95-60; or (b) an opinion of counsel (a "benefit plan opinion")
satisfactory to the trustee and Vanderbilt, and upon which the trustee and
Vanderbilt shall be entitled to rely, to the effect that the purchase and
holding of the certificate with a rating below BBB- by the prospective
transferee will not result in the assets of the trust fund being deemed to be
plan assets and subject to the prohibited transaction provisions of ERISA or the
Code and will not subject the trustee or Vanderbilt to any obligation in
addition to those undertaken by those entities in the pooling and servicing
agreement, which opinion of counsel shall not be an expense of the trustee or
Vanderbilt. Unless a different certification or an opinion is delivered,
Certificate Owners of the certificates with a rating below BBB- will be deemed
to make the representations in clause (a)(1).
37
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of material federal income tax
consequences relating to the purchase, ownership, and disposition of the
certificates and is based on advice of Sidley Austin Brown & Wood LLP, special
tax counsel to Vanderbilt. The discussion is also based upon laws, regulations,
rulings, and decisions now in effect, including Treasury Regulations issued on
December 23, 1992, and generally effective for REMICs with startup days on or
after November 12, 1991, all of which are subject to change or possibly
differing interpretations. The discussion below addresses all material federal
income tax consequences generally applicable to investors. However, the
discussion 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. Investors should consult their own tax advisors to determine the
federal, state, local, and any other tax consequences of the purchase,
ownership, and disposition of the certificates.
Many aspects of the federal tax treatment of the purchase, ownership, and
disposition of the certificates will depend upon whether an election is made to
treat the trust fund or a segregated portion thereof evidenced by a particular
series or sub-series of certificates as a REMIC within the meaning of Section
860D(a) of the Code. The prospectus supplement for each series will indicate
whether or not an election to be treated as a REMIC has been or will be made
with respect to the prospectus supplement. The following discussion deals first
with series with respect to which a REMIC Election is made and then with series
with respect to which a REMIC Election is not made.
REMIC SERIES
With respect to each series of certificates for which a REMIC Election is
made, Sidley Austin Brown & Wood LLP, special tax counsel to Vanderbilt, is of
the opinion that, assuming: (a) the making of that election in accordance with
the requirements of the Code and (b) ongoing compliance with the applicable
pooling and servicing agreement, at the initial issuance of the certificates in
those series the trust fund will qualify as a REMIC and the certificates in
those series will be treated either as Regular Certificates or as a Residual
Certificate.
Qualification as a REMIC. Qualification as a REMIC involves ongoing
compliance with some requirements and the following discussion assumes that
those requirements will be satisfied by the trust fund so long as there are any
REMIC certificates outstanding. Substantially all of the assets of the REMIC
must consist of qualified mortgages and Permitted Investments as of the Startup
Day and at all times after that. The term "qualified mortgage" means any
obligation (including a participation or certificate of beneficial ownership in
that obligation) which is principally secured by an interest in real property
that is transferred to the REMIC on the Startup Day in exchange for regular or
residual interests in the REMIC or is purchased by the REMIC within the
three-month period beginning on the Startup Day if that purchase is in
accordance with a fixed price contract in effect on the Startup Day. The REMIC
regulations provide that a contract is principally secured by an interest in
real property if the fair market value of the real property securing the
contract is at least equal to either (a) 80% of the issue price (generally, the
principal balance) of the contract at the time it was originated or (b) 80% of
the adjusted issue price (the then-outstanding principal balance, with some
adjustments) of the contract at the time it is contributed to a REMIC. The fair
market value of the underlying real property is to be determined after taking
into account other liens encumbering that real property. Alternatively, a
contract is principally secured by an interest in real property if substantially
all of the proceeds of the contract were used to acquire or to improve or
protect an interest in real property that, at the origination date, is the only
security for the contract (other than the personal liability of the obligor).
The REMIC Regulations provide that obligations secured by manufactured housing
or mobile homes (not including recreational vehicles, campers or similar
vehicles) which are "single family residences" under Section 25(e)(10) of the
Code will qualify as obligations secured by real property without regard to
state law classifications. See the discussion below under "REMIC Series --
Status of Manufactured Housing Contracts." A qualified mortgage also includes a
qualified replacement mortgage that is used to replace any qualified mortgage
within three months of the Startup Day or to replace a defective mortgage within
two years of the Startup Day.
38
A reserve fund will not be qualified if more than 30% of the gross income
from the assets in the reserve fund is derived from the sale or other
disposition of property held for three months or less, unless that sale is
necessary to prevent a default in payment of principal or interest on Regular
Certificates. In accordance with Section 860G(a)(7) of the Code, a reserve fund
must be promptly and appropriately reduced as payments on contracts are
received. Foreclosure property will be a Permitted Investment only to the extent
that that property is not held for more than three years following the close of
the taxable year in which the property was acquired by the REMIC.
The Code requires that in order to qualify as a REMIC an entity must make
reasonable arrangements designed to ensure that Disqualified Organizations do
not hold residual interest in the REMIC. Consequently, it is expected that in
the case of any trust fund for which a REMIC Election is made the transfer,
sale, or other disposition of a Residual Certificate to a Disqualified
Organization will be prohibited and the ability of a Residual Certificate to be
transferred will be conditioned on the trustee's receipt of a certificate or
other document representing that the proposed transferee is not a Disqualified
Organization. The transferor of a Residual Certificate must not, as of the time
of the transfer, have actual knowledge that that representation is false. The
Code further requires that reasonable arrangements must be made to enable a
REMIC to provide the IRS and some other parties, including transferors of
residual interests in a REMIC, with the information needed to compute the tax
imposed by Section 860E(e)(1) of the Code if, in spite of the steps taken to
prevent Disqualified Organizations from holding residual interests, that an
organization does, in fact, acquire a residual interest. See "REMIC Series --
Restrictions on Transfer of Residual Certificates" below.
If the trust fund fails to comply with one or more of the ongoing
requirements for qualification as a REMIC, the trust fund will not be treated as
REMIC for the year during which that failure occurs and for all years after that
unless the IRS determines, in its discretion, that that failure was inadvertent
(in which case, the IRS may require any adjustments which it deems appropriate).
If the ownership interests in the assets of the trust fund consist of multiple
classes, failure to treat the trust fund as a REMIC may cause the trust fund to
be treated as an association taxable as a corporation. That treatment could
result in income of the trust fund being subject to corporate tax in the hands
of the trust fund and in a reduced amount being available for distribution to
certificateholders as a result of the payment of those taxes.
Status of Manufactured Housing Contracts. The REMIC Regulations as well as
a Notice issued by the IRS provide that obligations secured by interests in
manufactured housing, which qualify as "single family residences" within the
meaning of Section 25(e)(10) of the Code, are to be treated as "qualified
mortgages" for a REMIC. Under Section 25(e)(10) of the Code, the term "single
family residence" includes any manufactured home which has a minimum of 400
square feet of living space and a minimum width in excess of 102 inches and
which is of a kind customarily used at a fixed location. Vanderbilt will
represent and warrant that each of the manufactured homes securing the Contracts
which are a part of a Trust Fund meets this definition of a "single family
residence." See the discussion above under "REMIC Series -- Qualification as a
REMIC."
Tiered REMIC Structures. For some series of certificates, two or more
separate elections may be made to treat segregated portions of the assets of a
single trust fund as REMICs for federal income tax purposes (respectively, the
subsidiary REMIC or subsidiary REMICs and the master REMIC). Upon the issuance
of any of those series of certificates, Sidley Austin Brown & Wood LLP, special
tax counsel to Vanderbilt, will have advised Vanderbilt, as described above,
that at the initial issuance of the certificates, the subsidiary REMIC or
subsidiary REMICs and the master REMIC will each qualify as a REMIC for federal
income tax purposes, and that the certificates in those series will be treated
either as Regular Certificates or Residual Certificates of the appropriate
REMIC. Only REMIC certificates issued by the master REMIC will be offered under
this prospectus. Solely for the purpose of determining whether those Regular
Certificates will constitute qualifying real estate or real property assets for
some categories of financial institutions or real estate investment trusts, each
REMIC in a tiered REMIC structure will be treated as one. See the discussion
below under "REMIC Series -- Taxation of Regular Interests."
Taxation of Regular Interests. Regular Certificates will be treated as new
debt instruments issued by the REMIC on the Startup Day. If a Regular
Certificate represents an interest in a REMIC that consists
39
of a specified portion of the interest payments on the REMIC's qualified
mortgages, the stated principal amount with respect to that Regular Certificate
may be zero. That specified portion may consist of a fixed number of basis
points, a fixed percentage of interest or a qualified variable rate on some or
all of the qualified mortgages. Stated interest on a Regular Certificate will be
taxable as ordinary income. Holders of Regular Certificates that would otherwise
report income under a cash method of accounting will be required to report
income with respect to those Regular Certificates under the accrual method.
Under temporary Treasury regulations, if a trust fund, with respect to which a
REMIC Election is made, is considered to be a "single-class REMIC," a portion of
the REMIC's Servicing Fees, administrative and other non-interest expenses,
including assumption fees and late payment charges retained by Vanderbilt, will
be allocated as a separate item to those Regular Certificate holders that are
"pass-through interest holders." Generally, a single-class REMIC is defined as a
REMIC that would be treated as a fixed investment trust under applicable law but
for its qualification as a REMIC, or a REMIC that is substantially similar to an
investment trust but is structured with the principal purpose of avoiding this
allocation requirement imposed by the temporary Treasury regulations. Generally,
a pass-through interest holder refers to individuals, entities taxed as
individuals, such as some trusts and estates, and regulated investment
companies. An individual, an estate, or a trust that holds a Regular Certificate
in that REMIC will be allowed to deduct the above expenses under Section 212 of
the Code only to the extent that, in the aggregate and combined with some other
itemized deductions, they exceed 2% of the adjusted gross income of the holder.
In addition, Section 68 of the Code provides that the amount of itemized
deductions (including those provided for in Section 212 of the Code) otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a threshold amount specified in the Code will be reduced by the lesser
of:
(1) 3% of the excess of adjusted gross income over the specified
threshold amount or
(2) 80% of the amount of itemized deductions otherwise allowable, for
that taxable year. As a result of the above-mentioned limitations, some
holders of Regular Certificates in "single-class REMICs" may not be entitled
to deduct all or any part of the above-mentioned expenses.
Tax Status of REMIC Certificates. In general,
o Regular Certificates held by a thrift institution taxed as a "domestic
building and loan association" within the meaning of Section
7701(a)(19) of the Code will constitute "a regular interest in a REMIC"
within the meaning of Section 7701(a)(19)(C)(xi) of the Code; and
o Regular Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code and interest on the Regular Certificate, will
be considered "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code, in
each of that case as long as the portion of the assets of the trust
fund qualifying for the corresponding status is at least 95% of the
assets of the REMIC.
If less than 95% of the average adjusted basis of the assets comprising the
REMIC are assets qualifying under any of the above-mentioned sections of the
Code (including assets described in Section 7701(a)(19)(C) of the Code), then
the Regular Certificates will be qualifying assets only to the extent that the
assets comprising the REMIC are qualifying assets. Treasury regulations
promulgated in accordance with Section 593 of the Code define "qualifying real
property loans" to include a loan secured by a mobile home unit "permanently
fixed to real property" except during a brief period in which the unit is
transported to its site. Section 7701(a)(19)(C)(v) of the Code provides that
"loans secured by an interest in real property" includes loans secured by mobile
homes not used on a transient basis. Treasury regulations promulgated in
accordance with Section 856 of the Code state that local law definitions are not
controlling in determining the meaning of the term "real property" for purposes
of that section, and the IRS has ruled that obligations secured by permanently
installed mobile home units qualify as "real estate assets" under this
provision. Entities affected by the above-mentioned provisions of the Code that
are considering the purchase of certificates should consult their own tax
advisors regarding these provisions. Furthermore, interest paid with respect to
certificates held by a real estate investment trust will be considered "interest
on obligations secured by mortgages on real property or on interest in real
40
property" within the meaning of Section 856(c)(3)(B) of the Code to the same
extent that the certificates themselves are treated as real estate assets.
Regular Certificates held by a regulated investment company or a real estate
investment trust will not constitute "government securities" within the meaning
of Sections 851(b)(3)(A)(i) and 856(c)(4)(A) of the Code, respectively. In
addition, the REMIC regulations provide that payments on contracts qualifying
for the corresponding status that are held and reinvested pending distribution
to certificateholders will be considered to be "real estate assets" within the
meaning of Section 856(c)(5)(B) of the Code.
Original Issue Discount. Regular Certificates may be issued with OID. OID
Regulations governing original issue discount are set forth in Sections
1271-1273 and 1275 of the Code and the Treasury regulations issued after that in
January 1994 and in June 1996. The discussion in this prospectus is based in
part on the OID Regulations, which generally apply to debt instruments issued on
or after April 4, 1994, but which generally may be relied upon for debt
instruments issued after December 21, 1992. The June 1996 Regulations apply to
debt instruments issued after August 13, 1996. Moreover, although the rules
relating to original issue discount contained in the Code were modified by the
Tax Reform Act of 1986 specifically to address the tax treatment of securities,
such as the Regular Certificates, on which principal is required to be prepaid
based on prepayments of the underlying assets, regulations under that
legislation have not yet been finalized. Certificateholders also should be aware
that the OID Regulations do not address some issues relevant to prepayable
securities such as the Regular Certificates.
In general, in the hands of the original holder of a Regular Certificate,
original issue discount, if any, is the difference between the "stated
redemption price at maturity" of the Regular Certificate and its "issue price."
The original issue discount with respect to a Regular Certificate will be
considered to be zero if it is less than 0.25% of the Regular Certificate's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of that Regular Certificate to its maturity date. The OID
Regulations, however, provide a special de minimis rule to apply to obligations
such as the Regular Certificates that have more than one principal payment or
that have interest payments that are not qualified stated interest as defined in
the OID Regulations, payable before maturity ("installment obligations"). Under
the special rule, original issue discount on an installment obligation is
generally considered to be zero if it is less than 0.25% of the principal amount
of the obligation multiplied by the weighted average maturity of the obligation
as defined in the OID Regulations. Because of the possibility of prepayments, it
is not clear whether or how the de minimis rules will apply to the Regular
Certificates. It is possible that the Prepayment Assumption will be required to
be used in determining the weighted average maturity of the Regular
Certificates. In the absence of authority to the contrary, Vanderbilt expects to
apply the de minimis rule applicable to installment obligations by using the
Prepayment Assumption. The OID Regulations provide a further special de minimis
rule applicable to any Regular Certificates that are "self-amortizing
installment obligations," i.e., Regular Certificates that provide for equal
payments composed of principal and qualified stated interest payable
unconditionally at least annually during its entire term, with no significant
additional payment required at maturity. Under this special rule, original issue
discount on a self-amortizing installment obligation is generally considered to
be zero if it is less than 0.167% of the principal amount of the obligation
multiplied by the number of complete years from the date of issue of that
Regular Certificate to its maturity date.
Generally, the original holder of a Regular Certificate that includes a de
minimis amount of original issue discount includes that de minimis original
issue discount in income as principal payments are made. The amount included in
income with respect to each principal payment equals a pro rata portion of the
entire amount of de minimis original issue discount with respect to that Regular
Certificate. Any de minimis amount of original issue discount included in income
by a holder of a Regular Certificate is generally treated as a capital gain if
the Regular Certificate is a capital asset in the hands of the holder of that
Regular Certificate. In accordance with the OID Regulations, a holder of a
Regular Certificate that uses the accrual method of tax accounting may elect to
include in gross income all interest that accrues on a Regular Certificate,
including any de minimis original issue discount and market discount, by using
the constant yield method with respect to original issue discount.
The stated redemption price at maturity of a Regular Certificate generally
will be equal to the sum of all payments, whether denominated as principal or
interest, to be made with respect to that Regular
41
Certificate other than "qualified stated interest." In accordance with the OID
Regulations, qualified stated interest generally means stated interest that is
unconditionally payable at least annually at a single fixed rate of interest
(or, under some circumstances, a variable rate tied to an objective index)
during the entire term of the Regular Certificate (including short periods). It
is possible that the IRS could assert that the stated rate of interest on the
certificates is not unconditionally payable or otherwise does not qualify as
qualified stated interest. That position, if successful, would require all
holders of certificates to accrue all income on the certificates under the OID
Regulations. Vanderbilt, however, intends to treat all stated interest on the
certificates as qualified stated interest. Under the OID Regulations, some
variable interest rates payable on Regular Certificates, including rates based
upon the weighted average interest rate of a pool of contracts, may not be
treated as qualified stated interest. In that case, the OID Regulations would
treat interest under those rates as contingent interest which generally must be
included in income by the Regular Certificate holder when the interest becomes
fixed, as opposed to when it accrues. Until further guidance is issued
concerning the treatment of that interest payable on Regular Certificates, the
REMIC will treat that interest as being payable at a variable rate tied to a
single objective index of market rates. Prospective investors should consult
their tax advisors regarding the treatment of that interest under the OID
Regulations. In the absence of authority to the contrary and if otherwise
appropriate, Vanderbilt expects to determine the stated redemption price at
maturity of a Regular Certificate by assuming that the anticipated rate of
prepayment for all contracts will occur in that manner that the initial
remittance rate for a certificate will not change. Accordingly, interest at the
initial remittance rate will constitute qualified stated interest payments for
purposes of applying the original issue discount provisions of the Code. In
general, the issue price of a Regular Certificate is the first price at which a
substantial amount of the Regular Certificates of that class are sold for money
to the public (excluding bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers). If a portion of the initial offering price of a Regular
Certificate is allocable to interest that has accrued prior to its date of
issue, the issue price of that Regular Certificate includes that pre-issuance
accrued interest.
If the Regular Certificates are determined to be issued with original issue
discount, a holder of a Regular Certificate must generally include the original
issue discount in ordinary gross income for federal income tax purposes as it
accrues in advance of the receipt of any cash attributable to that income. The
amount of original issue discount, if any, required to be included in a Regular
Certificate holder's ordinary gross income for federal income tax purposes in
any taxable year will be computed in accordance with Section 1272(a) of the Code
and the OID Regulations. Under that section and the OID Regulations, original
issue discount accrues on a daily basis under a constant yield method that takes
into account the compounding of interest. The amount of original issue discount
to be included in income by a holder of a debt instrument, such as a Regular
Certificate, under which principal payments may be subject to acceleration
because of prepayments of other debt obligations securing those instruments, is
computed by taking into account the Prepayment Assumption. The prospectus
supplement for each series of Regular Certificates will specify the Prepayment
Assumption to be used for the purpose of determining the amount and rate of
accrual of OID. No representation is made that the Regular Certificates will
prepay at the Prepayment Assumption or at any other rate.
The amount of original issue discount included in income by a holder of a
Regular Certificate is the sum of the "daily portions" of the original issue
discount for each day during the taxable year on which the holder held the
Regular Certificate. The daily portions of original issue discount are
determined by allocating to each day in any "accrual period" a pro rata portion
of the excess, if any, of the same of:
o the present value of all remaining payments to be made on the Regular
Certificate as of the close of the "accrual period" and
o the payments during the "accrual period" of amounts included in the
stated redemption price of the Regular Certificate over the "adjusted
issue price" of the Regular Certificate at the beginning of the
"accrual period."
Generally, the "accrual period" for the Regular Certificates corresponds to
the intervals at which amounts are paid or compounded with respect to that
Regular Certificate, beginning with their date of issuance and ending with the
maturity date. The "adjusted issue price" of a Regular Certificate at the
beginning of any accrual period is the sum of the issue price and accrued
original issue discount for each
42
prior accrual period reduced by the amount of payments other than payments of
qualified stated interest made during each prior accrual period. The Code
requires the present value of the remaining payments to be determined on the
bases of:
o the original yield to maturity (determined on the basis of compounding
at the close of each accrual period and properly adjusted for the
length of the accrual period),
o events, including actual prepayments, which have occurred before the
close of the accrual period, and
o the assumption that the remaining payments will be made in accordance
with the original Prepayment Assumption. The effect of this method is
to increase the portions of original issue discount that a Regular
Certificate holder must include in income to take into account
prepayments with respect to the contracts held by the trust fund that
occur at a rate that exceeds the Prepayment Assumption and to decrease
(but not below zero for any period) the portions of original issue
discount that a Regular Certificate holder must include in income to
take into account prepayments with respect to the contracts that occur
at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported to Regular Certificate holders
based on the Prepayment Assumption, no representation is made to
Regular Certificate holders that the contracts will be prepaid at that
rate or at any other rate.
A subsequent purchaser of a Regular Certificate will also be required to
include in that purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to that
Regular Certificate. However, if the price paid exceeds the sum of the Regular
Certificate's issue price plus the aggregate amount of original issue discount
accrued with respect to the Regular Certificate, but does not equal or exceed
the outstanding principal amount of the Regular Certificate, the amount of
original issue discount to be accrued will be reduced in accordance with a
formula set forth in Section 1272(a)(7)(B) of the Code.
Vanderbilt believes, upon the advice of Sidley Austin Brown & Wood LLP,
special tax counsel to Vanderbilt, that the holder of a Regular Certificate
determined to be issued with non-de minimis original issue discount will be
required to include the original issue discount in ordinary gross income for
federal income tax purposes computed in the manner described above. However, the
OID Regulations either do not address or are subject to varying interpretations
with respect to several issues concerning the computation of original issue
discount for obligations such as the Regular Certificates.
Variable Rate Regular Certificates. Regular Certificates may bear interest
at a variable rate. Under the OID Regulations, if a Variable Rate Regular
Certificate provides for qualified stated interest payments computed on the
basis of some qualified floating rates or objective rates, then any original
issue discount on that Regular Certificate is computed and accrued under the
same methodology that applies to Regular Certificates paying qualified stated
interest at a fixed rate. See the discussion above under "REMIC Series --
Original Issue Discount." Accordingly, if the issue price of that Regular
Certificate is equal to its stated redemption price at maturity, the Regular
Certificate will not have any original issue discount.
For purposes of applying the original issue discount provisions of the
Code, all or a portion of the interest payable with respect to a Variable Rate
Regular Certificate may not be treated as qualified stated interest in some
circumstances, including the following:
o if the variable rate of interest is subject to one or more minimum or
maximum rate floors or ceilings which are not fixed throughout the term
of the Regular Certificate and which are reasonably expected as of the
issue date to cause the rate in some accrual periods to be
significantly higher or lower than the overall expected return on the
Regular Certificate determined without that floor or ceiling; or
o if it is reasonably expected that the average value of the variable
rate during the first half of the term of the Regular Certificate will
be either significantly less than or significantly greater than the
average value of the rate during the final half of the term of the
Regular Certificate. In these
43
situations, as well as others, it is unclear under the OID Regulations
whether those interest payments constitute qualified stated interest
payments, or must be treated either as part of a Regular Certificate's
stated redemption price at maturity resulting in original issue
discount, or represent contingent payments. The amended OID Regulations
issued on June 11, 1996 generally require the accrual of original issue
discount on contingent payment debt instruments based on the comparable
yield of fixed rate debt instruments with similar terms and conditions,
followed by adjustments to reflect the differences between the payments
so projected and the actual contingent payments. Although the new rules
technically do not adequately address some issues relevant to, or
applicable to, prepayable securities such as REMIC regular interests,
in the absence of other authority, the servicer intends to be guided by
principles of the OID Regulations applicable to variable rate debt
instruments in determining whether those certificates should be treated
as issued with original issue discount and in adapting the provisions
of Section 1272(a)(6) of the Code to those certificates for the purpose
of preparing reports furnished to certificateholders and the IRS.
Investors acquiring Regular Certificates whose rates are subject to the
variations outlined above should consult their tax advisors concerning
their appropriate tax treatment.
If a Variable Rate Regular Certificate is deemed to have been issued with
original issue discount, as described above, the amount of original issue
discount accrues on a daily basis under a constant yield method that takes into
account the compounding of interest; provided, however, that the interest
associated with that Regular Certificate generally is assumed to remain constant
throughout the term of the Regular Certificate at a rate that, in the case of a
qualified floating rate, equals the value of that qualified floating rate as of
the issue date of the Regular Certificate, or, in the case of an objective rate,
at a fixed rate that reflects the yield that is reasonably expected for the
Regular Certificate. A holder of that Regular Certificate would then recognize
original issue discount during each accrual period which is calculated based
upon that Regular Certificate's assumed yield to maturity, adjusted to reflect
the difference between the assumed and actual interest rate.
Market Discount. Regular Certificates, whether or not issued with original
issue discount, will be subject to the market discount rules of the Code. A
purchaser of a Regular Certificate who purchases the Regular Certificate at a
market discount (i.e., a discount from its original issue price plus any accrued
original issue discount, if any, as described above) will be required to
recognize accrued market discount as ordinary income as payments of principal
are received on that Regular Certificate or upon the sale or exchange of the
Regular Certificate. In general, the holder of a Regular Certificate may elect
to treat market discount as accruing either:
o under a constant yield method that is similar to the method for the
accrual of original issue discount or
o in proportion to accruals of original issue discount (or, if there is
no original issue discount, in proportion to accruals of stated
interest), in each case computed taking into account the Prepayment
Assumption.
The Code provides that the market discount in respect of a Regular
Certificate will be considered to be zero if the amount allocable to the Regular
Certificate is less than 0.25% of the Regular Certificate's stated redemption
price at maturity multiplied by the number of complete years remaining to its
maturity after the holder acquired the obligation. If market discount is treated
as de minimis under this rule, the actual discount would be allocated among a
portion of each scheduled distribution representing the stated redemption price
of that Regular Certificate and that portion of the discount allocable to that
distribution would be reported as income when that distribution occurs or is
due.
The Code further provides that any principal payment with respect to a
Regular Certificate acquired with market discount or any gain on disposition of
that Regular Certificate shall be treated as ordinary income to the extent it
does not exceed the accrued market discount at the time of that payment. The
amount of accrued market discount for purposes of determining the amount of
ordinary income to be recognized with respect to subsequent payments on that
Regular Certificate is to be reduced by the amount previously treated as
ordinary income.
44
The Code grants authority to the Treasury Department to issue regulations
providing for the computation of accrued market discount on debt instruments
such as the Regular Certificates. Until that time as regulations are issued,
rules described in the legislative history for these provisions of the Code will
apply. Under those rules, as described above, the holder of a Regular
Certificate with market discount may elect to accrue market discount either on
the basis of a constant interest rate or according to other methods.
Certificateholders who acquire a Regular Certificate at a market discount should
consult their tax advisors concerning various methods which are available for
accruing that market discount.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income may require a holder of a Regular
Certificate having market discount to defer a portion of the interest deductions
attributable to any indebtedness incurred or continued to purchase or carry that
Regular Certificate. Alternatively, a holder of a Regular Certificate may elect
to include market discount in gross income as it accrues and, if he makes that
election, is exempt from this rule. The adjusted basis of a Regular Certificate
subject to that election will be increased to reflect market discount included
in gross income, thereby reducing any gain or increasing any loss on a sale or
taxable disposition.
Amortizable Premium. A holder of a Regular Certificate who holds the
Regular Certificate as a capital asset and who purchased the Regular Certificate
at a cost greater than its outstanding principal amount will be considered to
have purchased the Regular Certificate at a premium. In general, the Regular
Certificate holder may elect to deduct the amortizable bond premium as it
accrues under a constant yield method. A Regular Certificate holder's tax basis
in the Regular Certificate will be reduced by the amount of the amortizable bond
premium deducted. In addition, it appears that the same methods which apply to
the accrual of market discount on installment obligations are intended to apply
in computing the amortizable bond premium deduction with respect to a Regular
Certificate. It is not clear, however,
(1) whether the alternatives to the constant-yield method which may be
available for the accrual of market discount are available for amortizing
premium on Regular Certificates and
(2) whether the Prepayment Assumption should be taken into account in
determining the term of a Regular Certificate for this purpose.
Certificateholders who pay a premium for a Regular Certificate should consult
their tax advisors concerning that election and rules for determining the
method for amortizing bond premium.
On December 30, 1997 the IRS issued final regulations, the Amortizable Bond
Premium Regulations, deal with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6) such as the Regular Certificates. Absent further guidance from the
IRS, the trustee intends to account for amortizable bond premium in the manner
described above. Prospective purchasers of the certificates should consult their
tax advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
Gain or Loss on Disposition. If a Regular Certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
from the sale and the seller's adjusted basis in that Regular Certificate. The
adjusted basis generally will equal the cost of that Regular Certificate to the
seller, increased by any original issue discount included in the seller's
ordinary gross income with respect to that Regular Certificate and reduced (but
not below zero) by any payments on the Regular Certificate previously received
or accrued by the seller (other than qualified stated interest payment) and any
amortizable premium. Similarly, a Regular Certificate holder who receives a
principal payment with respect to a Regular Certificate will recognize gain or
loss equal to the difference between the amount of the payment and the holder's
allocable portion of his or her adjusted basis in the Regular Certificate.
Except as discussed below or with respect to market discount, any gain or loss
recognized upon a sale, exchange, retirement, or other disposition of a Regular
Certificate will be capital gain if the Regular Certificate is held as a capital
asset.
Gain from the disposition of a Regular Certificate that might otherwise be
capital gain, including any gain attributable to de minimis original issue
discount, will be treated as ordinary income to the extent of the excess, if
any, of:
45
(1) the amount that would have been included in the holder's income if the
yield on that Regular Certificate had equaled 110% of the applicable federal
rate determined as of the beginning of that holder's holding period, over
(2) the amount of ordinary income actually recognized by the holder with
respect to that Regular Certificate.
If it is determined that Vanderbilt intended on the date of issue of the
Regular Certificates to call all or any portion of the Regular Certificates
prior to their stated maturity within the meaning of Section 1271(a)(2)(A) of
the Code, any gain realized upon a sale, exchange, retirement, or other
disposition of a Regular Certificate would be considered ordinary income to the
extent it does not exceed the unrecognized portion of the original issue
discount, if any, with respect to the Regular Certificate. The OID Regulations
provide that the intention to call rule will not be applied to mortgage-backed
securities such as the Regular Certificates. In addition, under the OID
Regulations, a mandatory sinking fund or call option is not evidence of an
intention to call.
Taxation of Residual Interests. Generally, the "daily portions" of the
taxable income or net loss of a REMIC will be included as ordinary income or
loss in determining the taxable income of Residual Holders, and will not be
taxed separately to the REMIC. The daily portions are determined by allocating
the REMIC's taxable income or net loss for each calendar quarter ratably to each
day in that quarter and by allocating that daily portion among the Residual
Holders in proportion to their respective holdings of Residual Certificates in
the REMIC on that day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting except
that:
o the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply,
o all bad loans will be deductible as business bad debts, and
o the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply.
REMIC taxable income generally means a REMIC's gross income, including
interest, original issue discount income, and market discount income, if any, on
the contracts, plus income on reinvestment of cash flows and reserve assets,
minus deductions, including interest and original issue discount expense on the
Regular Certificates, Servicing Fees on the contracts, other administrative
expenses of a REMIC, and amortization of premium, if any, with respect to the
contracts.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
interest, original issue discount or market discount income, or amortization of
premium with respect to the contracts, on the one hand, and the timing of
deductions for interest (including original issue discount) on the Regular
Certificates, on the other hand. In the event that an interest in the contracts
is acquired by a REMIC at a discount, and one or more of those contracts is
prepaid, the Residual Holder may recognize taxable income without being entitled
to receive a corresponding cash distribution because:
o the prepayment may be used in whole or in part to make distributions on
Regular Certificates and
o the discount on the contracts which is included in a REMIC's income may
exceed its deduction with respect to the distributions on those Regular
Certificates. When there is more than one class of Regular Certificates
that receive payments sequentially (i.e., a fast-pay, slow-pay
structure), this mismatching of income and deductions is particularly
likely to occur in the early years following issuance of the Regular
Certificates, when distributions are being made in respect of earlier
classes of Regular Certificates to the extent that those classes are
not issued with substantial discount. If taxable income attributable to
that mismatching is realized, in general, losses would be allowed in
later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier
years than in later years as a result of
46
the fact that interest expense deductions, expressed as a percentage of
the outstanding principal amount of Regular Certificates, may increase
over time as distributions are made on the lower yielding classes of
Regular Certificates, whereas interest income with respect to any given
contract will remain constant over time as a percentage of the
outstanding principal amount of that loan (assuming it bears interest
at a fixed rate). Consequently, Residual Holders must have sufficient
other sources of cash to pay any federal, state, or local income taxes
due as a result of that mismatching, or those holders must have
unrelated deductions against which to offset that income, subject to
the discussion of "excess inclusions" below under "REMIC Series --
Limitations on Offset or Exemption of REMIC Income." The mismatching of
income and deductions described in this paragraph, if present with
respect to a series of certificates, may have a significant adverse
effect upon the Residual Holder's after-tax rate of return.
The amount of any net loss of a REMIC that may be taken into account by the
Residual Holder is limited to the adjusted basis of the Residual Certificate as
of the close of the quarter (or time of disposition of the Residual Certificate
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Certificate is
the amount paid for that Residual Certificate. That adjusted basis will be
increased by the amount of taxable income of the REMIC reportable by the
Residual Holder and decreased by the amount of loss of the REMIC reportable by
the Residual Holder. A cash distribution from the REMIC also will reduce that
adjusted basis (but not below zero). Any loss that is disallowed on account of
this limitation may be carried over indefinitely by the Residual Holder for whom
that loss was disallowed and may be used by that Residual Holder only to offset
any income generated by the same REMIC.
If a Residual Certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or that negative amount for purposes
of determining the REMIC's basis in its assets. The REMIC regulations imply that
residual interest cannot have a negative basis or a negative issue price.
However, the preamble to the REMIC regulations indicates that, while existing
tax rules do not accommodate those concepts, the IRS is considering the tax
treatment of these types of residual interests, including the proper tax
treatment of a payment made by the transferor of that residual interest to
induce the transferee to acquire that interest. Absent regulations or
administrative guidance to the contrary, Vanderbilt does not intend to treat a
class of Residual Certificates as having a value of less than zero for purposes
of determining the basis of the related REMIC in its assets.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than the
corresponding portion of the REMIC's basis in the contracts, the Residual Holder
will not recover a portion of that basis until termination of the REMIC unless
Treasury regulations yet to be issued provide for periodic adjustments to the
REMIC income otherwise reportable by that holder.
Treatment of Some Items of REMIC Income and Expense. Generally, a REMIC's
deductions for original issue discount will be determined in the same manner as
original issue discount income on Regular Certificates as described above under
"REMIC Series -- Original Issue Discount" and "-- Variable Rate Regular
Certificates," without regard to the de minimis rule described in this
prospectus.
The REMIC will have market discount income in respect of the contracts if,
in general, the basis of the REMIC in the contracts is exceeded by their unpaid
principal balances. The REMIC's basis in the contracts is generally the fair
market value of the contracts immediately after the transfer of the contracts to
the REMIC (which may equal a proportionate part of the aggregate fair market
value of the REMIC certificates). In respect of the contracts that have market
discount to which Code Section 1276 applies, the market discount income
generally should accrue in the manner described above under "REMIC Series --
Market Discount."
Generally, if the basis of a REMIC in the contracts exceeds the unpaid
principal balances of those contracts, the REMIC will be considered to have
acquired those contracts at a premium equal to the amount of that excess. As
stated above, the REMIC's basis in the contracts is the fair market value of the
47
contracts immediately after the transfer thereof to the REMIC. Generally, a
person that holds a contract as a capital asset may elect to amortize premium on
the contracts under a constant interest method. See the discussion under "REMIC
Series -- Amortizable Premium."
Limitations on Offset or Exemption of REMIC Income. If the aggregate value
of the Residual Certificates relative to the aggregate value of the Regular
Certificates and Residual Certificates is considered to be "significant," then a
portion (but not all) of the REMIC taxable income included in determining the
federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for the quarterly period of:
(1) 120% of the long-term applicable Federal rate that would have applied
to the Residual Certificate (if it were a debt instrument) on the Startup Day
under Section 1274(d) of the Code, multiplied by
(2) the adjusted issue price of that Residual Certificate at the beginning
of that quarterly period. For this purpose, the adjusted issue price of a
Residual Certificate at the beginning of a quarter is the issue price of the
Residual Certificate, plus the amount of daily accruals of REMIC income
described in this paragraph for all prior quarters decreased by any
distributions made with respect to that Residual Certificate prior to the
beginning of that quarterly period. The value of the Residual Certificates
would be significant in cases where the aggregate issue price of the Residual
Certificates is at least 2% of the aggregate issue price of the Regular
Certificates and Residual Certificates, and the anticipated weighted average
life of the Residual Certificates is at least 20% of the anticipated weighted
average life of the REMIC.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions on the
Residual Holder's tax return, including net operating loss carry forwards.
Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Section 511 of the Code, the Residual
Holder's excess inclusions will be treated an unrelated business taxable income
of the Residual Holder for purposes of Section 511. Finally, if a real estate
investment trust or regulated investment company owns a Residual Certificate, a
portion (allocated under Treasury regulations yet to be issued) of dividends
paid by the real estate investment trust or regulated investment company could
not be offset by net operating losses of its shareholders, would constitute
unrelated business taxable income for tax-exempt shareholders, and would be
ineligible for reduction of withholding to persons who are not U.S. persons.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 thrift institutions to use net operating losses and
other allowable deductions to offset their excess inclusion income from REMIC
Residual Certificates that have "significant value" within the meaning of the
REMIC regulations, effective for taxable years beginning after December 31,
1995, except with respect to Residual Certificates continuously held by a thrift
institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a Residual Holder. First, alternative minimum taxable income
for that Residual Holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a Residual
Holder's alternative minimum taxable income for a tax year cannot be less than
the excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a Residual Holder elects to have those rules apply only to tax
years beginning after August 20, 1996.
Restrictions on Transfer of Residual Certificates. As described above under
"REMIC Series -- Qualification as a REMIC," an interest in a Residual
Certificate may not be transferred to a Disqualified Organization. If any legal
or beneficial interest in a Residual Certificate is, nonetheless, transferred to
a Disqualified Organization, a tax would be imposed in an amount equal to the
product of:
(1) the present value of the total anticipated excess inclusions with
respect to that Residual Certificate for periods after the transfer, and
48
(2) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments
based on the Prepayment Assumption. The present value rate equals the
applicable federal rate under Section 1274(d) of the Code as of the date of
the transfer for a term ending on the close of the last quarter in which
excess inclusions are expected to accrue. That rate is applied to the
anticipated excess inclusions from the end of the remaining calendar quarters
in which they arise to the date of the transfer. That a tax generally would
be imposed on the transferor of the Residual Certificate, except that where
that transfer is through an agent (including a broker, nominee, or other
middleman) for a Disqualified Organization, the tax would instead be imposed
on that agent. However, a transferor of a Residual Certificate would in no
event be liable for that tax with respect to a transfer if the transferee
furnishes to the transferor an affidavit, under penalties of perjury, that
the transferee is not a Disqualified Organization and, as of the time of the
transfer, the transferor does not have the actual knowledge that that
affidavit is false. The tax also may be waived by the Treasury Department if
the Disqualified Organization promptly disposes of the residual interest and
the transferor pays that amount of tax as the Treasury Department may require
(presumably, a corporate tax on the excess inclusion for the period the
residual interest is actually held by the Disqualified Organization).
In addition, if a Pass-Through Entity has excess inclusion income with
respect to a Residual Certificate during a taxable year and a Disqualified
Organization is the record holder of an equity interest in that entity, then a
tax is imposed on that entity equal to the product of:
(1) the amount of excess inclusions on the Residual Certificate that are
allocable to the interest in the Pass-Through Entity during the period that
interest is held by the Disqualified Organization, and
(2) the highest marginal federal income tax rate imposed on corporations.
That tax would be deductible from the ordinary gross income of the
Pass-Through Entity during the period that interest is held by that
Disqualified Organization, and
(3) the highest marginal federal income tax rate imposed on corporations.
That tax would be deductible from the ordinary gross income of the
Pass-Through Entity for the taxable year.
The Pass-Through Entity would not be liable for that tax if it has received
an affidavit from the record holder that it is not a Disqualified Organization
and, during the period that person is the record holder of the Residual
Certificate, the Pass-Through Entity would not be liable for that tax if it has
received an affidavit from the record holder that it is not a Disqualified
Organization and, during the period that person is the record holder of the
Residual Certificate, the Pass-Through Entity does not have actual knowledge
that the affidavit is false.
Except as may be provided in Treasury Regulations, any person holding an
interest in a Pass-Through Entity as a nominee for another will, with respect to
that interest, be treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard
transfers of Residual Certificates, in which case the transferor would continue
to be treated as the owner of the Residual Certificates and thus would continue
to be subject to tax on its allocable portion of the net income of the REMIC.
Under the REMIC regulations, a transfer of a "noneconomic residual interest" (as
defined below) to a Residual Holder is disregarded for all federal income tax
purposes if a significant purpose of the transfer is to enable the transferor to
impede the assessment or collection of tax. A residual interest in a REMIC
(including a residual interest with a positive value at issuance) is a
"noneconomic residual interest" unless, at the time of transfer,
o the present value of the expected future distributions on the residual
interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate
in effect for the year in which the transfer occurs, and
o the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which taxes accrue
on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes.
49
The anticipated excess inclusions and the present value rate are determined
in the same manner as described above. The REMIC regulations explain that a
significant purpose to impede the assessment or collection of tax exists if the
transferor, at the time of the transfer, either knew or should have known that
the transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A safe harbor is provided if:
(1) the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and found that the
transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferee will not continue to pay
its debts as they come due in the future; and
(2) the transferee represents to the transferor that it understands that,
as the holder of a non-economic residual interest, the transferee may incur
tax liabilities in excess of any cash flows generated by the interest and
that the transferee intends to pay taxes associated with holding the residual
interest as they become due.
The pooling and servicing agreement with respect to each series of REMIC
Certificates will require the transferee of a Residual Certificate to certify to
the statements in clause (2) of the preceding sentence as part of the affidavit
described above under "Restrictions on Transfer of Residual Certificates."
Final Treasury regulations issued on July 18, 2002 (the "New REMIC
Regulations"), provide that transfers of noneconomic residual interests must
meet two additional requirements to qualify for the safe harbor: (i) the
transferee must represent that it will not cause income from the noneconomic
residual interest to be attributable to a foreign permanent establishment or
fixed base (within the meaning of an applicable income tax treaty, hereafter a
"foreign branch") of the transferee or another U.S. taxpayer; and (ii) the
transfer must satisfy either an "asset test" or a "formula test" provided under
the REMIC Regulations.
A transfer to an "eligible corporation," generally a domestic corporation,
will satisfy the asset test if: (i) at the time of the transfer, and at the
close of each of the transferee's two fiscal years preceding the transferee's
fiscal year of transfer, the transferee's gross and net assets for financial
reporting purposes exceed $100 million and $10 million, respectively, in each
case, exclusive of any obligations of certain related persons, (ii) the
transferee agrees in writing that any subsequent transfer of the interest will
be to another eligible corporation in a transaction that satisfies the asset
test, and the transferor does not know or have reason to know, that the
transferee will not honor these restrictions on subsequent transfers, and (iii)
a reasonable person would not conclude, based on the facts and circumstances
known to the transferor on or before the date of the transfer (specifically
including the amount of consideration paid in connection with the transfer of
the noneconomic residual interest) that the taxes associated with the residual
interest will not be paid. In addition, the direct or indirect transfer of the
residual interest to a foreign branch of a domestic corporation is not treated
as a transfer to an eligible corporation under the asset test. The transfer of a
noneconomic residual interest will not qualify under the formula test harbor
unless the present value of the anticipated tax liabilities associated with
holding the residual interest does not exceed the present value of the sum of:
(1) any consideration given to the transferee to acquire the interest
(the inducement payment),
(2) future distributions on the interest, and
(3) any anticipated tax savings associated with holding the interest as the
REMIC generates losses.
For purposes of this calculation, the present value is calculated using a
discount rate equal to the applicable federal rate for short term debt
instruments. If the transferee has been subject to the alternative minimum tax
in the preceding two years and will compute its taxable income in the current
taxable year using the alternative minimum tax rate, then it may use the
alternative minimum tax rate in lieu of the corporate tax rate. In addition, the
direct or indirect transfer of the residual interest to a foreign branch of a
domestic corporation is not treated as a transfer to an eligible corporation
under the formula test.
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The New REMIC Regulations generally apply to transfers of noneconomic
residual interests occurring on or after February 4, 2000. The requirement of a
representation that a transfer of a noneconomic residual interest is not made to
a foreign branch of a domestic corporation and the requirement of using the
short term applicable federal rate for purposes of the formula test, apply to
transfers occurring on or after August 19, 2002.
Mark-to-Market Rules. On December 23, 1996, the IRS finalized
mark-to-market regulations relating to the requirement that a securities dealer
mark-to-market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The regulations provide that a REMIC residual interest acquired on or after
January 4, 1995, will not be considered a security for purposes of the
Mark-to-Market Regulations, and thus, those interests may not be marked to
market.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a
Residual Certificate, the Residual Holder will recognize gain or loss equal to
the excess, if any, of the amount realized over the adjusted basis as described
above of the Residual Holder in the Residual Certificate at the time of the sale
or exchange. In addition to reporting the taxable income of the REMIC, a
Residual Holder will have taxable income to the extent that any cash
distribution to him from the REMIC exceeds that adjusted basis on that
remittance date. That income will be treated as gain from the sale or exchange
of the Residual Certificate. It is possible that the termination of the REMIC
may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in his
Residual Certificate remaining when his interest in the REMIC terminates, and if
he holds that Residual Certificate as a capital asset, then he will recognize a
capital loss at that time in the amount of the remaining adjusted basis.
The Conference Committee Report to the Tax Reform Act of 1986 provides
that, except as provided in Treasury regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after that sale or disposition, acquires (or enters into any other transaction
that results in the application of Code Section 1091) any residual interest in
any REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC
owner trust) that is economically comparable to a Residual Certificate.
Certain Other Taxes on the REMIC. The REMIC provisions of the Code impose a
100% tax on any net income derived by a REMIC from some prohibited transactions,
and prohibits deducting any loss with respect to those transactions. Those
transactions are:
o any disposition of a qualified mortgage, other than in accordance with
the substitution of a qualified replacement mortgage for a qualified
mortgage (or the repurchase in lieu of substitution of a defective
obligation), a disposition incident to the foreclosure, default, or
imminent default of a mortgage, the bankruptcy or insolvency of the
REMIC, or a qualified liquidation of the REMIC;
o the receipt of income from assets other than qualified mortgages and
Permitted Investments;
o the receipt of compensation for services; and
o the receipt of gain from the dispositions of cash flow investments.
The REMIC regulations provide that the modification of the terms of a
contract occasioned by default or a reasonably foreseeable default of the
contract, the assumption of the contract, the waiver of a due-on-sale clause or
the conversion of an interest rate by an obligor in accordance with the terms of
a convertible adjustable-rate contract will not be treated as a disposition of
the contract. In the event that a REMIC holds Convertible ARM Loans which are
convertible at the option of the obligor into fixed-rate, fully amortizing,
level payment contracts, a sale of those contracts by the REMIC in accordance
with a purchase agreement or other contract with Vanderbilt or other party, if
and when the obligor elects to so convert the terms of the contract, is not
expected to result in a prohibited transaction for the REMIC. The Code also
imposes a 100% tax on contributions to a REMIC made after the Startup
51
Day, unless those contributions are payments made to facilitate a cleanup call
or a qualified liquidation of the REMIC, payments in the nature of a guaranty,
contributions during the three-month period beginning on the Startup Day or
contributions to a qualified reserve fund of the REMIC by a holder of a residual
interest in the foreclosure property that the REMIC derives at the highest
corporate rate on some net income from foreclosure property that the REMIC
derives from the management, sale, or disposition of any real property, or any
personal property incident to the foreclosure, acquired by the REMIC in
connection with the default or imminent default of a loan. Generally, it is not
anticipated that a REMIC will generate a significant amount of that income.
Liquidation of the REMIC. A REMIC may liquidate without the imposition of
entity-level tax only in a "qualified liquidation." A liquidation is considered
qualified if a REMIC adopts a plan of complete liquidation (which may be
accomplished by designating in the REMIC's final tax return a date on which an
adoption is deemed to occur) and sells all of its assets (other than cash)
within the ninety-day period beginning on the date of the adoption of the plan
of liquidation, provided that it distributes to holders of Regular or Residual
Certificates, on or before the last day of the ninety-day liquidation period,
all the proceeds of the liquidation (including all cash), less amounts retained
to meet claims.
Taxation of Some Foreign Investors. To the extent provided in Treasury
regulations, some trusts in existence on August 20, 1996 and treated as United
States persons prior to that date that elect to continue to be treated as United
States persons will not be considered Foreign Holders. Unless the interest on a
Regular Certificate is effectively connected with the conduct by the Foreign
Holder of a trade or business within the United States, the Foreign Holder is
not subject to federal income or withholding tax on interest (or original issue
discount, if any) on a Regular Certificate (subject to possible backup
withholding of tax, discussed below), provided the Foreign Holder is not a
controlled foreign corporation related to Vanderbilt and does not own actually
or constructively 10% or more of the voting stock of Vanderbilt. To qualify for
this tax exemption, the Foreign Holder will be required to provide periodically
a statement signed under penalties of perjury certifying that the Foreign Holder
meets the requirements for treatment as a Foreign Holder and providing the
Foreign Holder's name and address. The statement, which may be made on a Form
W-8BEN or substantially similar substitute form, generally must be provided in
the year a payment occurs or in either of the two preceding years. This
exemption may not apply to a Foreign Holder that owns both Regular Certificates
and Residual Certificates. If the interest on a Regular Certificate is
effectively connected with the conduct by a Foreign Holder of a trade or
business within the United States, then the Foreign Holder will be subject to
tax at regular graduated rates. Foreign Holders should consult their own
advisors regarding the specific tax consequences of their owning a Regular
Certificate.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued new regulations which unify certification requirements and modify
reliance standards effective for payments made after December 31, 2000.
Prospective investors are urged to consult their own tax advisors regarding the
those regulations.
Any gain recognized by a Foreign Holder upon a sale, retirement or other
taxable disposition of a Regular Certificate generally will not be subject to
United States federal income tax unless either:
o the Foreign Holder is a non-resident alien individual who holds the
Regular Certificate as a capital asset and who is present in the United
States for 183 days or more in the taxable year of the disposition, or
o the gain is effectively connected with the conduct by the Foreign
Holder of a trade or business within the United States.
A Regular Certificate will not be included in the estate of a Foreign
Holder who does not own actually or constructively 10% or more of the voting
stock of Vanderbilt.
Backup Withholding. Under some circumstances, a REMIC certificateholder may
be subject to "backup withholding". Backup withholding may apply to a REMIC
certificateholder who is a United States person if the holder, among other
circumstances, fails to furnish his social security number or other taxpayer
identification number to the trustee. Backup withholding may apply, under some
circumstances,
52
to a REMIC certificateholder who is a Foreign Holder if the REMIC
certificateholder fails to provide the trustee or the REMIC certificateholder's
securities broker with the statement necessary to establish the exemption from
federal income and withholding tax on interest on the REMIC certificates. Backup
withholding, however, does not apply to payments on a certificate made to exempt
recipients, such as corporations and tax-exempt organizations, and to some
foreign persons. Any amounts withheld under the backup withholding rules from a
payment to a beneficial owner would be allowed as a credit or refund against
that beneficial owner's federal income tax provided that the required
information is furnished to the IRS. REMIC certificateholders should consult
their tax advisors for additional information concerning the potential
application of backup withholding to payments received by them with respect to a
certificate.
Reporting Requirements and Tax Administration. Vanderbilt will report
annually to the IRS, holders of record of the Regular Certificates that are not
excepted from the reporting requirements and, to the extent required by the
Code, other interested parties, information with respect to the interest paid or
accrued on the Regular Certificates, original issue discount, if any, accruing
on the Regular Certificates and information necessary to compute the accrual of
any market discount or the amortization of any premium on the Regular
Certificates.
The Treasury Department has issued temporary regulations concerning some
aspects of REMIC tax administration. Under those regulations, a Residual
Certificate holder must be designated as the REMIC's "tax matters person." The
tax matters person, generally, has responsibility for overseeing and providing
notice to the other Residual Certificate holders of administrative and judicial
proceedings regarding the REMIC's tax affairs. Vanderbilt will be designated as
tax matters person for each REMIC, and in conjunction with the trustee will act
as the agent of the Residual Certificate holders in the preparation and filing
of the REMIC's federal and state income tax and other information returns.
GRANTOR TRUST SERIES
Tax Status of the Trust Fund. In the case of a trust fund evidenced by a
series or sub-series of certificates, or a segregated portion of those
certificates, with respect to Non-REMIC Certificates, Sidley Austin Brown & Wood
LLP, special tax counsel to Vanderbilt, is of the opinion that each contract
pool and the arrangement to be administered by Vanderbilt under which the
trustee will hold and Vanderbilt will be obligated to service the contracts and
in accordance with which Non-REMIC Certificates will be issued to Non-REMIC
Certificate holders will not be classified as an association taxable as a
corporation or a "taxable mortgage pool," within the meaning of Code Section
7701(i), but rather will be classified as a grantor trust under Subpart E, Part
I of Subchapter J of Chapter 1 of Subtitle A of the Code. Each Non-REMIC
Certificate holder will be treated as the owner of a pro rata undivided interest
in the ordinary income and corpus portions of the trust attributable to the
contract pool in which its certificate evidences an ownership interest and will
be considered the equitable owner of a pro rata undivided interest in each of
the contracts included in the contract pool.
Tax Status of Non-REMIC Certificates. In general, (1) Certificates held by
a "domestic building and loan association" within the meaning of Section
7701(a)(19) of the Code may be considered to represent "qualifying real property
loans" within the meaning of Section 7701(a)(19)(C)(v) of the Code; and (2)
Certificates held by a real estate investment trust may constitute "real estate
assets" within the meaning of Section 856(c)(5)(B) of the Code and interest
thereon may be considered "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code. See the
discussions of the Code provisions above under "REMIC Series Tax Status of REMIC
Certificates." Investors should review the related prospectus supplement for the
treatment of Non-REMIC Certificates and contracts, if any, under these Code
sections and should, in addition, consult with their own tax advisors with
respect to these matters.
Tax Treatment of Non-REMIC Certificates. Non-REMIC Certificate holders will
be required to report on their federal income tax returns, and in a manner
consistent with their respective methods of accounting, their pro rata share of
the entire income arising from the contracts comprising the contract pool,
including interest, original issue discount, if any, prepayment fees, assumption
fees, and late payment charges received by Vanderbilt, and any gain upon
disposition of those contracts. (For purposes of this
53
discussion, the term "disposition," when used with respect to the contracts,
includes scheduled or prepaid collections with respect to the contracts, as well
as the sale or exchange of a Non-REMIC Certificate.) Non-REMIC Certificate
holders will be entitled under Section 162 or 212 of the Code to deduct their
pro rata share of related Servicing Fees, administrative and other non-interest
expenses, including assumption fees and late payment charges retained by
Vanderbilt. An individual, an estate, or a trust that holds a Non-REMIC
Certificate either directly or through a Pass-Through Entity will be allowed to
deduct those expenses under Section 212 of the Code only to the extent that, in
the aggregate and combined with other itemized deductions, they exceed 2% of the
adjusted gross income of the holder. In addition, Section 68 of the Code
provides that the amount of itemized deductions (including those provided for in
Section 212 of the Code) otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a threshold amount specified in
the Code will be reduced by the lesser of:
(1) 3% of the excess of adjusted gross income over the specified
threshold amount or
(2) 80% of the amount of itemized deductions otherwise allowable for that
taxable year. To the extent that a Non-REMIC Certificate holder is not
permitted to deduct Servicing Fees allocable to a Non-REMIC Certificate, the
taxable income of the Non-REMIC Certificate holder attributable to that
Non-REMIC Certificate will exceed the net cash distributions related to that
income. Non-REMIC Certificate holders may deduct any loss on disposition of
the contracts to the extent permitted under the Code.
Under current IRS interpretations of applicable Treasury regulations
Vanderbilt would be able to sell or otherwise dispose of any subordinated
Non-REMIC Certificates. Accordingly, Vanderbilt expects to offer subordinated
Non-REMIC Certificates for sale to investors. In general, that subordination
should not affect the federal income tax treatment of either the Subordinated or
Senior Certificates. Holders of subordinated classes of certificates should be
able to recognize any losses allocated to that class when and if losses are
realized.
To the extent that any of the contracts comprising a contract pool were
originated on or after March 2, 1984 and under circumstances giving rise to
original issue discount, certificateholders will be required to report annually
an amount of additional interest income attributable to that discount in those
contracts prior to receipt of cash related to that discount. See the discussion
above under "REMIC Series -- Original Issue Discount." Similarly, Code
provisions concerning market discount and amortizable premium will apply to the
Contracts comprising a contract pool to the extent that the loans were
originated after July 18, 1984 and September 27, 1985, respectively. See the
discussions above under "REMIC Series -- Market Discount" and "REMIC Series --
Amortizable Premium."
It is not clear whether a reasonable Prepayment Assumption should be used
in computing amortization of premium allowable under Code Section 171 or in
computing the accrual of market discount for non-REMIC Certificates. However,
the use of a Prepayment Assumption is required for purposes of calculating OID
for tax years beginning after August 5, 1997, to pools of receivables the yield
on which may be affected by reason of prepayments. Previous legislative history
states that Congress intends that if a Prepayment Assumption would be used to
calculate OID then it should also be used to accrue market discount and amortize
bond premium. Because regulations have not yet been issued, it is impossible to
predict what effect those regulations might have on the tax treatment of a
certificate purchased at a discount or premium in the secondary market.
Prospective investors are urged to consult their own tax advisors concerning the
tax treatment of a certificate purchased at a discount or a premium.
If premium is not subject to amortization using a reasonable Prepayment
Assumption, the holder of a certificate acquired at a premium should recognize a
loss, if a contract repays in full, equal to the difference between the portion
of the prepaid principal amount of that contract that is allocable to the
certificate and the portion of the adjusted basis of the certificate that is
allocable to the contract. If a reasonable Prepayment Assumption is used to
amortize that premium, it appears that 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 the differences between an assumed prepayment rate and the actual
rate of prepayments. In addition, under recent legislation, amounts received on
the redemption of an obligation issued by a natural person are
54
considered received in exchange of that obligation if the debt obligation is
purchased or issued after June 8, 1997 (i.e., treated the same as obligations
issued by corporations). This change could affect the character of any of the
loss (e.g., cause the loss to be treated as capital if those assets are held as
capital assets by the taxpayer).
Stripped Non-REMIC Certificates. Some classes of Non-REMIC Certificates may
be Stripped Certificates. In general, a Stripped Certificate will be subject to
the stripped bond rules where there has been a separation of ownership of the
right to receive some or all of the principal payments on a contract from
ownership of the right to receive some or all of the related interest payments.
Non-REMIC Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable amount;
o if Vanderbilt or any other party retains a retained yield with respect
to the contracts comprising a contract pool;
o if two or more classes of Non-REMIC Certificates are issued
representing the right to non-pro rata percentages of the interest or
principal payments on the contracts; or
o if Non-REMIC Certificates are issued which represent the right to
interest only payments or principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate, if any, must be included in ordinary gross income for
federal income tax purposes as it accrues in accordance with the constant-yield
method that takes into account the compounding of interest and that accrual of
income may be in advance of the receipt of any cash attributable to that income.
See "REMIC Series -- Original Issue Discount" above. For purposes of applying
the original issue discount provisions of the Code, the issue price of a
Stripped Certificate will be the purchase price paid by each holder of that
Stripped Certificate and the stated redemption price at maturity may include the
aggregate amount of all payments to be made with respect to the Stripped
Certificate whether or not denominated as interest. The amount of original issue
discount with respect to a Stripped Certificate may be treated as zero under the
original issue discount de minimis rules described above. A purchaser of a
Stripped Certificate will be required to account for any discount on the
certificate as market discount rather than original issue discount if either:
o the amount of original issue discount with respect to the certificate
was treated as zero under the original issue discount de minimis rule
when the certificate was stripped or
o no more than 100 basis points (including any amount of servicing in
excess of reasonable servicing) is stripped off of the contracts.
See "REMIC Series -- Market Discount" above.
When an investor purchases more than one class of Stripped Certificates it
is currently unclear whether for federal income tax purposes those classes of
Stripped Certificates should be treated separately or aggregated for purposes of
applying the original issue discount rules described above.
It is possible that the IRS may take a contrary position with respect to
some or all of the above-mentioned tax consequences. For example, a holder of a
Stripped Certificate may be treated as the owner of:
o as many stripped bonds or stripped coupons as there are scheduled
payments of principal and/or interest on each contract or
o a separate installment obligation for each contract representing the
Stripped Certificate's pro rata share of price; and/or interest
payments to be made with respect to that Stripped Certificate.
As a result of these possible alternative characterizations, investors
should consult their own tax advisors regarding the proper treatment of Stripped
Certificates for federal income tax purposes.
55
It is unclear under what circumstance, if any, the prepayment of contracts
will give rise to a loss to the holder of a stripped bond certificate purchased
at a premium or a stripped coupon certificate. If that certificate is treated as
a single instrument (rather than an interest in discrete contracts) and the
effect of prepayments is taken into account in computing yield with respect to
that certificate, it appears that no loss will be available as a result of any
particular prepayment unless prepayments occur at a rate faster than the assumed
prepayment rate. However, if that certificate is treated as an interest in
discrete contracts, or if no Prepayment Assumption is used, then when a contract
is prepaid, the holder of that certificate should be able to recognize a loss
equal to the portion of the unrecovered premium of that certificate that is
allocable to that contract. In addition, amounts received in redemption for debt
instruments issued by natural persons purchased or issued after June 8, 1997 are
treated as received in exchange for those debt instruments (i.e., treated the
same as obligations issued by corporations). This change could affect the
character of any loss. Holders of Stripped Bond Certificates and Stripped Coupon
Certificates are urged to consult with their own tax advisors regarding the
proper treatment of these Certificates for federal income tax purposes.
Gain or Loss on Disposition. Upon sale or exchange of a Non-REMIC
Certificate, a Non-REMIC Certificate holder will recognize gain or loss equal to
the difference between the amount realized in the sale and its aggregate
adjusted basis in the contracts represented by the Non-REMIC Certificate.
Generally, the aggregate adjusted basis will equal the Non-REMIC Certificate
holder's cost for the Non-REMIC Certificate increased by the amount of any
previously reported gain with respect to the Non-REMIC Certificate and decreased
by the amount of any losses previously reported with respect to the Non-REMIC
Certificate and the amount of any distributions received thereon. Except as
provided above with respect to the original issue discount and market discount
rules, any of the gain or loss would be capital gain or loss if the Non-REMIC
Certificate was held as a capital asset. See "REMIC Series -- Gain or Loss on
Disposition" above.
Recharacterization of Servicing Fees. The servicing compensation to be
received by the servicer may be questioned by the IRS with respect to some
certificates or contracts as exceeding a reasonable fee for the services being
performed in exchange that fee, and a portion of that servicing compensation
could be recharacterized as an ownership interest retained by the servicer or
other party in a portion of the interest payments to be made in accordance with
the contracts. In this event, a certificate might be treated as a Stripped
Certificate subject to the stripped bond rules of Section 1286 of the Code and
the original issue discount provisions rather than to the market discount and
premium rules. See the discussion above under "Non-REMIC Series -- Stripped
Non-REMIC Certificates."
Tax Treatment of Some Foreign Investors. Generally, interest or original
issue discount paid to or accruing for the benefit of a Non-REMIC Certificate
holder who is a Foreign Holder (as defined in "REMIC Series -- Taxation of Some
Foreign Investors") will be treated as "portfolio interest" and therefore will
be exempt from the 30% withholding tax. That Non-REMIC Certificate holder will
be entitled to receive interest payments and original issue discount on the
Non-REMIC Certificates free of United States federal income tax, but only to the
extent the contracts were originated after July 18, 1984 and provided that the
Non-REMIC Certificate holder periodically provides the trustee (or other person
who would otherwise be required to withhold tax) with a statement certifying
under penalty of perjury that the Non-REMIC Certificate holder is a Foreign
Holder and provides the name and address of the Non-REMIC Certificate holder.
For additional information concerning interest or original issue discount paid
by Vanderbilt to a Foreign Holder and the treatment of a sale or exchange of a
Non-REMIC Certificate by a Foreign Holder, which will generally have the same
tax consequences as the sale of a Regular Certificate, see the discussion above
under "REMIC Series -- Taxation of Some Foreign Investors". In addition,
payments of interest or original issue discount made to a Foreign Investor after
December 31, 2000 are subject to the New Regulations. See discussion above under
"REMIC Series -- New Withholding Regulations."
Tax Administration and Reporting. Vanderbilt will furnish to each Non-REMIC
Certificate holder with each distribution a statement setting forth the amount
of the distribution allocable to principal and to interest. In addition,
Vanderbilt will furnish, within a reasonable time after the end of each calendar
year, to each Non-REMIC Certificate holder who was a certificateholder at any
time during that year,
56
information regarding the amount of servicing compensation received by
Vanderbilt and any sub-servicer and other customary factual information as
Vanderbilt deems necessary or desirable to enable certificateholders to prepare
their tax returns. Reports will be made annually to the IRS and to holders of
record that are not expected from the reporting requirements regarding
information as may be required with respect to interest and original issue
discount, if any, with respect to the Non-REMIC Certificates.
FASIT SECURITIES
Qualification as a FASIT. In the case of a trust fund underlying a series
(or one or more designated pools of assets held in the trust fund) for which a
REMIC Election is not made, Sidley Austin Brown & Wood LLP, special tax counsel
to Vanderbilt may advise Vanderbilt that in their opinion, the trust fund will
qualify under the Code as a FASIT, in which the FASIT Regular Securities and the
FASIT Ownership Securities will constitute the "regular interests" and the
"ownership interests," respectively, if:
o a FASIT election is in effect,
o some tests concerning,
(A) the composition of the FASIT's assets and
(B) the nature of the Securityholders' interests in the FASIT are met
on a continuing basis, and
o the trust fund is not a regulated investment company as defined in
Section 851(a) of the Code.
Moreover, the qualification as a FASIT of any FASIT Trust depends on the
trust's ability to satisfy the requirements of the FASIT provisions on an
ongoing basis, including, without limitation, the requirements of any final
Treasury regulations that may be promulgated in the future under the FASIT
provisions or as a result of any change in applicable law. Thus, no assurances
can be made regarding the qualification as a FASIT of any FASIT Trust for which
a FASIT election is made at any particular time after the issuance of securities
by the FASIT Trust.
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities. The FASIT
provisions of the Code became effective on September 1, 1997. On February 4,
2000, the IRS and Treasury Department issued proposed Treasury regulations on
FASITs. The regulations generally would not be effective until final regulations
are filed with the federal register. However, it appears that some anti-abuse
rules would apply as of February 4, 2000. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of FASIT
securityholders. Investors also should note that the FASIT discussion contained
in this prospectus constitutes only a summary of the federal income tax
consequences to holders of FASIT Securities. With respect to each series of
FASIT securities, the related prospectus supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT regular securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT ownership securities, which generally are not treated as debt for those
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related series of FASIT securities. The
prospectus supplement for each series of securities will indicate whether one or
more FASIT elections will be made for that series and which securities of those
series will be designated as regular securities, and which, if any, will be
designated as ownership securities.
Asset Composition. In accordance with the FASIT Qualification Test, in
order for a trust fund (or one or more designated pools of assets held by a
trust fund) to be eligible for FASIT status, substantially all of the assets of
the trust fund (or the designated pool) must consist of "permitted assets" as of
the close of the third month beginning after the closing date and at all times
after that. Permitted assets include:
57
o cash or cash equivalents,
o debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only type rate,
o foreclosure property,
o hedging instruments (generally, interest and currency rate swaps and
credit enhancement contracts) that are reasonably required to guarantee
or hedge against the FASIT's risks associated with being the obligor on
FASIT interests,
o contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
o FASIT regular interests, and
o REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder
of the FASIT's ownership interest or by any person related to that holder.
Interests in a FASIT. In addition to the above-mentioned asset
qualification requirements, the interests in a FASIT also must meet some
requirements. All of the interests in a FASIT must belong to either of the
following:
o one or more classes of regular interests or
o a single class of ownership interest that is held by a fully taxable
domestic C corporation.
In the case of Series that include FASIT ownership securities, the ownership
interest will be represented by the FASIT ownership securities.
A FASIT interest generally qualifies as a regular interest if:
o it is designated as a regular interest,
o it has a stated maturity not greater than thirty years,
o it entitles its holder to a specified principal amount,
o the issue price of the interest does not exceed 125% of its stated
principal amount,
o the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and
o if it pays interest, that interest is payable at either (a) a fixed
rate with respect to the principal amount of the regular interest or
(b) a permissible variable rate with respect to that principal amount.
Permissible variable rates for FASIT regular interests are the same as
those for REMIC regular interests (i.e., some qualified floating rates
and weighted average rates).
See "Material Federal Income Tax Consequences -- REMIC Series -- Original Issue
Discount" and "-- Variable Rate Regular Certificates" in this prospectus.
If a FASIT security fails to meet one or more of the requirements set out
in clauses (3), (4), or (5), but otherwise meets the above requirements, it may
still qualify as a High-Yield Interest. In addition, if a FASIT security fails
to meet the requirement of clause (6), but the interest payable on the security
consists of a specified portion of the interest payments on permitted assets and
that portion does not vary over the life of the security, the security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
Eligible Corporations, other FASITs, and dealers in securities who acquire those
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offsetting income derived
from that interest. See "Material Federal Income Tax Consequences -- FASIT
Securities -- Tax Treatment of FASIT Regular Securities -- Treatment of
High-Yield Interests."
58
Anti-Abuse Rule. Under proposed Treasury regulations, the Commissioner of
Internal Revenue may make appropriate adjustments with regard to the FASIT and
any arrangement or transaction involving the FASIT if a principal purpose of
forming or using the FASIT is to achieve results inconsistent with the intent of
the FASIT provisions and the FASIT regulations. This determination would be
based on all of the facts and circumstances, including a comparison of the
purported business purpose for a transaction and the claimed tax benefits
resulting from the transaction.
Consequences of the Failure of the FASIT trust to Qualify as a FASIT. If a
FASIT Trust fails to comply with one or more of the Code's ongoing requirements
for FASIT status during any taxable year and the Commissioner, proposed Treasury
regulations provide that its FASIT status would be lost for that year and the
FASIT Trust will be unable to elect FASIT status without the Commissioner's
approval. If FASIT status is lost, under proposed Treasury regulations the
entity classification of the former FASIT, the new arrangement, is determined
under general federal income tax principles. The holder of the FASIT ownership
security is treated as exchanging the new arrangement's assets for an amount
equal to their value and gain recognized is treated as gain from a prohibited
transaction that is subject to the 100 percent tax, without exception. Loss, if
any, is disallowed. In addition, the holder of the FASIT ownership security must
recognize cancellation of indebtedness income, on a regular interest by regular
interest basis, in an amount equal to the adjusted issue price of each FASIT
regular security outstanding immediately before the cessation over its fair
market value. If the holder of the FASIT ownership security has a continuing
economic interest in the New Arrangement, the characterization of this interest
is determined under general federal income tax principles. Holder of FASIT
regular securities are treated as exchanging their securities for interests in
the New Arrangement, the classification of which is determined under general
federal income tax principles. Gain is recognized to the extent the new interest
either does not qualify as debt or differs either in kind or extent. The basis
of the interest in the New Arrangement equals the basis in the FASIT regular
security increased by any gain recognized on the exchange.
Tax Treatment of FASIT Regular securities. Payments received by holders of
FASIT regular securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC regular securities. As in the case of holders of REMIC regular
securities, holders of FASIT regular securities must report income from those
securities under an accrual method of accounting, even if they otherwise would
have used the cash receipts and disbursements method. Except in the case of
FASIT regular securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT regular security
generally will be treated as ordinary income to the securityholder and a
principal payment on that security will be treated as a return of capital to the
extent that the securityholder's basis is allocable to that payment. FASIT
regular securities issued with original issue discount or acquired with market
discount or premium generally will treat interest and principal payments on
those securities in the same manner described for REMIC regular securities. See
"Material Federal Income Tax Consequences -- REMIC Series -- Original Issue
Discount," "-- Market Discount," and "-- Amortizable Premium" above. High-yield
securities may be held only by Eligible Corporations, other FASITs, and some
securities dealers. Holders of high-yield securities are subject to limitations
on their ability to use current losses or net operating loss carryforwards or
carrybacks to offset any income derived from those securities.
If a FASIT regular security is sold, the securityholder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
regular securities. See "Material Federal Income Tax Consequences -- REMIC
Series -- Gain or Loss on Disposition."
FASIT regular securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(5)(B) of the Code, and interest on
those securities will be considered Qualifying REIT Interest to the same extent
that REMIC securities would be so considered. See "Material Federal Income Tax
Consequences -- REMIC Series -- Tax Status of REMIC Certificates" in this
prospectus. FASIT regular securities held by a Thrift Institution taxed as a
"domestic building and loan association" will represent qualifying assets for
purposes of the qualification requirements set forth in Code Section 7701(a)(19)
to the same extent that REMIC Securities would be so considered. See "Material
Federal Income Tax Consequences -- REMIC -- Series Tax Status of REMIC
Certificates." In addition, FASIT
59
regular securities held by a financial institution to which Section 585 of the
Code applies will be treated as evidences of indebtedness for purposes of
Section 582(c)(1) of the Code. FASIT Securities will not qualify as "government
securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of those interests, and the
ability of those holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations, other
FASITs, and dealers in securities who acquire those interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
regular security that is held by a Pass-Through Entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Security and that have the same features as High-Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT ownership security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT ownership security determines its taxable income by taking into account
all assets, liabilities, and items of income, gain, deduction, loss, and credit
of a FASIT. In general, the character of the income to the holder of a FASIT
ownership interest will be the same as the character of that income to the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT ownership interest is treated as ordinary income. In
determining taxable income, the holder of a FASIT ownership security must
determine the amount of interest, original issue discount, market discount, and
premium recognized with respect to the FASIT's assets and the FASIT regular
securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT ownership
securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT security as are the holders of High-Yield
Interests. See "Material Federal Income Tax Consequences -- FASIT Securities --
Tax Treatment of FASIT Regular Securities -- Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual
securities also will apply to FASIT ownership securities. Accordingly, losses on
dispositions of a FASIT ownership security generally will be disallowed where,
within six months before or after the disposition, the seller of that security
acquires any other FASIT ownership security or, in the case of a FASIT holding
mortgage assets, any interest in a taxable mortgage pool, that is economically
comparable to a FASIT ownership security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT ownership
security was required to be marked-to-market under Code section 475 by that
holder, then section 475 will continue to apply to those securities, except that
the amount realized under the mark-to-market rules will be the greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded semiannually.
The holder of a FASIT ownership security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include:
o the receipt of income derived from assets that are not permitted
assets,
o some dispositions of permitted assets,
o the receipt of any income derived from any loan originated by a FASIT,
and
60
o in some cases, the receipt of income representing a Servicing Fee or
other compensation.
Any series for which a FASIT election is made generally will be structured in
order to avoid application of the prohibited transaction tax.
Withholding, Backup Withholding, Reporting and Tax Administration to
Withholding and Backup Withholding. Holders of FASIT securities will be subject
to withholding and backup withholding to the same extent holders of REMIC
securities would be subject. See "Material Federal Income Tax Consequences --
REMIC Series -- Backup Withholding" and "Material Federal Income Tax
Consequences -- REMIC Series -- New Withholding Regulations." For purposes of
reporting and tax administration, holders of record of FASIT securities
generally will be treated in the same manner as holders of REMIC securities. See
"Material Federal Income Tax Consequences -- REMIC Series -- Reporting
Requirements and Tax Administration" above. Prospective investors should be
aware than on October 6, 1997, the Treasury Department issued new regulations
regarding withholding, backup withholding, and information reporting. Those
regulations are further discussed at "Material Federal Income Tax Consequences
- -- REMIC Series -- New Withholding Regulations."
Under proposed Treasury regulations, if a non-United States Person holds
(either directly or through a vehicle which itself is not subject to U.S.
federal income tax such as a partnership or a trust) a FASIT regular security
and a "conduit debtor" pays or accrues interest on a debt instrument held by
that FASIT, any interest received or accrued by the non- United States Person
FASIT Regular Securityholder is treated as received or accrued from the conduit
debtor. The proposed Treasury regulations state that a debtor is a conduit
debtor if the debtor is a United States Person or the United States branch of a
non- United States Person and the non- United States Person regular interest
holder is:
o a "10 percent shareholder" of the debtor,
o a "controlled foreign corporation" and the debtor is a related person
with respect to the controlled foreign corporation or
o related to the debtor.
As described above, the proposed Treasury regulations would not be effective
until final regulations are filed with the federal register.
STATE AND LOCAL TAX CONSIDERATIONS
No advice has been received as to local income, franchise, personal
property, or other taxation in any state or locality, or as to the tax effect of
ownership of certificates in any state or locality. Certificateholders are
advised to consult their own tax advisors with respect to any state or local
income, franchise, personal property, or other tax consequences arising out of
their ownership of certificates.
LEGAL INVESTMENT CONSIDERATIONS
The prospectus supplement for each series of securities will specify which,
if any, of the classes of securities offered by the prospectus supplement
constitute "mortgage related securities" for purposes of the SMMEA. Classes of
securities that qualify as "mortgage related securities" will be legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions, life
insurance companies and pension funds) created in accordance with or existing
under the laws of the United States or of any state, including the District of
Columbia and Puerto Rico, whose authorized investments are subject to state
regulation to the same extent as, under applicable law, obligations issued by or
guaranteed as to principal and interest by the United States or any of those
entities. Under SMMEA, if a state enacted legislation prior to October 4, 1991
specifically limiting the legal investment authority of any of those entities
with respect to "mortgage related securities," securities will constitute legal
investments for entities subject to that legislation only to the extent provided
in the legislation. Approximately twenty-one states adopted that legislation
prior to the October 4, 1991 deadline.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise
61
deal in mortgage related securities without limitation as to the percentage of
their assets represented by those entities; federal credit unions may invest in
mortgage related securities; and national banks may purchase mortgage related
securities for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. 24 (Seventh), subject
in each case to those regulations as the applicable federal regulatory authority
may prescribe.
All depository institutions considering an investment in the securities,
whether or not the class of securities under consideration for purchase
constitutes a "mortgage related security," should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities, to the extent adopted by their respective regulators. The
Policy Statement described, in relevant part, securities trading and sales
practices deemed unsuitable for an institution's investment portfolio, and
guidelines for, and restrictions on, investing in mortgage derivative products,
including "mortgage related securities," which are "high-risk mortgage
securities" as defined in the Policy Statement. According to the Policy
Statement, "high-risk mortgage securities" include securities such as securities
not entitled to distributions allocated to principal or interest, or
subordinated securities. Under the Policy Statement, it is the responsibility of
each depository institution to determine, prior to purchase, and at stated
intervals thereafter, whether a particular mortgage derivative product is a
"high-risk mortgage security," and whether the purchase or retention of such a
product would be consistent with the Policy Statement.
The discussion above 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."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase securities or to purchase
mortgage related securities representing more than a specified percentage of the
investor's assets. Investors should consult with their own legal advisors in
determining whether and to what extent the securities constitute legal
investments for investors.
RATINGS
It is a condition precedent to the issuance of any class of certificates
sold under this prospectus that they be rated by at least one nationally
recognized statistical rating organization in one of its four highest rating
categories (within which there may be sub-categories or gradations indicating
relative standing). 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 agency. The security rating of any series of certificates
should be evaluated independently of similar security ratings assigned to other
kinds of securities.
Ratings of the certificates address the likelihood of the ultimate receipt
of all distributions on the contracts by the related certificateholders under
the agreements pursuant to which those certificates are issued. The ratings take
into consideration the credit quality of the related contract pool, including
any credit support providers, structural and legal aspects associated with those
certificates, and the extent to which payment stream on the contract pool is
adequate to make payments required by those certificates. The ratings on those
certificates do not, however, constitute a statement regarding frequency of
prepayments on the related contracts.
UNDERWRITING
The depositor may sell certificates of each series to or through
underwriters by a negotiated firm commitment underwriting and public reoffering
by the underwriters, and also may sell and place certificates directly to other
purchasers or through agents. The depositor intends that the certificates will
be offered through various methods from time to time and that offerings may be
made concurrently through more than one of these methods or that an offering of
a particular series of certificates may be made through a combination of these
methods.
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The distribution of the certificates may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to prevailing
market prices or at negotiated prices.
In connection with the sale of the certificates, underwriters may receive
compensation from the depositor or from purchasers of certificates for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the certificates of a series to or through dealers and
those dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the certificates of a series may be deemed to be
underwriters, and any discounts or commissions received by them from the
depositor and any profit on the resale of the certificates by them may be deemed
to be underwriting discounts and commissions, under the Securities Act. The
underwriters or agents will be identified, and compensation received from the
depositor will be described, in the prospectus supplement.
Under agreements which may be entered into by Vanderbilt and/or the
depositor, underwriters and agents who participate in the distribution of the
certificates may be entitled to indemnification by Vanderbilt and/or the
depositor against some liabilities, including liabilities under the Securities
Act.
The depositor may authorize underwriters or other persons acting as the
depositor's agents to solicit offers by some institutions to purchase the
certificates from the depositor in accordance with agreements providing for
payment and delivery on a future date. Institutions with which those agreements
may be made include commercial and savings banks, insurance companies, pension
funds, investment companies, educational charitable institutions and others, but
in all cases those institutions must be approved by the depositor. The
obligation of any purchaser under any agreement will be subject to the condition
that the purchaser of the offered certificates shall not at the time of delivery
be prohibited under the laws of the jurisdiction to which that purchaser is
subject from purchasing those certificates. The underwriters and the other
agents will not have responsibility in respect of the validity or performance of
those contracts.
The underwriters may, from time to time, buy and sell certificates, but
there can be no assurance that an active secondary market will develop and there
is no assurance that any market, if established, will continue.
Some of the underwriters and their associates may engage in transactions
with and perform services for Vanderbilt and/or Vanderbilt ABS Corp. in the
ordinary course of business.
LEGAL MATTERS
The validity of the certificates will be passed upon for Vanderbilt and/or
the depositor by Boult, Cummings, Conners & Berry, PLC. The material federal
income tax consequences of the certificates will be passed upon for Vanderbilt
and/or the depositor by Sidley Austin Brown & Wood LLP, New York, New York.
EXPERTS
The consolidated financial statements of Clayton incorporated in this
prospectus by reference to the annual report on Form 10-K for the year ended
June 30, 2002, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
63
GLOSSARY
There follows abbreviated definitions of some capitalized terms used in
this prospectus and the prospectus supplement. The pooling and servicing
agreement may contain a more complete definition of some of the terms defined in
this prospectus and reference should be made to the pooling and servicing
agreement for a more complete definition of all of those terms.
"Advances" means the advances made by a servicer (including from advances
made by a sub-servicer) on any remittance date in accordance with the pooling
and servicing agreement.
"Business Day" means any day other than a Saturday, a Sunday, a legal
holiday or any other day on which national banking institutions or commercial
banking institutions in the State of New York or Tennessee are authorized or
required by law, executive order or governmental decree to be closed.
"Certificate Account" means the account or accounts maintained at an
Eligible Institution in the name of the trustee, as specified in the related
prospectus supplement.
"Clayton" means Clayton Homes, Inc.
"Code" means the Internal Revenue Code of 1986, as amended, and any
regulations promulgated under the Internal Revenue Code.
"Contract Rate" means, with respect to each contract, the fixed or variable
annual percentage rate, specified in the contract.
"Cut-off Date" means the date specified in the related prospectus
supplement as the date from which principal and interest payments on the
contracts are included in the trust fund.
"Determination Date" means, unless otherwise specified in the related
prospectus supplement, the fifth Business Day immediately preceding the related
remittance date.
"Disqualified Organizations" include governmental entities or other
entities that are exempt from United States tax.
"Due Date" is, unless otherwise specified in a related prospectus
supplement, the date on which each scheduled payment of principal and interest
is due on a contract, exclusive of any days of grace.
"Due Period" means, unless otherwise provided in a related prospectus
supplement, with respect to any remittance date, the period beginning on the
26th day of the second month preceding the month of the remittance date and
ending on the 25th day of the month preceding the month of the remittance date.
"Eligible Substitute Contract" is a contract that satisfies, as of the date
of its substitution, the representations and warranties specified in the pooling
and servicing agreement, has a Scheduled Principal Balance that is not greater
than the Scheduled Principal Balance of the Replaced Contract, has a Contract
Rate that is at least equal to the Contract Rate of the Replaced Contract and
has a remaining term to scheduled maturity that is not greater than the
remaining term to scheduled maturity of the Replaced Contract.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"Escalating Principal Payment Contracts" are contracts with financing terms
which provide for an annual increase in monthly payments over the first five
years of the term of the contracts.
"FASIT" means a Financial Asset Securitization Investment Trust.
"FASIT Trust" means a FASIT of any trust for which a FASIT election is
made.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration.
"Foreign Holder" is a certificateholder who holds a Regular Certificate and
who is not:
o a citizen or resident of the United States,
64
o a corporation, partnership or other entity treated as a corporation or
partnership for United States federal income tax purposes, organized in
or under the laws of the United States, any state of the United States
or the District of Columbia (unless, in the case of a partnership,
Treasury regulations provide otherwise),
o an estate, the income of which is included in gross income for United
States tax purposes regardless of its source, or
o a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United
States persons have the authority to control all substantial decisions
of the trust.
"Foreign Investors" means any person other than:
o a citizen or resident of the United States,
o a corporation, partnership or other entity treated as a corporation or
partnership for U.S. federal income tax purposes organized in or under
the laws of the United States or any state of the United States or the
District of Columbia (other than a partnership that is not treated as
United States person under any applicable Treasury regulations),
o an estate, the income of which is includible in gross income for U.S.
federal income tax purposes, regardless of its source, or
o a trust, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have authority to control all substantial
decisions of the trust. In spite of the preceding sentence, to the
extent provided in Treasury regulations, some trusts in existence on
August 20, 1996 which were treated as United States persons prior to
that date that elect to continue to be treated as United States persons
will not be considered a Foreign Investor.
"Formula Principal Distribution Amount" shall have the meaning specified in
the related prospectus supplement or, if not specified in the related prospectus
supplement, shall, in respect of a remittance date, equal the sum of:
(1) all scheduled payments of principal due on each outstanding contract
during the Due Period preceding the month in which the remittance date
occurs,
(2) the Scheduled Principal Balance of each contract which, during the Due
Period preceding the month of that remittance date, was purchased by
Vanderbilt in accordance with the pooling and servicing agreement on account
of some breaches of its representation and warranties,
(3) all partial prepayments (as defined in the pooling and servicing
agreement) of contracts received during the preceding Due Period,
(4) the Scheduled Principal Balance of each contract that was prepaid in
full during that preceding Due Period,
(5) the Scheduled Principal Balance of each contract that became a
liquidated contract during the preceding Due Period, and
(6) any previously undistributed shortfalls in the amounts in clauses (1)
and (5) in respect of the prior remittance dates (other than any of that
shortfall with respect to which an Enhancement Payment has been made to the
Class B-2 Certificate holders).
"Global Securities" are securities of the series specified in the
applicable prospectus supplement.
"High-Yield Interest" is a type of "regular interest."
"HUD" means the United States Department of Housing and Urban Development.
"Land-and-Home Contracts" are, unless otherwise specified in a related
prospectus supplement, those contracts that are secured by liens on the real
estate on which the related manufactured homes are located.
65
"Monthly Servicing Fee" means the fee specified in the related prospectus
supplement for that remittance date.
"Non-REMIC Certificates" means certificates issued by a trust fund for
which a REMIC Election was not made.
"NYSE" means New York Stock Exchange.
"Offered Certificates" are the certificates offered to the public under
this prospectus and a related prospectus supplement, as identified in the
related prospectus supplement.
"OID" means original issue discount.
"OID Regulations" are regulations governing original issue discount are set
forth in Section 1271-1273 and 1275 of the Code and the Treasury regulations
issued under the Code in January 1994 and in June 1996.
"Pass-Through Entity" means any regulated investment company, real estate
investment trust, common trust fund, partnership, trust or estate and
corporations operating on a cooperative basis.
"Permitted Investments" consist of:
(1) temporary investments of cash received under qualified mortgages before
distribution to holders of interest in the REMIC ("cash-flow investments"),
(2) amounts, that as a reserve fund, if any, reasonably required to provide
for full payment of expenses of the REMIC, the principal and interest due on
regular or residual interests in the event of defaults on qualified
mortgages, lower than expected returns on cash-flow investments, prepayment
interest shortfalls or some other contingencies ("qualified reserve assets"),
and
(3) property acquired as a result of foreclosure of defaulted qualified
mortgages ("foreclosure property").
"Pre-Funding Account" means monies on deposit in a trust account, as
further described and identified by the related prospectus supplement, if
applicable.
"Prepayment Assumption" means the anticipated rate of prepayments assumed
in pricing the debt instrument.
"Record Date" means, unless otherwise specified in a related prospectus
supplement:
(1) with respect to the initial remittance date, the closing date,
(2) with respect to any remittance date after that, the last Business Day
of the month preceding the month of the related remittance date,
"Regular Certificates" means the certificates of any series identified in
the related prospectus supplement as "regular interests" in the REMIC within the
meaning of Section 860G(a)(1) of the Code.
"REMIC" means a "real estate mortgage investment conduit" as defined in the
Code.
"REMIC Election" means an election that is made, with respect to a
particular series of certificates, to treat the trust fund as a REMIC within the
meaning of Section 860(D)(a) of the Code, to maintain the REMIC status of the
trust fund and to avoid the imposition of some taxes on the REMIC.
"Replaced Contract" is a contract that Vanderbilt is obligated to
repurchase under a pooling and servicing agreement.
"Repurchase Price" for any contract will be the remaining principal amount
outstanding on that contract on the date of repurchase plus accrued and unpaid
interest on that contract at its Contract Rate to the date of that repurchase.
"Residual Certificates" means, unless otherwise specified in a related
prospectus supplement, the certificate of any series identified in a related
prospectus supplement as "residual interest" in the REMIC within the meaning of
Section 860(G)(a)(2) of the Code.
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"Residual Holders" are holders of Residual Certificates.
"Restricted Group" means Vanderbilt, any underwriter, any insurer, the
trustee, the servicer, any obligor with respect to contracts included in the
trust fund constituting more than a five percent of the aggregate unamortized
principal balance of the assets in the trust fund, any counterparty in a
qualified swap transaction or a notional principal transaction included in a
yield maintenance agreement or any affiliate of those parties.
"Securities Act" means the Securities Act of 1933 as amended.
"Senior Certificates" means, with respect to each series of certificates,
the class or classes which have rights senior to another class or classes in
those series, as identified in the related prospectus supplement.
"Servicing Fee" means the amount of the annual fee paid to the servicer or
the trustee as specified in the related prospectus supplement.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984.
"Soldier's and Sailor's Civil Relief Act" means the Federal Soldier's and
Sailor's Civil Relief Act of 1940.
"Stated Balance" means, with respect to any series of certificates
providing for sequential distributions in reduction of Stated Balance of the
classes of the series, the maximum specified dollar amount (exclusive of
interest at the related interest rate) to which the holder of those certificates
is entitled from the cash flow of the trust fund.
"Step-up Rate Contracts" are, unless otherwise specified in a related
prospectus supplement, contracts which provide for Contract Rates that
periodically increase over some period of time.
"Stripped Certificates" are certificates subject to the stripped bond rules
of Section 1286 of the Code.
"Subordinate Certificates" means, with respect to each series of
certificates, the class or classes with rights subordinate to another class or
classes of those series, as identified in the related prospectus supplement.
"UCC" means the Uniform Commercial Code.
"VA" means the Veterans' Administration.
"Vanderbilt" means Vanderbilt Mortgage and Finance, Inc.
"Variable Rate Regular Certificates" means certificates which evidence the
right to receive distributions of income at a variable remittance rate.
67
$289,950,522
(APPROXIMATE)
[VANDERBILT LOGO OMITTED]
VANDERBILT MORTGAGE AND FINANCE, INC.
SELLER AND SERVICER
Manufactured Housing Contract
Senior/Subordinate Pass-Through Certificates, Series 2003-A
------------
PROSPECTUS SUPPLEMENT
------------
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
We are not offering the Series 2003-A Manufactured Housing Contract
Senior/Subordinate Pass-Through Certificates in any state where the offer is
not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Series 2003-A Manufactured Housing Contract
Senior/Subordinate Pass-Through Certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling the Series 2003-A
Manufactured Housing Contract Senior/Subordinate Pass-Through Certificates will
be required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
February 14, 2003