-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C3wr2Y2TjSumVp7fqlc8Zz9pJA/v25Ip0BavEgqCHraWrrleX7T0j283YHKf1SVN 7g6jGzvcjXINFEHxzKikSg== 0000950123-97-002705.txt : 19970329 0000950123-97-002705.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950123-97-002705 CONFORMED SUBMISSION TYPE: 424B5 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQCC RECEIVABLES CORP CENTRAL INDEX KEY: 0000897897 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 593170055 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B5 SEC ACT: 1933 Act SEC FILE NUMBER: 333-17893 FILM NUMBER: 97567255 BUSINESS ADDRESS: STREET 1: C/O EQUICREDIT CORP OF AMERICA STREET 2: 10401 DEERWOOD PARK BLVD CITY: JACKSONVILLE STATE: FL ZIP: 32256 BUSINESS PHONE: 9049875000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQCC ASSET BACKED CORP CENTRAL INDEX KEY: 0000897898 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 593170052 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B5 SEC ACT: 1933 Act SEC FILE NUMBER: 333-17893-01 FILM NUMBER: 97567256 BUSINESS ADDRESS: STREET 1: C/O EQUICREDIT CORP OF AMERICA STREET 2: 10401 DEERWOOD PARK BLVD CITY: JACKSONVILLE STATE: FL ZIP: 32256 BUSINESS PHONE: 9049875000 MAIL ADDRESS: STREET 1: C/O EQUICREDIT CORP OF AMERICA STREET 2: 10401 DEERWOOD PARK BLVD CITY: JACKSONVILLE STATE: FL ZIP: 32256 424B5 1 FORM 424B5 1 Pursuant to Rule 424(b)(5) Registration Nos. 333-17893 and 333-17893-01 PROSPECTUS SUPPLEMENT (To Prospectus dated March 21, 1997) $600,098,000 EQCC HOME EQUITY LOAN TRUST 1997-1 EQCC HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1997-1 $196,833,000 CLASS A-1 CERTIFICATES, 6.31% PASS-THROUGH RATE $ 18,259,000 CLASS A-2 CERTIFICATES, 6.61% PASS-THROUGH RATE $127,073,000 CLASS A-3 CERTIFICATES, 6.84% PASS-THROUGH RATE $ 47,407,000 CLASS A-4 CERTIFICATES, 7.16% PASS-THROUGH RATE $ 25,494,000 CLASS A-5 CERTIFICATES, 7.31% PASS-THROUGH RATE $ 33,989,000 CLASS A-6 CERTIFICATES, 7.56% PASS-THROUGH RATE $ 50,000,000 CLASS A-7 CERTIFICATES, 7.12% PASS-THROUGH RATE $101,043,000 CLASS A-8 ADJUSTABLE RATE CERTIFICATES EQCC RECEIVABLES CORPORATION EQCC ASSET BACKED CORPORATION DEPOSITORS EQUICREDIT CORPORATION OF AMERICA SERVICER The EQCC Home Equity Loan Asset Backed Certificates, Series 1997-1 (the "Certificates"), will consist of nine classes of Certificates designated as (i) the Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates, Class A-5 Certificates, Class A-6 Certificates and Class A-7 Certificates (collectively, the "Fixed Rate Certificates"), (ii) the Class A-8 Certificates (the "Adjustable Rate Certificates" and, together with the Fixed Rate Certificates, the "Class A Certificates") and (iii) the Class R Certificates. Only the Class A Certificates are offered hereby. The Certificates represent fractional undivided interests in a trust fund to be designated as EQCC Home Equity Loan Trust 1997-1 (the "Trust" or the "Trust Fund"), initially consisting primarily of (i) a pool (the "Mortgage Pool") of fixed- and adjustable-rate mortgage loans (each, a "Mortgage Loan") secured by mortgages, deeds of trust or other instruments (each, a "Mortgage") creating a first or second lien on one- to four-family dwellings (each, a "Mortgaged Property") to be deposited into the Trust Fund by the (continues on following page) ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS" HEREIN AT PAGE S-19 AND IN THE PROSPECTUS AT PAGE 13 THEREOF. - -------------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC(1) DISCOUNT DEPOSITORS(1)(2) - -------------------------------------------------------------------------------------------------------------- Per Class A-1 Certificate...................... 99.9885900% 0.200% 99.7885900% Per Class A-2 Certificate...................... 99.9843750% 0.225% 99.7593750% Per Class A-3 Certificate...................... 99.9609375% 0.325% 99.6359375% Per Class A-4 Certificate...................... 99.9609375% 0.375% 99.5859375% Per Class A-5 Certificate...................... 99.9453125% 0.425% 99.5203125% Per Class A-6 Certificate...................... 99.9062500% 0.450% 99.4562500% Per Class A-7 Certificate...................... 99.9453125% 0.420% 99.5253125% Per Class A-8 Certificates..................... 100.0000000% 0.250% 99.7500000% Total.......................................... $599,931,381.67 $1,749,419.75 $598,181,961.92
- -------------------------------------------------------------------------------- (1) Plus accrued interest, if any, from March 15, 1997 with respect to the Fixed Rate Certificates. (2) Before deducting expenses, estimated to be $952,000. The Class A Certificates are offered by the several Underwriters, when, as and if issued by the Trust, delivered to and accepted by the Underwriters and subject to their right to reject orders in whole or in part. It is expected that the delivery of the Class A Certificates, in book-entry form, will be made through the facilities of The Depository Trust Company, Cedel Bank, societe anonyme or the Euroclear System on or about March 31, 1997 (the "Closing Date") against payment in immediately available funds. - ------------------------------------------------------------- SALOMON BROTHERS INC CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS PRUDENTIAL SECURITIES INCORPORATED March 21, 1997 2 (continuation of cover page) Depositors and originated by or purchased and re-underwritten by EquiCredit Corporation of America ("EquiCredit", the "Representative" or an "Originator"), EquiCredit Corporation/Ala. & Miss., California/EquiCredit Corporation, EquiCredit Corporation of In., EquiCredit Corporation of Pa. or EquiCredit Corporation of SC (each, an "Originator") for the holders of the Certificates (the "Certificateholders"), (ii) all monies received on the Mortgage Loans on and after the Cut-off Date (as defined herein) (other than the Representative's Yield, as described herein, and amounts received on and after the Cut-off Date in respect of interest accrued on the Mortgage Loans prior to the Cut-off Date), (iii) the Securities Insurance Policy described herein, and (iv) certain other property. The Mortgage Pool will be divided into two groups (each, a "Mortgage Loan Group"). The Fixed Rate Certificates will represent an undivided ownership interest in a group of fixed-rate Mortgage Loans (the "Fixed Rate Group"). The Adjustable Rate Certificates will represent an undivided ownership interest in a group of adjustable-rate Mortgage Loans (the "Adjustable Rate Group"). The Mortgage Loans will be serviced by EquiCredit (in its capacity as servicer, the "Servicer"). The Certificates will be issued pursuant to a Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") to be entered into among the Servicer, the Depositors and First Bank National Association, as trustee (the "Trustee"). Distributions on the Certificates will be made, to the extent of funds available therefor, on the fifteenth day of each month, or, if such day is not a business day, then on the next business day, commencing on April 15, 1997 (each, a "Payment Date"). The Fixed Rate Certificates will accrue interest during each Accrual Period at the rates shown above. The Adjustable Rate Certificates will accrue interest during each Accrual Period at a rate equal to the lesser of (i) the London interbank offered rate for one month U.S. dollar deposits ("LIBOR") (calculated as described herein) as of the LIBOR Determination Date (as defined herein) plus (a) 0.20% per annum on each Payment Date on or prior to the Optional Purchase Date (as defined herein) and (b) 0.40% per annum on each Payment Date following the Optional Purchase Date (the "Class A-8 LIBOR Rate") and (ii) the Net Funds Cap Rate (as defined herein) with respect to such Accrual Period. See "Description of the Certificates -- Interest" herein. On or before the issuance of the Certificates, the Servicer will obtain from Financial Guaranty Insurance Company (the "Insurer") a securities guaranty surety bond in favor of the Trustee for the benefit of the Certificateholders relating to the Class A Certificates (the "Securities Insurance Policy"). The Securities Insurance Policy will provide for 100% coverage of the Class A Remittance Amount (as defined herein) due on the Class A Certificates on each Payment Date. FINANCIAL GUARANTY INSURANCE COMPANY (LOGO)
FGIC IS A REGISTERED SERVICE MARK USED BY FINANCIAL GUARANTY INSURANCE COMPANY UNDER LICENSE FROM ITS PARENT COMPANY, FGIC CORPORATION, A PRIVATE COMPANY NOT AFFILIATED WITH ANY U.S. GOVERNMENTAL AGENCY. There is currently no secondary market for the Class A Certificates. The Underwriters intend to make a secondary market in the Class A Certificates, but are not obligated to do so. There can be no assurance that a secondary market for the Class A Certificates will develop or, if one does develop, that it will continue. None of the Class A Certificates will be listed on any securities exchange. It is a condition to the issuance of the Class A Certificates that they be rated Aaa by Moody's Investors Service, a division of Dun & Bradstreet, and "AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. The Class A Certificates initially will be represented by certificates registered in the name of Cede & Co., the nominee of DTC. The interests of owners of the Class A Certificates will be represented by book-entries on the records of DTC and participating members thereof. See "Description of the Certificates -- Registration of the Class A Certificates" herein. As described herein an election will be made to treat certain assets in the Trust Fund as a "real estate mortgage investment conduit" (a "REMIC") for federal income tax purposes. The Class A Certificates will constitute "regular interests" in the REMIC and the Class R Certificates will constitute the sole class of "residual interests" in the REMIC. For a description of certain tax consequences of owning the Certificates, see "Summary of Terms -- REMIC Election and Tax Status" herein and "Certain Federal Income Tax Consequences" in the Prospectus. S-2 3 PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE REPRESENTATIVE, THE SERVICER, EITHER DEPOSITOR, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES. NONE OF THE CERTIFICATES OR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE REPRESENTATIVE, THE SERVICER, EITHER DEPOSITOR, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES. CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A CERTIFICATES, INCLUDING PURCHASES OF THE CLASS A CERTIFICATES TO STABILIZE THE MARKET PRICE THEREOF, PURCHASES OF THE CLASS A CERTIFICATES TO COVER SOME OR ALL OF A SHORT POSITION IN THE CLASS A CERTIFICATES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING" HEREIN. THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE OFFERING OF THE CLASS A CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE PROSPECTUS DATED MARCH 21, 1997 OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. PURCHASERS ARE URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE CLASS A CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. REPORTS TO HOLDERS Unless and until the Class A Certificates are issued in definitive certificated form, periodic reports concerning the assets of the Trust are required to be forwarded to Cede & Co. ("Cede") as nominee of The Depository Trust Company ("DTC") and registered holder of the Class A Certificates. See "Description of the Securities -- Reports to Holders" in the Prospectus. Any reports forwarded to holders will not contain financial information that has been examined and reported upon by, with an opinion expressed by, an independent public or certified public accountant. The Depositors will file with the Securities and Exchange Commission (the "Commission") such periodic reports with respect to the Trust as are required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder. S-3 4 SUMMARY OF TERMS The following Summary of Terms is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus Supplement and in the Prospectus. Capitalized terms used but not otherwise defined shall have the meanings ascribed to such terms in the Prospectus. Issuer..................... EQCC Home Equity Loan Trust 1997-1. Securities Offered......... $196,833,000 Class A-1 Certificates, having a Pass-Through Rate equal to 6.31% per annum. $18,259,000 Class A-2 Certificates, having a Pass-Through Rate equal to 6.61% per annum. $127,073,000 Class A-3 Certificates, having a Pass-Through Rate equal to 6.84% per annum. $47,407,000 Class A-4 Certificates, having a Pass-Through Rate equal to 7.16% per annum. $25,494,000 Class A-5 Certificates, having a Pass-Through Rate equal to 7.31% per annum. $33,989,000 Class A-6 Certificates, having a Pass- Through Rate equal to 7.56% per annum. $50,000,000 Class A-7 Certificates, having a Pass-Through Rate equal to 7.12% per annum. $101,043,000 Class A-8 Certificates, having an adjustable Pass-Through Rate, as described herein. The Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates, Class A-5 Certificates, Class A-6 Certificates and Class A-7 Certificates are collectively referred to herein as the "Fixed Rate Certificates." The Class A-8 Certificates are also referred to herein as the "Adjustable Rate Certificates." The Fixed Rate Certificates and the Adjustable Rate Certificates are collectively referred to as the "Class A Certificates." In addition to the Class A Certificates, the EQCC Home Equity Loan Asset Backed Certificates, Series 1997-1 will include the Class R Certificates (together with the Class A Certificates, the "Certificates"). Only the Class A Certificates are offered hereby. The Certificates will be issued pursuant to a Pooling and Servicing Agreement to be dated as of March 1, 1997 among the Servicer, the Depositors and the Trustee (the "Pooling and Servicing Agreement"). Depositors................. EQCC Receivables Corporation, a corporation organized under the laws of the State of Delaware, and EQCC Asset Backed Corporation, a corporation organized under the laws of the State of Delaware (together, the "Depositors"). All of the outstanding common stock of each of the Depositors is owned by one or more of the Originators (as defined below). Representative and Originators.. EquiCredit Corporation of America, a corporation organized under the laws of the State of Delaware ("EquiCredit," the "Representative" and an "Originator"), and EquiCredit Corporation/Ala. & Miss., a corporation organized under the laws of the State of Florida, California/EquiCredit Corporation, a corporation organized under the laws of the State of California, EquiCredit Corporation of In., a corporation organized under the laws of the State of Indiana, EquiCredit Corporation of Pa., a corporation organized under the laws of the Commonwealth of Pennsylvania, and EquiCredit Corporation of SC, a corporation organized under the laws of the State of South Carolina (each, an "Originator"). Each Originator (other than EquiCredit) is a wholly-owned subsidiary of the Representative. See "The Depositors, the Servicer, the Representative and the Origina- S-4 5 tors" in the Prospectus and "The Originators and the Servicer -- Origination, Foreclosure and Loss Experience" herein. Servicer................... EquiCredit (in its capacity as servicer, the "Servicer"). See "The Depositors, the Servicer, the Representative and the Originators" in the Prospectus. Trustee.................... First Bank National Association, a national banking association, organized under the laws of the United States and having its principal place of business in the State of Minnesota (the "Trustee"). See "The Trustee" herein. Cut-off Date............... March 1, 1997 (the "Cut-off Date"). References herein to the Cut-off Date shall mean the date of origination in the case of Mortgage Loans originated after March 1, 1997. Closing Date............... March 31, 1997 (the "Closing Date"). Payment Date............... The fifteenth calendar day of each month or, if such day is not a business day, the first business day following such fifteenth calendar day, commencing on April 15, 1997 (each, a "Payment Date"). Determination Date......... The seventh business day of the month in which the related Payment Date occurs (each, a "Determination Date"). Record Date................ The calendar day immediately preceding each Payment Date (or, if Definitive Certificates are issued, the last calendar day of the month preceding the month in which each such Payment Date occurs) (each, a "Record Date"). Denominations.............. The Class A Certificates will be issued in minimum denominations of $1,000 and integral multiples thereof. Each Class A Certificate will represent a percentage interest (a "Percentage Interest") in the respective Class determined by dividing the original dollar amount represented by such Certificate by the Original Class A Principal Balance (as defined herein) of such Class. Registration of the Class A Certificates............. The Class A Certificates will initially be issued in a book-entry form. Persons acquiring beneficial ownership interests in the Class A Certificates ("Certificate Owners") may elect to hold their Certificate interests through The Depository Trust Company ("DTC"), in the United States, or Cedel Bank, societe anonyme ("CEDEL") or the Euroclear System ("Euroclear"), in Europe. Transfers within DTC, CEDEL or Euroclear, as the case may be, will be in accordance with the usual rules and operating procedures of the relevant system. So long as the Class A Certificates are Book-Entry Certificates (as defined herein), such Certificates will be evidenced by one or more Certificates registered in the name of Cede & Co. ("Cede"), as the nominee of DTC or one of the relevant depositaries (collectively, the "European Depositaries"). Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and counterparties holding directly or indirectly through CEDEL or Euroclear, on the other, will be effected in DTC through Citibank N.A. ("Citibank") or The Chase Manhattan Bank ("Chase"), the relevant depositaries of CEDEL and Euroclear, respectively, and each a participating member of DTC. The Class A Certificates will initially be S-5 6 registered in the name of Cede. The interests of the Class A Certificateholders will be represented by book entries on the records of DTC and participating members thereof. No Certificate Owner will be entitled to receive a definitive certificate representing such person's interest, except in the event that Definitive Certificates are issued under the limited circumstances described herein. See "Risk Factors -- Book-Entry Certificates", "Description of the Certificates -- Book-Entry Certificates" and "ANNEX I" hereto. The Trust Property......... The EQCC Home Equity Loan Asset Backed Certificates, Series 1997-1 (the "Certificates"), represent interests in a trust fund to be designated as EQCC Home Equity Loan Trust 1997-1 (the "Trust" or the "Trust Fund"), initially consisting primarily of (i) a pool (the "Mortgage Pool") of fixed- and adjustable-rate mortgage loans originated by or purchased and re-underwritten by the Originators (each, a "Mortgage Loan") and evidenced by promissory notes or other evidence of indebtedness (each, a "Mortgage Note") secured by mortgages, deeds of trust or other instruments (each, a "Mortgage") creating a first or second lien on one- to four-family dwellings, units in condominium developments and may include units in planned unit developments (each, a "Mortgaged Property"), with an aggregate principal balance of $600,098,236 as of the Cut-off Date, after giving effect to payments received prior to the Cut-off Date (the "Original Pool Principal Balance"), (ii) all monies received with respect to the Mortgage Loans on and after the Cut-off Date (other than the Representative's Yield, as defined below, and amounts received on and after the Cut-off Date in respect of interest accrued on the Mortgage Loans prior to the Cut-off Date), (iii) an irrevocable securities guaranty surety bond (the "Securities Insurance Policy") to be issued on or before the Closing Date by Financial Guaranty Insurance Company (the "Insurer") in favor of the Trustee for the benefit of the Class A Certificateholders, (iv) certain rights of the Depositors under the Transfer Agreement and (v) amounts on deposit in the Spread Account and certain other property. The Mortgage Pool will be divided into two groups of Mortgage Loans (each, a "Mortgage Loan Group"). The Fixed Rate Certificates will represent an undivided ownership interest in a group of fixed-rate Mortgage Loans (the "Fixed Rate Group"), and distributions on the Fixed Rate Certificates will be based on amounts available for distribution in respect of Mortgage Loans in the Fixed Rate Group. The Adjustable Rate Certificates will represent an undivided ownership interest in a group of Mortgage Loans that are subject to periodic interest rate adjustment (the "Adjustable Rate Group"), and distributions on the Adjustable Rate Certificates will be based on amounts available for distribution in respect of Mortgage Loans in the Adjustable Rate Group. As of the Cut-off Date, the aggregate principal balance of the Mortgage Loans in the Fixed Rate Group is $499,055,134 and the aggregate principal balance of the Mortgage Loans in the Adjustable Rate Group is $101,043,103. The Mortgage Loans will be deposited into the Trust on the Closing Date. Unless otherwise noted, all percentages of Mortgage Loans herein are measured by the aggregate principal balance of the Mortgage Loans or of the Mortgage Loans in the applicable Mortgage Loan S-6 7 Group, in each case as of the Cut-off Date, and take into account principal payments and principal prepayments received prior to the Cut-off Date. As of the Cut-off Date, the Mortgage Pool will consist of 12,398 Mortgage Loans (of which 78.63% are secured by first Mortgages and 21.37% are secured by second Mortgages) having an aggregate outstanding principal balance of $600,098,236, a weighted average Mortgage Interest Rate of 10.478% per annum, minimum and maximum outstanding principal balances of $1,490 and $350,000, respectively, a weighted average Combined Loan-to-Value Ratio of 77.80%, minimum and maximum Mortgage Interest rates of 6.400 % per annum and 17.590% per annum, respectively, a weighted average original term to maturity of 164 months, a weighted average remaining term to maturity of 162 months, approximate minimum and maximum remaining terms to maturity of 12 and 360 months, respectively, and origination dates between January 1986 and March 1997. The "Mortgage Interest Rate" for a Mortgage Loan is the annual rate of interest borne by such Mortgage Loan. Approximately 47.14% of the Mortgage Loans are Balloon Loans (as defined herein). Fixed Rate Group. As of the Cut-off Date, the Fixed Rate Group of the Mortgage Pool will consist of 11,203 Mortgage Loans (of which approximately 74.31% are secured by first Mortgages and approximately 25.69% are secured by second Mortgages) having an aggregate outstanding principal balance of $499,055,134, a weighted average Mortgage Interest Rate of approximately 10.728% per annum, minimum and maximum outstanding principal balances of approximately $1,490 and $350,000, respectively, a weighted average Combined Loan-to-Value Ratio of approximately 77.62%, minimum and maximum Mortgage Interest Rates of approximately 8.050% per annum and 17.590% per annum, respectively, a weighted average original term to maturity of approximately 174 months, a weighted average remaining term to maturity of approximately 173 months, minimum and maximum remaining terms to maturity of approximately 12 and 360 months, respectively, and origination dates between January 1986 and March 1997. Approximately 38.76% of the Fixed Rate Group of the Mortgage Pool are Balloon Loans (as defined herein). Adjustable Rate Group. All of the Mortgage Loans in the Adjustable Rate Group bear interest rates that adjust based on the London interbank offered rate for six-month United States dollar deposits. The Mortgage Interest Rates with respect to all of the Mortgage Loans in the Adjustable Rate Group are subject to periodic interest rate adjustment caps, interest rate ceilings and interest rate floors. See "Description of the Mortgage Pool -- Adjustable Rate Group." As of the Cut-off Date, the Adjustable Rate Group of the Mortgage Pool will consist of 1,195 Mortgage Loans (all of which are secured by first Mortgages) having an aggregate outstanding principal balance of $101,043,103, a weighted average Mortgage Interest Rate of approximately 9.245% per annum, minimum and maximum outstanding principal balances of approximately $13,480 and $260,204, respectively, a weighted average Combined Loan-to-Value Ratio of approximately 78.69%, a weighted average original term to maturity S-7 8 of approximately 110 months, a weighted average remaining term to maturity of approximately 103 months, minimum and maximum remaining terms to maturity of approximately 71 months and 356 months, respectively, and origination dates between December 1995 and September 1996. Approximately 88.49% of the Adjustable Rate Group of the Mortgage Pool are Balloon Loans (as defined herein). All of the Mortgage Loans in the Adjustable Rate Group have minimum and maximum Mortgage Interest Rates. The weighted average minimum Mortgage Interest Rate of the Mortgage Loans in the Adjustable Rate Group is approximately 8.583% per annum, with minimum Mortgage Interest Rates that range from approximately 6.400% per annum to 13.800% per annum. The weighted average maximum Mortgage Rate of the Mortgage Loans in the Adjustable Rate Group is approximately 17.454% per annum, with maximum Mortgage Interest Rates that range from approximately 10.250% per annum to 21.250% per annum. The Mortgage Loans in the Adjustable Rate Group have a weighted average gross margin as of the Cut-off Date of approximately 5.808% per annum. The gross margin for the Mortgage Loans in the Adjustable Rate Group ranges from approximately 3.650% per annum to 9.600% per annum. As of the Cut-off Date, the Mortgage Interest Rates for the Mortgage Loans in the Adjustable Rate Group range from approximately 6.400% per annum to 14.800% per annum. The Certificates........... The Class A-1 Certificates will have an aggregate principal balance of $196,833,000 (the "Original Class A-1 Principal Balance") as of the date of issuance and will accrue interest at a rate equal to 6.31% per annum (the "Class A-1 Pass-Through Rate"). The Class A-2 Certificates will have an aggregate principal balance of $18,259,000 (the "Original Class A-2 Principal Balance") as of the date of issuance and will accrue interest at a rate equal to 6.61% per annum (the "Class A-2 Pass-Through Rate"). The Class A-3 Certificates will have an aggregate principal balance of $127,073,000 (the "Original Class A-3 Principal Balance") as of the date of issuance and will accrue interest at a rate equal to 6.84% per annum (the "Class A-3 Pass-Through Rate). The Class A-4 Certificates will have an aggregate principal balance of $47,407,000 (the "Original Class A-4 Principal Balance") as of the date of issuance and will accrue interest at a rate equal to 7.16% per annum (the "Class A-4 Pass-Through Rate"). The Class A-5 Certificates will have an aggregate principal balance of $25,494,000 (the "Original Class A-5 Principal Balance") as of the date of issuance and will accrue interest at a rate equal to 7.31% per annum (the "Class A-5 Pass-Through Rate"). The Class A-6 Certificates will have an aggregate principal balance of $33,989,000 (the "Original Class A-6 Principal Balance") as of the date of issuance and will accrue interest at a rate equal to 7.56% per annum (the "Class A-6 Pass-Through Rate"). The Class A-7 Certificates will have an aggregate principal balance of $50,000,000 (the "Original Class A-7 Principal Balance" and, together with the Original Class A-1 Principal Balance, the Original Class A-2 Principal Balance, the Original Class A-3 Principal Balance, the Original Class A-4 Principal Balance, the Original Class A-5 Principal Balance and the Original Class A-6 Principal Balance, the "Original Fixed Rate S-8 9 Certificate Principal Balance") as of the date of issuance and will accrue interest at a rate equal to 7.12 % per annum (the "Class A-7 Pass-Through Rate"). The Class A-8 Certificates will have an aggregate principal balance of $101,043,000 (the "Original Class A-8 Principal Balance") as of the date of issuance and will accrue interest during each Accrual Period at a rate (the "Class A-8 Pass-Through Rate"; each of the Class A-1 Pass-Through Rate, Class A-2 Pass-Through Rate, Class A-3 Pass-Through Rate, Class A-4 Pass-Through Rate, Class A-5 Pass-Through Rate, Class A-6 Pass-Through Rate, Class A-7 Pass-Through Rate and Class A-8 Pass-Through Rate, a "Pass-Through Rate") equal to the lesser of (i) the London interbank offered rate for one month U.S. dollar deposits ("LIBOR") (calculated as described under "Description of the Certificates -- Calculation of LIBOR" herein) as of the LIBOR Determination Date (as defined herein) plus (a) 0.20% per annum on each Payment Date on or prior to the Optional Purchase Date (as defined herein) and (b) 0.40% per annum on each Payment Date following the Optional Purchase Date (the "Class A-8 LIBOR Rate") and (ii) the Net Funds Cap Rate with respect to such Accrual Period. The "Net Funds Cap Rate" for any Accrual Period shall be a rate equal to the weighted average of the Mortgage Interest Rates on the Mortgage Loans in the Adjustable Rate Group as of the first day of the related Due Period less either (i) 0.73% per annum, with respect to the first six Accrual Periods or (ii) 1.23% per annum, with respect to each subsequent Accrual Period. Each Class of Class A Certificates will have the Final Scheduled Payment Date set forth below. See "Description of the Certificates -- General" herein. Final Scheduled Payment Dates..................... The Final Scheduled Payment Dates for each Class of Class A Certificates are set forth below, although it is anticipated that the actual final Payment Date for such Class may occur earlier than its Final Scheduled Payment Date. See "Description of the Certificates -- General" for a description of the methodology of calculating the Final Scheduled Payment Dates. See also "Certain Yield and Prepayment Considerations" herein.
FINAL SCHEDULED PAYMENT DATE ------------------- Class A-1 Certificates: May 15, 2005 Class A-2 Certificates: June 15, 2006 Class A-3 Certificates: September 15, 2011 Class A-4 Certificates: March 15, 2013 Class A-5 Certificates: October 15, 2019 Class A-6 Certificates: May 15, 2028 Class A-7 Certificates: May 15, 2028 Class A-8 Certificates: November 15, 2027
Distributions on the Class A Certificates A. General................ As more fully described herein, distributions will be made on each Class of Class A Certificates on each Payment Date to the extent available from the related Mortgage Loan Group and the Spread Account, if and to the extent such Certificates are then entitled to S-9 10 such distributions, first, to pay interest on the Class A Certificates and, second, to reduce the principal amount of Class A Certificates in the order and priority described herein. As described herein, after payment of such amounts to the Class A Certificateholders, certain amounts may be distributed on the Class R Certificates. Any distributions on the Class A Certificates will be made on each Payment Date to Certificateholders of record on the related Record Date in an amount equal to the product of such Certificateholder's Percentage Interest and the amount available from the related Mortgage Loan Group for distribution on such Payment Date to the Certificateholders of the related Class in accordance with the priorities described in "Description of the Certificates -- Distributions" herein. On any Payment Date, the amount available for distribution to the Class A Certificateholders generally will equal, with respect to the Mortgage Loans in the related Mortgage Loan Group, (a) the sum of (i) the Available Payment Amount (as defined below), (ii) any amount (the "Spread Account Draw") available from the Spread Account and (iii) any Insured Payments (as defined below), less (b) the sum of (i) the amount of the Monthly Premium payable to the Insurer during the related Due Period to the extent provided in the Pooling and Servicing Agreement and (ii) the amount of the fees payable to the provider of any Letter of Credit (as defined below) during the related Due Period. The term "Available Payment Amount" generally means, with respect to any Payment Date and each Mortgage Loan Group (a) collections on or with respect to the Mortgage Loans in the related Mortgage Loan Group received by the Servicer during the related Due Period, net of the related Servicing Fee paid to the Servicer and reimbursements for any accrued and unpaid Servicing Fees and certain expenses paid by the Servicer, plus (b) the amount of any Advances, less (c) the Excess Spread. B. Interest.............. Interest on the Fixed Rate Certificates will accrue from the fifteenth calendar day of each month, commencing March 15, 1997 (whether or not such day is a Business Day) to, but excluding, the fifteenth calendar day of the next succeeding month (whether or not such day is a Business Day). Interest on the Adjustable Rate Certificates will accrue from and including the Closing Date, in the case of the initial Payment Date, or from and including the most recent Payment Date on which interest has been paid, to, but excluding the next succeeding Payment Date (in each case, an "Accrual Period"). Interest shall accrue on each Class of Class A Certificates at the related Pass-Through Rate and shall be distributed to each Class of Class A Certificates, to the extent available, on each Payment Date. Interest with respect to the Fixed Rate Certificates will accrue on the basis of a 360-day year consisting of twelve 30-day months. Interest with respect to the Adjustable Rate Certificates will accrue on the basis of actual number of days over a 360-day year. With respect to each Payment Date and each Class of Class A Certificates, interest accrued during the related Accrual Period at the related Pass-Through Rate on the related Principal Balance outstanding on the immediately preceding Payment Date (after giving effect to all payments of principal made on such Payment Date) (or the related Original Principal Balances in the case of the Initial Accrual Period) is S-10 11 referred to herein as the "Class A Interest Remittance Amount" for such Class of Class A Certificates. See "Description of the Certificates -- Distributions" herein and in the Prospectus. If on any Payment Date the Class A-8 Pass-Through Rate is equal to the Net Funds Cap Rate, an amount (the "LIBOR Interest Carryover") equal to (i) the difference between (a) the amount of interest the Adjustable Rate Certificates would be entitled to receive on such Payment Date without regard to the Net Funds Cap Rate and (b) the amount of interest actually distributed to the Adjustable Rate Certificates on such Payment Date plus (ii) the portion of the amount calculated pursuant to clause (i) remaining unpaid from prior Payment Dates and interest accrued thereon at the then-applicable Class A-8 LIBOR Rate, shall be distributed on subsequent Payment Dates, from the amount of the Excess Spread otherwise payable to the Class R Certificates, to the Adjustable Rate Certificates. No LIBOR Interest Carryover will be paid to the Adjustable Rate Certificates after the Principal Balance of the Adjustable Rate Certificates has been reduced to zero. The ratings assigned to the Adjustable Rate Certificates do not address the likelihood of the payment of the amount of any LIBOR Interest Carryover. The Securities Insurance Policy does not provide coverage of the LIBOR Interest Carryover and the amount of any LIBOR Interest Carryover may remain unpaid on the final Distribution Date. C. Principal............. Holders of the Class A Certificates will be entitled to receive on each Payment Date, in the order and priority set forth herein, to the extent of the portion of the amount available for distribution attributable to the principal of the Mortgage Loans in the related Mortgage Loan Group (but not more than the Principal Balance of the related Class then outstanding), a distribution allocable to principal which will generally equal the sum of (a)(i) the principal portion of all scheduled payments ("Monthly Payments") received on the Mortgage Loans in such Mortgage Loan Group during the calendar month preceding the calendar month in which such Payment Date occurs (the "Due Period"), (ii) any principal prepayments in full of any Mortgage Loans in the related Mortgage Loan Group ("Principal Prepayments") received during the related Due Period and partial prepayments of principal on any Mortgage Loans in such Mortgage Loan Group that were received during the related Due Period that are not Principal Prepayments (each, a "Curtailment"), (iii) the principal portion of (A) the proceeds of any insurance policy relating to a Mortgage Loan in such Mortgage Loan Group, a Mortgaged Property (as defined below) or a REO Property (as defined below), net of proceeds to be applied to the repair of the Mortgaged Property or released to the Mortgagor (as defined herein) and net of expenses reimbursable therefrom ("Insurance Proceeds"), (B) proceeds received during the related Due Period in connection with the liquidation of any defaulted Mortgage Loans in such Mortgage Loan Group, whether by trustee's sale, foreclosure sale or otherwise ("Liquidation Proceeds"), net of fees and advances reimbursable therefrom ("Net Liquidation Proceeds") and (C) proceeds received during the related Due Period in connection with a taking of a related Mortgaged Property with respect to a Mortgage Loan in such Mortgage Loan S-11 12 Group by condemnation or the exercise of eminent domain or in connection with a release of part of any such Mortgaged Property from the related lien ("Released Mortgaged Property Proceeds"), (iv) the principal portion of all amounts paid by the Depositors (which are limited to amounts paid by the Representative or an Originator pursuant to the obligation to purchase or substitute Mortgage Loans contained in the Transfer Agreement) in connection with the purchase of, or the substitution of a substantially similar mortgage loan for, a Mortgage Loan in the related Mortgage Loan Group as to which there is defective documentation or a breach of a representation or warranty contained in the Pooling and Servicing Agreement and (v) the principal balance of each defaulted Mortgage Loan or REO Property (as defined below) in such Mortgage Loan Group as to which the Servicer has determined that all amounts expected to be recovered have been recovered (each, a "Liquidated Mortgage Loan") to the extent not included in the amounts described in clauses (i) through (iv) above (the sum of (i) through (v) above, with respect to each Mortgage Loan Group, the "Basic Principal Amount") and (b) the sum of (i) the amount, if any, by which (A) the amount required to be distributed to Fixed Rate Certificateholders or Adjustable Rate Certificateholders, as the case may be, as of the preceding Payment Date exceeded (B) the amount of the actual distribution to the Fixed Rate Certificateholders or Adjustable Rate Certificateholders, as the case may be, on such preceding Payment Date, exclusive of any portion of any Insured Payment made to such Certificateholders, and (ii) if any portion of the amount in the preceding clause (i) represents Insured Payments made by the Insurer, interest on such portion at the applicable Pass-Through Rate from such immediately preceding Payment Date (with respect to the Certificates related to each Mortgage Loan Group, the "Carry-Forward Amount" with respect to such Certificates, together with the Basic Principal Amount for such Certificates, the "Principal Remittance Amount" for such Certificates and the aggregate Principal Remittance Amount, with respect to all of the Class A Certificates, the "Class A Principal Remittance Amount"). On each Payment Date, the lesser of (i) the Fixed Rate Certificate Principal Balance then outstanding and (ii) the Principal Remittance Amount for the Fixed Rate Group (together with the Class A Interest Remittance Amount for the Fixed Rate Certificates, the "Remittance Amount" for the Fixed Rate Group) is payable to the Fixed Rate Certificateholders as follows: first, to the Class A-7 Certificates up to an amount equal to the Class A-7 Lockout Remittance Amount (as defined herein); and then, to the Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates, Class A-5 Certificates, Class A-6 Certificates and Class A-7 Certificates (without regard to the Class A-7 Lockout Remittance Amount) in that order, until the Principal Balance of each such Class is reduced to zero. Concurrently with such distribution to the Fixed Rate Certificates, on each Payment Date, the lesser of (i) the Adjustable Rate Certificate Principal Balance then outstanding and (ii) the Principal Remittance Amount for the Adjustable Rate Group (together with the Class A Interest Remittance Amount for the Adjustable Rate Certifi- S-12 13 cates, the "Remittance Amount" for the Adjustable Rate Group) is payable to the Adjustable Rate Certificates until the Principal Balance of such Class is reduced to zero. On any Payment Date, the aggregate Remittance Amount for the Class A Certificates is referred to herein as the "Class A Remittance Amount." Notwithstanding the foregoing, if on any Payment Date following the depletion of the Spread Account, the Insurer fails to make an Insured Payment (as defined herein) when due, the Class A Principal Remittance Amount will be distributed to each Class of Class A Certificates on a pro rata basis in proportion to the respective Principal Balances for each such Class. As of any Payment Date, the "Class A Principal Balance" will equal the sum of the Original Class A-1 Principal Balance, the Original Class A-2 Principal Balance, the Original Class A-3 Principal Balance, the Original Class A-4 Principal Balance, the Original Class A-5 Principal Balance, the Original Class A-6 Principal Balance, the Original Class A-7 Principal Balance and the Original Class A-8 Principal Balance, less all amounts previously distributed on account of principal to holders of the Class A Certificates. As of any Payment Date, the "Fixed Rate Certificate Principal Balance" will equal the Original Fixed Rate Certificate Principal Balance, less all amounts previously distributed on account of principal to holders of the Fixed Rate Certificates. As of any Payment Date, the "Adjustable Rate Certificate Principal Balance" will equal the Original Class A-8 Principal Balance, less all amounts previously distributed on account of principal to holders of the Adjustable Rate Certificates. As of any Payment Date, the Principal Balance for each Class of Class A Certificates will equal the Original Principal Balance for such Class, less all amounts previously distributed on account of principal to holders of such Class. D. Spread Account.......... Pursuant to the Pooling and Servicing Agreement, there shall be established with the Trustee a separate trust account (the "Spread Account"), for the benefit of the holders of the Certificates, into which the Trustee will deposit upon receipt from the Servicer on each Payment Date, prior to making any payments to the Certificateholders, the excess, if any, of the aggregate interest accrued during the related Due Period on all of the Mortgage Notes at their respective Mortgage Interest Rates over the sum of (i) the Class A Interest Remittance Amount for the Class A Certificates, (ii) the Monthly Premium (as defined below) due to the Insurer, (iii) the Letter of Credit Fee Amount (as defined below) due to the issuers of any Letters of Credit and (iv) the Servicing Fee (such excess with respect to each Payment Date, the "Excess Spread"). Unless otherwise specified by the Insurer, the Trustee is required to retain 100% of the Excess Spread (the "Periodic Excess Spread Amount") in the Spread Account until the amount on deposit therein is equal to an amount specified by the Insurer in the Pooling and Servicing Agreement (the "Base Spread Account Requirement"). After the amount on deposit in the Spread Account is equal to the Base Spread Account Requirement, the amount required to be on deposit in the Spread Account at any time (the "Specified Spread Account Re- S-13 14 quirement") may be reduced over time as specified by the Insurer. The percentage used in determining the Periodic Excess Spread Amount may be reduced at the sole discretion of the Insurer with the consent of each person obligated to reimburse issuers of any Letters of Credit on deposit in the Spread Account for outstanding drawings thereunder (each such person, an "Account Party"), and the Base Spread Account Requirement may be reduced at the sole discretion of the Insurer, in each case without the consent of any Certificateholder. The Pooling and Servicing Agreement permits the Spread Account to be funded in part by one or more letters of credit (each, a "Letter of Credit") issued by banks, trust companies or other institutions having on the date of delivery of such Letter of Credit debt ratings acceptable to Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Services ("S&P"), and having certain other qualifications set forth in the Pooling and Servicing Agreement. Amounts available to be drawn under any Letter of Credit will be deemed to be on deposit in the Spread Account. On each Payment Date amounts, if any, on deposit in the Spread Account will be available to fund any shortfall between the available funds for payments to Class A Certificateholders and the Class A Remittance Amount; provided that, on and after the date (the "Cross-Over Date") on which the aggregate withdrawals from the Spread Account to cover shortfalls in amounts payable on the Class A Certificates attributable to Mortgage Loan Losses (such withdrawals, "Cumulative Spread Account Receipts") equal an amount specified by the Insurer in the Pooling and Servicing Agreement (the "Subordinated Amount"), no further withdrawals with respect to shortfalls in the amounts required to be paid to the Class A Certificateholders may be made from the Spread Account, and the Specified Spread Account Requirement will thereafter be zero. In addition, the Pooling and Servicing Agreement provides that the Specified Spread Account Requirement for any date shall in no event be greater than the Subordinated Amount as of such date. On each Payment Date, any amounts constituting (i) Excess Spread in excess of the Periodic Excess Spread Amount (the "Remainder Excess Spread Amount"), (ii) amounts in the Spread Account in excess of the Specified Spread Account Requirement as of such Payment Date (any such amount, a "Spread Account Excess") and (iii) after the Cross-Over Date, the entire Excess Spread, will be distributed, after repayment of outstanding draws under any Letters of Credit and of unreimbursed Servicing Advances to the Servicer, first, to the Adjustable Rate Certificateholders to pay any LIBOR Interest Carryover and second, to the Class R Certificateholders. Neither the Class R Certificateholders nor the Servicer will be required to refund any amounts properly distributed to them, regardless of whether there are sufficient funds on a subsequent Payment Date to make a full payment to Class A Certificateholders of the amount required to be paid to such holders. S-14 15 The funding and maintenance of the Spread Account is intended to enhance the likelihood of timely payment to Class A Certificateholders of the Class A Remittance Amount; however, in certain circumstances, the Spread Account could be depleted or reduced by the Insurer and shortfalls could result. The Spread Account will be funded with Excess Spread from all Mortgage Loans, without regard to Mortgage Loan Group, and will be available for distributions to all of the Class A Certificates. Notwithstanding the depletion or reduction of the Spread Account, the Insurer will be obligated to make Insured Payments on each Payment Date to fund the full amount of the Class A Remittance Amount on such Payment Date. E. The Securities Insurance Policy................ On or before the Closing Date, the Servicer will obtain the Securities Insurance Policy, which is noncancelable, in favor of the Trustee on behalf of the Class A Certificateholders. The Securities Insurance Policy will provide for 100% coverage of the Class A Remittance Amount due on the Class A Certificates on each Payment Date. On each Payment Date, the Insurer will make available to the Trustee the amount of any insufficiency in the amount available as of such Payment Date which is necessary to distribute to the Class A Certificateholders the Class A Remittance Amounts on such Payment Date (each, an "Insured Payment"). The Securities Insurance Policy does not guarantee payment of any LIBOR Interest Carryover nor does it guarantee to the Class A Certificateholders any specified rate of prepayments. See "Description of the Certificates -- Securities Insurance Policy" and "The Securities Insurance Policy and the Insurer" herein. Payment of Certain Expenses................... In order to provide for the payment of the fees of the Insurer, the Trustee is required to establish and maintain one or more trust accounts (the "Insurance Account") into which the Trustee is required to deposit on each Payment Date, from amounts on deposit in the Collection Account and before making any required deposits into the Spread Account and, except under certain limited circumstances as provided in the Pooling and Servicing Agreement, before making any required distributions to the Class A Certificateholders, an amount that is sufficient to pay the monthly fee of the Insurer (the "Monthly Premium"). The Servicer is required to pay to the Trustee from time to time the fees of the Trustee and the reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with the Pooling and Servicing Agreement. The Trustee is permitted on each Payment Date to pay to itself, from amounts on deposit in the Collection Account after making any required distributions to Class A Certificateholders and any required deposits into the Insurance Account, any amounts then due and owing representing fees of the Trustee that have not been paid by the Servicer after written demand therefor. Advances from the Principal and Interest Account..... The Servicer is required to withdraw from the Principal and Interest Account amounts on deposit therein and held for future distribution to make advances (each, an "Advance") on the third business day S-15 16 preceding each Payment Date in respect of interest on the Mortgage Loans accrued but uncollected as of the end of the related Due Period (net of the applicable Servicing Fee). The Servicer generally shall not be required to make such Advance from its own funds or be liable for the recovery thereof from collections on the related Mortgage Loans or otherwise. See "Description of the Certificates -- Advances from the Principal and Interest Account" herein and "Description of the Offered Securities -- Advances from the Principal and Interest Account; Servicing Advances" in the Prospectus. Transfer and Servicing..... Under the Transfer Agreement, each Depositor will acquire the Mortgage Loans from certain of the Originators and, under the Pooling and Servicing Agreement, each Depositor will transfer the Mortgage Loans to the Trust. In addition, the Servicer will agree to service the Mortgage Loans. Servicing Fee.............. The Servicer will be entitled to a fee (the "Servicing Fee") of 0.60% per annum (the "Servicing Fee Rate") of the outstanding principal balance of each Mortgage Loan, subject to certain limitations set forth in the Pooling and Servicing Agreement, payable monthly from the interest portion of monthly payments on such Mortgage Loan, Liquidation Proceeds, Released Mortgaged Property Proceeds and certain other sources as provided in the Pooling and Servicing Agreement. Representative's Yield..... The Representative will be entitled to receive an amount (the "Representative's Yield") equal to the sum of (A) all prepayment penalties and premiums collected by the Servicer with respect to any Mortgage Loan and (B) any sum or other finance charge payable by the Mortgagor on a prepaid Rule of 78s Mortgage Loan (as defined in the Prospectus) that is in excess of (i) the Curtailment or Principal Prepayment (as the case may be) on the related Mortgage Loan, together with accrued and unpaid interest thereon at the Mortgage Interest Rate, plus (ii) servicing compensation exclusive of Servicing Fees. The Representative's Yield is retained and freely transferable by the Representative and does not constitute a portion of the Trust Fund. Ratings.................... It is a condition to the issuance of the Class A Certificates that each Class of Class A Certificates be rated Aaa by Moody's and "AAA" by S&P (each of Moody's and S&P, a "Rating Agency"). The ratings assigned to the Class A Certificates will be based primarily on the claims-paying ability of the Insurer and do not address the payment of any LIBOR Interest Carryover. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time. No person is obligated to maintain any rating on any Class A Certificate, and, accordingly, there can be no assurance that the ratings assigned to the Class A Certificates upon initial issuance thereof will not be lowered or withdrawn by a Rating Agency at any time thereafter. In the event any rating is revised or withdrawn, the liquidity of the Class A Certificates may be adversely affected. In general, the ratings address credit risk and do not represent any assessment of the likelihood or rate of principal prepayments. See "Risk Factors" and "Ratings" herein. Optional Termination by the Servicer................. The Servicer may, at its option, terminate the Pooling and Servicing Agreement on any date following the first Payment Date on which the S-16 17 Pool Principal Balance as of the last day of the related Due Period is less than 10% of the Original Pool Principal Balance by purchasing from the Trust, on the next succeeding Payment Date, all of the Mortgage Loans and all Mortgaged Properties acquired by foreclosure or deed in lieu of foreclosure ("REO Properties") then remaining in the Trust at a price (the "Termination Price") equal to (i) the sum of (x) 100% of the aggregate outstanding principal balances of the Mortgage Loans and REO Properties, (y) accrued and unpaid interest on such amount computed at a rate equal to the weighted average Mortgage Interest Rate and (z) any unpaid LIBOR Interest Carryover, minus (ii) any amounts representing collections on the Mortgage Loans and REO Properties not yet applied to reduce the principal balance thereof or interest related thereto. The proceeds of such sale will be deposited into the Collection Account for distribution to the Certificateholders on the next succeeding Payment Date. In connection with such disposition, the Servicer is required to pay any unpaid fees and expenses of the Trustee and the Insurer. See "Description of the Certificates -- Termination; Purchase of Mortgage Loans" herein and in the Prospectus. Certain Legal Aspects of the Mortgage Loans......... Approximately 25.69% of the Mortgage Loans in the Fixed Rate Group, by aggregate principal balance as of the Cut-off Date, are secured by second Mortgages which are subordinate to a mortgage lien on the related Mortgaged Property prior to the lien of such Mortgage Loan (such senior lien, a "First Lien"). A primary risk with respect to second Mortgages is that foreclosure funds received in connection therewith will not be sufficient to satisfy fully both the First Lien and the second Mortgage. See "Risk Factors" and "Certain Legal Aspects of the Mortgage Loans" herein. REMIC Election and Tax Status............... An election will be made to treat certain assets in the Trust Fund as a "real estate mortgage investment conduit" (a "REMIC") for federal income tax purposes (the "REMIC"). The Class A Certificates will be regular interests in the REMIC. As regular interests in a REMIC, the Class A Certificates generally will be treated as debt instruments issued by the REMIC. Certain Classes of the Class A Certificates may be issued with original issue discount. As a result, holders of such Class A Certificates may be required to include amounts in income with respect to such Certificates in advance of the receipt of cash attributable to that income. With respect to any Class of Certificates, the prepayment assumption that will be used in computing the amount of original issue discount includible periodically will be 125% of the Prepayment Assumption (as defined herein) with respect to the Fixed Rate Certificates, and 125% of the applicable Prepayment Assumption with respect to the Adjustable Rate Certificates. See "Certain Yield and Prepayment Considerations" herein and in the Prospectus. No representation is made that either prepayments on the Mortgage Loans or payments on the Class A Certificates will occur at these rates or any other rate. In addition, other Classes of Class A Certificates may be issued at a premium. Based on the Treasury regulations relating to the treatment of original issue discount, the Internal Revenue Service could assert that all of the interest payments on the Certificates should be treated as original issue discount regardless of their issue price. If such an assertion were successful, all income derived from the Class A Certificates, including any otherwise de minimis discount, would be treated as original issue discount. See "Certain Federal Income Tax S-17 18 Consequences for REMIC Certificates -- Original Issue Discount" in the Prospectus. ERISA Considerations....... A fiduciary or other person contemplating purchasing the Class A Certificates on behalf of or with "plan assets" of any employee benefit or other plan or other retirement arrangement subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986 (the "Code") should carefully review with its legal advisors whether the purchase or holding of Class A Certificates could give rise to a non-exempt prohibited transaction under ERISA or Section 4975 of the Code and the application of the fiduciary responsibility provisions of ERISA. The U.S. Department of Labor has issued individual prohibited transaction exemptions to the Underwriters (the "Underwriters' PTEs"). Generally, the Underwriters' PTEs provide exemptive relief from the application of certain of the prohibited transaction provisions of ERISA and Section 4975 of the Code relating to the purchase, sale and holding of pass-through certificates such as the Class A Certificates and the servicing and operation of asset pools such as the Mortgage Pool, provided that certain conditions are satisfied. See "ERISA Considerations" herein and in the Prospectus. Legal Investment........... Although upon their initial issuance the Class A Certificates will be rated Aaa by Moody's and "AAA" by S&P, the Class A Certificates (other than the Adjustable Rate Certificates) will not constitute "mortgage related securities" under the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because the Fixed Rate Group includes Mortgage Loans that are secured by second Mortgages. The Adjustable Rate Certificates will constitute "mortgage related securities" under SMMEA. Investors should consult their own legal advisers in determining whether and to what extent the Class A Certificates constitute legal investments for such investors. See "Legal Investment" herein. Use of Proceeds............ Substantially all of the net proceeds to be received from the sale of the Class A Certificates will be received by the Depositors, which will apply such proceeds to pay to the Originators a portion of the purchase price for the Mortgage Loans. S-18 19 RISK FACTORS Investors should consider, among other things, the matters discussed under "Risk Factors" in the Prospectus and the following factors in connection with the purchase of the Class A Certificates: RISKS OF THE MORTGAGE LOANS The following description refers to the aggregate Mortgage Pool. For information regarding the Mortgage Loans in each of the Fixed Rate Group and the Adjustable Rate Group, see "Description of the Mortgage Pool -- Fixed Rate Group" and "-- Adjustable Rate Group" herein. Geographic Concentration. Certain geographic regions of the United States from time to time will experience weaker regional economic conditions and housing markets, and, consequently, will experience higher rates of loss and delinquency on mortgage loans generally. Any concentration of the Mortgage Loans in such a region may present risk considerations in addition to those generally present for similar mortgage-backed securities without such concentration. In particular, approximately 11.39%, 7.87%, 5.70%, 5.52%, 5.33% and 5.30% of the Mortgage Loans, by aggregate principal balance as of the Cut-off Date, are secured by Mortgaged Properties located in Florida, Ohio, California, Illinois, Pennsylvania and Michigan, respectively. There has been a contraction of economic activity and a deterioration of the real estate market in many states and uncertainty exists with respect to the economy and the real estate market in Florida, California and other regions of the United States. See "Description of the Mortgage Pool" herein for further information regarding the geographic concentration of the Mortgage Loans in the Mortgage Pool. Nature of Security. Approximately 21.37% of the Mortgage Loans in the Mortgage Pool, by aggregate principal balance as of the Cut-off Date, all of which are in the Fixed Rate Group, are secured by second Mortgages, and the related First Liens are not included in the Mortgage Pool. Although little data is available, the rate of default of second mortgage loans may be greater than that of mortgage loans secured by First Liens on comparable properties. See "Risk Factors -- Risks of the Mortgage Loans -- Nature of Security" in the Prospectus. Risk of Early Defaults. Approximately 47.41% of the Mortgage Loans in the Mortgage Pool, by aggregate principal balance as of the Cut-off Date, were originated within 2 months prior to the Cut-off Date, including approximately 3.48% of the Mortgage Loans which were originated after March 1, 1997. The weighted average remaining term to maturity of the Mortgage Loans as of the Cut-off Date is approximately 162 months. Although little data is available, defaults on mortgage loans are generally expected to occur with greater frequency in their early years. Balloon Mortgage Loans. Approximately 47.14% of the Mortgage Loans in the Mortgage Pool, by aggregate principal balance as of the Cut-off Date, provide for the payment of the unamortized principal balance of the Mortgage Loan in a single payment at the maturity of the Mortgage Loan that is greater than the preceding monthly payment ("Balloon Loans"). See "Description of the Mortgage Pool" and "Risk Factors -- Risks of the Mortgage Loans -- Balloon Loans" in the Prospectus. Mortgaged Properties in Flood Areas. During the later part of 1996 and the early part of 1997, major flooding (the "Flood") occurred in Ohio, Kentucky and Indiana (the "Affected States"). The Flood caused significant damage and may have damaged some of the Mortgaged Properties. Approximately 13.02% of the Mortgage Loans in the Mortgage Pool, as of the Cut-off Date, had related Mortgaged Properties located in the Affected States. The Originators will represent in the Transfer Agreement, and the Depositors will represent in the Pooling and Servicing Agreement, that each Mortgaged Property has not been damaged by the Flood in a manner which affects adversely the value of the Mortgaged Property as security for the related Mortgage Loan or the use for which the premises was intended. Were a Mortgaged Property in an Affected State to be so adversely affected as a result of the Flood, the Depositors, in accordance with the terms of the Pooling and Servicing Agreement, may either provide qualifying Mortgage Loans in substitution for the related Mortgage Loans or repurchase such Mortgage Loans from the Trust. In the event such Mortgage Loans are repurchased, the yield to maturity on the Class A Certificates may be affected. See "Certain Yield and Prepayment Considerations" herein. S-19 20 YIELD AND PREPAYMENT CONSIDERATIONS The yield to maturity of the Class A Certificates will depend on the rate and timing of payment of principal on the Mortgage Loans in the Mortgage Pool, including prepayments, liquidations due to defaults and repurchases due to defective documentation or breaches of representations and warranties. Such yield may be adversely affected by a higher or lower than anticipated rate of prepayments on the Mortgage Loans. Prepayments are influenced by a number of factors, including prevailing mortgage market interest rates, local and regional economic conditions and homeowner mobility. Principal distributions on the Class A-7 Certificates will vary on each Payment Date in accordance with the Class A Lockout Remittance Amount for such Payment Date until the Class A-6 Certificates have been paid in full. Upon payment of the Class A-6 Certificates in full, the entire Class A Principal Remittance Amount will be distributed to the Class A-7 Certificates until they have been paid in full. See "Certain Yield and Prepayment Considerations" herein and in the Prospectus. RISK OF MORTGAGE LOAN YIELD REDUCING THE CLASS A-8 PASS-THROUGH RATE The Adjustable Rate Group contains Mortgage Loans which bear interest at rates which adjust semi-annually based on the London interbank offered rate for six-month United States dollar deposits, as described under "Description of the Mortgage Pool -- Adjustable Rate Group," while the Class A-8 Pass-Through Rate adjusts monthly based on one-month LIBOR (defined herein). Consequently, the interest which becomes due on such Mortgage Loans at their respective Mortgage Interest Rates (in each case less 0.73% per annum for the first six Due Periods and 1.23% for each subsequent Due Period) during any Due Period may not equal the amount of interest that would accrue at one-month LIBOR, as applicable to the Adjustable Rate Certificates plus the margin on the Adjustable Rate Certificates during the related Accrual Period. As a result, the Net Funds Cap Rate may be lower than the interest otherwise due at the applicable Class A-8 Pass-Through Rate in a rising interest rate environment. In addition, because the Mortgage Interest Rates of the Mortgage Loans in the Adjustable Rate Group are subject to lifetime and periodic rate caps, such interest rates may be subject to limitation despite changes in the six-month London interbank offered rate for U.S. dollar deposits or LIBOR. Further, all of the Mortgage Loans in the Adjustable Rate Group bear interest as of the Cut-off Date or as of their dates of origination at initial rates which were determined without regard to the applicable index. The application of the rate caps, particularly the application of the periodic caps prior to the initial rates becoming fully-indexed, may result in the Net Funds Cap Rate being lower than the otherwise applicable Class A-8 Pass-Through Rate and a LIBOR Interest Carryover could become payable with respect to the Adjustable Rate Certificates. If the Net Funds Cap Rate results in a lower interest payment to the Adjustable Rate Certificates for a Payment Date, the value of the Adjustable Rate Certificates may be temporarily or permanently reduced. Any LIBOR Interest Carryover will be payable only to the extent of amounts which would otherwise be available to be distributed to the Class R Certificateholders and such LIBOR Interest Carryover may remain unpaid on the Final Payment Date. BOOK-ENTRY CERTIFICATES Issuance of the Certificates in book-entry form may reduce the liquidity of such Certificates in the secondary trading market since investors may be unwilling to purchase Certificates for which they cannot obtain physical certificates. Since transactions in the Certificates can be effected only through DTC, CEDEL, Euroclear, participating organizations, indirect participants and certain banks, the ability of a Certificate Owner to pledge a Certificate to persons or entities that do not participate in the DTC, CEDEL or Euroclear system or otherwise to take actions in respect of such Certificates, may be limited due to lack of a physical certificate representing the Certificates. Certificate Owners may experience some delay in their receipt of distributions of interest and principal on the Certificates since such distributions will be forwarded by the Trustee to DTC and DTC will credit such distributions to the accounts of its Participants (as defined herein), which will thereafter credit them to the accounts of Certificate Owners either directly or indirectly through indirect participants. See "Description Of The Certificates -- Book-Entry Certificates" herein. S-20 21 DESCRIPTION OF THE MORTGAGE POOL GENERAL Unless otherwise noted, the statistical information presented herein concerning the Mortgage Pool is based on such pool as of the Cut-off Date. In addition, certain loans included in such pool as of the Cut-off Date may prepay in full, or may be determined not to meet the eligibility requirements for the final pool, and thus may not be included in the final pool. The Mortgage Pool consists of Mortgage Loans with an aggregate principal balance outstanding as of the Cut-off Date, after giving effect to payments received prior to such date, of $600,098,236 (such aggregate principal balance as of the Cut-off Date, after giving effect to payments received prior to the Cut-off Date, the "Original Pool Principal Balance"). This subsection describes generally certain characteristics of the Mortgage Loans. Unless otherwise specified herein, references herein to percentages of Mortgage Loans refer in each case to the approximate percentage of the aggregate principal balance of the Mortgage Loans as of the Cut-off Date, based on the outstanding principal balances of the Mortgage Loans in the applicable Mortgage Loan Group, in each case as of the Cut-off Date, and giving effect to all payments received prior to the Cut-off Date. The Mortgage Pool consists of fixed-rate and adjustable-rate Mortgage Loans with remaining terms to maturity of not more than 360 months (including both fully amortizing Mortgage Loans and Balloon Loans). All of the Mortgage Loans were originated and underwritten or purchased and re-underwritten by the Representative or by a wholly-owned subsidiary of the Representative. The Mortgage Loans have the characteristics set forth below as of the Cut-off Date. Percentages expressed herein based on principal balances and number of Mortgage Loans have been rounded, and in the tables set forth herein the sum of the percentages may not equal the respective totals due to such rounding. Each Mortgage Loan in the Trust will be assigned to one of two mortgage loan groups (the "Fixed Rate Group" and the "Adjustable Rate Group," respectively, and each a "Mortgage Loan Group") comprised of Mortgage Loans which bear fixed interest rates only, in the case of the Fixed Rate Group, and Mortgage Loans which bear adjustable interest rates only, in the case of the Adjustable Rate Group. The Fixed Rate Certificates (defined below) represent undivided ownership interests in all Mortgage Loans contained in the Fixed Rate Group, and distributions on the Fixed Rate Certificates will be based primarily on amounts available for distribution in respect of Mortgage Loans in the Fixed Rate Group, and the Adjustable Rate Certificates (defined below) represent undivided ownership interests in all Mortgage Loans contained in the Adjustable Rate Group, and distributions on the Adjustable Rate Certificates will be based primarily on amounts available for distribution in respect of Mortgage Loans in the Adjustable Rate Group. FIXED RATE GROUP All of the Mortgage Loans in the Fixed Rate Group were originated between January 1986 and March 1997 and have a scheduled maturity date no later than April 2027. No Mortgage Loan in the Fixed Rate Group has a remaining term to maturity as of the Cut-off Date of less than 12 months. The weighted average original term to maturity of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date is approximately 174 months. The weighted average remaining term to maturity of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date is approximately 173 months. The weighted average Mortgage Interest Rate of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date is approximately 10.728% per annum. All of the Mortgage Loans in the Fixed Rate Group have Mortgage Interest Rates as of the Cut-off Date of at least 8.050% per annum but not more than 17.590% per annum. The average principal balance outstanding of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date was approximately $44,547, and the principal balances of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date ranged from approximately $1,490 to $350,000. The original principal balances of the Mortgage Loans in the Fixed Rate Group as of Cut-off Date ranged from $4,000 to $350,000. Approximately 25.69% of the Mortgage Loans in the Fixed Rate Group are secured by a second Mortgage on the related Mortgaged Property that is junior to a First Lien, and approximately 74.31% of S-21 22 the Mortgage Loans in the Fixed Rate Group are secured by a first Mortgage on the related Mortgage Property. Approximately 0.77% of the Mortgage Loans in the Fixed Rate Group are secured by more than one property. The First Liens related to the Mortgage Loans in the Fixed Rate Group secured by second Mortgages are not included in the Mortgage Pool. None of the Mortgage Loans in the Fixed Rate Group had a Combined Loan-to-Value Ratio (defined in the Prospectus) at origination in excess of 104.1%. The weighted average Combined Loan-to-Value Ratio at origination of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date is 77.62%. None of the Mortgage Loans in the Fixed Rate Group had a Home Equity Loan Ratio (defined in the Prospectus) at origination in excess of 100.83%. The weighted average Home Equity Loan Ratio at origination of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date is approximately 63.12%. At least 92.98% of the Mortgage Loans in the Fixed Rate Group are secured by fee simple interests in detached single-family dwelling units, including units in de minimis planned unit developments and townhouses, with the remaining Mortgage Loans secured by fee simple interests in attached or detached two- to four-family dwelling units, manufactured housing and condominiums on more than one parcel of real property; provided, however, that approximately 0.42% of the Mortgage Loans in the Fixed Rate Group are secured by a leasehold interest in a one- to four-family residential dwelling situated on property located in the State of Maryland or Illinois. With respect to at least 94.75% of the Mortgage Loans in the Fixed Rate Group, the Mortgagor represented at the time of the origination of the Mortgage Loan that the related Mortgaged Property would be occupied by the Mortgagor as a primary or secondary residence (an "Owner Occupied Mortgaged Property"). No more than approximately 0.10% of the Mortgage Loans in the Fixed Rate Group are secured by Mortgaged Properties located in any one zip code area in the State of California, and no more than 0.23% of the Mortgage Loans in the Fixed Rate Group are secured by Mortgaged Properties located in any one zip code area outside the State of California. Approximately 13.22%, 6.40%, 5.68%, 5.51% and 5.46% of the Mortgage Loans in the Fixed Rate Group are secured by Mortgaged Properties located in Florida, California, New York, Pennsylvania and Ohio, respectively. Except as indicated in the preceding sentence, no more than approximately 4.63% of the Mortgage Loans in the Fixed Rate Group are secured by Mortgaged Properties located in any one state. Approximately 38.76% of the Mortgage Loans in the Fixed Rate Group are Balloon Loans. Approximately 0.05%, 26.77%, 4.58% and 7.22% of the Mortgage Loans in the Fixed Rate Group are Balloon Loans generally based on approximately a 30 year amortization schedule and a single payment of the remaining loan balance approximately 5, 7, 10 and 15 years after origination, respectively. Approximately 0.02% of the Mortgage Loans in the Fixed Rate Group are Bankruptcy Mortgage Loans. None of the Mortgage Loans in the Fixed Rate Group are Bankruptcy Mortgage Loans which are 30 days or more contractually delinquent. None of the Mortgage Loans in the Fixed Rate Group other than Bankruptcy Mortgage Loans are contractually delinquent 30 days or more. Approximately 0.35% of the Mortgage Loans in the Fixed Rate Group were originated in connection with the sale of properties acquired by the Originators through foreclosure and were not originated in accordance with all of the Underwriting Criteria. S-22 23 MORTGAGE POOL STATISTICS -- FIXED RATE GROUP The following table sets forth the number and outstanding principal balance as of the Cut-off Date and the percentage of the Fixed Rate Group represented by Mortgage Loans in the Fixed Rate Group having outstanding principal balances as of the Cut-off Date in the ranges described therein:
PERCENT OF FIXED RATE PERCENT OF FIXED GROUP BY RATE GROUP BY NUMBER OF NUMBER OF RANGE OF PRINCIPAL BALANCES PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------------- ----------------- ----------------- -------------- -------------- $ 0.01 to 25,000.00..... $ 61,178,372.56 12.26% 3,432 30.63% 25,000.01 to 50,000.00...... 154,881,145.15 31.03 4,277 38.18 50,000.01 to 75,000.00...... 127,567,838.84 25.56 2,086 18.62 75,000.01 to 100,000.00...... 64,260,729.27 12.88 749 6.69 100,000.01 to 125,000.00...... 35,964,196.34 7.21 321 2.87 125,000.01 to 150,000.00...... 23,720,956.03 4.75 174 1.55 150,000.01 to 175,000.00...... 11,560,476.38 2.32 71 0.63 175,000.01 to 200,000.00...... 9,545,039.54 1.91 51 0.46 200,000.01 to 225,000.00...... 3,187,764.76 0.64 15 0.13 225,000.01 to 250,000.00...... 2,600,651.90 0.52 11 0.10 250,000.01 to 275,000.00...... 1,039,874.74 0.21 4 0.04 275,000.01 to 300,000.00...... 2,888,088.02 0.58 10 0.09 300,000.01 to 325,000.00...... 310,000.00 0.06 1 0.01 325,000.01 to 350,000.00...... 350,000.00 0.07 1 0.01 --------------- ------- --------- ------ Total................ $ 499,055,133.53 100.00% 11,203 100.00% =============== ======= ========= ======
S-23 24 The following table sets forth the geographic distribution of the Mortgaged Properties in the Fixed Rate Group of the Mortgage Pool by state or territory as of the Cut-off Date:
PERCENT OF PERCENT OF FIXED RATE GROUP BY FIXED RATE GROUP BY NUMBER OF NUMBER OF STATE OR TERRITORY PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ---------------------- ----------------- ------------------- -------------- ------------------- Alabama............... $ 481,614.08 0.10% 20 0.18% Arizona............... 8,639,007.87 1.73 233 2.08 Arkansas.............. 2,213,188.27 0.44 45 0.40 California............ 31,961,979.41 6.40 642 5.73 Colorado.............. 6,954,785.43 1.39 206 1.84 Connecticut........... 10,397,713.80 2.08 159 1.42 Delaware.............. 4,451,858.20 0.89 92 0.82 Florida............... 65,984,360.75 13.22 1,689 15.08 Georgia............... 14,608,609.24 2.93 342 3.05 Idaho................. 4,358,847.69 0.87 112 1.00 Illinois.............. 20,777,542.10 4.16 434 3.87 Indiana............... 17,403,905.72 3.49 429 3.83 Iowa.................. 8,465,742.62 1.70 199 1.78 Kansas................ 4,192,887.07 0.84 95 0.85 Kentucky.............. 10,192,499.16 2.04 257 2.29 Louisiana............. 10,290,625.97 2.06 246 2.20 Maryland.............. 14,999,147.06 3.01 373 3.33 Massachusetts......... 9,377,691.57 1.88 145 1.29 Michigan.............. 20,017,961.28 4.01 418 3.73 Minnesota............. 10,733,735.13 2.15 256 2.29 Mississippi........... 3,574,558.88 0.72 100 0.89 Missouri.............. 9,156,067.36 1.83 215 1.92 Nebraska.............. 1,795,298.06 0.36 51 0.46 Nevada................ 2,066,034.30 0.41 55 0.49 New Jersey............ 5,923,047.73 1.19 84 0.75 New Mexico............ 1,494,805.90 0.30 30 0.27 New York.............. 28,348,574.06 5.68 432 3.86 North Carolina........ 21,293,888.49 4.27 514 4.59 Ohio.................. 27,224,376.69 5.46 558 4.98 Oklahoma.............. 4,579,924.09 0.92 138 1.23 Oregon................ 5,309,288.42 1.06 116 1.04 Pennsylvania.......... 27,492,355.62 5.51 578 5.16 Rhode Island.......... 2,812,867.35 0.56 58 0.52 South Carolina........ 10,109,355.20 2.03 266 2.37 Tennessee............. 23,083,929.98 4.63 488 4.36 Texas................. 5,141,806.59 1.03 69 0.62 Utah.................. 7,357,776.28 1.47 234 2.09 Virginia.............. 12,877,398.33 2.58 311 2.78 Washington............ 12,889,202.16 2.58 304 2.71 Washington DC......... 949,626.72 0.19 15 0.13 West Virginia......... 2,226,908.53 0.45 42 0.37 Wisconsin............. 6,844,340.37 1.37 153 1.37 ----------------- -------- -------------- -------- Total....... $ 499,055,133.53 100.00% 11,203 100.00% =============== ================ ============= ================
S-24 25 The following table sets forth the Combined Loan-to-Value Ratios of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date:
PERCENT OF PERCENT OF FIXED RATE GROUP BY RANGE OF COMBINED FIXED RATE GROUP BY NUMBER OF NUMBER OF LOAN-TO-VALUE RATIOS PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------ ----------------- ------------------- -------------- ------------------- 0.01% to 5.00%...... $ 10,500.00 0.00% 1 0.01% 5.01% to 10.00%...... 106,408.14 0.02 4 0.04 10.01% to 15.00%...... 499,506.46 0.10 27 0.24 15.01% to 20.00%...... 756,418.26 0.15 43 0.38 20.01% to 25.00%...... 1,418,875.41 0.28 65 0.58 25.01% to 30.00%...... 2,226,491.18 0.45 88 0.79 30.01% to 35.00%...... 2,416,541.40 0.48 87 0.78 35.01% to 40.00%...... 3,681,103.02 0.74 125 1.12 40.01% to 45.00%...... 6,035,855.90 1.21 176 1.57 45.01% to 50.00%...... 8,747,629.79 1.75 249 2.22 50.01% to 55.00%...... 8,134,335.51 1.63 211 1.88 55.01% to 60.00%...... 15,302,529.25 3.07 374 3.34 60.01% to 65.00%...... 19,396,712.08 3.89 438 3.91 65.01% to 70.00%...... 40,651,946.76 8.15 849 7.58 70.01% to 75.00%...... 72,677,252.39 14.56 1,353 12.08 75.01% to 80.00%...... 89,087,146.43 17.85 1,746 15.59 80.01% to 85.00%...... 128,000,415.96 25.65 2,428 21.67 85.01% to 90.00%...... 56,344,942.24 11.29 1,254 11.19 90.01% to 95.00%...... 15,463,169.75 3.10 409 3.65 95.01% to 100.00%...... 25,645,358.43 5.14 1,170 10.44 100.01% to 105.00%...... 2,451,995.17 0.49 106 0.95 --------------- ------ ----- ------ Total.......... $ 499,055,133.53 100.00% 11,203 100.00% =============== ====== ===== ======
The following table sets forth the Home Equity Loan Ratios of Mortgage Loans in the Fixed Rate Group as of the Cut-off Date:
PERCENT OF PERCENT OF FIXED RATE GROUP BY RANGE OF HOME EQUITY FIXED RATE GROUP BY NUMBER OF NUMBER OF LOAN RATIOS PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------ ----------------- ------------------- -------------- ------------------- 0.01% to 5.00%...... $ 215,082,73 0.04% 17 0.15% 5.01% to 10.00%...... 4,319,571.60 0.87 291 2.60 10.01% to 15.00%...... 16,778,168.94 3.36 906 8.09 15.01% to 20.00%...... 27,966,779.34 5.60 1,257 11.22 20.01% to 25.00%...... 25,397,487.71 5.09 969 8.65 25.01% to 30.00%...... 20,203,621.16 4.05 680 6.07 30.01% to 35.00%...... 14,501,331.48 2.91 434 3.87 35.01% to 40.00%...... 11,790,464.75 2.36 338 3.02 40.01% to 45.00%...... 11,022,180.21 2.21 284 2.54 45.01% to 50.00%...... 10,975,815.07 2.20 284 2.54 50.01% to 55.00%...... 9,104,580.55 1.82 217 1.94 55.01% to 60.00%...... 14,424,985.17 2.89 318 2.84 60.01% to 65.00%...... 16,628,185.46 3.33 327 2.92 65.01% to 70.00%...... 35,544,341.93 7.12 658 5.87 70.01% to 75.00%...... 61,146,525.84 12.25 988 8.82 75.01% to 80.00%...... 71,123,501.85 14.25 1,134 10.12 80.01% to 85.00%...... 101,533,719.42 20.35 1,430 12.76 85.01% to 90.00%...... 35,100,076.96 7.03 492 4.39 90.01% to 95.00%...... 8,741,968.36 1.75 136 1.21 95.01% to 100.00%...... 2,398,245.77 0.48 41 0.37 100.01% to 105.00%...... 138,499.23 0.03 2 0.02 --------------- ------ ----- ------ Total.......... $ 499,055,133.53 100.00% 11,203 100.00% =============== ====== ===== ======
S-25 26 The following table sets forth the Mortgage Interest Rates borne by the Mortgage Notes relating to the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date:
PERCENT OF PERCENT OF FIXED RATE GROUP FIXED RATE GROUP RANGE OF MORTGAGE BY PRINCIPAL NUMBER OF BY NUMBER OF INTEREST RATES PRINCIPAL BALANCE BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------ ----------------- ----------------- -------------- ----------------- 8.001% to 8.250%...... $ 803,380.61 0.16% 13 0.12% 8.251% to 8.500%...... 4,334,609.95 0.87 73 0.65 8.501% to 8.750%...... 3,321,446.78 0.67 50 0.45 8.751% to 9.000%...... 10,614,234.30 2.13 144 1.29 9.001% to 9.250%...... 13,904,603.94 2.79 199 1.78 9.251% to 9.500%...... 29,912,255.08 5.99 486 4.34 9.501% to 9.750%...... 40,393,592.27 8.09 685 6.11 9.751% to 10.000%...... 55,203,890.70 11.06 936 8.35 10.001% to 10.250%...... 40,443,026.06 8.10 794 7.09 10.251% to 10.500%...... 47,132,698.15 9.44 906 8.09 10.501% to 10.750%...... 62,933,090.72 12.61 1,521 13.58 10.751% to 11.000%...... 30,081,047.35 6.03 662 5.91 11.001% to 11.250%...... 30,930,671.66 6.20 825 7.36 11.251% to 11.500%...... 16,686,774.39 3.34 359 3.20 11.501% to 11.750%...... 19,796,156.43 3.97 510 4.55 11.751% to 12.000%...... 15,187,048.43 3.04 323 2.88 12.001% to 12.250%...... 19,872,004.55 3.98 530 4.73 12.251% to 12.500%...... 5,072,150.05 1.02 118 1.05 12.501% to 12.750%...... 13,394,187.23 2.68 449 4.01 12.751% to 13.000%...... 12,555,993.78 2.52 335 2.99 13.001% to 13.250%...... 1,461,835.52 0.29 57 0.51 13.251% to 13.500%...... 23,379,693.21 4.68 1,121 10.01 13.501% to 13.750%...... 368,949.07 0.07 20 0.18 13.751% to 14.000%...... 393,567.69 0.08 15 0.13 14.001% to 14.250%...... 192,606.59 0.04 15 0.13 14.251% to 14.500%...... 173,708.73 0.03 9 0.08 14.501% to 14.750%...... 42,136.47 0.01 6 0.05 14.751% to 15.000%...... 35,996.82 0.01 3 0.03 15.001% to 15.250%...... 40,857.48 0.01 3 0.03 15.251% to 15.500%...... 177,848.53 0.04 25 0.22 15.501% to 15.750%...... 54,050.64 0.01 4 0.04 15.751% to 16.000%...... 48,729.97 0.01 2 0.02 16.251% to 16.500%...... 69,639.18 0.01 3 0.03 16.751% to 17.000%...... 10,826.67 0.01 1 0.01 17.501% to 17.750%...... 31,824.53 0.01 1 0.01 --------------- ------ ----- ------ Total......... $ 499,055,133.53 100.00% 11,203 100.00% =============== ====== ===== ======
S-26 27 The following table sets forth the number of remaining months to stated maturity of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date:
PERCENT OF PERCENT OF FIXED RATE FIXED RATE GROUP BY RANGE OF REMAINING MONTHS GROUP BY NUMBER OF NUMBER OF TO STATED MATURITY PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------- ----------------- ----------------- -------------- -------------- 1 to 12............... $ 1,490.20 0.00% 1 0.01% 13 to 24............... 6,392.88 0.00 1 0.01 25 to 36............... 111,160.75 0.02 5 0.04 37 to 48............... 141,055.85 0.03 9 0.08 49 to 60............... 1,643,598.56 0.33 89 0.79 61 to 72............... 421,254.31 0.08 11 0.10 73 to 84............... 135,007,268.66 27.05 2,012 17.96 85 to 96............... 1,057,258.65 0.21 44 0.39 97 to 108............... 645,877.37 0.13 25 0.22 109 to 120............... 34,404,945.69 6.89 865 7.72 121 to 132............... 24,194.31 0.00 1 0.01 133 to 144............... 971,243.90 0.19 27 0.24 145 to 156............... 257,241.14 0.05 6 0.05 157 to 168............... 191,583.92 0.04 5 0.04 169 to 180............... 235,878,788.89 47.27 6,708 59.88 229 to 240............... 28,197,354.66 5.65 548 4.89 337 to 348............... 248,464.15 0.05 1 0.01 349 to 360............... 59,845,959.64 11.99 845 7.54 --------------- ------ ----- ------ Total............. $ 499,055,133.53 100.00% 11,203 100.00% =============== ====== ===== ======
The following table sets forth the number of months since origination of the Mortgage Loans in the Fixed Rate Group as of the Cut-off Date:
PERCENT OF PERCENT OF FIXED RATE FIXED RATE GROUP BY RANGE OF MONTHS GROUP BY NUMBER OF NUMBER OF SINCE ORIGINATION PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------- ----------------- ----------------- -------------- -------------- Less than 1.............. $ 153,546,387.40 30.77% 3,365 30.04% 1 to 6................... 342,577,576.96 68.65 7,726 68.96 7 to 12.................. 279,222.66 0.06 6 0.05 Greater than 12.......... 2,651,946.51 0.53 106 0.95 --------------- ------ ----- ------ Total.......... $ 499,055,133.53 100.00% 11,203 100.00% =============== ====== ===== ======
ADJUSTABLE RATE GROUP All of the Mortgage Loans in the Adjustable Rate Group were originated between December 1995 and September 1996 and have scheduled maturity date no later than October 2026. No Mortgage Loan in the Adjustable Rate Group has a remaining term to maturity as of the Cut-off Date of less than 71 months. The weighted average original term to maturity of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date is approximately 110 months. The weighted average remaining term to maturity of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date is approximately 103 months. The average principal balance outstanding of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date was approximately $84,555 and the principal balances of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date ranged from approximately $13,480 to $260,204. The original principal balances of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date ranged from approximately $13,500 to $261,250. The Mortgage Loans in the Adjustable Rate Group bear interest rates that adjust based on the London interbank offered rate for six-month United States dollar deposits and accrue interest on the basis of a 360-day year consisting of twelve 30-day months. S-27 28 All of the Mortgage Loans in the Adjustable Rate Group are secured by a first Mortgage on the related Mortgaged Property. As of the Cut-off Date the weighted average Mortgage Interest Rate of the Mortgage Loans in the Adjustable Rate Group is approximately 9.245% per annum. The Mortgage Interest Rates for the Mortgage Loans in the Adjustable Rate Group range from approximately 6.400% per annum to 14.800% per annum. The Mortgage Loans in the Adjustable Rate Group have a weighted average gross margin as of the Cut-off Date of approximately 5.808% per annum. The gross margin for the Mortgage Loans in the Adjustable Rate Group ranges from approximately 3.650% per annum to 9.600% per annum. All the Mortgage Loans in the Adjustable Rate Group have periodic rate adjustment caps of 1.0%. The Mortgage Loans in the Adjustable Rate Group have a weighted average maximum Mortgage Interest Rate as of the Cut-off Date of approximately 17.454% per annum, with maximum Mortgage Interest Rates (i.e. lifetime caps) that range from approximately 10.250% per annum to 21.250% per annum and a weighted average minimum Mortgage Interest Rate as of the Cut-off Date of approximately 8.583% per annum, with minimum Mortgage Interest Rates that range from approximately 6.400% per annum to 13.800% per annum. None of the Mortgage Loans in the Adjustable Rate Group had a Combined Loan-to-Value Ratio at origination in excess of 94.93%. The weighted average Combined Loan-to-Value Ratio at origination of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date is approximately 78.69%. None of the Mortgage Loans in the Adjustable Rate Group had a Home Equity Loan Ratio at origination in excess of 94.93%. The weighted average Home Equity Loan Ratio at origination of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date is approximately 78.69%. At least 95.69% of the Mortgage Loans in the Adjustable Rate Group are secured by fee simple interests in detached single-family dwelling units, which may include units in de minimis planned unit developments and townhouses, with the remaining Mortgage Loans secured by fee simple interests in attached or detached two- to four-family dwelling units, manufactured housing and condominiums on more than one parcel of real property. Approximately 0.23% of the Mortgage Loans in the Adjustable Rate Group are secured by a leasehold interest in a one- to four-family residential dwelling situated on property located in the State of Maryland or Illinois. None of the Mortgage Loans in the Adjustable Rate Group are secured by real property improved with a single-family residence constituting a permanently affixed manufactured housing unit. For approximately 99.77% of the Mortgage Loans in the Adjustable Rate Group, the related Mortgaged Property is an Owner Occupied Mortgaged Property. No more than approximately 0.43% of the Mortgage Loans in the Adjustable Rate Group are secured by Mortgaged Properties located in any one zip code area in the State of California, and no more than approximately 0.91% of the Mortgage Loans in the Adjustable Rate Group are secured by Mortgaged Properties located in any one zip code area outside the State of California. Approximately 19.77%, 12.21%, 12.12% and 11.65% of the Mortgage Loans in the Adjustable Rate Group are secured by Mortgaged Properties located in Ohio, Illinois, Minnesota and Michigan, respectively. Except as indicated in the preceding sentence, no more than approximately 4.42% of the Mortgage Loans in the Adjustable Rate Group are secured by Mortgaged Properties located in any one state. Approximately 88.49% of the Mortgage Loans in the Adjustable Rate Group are Balloon Loans. Approximately 81.08%, 4.88% and 2.31% of the Mortgage Loans in the Adjustable Rate Group are Balloon Loans generally based on approximately a 30 year amortization schedule and a single payment of the remaining loan balance approximately 7, 10 and 15 years after origination, respectively. Approximately 0.06% of the Mortgage Loans in the Adjustable Rate Group are Bankruptcy Mortgage Loans. None of the Mortgage Loans in the Adjustable Rate Group are contractually delinquent 30 or more days. None of the Mortgage Loans in the Adjustable Rate Group were originated in connection with the sale of properties acquired by the Originators through foreclosure and were not originated in accordance with all of the Underwriting Criteria. S-28 29 MORTGAGE POOL STATISTICS -- ADJUSTABLE RATE GROUP The following table sets forth the number and outstanding principal balance as of the Cut-off Date and the percentage of the Adjustable Rate Group represented by Mortgage Loans in the Adjustable Rate Group having outstanding principal balances as of the Cut-off Date in the ranges described therein:
PERCENT OF ADJUSTABLE PERCENT OF RATE ADJUSTABLE RATE GROUP BY GROUP BY NUMBER OF NUMBER OF RANGE OF PRINCIPAL BALANCES PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------------- ----------------- ----------------- -------------- -------------- $ 0.01 to 25,000.00..... 2$68,512.82....... 0.27% 13 1.09% 25,000.01 to 50,000.00...... 7,481,314.08 7.40 183 15.31 50,000.01 to 75,000.00...... 25,577,714.16 25.31 408 34.14 75,000.01 to 100,000.00...... 21,616,394.09 21.39 248 20.75 100,000.01 to 125,000.00...... 19,676,530.39 19.47 177 14.81 125,000.01 to 150,000.00...... 11,807,835.25 11.69 86 7.20 150,000.01 to 175,000.00...... 5,989,684.27 5.93 37 3.10 175,000.01 to 200,000.00...... 4,622,801.77 4.58 25 2.09 200,000.01 to 225,000.00...... 2,302,459.27 2.28 11 0.92 225,000.01 to 250,000.00...... 1,439,652.83 1.42 6 0.50 250,000.01 to 275,000.00...... 260,203.62 0.26 1 0.08 --------------- ------ ----- ------ $ 101,043,102.55 100.00% 1,195 100.00% =============== ====== ===== ======
S-29 30 The following table sets forth the geographic distribution of the Mortgaged Properties in the Adjustable Rate Group of the Mortgage Pool by state or territory as of the Cut-off Date:
PERCENT OF PERCENT OF ADJUSTABLE ADJUSTABLE RATE GROUP BY RATE GROUP BY NUMBER OF NUMBER OF STATE OR TERRITORY PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - --------------------------- ----------------- ----------------- -------------- -------------- Alabama.................... $ 907,158.48 0.90% 11 0.92% Arizona.................... 2,860,868.73 2.83 29 2.43 Arkansas................... 442,564.36 0.44 4 0.33 California................. 2,224,822.00 2.20 12 1.00 Colorado................... 1,263,297.63 1.25 13 1.09 Connecticut................ 2,281,238.38 2.26 21 1.76 Delaware................... 263,062.24 0.26 3 0.25 Florida.................... 2,388,425.61 2.36 27 2.26 Georgia.................... 683,246.85 0.68 9 0.75 Idaho...................... 1,015,511.69 1.01 15 1.26 Illinois................... 12,341,672.74 12.21 135 11.30 Indiana.................... 1,341,855.56 1.33 22 1.84 Iowa....................... 217,675.07 0.22 4 0.33 Kansas..................... 92,342.37 0.09 1 0.08 Kentucky................... 1,965,741.72 1.95 25 2.09 Louisiana.................. 363,220.69 0.36 4 0.33 Maryland................... 2,596,497.56 2.57 25 2.09 Massachusetts.............. 709,831.74 0.70 6 0.50 Michigan................... 11,773,170.78 11.65 154 12.89 Minnesota.................. 12,250,274.11 12.12 130 10.88 Mississippi................ 267,344.68 0.26 3 0.25 Missouri................... 2,943,281.54 2.91 32 2.68 Nebraska................... 210,279.43 0.21 2 0.17 Nevada..................... 112,195.01 0.11 1 0.08 New Hampshire.............. 272,001.04 0.27 2 0.17 New Jersey................. 220,192.16 0.22 2 0.17 New Mexico................. 149,301.25 0.15 2 0.17 New York................... 579,266.79 0.57 6 0.50 North Carolina............. 1,690,129.08 1.67 21 1.76 Ohio....................... 19,974,600.17 19.77 281 23.51 Oklahoma................... 245,254.23 0.24 5 0.42 Oregon..................... 227,726.00 0.23 2 0.17 Pennsylvania............... 4,470,192.10 4.42 54 4.52 Rhode Island............... 445,356.75 0.44 5 0.42 South Carolina............. 346,188.11 0.34 6 0.50 Tennessee.................. 1,909,475.41 1.89 20 1.67 Texas...................... 250,935.05 0.25 3 0.25 Utah....................... 2,743,656.17 2.72 25 2.09 Virginia................... 465,778.97 0.46 5 0.42 Washington................. 2,081,001.94 2.06 23 1.92 Wisconsin.................. 3,456,468.36 3.42 45 3.77 -------------- ------ -------- ------ Total............ $ 101,043,102.55 100.00% 1,195 100.00% ============== ====== ======== ======
S-30 31 The following table sets forth the Combined Loan-to-Value Ratios of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date:
PERCENT OF PERCENT OF ADJUSTABLE ADJUSTABLE RATE GROUP BY RANGE OF COMBINED PRINCIPAL RATE GROUP BY NUMBER OF NUMBER OF LOAN-TO-VALUE RATIOS BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------------- --------------- ----------------- -------------- -------------- 20.01% to 25.00%............... $ 48,738.13 0.05% 1 0.08% 25.01% to 30.00%............... 170,168.08 0.17 4 0.33 30.01% to 35.00%............... 270,176.58 0.27 4 0.33 35.01% to 40.00%............... 115,658.39 0.11 2 0.17 40.01% to 45.00%............... 285,802.45 0.28 6 0.50 45.01% to 50.00%............... 810,381.93 0.80 16 1.34 50.01% to 55.00%............... 1,490,997.24 1.48 19 1.59 55.01% to 60.00%............... 1,675,412.14 1.66 23 1.92 60.01% to 65.00%............... 3,996,113.82 3.95 57 4.77 65.01% to 70.00%............... 5,857,252.00 5.80 73 6.11 70.01% to 75.00%............... 13,615,287.71 13.47 160 13.39 75.01% to 80.00%............... 28,720,784.52 28.42 331 27.70 80.01% to 85.00%............... 33,056,631.60 32.72 384 32.13 85.01% to 90.00%............... 10,047,080.41 9.94 107 8.95 90.01% to 95.00%............... 882,617.55 0.87 8 0.67 -------------- ------ -------- ------ Total................ $101,043,102.55 100.00% 1,195 100.00% ============== ====== ======== ======
The following table sets forth the Home Equity Loan Ratios of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date:
PERCENT OF PERCENT OF ADJUSTABLE ADJUSTABLE RATE GROUP BY RANGE OF HOME PRINCIPAL RATE GROUP BY NUMBER OF NUMBER OF EQUITY LOAN RATIOS BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------------- --------------- ----------------- -------------- -------------- 20.01% to 25.00%............... $ 48,738.13 0.05% 1 0.08% 25.01% to 30.00%............... 170,168.08 0.17 4 0.33 30.01% to 35.00%............... 270,176.58 0.27 4 0.33 35.01% to 40.00%............... 115,658.39 0.11 2 0.17 40.01% to 45.00%............... 285,802.45 0.28 6 0.50 45.01% to 50.00%............... 810,381.93 0.80 16 1.34 50.01% to 55.00%............... 1,490,997.24 1.48 19 1.59 55.01% to 60.00%............... 1,675,412.14 1.66 23 1.92 60.01% to 65.00%............... 3,996,113.82 3.95 57 4.77 65.01% to 70.00%............... 5,857,252.00 5.80 73 6.11 70.01% to 75.00%............... 13,615,287.71 13.47 160 13.39 75.01% to 80.00%............... 28,720,784.52 28.42 331 27.70 80.01% to 85.00%............... 33,056,631.60 32.72 384 32.13 85.01% to 90.00%............... 10,047,080.41 9.94 107 8.95 90.01% to 95.00%............... 882,617.55 0.87 8 0.67 -------------- ------ ----- ------ Total................ $101,043,102.55 100.00% 1,195 100.00% ============== ====== ===== ======
S-31 32 The following table sets forth the Mortgage Interest Rates borne by the Mortgage Notes relating to the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date:
PERCENT OF PERCENT OF ADJUSTABLE ADJUSTABLE RATE GROUP BY RANGE OF MORTGAGE RATE GROUP BY NUMBER OF NUMBER OF INTEREST RATES PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------- ----------------- ----------------- -------------- -------------- 6.251% to 6.500%....... $ 86,254.31 0.09% 1 0.08% 6.751% to 7.000%....... 1,344,464.70 1.33 13 1.09 7.001% to 7.250%....... 282,350.82 0.28 3 0.25 7.251% to 7.500%....... 4,374,205.15 4.33 47 3.93 7.501% to 7.750%....... 973,152.94 0.96 14 1.17 7.751% to 8.000%....... 11,211,157.94 11.10 127 10.63 8.001% to 8.250%....... 5,032,077.06 4.98 55 4.60 8.251% to 8.500%....... 10,953,268.64 10.84 130 10.88 8.501% to 8.750%....... 3,851,673.18 3.81 44 3.68 8.751% to 9.000%....... 11,031,432.03 10.92 126 10.54 9.001% to 9.250%....... 8,574,327.81 8.49 88 7.36 9.251% to 9.500%....... 12,499,488.06 12.37 143 11.97 9.501% to 9.750%....... 4,716,120.07 4.67 58 4.85 9.751% to 10.000%....... 3,672,513.57 3.63 41 3.43 10.001% to 10.250%....... 2,953,511.76 2.92 35 2.93 10.251% to 10.500%....... 3,395,935.47 3.36 46 3.85 10.501% to 10.750%....... 1,920,282.56 1.90 24 2.01 10.751% to 11.000%....... 2,162,431.54 2.14 30 2.51 11.001% to 11.250%....... 3,869,347.29 3,83 53 4.44 11.251% to 11.500%....... 1,947,421.23 1.93 21 1.76 11.501% to 11.750%....... 1,154,115.19 1.14 14 1.17 11.751% to 12.000%....... 1,360,671.74 1.35 25 2.09 12.001% to 12.250%....... 833,460.20 0.82 16 1.34 12.251% to 12.500%....... 827,496.51 0.82 9 0.75 12.501% to 12.750%....... 925,428.71 0.92 11 0.92 12.751% to 13.000%....... 748,227.55 0.74 15 1.26 13.001% to 13.250%....... 139,903.25 0.14 2 0.17 13.251% to 13.500%....... 57,583.51 0.06 1 0.08 13.751% to 14.000%....... 82,148.69 0.08 1 0.08 14.501% to 14.750%....... 34,932.67 0.03 1 0.08 14.751% to 15.000%....... 27,718.40 0.03 1 0.08 -------------- ------ --- ------ Total.......... $ 101,043,102.55 100.00% 1,195 100.00% ============== ====== === ======
The following table sets forth the number of remaining months to stated maturity of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date:
PERCENT OF PERCENT OF ADJUSTABLE ADJUSTABLE RATE GROUP BY RANGE OF REMAINING RATE GROUP BY NUMBER OF NUMBER OF MONTHS TO STATED MATURITY PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------- ----------------- ----------------- -------------- -------------- 61 to 72............... $ 3,780,183.09 3.74% 37 3.10% 73 to 84............... 78,266,490.96 77.46 904 75.65 109 to 120............... 4,930,157.15 4.88 56 4.69 157 to 168............... 357,869.15 0.35 5 0.42 169 to 180............... 7,150,156.54 7.08 118 9.87 229 to 240............... 718,291.94 0.71 8 0.67 337 to 348............... 524,895.72 0.52 5 0.42 349 to 360............... 5,315,058.00 5.26 62 5.19 -------------- ------ --- ------ Total.......... $ 101,043,102.55 100.00% 1,195 100.00% ============== ====== === ======
S-32 33 The following table sets forth the number of months since origination of the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date:
PERCENT OF PERCENT OF ADJUSTABLE ADJUSTABLE RATE GROUP BY RANGE OF MONTHS RATE GROUP BY NUMBER OF NUMBER OF SINCE ORIGINATION PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------- ----------------- ----------------- -------------- -------------- 1 to 6................... $ 38,156,616.66 37.76% 436 36.49% 7 to 12.................. 58,299,667.19 57.70 711 59.50 Greater than 12.......... 4,586,818.70 4.54 48 4.02 -------------- ------ --- ------ Total.......... $ 101,043,102.55 100.00% 1,195 100.00% ============== ====== === ======
The following table sets forth the maximum Mortgage Interest Rates borne by the Mortgage Notes relating to the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date:
PERCENT OF RANGE OF PERCENT OF ADJUSTABLE MAXIMUM ADJUSTABLE RATE GROUP BY MORTGAGE RATE GROUP BY NUMBER OF NUMBER OF INTEREST RATES PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------- ----------------- ----------------- -------------- -------------- 10.01% to 10.50% $ 293,824.95 0.29% 2 0.17% 11.01% to 11.50%......... 69,505.26 0.07 1 0.08 12.01% to 12.50%......... 114,329.65 0.11 1 0.08 12.51% to 13.00%......... 28,709.54 0.03 1 0.08 13.01% to 13.50%......... 46,422.35 0.05 1 0.08 14.51% to 15.00%......... 220,289.72 0.22 2 0.17 15.01% to 15.50%......... 86,254.31 0.09 1 0.08 15.51% to 16.00%......... 2,397,856.20 2.37 29 2.43 16.01% to 16.50%......... 7,250,028.02 7.18 91 7.62 16.51% to 17.00%......... 15,259,503.42 15.10 167 13.97 17.01% to 17.50%......... 32,172,226.11 31.84 353 29.54 17.51% to 18.00%......... 23,081,381.12 22.84 279 23.35 18.01% to 18.50%......... 11,533,398.78 11.41 152 12.72 18.51% to 19.00%......... 5,561,447.70 5.50 76 6.36 19.01% to 19.50%......... 2,238,526.28 2.22 29 2.43 19.51% to 20.00%......... 293,812.93 0.29 3 0.25 20.01% to 20.50%......... 222,051.94 0.22 3 0.25 20.51% to 21.00%......... 97,406.00 0.10 3 0.25 21.01% to 21.50%......... 76,128.27 0.08 1 0.08 -------------- ------ ----- ------ Total.......... $ 101,043,102.55 100.00% 1,195 100.00% ============== ====== ===== ======
S-33 34 The following table sets forth the minimum Mortgage Interest Rates borne by the Mortgage Notes relating to the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date:
PERCENT OF RANGE OF PERCENT OF ADJUSTABLE MINIMUM ADJUSTABLE RATE GROUP BY MORTGAGE INTEREST RATE GROUP BY NUMBER OF NUMBER OF RATES PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ----------------- ----------------- ----------------- -------------- -------------- 6.01% to 6.50% ............ $ 86,254.31 0.09% 1 0.08% 6.51% to 7.00% ............ 2,140,659.31 2.12 23 1.92 7.01% to 7.50% ............ 10,303,726.04 10.20 120 10.04 7.51% to 8.00% ............ 22,660,777.51 22.43 262 21.92 8.01% to 8.50% ............ 28,896,888.17 28.60 318 26.61 8.51% to 9.00% ............ 11,917,155.91 11.79 135 11.30 9.01% to 9.50% ............ 8,826,595.25 8.74 105 8.79 9.51% to 10.00% ............ 3,795,259.73 3.76 48 4.02 10.01% to 10.50% ............ 6,415,006.03 6.35 82 6.86 10.51% to 11.00% ............ 2,473,245.46 2.45 43 3.60 11.01% to 11.50% ............ 1,396,613.69 1.38 24 2.01 11.51% to 12.00% ............ 1,846,218.13 1.83 29 2.43 12.01% to 12.50% ............ 139,903.25 0.14 2 0,17 12.51% to 13.00% ............ 82,148.69 0.08 1 0.08 13.51% to 14.00% ............ 62,651.07 0.06 2 0.17 --------------- ----- ----- ------ Total ............ $ 101,043,102.55 100.0% 1,195 100.00% =============== ===== ===== ======
The following table sets forth the gross margins borne by the Mortgage Notes relating to the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date:
PERCENT OF PERCENT OF ADJUSTABLE ADJUSTABLE RATE GROUP BY RANGE OF RATE GROUP BY NUMBER OF NUMBER OF GROSS MARGINS PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ----------------- ----------------- ----------------- -------------- -------------- 3.51% to 4.00% ............ $ 86,254.31 0.09% 1 0.08% 4.01% to 4.50% ............ 2,728,740.19 2.70 31 2.59 4.51% to 5.00% ............ 11,567,361.24 11.45 137 11.46 5.01% to 5.50% ............ 30,162,845.94 29.85 329 27.53 5.51% to 6.00% ............ 24,251,631.40 24.00 278 23.26 6.01% to 6.50% ............ 15,320,664.08 15.16 186 15.56 6.51% to 7.00% ............ 10,864,916.03 10.75 148 12.38 7.01% to 7.50% ............ 3,836,854.96 3.80 57 4.77 7.51% to 8.00% ............ 1,343,879.08 1.33 16 1.34 8.01% to 8.50% ............ 566,517.80 0.56 6 0.50 8.51% to 9.00% ............ 174,658.18 0.17 3 0.25 9.01% to 9.50% ............ 62,651.07 0.06 2 0.17 9.51% to 10.00% ............ 76,128.27 0.08 1 0.08 --------------- ------ ----- ------ Total ............ $ 101,043,102.55 100.00% 1,195 100.00% =============== ====== ===== ======
The following table sets forth the month of the next Mortgage Interest Rate change for each of the Mortgage Notes relating to the Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date:
PERCENT OF ADJUSTABLE MONTH OF PERCENT OF ADJUSTABLE RATE GROUP BY NEXT MORTGAGE INTEREST RATE GROUP BY NUMBER OF NUMBER OF RATE CHANGE PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - --------------------------- ----------------- --------------------- -------------- -------------- March 1997................. $ 24,238,781.67 23.99 300 25.10 April 1997................. 27,169,759.91 26.89 298 24.94 May 1997................... 9,345,784.81 9.25 116 9.71 June 1997.................. 9,373,848.43 9.28 110 9.21 July 1997.................. 12,589,417.20 12.46 149 12.47 August 1997................ 18,325,510.53 18.14 222 18.58 --------------- ------ ----- ------ Total............ $ 101,043,102.55 100.00% 1,195 100.00% =============== ====== ===== ======
S-34 35 CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS The rate of principal payments on the Class A Certificates, the aggregate amount of each interest payment on the Class A Certificates and the yield to maturity of such Certificates are related to the rate and timing of payments of principal on the Mortgage Loans in the related Mortgage Loan Group, which may be in the form of scheduled and unscheduled payments. In general, when the level of prevailing interest rates for similar loans significantly declines, the rate of prepayment is likely to increase, although the prepayment rate is influenced by a number of other factors, including general economic conditions and homeowner mobility. Defaults on mortgage loans are expected to occur with greater frequency in their early years, although little data is available with respect to the rate of default on second mortgage loans. The rate of default on second mortgage loans may be greater than that of mortgage loans secured by first liens on comparable properties. Prepayments, liquidations and repurchases of the Mortgage Loans will result in distributions to the Class A Certificateholders of amounts of principal which would otherwise be distributed over the remaining terms of the Mortgage Loans. In addition, the Servicer may, at its option, purchase from the Trust all of the outstanding Mortgage Loans and REO Properties, and thus effect the early retirement of the Class A Certificates, on any Payment Date following the first Payment Date for which the Pool Principal Balance (as defined herein) as of the last day of the related Due Period is less than 10% of the Original Pool Principal Balance. See "Description of the Certificates -- Termination; Purchase of Mortgage Loans" herein. As with fixed rate obligations generally, the rate of prepayment on a pool of mortgage loans with fixed rates such as the Mortgage Loans in the Fixed Rate Group is affected by prevailing market rates for mortgage loans of a comparable term and risk level. When the market interest rate is below the mortgage coupon, mortgagors may have an increased incentive to refinance their mortgage loans. Depending on prevailing market rates, the future outlook for market rates and economic conditions generally, some mortgagors may sell or refinance mortgaged properties in order to realize their equity in the mortgaged properties, to meet cash flow needs or to make other investments. All of the Mortgage Loans in the Adjustable Rate Group are adjustable-rate mortgage loans. As is the case with conventional fixed-rate mortgage loans, adjustable-rate mortgage loans may be subject to a greater rate of principal prepayments in a declining interest rate environment. For example, if prevailing interest rates fall significantly, adjustable-rate mortgage loans could be subject to higher prepayment rates than if prevailing interest rates remain constant because the availability of fixed-rate mortgage loans at competitive interest rates may encourage mortgagers to refinance their adjustable-rate mortgage loans to "lock in" a lower fixed interest rate. However, no assurance can be given as to the level of prepayments that the Mortgage Loans will experience. No representation is made as to the particular factors that will affect the prepayment of the Mortgage Loans, as to the relative importance of such factors, as to the percentage of the principal balance of the Mortgage Loans that will be paid as of any date or as to the overall rate of prepayment on the Mortgage Loans. See "Certain Yield and Prepayment Considerations" in the Prospectus. Greater than anticipated prepayments of principal will increase the yield on Class A Certificates purchased at a price less than par. Greater than anticipated prepayments of principal will decrease the yield on Class A Certificates purchased at a price greater than par. The effect on an investor's yield due to principal prepayments on the Mortgage Loans occurring at a rate that is faster (or slower) than the rate anticipated by the investor in the period immediately following the issuance of the Certificates will not be entirely offset by a subsequent like reduction (or increase) in the rate of principal payments. The weighted average life of the Class A Certificates will also be affected by the amount and timing of delinquencies and defaults on the Mortgage Loans in the related Mortgage Loan Group and the recoveries, if any, on defaulted Mortgage Loans and foreclosed properties in such Mortgage Loan Group. Principal distributions on the Class A-7 Certificates will vary on each Payment Date in accordance with the Class A Lockout Remittance Amount for such Payment Date until the Class A-6 Certificates have S-35 36 been paid in full. Upon payment of the Class A-6 Certificates in full, the entire Class A Principal Remittance Amount will be distributed to the Class A-7 Certificates until they have been paid in full. The "weighted average life" of a Certificate refers to the average amount of time that will elapse from the date of issuance to the date each dollar in respect of principal of such Certificate is repaid. The weighted average life of any Class of the Class A Certificates will be influenced by, among other factors, the rate at which principal payments are made on the Mortgage Loans in the related Mortgage Loan Group, including final payments made upon the maturity of Balloon Loans. Prepayments on Mortgage Loans are commonly measured relative to a prepayment standard or model. The model used in this Prospectus Supplement is the prepayment assumption (the "Prepayment Assumption"), which represents an assumed rate of prepayment each month relative to the then outstanding principal balance of the pool of mortgage loans for the life of such mortgage loans. For each Class of Fixed Rate Certificates, a 100% Prepayment Assumption assumes a conditional prepayment rate ("CPR") of 5% per annum of the outstanding principal balance of the Mortgage Loans in the Fixed Rate Group in the first month of the life of such Mortgage Loans and an additional 1.364% (precisely 15/11%) per annum in each month thereafter until the twelfth month; beginning in the twelfth month and in each month thereafter during the life of such Mortgage Loans, a conditional prepayment rate of 20% per annum each month is assumed. For the Adjustable Rate Certificates, a 100% Prepayment Assumption assumes a CPR of 20% per annum of the outstanding principal balance of the Mortgage Loans in the Adjustable Rate Group in each month of the life of such Mortgage Loans. As used in the table below, 0% Prepayment Assumption assumes a conditional prepayment rate equal to 0% of the Prepayment Assumption, i.e., no prepayments. Correspondingly, 125% Prepayment Assumption assumes prepayment rates equal to 125% of the Prepayment Assumption, and so forth. The Prepayment Assumption does not purport to be a historical description of prepayment experience or a prediction of the anticipated rate of prepayment of any pool of mortgage loans, including the Mortgage Loans. The Depositors believe that no existing statistics of which they are aware provide a reliable basis for holders of Class A Certificates to predict the amount or the timing of receipt of prepayments on the Mortgage Loans. Since the table was prepared on the basis of the assumptions in the foregoing and the following paragraphs, there are discrepancies between characteristics of the actual Mortgage Loans and the characteristics of the Mortgage Loans assumed in preparing the table. Any such discrepancy may have an effect upon the percentages of the Principal Balances outstanding and weighted average lives of the Certificates set forth in the table. In addition, since the actual Mortgage Loans in the Trust have characteristics which differ from those assumed in preparing the tables set forth below, the distributions of principal on the Certificates may be made earlier or later than as indicated in the table. For the purpose of the tables below, it is assumed that: (i) the Mortgage Loans of each Mortgage Loan Group consist of loans with the weighted average characteristics and amortization methodologies set forth below, (ii) the Closing Date for the Class A Certificates is March 31, 1997, (iii) distributions on the Class A Certificates are made on the 15th day of each month regardless of the day on which the Payment Date actually occurs, commencing in April 1997 in accordance with the priorities described herein, (iv) the scheduled monthly payments of principal and interest on the Mortgage Loans will be timely delivered to the Servicer each month (with no defaults), commencing March 1997, (v) the Mortgage Interest Rate for each Mortgage Loan in the Adjustable Rate Group is adjusted on its next rate adjustment date (and on subsequent rate adjustment dates, if necessary) to equal the sum of (a) an assumed level of the applicable index (which remains constant at 5.75%) and (b) the respective gross margin (such sum being subject to the applicable periodic adjustment cap, maximum interest rate and minimum interest rate), (vi) all prepayments are prepayments in full received on the last day of each month (commencing March 1997) and include 30 days' interest thereon, (vii) no optional termination or mandatory termination is exercised, (viii) the Class A Certificates of each Class have the respective Pass-Through Rates and Original Principal Balances as set forth herein, and (ix) the numbers under the S-36 37 "Monthly Rate Change" heading for the Adjustable Rate Group table below indicate the number of months from the Cut-off Date to the first interest rate change date for the applicable pools of loans. FIXED RATE GROUP
ASSUMED ORIGINAL ORIGINAL REMAINING MONTH OF MORTGAGE AMORTIZATION TERM TO TERM TO INITIAL AMORTIZATION PRINCIPAL INTEREST TERM MATURITY MATURITY SCHEDULED METHODOLOGY BALANCE RATE (MONTHS) (MONTHS) (MONTHS) PAYMENT - ------------------------ --------------- -------- ------------ -------- -------- ---------------- Level Pay............... $ 10,009,153.03 11.006% 111 111 110 March 1997 Level Pay............... 149,799,926.92 10.956 180 180 178 March 1997 Level Pay............... 19,810,573.71 10.695 240 240 239 March 1997 Level Pay............... 44,638,714.55 10.749 360 360 359 March 1997 Level Pay............... 4,090,595.05 10.732 111 111 111 April 1997 Level Pay............... 48,622,428.78 10.912 180 180 180 April 1997 Level Pay............... 7,899,593.95 10.664 240 240 240 April 1997 Level Pay............... 14,846,304.24 10.622 360 360 360 April 1997 Level Pay............... 5,897,658.00 11.127 201 201 201 May 1997 Balloon................. 95,818,767.00 10.447 360 84 83 March 1997 Balloon................. 17,343,818.96 10.821 359 120 118 March 1997 Balloon................. 26,334,665.07 10.719 360 180 179 March 1997 Balloon................. 35,527,234.65 10.255 360 84 84 April 1997 Balloon................. 5,118,702.00 10.522 360 120 120 April 1997 Balloon................. 9,277,144.71 10.494 358 180 180 April 1997 Balloon................. 4,019,852.91 10.502 359 104 104 May 1997
ADJUSTABLE RATE GROUP
ASSUMED PERIODIC ORIGINAL ORIGINAL REMAINING MONTH OF MONTHS MORTGAGE MAXIMUM MINIMUM RATE AMORTIZATION TERM TO TERM TO INITIAL AMORTIZATION PRINCIPAL TO RATE INTEREST GROSS INTEREST INTEREST ADJUSTMENT TERM MATURITY MATURITY SCHEDULED METHODOLOGY BALANCE CHANGE RATE MARGIN RATE RATE CAP (MONTHS) (MONTHS) (MONTHS) PAYMENT - ------ ------------- -------- -------- ------ ------- ------- ---------- ------------ -------- ------------ ---------- Level Pay... $3,029,335.34 1.000 9.346% 6.160% 17.833% 9.070% 1.000% 276 276 270 March 1997 Level Pay... 3,399,207.13 2.000 9.039 5.991 17.622 8.760 1.000 276 276 270 March 1997 Level Pay... 1,334,335.89 3.000 9.909 5.969 17.462 8.909 1.000 250 250 241 March 1997 Level Pay... 690,554.65 4.000 10.992 6.691 18.254 10.072 1.000 267 267 259 March 1997 Level Pay... 1,150,892.55 5.000 11.131 6.741 18.371 10.131 1.000 251 251 244 March 1997 Level Pay... 2,020,914.01 6.000 10.371 6.199 17.935 9.122 1.000 299 299 290 March 1997 Balloon... 21,209,446.33 1.000 8.804 5.756 17.427 8.548 1.000 360 90 83 March 1997 Balloon... 23,770,552.78 2.000 8.588 5.602 17.158 8.310 1.000 360 88 82 March 1997 Balloon... 8,011,448.92 3.000 9.695 5.921 17.535 8.658 1.000 360 88 79 March 1997 Balloon... 8,683,293.78 4.000 9.514 5.811 17.421 8.514 1.000 360 90 82 March 1997 Balloon... 11,438,524.65 5.000 9.637 5.845 17.555 8.636 1.000 361 91 84 March 1997 Balloon... 16,304,596.52 6.000 9.764 5.823 17.563 8.598 1.000 360 86 79 March 1997
Subject to the foregoing discussion and assumptions, the following tables indicate the weighted average life of each Class of Class A Certificates, and set forth the percentages of the Original Principal Balance of each such Class of Class A Certificates that would be outstanding after each of the dates shown at various percentages of the Prepayment Assumption, based on the assumptions described above. S-37 38 PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1 CLASS A-2 ---------------------------------------------------- ------------------------------------ PAYMENT DATE 0% 75% 100% 125% 150% 200% 0% 75% 100% 125% - -------------------------- ------ ------ ----- ----- ----- ----- ------ ------ ------ ------ Initial Percentage........ 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% March 15, 1998............ 96 71 62 54 45 28 100 100 100 100 March 15, 1999............ 91 34 16 0 0 0 100 100 100 90 March 15, 2000............ 86 2 0 0 0 0 100 100 0 0 March 15, 2001............ 80 0 0 0 0 0 100 0 0 0 March 15, 2002............ 74 0 0 0 0 0 100 0 0 0 March 15, 2003............ 67 0 0 0 0 0 100 0 0 0 March 15, 2004............ 19 0 0 0 0 0 100 0 0 0 March 15, 2005............ 1 0 0 0 0 0 100 0 0 0 March 15, 2006............ 0 0 0 0 0 0 16 0 0 0 March 15, 2007............ 0 0 0 0 0 0 0 0 0 0 March 15, 2008............ 0 0 0 0 0 0 0 0 0 0 March 15, 2009............ 0 0 0 0 0 0 0 0 0 0 March 15, 2010............ 0 0 0 0 0 0 0 0 0 0 March 15, 2011............ 0 0 0 0 0 0 0 0 0 0 March 15, 2012............ 0 0 0 0 0 0 0 0 0 0 March 15, 2013............ 0 0 0 0 0 0 0 0 0 0 March 15, 2014............ 0 0 0 0 0 0 0 0 0 0 March 15, 2015............ 0 0 0 0 0 0 0 0 0 0 March 15, 2016............ 0 0 0 0 0 0 0 0 0 0 March 15, 2017............ 0 0 0 0 0 0 0 0 0 0 March 15, 2018............ 0 0 0 0 0 0 0 0 0 0 March 15, 2019............ 0 0 0 0 0 0 0 0 0 0 March 15, 2020............ 0 0 0 0 0 0 0 0 0 0 March 15, 2021............ 0 0 0 0 0 0 0 0 0 0 March 15, 2022............ 0 0 0 0 0 0 0 0 0 0 March 15, 2023............ 0 0 0 0 0 0 0 0 0 0 March 15, 2024............ 0 0 0 0 0 0 0 0 0 0 March 15, 2025............ 0 0 0 0 0 0 0 0 0 0 March 15, 2026............ 0 0 0 0 0 0 0 0 0 0 March 15, 2027............ 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (Years)*............. 5.7 1.6 1.3 1.1 0.9 0.7 8.7 3.3 2.5 2.1 CLASS A-3 --------------------------------------------------- PAYMENT DATE 150% 200% 0% 75% 100% 125% 150% 200% - -------------------------- ------ ----- ------ ----- ----- ----- ----- ----- Initial Percentage........ 100% 100% 100% 100% 100% 100% 100% 100% March 15, 1998............ 100 100 100 100 100 100 100 100 March 15, 1999............ 0 0 100 100 100 100 88 42 March 15, 2000............ 0 0 100 100 82 50 21 0 March 15, 2001............ 0 0 100 80 41 9 0 0 March 15, 2002............ 0 0 100 48 9 0 0 0 March 15, 2003............ 0 0 100 23 0 0 0 0 March 15, 2004............ 0 0 100 0 0 0 0 0 March 15, 2005............ 0 0 100 0 0 0 0 0 March 15, 2006............ 0 0 100 0 0 0 0 0 March 15, 2007............ 0 0 80 0 0 0 0 0 March 15, 2008............ 0 0 63 0 0 0 0 0 March 15, 2009............ 0 0 48 0 0 0 0 0 March 15, 2010............ 0 0 30 0 0 0 0 0 March 15, 2011............ 0 0 10 0 0 0 0 0 March 15, 2012............ 0 0 0 0 0 0 0 0 March 15, 2013............ 0 0 0 0 0 0 0 0 March 15, 2014............ 0 0 0 0 0 0 0 0 March 15, 2015............ 0 0 0 0 0 0 0 0 March 15, 2016............ 0 0 0 0 0 0 0 0 March 15, 2017............ 0 0 0 0 0 0 0 0 March 15, 2018............ 0 0 0 0 0 0 0 0 March 15, 2019............ 0 0 0 0 0 0 0 0 March 15, 2020............ 0 0 0 0 0 0 0 0 March 15, 2021............ 0 0 0 0 0 0 0 0 March 15, 2022............ 0 0 0 0 0 0 0 0 March 15, 2023............ 0 0 0 0 0 0 0 0 March 15, 2024............ 0 0 0 0 0 0 0 0 March 15, 2025............ 0 0 0 0 0 0 0 0 March 15, 2026............ 0 0 0 0 0 0 0 0 March 15, 2027............ 0 0 0 0 0 0 0 0 Weighted Average Life (Years)*............. 1.8 1.4 11.8 5.1 3.8 3.1 2.6 1.9
- --------------- * The weighted average life of a Certificate of any class is determined by (i) multiplying the amount of each distribution in reduction of the related Principal Balance by the number of years from the date of issuance of the Certificate to the related Payment Date, (ii) adding the results, and (iii) dividing the sum by the highest related Principal Balance of the Certificate. This table has been prepared based on the assumptions described in the second and fourth paragraphs preceding this table (including the assumptions regarding the characteristics and performance of the Mortgage Loans, which differ from the actual characteristics and performance thereof) and should be read in conjunction therewith. S-38 39 PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-4 CLASS A-5 ---------------------------------------------------- ------------------------------------ PAYMENT DATE 0% 75% 100% 125% 150% 200% 0% 75% 100% 125% - -------------------------- ------ ------ ----- ----- ----- ----- ------ ------ ------ ------ Initial Percentage........ 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% March 15, 1998............ 100 100 100 100 100 100 100 100 100 100 March 15, 1999............ 100 100 100 100 100 100 100 100 100 100 March 15, 2000............ 100 100 100 100 100 30 100 100 100 100 March 15, 2001............ 100 100 100 100 51 0 100 100 100 100 March 15, 2002............ 100 100 100 43 0 0 100 100 100 100 March 15, 2003............ 100 100 65 0 0 0 100 100 100 87 March 15, 2004............ 100 59 0 0 0 0 100 100 80 0 March 15, 2005............ 100 25 0 0 0 0 100 100 41 0 March 15, 2006............ 100 0 0 0 0 0 100 95 2 0 March 15, 2007............ 100 0 0 0 0 0 100 40 0 0 March 15, 2008............ 100 0 0 0 0 0 100 0 0 0 March 15, 2009............ 100 0 0 0 0 0 100 0 0 0 March 15, 2010............ 100 0 0 0 0 0 100 0 0 0 March 15, 2011............ 100 0 0 0 0 0 100 0 0 0 March 15, 2012............ 26 0 0 0 0 0 100 0 0 0 March 15, 2013............ 0 0 0 0 0 0 100 0 0 0 March 15, 2014............ 0 0 0 0 0 0 82 0 0 0 March 15, 2015............ 0 0 0 0 0 0 65 0 0 0 March 15, 2016............ 0 0 0 0 0 0 46 0 0 0 March 15, 2017............ 0 0 0 0 0 0 26 0 0 0 March 15, 2018............ 0 0 0 0 0 0 16 0 0 0 March 15, 2019............ 0 0 0 0 0 0 6 0 0 0 March 15, 2020............ 0 0 0 0 0 0 0 0 0 0 March 15, 2021............ 0 0 0 0 0 0 0 0 0 0 March 15, 2022............ 0 0 0 0 0 0 0 0 0 0 March 15, 2023............ 0 0 0 0 0 0 0 0 0 0 March 15, 2024............ 0 0 0 0 0 0 0 0 0 0 March 15, 2025............ 0 0 0 0 0 0 0 0 0 0 March 15, 2026............ 0 0 0 0 0 0 0 0 0 0 March 15, 2027............ 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (Years)*............. 14.9 7.5 6.3 4.9 4.0 2.9 18.9 9.9 7.8 6.5 CLASS A-6 --------------------------------------------------- PAYMENT DATE 150% 200% 0% 75% 100% 125% 150% 200% - -------------------------- ------ ----- ------ ----- ----- ----- ----- ----- Initial Percentage........ 100% 100% 100% 100% 100% 100% 100% 100% March 15, 1998............ 100 100 100 100 100 100 100 100 March 15, 1999............ 100 100 100 100 100 100 100 100 March 15, 2000............ 100 100 100 100 100 100 100 100 March 15, 2001............ 100 0 100 100 100 100 100 97 March 15, 2002............ 63 0 100 100 100 100 100 33 March 15, 2003............ 0 0 100 100 100 100 94 13 March 15, 2004............ 0 0 100 100 100 93 50 6 March 15, 2005............ 0 0 100 100 100 79 44 6 March 15, 2006............ 0 0 100 100 100 58 32 6 March 15, 2007............ 0 0 100 100 73 39 20 4 March 15, 2008............ 0 0 100 99 52 27 13 2 March 15, 2009............ 0 0 100 76 37 18 8 1 March 15, 2010............ 0 0 100 55 26 11 5 1 March 15, 2011............ 0 0 100 39 17 7 3 0 March 15, 2012............ 0 0 100 20 8 3 1 0 March 15, 2013............ 0 0 100 14 5 2 1 0 March 15, 2014............ 0 0 100 11 4 1 0 0 March 15, 2015............ 0 0 100 8 3 1 0 0 March 15, 2016............ 0 0 100 7 2 1 0 0 March 15, 2017............ 0 0 100 5 1 0 0 0 March 15, 2018............ 0 0 100 4 1 0 0 0 March 15, 2019............ 0 0 100 3 1 0 0 0 March 15, 2020............ 0 0 96 2 1 0 0 0 March 15, 2021............ 0 0 86 2 0 0 0 0 March 15, 2022............ 0 0 75 1 0 0 0 0 March 15, 2023............ 0 0 63 1 0 0 0 0 March 15, 2024............ 0 0 49 1 0 0 0 0 March 15, 2025............ 0 0 34 0 0 0 0 0 March 15, 2026............ 0 0 18 0 0 0 0 0 March 15, 2027............ 0 0 0 0 0 0 0 0 Weighted Average Life (Years)*............. 5.2 3.6 26.7 14.0 11.8 9.9 8.3 5.2
- --------------- * The weighted average life of a Certificate of any class is determined by (i) multiplying the amount of each distribution in reduction of the related Principal Balance by the number of years from the date of issuance of the Certificate to the related Payment Date, (ii) adding the results, and (iii) dividing the sum by the highest related Principal Balance of the Certificate. This table has been prepared based on the assumptions described in the second and fourth paragraphs preceding this table (including the assumptions regarding the characteristics and performance of the Mortgage Loans, which differ from the actual characteristics and performance thereof) and should be read in conjunction therewith. S-39 40 PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-7 ----------------------------------- PAYMENT DATE 0% 75% 100% 125% 150% - -------------------------------------------------------------------------------------------- --- --- --- --- --- Initial Percentage.......................................................................... 100% 100% 100% 100% 100% March 15, 1998.............................................................................. 100 100 100 100 100 March 15, 1999.............................................................................. 100 100 100 100 100 March 15, 2000.............................................................................. 100 100 100 100 100 March 15, 2001.............................................................................. 99 92 89 87 84 March 15, 2002.............................................................................. 98 84 80 76 71 March 15, 2003.............................................................................. 95 72 65 58 52 March 15, 2004.............................................................................. 72 46 39 33 28 March 15, 2005.............................................................................. 41 16 11 8 6 March 15, 2006.............................................................................. 32 7 4 2 1 March 15, 2007.............................................................................. 20 3 1 1 0 March 15, 2008.............................................................................. 14 1 0 0 0 March 15, 2009.............................................................................. 10 1 0 0 0 March 15, 2010.............................................................................. 6 0 0 0 0 March 15, 2011.............................................................................. 3 0 0 0 0 March 15, 2012.............................................................................. 0 0 0 0 0 March 15, 2013.............................................................................. 0 0 0 0 0 March 15, 2014.............................................................................. 0 0 0 0 0 March 15, 2015.............................................................................. 0 0 0 0 0 March 15, 2016.............................................................................. 0 0 0 0 0 March 15, 2017.............................................................................. 0 0 0 0 0 March 15, 2018.............................................................................. 0 0 0 0 0 March 15, 2019.............................................................................. 0 0 0 0 0 March 15, 2020.............................................................................. 0 0 0 0 0 March 15, 2021.............................................................................. 0 0 0 0 0 March 15, 2022.............................................................................. 0 0 0 0 0 March 15, 2023.............................................................................. 0 0 0 0 0 March 15, 2024.............................................................................. 0 0 0 0 0 March 15, 2025.............................................................................. 0 0 0 0 0 March 15, 2026.............................................................................. 0 0 0 0 0 March 15, 2027.............................................................................. 0 0 0 0 0 Weighted Average Life (Years)*............................................................................... 8.4 6.7 6.4 6.1 5.9 CLASS A-8 ------------------- PAYMENT DATE 200% 0% 75% 100% - -------------------------------------------------------------------------------------------- --- --- --- --- Initial Percentage.......................................................................... 100% 100% 100% 100% March 15, 1998.............................................................................. 100 99 84 79 March 15, 1999.............................................................................. 100 99 71 63 March 15, 2000.............................................................................. 100 98 60 50 March 15, 2001.............................................................................. 79 97 51 40 March 15, 2002.............................................................................. 62 97 43 32 March 15, 2003.............................................................................. 40 96 36 25 March 15, 2004.............................................................................. 18 10 3 2 March 15, 2005.............................................................................. 7 10 3 2 March 15, 2006.............................................................................. 2 10 2 1 March 15, 2007.............................................................................. 0 9 2 1 March 15, 2008.............................................................................. 0 9 2 1 March 15, 2009.............................................................................. 0 9 1 1 March 15, 2010.............................................................................. 0 8 1 0 March 15, 2011.............................................................................. 0 8 1 0 March 15, 2012.............................................................................. 0 7 1 0 March 15, 2013.............................................................................. 0 6 0 0 March 15, 2014.............................................................................. 0 6 0 0 March 15, 2015.............................................................................. 0 5 0 0 March 15, 2016.............................................................................. 0 4 0 0 March 15, 2017.............................................................................. 0 3 0 0 March 15, 2018.............................................................................. 0 2 0 0 March 15, 2019.............................................................................. 0 1 0 0 March 15, 2020.............................................................................. 0 0 0 0 March 15, 2021.............................................................................. 0 0 0 0 March 15, 2022.............................................................................. 0 0 0 0 March 15, 2023.............................................................................. 0 0 0 0 March 15, 2024.............................................................................. 0 0 0 0 March 15, 2025.............................................................................. 0 0 0 0 March 15, 2026.............................................................................. 0 0 0 0 March 15, 2027.............................................................................. 0 0 0 0 Weighted Average Life (Years)*............................................................................... 5.6 7.7 4.2 3.5 PAYMENT DATE 125% 150% 200% - -------------------------------------------------------------------------------------------- --- --- --- Initial Percentage.......................................................................... 100% 100% 100% March 15, 1998.............................................................................. 75 70 60 March 15, 1999.............................................................................. 56 48 36 March 15, 2000.............................................................................. 41 34 21 March 15, 2001.............................................................................. 31 23 13 March 15, 2002.............................................................................. 23 16 8 March 15, 2003.............................................................................. 17 11 4 March 15, 2004.............................................................................. 1 1 0 March 15, 2005.............................................................................. 1 1 0 March 15, 2006.............................................................................. 1 0 0 March 15, 2007.............................................................................. 1 0 0 March 15, 2008.............................................................................. 0 0 0 March 15, 2009.............................................................................. 0 0 0 March 15, 2010.............................................................................. 0 0 0 March 15, 2011.............................................................................. 0 0 0 March 15, 2012.............................................................................. 0 0 0 March 15, 2013.............................................................................. 0 0 0 March 15, 2014.............................................................................. 0 0 0 March 15, 2015.............................................................................. 0 0 0 March 15, 2016.............................................................................. 0 0 0 March 15, 2017.............................................................................. 0 0 0 March 15, 2018.............................................................................. 0 0 0 March 15, 2019.............................................................................. 0 0 0 March 15, 2020.............................................................................. 0 0 0 March 15, 2021.............................................................................. 0 0 0 March 15, 2022.............................................................................. 0 0 0 March 15, 2023.............................................................................. 0 0 0 March 15, 2024.............................................................................. 0 0 0 March 15, 2025.............................................................................. 0 0 0 March 15, 2026.............................................................................. 0 0 0 March 15, 2027.............................................................................. 0 0 0 Weighted Average Life (Years)*............................................................................... 3.0 2.5 1.9
- --------------- * The weighted average life of a Certificate of any class is determined by (i) multiplying the amount of each distribution in reduction of the related Principal Balance by the number of years from the date of issuance of the Certificate to the related Payment Date, (ii) adding the results, and (iii) dividing the sum by the highest related Principal Balance of the Certificate. This table has been prepared based on the assumptions described in the second and fourth paragraphs preceding this table (including the assumptions regarding the characteristics and performance of the Mortgage Loans, which differ from the actual characteristics and performance thereof) and should be read in conjunction therewith. S-40 41 THE ORIGINATORS AND THE SERVICER -- ORIGINATION, FORECLOSURE AND LOSS EXPERIENCE GENERAL For a general discussion of the Depositors, the Servicers and the Originators, see "The Depositors, the Servicer, the Representative and the Originators" in the Prospectus. In the discussion that follows, references to the "Company" include EquiCredit Corporation, EquiCredit Corporation of America ("EquiCredit") and its subsidiaries (including the other Originators) and EquiCredit's predecessor in interest, OSCC-Florida. As of December 31, 1996, the Company had a total of 1,109 employees; 363 employees at its Jacksonville, Florida headquarters and an additional 746 employees in 141 branch offices located nationwide. As of December 31, 1995, the total stockholder's equity of the Company was $361,200,473. Copies of the audited financial statements of the Company for the fiscal years ended December 31, 1995, 1994 and 1993, prepared on the basis of generally accepted accounting principles, may be obtained upon request from Jerry McCoy, Senior Vice President and Chief Accounting Officer, EquiCredit Corporation of America, 10401 Deerwood Park Boulevard, Jacksonville, Florida 32256 or by telephoning (904) 987-2604. LOAN ORIGINATION HISTORY At December 31, 1996, the Company conducted loan origination and/or wholesale operations in a number of states, including but not limited to Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin. The dollar amounts of first and second lien mortgage loans originated or purchased and re-underwritten by the Company during the years ended December 31, 1996, 1995 and 1994 were $2,000,927,000, $1,117,014,000 and $653,975,000, respectively. UNDERWRITING PROGRAMS The following table sets forth the distribution of the Mortgage Loans among the Underwriting Programs as of the Cut-off Date:
PERCENT OF MORTGAGE PERCENT OF MORTGAGE UNDERWRITING POOL BY NUMBER OF POOL BY NUMBER OF PROGRAM* PRINCIPAL BALANCE PRINCIPAL BALANCE MORTGAGE LOANS MORTGAGE LOANS - ------------------------- ----------------- -------------------- -------------- ------------------- Class A.................. $ 337,305,671.80 56.21% 7,088 57.17% Class B.................. 168,218,551.00 28.03 3,232 26.07 Class C.................. 83,263,793.11 13.88 1,814 14.63 Class D.................. 11,310,220.17 1.88 264 2.13 --------------- ------ ----- ------ Total.......... $ 600,098,236.08 100.00% 12,398 100.00% =============== ====== ===== ======
- --------------- * Class A refers collectively to the Class A+ and Class A Underwriting Programs, Class B refers collectively to the Class B+ and Class B Underwriting Programs, Class C refers collectively to the Class C+ and Class C Underwriting Programs and Class D refers to the Class D Underwriting Program. References to each of the Class A, Class B, Class C and Class D Underwriting Programs also refer to substantially similar programs employed by the Originators before August 1996. See "The Depositors, the Servicer, the Representative and the Originators -- Specific Underwriting Criteria; Underwriting Programs" in the Prospectus for a discussion of each of the Underwriting Programs. S-41 42 SERVICING PORTFOLIO At December 31, 1995 and December 31, 1996, the Company serviced a total portfolio of 60,000 and 83,454 mortgage loans, respectively, having aggregate unpaid principal balances of $2,352,506,412 and $3,523,874,229, respectively, for itself and investors consisting primarily of major commercial banks, savings and loan associations, brokerage houses and the Federal National Mortgage Association ("FNMA"). The foregoing figures include loans that were not originated or acquired and re-underwritten by the Company but are serviced (principally for FNMA) on a contractual basis. DELINQUENCY AND LOSS EXPERIENCE The following table sets forth the Company's delinquency and charge-off experience at the dates indicated on mortgage loans included in its servicing portfolio, including loans in foreclosure proceedings, but excluding loans serviced by the Company that were not originated or acquired and re-underwritten by the Company (such portfolio, excluding such loans, the "Primary Servicing Portfolio").
AT OR FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1993 1994 1995(4) 1996 ---------- ---------- ---------- ------------------ (DOLLARS IN THOUSANDS) Portfolio Unpaid Principal Balance(1).................. $1,443,696 $1,710,980 $2,348,583 $3,513,223 Average Portfolio Unpaid Principal Balance........... $1,350,373 $1,577,333 $2,029,782 $2,930,903 Period of Delinquency(2): 30-59 Days.................. 0.75% 0.72% 1.38% 1.89% 60-89 Days.................. 0.50% 0.47% 0.68% 0.89% 90 Days or More............. 2.65% 2.22% 2.38% 2.80% Total Delinquencies........... 3.90% 3.40% 4.45% 5.58% Total Credit Losses(3)........ $ 8,733 $ 8,749 $ 10,738 $ 14,418 Total Credit Losses as a Percent of Average Portfolio Unpaid Principal Balance.... 0.65% 0.55% 0.53% 0.49%
- --------------- (1) Portfolio Unpaid Principal Balance is the net amount of principal to be paid on each mortgage loan, excluding unearned finance charges and other charges, and excludes the principal balance of each mortgage loan as to which the related mortgaged property has been previously acquired through foreclosure. (2) Delinquency percentages are calculated as the dollar amount of mortgage loan principal delinquent as a percent of the Portfolio Unpaid Principal Balance. Delinquency percentages include the principal balance of all mortgage loans in foreclosure proceedings. Generally, all Mortgage Loans in foreclosure proceedings are 90 days or more delinquent. Delinquency percentages do not include the principal balance of mortgage loans which are real estate owned. (3) Total Credit Losses includes (a) charge-offs of principal, net of subsequent recoveries, relating to mortgage loans written off as uncollectible or charge-offs relating to properties securing any mortgage loans which have been foreclosed upon and for which, in the opinion of management, liquidation proceeds would not exceed estimated expenses of liquidation plus the unpaid principal balance, (b) expenses associated with maintaining, repairing, and selling foreclosed properties and real estate owned, and (c) losses (gains) on the disposition of foreclosed properties and real estate owned. (4) Commencing August 1995 the Company moved the end of its mortgage loan collection period from the first business day of a subsequent calendar month to the next to last business day of the calendar month being reported. As a consequence of this accounting change, commencing August 1995, mortgage loans were reported delinquent which would not have been so reported in prior periods. In the opinion of the Company, a portion of the increase in delinquency percentages from 1994 to 1995 was due to this accounting change. S-42 43 The delinquency percentages set forth in the preceding table are calculated on the basis of the unpaid principal balances of mortgage loans included in the Primary Servicing Portfolio as of the end of the periods indicated. The charge-off experience percentages set forth above are calculated on the basis of the average outstanding unpaid principal balance of mortgage loans included in the Primary Servicing Portfolio during the periods indicated. However, because the amount of loans included in the Primary Servicing Portfolio has increased over these periods as a result of new originations, the Primary Servicing Portfolio as of the end of any indicated period includes many loans that will not have been outstanding long enough to give rise to some or all of the indicated periods of delinquency or to have resulted in losses. In the absence of such substantial and continual additions of newly originated loans to the Primary Servicing Portfolio, the delinquency and charge-offs percentages indicated above would be higher and could be substantially higher. The actual delinquency percentages and loss experience with respect to the Mortgage Loans may be expected to be substantially higher than the delinquency percentages indicated above because the composition of the Mortgage Pool will not change. In addition, over the last several years, there has been a general deterioration of the real estate market and weakening of the economy in many regions of the country. The general deterioration of the real estate market has been reflected in increases in delinquencies of loans secured by real estate, slower absorption rates of real estate into the market and lower sales prices for real estate. The general weakening of the economy has been reflected in decreases in the financial strength of borrowers and decreases in the value of collateral serving as security for loans. If the real estate market and economy continue to decline, the Company may experience an increase in delinquencies on the loans it services and higher credit losses on liquidated loans. OUTSTANDING REAL ESTATE OWNED At each of December 31, 1995 and December 31, 1996, approximately 265 and 267 properties, respectively, acquired through foreclosure were owned by the Company for its own account or on behalf of owners of other mortgage loans included in the Company's Primary Servicing Portfolio. Such properties, at December 31, 1995 and December 31, 1996, had recorded book values of $15,786,383 and $13,846,216, respectively. CERTAIN LITIGATION On February 19, 1996, a class action complaint was filed in the U.S. District Court for the Northern District of Georgia by Elizabeth D. Washington on behalf of herself and others similarly situated, against EquiCredit Corporation of Ga., an affiliate of the Servicer. The plaintiff purports to represent a class consisting of all persons who obtained "federally regulated mortgage loans" from February 16, 1995 to February 16, 1996 on which a fee or yield spread premium ("YSP") was paid to a mortgage broker. The action is brought pursuant to the Real Estate Settlement Procedures Act ("RESPA") alleging that EquiCredit Corporation of Ga. violated RESPA by paying a YSP to Funding Center of Georgia, Inc. ("FCG") failing to disclose such YSP on the Good Faith Estimate of settlement costs, and failing to provide a Good Faith Estimate and HUD "Special Information Booklet" within three days of receipt of the loan application. The plaintiff seeks judgment equal to three times the amount of all YSP paid by EquiCredit Corporation of Ga. to FCG and other brokers, as well as court costs and litigation expenses, attorney fees and such other relief which may be granted by the court. Management of EquiCredit Corporation of Ga. has informed the Depositors that it denies that the company has violated any law, rule, or regulation as asserted in the plaintiff's complaint and intends to vigorously contest this action. DESCRIPTION OF THE CERTIFICATES GENERAL The EQCC Home Equity Loan Asset Backed Certificates, Series 1997-1 (the "Certificates"), will consist of nine classes of Certificates, designated as (i) the Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates, Class A-5 Certificates, Class A-6 Certificates and Class A-7 Certificates (collectively, the "Fixed Rate Certificates"), (ii) the Class A-8 Certificates S-43 44 (the "Adjustable Rate Certificates" and, together with the Fixed Rate Certificates, the "Class A Certificates") and (iii) the Class R Certificates. Only the Class A Certificates are offered hereby. The following summary describes certain terms of the Certificates and the Pooling and Servicing Agreement. Reference is made to the accompanying Prospectus for important additional information regarding the terms of the Certificates and the underlying documents. A form of the Pooling and Servicing Agreement has been filed as an exhibit to the Registration Statement of which the Prospectus forms a part. The summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the Certificates and the Pooling and Servicing Agreement. Where particular provisions or terms used in any of such documents are referred to, the actual provisions (including definitions of terms) are incorporated by reference as part of such summaries. The Certificates represent interests in the Trust created and held pursuant to the Pooling and Servicing Agreement. The Trust Fund will consist primarily of (i) the Mortgage Loans and all proceeds thereof, (ii) REO Property, (iii) amounts on deposit in the Collection Account (as defined herein), Principal and Interest Account (as defined herein), Insurance Account, Spread Account, and Letter of Credit Fee Account, including amounts on deposit in such accounts and all investments of amounts therein, (iv) certain rights of the Depositors under the Transfer Agreement, (v) the Securities Insurance Policy, and (vi) certain other property; provided, however, that the Trust Fund does not include the Representative's Yield or amounts received on or after the Cut-off Date in respect of interest accrued on the Mortgage Loans prior to the Cut-off Date. Each Class A Certificate will be issued in minimum denominations of $1,000 and integral multiples thereof. Each Class A Certificate will represent a percentage interest (a "Percentage Interest") in the Class A Certificates of the applicable Class determined by dividing the original dollar amount represented by such Class A Certificate by the original aggregate principal amount of all Class A Certificates of such Class. The Final Scheduled Payment Date for each Class of the Class A Certificates are as follows:
FINAL SCHEDULED PAYMENT DATE ---------------------------- Class A-1 Certificates: May 15, 2005 Class A-2 Certificates: June 15, 2006 Class A-3 Certificates: September 15, 2011 Class A-4 Certificates: March 15, 2013 Class A-5 Certificates: October 15, 2019 Class A-6 Certificates: May 15, 2028 Class A-7 Certificates: May 15, 2028 Class A-8 Certificates: November 15, 2027
The Final Scheduled Payment Date for each Class of Class A Certificates (other than the Class A-6 Certificates, Class A-7 Certificates and Adjustable Rate Certificates) is the date on which the Original Principal Balance set forth on the cover page hereof for such Class would be reduced to zero assuming that (x) no Prepayments or Curtailments are received on any of the Mortgage Loans, (y) each Monthly Payment of principal of and interest on each Mortgage Loan is timely received and (z) the Mortgage Loans have the applicable characteristics set forth in the tables immediately following the eleventh paragraph under "Certain Yield and Prepayment Considerations" herein. The Final Scheduled Payment Date for the Class A-6 Certificates and the Class A-7 Certificates is the Payment Date following the calendar month in which the stated maturity of the Mortgage Loan in the Fixed Rate Group having the latest stated maturity occurs, plus one year. The Final Scheduled Payment Date for the Adjustable Rate Certificates is the Payment Date following the calendar month in which the stated maturity of the Mortgage Loan in the Adjustable Rate Group having the latest stated maturity occurs, plus one year. The date on which the final payment on any Class A Certificate is distributed could occur significantly earlier than its Final Scheduled Payment Date, because, among other things, (i) prepayments on Mortgage Loans are likely to occur, (ii) defective Mortgage Loans may be purchased from the Trust under certain circumstances described herein, (iii) the Servicer may purchase S-44 45 all of the Mortgage Loans when the aggregate outstanding principal amount of the Mortgage Loans is less than 10% of the Original Pool Principal Balance and (iv) shortfalls in principal due to losses on the Mortgage Loans could result in Insured Payments in respect of principal on the Class A Certificates. The Servicer will service the Mortgage Loans either directly or through subservicers in accordance with the Pooling and Servicing Agreement and generally in accordance with the first and second mortgage loan servicing standards and procedures accepted by prudent mortgage lending institutions. See "Description of the Offered Securities -- Servicing Standards" and "Use of Subservicers" in the Prospectus for a further description of the provisions of the Pooling and Servicing Agreement relating to servicing standards and the use of subservicers. BOOK-ENTRY REGISTRATION Certificateholders may hold their Certificates through DTC (in the United States) or CEDEL or Euroclear (in Europe) if they are participants of such systems, or indirectly through organizations that are participants in such systems. Cede, as nominee for DTC, will hold the global Certificates. CEDEL and Euroclear will hold omnibus positions on behalf of the CEDEL Participants and the Euroclear Participants, respectively, through customers' securities accounts in CEDEL's and Euroclear's names on the books of their respective depositaries (collectively the "Depositaries"), which in turn will hold such positions in customers' securities accounts in the Depositaries' names on the books of DTC. DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York UCC and a "clearing agency" registered pursuant to Section 17A of the Exchange Act. DTC was created to hold securities for its Participants and to facilitate the clearance and settlement of securities transactions between Participants through electronic book-entries, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations. Indirect access to the DTC system also is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly ("Indirect Participants"). Transfers between DTC Participants will occur in accordance with DTC rules. Transfers between CEDEL Participants and Euroclear Participants will occur in the ordinary way in accordance with their applicable rules and operating procedures. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through CEDEL Participants or Euroclear Participants, on the other, will be effected in DTC in accordance with DTC rules on behalf of the relevant European international clearing system by its Depositary; however, such cross-market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (European time). The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to its Depositary to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear Participants may not deliver instructions directly to the Depositaries. Because of time-zone differences, credits of securities in CEDEL or Euroclear as a result of a transaction with a DTC Participant will be made during the subsequent securities settlement processing, dated the business day following the DTC settlement date, and such credits or any transactions in such securities settled during such processing will be reported to the relevant CEDEL Participant or Euroclear Participant on such business day. Cash received in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL Participant or a Euroclear Participant to a DTC Participant will be received with value on the DTC settlement date but will be available in the relevant CEDEL or Euroclear cash account S-45 46 only as of the business day following settlement in DTC. For additional information regarding clearance and settlement procedures for the Certificates, see Annex I hereto, and for information with respect to tax documentation procedures relating to the Certificates, see Annex I hereto and "Certain Federal Tax Considerations -- Federal Income Tax Consequences For REMIC Certificates -- Other Matters Relating to REMIC Certificates -- Taxation of Certain Foreign Investors -- Regular Certificates" in the Prospectus. The Certificateholders that are not Participants or Indirect Participants but who desire to purchase, sell or otherwise transfer ownership of, or other interests in, Certificates may do so only through Participants and Indirect Participants. In addition, Certificateholders will receive all distributions of principal and interest from the Trustee through the Participants who in turn will receive them from DTC. Under a book-entry format, Certificateholders may experience some delay in their receipt of payments, since such payments will be forwarded by the Trustee to Cede, as nominee for DTC. DTC will forward such payments to its Participants, which thereafter will forward them to Indirect Participants or Certificateholders. It is anticipated that the only "Certificateholder" will be Cede, as nominee of DTC. Certificateholders will not be recognized by the Trustee as Certificateholders, as such term is used in the Pooling and Servicing Agreement, and Certificateholders will be permitted to exercise the rights of Certificateholders only indirectly through DTC and its Participants. Under the rules, regulations and procedures creating and affecting DTC and its operations (the "Rules"), DTC is required to make book-entry transfers of Certificates among Participants on whose behalf it acts with respect to the Certificates and to receive and transmit distributions of principal of, and interest on, the Certificates. Participants and Indirect Participants with which the Certificateholders have accounts with respect to the Certificates similarly are required to make book-entry transfers and receive and transmit such payments on behalf of their respective Certificateholders. Accordingly, although the Certificateholders will not possess Certificates, the Rules provide a mechanism by which Participants will receive payments and will be able to transfer their interests. Because DTC can only act on behalf of Participants, who in turn act on behalf of Indirect Participants and certain banks, the ability of a Certificateholder to pledge Certificates to persons or entities that do not participate in the DTC system, or to otherwise act with respect to such Certificates, may be limited due to the lack of a physical certificate for such Certificates. DTC has advised the Administrator that it will take any action permitted to be taken by a Certificateholder under the Pooling and Servicing Agreement only at the direction of one or more Participants to whose accounts with DTC the Certificates are credited. DTC may take conflicting actions with respect to other undivided interests to the extent that such actions are taken on behalf of Participants whose holdings include such undivided interests. CEDEL is incorporated under the laws of Luxembourg as a professional depository. CEDEL holds securities for its participating organizations ("CEDEL Participants") and facilitates the clearance and settlement of securities transactions between CEDEL Participants through electronic book-entry changes in accounts of CEDEL Participants, thereby eliminating the need for physical movement of certificates. Transactions may be settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL provides to its CEDEL Participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. CEDEL interfaces with domestic markets in several countries. As a professional depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute. CEDEL Participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations and may include the Underwriters. Indirect access to CEDEL is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a CEDEL Participant, either directly or indirectly. Euroclear was created in 1968 to hold securities for participants of the Euroclear System ("Euroclear Participants") and to clear and settle transactions between Euroclear Participants through simultaneous S-46 47 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. The Euroclear System has subsequently been extended to clear and settle transactions between Euroclear Participants and counterparties both in CEDEL and in many domestic securities markets. Transactions may be settled in any of 32 settlement currencies. In addition to safekeeping (custody) and securities clearance and settlement, the Euroclear System includes securities lending and borrowing and money transfer services. The Euroclear System is operated by the Brussels, Belgium, office of Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under contract with Euroclear Clearance System S.C., a Belgian cooperative corporation that establishes policy on behalf of Euroclear Participants. The Euroclear Operator is the Belgian branch of a New York banking corporation which is a member bank of the Federal Reserve System. As such, it is regulated and examined by the Board of Governors of the Federal Reserve System and the New York State Banking Department, as well as the Belgian Banking Commission. All operations are conducted by the Euroclear Operator and all Euroclear securities clearance accounts and 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 (collectively, the "Terms and Conditions"). The Terms and Conditions govern all transfers of securities and cash, both within the 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 any of the Underwriters. 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 only on behalf of Euroclear Participants, and has no record of or relationship with persons holding through Euroclear Participants. Except as required by law, the Trustee will have no liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of the Certificates held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. REPRESENTATIONS AND WARRANTIES OF THE DEPOSITORS AND THE ORIGINATORS Each Originator will make the representations, among others, as to each Mortgage Loan conveyed by any Originator to the Depositors as of the Closing Date described under "Description of the Offered Securities -- Representations and Warranties of the Originators and the Depositors" in the Prospectus and will also represent that: 1. No more than approximately 0.36% of the Mortgage Loans are secured by Mortgaged Properties improved by permanently affixed manufactured housing units; 2. Approximately 47.14% of the Mortgage Loans (and approximately 38.76% of the Mortgage Loans in the Fixed Rate Group and approximately 88.49% of the Mortgage Loans in the Adjustable Rate Group) are Balloon Loans. All of the Balloon Loans provide for monthly payments based on an amortization schedule specified in the related Mortgage Note and have a final balloon payment no earlier than 60 months following the date of origination and no later than at the end of the 180th month following the date of origination; 3. None of the Mortgage Loans were 30 or more days contractually delinquent; 4. No more than approximately 0.30% of the Mortgage Loans (and no more than approximately 0.23% of the Mortgage Loans in the Fixed Rate Group and no more than approximately 0.91% of the Mortgage Loans in the Adjustable Rate Group) are secured by Mortgaged Properties located within any single zip code area; and S-47 48 5. Mortgage Loans representing at least approximately 95.60% of the Original Pool Principal Balance (and Mortgage Loans representing at least approximately 94.75% of the aggregate Principal Balance of the Mortgage Loans in the Fixed Rate Group and Mortgage Loans representing 99.77% of the aggregate Principal Balance of the Mortgage Loans in the Adjustable Rate Group) are secured by an Owner Occupied Mortgaged Property. The percentages set forth in the representations above have been calculated as of the Cut-off Date. DISTRIBUTIONS General. The Trustee is required to establish a trust account (the "Collection Account") for the remittance of payments on the Mortgage Loans to the Certificateholders. The Collection Account is required to be maintained as an Eligible Account. On each Payment Date, commencing on April 15, 1997, the Trustee will distribute to each person in whose name a Certificate is registered (which, as to each Class of Class A Certificates, initially will be only Cede, the nominee of DTC) on the related Record Date, the portion of the aggregate distribution to which such Certificateholder is entitled, if any, based on the Percentage Interest of the Certificates held by such holder. Distributions will be made by wire transfer of immediately available funds to the account of such Certificateholder at a bank or other entity having appropriate facilities therefor, if such Certificateholder of record owns Certificates aggregating in excess of $1,000,000, and shall have provided complete wiring instructions to the Trustee at least five business days prior to the related Record Date, and otherwise by check mailed to the address of the person entitled thereto as it appears on the Certificate Register. See "Registration of the Offered Securities -- Registration and Transfer of the Offered Securities" in the Prospectus. Except with respect to certain Payment Dates following the depletion of the Spread Account as described below, on each Payment Date, the Trustee shall withdraw from the Collection Account and distribute, based on the information provided in the most recent Trustee's Remittance Report, the following amounts to the extent available, in the priority indicated: (i) first, except as otherwise specified in the Pooling and Servicing Agreement, for deposit into the Insurance Account for the benefit of the Insurer, the Monthly Premium payable to the Insurer; (ii) second, for deposit into the Spread Account, the Excess Spread; (iii) third, for deposit into the Letter of Credit Fee Account, the Letter of Credit Fee Amount, representing the fees due to the issuers of any Letters of Credit; (iv) fourth, to each Class of Class A Certificates, from the amounts attributable to the related Mortgage Loan Group, the related Class A Interest Remittance Amount; (v) fifth, to the extent not payable pursuant to clause (i) above, as specified in the Pooling and Servicing Agreement, for deposit into the Insurance Account for the benefit of the Insurer, the Monthly Premium payable to the Insurer; (vi) sixth, to the Class A Certificates, from the amounts attributable to the related Mortgage Loan Group, the Class A Principal Remittance Amount as follows: (a) first, to the Class A-7 Certificates, the Class A-7 Lockout Remittance Amount; and then, to the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Certificates (without regard to the Class A-7 Lockout Remittance Amount), in that order, until the Principal Balance of each such Class is reduced to zero, the Principal Remittance Amount for the Fixed Rate Group; and (b) concurrently to the Adjustable Rate Certificates, to be applied to reduce the Principal Balance of such Class to zero, the Principal Remittance Amount for the Adjustable Rate Group; S-48 49 (vii) seventh, to the Trustee, any amounts then due and owing representing fees of the Trustee, provided that the Trustee certifies in writing that such amount is due and owing and has not been paid by the Servicer within 30 days after written demand therefor; (viii) eighth, to the Servicer and/or the Representative, an amount equal to the amounts expended by the Servicer or the Representative and reimbursable thereto under the Pooling and Servicing Agreement but not previously reimbursed; (ix) ninth, to the Servicer an amount equal to Nonrecoverable Advances previously made by the Servicer and not previously reimbursed; and (x) tenth, to the Class R Certificateholders, the balance, if any. Notwithstanding the foregoing, if on any Payment Date following the depletion of the Spread Account, the Insurer fails to make an Insured Payment when due, the Class A Principal Remittance Amount will be distributed to each Class of Class A Certificates on a pro rata basis in proportion to the respective Principal Balances for each such Class. The "Class A-7 Lockout Remittance Amount" for any Payment Date will be the least of (a) product of (i) the applicable Class A-7 Lockout Percentage for such Payment Date and (ii) the Class A-7 Lockout Pro Rata Remittance Amount for such Payment Date, (b) the Principal Remittance Amount for the Fixed Rate Group for such Payment Date and (c) the Principal Balance of the Class A-7 Certificates immediately prior to such Payment Date. The "Class A-7 Lockout Percentage" for each Payment Date shall be as follows:
Class A-7 Payment Dates Lockout Percentage April 1997-March 2000........................... 0% April 2000-March 2002........................... 45% April 2002-March 2003........................... 80% April 2003-March 2004........................... 100% April 2004 and thereafter....................... 300%
The "Class A-7 Lockout Pro Rata Remittance Amount" for any Payment Date will be an amount equal to the product of (x) a fraction, the numerator of which is the Class A-7 Certificate Principal Balance immediately prior to such Payment Date and the denominator of which is the Fixed Rate Certificate Principal Balance immediately prior to such payment date and (y) the Principal Remittance Amount for the Fixed Rate Group on such Payment Date. The amount available to make the payments described above will generally equal the sum of (i) the Available Payment Amount for the related Due Period, (ii) the Spread Account Draw deposited into the Collection Account from the Spread Account and (iii) any Insured Payments deposited into the Collection Account with respect to the related Due Period. The Pooling and Servicing Agreement provides that, to the extent the Insurer makes Insured Payments, the Insurer will be subrogated to the rights of the Class A Certificateholders with respect to such Insured Payments and shall be deemed, to the extent of the payments so made, to be a registered holder of Class A Certificates, and shall be entitled to reimbursement for such Insured Payments, with interest thereon at the applicable Pass-Through Rate on each Payment Date following the making of an Insured Payment, only after the Class A Certificateholders have received the Class A Remittance Amount for such Payment Date. Interest. Interest on each Class of Fixed Rate Certificates will accrue from the fifteenth calendar day of each month, commencing March 15, 1997 (whether or not such day is a Business Day) to, but excluding, the fifteenth calendar day of the next succeeding month (whether or not such day is a Business Day). Interest on the Adjustable Rate Certificates will accrue from and including the Closing Date, in the case of the initial Payment Date, or from and including the most recent Payment Date on which interest has been paid, to but excluding the next succeeding Payment Date (in each case, an "Accrual Period"). Interest shall accrue on each Class of Class A Certificates at the related Pass- Through Rate shown on the cover page hereof; provided that the Pass-Through Rate with respect to the S-49 50 Adjustable Rate Certificates will equal the lesser of (i) the London interbank offered rate for one-month United States dollar deposits (calculated as described under "--Calculation of LIBOR" below) as of the second business day prior to the immediately preceding Payment Date (or the second business day prior to the Closing Date with respect to the initial Payment Date) (the "LIBOR Determination Date") plus (a) 0.20% per annum on each Payment Date on or prior to the Optional Purchase Date (as defined herein) and (b) 0.40% per annum on each Payment Date following the Optional Purchase Date (the "Class A-8 LIBOR Rate") and (ii) the Net Funds Cap Rate with respect to such Accrual Period. The "Net Funds Cap Rate" for any Accrual Period shall be a rate equal to the weighted average of the Mortgage Interest Rates on the Mortgage Loans in the Adjustable Rate Group as of the first day of the related Due Period less either (i) 0.73% per annum, with respect to the first six Accrual Periods or (ii) 1.23% per annum, with respect to each subsequent Accrual Period. Interest shall be distributed to each Class of Class A Certificates on each Payment Date to the extent of available funds (including any withdrawals from the Spread Account and any Insured Payments). Interest with respect to each Class of the Class A Certificates (other than the Adjustable Rate Certificates) will accrue on the basis of a 360 day year consisting of twelve 30 day months. Interest with respect to the Adjustable Rate Certificates on each Payment Date will accrue on the basis of the actual number of days from, and including, the preceding Payment Date to, but excluding, such Payment Date, over a 360-day year. With respect to each Payment Date and each Class of Class A Certificates, interest accrued during the related Accrual Period at the related Pass-Through Rate on the related Principal Balance (as defined below) outstanding on the immediately preceding Payment Date (after giving effect to all payments of principal made on such Payment Date) is referred to herein as the "Class A Interest Remittance Amount" for such Class of Class A Certificates. See "Description of the Certificates -- Distributions" in the Prospectus. If on any Payment Date the Class A-8 Pass-Through Rate is equal to the Net Funds Cap Rate, an amount equal to the LIBOR Interest Carryover (as defined below) will be distributed on subsequent Payment Dates to the Adjustable Rate Certificates from the Excess Spread which would otherwise be distributed to the holders of the Class R Certificates on such Payment Date. The "LIBOR Interest Carryover" for any Payment Date shall equal (i) the difference between (a) the amount of interest the Adjustable Rate Certificates would be entitled to receive on such Payment Date without regard to the Net Funds Cap Rate and (b) the amount of interest actually distributed to the Adjustable Rate Certificates on such Payment Date, plus (ii) the portion of any amount calculated pursuant to clause (i) remaining unpaid from prior Payment Dates (and interest accrued thereon at the then-applicable Class A-8 LIBOR Rate). Calculation of LIBOR. On each LIBOR Determination Date (as defined above), the Trustee will determine the London interbank offered rate for one-month U.S. dollar deposits ("LIBOR") for the next Accrual Period for the Adjustable Rate Certificates. "LIBOR" means, as of any LIBOR Determination Date, the rate for deposits in United States dollars for a period equal to the relevant Accrual Period (commencing on the first day of such Accrual Period) which appears in the Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such rate does not appear on Telerate Page 3750, the rate for that day will be determined on the basis of the rates at which deposits in United States dollars are offered by the Reference Banks at approximately 11:00 a.m., London time, on that day to prime banks in the London interbank market for a period equal to the relevant Accrual Period (commencing on the first day of such Accrual Period). The Trustee will request the principal London office of each of the Reference Banks to provide a quotation of its rate. If at least two such quotations are provided, the rate for that day will be the arithmetic mean of the quotations. If fewer than two quotations are provided as requested, the rate for that day will be the arithmetic mean of the rates quoted by major banks in New York City, selected by the Servicer, at approximately 11:00 a.m., New York City time, on that day for loans in United States dollars to leading European banks for a period equal to the relevant Accrual Period (commencing on the first day of such Accrual Period). "Telerate Page 3750" means the display page currently so designated on the Dow Jones Telerate Service (or such other page as may replace that page on that service for the purpose of displaying comparable rates or prices). S-50 51 "Reference Banks" means four major banks in the London interbank market selected by the Servicer. Principal. Holders of the Class A Certificates will be entitled to receive on each Payment Date, in the order and priority set forth herein, to the extent of the portion of the amount available for distribution attributable to the principal of the Mortgage Loans in the related Mortgage Loan Group (but not more than the Principal Balance of the related Class then outstanding), a distribution allocable to principal which will generally equal the sum of (a)(i) the principal portion of all scheduled payments ("Monthly Payments") received on the Mortgage Loans in such Mortgage Loan Group during the calendar month preceding the calendar month in which such Payment Date occurs (the "Due Period"), (ii) any principal prepayments in full of any such Mortgage Loans in such Mortgage Loan Group ("Principal Prepayments") and partial prepayments on any such Mortgage Loan in the related Mortgage Loan Group received during the related Due Period that are not Principal Prepayments (each, a "Curtailment"), (iii) the principal portion of (A) the proceeds of any insurance policy relating to a Mortgage Loan in such Mortgage Loan Group, a Mortgaged Property (as defined below) or a REO Property (as defined below), net of proceeds to be applied to the repair of the Mortgaged Property or released to the Mortgagor (as defined herein) and net of expenses reimbursable therefrom ("Insurance Proceeds"), (B) proceeds received during the related Due Period in connection with the liquidation of any defaulted Mortgage Loans in such Mortgage Loan Group, whether by trustee's sale, foreclosure sale or otherwise ("Liquidation Proceeds"), net of fees and advances reimbursable therefrom ("Net Liquidation Proceeds") and (C) proceeds received during the related Due Period in connection with a taking of a related Mortgaged Property by condemnation or the exercise of eminent domain or in connection with a release of part of any such Mortgaged Property with respect to a Mortgage Loan in such Mortgage Loan Group from the related lien ("Released Mortgaged Property Proceeds"), (iv) the principal portion of all amounts paid by the Depositors (which are limited to amounts paid by the Representatives or an Originator pursuant to the obligation to purchase or substitute Mortgage Loans contained in the Transfer Agreement) in connection with the purchase of, or the substitution of a substantially similar mortgage loan for, a Mortgage Loan in such Mortgage Loan Group as to which there is defective documentation or a breach of a representation or warranty contained in the Pooling and Servicing Agreement and (v) the principal balance of each defaulted Mortgage Loan in such Mortgage Loan Group or REO Property as to which the Servicer has determined that all amounts expected to be recovered have been recovered (each, a "Liquidated Mortgage Loan") to the extent not included in the amounts described in clauses (i) through (iv) above (the sum of (i) through (v) above, the "Basic Principal Amount" with respect to such Mortgage Loan Group) and (b) the sum of (i) the amount, if any, by which (A) the amount required to be distributed to Fixed Rate Certificateholders or Adjustable Rate Certificateholders, as the case may be, as of the preceding Payment Date exceeded (B) the amount of the actual distribution to such Fixed Rate Certificateholders or Adjustable Rate Certificateholders, as the case may be, on such preceding Payment Date, exclusive of any portion of any Insured Payment made to such Certificateholders, and (ii) if any portion of the amount in the preceding clause (i) represents Insured Payments made by the Insurer, interest on such portion at the applicable Pass-Through Rate from such immediately preceding Payment Date (with respect to the Certificates related to each Mortgage Loan Group, the "Carry-Forward Amount" with respect to such Certificates, together with the Basic Principal Amount for such Certificates, the Principal Remittance Amount for such Certificates and the aggregate Principal Remittance Amount, with respect to all of the Class A Certificates, the "Class A Principal Remittance Amount"). Except as otherwise provided herein, on each Payment Date, after payment of the Class A-7 Lockout Remittance Amount to the Class A-7 Certificates, the lesser of (i) the Fixed Rate Certificate Principal Balance then outstanding and (ii) the Principal Remittance Amount for the Fixed Rate Group (together with the Class A Interest Remittance Amount for the Fixed Rate Certificates, the "Remittance Amount" for the Fixed Rate Group) is payable to the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Certificates, in that order, until the Principal Balance of each such Class is reduced to zero. Concurrently with such distribution to the Fixed Rate Certificates, on each Payment Date, the lesser of (i) the Adjustable Rate Certificate Principal Balance then outstanding and (ii) the Principal Remittance Amount for the Adjustable Rate Group (together with the Class A Interest Remittance S-51 52 Amount for the Adjustable Rate Certificates, the "Remittance Amount" for the Adjustable Rate Group) is payable to the Adjustable Rate Certificates until the Principal Balance of such Class is reduced to zero. On any Payment Date, the aggregate Remittance Amount for the Class A Certificates is referred to herein as the "Class A Remittance Amount." As of any Payment Date, the "Class A Principal Balance" will equal the sum of the Original Class A-1 Principal Balance, the Original Class A-2 Principal Balance, the Original Class A-3 Principal Balance, the Original Class A-4 Principal Balance, the Original Class A-5 Principal Balance, the Original Class A-6 Principal Balance, the Original Class A-7 Principal Balance and the Original Class A-8 Principal Balance, less all amounts previously distributed on account of principal to holders of the Class A Certificates. As of any Payment Date, the "Fixed Rate Certificate Principal Balance" will equal the Original Fixed Rate Certificate Principal Balance, less all amounts previously distributed on account of principal to holders of the Fixed Rate Certificates. As of any Payment Date, the "Adjustable Rate Certificate Principal Balance" will equal the Original Class A-8 Principal Balance, less all amounts previously distributed on account of principal to holders of the Adjustable Rate Certificates. As of any Payment Date, the Principal Balance for each Class of Class A Certificates will equal the Original Principal Balance for such Class, less all amounts previously distributed on account of principal to holders of such Class. Spread Account. The Trustee will establish a trust account (the "Spread Account") for the benefit of the Certificateholders and the Insurer into which it will deposit upon receipt from the Servicer on each Payment Date the excess, if any, of the aggregate interest accrued during the related Due Period on the Mortgage Loans at their respective annual rates of interest (each such annual rate of interest referred to as the "Mortgage Interest Rate" for the applicable Mortgage Loan) over the sum of (i) the Class A Interest Remittance Amount for the Class A Certificates, (ii) the monthly fee due to the Insurer (the "Monthly Premium"), (iii) the Letter of Credit Fee Amount due to the issuer of any Letter of Credit and (iv) the Servicing Fee for such Mortgage Loans (such aggregate amount, the "Excess Spread"). The Trustee is required to retain 100% of the Excess Spread (the "Periodic Excess Spread Amount") in the Spread Account until the amount on deposit therein is equal to an amount specified by the Insurer in the Pooling and Servicing Agreement (the "Base Spread Account Requirement"). After the amount on deposit in the Spread Account is equal to the Base Spread Account Requirement, the amount required to be on deposit in the Spread Account at any time as specified by the Insurer in the Pooling and Servicing Agreement (the "Specified Spread Account Requirement") may be reduced over time as specified by the Insurer, provided that such reduction shall not result in the reduction of the rating of the Class A Certificates. The percentage used in determining the Periodic Excess Spread Amount may be reduced at the sole discretion of the Insurer with the consent of each Account Party, and the Base Spread Account Requirement may be reduced at the sole discretion of the Insurer, in each case without the consent of any Certificateholder. The Pooling and Servicing Agreement permits the Spread Account to be funded in part by one or more Letters of Credit issued by banks, trust companies or other institutions having debt obligations on the date of delivery of such Letter of Credit with ratings that are acceptable to Moody's and S&P, and having certain other qualifications set forth in the Pooling and Servicing Agreement. Amounts available for drawing under any Letter of Credit will be deemed to be on deposit in the Spread Account. On each Payment Date, amounts, if any, on deposit in the Spread Account will be available to fund any shortfall between the available funds for distributions to Class A Certificateholders and the Class A Remittance Amount; provided, however, that, on and after such date (the "Cross-Over Date") on which the aggregate withdrawals from the Spread Account to cover shortfalls in amounts payable on the Class A Certificates attributable to Mortgage Loan Losses ("Cumulative Spread Account Receipts") equal an amount specified by the Insurer (the "Subordinated Amount") in the Pooling and Servicing Agreement, no further withdrawals with respect to shortfalls in the amounts required to be paid on the Class A Certificates may be made from the Spread Account, and the Specified Spread Account Requirement will thereafter be zero. The Pooling and Servicing Agreement provides that the Specified Spread Account Requirement for any date shall in no event be greater than the Subordinated Amount as of such date. Amounts on deposit in the Spread Account are available for payments to the Class A Certificates, without regard to the related Mortgage Loan Groups. S-52 53 If the Trustee determines prior to any Payment Date that the amount available in cash and from the liquidation of Permitted Instruments in which all or a portion of the Spread Account has been invested is insufficient to fund any withdrawals required to be made from the Spread Account on such Payment Date, the Trustee is required to cause to be presented to the issuers of any Letters of Credit on deposit in the Spread Account one or more drawing certificates in proper form for the payment under such Letters of Credit of the amount of such insufficiency. The proceeds of any such drawings are required to be deposited into the Spread Account for withdrawal on such Payment Date. On each Payment Date any amounts constituting (i) Excess Spread in excess of the Periodic Excess Spread Amount (the "Remainder Excess Spread Amount"), (ii) amounts in the Spread Account in excess of the Specified Spread Account Requirement (any such amount, a "Spread Account Excess") and (iii) after the Cross-Over Date, the entire Excess Spread will be distributed, after payment of outstanding LC Obligations to Account Parties and of unreimbursed Servicing Advances to the Servicer, first, to the Adjustable Rate Certificateholders to pay any LIBOR Interest Carryover and second, to the holders of the Class R Certificates. Neither the holders of the Class R Certificates nor the Servicer will be required to refund any amounts previously distributed to them properly, regardless of whether there are sufficient funds on a subsequent Payment Date to make full distributions to the Class A Certificateholders of the amounts required to be distributed to the Class A Certificateholders. The funding and maintenance of the Spread Account is intended to enhance the likelihood of timely payment to the Class A Certificateholders of the Class A Remittance Amount and to afford limited protection against losses in respect of the Mortgage Loans; however, in certain circumstances, the Spread Account could be depleted and shortfalls could result. Notwithstanding the depletion of the Spread Account, the Insurer will be obligated to make Insured Payments on each Payment Date to fund the full amount of the Class A Remittance Amount on any Payment Date. Certain Definitions. For purposes of the provisions described above, the following terms have the respective meanings ascribed to them below, each determined as of any Payment Date. The use of any of the following terms with respect to either the Fixed Rate Group or the Adjustable Rate Group shall have the same meaning as set forth below, except that all amounts referred to shall include only the Fixed Rate Group or the Adjustable Rate Group, as applicable. "Available Payment Amount" generally equals (a) collections on or with respect to the Mortgage Loans in the related Mortgage Loan Group received by the Servicer during the related Due Period, net of the Servicing Fee paid to the Servicer during the related Due Period and reimbursements for accrued unpaid Servicing Fees and for certain expenses paid by the Servicer, plus (b) the amount of any Advances made by the Servicer, less (c) Excess Spread. "Basic Principal Amount" means the sum of (i) the principal portion of each Monthly Payment received by the Servicer or any Subservicer during the related Due Period, (ii) all Curtailments and all Principal Prepayments received during such related Due Period, (iii) the principal portion of all Insurance Proceeds, Released Mortgaged Property Proceeds and Net Liquidation Proceeds received during the related Due Period, (iv)(a) that portion of the purchase price of any purchased Mortgage Loans which represents principal and (b) any Substitution Adjustments deposited into the Collection Account as of the related Determination Date and (v) the Principal Balance of each Mortgage Loan as of the beginning of the related Due Period which became a Liquidated Loan during the related Due Period. "Class A Carry-Forward Amount" means the sum of (i) the amount, if any, by which (x) the Class A Remittance Amount as of the immediately preceding Payment Date exceeded (y) the amount of the actual distribution to the Class A Certificateholders, exclusive of any portion of such amount attributable to any Insured Payment, on such preceding Payment Date, and (ii) if any portion of the amount in the preceding clause (i) represents Insured Payments made by the Insurer, interest on such portion at the applicable Pass-Through Rate. S-53 54 "Class A Remittance Amount" means the sum of the Class A Principal Remittance Amount and the Class A Interest Remittance Amount. "Excess Spread" means the excess, if any, of the aggregate interest accrued during the related Due Period on all of the Mortgage Notes at their respective Mortgage Interest Rates over the sum of the Class A Interest Remittance Amount for the Class A Certificates, the Monthly Premium due to the Insurer and the Servicing Fee. "Insured Payment" means the amount, if any, by which (A) the Class A Remittance Amount exceeds (B) the sum of (i) the Available Payment Amount plus any amounts transferred from the Spread Account to the Collection Account and (ii) the aggregate amount of any previous Insured Payments for which the Insurer has not been reimbursed. "Mortgage Loan Losses" means the aggregate sum of the amount, if any, by which the sum of (i) the outstanding principal balance of each Mortgage Loan that became a Liquidated Mortgage Loan during the related Due Period (such principal balance determined immediately before such Mortgage Loan became a Liquidated Mortgage Loan) and accrued and unpaid interest thereon at the Mortgage Interest Rate to the date on which such Mortgage Loan became a Liquidated Mortgage Loan exceeds (ii) the Net Liquidation Proceeds received during such Due Period in connection with the liquidation of such Mortgage Loan which have not theretofore been used to reduce the Principal Balance of such Mortgage Loan. "Spread Account Draw" means an amount deposited into the Collection Account from the Spread Account equal to the excess of (i) the Class A Remittance Amount, over (ii) the Available Payment Amount less the fee of the Insurer and any provider of a Letter of Credit (as reduced by any portion of the Available Payment Amount that has been deposited in the Collection Account but may not be withdrawn therefrom pursuant to an order of a United States bankruptcy court of competent jurisdiction imposing a stay pursuant to Section 362 of the United States Bankruptcy Code). EXAMPLE OF DISTRIBUTIONS The following chart sets forth an example of distributions on the Class A Certificates based upon the assumption that the Certificates will be issued in March 1997. March 1.................... Cut-off Date. The Original Pool Principal Balance will be the aggregate principal balance of the Mortgage Loans on the Cut-off Date after application of all payments received prior to the Cut-off Date. March 1 -- March 31........ Due Period. The Servicer and any subservicers remit for deposit into the Principal and Interest Account all amounts received on account of the Mortgage Loans (other than interest accrued prior to the Cut-off Date). March 27................... LIBOR Determination Date. The Trustee determines one-month LIBOR with respect to the Adjustable Rate Certificates for the related Accrual Period commencing on the Closing Date. April 9.................... Determination Date. The Trustee determines, based on information provided by the Servicer, the amount of principal and interest that will be distributed to Certificateholders on April 15, 1997. April 10................... The Servicer transfers funds, including any Advances, in the Principal and Interest Account to the Collection Account. Not later than 10:00 a.m. on April 14................ The Trustee will notify the Servicer and the Insurer of the amount of the Insured Payment, if any, required to be distributed to the Class A Certificateholders on April 15, 1997. April 14................... First Record Date. Distributions on April 15, 1997 will be made to Certificateholders of record at the close of business on April 14, 1997. April 15................... Payment Date. The Trustee or its designee will transfer funds from the Collection Account into the Insurance Account, Spread Account and the Letter of Credit Fee Account, as required, and to Certificate- S-54 55 holders the amounts required to be distributed pursuant to the Pooling and Servicing Agreement and distributes the Remainder Excess Spread Amount, the Spread Account Excess and, after the Cross-Over Date, the entire Excess Spread, to the Class R Certificateholders. SECURITIES INSURANCE POLICY The Servicer will obtain the Securities Insurance Policy in favor of the Trustee for the benefit of the Class A Certificateholders. In the event that, on any Payment Date, the amount available for distribution (net of any Insured Payments) is less than the Class A Remittance Amount, the Trustee will make a draw on the Securities Insurance Policy for an Insured Payment, in an amount equal to any such deficiency. The Securities Insurance Policy provides for 100% coverage of the Class A Remittance Amount due on the Class A Certificates on each Payment Date. The Securities Insurance Policy provides protection for credit risk and does not guarantee to the Class A Certificateholders any specified rate of principal payments or prepayments. The Securities Insurance Policy does not guarantee payment of any LIBOR Interest Carryover. ADVANCES FROM THE PRINCIPAL AND INTEREST ACCOUNT Not later than the close of business on the third business day prior to each Payment Date, the Servicer shall withdraw from amounts on deposit in the Principal and Interest Account and held for future distribution and remit to the Trustee for deposit in the Collection Account an amount (the "Advance"), to be distributed on the related Payment Date, equal to the sum of the interest portions of the aggregate amount of Monthly Payments for each Mortgage Loan Group (net of the related Servicing Fee and, after the later to occur of (x) the Cross-Over Date and (y) the date on which there are no outstanding obligations to repay any draw on any Letter of Credit (each, an "LC Obligation"), the Excess Spread) accrued during the related Due Period, but uncollected as of the close of business on the last day of the related Due Period. The Servicer generally shall not be required to make such Advance from its own funds or be liable for the recovery thereof from collections on the Mortgage Loans for each Mortgage Loan Group or otherwise. SERVICING COMPENSATION As compensation for servicing and administering the Mortgage Loans, the Servicer is entitled to a fee (the "Servicing Fee") equal to 0.60% per annum (the "Servicing Fee Rate") of the outstanding principal balance of each Mortgage Loan, subject to certain limitations set forth in the Pooling and Servicing Agreement, payable monthly from the interest portion of monthly payments on the Mortgage Loans, Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds and certain other late collections on the Mortgage Loans. In addition to the Servicing Fee, the Servicer is entitled under the Pooling and Servicing Agreement to retain as additional servicing compensation any assumption and other administrative fees (including bad check charges, late payment fees and similar fees), the excess of any Net Liquidation Proceeds over the outstanding principal balance of a Liquidated Mortgage Loan, to the extent not otherwise required to be remitted to the Trustee for deposit into the Collection Account and not constituting any part of the Representative's Yield, and interest paid on funds on deposit in the Principal and Interest Account, earnings paid on Permitted Instruments, certain amounts representing excess funds released from the Insurance Account and similar items. TERMINATION; PURCHASE OF MORTGAGE LOANS The Pooling and Servicing Agreement will terminate upon notice to the Trustee of either: (a) the later of the distribution to Certificateholders of the final payment or collection with respect to the last Mortgage Loan (or Advances of such payment or collection by the Servicer), or the disposition of all funds with respect to the last Mortgage Loan and the remittance of all funds due under the Pooling and Servicing Agreement and the payment of all amounts due and payable to the Insurer and the Trustee or (b) mutual consent of the Servicer, the Insurer and all Certificateholders in writing; provided, however, that in no event will the Trust established by the Pooling and Servicing Agreement terminate later than twenty-one S-55 56 years after the death of the last surviving lineal descendant of the person named in the Pooling and Servicing Agreement, alive as of the date of the Pooling and Servicing Agreement. Subject to provisions in the Pooling and Servicing Agreement concerning adopting a plan of complete liquidation, the Servicer may, at its option, terminate the Pooling and Servicing Agreement on any date following the first Payment Date on which the Pool Principal Balance as of the last day of the related Due Period is less than 10% of the Original Pool Principal Balance by purchasing, on the next succeeding Payment Date, all of the outstanding Mortgage Loans and REO Properties then remaining in the Trust at a price equal to (i) the sum of (x) 100% of the aggregate outstanding principal balances of the Mortgage Loans and REO Properties, (y) accrued and unpaid interest thereon at a rate equal to the weighted average Mortgage Interest Rate and (z) any unpaid LIBOR Interest Carryover minus (ii) any amounts representing collections on the Mortgage Loans and REO Properties not yet applied to reduce the principal balance thereof or interest related thereto (the "Termination Price"). In connection with such purchase, the Servicer is required to pay any unpaid fees and expenses of the Trustee and the Insurer. In connection with a purchase by the Servicer as described above, the Servicer is required to remit to the Trustee all amounts then on deposit in the Principal and Interest Account that would have constituted part of the Available Payment Amount for subsequent Payment Dates absent such purchase. Any such purchase is required to be accomplished by deposit of the Termination Price into the Collection Account. AMENDMENT The Pooling and Servicing Agreement may be amended from time to time by the Servicer and the Trustee by written agreement, upon the prior written consent of the Insurer, without notice to, or consent of, the Certificateholders, to cure any ambiguity, to correct or supplement any provisions therein, to comply with any changes in the Code, or to make any other provisions with respect to matters or questions arising under the Pooling and Servicing Agreement which shall not be inconsistent with the provisions of the Pooling and Servicing Agreement, or any Custodial Agreement, provided that such action does not, as evidenced by an opinion of counsel delivered to the Trustee, adversely affect in any material respect the interests of any Certificateholder; and provided, further, that no such amendment is permitted to reduce in any manner the amount of, or delay the timing of, payments received on Mortgage Loans which are required to be distributed on any Certificate without the consent of the holder of such Certificate, or change the rights or obligations of any other party to the Pooling and Servicing Agreement without the consent of such party. The Pooling and Servicing Agreement also may be amended from time to time by the Representative, the Depositors, the Servicer and the Trustee, with the consent of the Insurer, the Majority in Aggregate Voting Interest and the holders of the majority of the Percentage Interest in the Class R Certificates 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 such amendment is permitted unless the Trustee receives an opinion of counsel, at the expense of the party requesting the change, that such change will not adversely affect the status of the Trust Fund as a REMIC or cause any tax to be imposed on the REMIC, and provided further, that no such amendment is permitted to reduce in any manner the amount of, or delay the timing of, payments received on Mortgage Loans which are required to be distributed on any Certificate without the consent of the holder of each such Certificate or reduce the percentage for each Class the holders of which are required to consent to any such amendment without the consent of the holders of 100% of each Class of Certificates affected thereby. Notwithstanding any contrary provision of the Pooling and Servicing Agreement, the Trustee is not permitted to consent to any amendment to the Pooling and Servicing Agreement unless it has first received an opinion of counsel to the effect that such amendment or the exercise of any power granted to the Servicer, the Representative, any Depositor, the Insurer or the Trustee in accordance with such amendment will not result in the imposition of tax on the Trust or cause the Trust Fund to fail to qualify as a REMIC at any time that any Certificate is outstanding. S-56 57 THE TRUSTEE First Bank National Association, a national banking association organized under the laws of the United States of America with its principal place of business in the State of Minnesota, will be named Trustee pursuant to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement provides that any corporation into which the Trustee may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Trustee shall be a party, or any corporation to which the Trustee may sell or transfer all or substantially all of its corporate trust business, shall be the successor Trustee provided that such corporation meets the requirements described below. Pursuant to the Pooling and Servicing Agreement, the Trustee is required at all times to be a banking association organized and doing business under the laws of the United States of America or of any State authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, whose long-term deposits, if any, are rated at least "BBB" by S&P and Baa2 by Moody's, or such lower rating as may be approved in writing by the Insurer, Moody's and S&P, subject to supervision or examination by federal or state authority and reasonably acceptable to the Insurer. If at any time the Trustee shall cease to be eligible in accordance with the provisions described in this paragraph, the Trustee shall give notice of such ineligibility to the Insurer and shall resign, upon the request of the Insurer or the Majority in Aggregate Voting Interest, in the manner and with the effect specified in the Pooling and Servicing Agreement. Any resignation or removal of the Trustee and appointment of a successor trustee shall become effective upon the acceptance of appointment by such successor trustee. The Trustee, or any successor trustee or trustees, may resign at any time by giving written notice to the Servicer, the Insurer and to all Certificateholders in the manner set forth in the Pooling and Servicing Agreement. Upon receiving notice of resignation, the Servicer, with the consent of the Insurer, is required to promptly appoint a successor trustee or trustees meeting the eligibility requirements set forth above in the manner set forth in the Pooling and Servicing Agreement. The Servicer will deliver a copy of the instrument used to appoint a successor trustee to the Certificateholders. If no successor trustee shall have been appointed and have accepted appointment within 60 days after the giving of such notice of resignation, the resigning trustee may petition any court of competent jurisdiction for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. The Majority in Aggregate Voting Interest or, if the Trustee fails to perform in accordance with the terms of the Pooling and Servicing Agreement, the Insurer, may remove the Trustee under the conditions set forth in the Pooling and Servicing Agreement and appoint a successor trustee in the manner set forth therein. At any time, for the purpose of meeting any legal requirements of any jurisdiction in which any part of the Trust Fund or property securing the same may at the time be located, the Servicer and the Trustee acting jointly shall have the power and shall execute and deliver all instruments to appoint one or more persons approved by the Trustee to act as co-trustee or co-trustees, jointly with the Trustee, or separate trustee or separate trustees, of all or any part of the Trust Fund, and to vest in such person or persons, in such capacity, such title to the Trust Fund, or any part thereof, and, subject to the provisions of the Pooling and Servicing Agreement, such powers, duties, obligations, rights and trusts as the Servicer and the Trustee may consider necessary or desirable. THE SECURITIES INSURANCE POLICY AND THE INSURER The information set forth in this section and in the financial statements of the Insurer set forth in Appendix A and Appendix B hereto has been provided by Financial Guaranty Insurance Company. No representation is made by the Representative, the Depositors, any Originator or any of their affiliates as to the accuracy or completeness of any such information. S-57 58 FINANCIAL GUARANTY INSURANCE COMPANY Financial Guaranty Insurance Company (the "Insurer"), a New York stock insurance company, is a monoline financial guaranty insurance company which, since January 1984, has been a leading insurer of bonds issued by municipal governmental subdivisions and agencies thereof. The Insurer also insures a variety of non-municipal structured debt obligations and pass-through securities. The Insurer is authorized to write insurance in all 50 states and the District of Columbia and is also authorized to carry on general insurance business in the United Kingdom and to write credit and guaranty insurance in France. The Insurer is a wholly-owned subsidiary of FGIC Corporation, a Delaware holding company. FGIC Corporation is a subsidiary of General Electric Capital Corporation ("GE Capital"). Neither the Corporation nor GE Capital is obligated to pay the debts of or the claims of the Insurer. The Insurer and its holding company, FGIC Corporation, are subject to regulation by the State of New York Insurance Department and by each other jurisdiction in which the Insurer is licensed to write insurance. These regulations vary from jurisdiction to jurisdiction, but generally require insurance holding companies and their insurance subsidiaries to register and file certain reports, including information concerning their capital structure, ownership and financial condition and require prior approval by the insurance department of their state of domicile of changes in control, of dividends and of other intercorporate transfer of assets and of transactions between insurance companies, their parents and affiliates. The Insurer is required to file quarterly and annual statutory financial statements and is subject to statutory restrictions concerning the types and quality of investments, the use of policy forms, premium rates and the size of risk that it may insure, subject to reinsurance. Additionally, the Insurer is subject to triennial audits by the State of New York Insurance Department. The Insurer considers its role in providing insurance to be credit enhancement rather than credit substitution. The Insurer only insures securities that it considers to be of investment grade quality. With respect to each category of obligations considered for insurance, the Insurer has established and maintains its own underwriting standards that are based on those aspects of credit quality that the Insurer deems important for the category and that take into account criteria established for the category typically used by rating agencies. Credit criteria for evaluating securities include economic and social trends, debt management, financial management and legal and administrative factors, the adequacy of anticipated cash flow, including the historical and expected performance of assets pledged for payment of securities under varying economic scenarios, underlying levels of protection such as insurance or overcollateralization, and, particularly in the case of long-term municipal securities, the importance of the project being financed. The Insurer also reviews the security features and reserves created by the financing documentation, as well as the financial and other covenants imposed upon the credit backing the issue. In connection with underwriting new issues, the Insurer sometimes requires, as a condition to insuring an issue, that collateral be pledged or, in some instances, that a third-party guarantee be provided for a term of the insured obligation by a party of acceptable credit quality obligated to make payment prior to any payment by the Insurer. Insurance written by the Insurer insures the full and timely payment of interest and principal when due on insured debt securities and timely interest and ultimate principal payments due in respect of pass-through securities such as the Class A Certificates. If the issuer of a security insured by the Insurer defaults on its obligations to pay such debt service, or, in the case of a pass-through security, available funds are insufficient to pay the insured amounts, the Insurer will make the scheduled insured payments, without regard to any acceleration of the securities which may have occurred, and will be subrogated to the rights of security holders to the extent of its payments. The claims paying ability of the Insurer is rated Aaa, "AAA" and "AAA" by Moody's, S&P and Fitch, respectively. In consideration for issuing its insurance, the Insurer receives a premium which is generally paid in full upon issuance of the policy or on an annual, semiannual or monthly basis. The premium rates charged S-58 59 depend principally on the credit strength of the securities as judged by the Insurer according to its internal credit rating system and the type of issue. As of September 30, 1996, and December 31, 1995 and 1994 the Insurer had written directly or assumed through reinsurance, guaranties of approximately $197.8 billion, $180.0 billion and $160.2 billion par value of securities, respectively (of which approximately 86 percent, 88 percent and 89 percent, respectively, constituted guaranties of municipal bonds), for which it had collected gross premiums of approximately $2.01 billion, $1.95 billion and $1.78 billion, respectively. As of September 30, 1996, the Insurer had reinsured approximately 18 percent of the risks it had written, 34 percent through quota share reinsurance and 66 percent through facultative arrangements. CAPITALIZATION The following table sets forth the capitalization of the Insurer as of December 31, 1994, December 31, 1995 and September 30, 1996, respectively, on the basis of generally accepted accounting principles. No material adverse change in the capitalization of the Insurer has occurred since September 30, 1996.
(UNAUDITED) DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1994 1995 1996 ------------- ------------- ------------- (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) Unearned Premiums................................ $ 757 $ 728 $ 685 Other Liabilities................................ 261 304 332 Stockholder's Equity Common Stock................................... 15 15 15 Additional Paid-in Capital..................... 334 334 334 Net Unrealized Gains(Losses)................... (42) 64 12 Foreign Currency Translation Adjustment........ (1) (2) (2) Retained Earnings.............................. 974 1,137 1,273 ------ ------ ------ Total Stockholder's Equity....................... 1,280 1,548 1,632 ------ ------ ------ Total Liabilities and Stockholder's Equity....... $ 2,298 $ 2,580 $ 2,649 ====== ====== ======
For further financial information concerning the Insurer, see the audited and unaudited financial statements of the Insurer included as Appendix A and Appendix B of this Prospectus Supplement. Copies of the Insurer's quarterly and annual statutory statements filed by the Insurer with the New York Insurance Department are available upon request to Financial Guaranty Insurance Company, 115 Broadway, New York, New York 10006, Attention: Corporate Communications Department. The Insurer's telephone number is (212) 312-3000. The Insurer does not accept any responsibility for the accuracy or completeness of this Prospectus Supplement or the Prospectus or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of information in this Prospectus Supplement regarding the Insurer and the Securities Insurance Policy set forth under the heading "The Securities Insurance Policy and The Insurer" and set forth in Appendix A and Appendix B. THE SECURITIES INSURANCE POLICY The Insurer will issue its Securities Guaranty Surety Bond for the Class A Certificates (the "Securities Insurance Policy"). The Securities Insurance Policy unconditionally guarantees the payment of Insured Payments on the Class A Certificates. The Insurer will make each required Insured Payment to the Trustee on the later of (i) the Payment Date on which such Insured Payment is distributable to the Class A Certificateholders pursuant to the Pooling and Servicing Agreement and (ii) the business day next following the day on which the Insurer shall have received telephonic or telegraphic notice, S-59 60 subsequently confirmed in writing, or written notice by registered or certified mail, from the Trustee, specifying that an Insured Payment is due in accordance with the terms of the Securities Insurance Policy. The Insurer's obligation under the Securities Insurance Policy will be discharged to the extent that funds are received by the Trustee for distribution to the Class A Certificateholders, whether or not such funds are properly distributed by the Trustee. For purposes of the Securities Insurance Policy, "Class A Certificateholder" as to a particular Certificate, does not and may not include the Trust, the Servicer, any Subservicer, the Representative, any Depositor or any Originator. The Insurer only insures the timely receipt of interest on the Class A Certificates and the ultimate receipt of principal on the Class A Certificates. The Securities Insurance Policy does not guarantee to the Class A Certificateholders any rate of principal payments on the Class A Certificates. The Securities Insurance Policy does not guarantee payment of any LIBOR Interest Carryover. The Securities Insurance Policy is non-cancelable. The Securities Insurance Policy expires and terminates without any action on the part of the Insurer or any other person on the date that is one year and one day following the date on which the Class A Certificates have been paid in full. In the absence of payments under the Securities Insurance Policy, Certificateholders will directly bear the credit and other risks associated with their undivided interest in the Trust Fund. The Securities Insurance Policy is non-cancelable. THE SECURITIES INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/ CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. ERISA CONSIDERATIONS The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), imposes certain restrictions on employee benefit plans that are subject to ERISA ("Plans") and on those persons who are fiduciaries with respect to "plan assets" of such Plans. In accordance with the general fiduciary standards of ERISA, a Plan fiduciary or any other individual contemplating purchasing the Class A Certificates with "plan assets" of any Plan should consider whether an investment in the Class A Certificates is permitted by the documents and instruments governing the Plan, consistent with the Plan's overall investment policy, and appropriate in view of the composition of its investment portfolio. Employee benefit plans that are governmental plans and certain church plans (if no election has been made under Section 410(d) of the Code) are not subject to ERISA requirements. Accordingly, assets of such plans may be invested in the Class A Certificates subject to the provisions of applicable federal and state law and, in the case of any such plan which is qualified under Section 401(a) of the Code and exempt from taxation under Section 501(a) of the Code, the restrictions imposed under Section 503(b) of the Code. In addition to imposing general fiduciary standards, ERISA and Section 4975 of the Code prohibit a broad range of transactions involving "plan assets" of a Plan or of a plan that is subject to Section 4975 of the Code (also a "Plan") and certain persons who are "parties in interest" under ERISA or "disqualified persons" under Section 4975 of the Code with respect to such Plans. If the assets of the Trust were treated as "plan assets" of a Plan whose "plan assets" are used to purchase or hold Class A Certificates, such an investment in Class A Certificates might constitute or result in a non-exempt prohibited transaction under ERISA or Section 4975 of the Code, unless a statutory or administrative exemption applies. Violation of the prohibited transaction rules could result in the imposition of excise taxes and/or other penalties and liabilities under ERISA and/or Section 4975 of the Code. S-60 61 FINAL PLAN ASSETS REGULATION The U.S. Department of Labor has issued a final regulation (the "Final Regulation") under which the purchase with "plan assets" of equity interests in an entity could, in certain circumstances, cause the entity's assets to be treated as "plan assets" of the investing Plan. Unless the Final Regulation provides an exemption from this "plan asset" treatment, and if such an exemption is not otherwise available under ERISA and Section 4975 of the Code, an undivided portion of the assets of the Trust will be treated, for purposes of applying the fiduciary standards and prohibited transaction rules of ERISA and Section 4975 of the Code, as "plan assets" of each Plan whose "plan assets" are used to purchase or hold Class A Certificates. UNDERWRITERS' PTES Salomon Brothers Inc ("Salomon"), The First Boston Corporation, a predecessor of Credit Suisse First Boston Corporation ("First Boston"), Shearson Lehman Hutton, Inc., a predecessor of an affiliate of Lehman Brothers Inc. ("Lehman") and Prudential Securities Incorporated ("Prudential") are the recipients of final prohibited transaction exemptions 56 Fed. Reg. 7413 (1991), 54 Fed. Reg. 42589 (1989), 54 Fed. Reg. 42597 (1989) and 55 Fed. Reg. 23147 (1990) and respectively (collectively, the "Underwriters' PTEs"), which may accord protection from violations under Sections 406 and 407 of ERISA and Section 4975 of the Code for Plans whose "plan assets" are used to acquire Class A Certificates. The Underwriters' PTEs apply to a certificate (a) which represents a beneficial ownership interest in the assets of a trust and entitle the holder to pass-through payments of principal, interest and/ or other payments made with respect to the assets of the trust, and (b) with respect to which Salomon, First Boston, Lehman and Prudential or any of their affiliates is either the sole underwriter, the manager or co-manager of the underwriting syndicate or a selling or placement agent. The corpus of a trust to which the Underwriters' PTEs apply may consist of (1) obligations which bear interest or are purchased at a discount, and which are identified on or before the Closing Date for deposit in the Trust which are secured by (A) single-family residential, multifamily residential or commercial real property (including obligations secured by leasehold interests on commercial real property), or (B) shares issued by a cooperative housing association; and (2) "guaranteed governmental mortgage pool certificates" (as defined in the Final Regulation). Plans whose "plan assets" are used to acquire Class A Certificates may be eligible for protection under the Underwriters' PTEs if: (a) assets of the type included as Trust Assets have been included in other investment pools ("Other Pools"); (b) Certificates evidencing interests in Other Pools have been both (1) rated in one of the three highest generic rating categories by Standard & Poor's Rating Services, Moody's Investors Service, Duff & Phelps Credit Rating Co. or Fitch Investors Services, L.P.; and (2) purchased by investors other than Plans, for at least one year prior to a Plan's acquisition of Certificates in reliance upon an Underwriters' PTE; (c) the Class of Certificates acquired by the Plan are not subordinated to other Classes of Certificates of that series with respect to the right to receive payment in the event of defaults or delinquencies on the underlying trust assets; (d) the Plan is an "accredited investor" (as defined in Rule 501(a)(1) of Regulation D under the Securities Act); (e) 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; (f) the Trustee is not an affiliate of any member of the Restricted Group or any of their affiliates; and S-61 62 (g) the sum of all payments made to and retained by the Underwriter in connection with the distribution or placement of the Certificates represents not more than reasonable compensation for underwriting the Certificates; the sum of all payments made to and retained by any Depositor pursuant to the sale of the trust assets to the Trust represents not more than the fair market value of such trust assets; and the sum of all payments made to and retained by the Servicer represents not more than reasonable compensation for such Servicers' services under the Pooling and Servicing Agreement and reimbursement of such Servicers' reasonable expenses in connection herewith. In addition, the Underwriters' PTEs will not provide exemptive relief for certain transactions prohibited by Section 406(b) of ERISA or Section 4975(c)(1)(E) or (F) of the Code which may result from a Plan's investment in Certificates if: (1) the Plan's investment in any Class of Certificates exceeds 25% of the outstanding Certificates of that Class at the time of acquisition; (2) 25% or more of the "plan assets" with respect to which the investing fiduciary has discretionary authority or renders investment advice are invested in certificates evidencing interest in trusts sponsored or containing assets sold or serviced by the same entity; (3) the Plan is sponsored by any Depositor, any Underwriter, the Trustee, any Servicer, any Pool, Special Hazard or Primary Mortgage Insurer or the obligor under any other credit support mechanism (the "Restricted Group"), an obligor with respect to obligations constituting more than 5% of the aggregate unamortized principal balance of the trust assets on the date of the initial issuance of Certificates (a "Major Obligor"), or their affiliates; or (4) the Plan fiduciary responsible for the decision to invest or any of its affiliates is a Major Obligor. Class A Certificates generally are expected to satisfy conditions (a), (b), (c) and (f) above. Whether the other conditions of the Underwriters' PTEs will be satisfied as to the Class A Certificates will depend upon the relevant facts and circumstances existing at the time "plan assets" of a Plan are used to acquire Class A Certificates. Any fiduciary or other Plan investor who proposes to cause "plan assets" of any Plan to acquire Class A Certificates in reliance upon the Underwriters' PTEs should determine whether all of the applicable conditions are satisfied and consult with its counsel regarding other factors that may affect the applicability of Underwriters' PTEs. GENERAL CONSIDERATIONS Any member of the Restricted Group, a Major Obligor or any of their affiliates might be considered or might become a "party in interest" or "disqualified person" with respect to a Plan. In that event, the acquisition or holding of Class A Certificates by, on behalf of or with "plan assets" of any such Plan might be viewed as giving rise to a prohibited transaction under ERISA and Section 4975 of the Code, unless exemption is available. Accordingly, before a fiduciary or other Plan investor makes the investment decision to purchase, to commit to purchase or to hold Class A Certificates, the fiduciary or other Plan investor should determine (a) whether the Underwriters' PTEs are available, (b) whether any other prohibited transaction exemption (if required) is available under ERISA and Section 4975 of the Code, or (c) whether an exemption from "plan asset" treatment is available to the Trust. The fiduciary or other Plan investor should also consult the ERISA discussion in the Prospectus for further information regarding the application of ERISA to the Class A Certificates. Any fiduciary or other Plan investor who proposes to invest "plan assets" of any Plan in the Class A Certificates should consult with its counsel with respect to the potential consequences under ERISA and Section 4975 of the Code of the acquisition and ownership of such Certificates. S-62 63 LEGAL INVESTMENT Although upon their initial issuance the Class A Certificates will be rated Aaa by Moody's and "AAA" by S&P, the Class A Certificates (other than the Adjustable Rate Certificates) will not constitute "mortgage related securities" under the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because the Mortgage Pool includes Mortgage Loans that are secured by second Mortgages. The Adjustable Rate Certificates will constitute "mortgage related securities" under SMMEA. Investors should consult their own legal advisers in determining whether and to what extent the Class A Certificates constitute legal investments for such investors. USE OF PROCEEDS Substantially all of the net proceeds to be received from the sale of the Class A Certificates will be received by the Depositors, which will apply such proceeds to pay to the Originators a portion of the purchase price for the Mortgage Loans. UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement (the "Underwriting Agreement") among the Depositors and the Underwriters named below (the "Underwriters"), the Depositors have agreed to sell to the Underwriters, and the Underwriters have agreed to purchase from the Trust and the Depositors, the respective principal amounts of the Class A Certificates (based on the original Principal Balances of Class A Certificates set forth herein) set forth opposite their names below.
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6 CLASS A-7 CLASS A-8 UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES - ---------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Salomon Brothers Inc...... $ 49,233,000 $ 4,579,000 $ 31,778,000 $ 11,857,000 $ 6,384,000 $ 8,519,000 $ 12,500,000 $ 25,263,000 Credit Suisse First Boston Corporation... $ 49,200,000 $ 4,560,000 $ 31,765,000 $ 11,850,000 $ 6,370,000 $ 8,490,000 $ 12,500,000 $ 25,260,000 Lehman Brothers Inc...... $ 49,200,000 $ 4,560,000 $ 31,765,000 $ 11,850,000 $ 6,370,000 $ 8,490,000 $ 12,500,000 $ 25,260,000 Prudential Securities Incorporated... $ 49,200,000 $ 4,560,000 $ 31,765,000 $ 11,850,000 $ 6,370,000 $ 8,490,000 $ 12,500,000 $ 25,260,000 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total... $196,833,000 $ 18,259,000 $127,073,000 $ 47,407,000 $ 25,494,000 $ 33,989,000 $ 50,000,000 $101,043,000 =============== =============== =============== ============= ============= ============= ============= ===============
Under the terms of the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the Class A Certificates offered hereby if any of the Class A Certificates are purchased. The Underwriters have advised the Depositors that they propose to offer the Class A Certificates to the public at the prices set forth on the cover page hereof, and to certain dealers at such prices less a concession not in excess of 0.125% of the denomination of the Class A-1 Certificates, 0.150% of the denomination of the Class A-2 Certificates, 0.200% of the denomination of the Class A-3 Certificates, 0.225% of the denomination of the Class A-4 Certificates, 0.275% of the denomination of the Class A-5 Certificates, 0.300% of the denomination of the Class A-6 Certificates, 0.275% of the denomination of the Class A-7 Certificates and 0.150% of the denomination of the Class A-8 Certificates. The Underwriters may allow and such dealers may reallow a concession to certain other dealers not in excess of 0.100% of the denomination of the Class A-1 Certificates, 0.100% of the denomination of the Class A-2 Certificates, 0.150% of the denomination of the Class A-3 Certificates, 0.150% of the denomination of the Class A-4 Certificates, 0.200% of the denomination of the Class A-5 Certificates, 0.225% of the denomination of the Class A-6 Certificates, 0.225% of the denomination of the Class A-7 Certificates and 0.100% of the denomination of the Class A-8 Certificates. After the initial public offering, the public offering prices and such concessions may be changed. Until the distribution of the Class A Certificates is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase such Certificates. As an exception to these rules, the Underwriters are permitted to engage in S-63 64 certain transactions that stabilize the price of the Certificates. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of such Certificates. If the Underwriters create a short position in any such Class of Class A Certificates in connection with the offering, by selling more of any such Class than is set forth on the cover page of this Prospectus Supplement, the Underwriters may reduce that short position by purchasing Certificates of such Class in the open market. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The Underwriters make no representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the prices of such Certificates. In addition, the Underwriters make no representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Underwriting Agreement, together with a Representations Letter from the Originators and the Depositors to the Underwriters, provide that the Originators and the Depositors will indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. EXPERTS The financial statements of Financial Guaranty Insurance Company, included in this Prospectus Supplement in Appendix A and in the related registration statement, as of December 31, 1995 and 1994 and for each of the years in the three year period ended December 31, 1995, have been included in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing in Appendix A and in the related registration statement, and upon the authority of such firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP refers to changes, in 1993, in accounting methods for multiple-year retrospectively rated reinsurance contracts, and for the adoption of the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." RATINGS The Class A Certificates will be rated at their initial issuance Aaa by Moody's and "AAA" by S&P. Such ratings are the highest long-term ratings that such Rating Agencies assign to securities. The ratings assigned to the Class A Certificates will be based primarily on the claims-paying ability of the Insurer and do not address payment of any LIBOR Interest Carryover. 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. No person is obligated to maintain the rating on any Certificate, and, accordingly, there can be no assurance that the ratings assigned to the Certificates upon initial issuance will not be lowered or withdrawn by a Rating Agency at any time thereafter. The ratings do not represent any assessment of the likelihood or rate of principal prepayments. LEGAL MATTERS Certain legal matters relating to the Offered Securities will be passed upon for the Originators, Depositors and EquiCredit by Hutchins, Wheeler & Dittmar, A Professional Corporation, Boston, Massachusetts and for the Underwriters by Orrick, Herrington & Sutcliffe LLP, New York, New York. Orrick, Herrington & Sutcliffe LLP will also pass upon certain legal and ERISA matters for the Depositors. Certain federal income tax matters will also be passed upon for the Depositors by Orrick, Herrington & Sutcliffe LLP (in such capacity, "Tax Counsel"). S-64 65 APPENDIX A AUDITED FINANCIALS OF INSURER FINANCIAL GUARANTY INSURANCE COMPANY FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (WITH INDEPENDENT AUDITORS' REPORT THEREON) A-1 66 FINANCIAL GUARANTY INSURANCE COMPANY AUDITED FINANCIAL STATEMENTS DECEMBER 31, 1995
PAGE ---- Report of Independent Auditors........................................................ A-3 Balance Sheets........................................................................ A-4 Statements of Income.................................................................. A-5 Statements of Stockholder's Equity.................................................... A-6 Statements of Cash Flows.............................................................. A-7 Notes to Financial Statements......................................................... A-8
A-2 67 LOGO Report of Independent Auditors' The Board of Directors and Stockholder Financial Guaranty Insurance Company: We have audited the accompanying balance sheets of Financial Guaranty Insurance Company as of December 31, 1995 and 1994, and the related statements of income, stockholder's equity, and cash flows for each of the years in the three year period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Financial Guaranty Insurance Company as of December 31, 1995 and 1994 and the results of its operations and its cash flows for each of the years in the three year period then ended in conformity with generally accepted accounting principles. As described in notes 6 and 2, respectively, in 1993, the Company changed its methods of accounting for multiple-year retrospectively rated reinsurance contracts and for the adoption of the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. LOGO January 19, 1996 LOGO A-3 68 FINANCIAL GUARANTY INSURANCE COMPANY BALANCE SHEETS ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31, 1995 1994 ------------ ------------ ASSETS Fixed maturity securities available-for-sale (amortized cost of $2,043,453 in 1995 and $1,954,177 in 1994)..................... $2,141,584 $1,889,910 Short-term investments, at cost, which approximates market....... 91,032 75,674 Cash............................................................. 199 1,766 Accrued investment income........................................ 37,347 40,637 Reinsurance recoverable.......................................... 7,672 14,472 Prepaid reinsurance premiums..................................... 162,087 164,668 Deferred policy acquisition costs................................ 94,868 90,928 Property and equipment, net of accumulated depreciation ($12,861 in 1995 and $10,512 in 1994)................................... 6,314 7,912 Receivable for securities sold................................... 26,572 -- Prepaid expenses and other assets................................ 12,627 12,243 ---------- ---------- Total assets........................................... $2,580,302 $2,298,210 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Unearned premiums.............................................. $ 727,535 $ 757,425 Loss and loss adjustment expenses.............................. 77,808 98,746 Ceded reinsurance balances payable............................. 1,942 2,258 Accounts payable and accrued expenses.......................... 32,811 28,489 Payable to Parent.............................................. 1,647 18,600 Current federal income taxes payable........................... 51,296 82,123 Deferred federal income taxes.................................. 99,171 22,640 Payable for securities purchased............................... 40,211 8,206 ---------- ---------- Total liabilities...................................... 1,032,421 1,018,487 ========== ========== Stockholder's Equity: Common stock, par value $1,500 per share; 10,000 shares authorized, issued and outstanding............... 15,000 15,000 Additional paid-in capital..................................... 334,011 334,011 Net unrealized gains (losses) on fixed maturity securities available-for-sale, net of tax.............................. 63,785 (41,773) Foreign currency translation adjustment........................ (1,499) (1,221) Retained earnings.............................................. 1,136,584 973,706 ---------- ---------- Total stockholder's equity............................. 1,547,881 1,279,723 ---------- ---------- Total liabilities and stockholder's equity............. $2,580,302 $2,298,210 ========== ==========
See accompanying notes to financial statements. A-4 69 FINANCIAL GUARANTY INSURANCE COMPANY STATEMENTS OF INCOME ($ IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- REVENUES: Gross premiums written................................ $ 97,288 $161,940 $291,052 Ceded premiums........................................ (19,319) (46,477) (49,914) -------- -------- -------- Net premiums written............................... 77,969 115,463 241,138 Decrease (increase) in net unearned premiums.......... 27,309 53,364 (74,902) -------- -------- -------- Net premiums earned................................ 105,278 168,827 166,236 Net investment income................................. 120,398 109,828 99,920 Net realized gains.................................... 30,762 5,898 35,439 -------- -------- -------- Total revenues................................ 256,438 284,553 301,595 -------- -------- -------- EXPENSES: Loss and loss adjustment expenses..................... (8,426) 3,646 42,894 Policy acquisition costs.............................. 13,072 15,060 19,592 (Increase) decrease in deferred policy acquisition costs.............................................. (3,940) 3,709 2,658 Other underwriting expenses........................... 19,100 21,182 21,878 -------- -------- -------- Total expenses................................ 19,806 43,597 87,022 -------- -------- -------- Income before provision for Federal income taxes...... 236,632 240,956 214,573 -------- -------- -------- Federal income tax expense (benefit): Current............................................ 28,913 43,484 59,505 Deferred........................................... 19,841 7,741 (7,284) -------- -------- -------- Total Federal income tax expense................... 48,754 51,225 52,221 -------- -------- -------- Net income before cumulative effect of change in accounting principle............................. 187,878 189,731 162,352 -------- -------- -------- Net cumulative effect of change in accounting principle........................................ -- -- 3,008 -------- -------- -------- Net income.................................... $187,878 $189,731 $165,360 ======== ======== ========
See accompanying notes to financial statements. A-5 70 FINANCIAL GUARANTY INSURANCE COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY ($ IN THOUSANDS)
NET UNREALIZED GAINS (LOSSES) ON ADDITIONAL FIXED MATURITY SECURITIES FOREIGN COMMON PAID-IN AVAILABLE-FOR-SALE, CURRENCY RETAINED STOCK CAPITAL NET OF TAX ADJUSTMENT EARNINGS ------- ---------- ------------------------- ---------- ---------- Balance, January 1, 1993.... $ 2,500 $ 324,639 $ 7,267 $ (1,597) $ 618,615 Net income.................. -- -- -- -- 165,360 Capital contribution........ -- 21,872 -- -- -- Adjustment to common stock par value................. 12,500 (12,500) -- -- -- Unrealized gains on fixed maturity securities previously held at market, net of tax of ($713)...... -- -- (1,325) -- -- Implementation of change in accounting for adoption of SFAS 115, net of tax of $45,643................... -- -- 84,766 -- -- Foreign currency translation adjustment................ -- -- -- (668) -- ------- -------- -------- ------- ---------- Balance, December 31, 1993.. 15,000 334,011 90,708 (2,265) 783,975 Net income.................. -- -- -- -- 189,731 Unrealized losses on fixed maturity securities available-for-sale, net of tax of ($71,336).......... -- -- (132,481) -- -- Foreign currency translation adjustment................ -- -- -- 1,044 -- ------- -------- -------- ------- ---------- Balance, December 31, 1994.. 15,000 334,011 (41,773) (1,221) 973,706 Net income.................. -- -- -- -- 187,878 Dividend paid............... -- -- -- -- (25,000) Unrealized gains on fixed maturity securities available for sale, net of tax of $56,839............ -- -- 105,558 -- -- Foreign currency translation adjustment................ -- -- -- (278) -- ------- -------- -------- ------- ---------- Balance, December 31, 1995.. $15,000 $ 334,011 $ 63,785 $ (1,499) $1,136,584 ======= ======== ======== ======= ==========
See accompanying notes to financial statements. A-6 71 FINANCIAL GUARANTY INSURANCE COMPANY STATEMENTS OF CASH FLOWS ($ IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1994 1993 --------- --------- ----------- OPERATING ACTIVITIES: Net income.................................... $ 187,878 $ 189,731 $ 165,360 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle, net of tax.................................. -- -- (3,008) Change in unearned premiums................... (29,890) (45,927) 90,429 Change in loss and loss adjustment expense reserves.................................... (20,938) 2,648 51,264 Depreciation of property and equipment........ 2,348 2,689 2,012 Change in reinsurance receivable.............. 6,800 (304) (9,040) Change in prepaid reinsurance premiums........ 2,581 (7,437) (15,527) Change in foreign currency translation adjustment.................................. (427) 1,607 (1,029) Policy acquisition costs deferred............. (16,219) (18,306) (19,592) Amortization of deferred policy acquisition costs....................................... 12,279 22,015 22,250 Change in accrued investment income, and prepaid expenses and other assets................... 2,906 (5,150) (9,048) Change in other liabilities................... (12,946) 2,577 7,035 Change in deferred income taxes............... 19,841 7,741 (7,284) Amortization of fixed maturity securities..... 1,922 5,112 8,976 Change in current income taxes payable........ (30,827) 33,391 30,089 Net realized gains on investments............. (30,762) (5,898) (35,439) -------- -------- ----------- Net cash provided by operating activities..... 94,546 184,489 277,448 -------- -------- ----------- INVESTING ACTIVITIES: Sales and maturities of fixed maturity securities....................................... 836,103 550,534 789,036 Purchases of fixed maturity securities........ (891,108) (721,908) (1,090,550) Purchases, sales and maturities of short-term investments, net............................ (15,358) (11,486) 4,164 Purchases of property and equipment, net...... (750) (1,290) (985) -------- -------- ----------- Net cash used in investing activities......... (71,113) (184,150) (298,335) -------- -------- ----------- FINANCING ACTIVITIES: Dividends paid..................................... (25,000) -- -- Capital contribution.......................... -- -- 21,872 -------- -------- ----------- Net cash provided by financing activities..... (25,000) -- 21,872 -------- -------- ----------- (Decrease) Increase in cash................... (1,567) 339 985 Cash at beginning of year..................... 1,766 1,427 442 -------- -------- ----------- Cash at end of year........................... $ 199 $ 1,766 $ 1,427 ======== ======== ===========
See accompanying notes to financial statements. A-7 72 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (1) BUSINESS Financial Guaranty Insurance Company (the "Company"), a wholly-owned insurance subsidiary of FGIC Corporation (the "Parent"), provides financial guaranty insurance on newly issued municipal bonds and municipal bonds trading in the secondary market, the latter including bonds held by unit investment trusts and mutual funds. The Company also insures structured debt issues outside the municipal market. Approximately 88% of the business written since inception by the Company has been municipal bond insurance. The Company insures only those securities that, in its judgment, are of investment grade quality. Municipal bond insurance written by the Company insures the full and timely payment of principal and interest when due on scheduled maturity, sinking fund or other mandatory redemption and interest payment dates to the holders of municipal securities. The Company's insurance policies do not provide for accelerated payment of the principal of, or interest on, the bond insured in the case of a payment default. If the issuer of a Company-insured bond defaults on its obligation to pay debt service, the Company will make scheduled interest and principal payments as due and is subrogated to the rights of bondholders to the extent of payments made by it. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements have been prepared on the basis of generally accepted accounting principles ("GAAP") which differ in certain respects from the accounting practices prescribed or permitted by regulatory authorities (see Note 3). The prior years financial statements have been reclassified to conform to the 1995 presentation. Significant accounting policies are as follows: Investments As of December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities." The Statement defines three categories for classification of debt securities and the related accounting treatment for each respective category. The Company has determined that its fixed maturity securities portfolio should be classified as available-for-sale. Under SFAS 115, securities held as available-for-sale are recorded at fair value and unrealized holding gains/losses are recorded as a separate component of stockholder's equity, net of applicable income taxes. Short-term investments are carried at cost, which approximates fair value. Bond discounts and premiums are amortized over the remaining terms of the securities. Realized gains or losses on the sale of investments are determined on the basis of specific identification. Premium Revenue Recognition Premiums are earned over the period at risk in proportion to the amount of coverage provided which, for financial guaranty insurance policies, generally declines according to predetermined schedules. When unscheduled refundings of municipal bonds occur, the related unearned premiums, net of premium credits allowed against the premiums charged for insurance of refunding issues and applicable A-8 73 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) acquisition costs, are earned immediately. Unearned premiums represent the portion of premiums written related to coverage yet to be provided on policies in force. Policy Acquisition Costs Policy acquisition costs include only those expenses that relate directly to premium production. Such costs include compensation of employees involved in underwriting, marketing and policy issuance functions, rating agency fees, state premium taxes and certain other underwriting expenses, offset by ceding commission income on premiums ceded to reinsurers (see Note 6). Net acquisition costs are deferred and amortized over the period in which the related premiums are earned. Anticipated loss and loss adjustment expenses are considered in determining the recoverability of acquisition costs. Loss and Loss Adjustment Expenses Provision for loss and loss adjustment expenses is made in an amount equal to the present value of unpaid principal and interest and other payments due under insured risks at the balance sheet date for which, in management's judgment, the likelihood of default is probable. Such reserves amounted to $77.8 million and $98.7 million at December 31, 1995 and 1994, respectively. As of December 31, 1995 and 1994, such reserves included $28.8 million and $71.0 million, respectively, established based on an evaluation of the insured portfolio in light of current economic conditions and other relevant factors. Loss and loss adjustment expenses include amounts discounted at an interest rate of 5.5% in 1995 and 7.8% in 1994. The reserve for loss and loss adjustment expenses is necessarily based upon estimates, however, in management's opinion the reserves for loss and loss adjustment expenses is adequate. However, actual results will likely differ from those estimates. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These temporary differences relate principally to unrealized gains (losses) on fixed maturity securities available-for-sale, premium revenue recognition, deferred acquisition costs and deferred compensation. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Financial guaranty insurance companies are permitted to deduct from taxable income, subject to certain limitations, amounts added to statutory contingency reserves (see Note 3). The amounts deducted must be included in taxable income upon their release from the reserves or upon earlier release of such amounts from such reserves to cover excess losses as permitted by insurance regulators. The amounts deducted are allowed as deductions from taxable income only to the extent that U.S. government non-interest bearing tax and loss bonds are purchased and held in an amount equal to the tax benefit attributable to such deductions. Property and Equipment Property and equipment consists of furniture, fixtures, equipment and leasehold improvements which are recorded at cost and are charged to income over their estimated service lives. Office furniture and equipment are depreciated straight-line over five years. Leasehold improvements are amortized over their estimated service life or over the life of the lease, whichever is shorter. Computer equipment and software are depreciated over three years. Maintenance and repairs are charged to expense as incurred. A-9 74 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Foreign Currency Translation The Company has established foreign branches in France and the United Kingdom and determined that the functional currencies of these branches are local currencies. Accordingly, the assets and liabilities of these foreign branches are translated into U.S. dollars at the rates of exchange existing at December 31, 1995 and 1994 and revenues and expenses are translated at average monthly exchange rates. The cumulative translation loss at December 31, 1995 and 1994 was $1.5 million and $1.2 million, respectively, net of tax, and is reported as a separate component of stockholder's equity. (3) STATUTORY ACCOUNTING PRACTICES The financial statements are prepared on the basis of GAAP, which differs in certain respects from accounting practices prescribed or permitted by state insurance regulatory authorities. The following are the significant ways in which statutory-basis accounting practices differ from GAAP: (a) premiums are earned in proportion to the reduction of the related risk rather than in proportion to the coverage provided; (b) policy acquisition costs are charged to current operations as incurred rather than as related premiums are earned; (c) a contingency reserve is computed on the basis of statutory requirements for the security of all policyholders, regardless of whether loss contingencies actually exist, whereas under GAAP, a reserve is established based on an ultimate estimate of exposure; (d) certain assets designated as non-admitted assets are charged directly against surplus but are reflected as assets under GAAP, if recoverable; (e) federal income taxes are only provided with respect to taxable income for which income taxes are currently payable, while under GAAP taxes are also provided for differences between the financial reporting and the tax bases of assets and liabilities; (f) purchases of tax and loss bonds are reflected as admitted assets, while under GAAP they are recorded as federal income tax payments; and (g) all fixed income investments are carried at amortized cost rather than at fair value for securities classified as available-for-sale under GAAP. A-10 75 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following is a reconciliation of net income and stockholder's equity presented on a GAAP basis to the corresponding amounts reported on a statutory-basis for the periods indicated below (in thousands):
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------- 1995 1994 1993 ----------------------- ----------------------- ----------------------- NET STOCKHOLDER'S NET STOCKHOLDER'S NET STOCKHOLDER'S INCOME EQUITY INCOME EQUITY INCOME EQUITY -------- ------------- -------- ------------- -------- ------------- GAAP basis amount.......... $187,878 $ 1,547,881 $189,731 $ 1,279,723 $165,360 1,221,429 Premium revenue recognition.............. (22,555) (166,927) (4,970) (144,372) (16,054) (139,401) Deferral of acquisition costs.................... (3,940) (94,868) 3,709 (90,928) 2,658 (94,637) Contingency reserve........ -- (386,564) -- (328,073) -- (252,542) Non-admitted assets........ -- (5,731) -- (7,566) -- (8,951) Case basis loss reserves... 4,048 (52) (3,340) (4,100) 1,626 (759) Portfolio loss reserves.... (22,100) 24,000 (11,050) 46,100 43,650 57,150 Deferral of income taxes (benefits)............... 19,842 64,825 7,741 45,134 (7,284) 35,209 Unrealized gains (losses) on fixed maturity securities held at fair value, net of tax........ -- (63,785) -- 41,773 -- (90,708) Recognition of profit commission............... 3,096 (5,744) (2,410) (8,840) (4,811) (4,811) Provision for unauthorized reinsurance.............. -- -- -- (266) -- -- Contingency reserve tax deduction (see Note 2)... -- 78,196 -- 55,496 -- 45,402 Allocation of tax benefits due to Parent's net operating loss to the Company (see Note 5)..... 637 10,290 (63) 9,653 -- 9,716 -------- ---------- -------- ---------- -------- ---------- Statutory-basis amount..... $166,906 $ 1,001,521 $179,348 $ 893,734 $185,145 $ 777,097 ======== ========== ======== ========== ======== ==========
(4) INVESTMENTS Investments in fixed maturity securities carried at fair value of $3.2 million and $3.0 million as of December 31, 1995 and 1994, respectively, were on deposit with various regulatory authorities as required by law. A-11 76 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The amortized cost and fair values of short-term investments and of investments in fixed maturity securities classified as available-for-sale are as follows (in thousands):
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR 1995 COST GAINS LOSSES VALUE - ----------------------------------------- ---------- ---------- ---------- ---------- U.S. Treasury securities and obligations of U.S. government corporations and agencies............................... $ 71,182 $ 1,696 -- $ 72,878 Obligations of states and political subdivisions........................... 1,942,001 98,458 $1,625 2,038,834 Debt securities issued by foreign governments............................ 30,270 152 550 29,872 ---------- -------- ------ ---------- Investments available-for-sale........... 2,043,453 100,306 2,175 2,141,584 Short-term investments................... 91,032 -- -- 91,032 ---------- -------- ------ ---------- Total.......................... $2,134,485 $ 100,306 $2,175 $2,232,616 ========== ======== ====== ==========
The amortized cost and fair values of short-term investments and of investments in fixed maturity securities available-for-sale at December 31, 1995, by contractual maturity date, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED FAIR 1995 COST VALUE ---------------------------------------------------------- ---------- ---------- Due in one year or less................................... $ 99,894 $ 99,984 Due after one year through five years..................... 137,977 141,235 Due after five years through ten years.................... 287,441 300,560 Due after ten years through twenty years.................. 1,406,219 1,476,261 Due after twenty years.................................... 202,954 214,576 ---------- ---------- Total..................................................... $2,134,485 $2,232,616 ========== ==========
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR 1994 COST GAINS LOSSES VALUE - ----------------------------------------- ---------- ---------- ---------- ---------- U.S. Treasury securities and obligations of U.S. government corporations and agencies............................... $ 10,945 $ 8 $ (519) $ 10,434 Obligations of states and political subdivisions........................... 1,839,566 25,809 (85,200) 1,780,175 Debt securities issued by foreign governments............................ 103,666 400 (4,765) 99,301 ---------- ------- -------- ---------- Investments available-for-sale........... 1,954,177 26,217 (90,484) 1,889,910 Short-term investments................... 75,674 -- -- 75,674 ---------- ------- -------- ---------- Total.......................... $2,029,851 $ 26,217 $ (90,484) $1,965,584 ========== ======= ======== ==========
In 1995, 1994 and 1993, proceeds from sales of investments in fixed maturity securities available-for-sale carried at fair value were $836.1 million, $550.5 million, and $789.0 million, respectively. For 1995, 1994 and 1993 gross gains of $36.3 million, $18.2 million and $36.1 million respectively, and gross losses of $5.5 million, $12.3 million and $1.0 million respectively, were realized on such sales. A-12 77 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Net investment income of the Company is derived from the following sources (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- Income from fixed maturity securities........... $112,684 $108,519 $ 97,121 Income from short-term investments.............. 8,450 2,479 3,914 -------- -------- -------- Total investment income......................... 121,134 110,998 101,035 Investment expenses............................. 736 1,170 1,115 -------- -------- -------- Net investment income........................... $120,398 $109,828 $ 99,920 ======== ======== ========
As of December 31, 1995, the Company did not have more than 10% of its investment portfolio concentrated in a single issuer or industry. (5) INCOME TAXES The Company files a federal tax return as part of the consolidated return of General Electric Capital Corporation ("GE Capital"). Under a tax sharing agreement with GE Capital, taxes are allocated to the Company and the Parent based upon their respective contributions to consolidated net income. The Company's effective federal corporate tax rate (20.6 percent in 1995, 21.3 percent in 1994 and 24.3 percent in 1993) is less than the corporate tax rate on ordinary income of 35 percent in 1995, 1994 and 1993. Federal income tax expense (benefit) relating to operations of the Company for 1995, 1994 and 1993 is comprised of the following (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 ------- ------- ------- Current tax expense................................. $28,913 $43,484 $59,505 Deferred tax expense................................ 19,841 7,741 (7,284) ------- ------- ------- Federal income tax expense.......................... $48,754 $51,225 $52,221 ======= ======= =======
The following is a reconciliation of federal income taxes computed at the statutory rate and the provision for federal income taxes (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- Income taxes computed on income before provision for federal income taxes, at the statutory rate.......................................... $ 82,821 $ 84,334 $ 75,101 Tax effect of: Tax-exempt interest........................... (30,630) (30,089) (27,185) Other, net.................................... (3,437) (3,020) 4,305 -------- -------- -------- Provision for income taxes...................... $ 48,754 $ 51,225 $ 52,221 ======== ======== ========
A-13 78 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities at December 31, 1995 and 1994 are presented below (in thousands):
1995 1994 -------- ------- Deferred tax assets: Unrealized losses on fixed maturity securities, available-for-sale....................................... -- $22,493 Loss reserves............................................... $ 8,382 16,136 Deferred compensation....................................... 5,735 9,685 Tax over book capital gains................................. 1,069 365 Other....................................................... 3,248 3,760 -------- ------- Total gross deferred tax assets............................... 18,434 52,439 -------- ------- Deferred tax liabilities: Unrealized gains on fixed maturity securities, available-for-sale....................................... 34,346 -- Deferred acquisition costs.................................. 33,204 31,825 Premium revenue recognition................................. 32,791 24,674 Rate differential on tax and loss bonds..................... 9,454 9,454 Other....................................................... 7,810 9,126 -------- ------- Total gross deferred tax liabilities.......................... 117,605 75,079 -------- ------- Net deferred tax liability.................................... $ 99,171 $22,640 ======== =======
Based upon the level of historical taxable income, projections of future taxable income over the periods in which the deferred tax assets are deductible and the estimated reversal of future taxable temporary differences, the Company believes it is more likely than not that it will realize the benefits of these deductible differences and has not established a valuation allowance at December 31, 1995 and 1994. The company anticipates that the related deferred tax asset will be realized. Total federal income tax payments during 1995, 1994 and 1993 were $59.8 million, $10.1 million, and $29.4 million, respectively. (6) REINSURANCE The Company reinsures portions of its risk with other insurance companies through quota share reinsurance treaties and, where warranted, on a facultative basis. This process serves to limit the Company's exposure on risks underwritten. In the event that any or all of the reinsuring companies were unable to meet their obligations, the Company would be liable for such defaulted amounts. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company holds collateral under reinsurance agreements in the form of letters of credit and trust agreements in various amounts with various reinsurers totaling $33.7 million that can be drawn on in the event of default. Effective January 1, 1993, the Company adopted the Emerging Issues Task Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6 requires that an asset be recognized by a ceding company to the extent a payment would be received from the reinsurer based on the contract's experience to date, regardless of the outcome of future events. To reflect the adoption of EITF 93-6 in the accompanying financial statements, an initial adjustment of $4.6 million, before applicable income taxes, has been reflected in the 1993 income statement. Net premiums earned are presented net of ceded earned premiums of $21.9 million, $39.0 million and $34.4 million for the years ended December 31, 1995, 1994 and 1993, respectively. Loss and loss A-14 79 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) adjustment expenses incurred are presented net of ceded losses of $1.1 million, $0.3 million and $9.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. (7) LOSS AND LOSS ADJUSTMENT EXPENSES Activity in the reserve for loss and loss adjustment expenses is summarized as follows (in thousands):
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1994 1993 -------- -------- ------- Balance at January 1,............................. $ 98,746 $ 96,098 $44,834 Less reinsurance recoverable.................... 14,472 14,168 5,128 -------- -------- ------- Net balance at January 1,......................... 84,274 81,930 39,706 Incurred related to: Current year................................. 26,681 15,133 -- Prior years.................................. (1,207) (437) (756) Portfolio reserves........................... (33,900) (11,050) 43,650 -------- -------- ------- Total Incurred.......................... (8,426) 3,646 42,894 -------- -------- ------- Paid related to: Current year................................. (197) (382) -- Prior years.................................. (5,515) (920) (670) -------- -------- ------- Total Paid.............................. (5,712) (1,302) (670) -------- -------- ------- Net balance at December 31,....................... 70,136 84,274 81,930 Plus reinsurance recoverable.................... 7,672 14,472 14,168 -------- -------- ------- Balance at December 31,........................... $ 77,808 $ 98,746 $96,098 ======== ======== =======
The changes in incurred portfolio reserves principally relate to business written in prior years. The changes are based upon an evaluation of the insured portfolio in light of current economic conditions and other relevant factors. (8) RELATED PARTY TRANSACTIONS The Company has various agreements with subsidiaries of General Electric Company ("GE") and GE Capital. These business transactions include appraisal fees and due diligence costs associated with underwriting structured finance mortgage-backed security business; payroll and office expenses incurred by the Company's international branch offices but processed by a GE subsidiary; investment fees pertaining to the management of the Company's investment portfolio; and telecommunication service charges. Approximately $3.2 million, $3.2 million and $1.0 million in expenses were incurred in 1995, 1994 and 1993, respectively, related to such transactions. The Company also insured certain non-municipal issues with GE Capital involvement as sponsor of the insured securitization and/or servicer of the underlying assets. For some of these issues, GE Capital also provides first loss protection in the event of default. Gross premiums written on these issues amounted to $1.3 million in 1995, $2.5 million in 1994, and $3.3 million in 1993. The Company insures bond issues and securities in trusts that were sponsored by affiliates of GE (approximately 1 percent of gross premiums written in 1995 and 1994 and 2 percent in 1993). A-15 80 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (9) COMPENSATION PLANS Officers and other key employees of the Company participate in the Parent's incentive compensation, deferred compensation and profit sharing plans. Expenses incurred by the Company under compensation plans and bonuses amounted to $7.5 million, $12.2 million and $16.7 million in 1995, 1994 and 1993, respectively, before deduction for related tax benefits. (10) DIVIDENDS Under New York insurance law, the Company may pay a dividend only from earned surplus subject to the following limitations: (a) statutory surplus after such dividend may not be less than the minimum required paid-in capital, which was $2.1 million in 1995 and 1994, and (b) dividends may not exceed the lesser of 10 percent of its surplus or 100 percent of adjusted net investment income, as defined by New York insurance law, for the 12 month period ending on the preceding December 31, without the prior approval of the Superintendent of the New York State Insurance Department. At December 31, 1995 and 1994, the amount of the Company's surplus available for dividends was approximately $100.2 million and $89.3 million, respectively. During 1995, the company paid dividends of $25 million. No dividends were paid during 1994 or 1993. (11) FINANCIAL INSTRUMENTS Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating fair values of financial instruments: Fixed Maturity Securities: Fair values for fixed maturity securities are based on quoted market prices, if available. If a quoted market price is not available, fair values is estimated using quoted market prices for similar securities. Fair value disclosure for fixed maturity securities is included in the balance sheets and in Note 4. Short-Term Investments: Short-term investments are carried at cost, which approximates fair value. Cash, Receivable for Securities Sold, and Payable for Securities Purchased: The carrying amounts of these items approximate their fair values. The estimated fair values of the Company's financial instruments at December 31, 1995 and 1994 are as follows (in thousands):
1995 1994 ------------------------- ------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- Financial Assets Cash On hand and in demand accounts.................. $ 199 $ 199 $ 1,766 $ 1,766 Short-term investments............................ 91,032 91,032 75,674 75,674 Fixed maturity securities......................... 2,141,584 2,141,584 1,889,910 1,889,910
Financial Guaranties: The carrying value of the Company's financial guaranties is represented by the unearned premium reserve, net of deferred acquisition costs, and loss and loss adjustment expense reserves. Estimated fair values of these guaranties are based on amounts currently charged to enter into similar agreements (net of applicable ceding commissions), discounted cash flows considering contractual revenues to be received adjusted for expected prepayments, the present A-16 81 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) value of future obligations and estimated losses, and current interest rates. The estimated fair values of such financial guaranties range between $412.8 million and $456.2 million compared to a carrying value of $540.6 million as of December 31, 1995 and between $518.1 million and $565.9 million compared to a carrying value of $585.1 million as of December 31, 1994. Concentrations of Credit Risk The Company considers its role in providing insurance to be credit enhancement rather than credit substitution. The Company insures only those securities that, in its judgment, are of investment grade quality. The Company has established and maintains its own underwriting standards that are based on those aspects of credit that the Company deems important for the particular category of obligations considered for insurance. Credit criteria include economic and social trends, debt management, financial management and legal and administrative factors, the adequacy of anticipated cash flows, including the historical and expected performance of assets pledged for payment of securities under varying economic scenarios and underlying levels of protection such as insurance or overcollateralization. In connection with underwriting new issues, the Company sometimes requires, as a condition to insuring an issue, that collateral be pledged or, in some instances, that a third-party guarantee be provided for a term of the obligation insured by a party of acceptable credit quality obligated to make payment prior to any payment by the Company. The types and extent of collateral pledged varies, but may include residential and commercial mortgages, corporate debt, government debt and consumer receivables. As of December 31, 1995, the Company's total insured principal exposure to credit loss in the event of default by bond issuers was $98.7 billion, net of reinsurance of $20.7 billion. The Company's insured portfolio as of December 31, 1995 was broadly diversified by geography and bond market sector with no single debt issuer representing more than 1% of the Company's principal exposure outstanding, net of reinsurance. As of December 31, 1995, the composition of principal exposure by type of issue, net of reinsurance, was as follows (in millions):
NET PRINCIPAL OUTSTANDING ----------- Municipal: General obligation.................................... $43,308.2 Special revenue....................................... 38,137.9 Industrial revenue.................................... 2,480.0 Non-municipal......................................... 14,734.2 --------- Total......................................... $98,660.3 =========
A-17 82 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company is authorized to do business in 50 states, the District of Columbia, and in the United Kingdom and France. Principal exposure outstanding at December 31, 1995 by state, net of reinsurance, was as follows (in millions):
NET PRINCIPAL OUTSTANDING ----------- California.............................................. $10,440.2 Florida................................................. 8,869.3 Pennsylvania............................................ 8,653.4 New York................................................ 7,706.7 Illinois................................................ 5,697.5 Texas................................................... 5,478.7 New Jersey.............................................. 4,181.9 Michigan................................................ 3,385.9 Arizona................................................. 2,776.9 Ohio.................................................... 2,327.7 --------- Sub-total............................................... 59,518.2 Other states and International.......................... 39,142.1 --------- Total......................................... $98,660.3 =========
(12) COMMITMENTS Total rent expense was $2.2 million, $2.6 million and $2.4 million in 1995, 1994 and 1993, respectively. For each of the next five years and in the aggregate as of December 31, 1995, the minimum future rental payments under noncancellable operating leases having remaining terms in excess of one year approximate (in thousands):
YEAR AMOUNT ---------------------------------------------------------- ------- 1996...................................................... $ 2,297 1997...................................................... 2,909 1998...................................................... 2,909 1999...................................................... 2,909 2000...................................................... 2,909 Subsequent to 2000........................................ 2,911 ------- Total minimum future rental payments............ $16,844 =======
A-18 83 APPENDIX B UNAUDITED FINANCIALS OF INSURER FINANCIAL GUARANTY INSURANCE COMPANY UNAUDITED INTERIM FINANCIAL STATEMENTS SEPTEMBER 30, 1996
PAGE ---- Balance Sheets........................................................................ B-2 Statements of Income.................................................................. B-3 Statements of Cash Flows.............................................................. B-4 Notes to Unaudited Interim Financial Statements....................................... B-5
B-1 84 FINANCIAL GUARANTY INSURANCE COMPANY BALANCE SHEETS ($ IN THOUSANDS)
DECEMBER 31, 1995 SEPTEMBER ---------- 30, 1996 ---------- (UNAUDITED) ASSETS Fixed maturity securities, available for sale, at fair value (amortized cost of $2,153,856 in 1996 and $2,043,453 in 1995)... $2,172,841 $2,141,584 Short-term investments, at cost, which approximates market........ 147,460 91,032 Cash.............................................................. 997 199 Accrued investment income......................................... 33,825 37,347 Reinsurance receivable............................................ 7,418 7,672 Deferred policy acquisition costs................................. 93,676 94,868 Property, plant and equipment net of accumulated depreciation of $14,704 in 1996 and $12,861 in 1995............................. 5,032 6,314 Prepaid reinsurance premiums...................................... 159,506 162,087 Prepaid expenses and other assets................................. 28,581 39,199 ---------- ---------- Total assets............................................ $2,649,336 $2,580,302 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Unearned premiums............................................... $ 685,364 $ 727,535 Losses and loss adjustment expenses............................. 72,127 77,808 Ceded reinsurance payable....................................... 12,507 1,942 Accounts payable and accrued expenses........................... 48,382 32,811 Due to parent................................................... 260 1,647 Current federal income taxes payable............................ 78,818 51,296 Deferred federal income taxes payable........................... 74,195 99,171 Payable for securities purchased................................ 45,796 40,211 ---------- ---------- Total liabilities....................................... 1,017,449 1,032,421 ---------- ---------- Stockholder's Equity: Common stock, par value $1,500 per share at September 30, 1996 and at December 31, 1995: 10,000 shares authorized, issued and outstanding.............................................. 15,000 15,000 Additional paid-in capital...................................... 334,011 334,011 Net unrealized gains on fixed maturity securities available for sale, net of tax............................................. 12,340 63,785 Foreign currency translation adjustment......................... (2,296) (1,499) Retained earnings............................................... 1,272,832 1,136,584 ---------- ---------- Total stockholder's equity.............................. 1,631,887 1,547,881 ---------- ---------- Total liabilities and stockholder's equity.............. $2,649,336 $2,580,302 ========== ==========
See accompanying notes to interim financial statements B-2 85 FINANCIAL GUARANTY INSURANCE COMPANY STATEMENTS OF INCOME ($ IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1996 1995 ----------- -------- (UNAUDITED) REVENUES: Gross premiums written.............................................. $ 65,875 $ 66,151 Ceded premiums...................................................... (14,178) (14,430) -------- -------- Net premiums written................................................ 51,697 51,721 Decrease in net unearned premiums................................... 39,589 29,428 -------- -------- Net premiums earned................................................. 91,286 81,149 Net investment income............................................... 92,957 89,716 Net realized gains.................................................. 11,132 19,574 -------- -------- Total revenues............................................ 195,375 190,439 EXPENSES: Losses and loss adjustment expenses................................. (2,078) 1,191 Policy acquisition costs............................................ 13,056 9,013 Other underwriting expenses......................................... 10,582 14,925 -------- -------- Total expenses............................................ 21,560 25,129 Income before provision for federal income taxes.......... 173,815 165,310 Provision for federal income taxes.................................. 37,566 33,323 -------- -------- Net income..................................................... $ 136,249 $131,987 ======== ========
See accompanying notes to interim financial statements B-3 86 FINANCIAL GUARANTY INSURANCE COMPANY STATEMENTS OF CASH FLOWS ($ IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1996 1995 ---------- --------- (UNAUDITED) OPERATING ACTIVITIES: Net income........................................................ $ 136,249 $ 131,987 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes............................. 3,155 14,917 Amortization of fixed maturity securities....................... 606 2,064 Policy acquisition costs deferred............................... (11,864) (14,213) Amortization of deferred policy acquisition costs............... 13,056 8,787 Depreciation of fixed assets.................................... 1,843 1,686 Change in reinsurance receivable................................ 254 4,574 Change in prepaid reinsurance premiums.......................... 2,581 2,930 Foreign currency translation adjustment......................... (1,226) (923) Change in accrued investment income, prepaid expenses and other assets....................................................... 14,140 (969) Change in unearned premiums..................................... (42,171) (32,359) Change in losses and loss adjustment expense reserves........... (5,681) (6,439) Change in other liabilities..................................... 24,749 (6,673) Change in current income taxes payable.......................... 27,522 (4,294) Net realized gains on investments............................... (11,132) (19,574) ---------- ---------- Net cash provided by operating activities......................... 152,081 81,501 ---------- ---------- INVESTING ACTIVITIES: Sales or maturities of fixed maturity securities.................. 633,347 622,658 Purchases of fixed maturity securities............................ (727,641) (651,424) Sales or maturities (purchases) of short-term investments, net.... (56,428) (46,053) Purchases of property and equipment, net.......................... (561) (449) ---------- ---------- Net cash used for investing activities............................ (151,283) (75,268) ---------- ---------- Increase in cash.................................................. 798 6,233 Cash at beginning of period....................................... 199 1,766 ---------- ---------- Cash at end of period............................................. $ 997 $ 7,999 ========== ==========
See accompanying notes to interim financial statements B-4 87 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) (1) BASIS OF PRESENTATION The interim financial statements of Financial Guaranty Insurance Company (the Company) in this report reflect all adjustments necessary, in the opinion of management, for a fair statement of (a) results of operations for the nine months ended September 30, 1996 and 1995, (b) the financial position at September 30, 1996 and December 31, 1995, and (c) cash flows for the nine months ended September 30, 1996 and 1995. These interim financial statements should be read in conjunction with the financial statements and related notes included in the 1995 audited financial statements. The 1995 financial statements have been reclassified to conform to the 1996 presentation. The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) STATUTORY ACCOUNTING PRACTICES The financial statements are prepared on the basis of GAAP, which differs in certain respects from accounting practices prescribed or permitted by state insurance regulatory authorities. The following are the significant ways in which statutory basis accounting practices differ from GAAP: (a) premiums are earned in proportion to the reduction of the related risk rather than in proportion to the coverage provided; (b) policy acquisition costs are charged to current operations as incurred rather than as related premiums are earned; (c) a contingency reserve is computed on the basis of statutory requirements for the security of all policyholders, regardless of whether loss contingencies actually exist, whereas under GAAP, a reserve is established based on an ultimate estimate of exposure; (d) certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP, if recoverable; (e) federal income taxes are only provided with respect to taxable income for which income taxes are currently payable, while under GAAP taxes are also provided for differences between the financial reporting and tax bases of assets and liabilities; (f) purchases of tax and loss bonds are reflected as admitted assets, while under GAAP they are recorded as federal income tax payments; and (g) all fixed income investments are carried at amortized cost, rather than at fair value for securities classified as "Available for Sale" under GAAP. B-5 88 The following is a reconciliation of the net income and stockholder's equity of Financial Guaranty prepared on a GAAP basis to the corresponding amounts reported on a statutory basis for the periods indicated below:
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------- 1996 (UNAUDITED) 1995 (UNAUDITED) ------------------------ ------------------------ NET STOCKHOLDER'S NET STOCKHOLDER'S INCOME EQUITY INCOME EQUITY -------- ------------- -------- ------------- GAAP basis amount........................... $136,249 $ 1,631,887 $131,987 $ 1,487,346 Premium revenue recognition................. (6,742) (173,669) (15,432) (159,804) Deferral of acquisition costs............... 1,192 (93,676) (5,426) (96,354) Contingency reserve......................... -- (428,798) -- (372,683) Non-admitted assets......................... -- (4,314) -- (6,084) Case-basis losses incurred and salvage recoverable............................... (3,854) (3,906) 1,586 (2,514) Portfolio loss reserves..................... -- 24,000 (10,900) 35,200 Deferral of income tax...................... 3,155 67,550 14,917 59,728 Unrealized gains on fixed maturity securities held at fair value, net of taxes..................................... -- (12,340) -- (34,463) Profit commission........................... 1,234 (4,510) 5,228 (3,613) Contingency reserve tax deduction........... -- 85,087 -- 78,196 Provision for unauthorized reinsurance...... -- -- -- (266) Allocation of tax benefits due to Parent's net operating loss to the Company......... (2) 10,289 118 9,772 -------- ---------- -------- ---------- Statutory basis amount...................... $131,232 $ 1,097,600 $122,078 $ 994,461 ======== ========== ======== ==========
(3) DIVIDENDS Under New York Insurance Law, the Company may pay a dividend only from earned surplus subject to the following limitations: - Statutory surplus after dividends may not be less than the minimum required paid-in capital, which was $2,100,000 in 1996. - Dividends may not exceed the lesser of 10 percent of its surplus or 100 percent of adjusted net investment income, as defined therein, for the twelve month period ending on the preceding December 31, without the prior approval of the Superintendent of the New York State Insurance Department. The amount of the Company s surplus available for dividends at September 30,1996 is approximately $109.8 million. (4) INCOME TAXES The Company's effective Federal corporate tax rate (21.6 percent and 20.2 percent for the nine months ended September 30, 1996 and 1995, respectively) is less than the statutory corporate tax rate (35 percent in 1996 and 1995) on ordinary income due to permanent differences between financial and taxable income, principally tax-exempt interest. (5) REINSURANCE In accordance with Statement of Financial Accounting Standards No. 113 ("SFAS 113"), "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts", adopted in 1993, the Company reports assets and liabilities relating to reinsured contracts gross of the effects of reinsurance. Net premiums earned are shown net of premiums ceded of $16.8 million and $17.1 million, respectively, for the nine months ended September 30, 1996 and 1995. B-6 89 ANNEX I GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES Except in certain limited circumstances, the globally offered EQCC Home Equity Loan Trust 1997-1 Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates, Class A-5 Certificates, Class A-6 Certificates, Class A-7 Certificates and Class A-8 Certificates (collectively, the "Global Securities") will be available only in book-entry form. Investors in the Global Securities may hold such Global Securities through any of The Depository Trust Company ("DTC"), CEDEL or Euroclear. The Global Securities will be tradeable as home market instruments in both the European and U.S. domestic markets. Initial settlement and all secondary trades will settle in same-day funds. Secondary market trading between investors holding Global Securities through CEDEL and Euroclear will be conducted in the ordinary way in accordance with their normal rules and operating procedures and in accordance with conventional Eurobond practice (i.e., seven calendar day settlement). Secondary market trading between investors holding Global Securities through DTC will be conducted according to the rules and procedures applicable to U.S. corporate debt obligations. Secondary cross-market trading between CEDEL or Euroclear and DTC Participants holding Certificates will be effected on a delivery against payment basis through the respective Depositaries of CEDEL and Euroclear (in such capacity) and as DTC Participants. Non-U.S. holders (as described below) of Global Securities will be subject to U.S. withholding taxes unless such holders meet certain requirements and deliver appropriate U.S. tax documents to the securities clearing organizations or their participants. INITIAL SETTLEMENT All Global Securities will be held in book-entry form by DTC in the name of Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will be represented through financial institutions acting on their behalf as direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold positions on behalf of their participants through their respective Depositaries, which in turn will hold such positions in accounts as DTC Participants. Investor securities custody accounts will be credited with their holdings against payment in same-day funds on the settlement date. Investors electing to hold their Global Securities through CEDEL or Euroclear accounts will follow the settlement procedures applicable to conventional eurobonds, except that there will be no temporary global security and no "lock-up" or restricted period. Global Securities will be credited to the securities custody accounts on the settlement date against payment in same-day funds. SECONDARY MARKET TRADING Since the purchaser determines the place of delivery, it is important to establish at the time of the trade where both the purchaser's and seller's accounts are located to ensure that settlement can be made on the desired value date. Trading between DTC Participants. Secondary market trading between DTC Participants will be settled in same-day funds. Trading between CEDEL and/or Euroclear Participants. Secondary market trading between CEDEL Participants or Euroclear Participants will be settled using the procedures applicable to conventional eurobonds in same-day funds. Trading between DTC seller and CEDEL or Euroclear purchaser. When Global Securities are to be transferred from the account of a DTC Participant to the account of a CEDEL Participant or a Euroclear Participant, the purchaser will send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at least one business day prior to settlement. CEDEL or Euroclear will instruct the respective Depositary, as the case may be, to receive the Global Securities against payment. Payment I-1 90 will include interest accrued on the Global Securities from and including the last coupon payment date to and excluding the settlement date, calculated on the basis of a year of 360 days, in each case for the actual number of days occurring in the period for which such interest is payable. Payment will then be made by the respective Depositary to the DTC Participant's account against delivery of the Global Securities. After settlement has been completed, the Global Securities will be credited to the respective clearing system and by the clearing system, in accordance with its usual procedures, to the CEDEL Participant's or Euroclear Participant's account. The securities credit will appear the next day (European time) and the cash debit will be back-valued to, and the interest on the Global Securities will accrue from, the value date (which would be the preceding day when settlement occurred in New York). If settlement is not completed on the intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debit will be valued instead as of the actual settlement date. CEDEL 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 pre-position funds for settlement, either from cash on hand or existing lines of credit, as they would for any settlement occurring within CEDEL or Euroclear. Under this approach, they may take on credit exposure to CEDEL or Euroclear until the Global Securities are credited to their accounts one day later. As an alternative, if CEDEL or Euroclear has extended a line of credit to them, CEDEL Participants can elect not to pre-position funds and allow that credit line to be drawn upon to finance settlement. Under this procedure, CEDEL Participants or Euroclear Participants purchasing Global Securities would incur overdraft charges for one day, assuming they cleared the overdraft when the Global Securities were credited to their accounts. However, interest on the Global Securities would accrue form the value date. Therefore, in many cases the investment income on the Global Securities earned during that one-day period may substantially reduce or offset the amount of such overdraft charges, although this result will depend on each CEDEL Participant's or Euroclear Participant's particular cost of funds. Since the settlement is taking place during New York business hours, DTC Participants can employ their usual procedures for sending Global Securities to the respective Depositary for the benefit of CEDEL Participants or Euroclear Participants. The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the DTC Participant a cross-market transaction will settle no differently than a trade between two DTC Participants. Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time zone differences in their favor, CEDEL Participants and Euroclear Participants may employ their customary procedures for transactions in which Global Securities are to be transferred by the respective clearing system, through the respective Depositary, to a DTC Participant. The seller will send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at least one business day prior to settlement. In these cases, CEDEL or Euroclear will instruct the respective Depositary, as appropriate, to deliver the bonds to the DTC Participant's account against payment. Payment will include interest accrued on the Global Securities from and including the last coupon payment date to and excluding the settlement date, calculated on the basis of a year of 360 days, in each case for the actual number of days occurring in the period for which such interest is payable. The payment will then be reflected in the account of the CEDEL Participant or Euroclear Participant the following day, and receipt of the cash proceeds in the CEDEL Participant's or Euroclear Participant's account would be back-valued to the value date (which would be the proceeding day, when settlement occurred in New York). Should the CEDEL Participant or Euroclear Participant have a line of credit with its respective clearing system and elect to be in debit in anticipation of receipt of the sale proceeds in its account, the back-valuation will extinguish any overdraft charges incurred over the one-day period. If settlement is not completed on the intended value date (i.e., the trade fails), receipt of the cash proceeds in the CEDEL Participant's or Euroclear Participant's account would instead be valued as of the actual settlement date. Finally, day traders that use CEDEL or Euroclear and that purchase Global Securities from DTC Participants for delivery to CEDEL Participants or Euroclear Participants should note that these trades would automatically fail on the sale side unless affirmative action was taken. At least three techniques should be readily available to eliminate this potential problem: I-2 91 (a) borrowing through CEDEL or Euroclear for one day (until the purchase side of the day trade is reflected in their CEDEL or Euroclear accounts) in accordance with the clearing system's customary procedures. (b) borrowing the Global Securities in the U.S. from a DTC Participant no later than one day prior to settlement, which would give the Global Securities sufficient time to be reflected in their CEDEL or Euroclear account in order to settle the sale side of the trade; or (c) staggering the value dates for the buy and sell sides of the trade so that the value date for the purchase from the DTC Participant is at least one day prior to the value date for the sale to the CEDEL Participant or Euroclear Participant. CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS A beneficial owner of Global Securities holding securities through CEDEL 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, 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 such beneficial owner and the U.S. entity required to withhold tax complies with applicable certification requirements and (ii) such beneficial owner takes one of the following steps to obtain an exemption or reduced tax rate. Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Certificates that are non-U.S. Persons can obtain a complete exemption from the withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If the information shown on Form W-8 changes, a new Form W-8 must be filed within 30 days of such change. Exemption for non-U.S. Persons with effectively connected income (Form 4224). 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 4224 (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States). Exemption or reduced rate for non-U.S. Persons resident in treaty countries (Form 1001). Non-U.S. Persons that are Certificateholders residing in a country that has a tax treaty with the United States can obtain an exemption or reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty provides only for a reduced rate, withholding tax will be imposed at that rate unless the filer alternatively files Form W-8. Form 1001 may be filed by the Certificateholder or his agent. 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 holder of a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by submitting the appropriate form to the person through whom it holds (the clearing agency, in the case of persons holding directly on the books of the clearing agency). Form W-8 and Form 1001 are effective for three calendar years and Form 4224 is effective for one calendar year. The term "U.S. Person" means (i) a citizen or resident of the United States, (ii) a corporation or partnership organized in or under the laws of the United States or any political subdivision thereof or (iii) an estate or trust the income of which is includible in gross income for United States tax purposes, regardless of its source. 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-3 92 PROSPECTUS EQCC RECEIVABLES CORPORATION EQCC ASSET BACKED CORPORATION DEPOSITORS EQUICREDIT CORPORATION OF AMERICA SERVICER EQCC HOME EQUITY LOAN ASSET BACKED SECURITIES EQUICREDIT FUNDING ASSET BACKED SECURITIES (ISSUABLE IN SERIES) ------------------ The EQCC Home Equity Loan Asset Backed Securities and EquiCredit Funding Asset Backed Securities (collectively, the "Securities") offered hereby may be sold from time to time in series (each, a "Series") as described in the related Prospectus Supplement. Each Series of Securities will be issued by a separate trust (each, a "Trust"). The assets of each Trust will consist primarily of (i) a pool (a "Mortgage Pool") of mortgage loans (each, a "Mortgage Loan") secured by mortgages, deeds of trust or other instruments (each, a "Mortgage") creating a first or junior lien on one- to four-family dwellings, units in planned unit developments, units in condominium developments, units in cooperatives or manufactured housing units (each, a "Mortgaged Property") to be transferred to such Trust by the Depositors and originated or purchased and re-underwritten by EquiCredit Corporation of America (formerly known as Old Stone Credit Corporation) ("EquiCredit", or the "Representative") or by EquiCredit Corporation/Ala. & Miss., California/EquiCredit Corporation, EquiCredit Corporation of In., EquiCredit Corporation of Pa. or EquiCredit Corporation of SC (each, an "Originator"), (ii) all monies received on the Mortgage Loans on and after the related Cut-off Date (as defined herein) (unless otherwise specified in the related Prospectus Supplement, other than the Representative's Yield, as described herein, and amounts received on and after the related Cut-off Date (defined herein) in respect of interest accrued on the Mortgage Loans prior to the Cut-off Date), and (iii) certain other property. The Mortgage Loans will be serviced by EquiCredit (in its capacity as servicer, the "Servicer"). The Mortgage Loans and other assets of each Trust as described herein and in the related Prospectus Supplement will be held for the benefit of the holders of the related Series of Securities. (continues on following page) NONE OF THE SECURITIES OF ANY SERIES WILL REPRESENT AN INTEREST IN OR OBLIGATION OF THE REPRESENTATIVE, THE DEPOSITORS, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES. NONE OF THE SECURITIES OF ANY SERIES OR THE UNDERLYING MORTGAGE LOANS WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE REPRESENTATIVE, EITHER DEPOSITOR OR ANY OF THEIR AFFILIATES. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------ Prospective investors should consider the factors set forth under "Risk Factors" herein and in the related Prospectus Supplement. Prospective investors should refer to the "Index of Principal Definitions" herein for the location of the definitions of capitalized terms that appear in this Prospectus. The date of this Prospectus is March 21, 1997. 93 (continuation of cover page) Each Series of Securities may be issuable in one or more classes (each, a "Class"). The Securities of any Class may represent beneficial ownership interests in the Mortgage Loans held by the related Trust or may represent debt secured by such Mortgage Loans, as described herein and in the related Prospectus Supplement. A Series may include one or more Classes of Securities entitled to principal distributions and disproportionate, nominal or no interest distributions, or to interest distributions and disproportionate, nominal or no principal distributions. The rights of one or more Classes of Securities of a Series may be senior or subordinate to the rights of one or more of the other Classes of Securities. A Series may include two or more Classes of Securities which differ as to the timing, sequential order, priority of payment, interest rate or amount of distributions of principal or interest or both. If specified in the related Prospectus Supplement, one or more Classes of Securities of a Series may have the benefit of one or more of a letter of credit, financial guaranty insurance policy, reserve fund, spread account, cash collateral account, overcollateralization or other form of credit enhancement. If specified in the related Prospectus Supplement, the Mortgage Loans underlying a Series of Securities may be insured under one or more of a mortgage pool insurance policy, bankruptcy bond, special hazard insurance policy or similar credit enhancement. In addition to or in lieu of any or all of the foregoing, credit enhancement with respect to one or more Classes of Securities of a Series may be provided through subordination. See "Description of Credit Enhancement". The yield on each Class of Securities of a Series will be affected by, among other things, the rate of payment of principal (including prepayments) on the Mortgage Loans in the related Trust and the timing of receipt of such payments. See "Certain Yield and Prepayment Considerations" herein and in the related Prospectus Supplement. A Trust may be subject to early termination under the circumstances described herein and in the related Prospectus Supplement. Offers of the Securities of a Series may be made through one or more different methods, including offerings through underwriters, as described under "Method of Distribution" herein and "Underwriting" in the related Prospectus Supplement. There will have been no secondary market for the Securities of any Series prior to the offering thereof. There can be no assurance that a secondary market for any Class of Securities of any Series will develop or, if one does develop, that it will continue. None of the Securities will be listed on any securities exchange. If so specified in the related Prospectus Supplement, one or more elections may be made to treat the related Trust or a designated portion of the assets of the related Trust as a "real estate mortgage investment conduit" for federal income tax purposes. For a description of certain tax consequences of owning the Securities, including, without limitation, original issue discount, see "Certain Federal Income Tax Consequences" herein and in the related Prospectus Supplement. 2 94 AVAILABLE INFORMATION The Depositors have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement under the Securities Act of 1933, as amended, with respect to the Securities. This Prospectus, which forms a part of the Registration Statement, omits certain information contained in such Registration Statement pursuant to the Rules and Regulations of the Commission. The Registration Statement and the exhibits thereto may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as follows: Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade Center, 3rd Floor, New York, New York 10007. Copies of such material may also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission maintains a public access site on the Internet through the World Wide Web at which site reports, information statements and other information, including all electronic filings, regarding the Depositors may be viewed. The Internet address of such World Wide Web site is http://www.sec.gov. REPORTS TO HOLDERS Periodic reports concerning the assets of each Trust are required to be forwarded to holders of the Securities of the related Series. See "Description of the Securities -- Reports to Holders" herein. Any reports forwarded to holders will not contain financial information that has been examined and reported upon by, with an opinion expressed by, an independent public or certified public accountant. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE All reports and other documents filed by the Depositors pursuant to Section 13(a), Section 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Securities offered hereby shall be deemed to be incorporated by reference in this Prospectus and to be part hereof. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Depositors will provide without charge to each person to whom a copy of this Prospectus is delivered, on the written or oral request of any such person, a copy of any of or all the documents incorporated herein by reference (other than exhibits to such documents). Requests for such copies should be directed to Jerry McCoy, Senior Vice President and Chief Accounting Officer, EQCC Receivables Corporation and EQCC Asset Backed Corporation, 10401 Deerwood Park Blvd., Jacksonville, Florida 32256, (904) 987-5106. 3 95 SUMMARY OF PROSPECTUS The following Summary of Prospectus is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus and by reference to the information with respect to each Series of Securities contained in the related Prospectus Supplement. Capitalized terms used but not defined in this Summary of Prospectus shall have the meanings ascribed to such terms elsewhere in this Prospectus. The Index of Principal Definitions included in this Prospectus sets forth the pages on which the definitions of certain principal terms appear. DEPOSITORS................. EQCC Receivables Corporation, a corporation organized under the laws of the State of Delaware, and EQCC Asset Backed Corporation, a corporation organized under the laws of the State of Delaware (together, the "Depositors"). All of the outstanding common stock of each of the Depositors is owned by one or more of the Originators (defined below). See "The Depositors, the Servicer, the Representative and the Originators" herein. ISSUER..................... With respect to each Series of Securities, a trust entitled "EQCC Home Equity Loan Trust" or "EquiCredit Funding Trust," as specified in the related Prospectus Supplement (the "Trust" or the "Issuer"), with an additional designation to indicate the Series of Securities to which it relates. The Mortgage Loans related to an EquiCredit Funding Trust will consist primarily of loans purchased and re-underwritten by one or more of the Originators. Each Trust will be either a trust formed pursuant to a Pooling and Servicing Agreement among the Depositors, the Servicer (defined herein) and the trustee named therein (the "Trustee") or a business trust formed pursuant to a Trust Agreement between the Depositors and a Trustee (the "Owner Trustee"), as set forth in the related Prospectus Supplement. REPRESENTATIVE AND ORIGINATORS................ EquiCredit Corporation of America (formerly known as Old Stone Credit Corporation), a corporation organized under the laws of the State of Delaware ("EquiCredit", the "Representative" and an "Originator"), and EquiCredit Corporation of Ala./Miss., a corporation organized under the laws of the State of Florida, California/EquiCredit Corporation, a corporation organized under the laws of the State of California, EquiCredit Corporation of In., a corporation organized under the laws of the State of Indiana, EquiCredit Corporation of Pa., a corporation organized under the laws of the Commonwealth of Pennsylvania, and EquiCredit Corporation of SC, a corporation organized under the laws of the State of South Carolina, each of which is a wholly-owned subsidiary of the Representative (each, an "Originator"). See "The Depositors, the Servicer, the Representative and the Originators" herein. SERVICER................... EquiCredit (in its capacity as servicer, the "Servicer"). See "The Depositors, the Servicer, the Representative and the Originators" herein. TRUSTEE.................... The entity or entities named as trustee in the related Prospectus Supplement. If so specified in the related Prospectus Supplement, a Series of Securities including one or more Classes of Notes and one or more Classes of Certificates may include a trustee for the Notes (the "Indenture Trustee") and a trustee for the certificates (the "Owner Trustee"). Unless otherwise indicated references herein to "Trustee" shall include any Indenture Trustee. 4 96 CUT-OFF DATE............... The date specified in the related Prospectus Supplement on and after which payments due or received on the related Mortgage Loans, as specified in the related Prospectus Supplement, are transferred to the related Trust and available for payment to the holders of the related Securities (each, a "Cut-off Date"). CLOSING DATE............... The date on which the Securities of any Series are initially issued (each, a "Closing Date") as specified in the related Prospectus Supplement. DESCRIPTION OF SECURITIES................. The Securities of each Series may be issued in one or more classes (each, a "Class") and will represent either beneficial interests in or debt secured by a segregated pool (each, a "Mortgage Pool") of mortgage loans (the "Mortgage Loans") originated or purchased and re-underwritten by the Originators and transferred by the Originators to the Depositors pursuant to a Transfer Agreement (each, a "Transfer Agreement"), and by the Depositors to the related Trust, and certain other property. See "The Trust Assets". A Series of Securities may include one or more Classes entitled to distributions of principal and disproportionate, nominal or no interest distributions or distributions of interest and disproportionate, nominal or no principal distributions. The principal amount of any Security may be zero or may be a notional amount as specified in the related Prospectus Supplement. A Class of Securities of a Series entitled to payments of interest may receive interest at a specified rate (a "Securities Interest Rate") which may be fixed, variable or adjustable and may differ from other Classes of the same Series, may receive interest based on the weighted average interest rate on the underlying Mortgage Loans or may receive interest as otherwise determined, all as described in the related Prospectus Supplement. One or more Classes of a Series may be Securities upon which interest will accrue but not be currently paid until certain other Classes have received principal payments due to them in full or until the happening of certain events, as set forth in the related Prospectus Supplement. One or more Classes of Certificates of a Series may be entitled to receive principal payments pursuant to a planned amortization schedule or may be entitled to receive interest payments based on a notional principal amount which reduces in accordance with a planned amortization schedule. A Series may also include one or more Classes of Certificates entitled to payments derived from a specified group or groups of Mortgage Loans held by the related Trust. The rights of one or more Classes of Securities may be senior or subordinate to the rights of one or more of the other Classes of Securities. A Series may include two or more Classes of Securities which differ as to the timing, sequential order, priority of payment or amount of distributions of principal or interest or both. PAYMENT DATE............... The monthly, quarterly or other periodic date specified in the related Prospectus Supplement on which payments will be made to holders of Securities. (each, a "Payment Date"). MONTHLY DEPOSIT DATE....... If so specified in the related Prospectus Supplement with respect to a Series of Securities having Payment Dates occurring less frequently than monthly, the day of each month other than a month in which a Payment Date occurs (each, a "Monthly Deposit Date") specified in the related 5 97 Prospectus Supplement on which certain deposits and transfers will be made. DETERMINATION DATE......... The day of the month in which the related Monthly Deposit Date or Payment Date occurs (each, a "Determination Date") specified in the related Prospectus Supplement. RECORD DATE................ The calendar day (each, a "Record Date") specified in the related Prospectus Supplement. INTEREST................... Unless otherwise specified in the related Prospectus Supplement, interest on each Class of Securities of a Series (other than a Class of Securities entitled to receive only principal) will accrue during each period specified in the related Prospectus Supplement (each, an "Accrual Period") at the Securities Interest Rate for such Class specified in the related Prospectus Supplement. Interest accrued on each Class of Securities at the applicable Securities Interest Rate during each Accrual Period will be paid, to the extent monies are available therefor, on each Payment Date, commencing on the day specified in the related Prospectus Supplement and will be distributed in the manner specified in such Prospectus Supplement, except for any Class of Securities ("Accrual Securities") on which interest is to accrue and not be paid until the principal of certain other Classes has been paid in full or until the occurrence of certain events as specified in such Prospectus Supplement. If so described in the related Prospectus Supplement, interest that has accrued but is not yet payable on any Accrual Securities will be added to the principal balance thereof on each Payment Date and will thereafter bear interest at the applicable Securities Interest Rate. Payments of interest with respect to any Class of Securities entitled to receive interest only or a disproportionate amount of interest and principal will be paid in the manner set forth in the related Prospectus Supplement. Payments of interest (or accruals of interest, in the case of Accrual Securities) with respect to any Series of Securities or one or more Classes of Securities of such Series, may be reduced to the extent of interest shortfalls not covered by Advances (defined herein) or by any applicable credit enhancement. PRINCIPAL.................. On each Payment Date, commencing with the Payment Date specified in the related Prospectus Supplement, principal with respect to the related Mortgage Loans during the period specified in the related Prospectus Supplement (each such period, a "Due Period") will be paid to holders of the Securities of the related Series (other than a Class of Securities of such Series entitled to receive interest only) in the priority, manner and amount specified in such Prospectus Supplement, to the extent funds are available therefor. Unless otherwise specified in the related Prospectus Supplement, such principal payments will generally include (i) the principal portion of all scheduled payments ("Monthly Payments") received on the related Mortgage Loans during the related Due Period, (ii) any principal prepayments of any such Mortgage Loans in full ("Principal Prepayments") and in part ("Curtailments") received during the related Due Period or such other period (each, a "Prepayment Period") specified in the related Prospectus Supplement, (iii) the principal portion of (A) the proceeds of any insurance policy relating to a Mortgage Loan, a Mortgaged Property (defined herein) or a REO Property (defined herein), net of any amounts applied to the repair of 6 98 the Mortgaged Property or released to the Mortgagor (defined herein) and net of reimbursable expenses (such net proceeds, "Insurance Proceeds"), (B) proceeds received in connection with the liquidation of any defaulted Mortgage Loans ("Liquidation Proceeds"), net of fees and advances reimbursable therefrom ("Net Liquidation Proceeds") and (C) proceeds received in connection with a taking of a related Mortgaged Property by condemnation or the exercise of eminent domain or in connection with any partial release of any such Mortgaged Property from the related lien ("Released Mortgaged Property Proceeds"), (iv) the principal portion of all amounts paid by the Depositors (which are limited to amounts paid by the Representative or an Originator pursuant to the related Transfer Agreement, unless otherwise specified in the related Prospectus Supplement) in connection with the purchase of or substitution for a Mortgage Loan as to which there is defective documentation or a breach of a representation or warranty contained in such Transfer Agreement and assigned to the related Trust under the related Pooling and Servicing Agreement and (v) the principal balance of each defaulted Mortgage Loan or REO Property as to which the Servicer has determined that all amounts expected to be recovered have been recovered (each, a "Liquidated Mortgage Loan"), to the extent not included in the amounts described in clauses (i) through (iv) above (the aggregate of the amounts described in clauses (i) through (v), less the amount of Special Payments (defined herein), if any, paid to the holders of the Securities on any Special Payment Date (defined herein) occurring in the related Accrual Period, the "Basic Principal Amount"). Payments of principal with respect to a Series of Securities or one or more Classes of such Series may be reduced to the extent of delinquencies or losses not covered by advances or any applicable credit enhancement. DENOMINATIONS.............. Each Class of Securities of a Series will be issued in the minimum denominations set forth in the related Prospectus Supplement. Each Security will represent a percentage interest (a "Percentage Interest") in the Securities of the related Class determined by dividing the original dollar amount (or Notional Principal Amount, in the case of Securities entitled to interest only and assigned a Notional Principal Amount) represented by such Security by the original aggregate principal balance (or original aggregate Notional Principal Amount, if applicable). REGISTRATION OF THE SECURITIES............... Each or any Class of Securities of a Series may be issued in definitive form or may initially be represented by one or more certificates registered in the name of Cede & Co. ("Cede"), the nominee of The Depository Trust Company ("DTC"), and available only in the form of book-entries on the records of DTC, participating members thereof ("Participants") and other entities, such as banks, brokers, dealers and trust companies, that clear through or maintain custodial relationships with a Participant, either directly or indirectly ("Indirect Participants") ("Book-Entry Securities"). Certificates representing Book-Entry Securities will be issued in definitive form only under the limited circumstances described herein and in the related Prospectus Supplement. With respect to the Book-Entry Securities, all references herein to "holders" shall reflect the rights of owners of the Book-Entry Securities as they may indirectly exercise such rights through DTC and Participants, 7 99 except as otherwise specified herein. See "Risk Factors" and "Description of the Securities -- Registration of the Securities" herein. THE TRUST PROPERTY......... Each Class of Securities of a Series will represent an interest in or debt secured by primarily (i) a segregated pool (the "Mortgage Pool") of fixed- or adjustable-rate mortgage loans originated by the Originators and evidenced by promissory notes or other evidence of indebtedness (the "Mortgage Loans") secured by mortgages, deeds of trust or other instruments (each, a "Mortgage") creating a first lien or a junior lien on one- to four-family dwellings, units in condominium developments, units in planned unit developments, units in cooperatives and manufactured housing units (each, a "Mortgaged Property"), with the aggregate principal balance of the Cut-off Date specified in the related Prospectus Supplement, after giving effect to payments received prior to the Cut-off Date (the "Original Pool Principal Balance"), (ii) all monies received with respect to the Mortgage Loans on and after the Cut-off Date (other than the Representative's Yield, as defined below, and amounts received on and after the Cut-off Date in respect of interest accrued on the Mortgage Loans prior to the Cut-off Date), (iii) certain rights of the Depositors under the related Transfer Agreement, and (iv) certain other property. One or more Classes of Securities of any Series may, if so specified in the related Prospectus Supplement, have the benefit of one or more of a spread account, reserve fund, financial guaranty insurance policy, letter of credit, cash collateral account, overcollateralization, subordination or other credit enhancement as described herein under "Description of Credit Enhancement". The Prospectus Supplement for each Series of Securities will specify certain information with respect to the related Mortgage Pool including, without limitation, the number of Mortgage Loans in the Mortgage Pool, the Original Pool Principal Balance, the respective percentages of the Mortgage Loans which are secured by first Mortgages, second Mortgages and more junior Mortgages, the minimum and maximum outstanding principal balances of the Mortgage Loans, the weighted average of the annual rates of interest of the Mortgage Loans (each such annual rate of interest hereinafter referred to as the "Mortgage Interest Rate") and, if the Mortgage Loans bear interest at adjustable interest rates, the applicable Index (defined herein), the maximum and minimum Gross Margins (defined herein) and the weighted average Gross Margin, the minimum and maximum Mortgage Interest Rates, the weighted average original term to maturity, the weighted average remaining term to maturity, the minimum and maximum remaining terms to maturity and the range of origination dates. If so specified in the related Prospectus Supplement, such information may be approximate, based on the expected Mortgage Pool, in which case the final information, to the extent of any variances, will be contained in the Current Report on Form 8-K referred to below. See "Description of the Mortgage Pools -- General" herein and "Description of the Mortgage Pool" in the related Prospectus Supplement. A Current Report on Form 8-K will be available to purchasers or underwriters of the related Series of Securities and will generally be filed, together with the related primary documents, with the Securities and Exchange Commission within fifteen days after the related Closing Date. 8 100 OPTIONAL TERMINATION....... The Servicer, the Depositors or the holders of the Class of Securities specified in the related Prospectus Supplement may cause the Issuer to sell all of the Mortgage Loans and all Mortgaged Properties acquired by foreclosure or deed in lieu of foreclosure ("REO Properties") when the Pool Principal Balance declines to the percentage of the Original Pool Principal Balance specified in the related Prospectus Supplement, the proceeds of which will be applied to retire the related Securities. See "Description of the Securities -- Optional Disposition of Mortgage Loans" herein. MANDATORY TERMINATION...... If so specified in the related Prospectus Supplement, the Trustee, the Servicer or such other entities as may be specified in such Prospectus Supplement, may be required to effect early retirement of a Series of Securities by soliciting competitive bids for the purchase of the assets of the related Trust or otherwise, under the circumstances and in the manner specified under "Description of the Securities -- Mandatory Disposition of Mortgage Loans" herein and in the related Prospectus Supplement. SPECIAL PAYMENTS........... One or more Classes of a Series of Securities may be subject to special redemption or distributions in part on the dates and under the circumstances described herein and in the related Prospectus Supplement. YIELD AND PREPAYMENT CONSIDERATIONS........... The yield on each Class of Securities of a Series will be affected by, among other things, the rate of payment of principal (including prepayments) on the Mortgage Loans in the related Trust and the timing of receipt of such payments. See "Certain Yield and Prepayment Considerations" herein and in the related Prospectus Supplement. The Prospectus Supplement for a Series may specify certain yield calculations, based upon an assumed rate or range of prepayment assumptions on the related Mortgage Loans, for Classes receiving disproportionate allocations of principal and interest. A higher level of principal prepayments on the related Mortgage Loans than anticipated is likely to have an adverse effect on the yield on any Class of Securities that is purchased at a premium and a lower level of principal prepayments on the related Mortgage Loans is likely to have an adverse effect on the yield on any Class of Securities that is purchased at a discount from its principal amount. It is possible under certain circumstances that holders of Securities purchased at a premium (including Securities entitled to receive interest only) could suffer a lower than anticipated yield or could fail to recoup fully their initial investment. See "Certain Yield and Prepayment Considerations" herein and in the related Prospectus Supplement. TRANSFER AND SERVICING..... Under the Transfer Agreement with respect to a Series of Securities, each Depositor will acquire the related Mortgage Loans from certain of the Originators and, under the related Pooling and Servicing Agreement, each Depositor will transfer the Mortgage Loans to the related Trust. In addition, the Servicer will agree to service the Mortgage Loans. FORWARD COMMITMENTS; PREFUNDING............... If so specified in the related Prospectus Supplement, a portion of the proceeds of the sale of one or more Classes of Securities of a Series may be deposited in a segregated account (a "Prefunding Account") or all or 9 101 a portion of the payments on the Mortgage Loans may be set aside, to be applied to acquire additional Mortgage Loans from the Depositors at the times and meeting the requirements set forth in the related Pooling and Servicing Agreement or other agreement with the Depositors. Unless otherwise specified in the related Prospectus Supplement, monies on deposit in the Prefunding Account or otherwise set aside to fund such transfer and not applied to acquire such additional Mortgage Loans within the time set forth in the related Pooling and Servicing Agreement or other applicable agreement will be treated as a principal prepayment and applied in the manner described in the related Prospectus Supplement. CREDIT ENHANCEMENT......... If so specified in the related Prospectus Supplement, credit enhancement may be provided by any one or a combination of a letter of credit, financial guaranty insurance policy, mortgage pool insurance policy, special hazard insurance policy, reserve fund, spread account, cash collateral account, overcollateralization or other type of credit enhancement to provide full or partial coverage for certain defaults and losses relating to the underlying Mortgage Loans. Credit support may also be provided by subordination. The amount of any credit enhancement may be limited or have exclusions from coverage and may decline over time or under certain circumstances, all as specified in the related Prospectus Supplement. See "Description of Credit Enhancement" herein. ADVANCES FROM THE PRINCIPAL AND INTEREST ACCOUNT....... If so specified in the related Prospectus Supplement, the Servicer will be required to withdraw from the Principal and Interest Account amounts on deposit therein and held for future distribution to make advances (each, an "Advance") in respect of interest on the Mortgage Loans accrued but uncollected as of the end of the related Monthly Period (net of the Servicing Fee). The Servicer generally shall not be required to make such Advance from its own funds or be liable for the recovery thereof from collections on the related Mortgage Loans or otherwise. See "Description of the Securities -- Advances from the Principal and Interest Account; Servicing Advances" herein. SERVICING FEE.............. The Servicer will be entitled to receive a fee for its servicing duties in the amount specified in the related Prospectus Supplement (the "Servicing Fee"), payable monthly from the interest portion of monthly payments on the related Mortgage Loans, Liquidation Proceeds, Released Mortgaged Property Proceeds and certain other sources as provided in the related Pooling and Servicing Agreement. REPRESENTATIVE'S YIELD..... Unless otherwise specified in the related Prospectus Supplement, the Representative will be entitled to receive an amount (the "Representative's Yield") equal to the sum of (A) all prepayment penalties and premiums collected by the Servicer with respect to any Mortgage Loan and (B) any sum or other finance charge payable by the Mortgagor on a prepaid Rule of 78s Mortgage Loan (as defined herein) that is in excess of (i) the Curtailment or Principal Prepayment (as the case may be) on the related Mortgage Loan, together with accrued and unpaid interest thereon at the Mortgage Interest Rate, plus (ii) servicing compensation exclusive of Servicing Fees. The Representative's Yield will be retained and will be freely transferable by the Representative and will not constitute a portion of the assets of the related Trust. 10 102 RATINGS.................... It is a condition to the issuance of each Series of Securities that each Class of the Securities of such Series be rated by one or more of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services ("S&P") and Fitch Investors Service, Inc. ("Fitch" and each of Fitch, Moody's and S&P, a "Rating Agency") in one of their four highest rating categories. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time. No person is obligated to maintain any rating on any Security, and, accordingly, there can be no assurance that the ratings assigned to any Class of Securities upon initial issuance thereof will not be lowered or withdrawn by a Rating Agency at any time thereafter. If a rating of any Class of Securities of a Series is revised or withdrawn, the liquidity of such Class of Securities may be adversely affected. In general, the ratings address credit risk and do not represent any assessment of the likelihood or rate of principal prepayments. See "Risk Factors -- Liquidity" and "Ratings" herein. CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS......... The Mortgage Loans relating to a Series of Securities may be secured by second or more junior Mortgages which are subordinate to one or more mortgage liens on the related Mortgaged Property prior to the lien of such Mortgage Loan (such senior lien, if any, a "Senior Lien"). A primary risk with respect to a junior Mortgage is that funds received in connection with the foreclosure thereof will not be sufficient to satisfy fully both the Senior Lien and the junior Mortgage. See "Risk Factors" and "Certain Legal Aspects of the Mortgage Loans" herein. TAX STATUS OF THE SECURITIES................. If an election is made to treat the Trust or one or more segregated pools of assets comprising the Trust relating to a Series of Securities as a "real estate mortgage investment conduit (a "REMIC"), the Securities will constitute "regular interests" in a REMIC or "residual interests" in a REMIC, as specified in the related Prospectus Supplement. See "Certain Federal Income Tax Consequences." If an election is not made to treat the Trust as a REMIC, (i) the Trust will not be treated as an association or publicly traded partnership taxable as a corporation and (ii) the Securities to be treated as debt (if any) will be treated as debt. The Depositors, the Representative, their affiliates and the Servicer will have agreed, and by the purchase of Securities, the holders of the Securities will agree, to treat the Trust as a partnership (the "Partnership") for purposes of federal and state income taxes, with the partners of the Partnership being the holders of the designated Classes of Securities and the Securities to be treated as debt being debt of the Partnership. See "Certain Federal Income Tax Consequences" herein and in the related Prospectus Supplement. Any such Securities representing debt of the Partnership will not be treated as assets described in section 7701(a)(19)(C) of the Internal Revenue Code of 1986 (the "Code"), and probably will not be treated as "real estate assets" within the meaning of section 856(c)(6)(B) of the Code. Income derived from such Securities treated as debt probably will not be treated as "interest on obligations secured by mortgages on real property or on interests in real property" within the meaning of section 856(c)(3)(B) of the Code. For any holder of a Security representing a partnership interest in the "Partnership", which holder is a "real estate 11 103 investment trust" within the meaning of section 856 of the Code, such Securities will be treated as "real estate assets" within the meaning of section 856(c)(6)(B) of the Code. However, no comparable authority exists that would allow a thrift institution that is such a holder to treat such Securities as assets described in section 7701(a)(19)(C) of the Code. If any Class of such Securities were treated as indebtedness rather than an interest in a partnership, such Securities would not be treated as qualifying real property loans within the meaning of section 593(d)(1) of the Code and assets described in section 7701(a)(19)(C) of the Code and probably would not be treated as "real estate assets" within the meaning of section 856(c)(6)(B) of the Code. In addition, in that case, income derived from such Securities probably would not be treated as "interest on obligations secured by mortgages on real property or on interests in real property" within the meaning of section 856(c)(3)(B) of the Code. See "Certain Federal Income Tax Consequences" herein and in the related Prospectus Supplement. ERISA CONSIDERATIONS....... A fiduciary or other person investing "plan assets" of any employee benefit or other plan subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code should carefully review with its legal advisors whether the purchase or holding of any Class of Securities could give rise to a transaction prohibited or not otherwise permissible under ERISA or Section 4975 of the Code. Certain Classes of Securities may not be permitted to be acquired by any employee benefit or other plan subject to ERISA or Section 4975 of the Code, as specified in the related Prospectus Supplement. See "ERISA Considerations" herein and in the related Prospectus Supplement. LEGAL INVESTMENT........... Unless otherwise specified in the related Prospectus Supplement, no Class of Securities will constitute "mortgage related securities" under the Secondary Mortgage Market Enhancement Act of 1984 because the related Mortgage Pool will include Mortgage Loans that are secured by second or more junior mortgages. Investors should consult their own legal advisers in determining whether and to what extent the Securities constitute legal investments for such investors. See "Legal Investment" herein and in the related Prospectus Supplement. USE OF PROCEEDS............ Substantially all of the net proceeds to be received from each sale of Securities will be received, directly or indirectly, by the Depositors. The Originators will, in the aggregate, contribute or otherwise transfer the related Mortgage Loans to the Depositors in return for cash, stock or other property, as specified in the related Prospectus Supplement. 12 104 RISK FACTORS Investors should consider, among other things, the following factors in connection with the purchase of Securities: SECURITIES Limited Liquidity. There is no assurance that a secondary market for any of the Securities will develop or, if one does develop, that it will provide the holders with liquidity of investment or that it will continue for the life of such Securities. None of the Securities will be listed on any securities exchange. It is a condition to the issuance of the Securities that each Class of Securities be rated in one of the four highest rating categories by one or more of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services ("S&P") or Fitch Investors Service, Inc. ("Fitch"; and each of Moody's, S&P and Fitch, a "Rating Agency"). See "Ratings" herein. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time. No person is obligated to maintain the rating on any Security and, accordingly, there can be no assurance that the ratings assigned to any Class of Securities on the date on which such Securities are initially issued will not be lowered or withdrawn by a Rating Agency at any time thereafter. In the event any rating is revised or withdrawn, the liquidity of the related Securities may be adversely affected. Issuance of any of the Securities in book-entry form may reduce the liquidity of such Securities in the secondary trading market because investors may be unwilling to purchase Securities for which they cannot obtain physical certificates. See "Description of the Securities -- Registration of the Securities" herein. Difficulty in Pledging. Because transactions in Securities of a Series in book-entry form may be effected only through DTC, Participants and Indirect Participants, the ability of an Owner to pledge such a Security to persons or entities that do not participate in the DTC system, or otherwise to take actions in respect of such Securities, may be limited due to the lack of a physical certificate representing such Security. See "Description of the Securities -- Registration of the Securities" herein. Potential Delays in Receipt of Payments. Owners of Securities issued in book-entry form may experience some delay in their receipt of payments of interest and principal on the Securities because such payments will be forwarded to DTC and DTC will credit such payments to the accounts of its Participants which will thereafter credit them to the accounts of Owners either directly or indirectly through Indirect Participants. See "Description of the Securities -- Registration and Transfer of the Securities" herein. Limited Obligations. No Class of Securities of any Series will represent an interest in or obligation of the Depositors, the Representative, any Originator, the Servicer or any of their affiliates. The only obligations of the foregoing entities with respect to any of the Securities or the related Mortgage Loans will be the Servicer's servicing obligations under the Pooling and Servicing Agreement and the obligations of the Depositors to purchase, or substitute substantially similar mortgage loans for, or cause the Originators to purchase or substitute, any Mortgage Loans as to which there is defective documentation or a breach of certain representations and warranties in the Pooling and Servicing Agreement and Transfer Agreement, respectively. Neither the Securities nor the underlying Mortgage Loans will be guaranteed or insured by any governmental agency or instrumentality, or by the Depositors, the Representative, any Originator, the Servicer or any of their affiliates. ERISA Considerations. An investment in a Class of Securities of any Series by Plans may give rise to a prohibited transaction under ERISA section 406 and be subject to tax under Code section 4975 unless a statutory or administrative exemption is available. Accordingly, fiduciaries of any employee benefit plan or other retirement arrangement should consult their counsel before purchasing any Class of Securities. Certain Classes of Securities will not be eligible for purchase by Plans. See "ERISA Considerations" herein and in the related Prospectus Supplement. Limitations, Reduction and Substitution of Credit Enhancement. Credit enhancement may be provided with respect to one or more Classes of Securities of a Series to cover certain types of losses on the underlying 13 105 Mortgage Loans. Credit enhancement may be provided by one or more forms, including but not limited to subordination of one or more Classes of Securities of such Series, letter of credit, financial guaranty insurance policy, mortgage pool insurance policy, special hazard insurance policy, reserve fund, spread account, cash collateral account, overcollateralization or other type of credit enhancement. The coverage of any credit enhancement may be limited or have exclusions from coverage and may decline over time or under certain circumstances, all as specified in the related Prospectus Supplement. See "Description of Credit Enhancement" herein. Yield and Prepayment Considerations. The yield on certain Classes of Securities of a Series may be particularly sensitive to the rate of prepayments, including voluntary prepayments and prepayments due to foreclosures, repurchases and losses. Accordingly, to the extent the risks described herein and in the related Prospectus Supplement with respect to the characteristics of the Mortgage Loans and of mortgage loans in general result in prepayments being received at rates greater or less than those assumed by investors, the yield to the holders of such Class of Securities will be adversely affected. See "Certain Yield and Prepayment Considerations" herein and in the related Prospectus Supplement. RISKS OF THE MORTGAGE LOANS General Economic Conditions. General economic conditions have an impact on the ability of borrowers to repay mortgage loans. Loss of earnings, illness and other similar factors may lead to an increase in delinquencies and bankruptcy filings by borrowers. In the event of personal bankruptcy of a borrower under a Mortgage Loan (a "Mortgagor"), it is possible that the holders of the related Securities could experience a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of principal and interest to be paid with respect to such Mortgage Loan, thus delaying the amount received by the holders of the related Securities with respect to such Mortgage Loan. Moreover, if a bankruptcy court prevents the transfer of the related Mortgaged Property to the related Trust, any remaining balance on such Mortgage Loan may not be recoverable. In recent years, EquiCredit Corporation of America (together with its wholly-owned subsidiaries, including the other Originators, the "Company") has experienced increased delinquencies and higher net losses on the mortgage loans included in its servicing portfolio. This trend may have resulted in part from the effect of general economic conditions on the ability of borrowers to repay such mortgage loans, although no statistics are available with respect to the extent of such effect. See "The Depositors, the Servicer, the Representative and the Originators -- Delinquency and Loss Experience" herein and "The Originators and the Servicer -- Origination, Foreclosure and Delinquency Experience" in the related Prospectus Supplement for further information regarding the rates of delinquency and net losses experienced on the mortgage loans included in the Company's servicing portfolio. Real Estate Market Conditions. An investment in securities such as the Offered Securities which are secured by or represent interests in mortgage loans may be affected by, among other things, a decline in real estate values. No assurance can be given that values of the Mortgaged Properties will remain at the levels existing on the dates of origination of the related Mortgage Loans. If the residential real estate market should experience an overall decline in property values such that the outstanding balances of the Mortgage Loans, together with loans secured by Senior Liens (defined below), if any, on the Mortgaged Properties, become equal to or greater than the value of the Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses could be higher than those now generally experienced in the mortgage lending industry. In recent years, the Company has experienced higher net losses on the mortgage loans included in the Company's servicing portfolio. This trend may have resulted in part from the effect of real estate market conditions on the value of the mortgaged properties securing such mortgage loans, although no statistics are available with respect to the extent of such effect. See "The Depositors, the Servicer, the Representative and the Originators -- Delinquency and Loss Experience" herein and "The Originators and the Servicer -- Origination, Foreclosure and Delinquency Experience" in the related Prospectus Supplement for further information regarding the rates of delinquency and net losses experienced on the mortgage loans included in the Company's servicing portfolio. 14 106 Geographic Concentration. Certain geographic regions of the United States from time to time will experience weaker regional economic conditions and housing markets, and, consequently, will experience higher rates of loss and delinquency on mortgage loans generally. Any concentration of the Mortgage Loans relating to any Series of Securities in such a region may present risk considerations in addition to those generally present for similar mortgage-backed securities without such concentration. See "Description of the Mortgage Pool" in the related Prospectus Supplement for further information regarding the geographic concentration of the Mortgage Loans underlying the Securities of any Series. Nature of Security. Certain of the Mortgage Loans underlying the Securities of a Series may be secured by Mortgages junior or subordinate to one or more other mortgages ("Senior Liens"), and the related Senior Liens will not be included in the Mortgage Pool. Although little data is available, the rate of default of second or more junior mortgage loans may be greater than that of mortgage loans secured by senior liens on comparable properties. A primary risk to holders of Mortgage Loans secured by junior Mortgages is the possibility that adequate funds will not be received in connection with a foreclosure of the related Senior Lien to satisfy fully both the Senior Lien and the Mortgage Loan. If a holder of the Senior Lien forecloses on a Mortgaged Property, the proceeds of the foreclosure or similar sale will be applied first to the payment of court costs and fees in connection with the foreclosure, second to real estate taxes, third in satisfaction of all principal, interest, prepayment or acceleration penalties, if any, and any other sums due and owing to the holder of the Senior Liens. The claims of the holder of the Senior Lien will be satisfied in full out of proceeds of the liquidation of the Mortgage Loan, if such proceeds are sufficient, before the related Trust as holder of the junior Mortgage receives any payments in respect of the Mortgage Loan. If the Servicer were to foreclose on any junior Mortgage Loan, it would do so subject to any related Senior Lien. The debt related to the Mortgage Loan would not be paid in full at such sale unless a bidder at the foreclosure sale of such Mortgage Loan bids an amount sufficient to pay off all sums due under the Mortgage Loan and the Senior Lien or purchases the Mortgaged Property subject to the Senior Lien. If such proceeds from a foreclosure or similar sale of the related Mortgaged Property are insufficient to satisfy such loans in the aggregate, the related Trust, as the holder of the junior Mortgage, and, accordingly, holders of the Offered Securities would bear (i) the risk of delay in distributions while a deficiency judgment against the borrower is obtained and (ii) the risk of loss if the deficiency judgment is not realized upon. Moreover, deficiency judgments may not be available in certain jurisdictions. In addition, a junior mortgagee may not foreclose on the property securing a junior Mortgage unless it forecloses subject to the Senior Lien. In servicing second Mortgages, it is generally the Servicer's practice to advance funds to keep the Senior Lien current in the event the mortgagor is in default thereunder until such time as the Servicer satisfies the Senior Lien by sale of the mortgaged property. The Servicer intends to advance such amounts in accordance with its normal servicing procedures, but only to the extent that it determines such advances will be recoverable from future payments and collections on that Mortgage Loan or otherwise. Such practice may not be followed in servicing loans more junior than second mortgages or may be modified at any time. The related Trust will have no source of funds to satisfy any Senior Lien or make payments due to any senior mortgagee. The junior Mortgages securing the Mortgage Loans are subject and subordinate to any Senior Liens affecting the related Mortgaged Property, including limitations and prohibitions which may be contained in such Senior Liens upon subordinate financing. Certain Mortgage Loans. Certain Mortgage Loans that may be included in the assets of a Trust may involve additional uncertainties not present in other types of loans. Certain of the Mortgage Loans may provide for escalating or variable payments that may be larger than the initial payment amount; however, the borrowers under such Mortgage Loans are generally qualified on the basis of the initial payment amount. In some instances, such a borrower's income may not be sufficient to enable them to pay the increased payment amounts and the likelihood of default may increase. Certain of the Mortgage Loans underlying a Series of Securities may be delinquent in respect of the payment of principal and interest. In addition, certain of the Mortgagors under the Mortgage Loans underlying a Series of Securities may be subject to personal bankruptcy proceedings. Such Mortgage Loans may be subject to a greater risk of default. See "Description of the Mortgage Pools" herein and "Description of the Mortgage Pool" in the related Prospectus Supplement. 15 107 Delays in Liquidating Defaulted Mortgage Loans. Even assuming that the Mortgaged Properties provide adequate security for the Mortgage Loans underlying a Series of Securities, substantial delays could be encountered in connection with the liquidation of defaulted Mortgage Loans and corresponding delays in the receipt of related proceeds by the related Trust could occur. An action to foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state statutes and rules and is subject to many of the delays and expenses of other lawsuits if defenses or counterclaims are interposed, sometimes requiring several years to complete. Furthermore, in some states an action to obtain a deficiency judgment is not permitted following a nonjudicial sale of a Mortgaged Property. In the event of a default by a Mortgagor, these restrictions, among other things, may impede the ability of the Servicer to foreclose on or sell the Mortgaged Property or to obtain Net Liquidation Proceeds sufficient to repay all amounts due on the related Mortgage Loan. In addition, the Servicer will be entitled to deduct from collections received during the preceding Due Period all expenses reasonably incurred in attempting to recover amounts due and not yet repaid on Liquidated Mortgage Loans, including payments to senior lienholders, legal fees and costs of legal action, real estate taxes and maintenance and preservation expenses, thereby reducing collections available to the related Trust. See "Certain Legal Aspects of the Mortgage Loans -- Foreclosure in General," and "-- Rights of Redemption" herein. Likelihood of Disproportionate Liquidation Expenses. Liquidation expenses with respect to defaulted mortgage loans do not vary directly with the outstanding principal balance of the loan at the time of default. Therefore, assuming that the Servicer took the same steps in realizing upon a defaulted mortgage loan having a small remaining principal balance as it would in the case of a defaulted mortgage loan having a large remaining principal balance, the amount realized after expenses of liquidation would be smaller as a percentage of the outstanding principal balance of the small mortgage loan than would be the case with the defaulted mortgage loan having a large remaining principal balance. Because the average outstanding principal balance of the Mortgage Loans is small relative to the size of the average outstanding principal balance of the loans in a typical pool consisting only of conventional purchase-money mortgage loans, Net Liquidation Proceeds on Liquidated Mortgage Loans may also be smaller as a percentage of the principal balance of a Mortgage Loan than would be the case in a typical pool consisting only of conventional purchase-money mortgage loans. Risk of Early Defaults. Certain of the Mortgage Loans underlying a Series of Securities may be recently originated as of the date of inclusion in the related Mortgage Pool. Although little data is available, defaults on mortgage loans are generally expected to occur with greater frequency in their early years. Balloon Mortgage Loans. Certain of the Mortgage Loans underlying a Series of Securities may provide for the payment of the unamortized principal balance of the Mortgage Loan in a single payment at the maturity of the Mortgage Loan that is greater than the preceding monthly payment ("Balloon Loans"). See "Description of the Mortgage Pools" herein and "Description of the Mortgage Pool" in the related Prospectus Supplement. Because borrowers under Balloon Loans are required to make a relatively large single payment upon maturity, it is possible that the default risk associated with Balloon Loans is greater than that associated with fully-amortizing mortgage loans. The ability of a Mortgagor on a Balloon Loan to repay the Mortgage Loan upon maturity frequently depends upon, among other things, the borrower's ability to refinance the Mortgage Loan, which will be affected by a number of factors, including, without limitation, the level of mortgage rates available in the primary mortgage market at the time, the Mortgagor's equity in the related Mortgaged Property, the financial condition of the Mortgagor, the condition of the Mortgaged Property, tax law, general economic conditions and the general willingness of financial institutions and primary mortgage bankers to extend credit. Although a low interest rate environment may facilitate the refinancing of a balloon payment, the receipt and reinvestment by holders of the Offered Securities of the proceeds in such an environment may produce a lower return than that previously received in respect of the related Mortgage Loan. Conversely, a high interest rate environment may make it more difficult for the Mortgagor to accomplish a refinancing and may result in delinquencies or defaults. Legal Considerations. Applicable state laws generally regulate interest rates and other charges, require certain disclosures and require licensing of the Representative, the Originators and the Servicer. In addition, 16 108 most states have other laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and practices which may apply to the origination, servicing and collection of the Mortgage Loans. Depending on the provisions of the applicable law and the specific facts and circumstances involved, violations of these laws, policies and principles may limit the ability of the Servicer to collect all or part of the principal of or interest on the Mortgage Loans, may entitle the borrower to a refund of amounts previously paid and, in addition, could subject the Servicer to damages and administrative sanctions. See "Certain Legal Aspects of the Mortgage Loans" herein. The Mortgage Loans are also subject to federal laws, including: (i) the Federal Truth in Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to the Mortgagors regarding the terms of the Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act, in the extension of credit; (iii) the Fair Credit Reporting Act, which regulates the use and reporting of information related to the Mortgagor's credit experience; and (iv) certain other laws and regulations. The Mortgage Loans may be subject to the Home Ownership and Equity Protection Act of 1994 (the "Equity Protection Act") which amended the Truth in Lending Act as it applies to mortgages subject to the Equity Protection Act. The Equity Protection Act requires certain additional disclosures, specifies the timing of such disclosures and limits or prohibits the inclusion of certain provisions in mortgages subject to its provisions. The Equity Protection Act also provides that any purchaser or assignee of a mortgage covered by the Equity Protection Act is subject to all of the claims and defenses which the borrower could assert against the original lender. The maximum damages that may be recovered under the Equity Protection Act from an assignee is the remaining amount of indebtedness plus the total amount paid by the borrower in connection with the Mortgage Loan. If the assets of the related Trust include Mortgage Loans subject to the Equity Protection Act, the Trust may be subject to all of the claims and defenses which the borrower could assert against the original lender. The Depositors are required to provide the Trustee, as assignee of such Mortgage Loans, with notice that such Mortgage Loans are subject to special rules under the Federal Truth in Lending Act and that the assignee could be liable for violations of such rules. Under environmental legislation and case law applicable in certain states, including the State of California, it is possible that liability for environmental hazards in respect of real property may be imposed on a holder of a mortgage note (such as the Trust) secured by real property. See "Certain Legal Aspects of the Mortgage Loans -- Environmental Legislation" herein. THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF BANKRUPTCY OF AN ORIGINATOR The transactions contemplated hereby and by the related Prospectus Supplement will be structured such that the voluntary or involuntary application for relief under the United States Bankruptcy Code or similar applicable state laws ("Insolvency Laws") by the Depositors is unlikely and such filings by the Originators should not result in consolidation of the assets and liabilities of the Depositors with those of the Originators. These steps include the creation of the Depositors as separate, limited purpose subsidiaries, the certificates of incorporation of which contain limitations on the nature of the Depositors' business and restrictions on the ability of a Depositor to commence voluntary or involuntary cases or proceedings under the Insolvency Laws without the prior unanimous affirmative vote of all its directors. However, there can be no assurance that the activities of the Depositors would not result in a court concluding that the assets and liabilities of the Depositors should be consolidated with those of the Originators. Each Originator will transfer its related Mortgage Loans to either Depositor, and the Depositors will transfer the Mortgage Loans to the related Trust. The Originators will warrant in the related Transfer Agreement, and the Depositors will warrant in the related Pooling and Servicing Agreement, that the Originators or the Depositors, as the case may be, have taken and will take all actions that are required to perfect the Depositors' and the Trust's, as the case may be, ownership interests in the Mortgage Loans. If an Originator were to become a debtor in a bankruptcy case, a creditor or trustee (or the debtor itself) may take the position that the contribution or transfer of the Mortgage Loans by the Originator to its related Depositor 17 109 should be characterized as a pledge of such Mortgage Loans to secure a borrowing of such debtor, with the result that such Depositor is deemed to be a creditor of such Originator, secured by a pledge of the applicable Mortgage Loans. If such an attempt were successful, delays in payments of collections on the Mortgage Loans could occur or reductions in the amount of such payments could result, or such a trustee in bankruptcy could elect to accelerate payment of the obligation to the Depositors and liquidate the Mortgage Loans. With respect to a Trust as to which no REMIC election is made and as to which a Class of Securities will be treated as debt of the Trust, if a Depositor were to become a debtor in a bankruptcy case, unless otherwise described in the related Prospectus Supplement, the Indenture Trustee will be directed to sell the assets of the Trust (other than the Accounts) in a commercially reasonable manner and on commercially reasonable terms. The proceeds of such sale will be treated as collections on the Mortgage Loans. YIELD AND PREPAYMENT CONSIDERATIONS The yield to maturity of each Class of Securities of a Series will depend on the rate and timing of payment of principal on the related Mortgage Loans, including prepayments, liquidations due to defaults and repurchases due to defective documentation or breaches of representations and warranties. Such yield may be adversely affected by a higher or lower than anticipated rate of prepayments on the Mortgage Loans. Prepayments are influenced by a number of factors, including prevailing mortgage market interest rates, local and regional economic conditions and homeowner mobility. The yield to maturity of certain Classes of Securities identified in the related Prospectus Supplement may be particularly sensitive to the rate and timing of principal payments (including prepayments, liquidations and repurchases) of the related Mortgage Loans, which may fluctuate significantly from time to time. Investors in a Class of Securities offered at a discount from the principal amount thereof or with no stated principal amount should fully consider the associated risks, including the risk that an extremely rapid rate of principal payments could result in the failure of such investors to recoup their initial investments. See "Certain Yield and Prepayment Considerations" herein and in the related Prospectus Supplement. LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), a Mortgagor who enters military service after the origination of such Mortgagor's Mortgage Loan (including a Mortgagor who is a member of the National Guard or is in reserve status at the time of the origination of the Mortgage Loan and is later called to active duty) may not be charged interest (including fees and charges) above an annual rate of 6% during the period of such Mortgagor's active duty status, unless a court orders otherwise upon application of the lender. It is possible that such action could have an effect, for an indeterminate period of time, on the ability of the Servicer to collect full amounts of interest on certain of the Mortgage Loans underlying a Series of Securities. In addition, the Relief Act imposes limitations which would impair the ability of the Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's period of active duty status. Thus, in the event that such a Mortgage Loan goes into default, there may be delays and losses occasioned by the inability to realize upon the related Mortgaged Property in a timely fashion. ORIGINAL ISSUE DISCOUNT Certain Classes of Securities of a Series may be treated as having been issued with original issue discount for federal income tax purposes. As a result, holders of such Securities will be required to include amounts in income without the receipt of cash corresponding to that income. See "Federal Income Tax Consequences -- Original Issue Discount" herein and, if applicable, in the related Prospectus Supplement. 18 110 DESCRIPTION OF THE MORTGAGE POOLS GENERAL Each Mortgage Pool will consist of Mortgage Loans having the aggregate principal balance outstanding as of the related Cut-off Date, after giving effect to payments due or received prior to such date, specified in the related Prospectus Supplement (the "Original Pool Principal Balance"). Unless otherwise specified in the related Prospectus Supplement, each Mortgage Pool will consist of fixed- or adjustable-rate Mortgage Loans (including both fully amortizing Mortgage Loans and Balloon Loans) originated and underwritten by the Representative or by a wholly-owned subsidiary of the Representative or purchased and re-underwritten by the Representative or by a wholly-owned subsidiary of the Representative. This subsection describes generally certain characteristics of the Mortgage Loans. The related Prospectus Supplement will describe certain characteristics of the related Mortgage Loans, including without limitation (i) the range of dates of origination and the latest scheduled maturity date, (ii) the minimum remaining term to maturity, the weighted average original term to maturity and the weighted average remaining term to maturity, (iii) the range of Mortgage Interest Rates and the weighted average Mortgage Interest Rate, (iv) in the case of Mortgage Loans with adjustable interest rates ("ARMs" or "Adjustable Rate Mortgages"), the weighted average outstanding current Mortgage Interest Rates, Gross Margins, Maximum Mortgage Rates and Minimum Mortgage Rates and Periodic Caps and Payment Caps, if any (as such terms are defined below under "-- Payments on the Mortgage Loans"), (v) the range of principal balances outstanding, the range of original principal balances and the weighted average outstanding principal balance, (vi) the percentages of Mortgage Loans secured by first Mortgages, second Mortgages and more junior Mortgages, respectively, (vii) the maximum Combined Loan-to-Value Ratio at origination (defined below), the weighted average Combined Loan-to-Value Ratio, the maximum Home Equity Loan Ratio (defined below) at origination and the weighted average Home Equity Loan Ratio, (viii) the percentage of Mortgage Loans secured by fee simple interests in single-family dwelling units, attached or detached two-to four-family dwelling units, units in planned unit developments and condominiums, respectively, the percentage of Mortgage Loans secured by leasehold interests, the percentage of Mortgage Loans secured by manufactured housing units and the percentage of Mortgage Loans secured by units in cooperatives, (ix) the percentage of Mortgage Loans as to which the related Mortgagor represented at the time of origination that the related Mortgaged Property would be occupied by such Mortgagor as a primary or secondary residence, (x) certain summary information relating to the geographic concentration of the Mortgaged Properties securing the Mortgage Loans, (xi) the percentage of Mortgage Loans which are Balloon Loans and the dates after origination the balloon payment is due, and (xii) the percentage of Mortgage Loans which are Bankruptcy Mortgage Loans (defined below), the percentage of Bankruptcy Loans which are 30 days or more contractually delinquent and the percentages of Mortgage Loans other than Bankruptcy Mortgage Loans which are 30 days and 60 days or more contractually delinquent, respectively. If so specified in the related Prospectus Supplement, such information may be approximate based on the expected characteristics of the Mortgage Liens to be included in the related Mortgage Pool and any significant variations therefrom provided on the related Current Report on Form 8-K, as described below. For purposes of the foregoing, the "Combined Loan-to-Value Ratio" of any Mortgage Loan is the ratio (expressed as a percentage) of (i) the sum of (a) the original principal balance of such Mortgage Loan at the date of origination plus (b) the outstanding balance of the Senior Lien, if any, divided by (ii) the lesser of (a) the value of the related Mortgaged Property, based upon the appraisal made at the time of origination of the Mortgage Loan and (b) the purchase price of the Mortgaged Property if the Mortgage Loan proceeds were used to purchase the Mortgaged Property. The Combined Loan-to-Value Ratios of the Mortgage Loans also reflect certain judgments of the Company's underwriters made at the time the Mortgage Loans were originated or acquired and certain other policies of the Company. See "The Depositors, the Servicer, the Representative and the Depositors -- Specific Underwriting Criteria -- Balloon Mortgage Loans" and "-- Certain Calculations Relating to Combined Loan-to-Value Ratios" herein. The "Home Equity Loan Ratio" of any Mortgage Loan is the ratio (expressed as a percentage) of (i) the original principal balance of such Mortgage Loan divided by (ii) the lesser of (a) the value of the related Mortgaged Property, based upon 19 111 the appraisal made at the time of origination of the Mortgage Loan and (b) the purchase price of the Mortgaged Property if the Mortgage Loan proceeds were used to purchase the Mortgaged Property. For Mortgage Loans secured by a first Mortgage, the Combined Loan-to-Value Ratio and the Home Equity Loan Ratio will be the same. A Bankruptcy Mortgage Loan is a Mortgage Loan on which the related Mortgagor is making payments pursuant to a personal bankruptcy plan or proceeding (each, a "Bankruptcy Plan"). The entire principal balance and the right to receive interest accrued after the Cut-off Date with respect to each Bankruptcy Mortgage Loan will generally be included in the assets of the related Trust, while the right to interest accrued but unpaid prior to the related Cut-off Date under each Bankruptcy Mortgage Loan will generally be retained by the Originators. The Originators' right to collect interest accrued on a Bankruptcy Mortgage Loan prior to the date of the related Bankruptcy Plan filing will generally be subordinate to the related Trust's right to receive timely payments of principal and interest with respect to such Bankruptcy Mortgage Loan. In addition, the related Prospectus Supplement or, if so specified therein, the Current Report on Form 8-K to be filed within fifteen days after the delivery of a Series of Securities, will set forth in tabular form certain more detailed information relating to the characteristics of the related Mortgage Loans by number and outstanding principal balance and by percentage of the Mortgage Pool including, without limitation, the outstanding principal balances of the Mortgage Loans, the geographic distribution of the related Mortgaged Properties (by state), the Combined Loan-to-Value Ratios, the Home Equity Loan Ratios, the Mortgage Interest Rates, the remaining months to stated maturity and the number of months since origination, in each case (except for geographic distribution) within the ranges specified therein. PAYMENTS ON THE MORTGAGE LOANS Unless otherwise specified in the related Prospectus Supplement, a substantial portion of the Mortgage Loans underlying a Series of Securities will provide for level monthly installments (except, in the case of Balloon Mortgage Loans, the final payment) consisting of interest equal to one-twelfth of the applicable Mortgage Interest Rate times the unpaid principal balance, with the remainder of such payment applied to principal (an "Actuarial Mortgage Loan"). No adjustment is made if a payment is made earlier or later than the due date, although the Mortgagor may be subject to a late payment penalty. If such Mortgage Loan is prepaid, the borrower is required to pay interest only to the date of prepayment. The remainder of the Mortgage Loans will provide for payments that are allocated to principal and interest according to the daily simple interest method (a "Simple Interest Mortgage Loan") or the "sum of the digits" method, otherwise known as the "Rule of 78s" method (a "Rule of 78s Mortgage Loan"). Unless otherwise specified in the related Prospectus Supplement, no Mortgage Loan will provide for deferred interest or negative amortization. The Mortgage Loans may have Mortgage Interest Rates which are fixed or may be ARMs on which the Mortgage Interest Rates are adjusted periodically based on an index (an "Index") or otherwise, as specified in the related Prospectus Supplement. ARMs generally provide for a fixed initial Mortgage Interest Rate until the first date on which such Mortgage Interest Rate is to be adjusted. Thereafter, the Mortgage Interest Rate is subject to periodic adjustment generally equal to the Index plus a fixed percentage spread over the Index established contractually for each ARM at the time of its origination (the "Gross Margin"). The initial Mortgage Interest Rate for an ARM may be lower than the sum of the then-applicable Index and the Gross Margin for such ARM. An ARM may be convertible into a fixed-rate Mortgage Loan. To the extent specified in the related Prospectus Supplement, any ARM so converted may be subject to repurchase upon conversion by the party specified in such Prospectus Supplement. An ARM may provide that its Mortgage Interest Rate may not exceed a rate above a maximum rate (the "Maximum Mortgage Rate") or be less than a minimum rate (the "Minimum Mortgage Rate") established at the time of origination. In addition, if so specified in the related Prospectus Supplement, an ARM may provide for limitations on the maximum amount by which the Mortgage Interest Rate may adjust for any single adjustment period (a "Periodic Cap") or, in the case of an ARM providing for negative amortization, may provide for limitations on the amounts by which scheduled payments may be increased due to rising interest rates (a "Payment Cap"). 20 112 A Simple Interest Mortgage Loan provides for the amortization of the amount financed under the Mortgage Loan over a series of equal monthly payments (except, in the case of a Balloon Loan, the final payment). Each monthly payment consists of an installment of interest which is calculated on the basis of the outstanding principal balance of the Mortgage Loan multiplied by the stated Mortgage Interest Rate and further multiplied by a fraction, the numerator of which is the number of days in the period 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 such Mortgage Loan. As payments are received under a Simple Interest Mortgage Loan, the amount received is applied first to interest accrued to the date of payment and the balance is applied to reduce the unpaid principal balance. Accordingly, if a borrower pays a fixed monthly installment on a Simple Interest Mortgage Loan before its scheduled due date, the portion of the payment allocable to interest for the period since the preceding payment was made will be less than it would have been had the payment been made as scheduled, and the portion of the payment applied to reduce the unpaid principal balance will be correspondingly greater. However, the next succeeding payment will result in an allocation of a greater amount to interest if such payment is made on its scheduled due date. Conversely, if a borrower pays a fixed monthly installment after its scheduled due date, the portion of the payment allocable to interest for the period since the preceding payment was made will be greater than it would have been had the payment been made as scheduled, and the 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 Mortgage Loan is made on or prior to its scheduled due date, the principal balance of the Mortgage Loan will amortize in the manner described in the preceding paragraph. However, if the borrower consistently makes scheduled payments after the scheduled due date the Mortgage Loan will amortize more slowly than scheduled. If a Simple Interest Mortgage Loan is prepaid, the borrower is required to pay interest only to the date of prepayment. A Rule of 78s Mortgage Loan provides for the payment by the borrower of a specified total amount of payments, payable in equal monthly installments on each due date, which total represents the amount financed and add-on interest in an amount calculated on the basis of the stated note rate for the term of the Mortgage Loan. The rate at which such amount of add-on interest is earned and, correspondingly, the portion of each fixed monthly payment allocated to reduction of the outstanding principal balance are calculated in accordance with the "sum of the digits" or "Rule of 78s". Under a Rule of 78s Mortgage Loan, the portion of a payment allocable to interest is determined by multiplying the total amount of add-on interest payable over the term of the Mortgage Loan by a fraction derived as described herein. The fraction used in the calculation of add-on interest earned each month under a Rule of 78s Mortgage Loan has as its denominator a number equal to the sum of a series of numbers beginning with one and ending with the number of monthly payments due under the Mortgage Loan. For example, for a Mortgage Loan providing for twelve scheduled payments, the denominator of each month's fraction would be 78, the sum of the series of numbers from one to twelve. The numerator of the fraction for a given month would be the number of payments remaining before giving effect to the payment to which the fraction is being applied. Accordingly, in the case of such Mortgage Loan, the fraction for the first payment would be 12/78, for the second payment, 11/78, for the third payment, 10/78, and so on through the final payment, for which the fraction would be 1/78. The applicable fraction is then multiplied by the total add-on interest payable over the term of the Mortgage Loan to determine the amount of interest "earned" that month. The difference between the amount of the monthly payment made by the borrower and the amount of earned add-on interest calculated for the month is applied to principal reduction. As a result, the rate at which interest is earned in the initial months of a Rule of 78s Mortgage Loan is somewhat higher than the interest computed for a Mortgage Loan computed on an actuarial basis, and the rate at which interest is earned at the end of the Mortgage Loan is somewhat less than that computed under an actuarial basis. Payments to holders of the related Securities and the Servicing Fee with respect to Rule of 78s Mortgage Loans will be computed as if such Mortgage Loans were Simple Interest Mortgage Loans. Unless otherwise specified in the related Prospectus Supplement, amounts received upon prepayment in full of a Rule of 78s Mortgage Loan in excess of (i) the then outstanding principal balance of such Mortgage Loan (computed on a daily simple interest amortization basis) and (ii) accrued interest computed on a daily simple interest basis 21 113 at the Mortgage Interest Rate, plus servicing compensation exclusive of Servicing Fees, will constitute part of the Representative's Yield and will not be part of the assets of the related Trust available to make required payments of principal and interest to holders of the related Securities and will not be treated as collected principal for purposes of computing the amount to be distributed. In the event of the prepayment in full (voluntarily or by acceleration) of a Rule of 78s Mortgage Loan, under the terms of the Mortgage Loan the entire remaining amount of payments is due but a "refund" or "rebate" will be made to the borrower of the portion of the total amount of the scheduled payments remaining under the Mortgage Loan immediately prior to such prepayment which is allocable to "unearned" add-on interest. Such rebate will be calculated in accordance with the Rule of 78s method. CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS The rate of principal payments on each Class of Securities of a Series entitled to principal, the aggregate amount of each interest payment on each Class of Securities of a Series entitled to interest and the yield to maturity of each Class of Securities of a Series will be related to the rate and timing of payments of principal on the related Mortgage Loans, which may be in the form of scheduled and unscheduled payments. The rate of prepayment on a pool of mortgage loans is affected by prevailing market rates for mortgage loans of a comparable term and risk level. In general, when the level of prevailing interest rates for similar loans significantly declines, the rate of prepayment is likely to increase, although the prepayment rate is influenced by a number of other factors, including general economic conditions and homeowner mobility. Defaults on mortgage loans are expected to occur with greater frequency in their early years, although little data is available with respect to the rate of default on second mortgage loans. The rate of default on second or more junior mortgage loans may be greater than that of mortgage loans secured by first liens on comparable properties. Prepayments, liquidations and purchases of the Mortgage Loans will result in distributions to the holders of amounts of principal which would otherwise be distributed over the remaining terms of the Mortgage Loans. In addition, unless otherwise specified in the related Prospectus Supplement, the Servicer, the Depositors or the holders of the Class of Securities of any Series specified in the related Prospectus Supplement may, at their option, cause the related Trust to sell all of the outstanding Mortgage Loans and REO Properties underlying the related Series of Securities, and thus effect the early retirement of the related Securities, after the date on which the Pool Principal Balance (as defined herein) is less than the percentage of the Original Pool Principal Balance specified in the related Prospectus Supplement. See "Description of the Securities -- Optional Disposition of Mortgage Loans" herein. Further, if so specified in the related Prospectus Supplement, the Servicer or such other entities as may be specified in such Prospectus Supplement may be required to effect early retirement of a Series of Securities by soliciting competitive bids for the purchase of the assets of the related Trust or otherwise. See "Description of the Securities -- Mandatory Disposition of Mortgage Loans" herein. If any Class of Securities of Series are subject to special redemption or special remittances ("Special Payments") on a date other than a Payment Date (each such date, a "Special Payment Date"), the holders will receive principal earlier than would have been the case had no special redemption or special remittance, as the case may be, occurred and such principal payments were made on the next succeeding Payment Date. In such event, holders may not be able to reinvest such payments at rates equal to the rates on such Class of Securities. If the Pooling and Servicing Agreement for a Series of Securities provides for a Prefunding Account or other means of funding the transfer of additional Mortgage Loans to the related Trust, as described under "Description of the Securities -- Forward Commitments; Prefunding" herein, and the Trust is unable to acquire such additional Mortgage Loans within any applicable time limit, the amounts set aside for such purpose may be required to effect the retirement of all or a portion of one or more Classes of Securities of such Series. 22 114 As described above, the rate of prepayment on a pool of mortgage loans is affected by prevailing market rates for comparable mortgage loans. When the market interest rate is below the mortgage coupon, mortgagors may have an increased incentive to refinance their mortgage loans. Depending on prevailing market rates, the future outlook for market rates and economic conditions generally, some mortgagors may sell or refinance mortgaged properties in order to realize their equity in the mortgaged properties, to meet cash flow needs or to make other investments. No representation is made as to the particular factors that will affect the prepayment of the Mortgage Loans underlying any Series of Securities, as to the relative importance of such factors, as to the percentage of the principal balance of the Mortgage Loans that will be paid as of any date or as to the overall rate of prepayment on the related Mortgage Loans. The yield to maturity of certain Classes of Securities of a Series may be particularly sensitive to the rate and timing of principal payments (including prepayments) of the Mortgage Loans, which may fluctuate significantly from time to time. The Prospectus Supplement relating to such Securities will provide certain additional information with respect to the effect of such payments on the yield to maturity of such Securities under varying rates of prepayment, including the rate of prepayment, if any, which would reduce the holder's yield to zero. Greater than anticipated prepayments of principal will increase the yield on Securities purchased at a price less than par. Conversely, greater than anticipated prepayments of principal will decrease the yield on Securities purchased at a price greater than par. The effect on an investor's yield due to principal prepayments on the Mortgage Loans occurring at a rate that is faster (or slower) than the rate anticipated by the investor in the period immediately following the issuance of the Securities will not be entirely offset by a subsequent like reduction (or increase) in the rate of principal payments. The weighted average life of each Class of Securities of a Series will also be affected by the amount and timing of delinquencies and defaults on the related Mortgage Loans and the recoveries, if any, on defaulted Mortgage Loans and foreclosed properties in the related Mortgage Pool. The "weighted average life" of a Security refers to the average amount of time that will elapse from the date of issuance to the date each dollar in respect of principal of such Security is repaid. The weighted average life of each Class of Securities of a Series will be influenced by, among other factors, the rate at which principal payments are made on the Mortgage Loans, including final payments made upon the maturity of Balloon Loans. THE TRUSTS Each Trust will be formed under a Pooling and Servicing Agreement (a "Pooling and Servicing Agreement") among the Depositors, the Servicer and the Trustee named therein (a "Trustee") or a Trust Agreement (each, a "Trust Agreement") between the Depositors and the trustee of the Trust (the "Owner Trustee"). If a Trust is formed under a Trust Agreement, the related Pooling and Servicing Agreement will be entered into between the Trust, the Depositors and the Servicer. No Trust will engage in any activity other than (i) acquiring, holding and managing the Mortgage Loans and the other assets of the Trust and the proceeds therefrom, (ii) issuing the related securities, (iii) making payments on the related Securities and (iv) engaging in other activities incidental to the foregoing. The property of each Trust will include: (i) the related Mortgage Loans as from time to time are subject to the related Pooling and Servicing Agreement and all proceeds thereof, (ii) such assets as from time to time are identified as REO Property or are deposited in the Collection Account (defined herein), Principal and Interest Account (defined herein), or other accounts established under any of the documents governing the Trust or the related Securities, including amounts on deposit in such accounts and invested in Permitted Instruments, (iii) the Trustee's rights under all insurance policies with respect to the Mortgage Loans required to be maintained pursuant to the Pooling and Servicing Agreement and any Insurance Proceeds, (iv) Liquidation Proceeds, (v) Released Mortgaged Property Proceeds; and (vi) certain other property; provided, however, that unless otherwise specified in the related Prospectus Supplement, the assets of a Trust will not include the Representative's Yield or amounts received on or after the Cut-off Date in respect of interest accrued on the Mortgage Loans prior to the Cut-off Date. 23 115 The Servicer will service the Mortgage Loans either directly or through subservicers in accordance with the Pooling and Servicing Agreement and generally in accordance with the first and second mortgage loan servicing standards and procedures accepted by prudent mortgage lending institutions. See "Description of the Securities -- Servicing Standards" and "-- Use of Subservicers" below for a further description of the provisions of the Pooling and Servicing Agreement relating to servicing standards and the use of subservicers. THE DEPOSITORS, THE SERVICER, THE REPRESENTATIVE AND THE ORIGINATORS GENERAL EquiCredit Corporation of America (formerly known as Old Stone Credit Corporation), the Servicer, the Representative and an Originator ("EquiCredit"), was incorporated under the laws of the State of Delaware on September 4, 1991, for the purpose of acquiring substantially all of the assets of Old Stone Credit Corporation ("OSCC-Florida"), a corporation organized under the laws of the State of Florida and a wholly-owned subsidiary of Old Stone Corporation, a corporation organized under the laws of the State of Rhode Island. EquiCredit is a wholly-owned subsidiary of EquiCredit Corporation ("EquiCredit Corporation"), a Delaware corporation organized on August 29, 1991. On November 7, 1991, EquiCredit acquired substantially all of the assets and succeeded in the business of OSCC-Florida, including the common stock of the wholly-owned subsidiaries of OSCC-Florida, consisting of, among other companies, EquiCredit Corporation/Ala. & Miss., California/EquiCredit Corporation, EquiCredit Corporation of In., EquiCredit Corporation of Pa. and EquiCredit Corporation of SC. In the discussion that follows, references to the "Company" include EquiCredit Corporation, EquiCredit and its subsidiaries (including the other Originators) and EquiCredit's predecessor in interest, OSCC-Florida. On January 27, 1995, Barnett Merger Sub Inc., a wholly-owned subsidiary of Barnett Banks, Inc. ("Barnett Banks"), was merged with and into EquiCredit Corporation, and EquiCredit Corporation became a wholly-owned indirect subsidiary of Barnett Banks. The Depositors were incorporated in the State of Delaware on February 26, 1993 for the limited purposes of receiving the mortgage loans from one or more Originators, transferring such mortgage loans to third parties, forming trusts and engaging in related activities. All of the outstanding common stock of each Depositor is owned by one or more of the Originators. The transactions contemplated hereby have been structured to make the voluntary or involuntary application for relief by a Depositor under any Insolvency Law unlikely and that such application by an Originator would not result in consolidation of the assets and liabilities of the Depositors with those of such Originator. If, notwithstanding the measures so taken, a court concluded that the assets and liabilities of the Depositors should be so consolidated with those of an Originator, delays in distributions on the Notes and the Certificates and possible reductions in the amount of such distributions could occur. See "Risk Factors -- The Status of the Mortgage Loans in the Event of Bankruptcy of an Originator". LOAN ORIGINATION HISTORY The Company originates mortgage loans on residential dwellings nationwide; purchases mortgage loans from lenders, mortgage bankers, and brokers on a wholesale basis; assembles and sells pools of mortgages to major commercial banks and other financial institutions; and services mortgage portfolios placed with such investors. The Company lends primarily on suburban and urban single-family homes in major metropolitan areas. See "The Originators and the Servicer -- Origination, Foreclosure and Loss Experience -- Loan Origination History" in the related Prospectus Supplement for a current listing of the states in which the Company conducts loan origination and/or wholesale operations. The related Prospectus Supplement will set forth the dollar amounts of first and junior lien mortgage loans originated and purchased by the Company during the three years immediately preceding the date of the Prospectus Supplement and, if available, the dollar amounts of mortgage loans originated and purchased by the Company during the most recent complete calendar quarters in the current year. 24 116 GENERAL LOAN UNDERWRITING The Company originates and acquires first and junior lien mortgage loans using standard underwriting procedures based upon an applicant's general creditworthiness and the extent of real estate equity used as collateral security. The following is a general discussion of the underwriting standards and procedures utilized by the Company, subject to such variations as are specified in the related Prospectus Supplement. All mortgage loan applications are underwritten, and collateral properties appraised, prior to the closing or acquisition of a mortgage loan by the Company. Loan underwriting and approval is centralized at the Company's headquarters in Jacksonville, Florida. Loans are reviewed and approved by one of the Company's underwriters, each of whom is granted specific credit approval limits based on experience and seniority (which approval limits may be waived at the discretion of management). Approval of a majority of the Company's Board of Directors is generally required for all loan applications over a dollar limit established from time to time, currently $350,000, except that such approval is not always obtained for loans acquired as part of a portfolio acquisition. The Company does not currently originate or acquire mortgage loans that result in a lien position more subordinate than a second lien on real estate and, unless otherwise specified in the related Prospectus Supplement, no loan secured by a more subordinate mortgage will be included in a Mortgage Pool. The Company will consider making a second mortgage loan in a subordinate position to a first mortgage loan held by a party other than a bank, savings association or a supervised lender, if a copy of the recorded security instrument and note are reviewed prior to credit approval. Second mortgage loans may also be made behind adjustable or variable rate first mortgage loans if the maximum payment (on a fully indexed basis) is used when calculating the debt ratio, and the note and mortgage relating to such first mortgage loan accompany the loan application file for consideration during the credit review process. Any first lien adjustable or variable rate loan is required to have been in existence for at least one year and to have experienced at least one rate adjustment. With respect to the Company's loan and loan portfolio acquisition activities, the Company reviews procedures and calculations used by each individual seller to achieve a certain "level of confidence" that the process used is correct and pragmatic. This is done by reviewing a sample size of loans under each seller's pool. The Company's goal in underwriting loan purchases is to follow the Company's published underwriting guidelines for each individual loan. However, flexibility is used to some extent to include some loans outside of the guidelines to successfully price and acquire the majority of the loan pool being considered. This flexibility is only used on loans that are believed to be acceptable by strong compensating factors, and exceptions to the underwriting guidelines are reviewed on a case by case basis. Therefore, the references to application to the underwriting guidelines to purchased loan portfolios assumes the possibility of any of the aforementioned exceptions. INCOME VERIFICATION Loan applications are considered through a combination of reviews of credit bureau reports and/or individual certifications. Income is verified through various means, including, but not limited to, applicant interviews, written verification, review of paycheck stubs, tax returns, and so forth, and the potential borrower's demonstration of sufficient levels of disposable income to satisfy debt repayment requirements. The following are certain of the key factors considered by the Company. Employment. A loan applicant's employer is always contacted to verify employment in addition to receipt of the potential borrower's W-2s, last two to four paycheck stubs or other similar items of verification as may be required by the underwriter. With respect to any acquired loan, the Company relies upon the supporting documentation in the loan application file relating to the applicant's employment status. Self-Employed Applicants -- Commissions/Bonuses/Tax Returns. Federal tax returns for the most recent two years (with schedules) signed by the potential borrower are required from self-employed applicants and applicants who derive 100% of their income from commissions or 25% or more of their total income from commissions and/or bonuses. Consistency in commission and/or bonus income must be established. The 25 117 Company's underwriters may, in the exercise of their judgment, either accept personal and business related financial statements prepared by the borrower or require financial statements prepared by a certified public accountant. Checking account statements are used solely as additional verification of income. Rental Income. Rental income must be documented by leases, rental agreements, tenant letters, or tax returns for the two most recent years. The Company calculates 75% of total rents received and subtracts from that figure the total mortgage payments on rental property to derive a cash flow, if any, which amount is then treated as additional income in the credit review process. If the subtraction of the mortgage payment from the rental income results in a negative cash flow, such amount is subtracted from the applicant's monthly income. Social Security and Veterans Compensation. Compensation from the Social Security Administration or the Department of Veterans Affairs must be supported by an awards letter from the appropriate agency. If such a letter is unavailable, copies of checks received from the appropriate agency or eight to twelve months of checking account statements indicating equal deposit amounts are required. Retirement Income. Retirement income must be supported by an annuity letter or similar awards document describing all details of income. If such a letter or document is unavailable, copies of checks received from the source of income or eight to twelve months of checking account statements indicating equal deposit amounts are required. Child and/or Spousal Support. A loan applicant must submit to the Company a copy of the final decree of divorce specifically setting forth the amount and term, if any, of support. If such award is a substantial portion of the applicant's total monthly income, either copies of cancelled checks from the former spouse, collection receipts paid through a court ordered public service office or checking account statements indicating equal monthly or otherwise periodic deposit amounts are required. APPRAISALS; TITLE COMPANIES AND CLOSING AGENTS All properties are required to be appraised by independent fee appraisers approved by the Company in advance of funding. Appraisers are approved by the Company based upon a review of sample appraisals, professional experience, education, membership in related professional organizations, clients and typical or specific properties appraised. Except with respect to loan portfolio purchases, all appraisers must be approved by the Company's Vice President or Assistant Vice President of Loan Administration and must be independent from borrowers, referral brokers used by the Company and any other mortgage loan originator from which the Company acquires mortgage loans. Management reviews references, credentials and examples of prior appraisals before approving an appraiser. The Company's underwriters may, in their discretion, accept an appraisal from a non-approved appraiser based solely on the appraisal's content. If an appraisal with respect to a mortgaged property appears to be inconsistent with appraisals previously conducted on comparable properties by the same or other appraisers, the Company requires the appraiser to explain the discrepancies. If the problems continue or are not resolved to the Company's satisfaction, the appraisal firm is removed from the Company's approved appraiser list. See "-- Quality Control Audit Procedures Highlights" below. Appraisals are completed on standard FNMA/FHLMC forms and conform to current FNMA/FHLMC secondary market requirements for one- to four family residential appraisals. Each such appraisal includes, among other things, an inspection of the exterior of the subject property, obtaining front, rear and street view photographs and obtaining data from three recent sales of similar properties within the same general location as such subject property; provided, that for certain high loan-to-value loans, interior inspections may not be included. The appraisals may take into account any increased value in the residence due to improvements proposed to be made with the proceeds of the Mortgage Loan. In such cases, the Company will escrow a portion of the loan proceeds until such improvements are made. Loans are generally closed by personnel at the respective branches of the Company, the related approved Originator, approved attorneys, title insurers or agents of title insurers, and title insurance is issued by one of several nationally recognized title companies. 26 118 SPECIFIC UNDERWRITING CRITERIA; UNDERWRITING PROGRAMS Prior to August 1, 1996, the Company originated and purchased loans under six underwriting programs. Beginning August 1, 1996, the Company originates and purchases loans under seven underwriting programs (each, an "Underwriting Program") summarized below, which may change from time to time, as described in the related Prospectus Supplement. Management permits deviations from the specific criteria of an Underwriting Program to reflect local economic trends and real estate valuations, as well as other credit factors specific to each loan application and/or each portfolio acquired. From time to time, the Company purchases or grants loans to applicants whose creditworthiness may not coincide with program criteria. In such circumstances, the Company strives to maintain the overall integrity of these programs and simultaneously provide its lending officers with the flexibility to consider the specific circumstances of the loan application or purchase. The related Prospectus Supplement will set forth the distribution of the Mortgage Loans among the Underwriting Programs as of the related Cut-off Date. SUMMARIES OF THE UNDERWRITING PROGRAMS CLASS A+ 1. The Company generally requires both direct creditor verification and a credit report on the borrower by two independent credit reporting agencies reflecting the borrower's complete credit history. An excellent credit history of at least one year is required, and prior credit history may be rated on a case-by-case basis. The credit history should reflect that existing and previous debts were paid in a timely manner. A Chapter 7 bankruptcy which has not been filed in the last five years, or a Chapter 13 bankruptcy that has been discharged for a minimum of 24 months, is acceptable if the borrower has since established a payment history, notwithstanding such bankruptcy, consistent with this Underwriting Program. No unpaid collections, liens or judgments are allowed under this Underwriting Program. Unless otherwise specified below, mortgage payment history may not reflect any 30-day delinquency during the most recent 12-month period. In addition, no more than one revolving credit account, and no installment credit account, may reflect a 30-day delinquency in the most recent 12-month period. 2. Generally, the borrower must have been employed for not less than two years with the same employer or have established comparable stability in a particular field of work. 3. Combined Loan-to-Value Ratios(1) and Debt-to-Income Ratios(2) must conform to the following criteria:
MAXIMUM COMBINED MAXIMUM LOAN-TO-VALUE DEBT-TO-INCOME PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A) - ----------------------- ------------- -------------- ------------------------------------------- Owner Occupied Single Family............... 100% 42% Only non-purchase money mortgage loans may be originated or acquired pursuant to these criteria. Mortgage payment history must be historically current with no late payments of 30 days or more in the last 12 months. Second mortgage loans originated or acquired under these criteria must not exceed $30,000, must have fixed rates, and may not have terms exceeding 15 years.
27 119
MAXIMUM COMBINED MAXIMUM LOAN-TO-VALUE DEBT-TO-INCOME PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A) - ----------------------- ------------- -------------- ------------------------------------------- Owner Occupied Single Family............... 95% 42% Mortgage payment history must be historically current with no late payments of 30 days or more in the last 12 months. First mortgage loans and second mortgage refinance loans originated under these criteria must not exceed $225,000 and $60,000, respectively and may have fixed- or adjustable-rates. The maximum term of any first mortgage loan originated or acquired under these criteria is 30 years, provided that balloon mortgage loans with 30-year amortization schedules and single payments of the remaining loan balances up to 15 years after origination may also be originated or acquired. The maximum term of any second mortgage refinance loan originated or acquired under these criteria is 15 years. Owner Occupied One- to Four-Family.......... 85% 42% A Debt-to-Income Ratio of up to 45% is permitted if income is not less than $5,000 per month. Mortgage payment history must be historically current with no late payments of 30 days or more in the last 12 months.
- --------------- (a) Additional criteria with respect to the Maximum Debt-to-Income Ratio may apply depending on the amount of gross monthly income. See "-- Monthly Income" below. (1) See "Description of the Mortgage Pool -- General" for the definition of "Combined Loan-to-Value Ratio." (2) "Debt-to-Income Ratio" under all of the Underwriting Programs is generally calculated as that ratio, stated as a percentage, which results from dividing a mortgagor's Fixed Monthly Debt by his or her gross monthly income. "Fixed Monthly Debt" includes: (i) in the case of second mortgages, the monthly payment under the first lien (which generally includes an escrow of real estate taxes), (ii) the related mortgage loan monthly payment (which in the case of an Adjustable Rate Mortgage, is calculated based on a rate per annum equal to 2% plus the initial rate), (iii) other installment debt service payment, including, in respect of revolving credit debt, the required monthly payment thereon, or, if no such payment is specified, the greater of the amount equal to 5% of the balance, or $10.00. "Fixed Monthly Debt" does not include any of the debt (other than revolving credit debt) described above that matures within less than three months from the date of the calculation, or in the case of revolving debt, the minimum $10.00 monthly payment on accounts showing a zero balance. 4. The mortgaged property is required to be an owner occupied one- to four-family or single family dwelling, as specified above, which may include condominiums, townhouses or manufactured housing (at lower Combined Loan-to-Value Ratios), in at least average repair, comparable to neighboring properties and generally in compliance with zoning regulations. If the mortgaged property is non-owner occupied, the Company reduces the Maximum Combined Loan-to-Value Ratio by 10%. 5. Generally, the borrower must have resided on the property that will secure the loan for at least two years or have established residential stability to date. 28 120 CLASS A 1. The Company generally requires both direct creditor verification and a credit report on the borrower by two independent credit reporting agencies reflecting the borrower's complete credit history. An excellent credit history of at least one year is required, and prior credit history may be rated on a case-by-case basis. The credit history should reflect that existing and previous debts were paid in a timely manner. A Chapter 7 bankruptcy that has been discharged for a minimum of 36 months or a Chapter 13 bankruptcy that has been discharged for a minimum of 24 months is acceptable if the borrower has since established a payment history, notwithstanding such bankruptcy, consistent with this Underwriting Program. No unpaid collections, liens or judgments are allowed under this Underwriting Program. Unless otherwise specified below, mortgage payment history may reflect not more than one 30-day delinquency during the most recent 12-month period. In addition, no more than two revolving credit accounts, and no more than two installment credit accounts, may reflect 30-day delinquencies in the most recent 12-month period. 2. Generally, the borrower must have been employed for not less than two years with the same employer or have established comparable stability in a particular field of work. 3. Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform to the following criteria:
MAXIMUM COMBINED MAXIMUM LOAN-TO-VALUE DEBT-TO-INCOME PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A) - ----------------------- ------------- -------------- ------------------------------------------- Owner Occupied One- to Four-Family.......... 85% 50% Self-Employed Owner Occupied One- to Four-Family.......... 75% 50% Exceptions to the Maximum Combined Loan-to- Value Ratio may be considered if the borrower's spouse has held a salaried job for at least two years and contributes at least 50% of the total joint income.
(a) Additional criteria with respect to the Maximum Debt-to-Income Ratio may apply depending on the amount of gross monthly income. See "-- Monthly Income" below. 4. The mortgaged property is required to be an owner occupied one- to four-family or single family dwelling, as specified above, which may include condominiums, townhouses or manufactured housing, in at least average repair, comparable to neighboring properties and generally in compliance with zoning regulations. If the mortgaged property is non-owner occupied, the Company reduces the Maximum Combined Loan-to-Value Ratio by 10%. 5. Generally, the borrower must have resided on the property that will secure the loan for at least two years or have established residential stability to date. CLASS B+ 1. The Company generally requires both direct creditor verification and a credit report on the borrower by two independent credit reporting agencies reflecting the borrower's complete credit history. A credit history of at least one year is required and prior credit history may be rated on a case-by-case basis. The credit history should reflect that existing and previous debts were paid in a predominantly timely manner. No more than an aggregate of five revolving credit accounts or five installment credit accounts with 30-day or 60-day delinquencies are considered. Collections up to $300 are acceptable as well as greater amounts if a satisfactory explanation is provided. The mortgage payment history is required to reflect no more than two 30-day delinquencies during the most recent 12-month period and prior mortgage payment history may be rated on a case-by-case basis; provided that consecutive or "rolling" delinquencies are counted as one occurrence. A Chapter 7 bankruptcy or a Chapter 13 bankruptcy that has been discharged for a minimum of two years is acceptable if the borrower has since established a payment history, notwithstanding such bankruptcy, consistent with this Underwriting Program. 29 121 2. Generally, the borrower must exhibit both employment and residential stability to date. 3. The Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform to the following criteria:
MAXIMUM COMBINED MAXIMUM LOAN-TO-VALUE DEBT-TO-INCOME PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A) - ----------------------- ------------- -------------- --------------------------------------- Owner Occupied One- to Four-Family.......... 85% 50% None Self-Employed Owner Occupied One- to Four-Family.......... 75% 50% Exceptions to the Maximum Combined Loan-to-Value Ratio may be considered if the borrower's spouse has held a salaried job for at least two years and contributes at least 50% of total joint income.
- --------------- (a) Additional criteria with respect to the Maximum Debt-to-Income Ratio may apply depending on gross monthly income. See "-- Monthly Income" below. 4. The mortgaged property is required to be an owner-occupied, one- to four-family dwelling, which may include condominiums, townhouses or manufactured housing, in at least average repair, comparable to neighboring properties and generally in compliance with zoning regulations. If the mortgaged property is non-owner occupied, the Company reduces the Maximum Combined Loan-to-Value Ratio by 10%. CLASS B 1. The Company generally requires both direct creditor verification and a credit report on the borrower by two independent credit reporting agencies reflecting the borrower's complete credit history. A credit history of at least one year is required and prior credit history may be rated on a case-by-case basis. The credit history should reflect that existing and previous debts were paid in a predominantly timely manner. No more than an aggregate of five revolving credit accounts or five installment credit accounts with 30-day to 90-day delinquencies are considered. Collections up to $300 are acceptable as well as greater amounts if a satisfactory explanation is provided. The mortgage payment history is required to reflect no more than three 30-day delinquencies during the most recent 12-month period and prior mortgage payment history may be rated on a case-by-case basis; provided that consecutive or "rolling" delinquencies are counted as one occurrence. A Chapter 7 bankruptcy or a Chapter 13 bankruptcy that has been discharged for a minimum of two years is acceptable if the borrower has since established a payment history, notwithstanding such bankruptcy, consistent with this Underwriting Program. 2. Generally, the borrower must exhibit both employment and residential stability to date. 30 122 3. The Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform to the following criteria:
MAXIMUM COMBINED MAXIMUM LOAN-TO-VALUE DEBT-TO-INCOME PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A) - ----------------------- ------------- -------------- --------------------------------------- Owner Occupied One- to Four-Family.......... 80% 50% Self-Employed Owner Occupied One- to Four-Family.......... 70% 50% Exceptions to the Maximum Combined Loan-to-Value Ratio may be considered if the borrower's spouse has held a salaried job for at least two years and contributes at least 50% of total joint income.
- --------------- (a) Additional criteria with respect to the Maximum Debt-to-Income Ratio may apply depending on gross monthly income. See "-- Monthly Income" below. 4. The mortgaged property is required to be an owner-occupied, one- to four-family dwelling, which may include condominiums, townhouses or manufactured housing, in at least average repair, comparable to neighboring properties and generally in compliance with zoning regulations. If the mortgaged property is non-owner occupied, the Company reduces the Maximum Combined Loan-to-Value Ratio by 10%. CLASS C+ 1. The Company generally requires both direct creditor verification and a credit report on the borrower by two independent credit reporting agencies reflecting the borrower's complete credit history. A credit history of at least one year is required and should reflect that existing and previous debts were paid in a generally satisfactory manner. No more than an aggregate of eight revolving credit accounts or installment credit accounts with 30- or 60- or 90-day delinquencies in the most recent 12-month period are considered. Collections of up to $300 are acceptable as well as greater amounts if a satisfactory explanation is provided. Mortgage payment history should reflect not more than four 30-day delinquencies and one 60-day delinquency during the most recent 12-month period; provided that consecutive or "rolling" delinquencies are counted as one occurrence. A Chapter 7 bankruptcy or a Chapter 13 bankruptcy that has been discharged for a minimum of two years is acceptable if the borrower has since established a payment history, notwithstanding such bankruptcy, consistent with this Underwriting Program. 2. Generally, the borrower must have been employed with the same employer for at least one year or have established employment stability to date. 31 123 3. The Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform to the following criteria:
MAXIMUM COMBINED MAXIMUM LOAN-TO-VALUE DEBT-TO-INCOME PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A) - ----------------------- ------------- -------------- --------------------------------------- Owner Occupied One- to Four-Family.......... 80% 50% Exceptions to the Maximum Debt-to-Income Ratio may be considered on a case-by-case basis. Self-Employed Owner Occupied One- to Four-Family.......... 70% 50% Exceptions to the Maximum Debt-to-Income Ratio may be considered on a case-by-case basis.
- --------------- (a) Additional criteria with respect to the Maximum Debt-to-Income Ratio may apply depending on gross monthly income. See "-- Monthly Income" below. 4. The mortgaged property is required to be an owner occupied one- to four-family dwelling, which may include condominiums, townhouses or manufactured housing, in at least average repair, comparable to neighboring properties and generally in compliance with zoning regulations. If the mortgaged property is non-owner occupied, the Company reduces the Maximum Combined Loan-to-Value Ratio by 10%. CLASS C 1. The Company generally requires a credit report on the borrower by two independent credit reporting agencies reflecting the complete credit history of the borrower, but ratings are not a material factor in determining whether the loan is approved. Mortgage payment history must reflect no more than two 60-day delinquencies and one 90-day delinquency within the most recent 12 months, and the mortgage must be current or brought current with the proceeds of the loan; provided that consecutive or "rolling" delinquencies are counted as one occurrence. The borrower may use the proceeds of a loan to discharge a bankruptcy. 2. Employment and income verification is required by direct employer contact and written documentation, such as pay stubs, W-2s and tax returns.
MAXIMUM COMBINED MAXIMUM LOAN-TO-VALUE DEBT-TO-INCOME PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A) - ----------------------- ------------- -------------- ------------------------------------------- Owner Occupied One- to Four-Family.......... 75% 50% Only first mortgage loans may be originated or acquired pursuant to these criteria. Owner Occupied One- to Four-Family.......... 70% 50% Second mortgage loans may be originated or acquired pursuant to these criteria. Self-Employed Owner Occupied One- to Four-Family.......... 65% 50% First or second mortgage loans may be originated or acquired pursuant to these criteria.
- --------------- (a) Additional criteria with respect to the Maximum Debt-to-Income Ratio may apply depending on gross monthly income. See "-- Monthly Income" below. 32 124 5. The mortgaged property is required to be owner occupied, in good repair and well maintained such that pride of ownership is evidenced. No rural property is considered as security for a loan originated or acquired for this Underwriting Program. CLASS D 1. The Company requires a credit report on the borrower by two independent credit reporting agencies reflecting the complete credit history of the borrower, but ratings are not a material factor in determining whether the loan is approved. Mortgage payment history will be considered on a case-by-case basis. The borrower may use the proceeds of a loan to discharge a bankruptcy. 2. The Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform to the following criteria:
MAXIMUM COMBINED MAXIMUM LOAN-TO-VALUE DEBT-TO-INCOME PROPERTY TYPE RATIO RATIO(A) ADDITIONAL CRITERIA OR VARIATION(A) - ----------------------- ------------- -------------- ------------------------------------------- Owner Occupied and Non-Owner Occupied One- to Four-Family.......... 70% 50% First mortgage loans may be originated or acquired pursuant to these criteria. A $300 per person disposable income is also required.
- --------------- (a) Additional criteria with respect to the Maximum Debt-to-Income Ratio may apply depending on gross monthly income. See "-- Monthly Income" below. 3. The mortgaged property may be an owner occupied or non-owner occupied one- to four-family dwelling. All mortgaged property must be in good repair and well maintained such that pride of ownership is evidenced. 4. The maximum term of any loan originated or acquired for this Underwriting Program is fifteen years; provided that balloon mortgage loans with 30-year amortization schedules and single payments of the remaining loan balances at approximately 7, 10 or 15 years after origination may also be originated or acquired. MONTHLY INCOME Under any Underwriting Program, Debt-to-Income Ratios must also conform to the following criteria, to the extent not otherwise satisfied pursuant to the criteria of such Underwriting Program:
MAXIMUM DEBT-TO-INCOME GROSS MONTHLY INCOME RATIO --------------------------------------------------------------- -------------- $1,500 or less................................................. 40% $1,501 to $4,000............................................... 45% $4,001 or more................................................. 50%
Exceptions to the Maximum Debt-to-Income Ratio may be considered under any Underwriting Program on a case-by-case basis, provided that any exception is reasonable in light of the entire circumstances and approved by senior underwriters located at the Company's headquarters. BALLOON MORTGAGE LOANS The Underwriting Guidelines provide that, notwithstanding the criteria described above in connection with any Underwriting Program, no balloon mortgage loan may be originated or acquired if (i) the amount of the loan is in excess of the dollar limit established from time to time, subject to exceptions on a case-by-case basis; (ii) the Combined Loan-to-Value Ratio of the loan is in excess of 95%; (iii) the amount of the loan is less than the dollar limit established from time to time. 33 125 CERTAIN CALCULATIONS RELATING TO COMBINED LOAN-TO-VALUE RATIOS Under all of the Underwriting Programs, the balance of the related Senior Lien, if any, used to determine the Combined Loan-to-Value Ratio for the mortgage loan is based on the judgment of the Company's underwriters. In determining the Combined Loan-to-Value Ratio in cases where the related Senior Lien, if any, secures an adjustable rate mortgage loan, the Company's underwriters also consider the historical performance of the index from which the mortgage interest rate is derived under the first mortgage and other credit factors. In addition, the maximum amount of any revolving credit line prior and superior to any mortgage loan is included in any calculation to determine the Combined Loan-to-Value Ratio. QUALITY CONTROL AUDIT PROCEDURES The Company's quality control audit procedures consist of post-funding examinations in the areas of legal documentation, credit documentation and underwriting. Following the origination or purchase of each loan, the Company's loan verification department conducts a review and verification of the loan with specific attention to the following areas: Legal Documentation: The mortgage note, mortgage, deed of trust, Truth-in-Lending disclosure, Real Estate Settlement Procedures Act and Equal Credit Opportunity Act documents, title abstract, affidavits, riders, and all other documents required pursuant to statutory law are reviewed for existence, accuracy, and proper signatures. Quality control audits ("Quality Control Audits") are conducted on approximately thirty percent of the mortgage loans funded each month, measured by aggregate outstanding principal balance, beginning in the first week of the following month and completed in most cases no later than the end of such following month. Reports, with any major exceptions noted, are forwarded to Senior Management Representative for review and distribution to appropriate senior management. Audit and quality control functions are performed separately from the activities of the loan verification department by credit reviewers on each loan to assure the accuracy of disclosure in dollar amounts, interest rates and appraisals. Credit Documentation: All credit verifications (such as verification of mortgage, verification of employment and verification of deposits), credit applications and credit reports are reviewed for existence, accuracy and proper signatures. Underwriting: Some loans are reviewed for compliance with the Company's underwriting standards for the Class of Underwriting Program (i.e., Class A Plus to Class D) under which the loan was originated or acquired. Quality Control Appraisals: If a Quality Control Audit determines circumstances that warrant a reappraisal, a drive-by appraisal is conducted by an independent fee appraisal firm. The Company's quality control department uses the following guidelines when reviewing each appraisal: 1. Up to 8% margin between the values reflected by each appraisal is acceptable. 2. In the case of a margin of 8% or above between values, an addendum is prepared by the review appraiser and a quality control addendum is written reflecting the discrepancies between market values reflected by each appraisal. 3. In the case of a margin of greater than 10% between values, when appropriate, further review and analysis is obtained from each of the appraisers involved. This is accomplished by submitting each appraisal to the opposite appraiser for review and written analysis. (All references to appraisal firms are omitted from the documents.) The foregoing information, along with a review by the Company's quality control department, is submitted in a monthly report to the President for review. Customer files, including both the original appraisal and the quality control appraisals, if any, are reviewed on all questionable appraisals. In the majority of cases, a review of the files and a quality control analysis is sufficient. A third appraisal can be ordered in any case where discrepancies are still unexplained to the Company's satisfaction. 34 126 If an appraiser's market value or other appraisal data are deemed to be consistently inaccurate, a meeting is arranged to address these problems. If the problems continue or are not resolved to the Company's satisfaction, the appraisal firm is removed from the Company's list of approved appraisers. COLLECTION PROCEDURES The related Prospectus Supplement will set forth the number and aggregate principal amount of mortgage loans serviced by the Company as of the end of the prior year and any completed calendar quarters in the current year, for itself and for investors (primarily major commercial banks, savings and loan associations, brokerage houses and the Federal National Mortgage Association ("FNMA")). Such statistics may include loans that were not originated or acquired and re-underwritten by the Company but are serviced (principally for FNMA) on a contractual basis. The following describes collection procedures generally employed by the Company. Any significant deviations therefrom with respect to a pool of Mortgage Loans will be described in the related Prospectus Supplement. Collections are conducted by the Company's Service Center at its corporate headquarters located in Jacksonville, Florida. The Company utilizes additional collection assistance from field collectors located in selected areas of the country. Delinquent accounts are divided into groups of accounts of 0-29, 30-59 and 60 or more days past due. All collection activity on 0-29 day accounts is handled by Service Center collectors who collect in teams headed by a senior collector. When an account becomes 7 days past due, the mortgagor is generally called by phone with simultaneous notices being sent if contact by phone is not made. When an account becomes 30-59 days delinquent, it is assigned to a higher level Home Office collector experienced in default accounts. A default management supervisor contacts area collectors on a daily basis to assign field work. Prior to submitting an account for foreclosure, a 30 day breach notice is sent certified mail to the customer. If the breach is not cured, the account is worked by the default management area located in Jacksonville, and collection management attempts personal contact with the borrower to determine that all avenues of resolution have been considered. Branch offices are not responsible for the management of accounts in foreclosure, bankruptcy, litigation or otherwise designated for special consideration, all of which are the responsibility of either the Company's loan asset control department or its legal department. If foreclosure is necessary, the Company's loan asset control department supervises and monitors all related procedures (including bankruptcy proceedings) conducted by the foreclosure attorneys. If title to the mortgaged property is taken in the name of the mortgagee, the Company's real estate owned division attempts to insure that the property is preserved and protected. After review and analysis, a disposition strategy is developed and the property is marketed for sale. DELINQUENCY AND LOSS EXPERIENCE The related Prospectus Supplement will set forth the Company's delinquency and charge-off experience at the dates indicated on mortgage loans included in its servicing portfolio, including loans in foreclosure proceedings, but excluding loans serviced by the Company that were not originated or acquired and re-underwritten by the Company (such portfolio, excluding such loans, the "Primary Servicing Portfolio"). OUTSTANDING REAL ESTATE OWNED Each Prospectus Supplement will set forth the number and value of properties acquired by the Company through foreclosure which were owned by the Company for its own account or on behalf of owners of mortgage loans included in the Company's Primary Servicing Portfolio as at the end of the immediately preceding calendar year and as at the end of the most recent complete calendar quarter. 35 127 DESCRIPTION OF THE SECURITIES GENERAL The following summary describes certain terms of the Securities, common to each Pooling and Servicing Agreement and any Indenture and Trust Agreement. Forms of the Indenture, the Trust Agreement, the Pooling and Servicing Agreements and the Transfer Agreement providing for the transfer of Mortgage Loans from the Originators to the Depositors have been filed as exhibits to the Registration Statement of which this Prospectus forms a part. The summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the Securities, the Pooling and Servicing Agreement and the Transfer Agreement for each Trust, any Indenture and Trust Agreement and the related Prospectus Supplement. Where particular provisions or terms used in any of such documents are referred to, the actual provisions (including definitions of terms) are incorporated by reference as part of such summaries. The Securities will represent beneficial interests in (sometimes referred to herein as "Certificates") or debt secured by (sometimes referred to herein as "Notes") the assets of the related Trust, including (i) the Mortgage Loans and all proceeds thereof, (ii) REO Property, (iii) amounts on deposit in the funds and accounts established with respect to the related Trust, including all investments of amounts on deposit therein, (iv) certain rights of the Depositors under the Transfer Agreement and (v) certain other property, as described in the related Prospectus Supplement. If specified in the related Prospectus Supplement, one or more Classes of Securities of a Series may have the benefit of one or more of a letter of credit, financial guaranty insurance policy, reserve fund, spread account, cash collateral account, overcollateralization or other form of credit enhancement. If so specified in the related Prospectus Supplement, a Series of Securities may have the benefit of one or more of a mortgage pool insurance policy, bankruptcy bond, special hazard insurance policy of similar credit enhancement. Any such credit enhancement may be included in the assets of the related Trust. See "Description of Credit Enhancement" herein. A Series of Securities may include one or more Classes entitled to distributions of principal and disproportionate, nominal or no interest distributions or distributions of interest and disproportionate, nominal or no principal distributions. The principal amount of any Security may be zero or may be a notional amount as specified in the related Prospectus Supplement. A Class of Securities of a Series entitled to payments of interest may receive interest at a specified rate (a "Securities Interest Rate") which may be fixed, variable or adjustable and may differ from other Classes of the same Series, may receive interest based on the weighted average Mortgage Interest Rate on the related Mortgage Loans, or may receive interest as otherwise determined, all as described in the related Prospectus Supplement. One or more Classes of a Series may be Securities upon which interest will accrue but not be currently paid until certain other Classes have received principal payments due to them in full or until the occurrence of certain events, as set forth in the related Prospectus Supplement. One or more Classes of Certificates of a Series may be entitled to receive principal payments pursuant to a planned amortization schedule or may be entitled to receive interest payments based on a notional principal amount which reduces in accordance with a planned amortization schedule. A Series may also include one or more Classes of Certificates entitled to payments derived from a specified group or groups of Mortgage Loans held by the related Trust. The rights of one or more Classes of Securities may be senior or subordinate to the rights of one or more of the other Classes of Securities. A Series may include two or more Classes of Securities which differ as to the timing, sequential order, priority of payment or amount of distributions of principal or interest or both. Each Class of Securities of a Series will be issued in the denominations specified in the related Prospectus Supplement. Each Security will represent a percentage interest (a "Percentage Interest") in the Securities of the respective Class, determined by dividing the original dollar amount (or Notional Principal Amount, in the case of certain Securities entitled to receive interest only) represented by such Security by the Original Principal Balance of such Class. 36 128 One or more Classes of Securities of a Series may be issuable in the form of fully registered definitive certificates or, if so specified in the related Prospectus Supplement, one or more Classes of Securities of a Series (the "Book-Entry Securities") may initially be represented by one or more certificates registered in the name of Cede & Co. ("Cede"), the nominee of The Depository Trust Company ("DTC"), and available only in the form of book-entries on the records of DTC, participating members thereof ("Participants") and other entities, such as banks, brokers, dealers and trust companies, that clear through or maintain custodial relationships with a Participant, either directly or indirectly ("Indirect Participants"). Certificates representing the Book-Entry Securities will be issued in definitive form only under the limited circumstances described herein and in the related Prospectus Supplement. With respect to Book-Entry Certificates, all references herein to "holders" of Securities shall reflect the rights of owners of the Book-Entry Securities, as they may indirectly exercise such rights through DTC and Participants, except as otherwise specified herein. See "-- Registration of Securities" herein. Unless otherwise specified in the related Prospectus Supplement, on each Payment Date and Special Payment Date, there shall be paid to each person in whose name a Security is registered on the related Record Date or Special Record Date (defined herein) as applicable (which in case of the Book-Entry Securities initially will be only Cede, as nominee of DTC), the portion of the aggregate payment to be made to holders of such Class to which such holder is entitled, if any, based on the Percentage Interest, held by such holder of such Class. INTEREST Unless otherwise specified in the related Prospectus Supplement, interest will accrue on each Class of Securities of a Series (other than a Class of Securities entitled to receive only principal) during each period specified in the related Prospectus Supplement (each, an "Accrual Period") at the Securities Interest Rate for such Class specified in the related Prospectus Supplement. Interest accrued on each Class of Securities at the applicable Securities Interest Rate during each Accrual Period will be paid, to the extent monies are available therefor, on each Payment Date, commencing on the day specified in the related Prospectus Supplement and will be distributed in the manner specified in such Prospectus Supplement, except for any Class of Securities ("Accrual Securities") on which interest is to accrue and not be paid until the principal of certain other Classes has been paid in full or the occurrence of certain events as specified in such Prospectus Supplement. If so described in the related Prospectus Supplement, interest that has accrued but is not yet payable on any Accrual Securities will be added to the principal balance thereof on each Payment Date and will thereafter bear interest at the applicable Securities Interest Rate. Payments of interest with respect to any Class of Securities entitled to receive interest only or a disproportionate amount of interest and principal will be paid in the manner set forth in the related Prospectus Supplement. Payments of interest (or accruals of interest, in the case of Accrual Securities) with respect to any Series of Securities or one or more Classes of Securities of such Series, may be reduced to the extent of interest shortfalls not covered by Advances or by any applicable credit enhancement. PRINCIPAL On each Payment Date, commencing with the Payment Date specified in the related Prospectus Supplement, principal with respect to the related Mortgage Loans during the period specified in the related Prospectus Supplement (each such period, a "Due Period") will be paid to holders of the Securities of the related Series (other than a Class of Securities of such Series entitled to receive interest only) in the priority, manner and amount specified in such Prospectus Supplement, to the extent funds are available therefor. Unless otherwise specified in the related Prospectus Supplement, such principal payments will generally include (i) the principal portion of all scheduled payments ("Monthly Payments") received on the related Mortgage Loans during the related Due Period, (ii) any principal prepayments of any such Mortgage Loans in full ("Principal Prepayments") and in part ("Curtailments") received during the related Due Period or such other period (each, a "Prepayment Period") specified in the related Prospectus Supplement, (iii) the principal portion of (A) the proceeds of any insurance policy relating to a Mortgage Loan, a Mortgaged Property (defined herein) or a REO Property (defined herein), net of any amounts applied to the repair of the 37 129 Mortgaged Property or released to the Mortgagor (defined herein) and net of reimbursable expenses ("Insurance Proceeds"), (B) proceeds received in connection with the liquidation of any defaulted Mortgage Loans ("Liquidation Proceeds"), net of fees and advances reimbursable therefrom ("Net Liquidation Proceeds") and (C) proceeds received in connection with a taking of a related Mortgaged Property by condemnation or the exercise of eminent domain or in connection with any partial release of any such Mortgaged Property from the related lien ("Released Mortgaged Property Proceeds"), (iv) the principal portion of all amounts paid by the Depositors (which are limited to amounts paid by the Representative or an Originator pursuant to the related Transfer Agreement, unless otherwise specified in the related Prospectus Supplement) in connection with the purchase of or substitution for a Mortgage Loan as to which there is defective documentation or a breach of a representation or warranty contained in the Transfer Agreement and assigned to the related Trust under the related Pooling and Servicing Agreement and (v) the principal balance of each defaulted Mortgage Loan or REO Property as to which the Servicer has determined that all amounts expected to be recovered have been recovered (each, a "Liquidated Mortgage Loan"), to the extent not included in the amounts described in clauses (i) through (iv) above (the aggregate of the amounts described in clauses (i) through (v), the "Basic Principal Amount"). Payments of principal with respect to a Series of Securities or one or more Classes of such Series may be reduced to the extent of delinquencies or losses not covered by advances or any applicable credit enhancement. ASSIGNMENT OF THE MORTGAGE LOANS At the time of issuance of a Series of Securities, the Originators, pursuant to a Transfer Agreement (the "Transfer Agreement") among the Originators and the Depositors, will assign the Mortgage Loans to the Depositors together with all principal and interest received on or with respect to the Mortgage Loans, other than (i) principal and interest received before the related Cut-off Date (and interest received on or after the Cut-off Date but accrued prior to the Cut-off Date) and (ii) unless otherwise specified in the related Prospectus Supplement, the Representative's Yield. On such date, the Depositors will assign the Mortgage Loans to the Trust pursuant to a Pooling and Servicing Agreement. Each Mortgage Loan will be identified in a schedule included as an exhibit to the related Transfer Agreement and the related Pooling and Servicing Agreement (the "Mortgage Loan Schedule"). The Mortgage Loan Schedule will set forth certain information with respect to each Mortgage Loan, including, among other things, the principal balance as of the Cut-off Date, the Mortgage Interest Rate, the scheduled monthly payment of principal and interest, the maturity of the Mortgage Note, the Combined Loan-to-Value Ratio at origination and, as applicable, the Home Equity Loan Ratio at origination. In addition, the Originators will, with respect to each Mortgage Loan, deliver to the applicable Depositor the Mortgage Note endorsed to the order of the Depositor or a Custodian or in blank, the mortgage with evidence of recording thereon, an assignment of the mortgage to the Depositor or a Custodian or in blank, evidence of title insurance, intervening assignments of the mortgage, assumption and modification agreements and, in the case of Mortgage Loans secured by Mortgaged Property improved by a manufactured housing unit, the certificate of title, if any (collectively, the "Mortgage File"). The Depositor shall simultaneously deliver such Mortgage Note, Mortgage and assignment of Mortgage to the Trust, endorsed as set forth in the related Pooling and Servicing Agreement. It is expected that each such transfer will be effected by endorsement and delivery to a Custodian, which Custodian shall hold such instruments and documents for the Depositor, the Trust and the Indenture Trustee, if any, as their interests may appear. The assignment of Mortgage shall be recorded in the name of the Trustee. With respect to a loan on a unit in a cooperative, the related Mortgage Note, the original security agreement, the proprietary lease or occupancy agreement, the related stock certificate evidencing the ownership interest in the cooperative association and blank stock powers and a copy of the original filed financing statement and assignments thereof in form sufficient for filing shall be so delivered and, where required, filed. With respect to any Mortgage Loan secured by a Mortgaged Property located in the State of Illinois held in a trust formed under a trust agreement between a trustee and one or more beneficiaries named therein pursuant to which such trustee holds legal and equitable title to the Mortgaged Property and such beneficiaries are the owners of the beneficial interest in such trust (an "Illinois Land Trust"), the Originators will not be required to deliver an assignment of the mortgage to the Depositors, 38 130 but will be required to deliver or cause to be delivered to the Depositors the original assignment of beneficial interest executed by the beneficiaries of the Illinois Land Trust assigning to the Originator all of such beneficiaries' rights in the Illinois Land Trust (or a copy thereof certified by the related trustee, under certain circumstances), an original reassignment of the assignment of beneficial interest to the Depositors, all originals of intervening reassignments of beneficial interest, together with a certified copy of the instrument creating the Illinois Land Trust, a copy of the financing statement evidencing the assignment of the Mortgagor's beneficial interest in the Illinois Land Trust (with evidence of filing thereon) and the original personal guaranty of the Mortgage Note executed by each beneficiary of the Illinois Land Trust, all of which shall also constitute part of the Mortgage File with respect to Mortgage Loans secured by Mortgaged Property held in an Illinois Land Trust. The Depositors will assign each of such documents to the Trust, which shall in turn assign such documents to the Indenture Trustee, if any related Securities represent debt secured by the Mortgage Loans. If, with respect to any Mortgage Loan, the Originators are unable to deliver to the Depositors on the Closing Date the mortgage or any assignment with evidence of recording thereon because they have not yet been returned from the public recording office, the Originators are required to deliver or cause to be delivered on the Closing Date a certified true copy of such mortgage or assignment, which certification may be that of an officer of the respective Originator. If, with respect to any Mortgage Loan, the Depositors are unable to deliver an original policy of title insurance because such policy has not yet been delivered by the insurer, the Depositors are required to deliver or cause to be delivered the commitment or binder to issue the title insurance. The Depositors are required to deliver or cause to be delivered the mortgage or assignment with evidence of recording thereon and an original title insurance policy within five Business Days after receipt thereof and in any event within one year after the Closing Date, provided, however, that if a mortgage or assignment has not been returned from the appropriate public recording office, the respective Originator is required to deliver a certified copy of the mortgage and a receipted copy of the assignment from the appropriate public recording office prior to the expiration of such one year period. The Servicer is required to cause the assignments of mortgage to be recorded in the appropriate public recording offices. With respect to loans on units in cooperatives, the Trustee or the Servicer, as specified in the related Prospectus Supplement, will also be required to use its best efforts to file continuation statements. Pursuant to the Pooling and Servicing Agreement, the Trustee will agree, for the benefit of the holders of the related Securities to review (or cause to be reviewed) each Mortgage File within 45 days (or such other time period as may be specified in the related Prospectus Supplement) after the Closing Date to ascertain that all required documents have been executed and received. If the Trustee (or if specified in the related Prospectus Supplement, any Credit Provider (defined herein)) during such 45-day period finds any document constituting a part of a Mortgage File which is not executed, has not been received or is unrelated to the Mortgage Loans, or that any Mortgage Loan does not conform to the delivery requirements described above or to the description thereof as set forth in the Mortgage Loan Schedule (other than certain descriptive items set forth in the Mortgage Loan Schedule), the Trustee (or the Credit Provider) is required to promptly so notify the Depositors, the Servicer, the Representative, the Originators, the Credit Provider, if any, and the Trustee. The Servicer is required to use reasonable efforts to cause to be remedied a material defect in a document constituting part of a Mortgage File of which it is so notified. If the Servicer has not caused the defect to be remedied within 60 days (or such other time period as may be specified in the related Prospectus Supplement) after notice thereof and the defect materially and adversely affects the interests of the holders of the Securities in the related Mortgage Loan or the interests of the Credit Provider, the Servicer is required, on the immediately following Determination Date (defined herein), to either (i) cause the respective Originator to substitute in lieu of such Mortgage Loan a mortgage loan that meets certain criteria set forth in the Pooling and Servicing Agreement (a "Qualified Substitute Mortgage Loan") and, if the then outstanding principal balance of such Qualified Substitute Mortgage Loan plus accrued and unpaid interest thereon is less than the outstanding principal balance of the substituted Mortgage Loan as of the date of such substitution plus accrued and unpaid interest thereon and the amount of any unreimbursed Servicing Advances, cause the respective Originator to deliver to the Servicer, to become part of the amount remitted by the Servicer on the related Payment Date, the amount of any such shortfall (a 39 131 "Substitution Adjustment") or (ii) cause the respective Originator to purchase such Mortgage Loan at a price equal to the outstanding principal balance of such Mortgage Loan as of the date of purchase plus all accrued and unpaid interest thereon computed at the Mortgage Interest Rate, net of the Servicing Fee if the Representative is the Servicer, plus the amount of any unreimbursed Servicing Advances made by the Servicer, which purchase price is required to be deposited in the Principal and Interest Account on the next succeeding Determination Date (after deducting therefrom any amounts received in respect of such repurchased Mortgage Loan or Loans and being held in the Principal and Interest Account for future distribution). REPRESENTATIONS AND WARRANTIES OF THE ORIGINATORS AND THE DEPOSITORS Unless otherwise specified in the related Prospectus Supplement, each Originator will represent, among other things, that as to each Mortgage Loan conveyed by any Originator to the Depositors as of the related Closing Date: 1. The information with respect to each Mortgage Loan set forth in the Mortgage Loan Schedule is true and correct; 2. All of the original or certified documentation constituting the Mortgage Files (including all material documents related thereto) has been or will be delivered to the Depositors or to the custodian appointed to hold the Mortgage Files (the "Custodian"), if any, on the Closing Date or as otherwise provided in the Agreement; 3. Each Mortgage Loan is principally secured by the related Mortgaged Property. Each Mortgaged Property is improved by a one- to four-family residential dwelling, including, if and to the extent specified in the related Prospectus Supplement, cooperatives or mobile homes; 4. All of the Balloon Loans, if any, provide for monthly payments based on an amortization schedule specified in the related Mortgage Note and have a final balloon payment no earlier than the number of months following the date of origination set forth in the related Prospectus Supplement and no later than at the end of the year following the date of origination set forth in the related Prospectus Supplement. Each other fixed-rate Mortgage Note will provide for a schedule of substantially equal monthly payments which are, if timely paid, sufficient to fully amortize the principal balance of such Mortgage Note on or before its maturity date; 5. Each Mortgage is a valid and subsisting first, second or, if so specified in the related Prospectus Supplement, more junior lien of record on the Mortgaged Property subject, in the case of any second or more junior Mortgage Loan, only to the Senior Lien or Liens on such Mortgaged Property and subject in all cases to the exceptions to title set forth in the title insurance policy, or the other evidence of title delivered pursuant to the Transfer Agreement, with respect to the related Mortgage Loan, which exceptions are generally acceptable to second mortgage lending companies, and such other exceptions to which similar properties are commonly subject and which do not individually, or in the aggregate, materially and adversely affect the benefits of the security intended to be provided by such Mortgage. If the Mortgaged Property is held in an Illinois Land Trust, (i) a natural person is the beneficiary of such Illinois Land Trust, and either is a party to the Mortgage Note or is a guarantor thereof, in either case, in an individual capacity and not in the capacity of trustee or otherwise, and, if a party to the Mortgage Note, is jointly and severally liable under the Mortgage Note and (ii) the Mortgagor is the trustee of such Illinois Land Trust, is a party to the Mortgage Note and is the Mortgagor under the Mortgage in its capacity as such trustee and not otherwise; 6. Except with respect to liens released immediately prior to the transfer contemplated in the Transfer Agreement, immediately prior to the transfer and assignment contemplated in the Transfer Agreement, the Originator held good and indefeasible title to, and was the sole owner of, each Mortgage Loan conveyed by the Originator subject to no liens, charges, mortgages, encumbrances or rights of others; and immediately upon the transfer and assignment herein contemplated, the Depositors will hold good and indefeasible title to, and be the sole owner of, each Mortgage Loan (other than the 40 132 Representative's Yield and amounts received on or after the Cut-off Date in respect of interest accrued prior to the Cut-off Date) subject to no liens, charges, mortgages, encumbrances or rights of others; 7. With respect to each Mortgage Loan secured by a second or more junior Mortgage, the related Senior Lien requires equal monthly payments, or if it bears an adjustable interest rate, the monthly payments for the related Senior Lien may adjust, but not more frequently than every six months; 8. The percentage of the Mortgage Loans which are secured by an Owner Occupied Mortgaged Property; and 9. Each Mortgage Loan conforms, and all Mortgage Loans in the aggregate conform, to the description thereof set forth in this Prospectus and the related Prospectus Supplement. Such Originator will also make representations as to the percentage of Mortgage Loans which are Balloon Loans, the percentage of Mortgage Loans secured by Mortgaged Properties located within any single zip code area and the percentage of the Mortgage Loans which were 30 or more days contractually delinquent and 60 or more days contractually delinquent. For purposes of this representation, "30 or more days contractually delinquent" means that a monthly payment due on a due date was unpaid as of the end of the month in which occurred the next succeeding due date and "60 or more days contractually delinquent" means that a monthly payment due on a due date was unpaid as of the end of the month in which occurred the second due date following the due date on which such monthly payment was due. In addition, each Originator will, with respect to each Bankruptcy Mortgage Loan, make certain representations regarding (i) the number of payments made under the related Bankruptcy Plan and (ii) the ratio of (a) the outstanding principal balance of the Bankruptcy Mortgage Loan (plus the outstanding principal balance of any Senior Lien) divided by (b) the current appraised value of the related Mortgaged Property, as determined within 30 days after the Closing Date. If there is a breach of these representations as to any Bankruptcy Mortgage Loan which is not waived by the Trustee or any Credit Provider, the Originators may, as described below, be required to repurchase such Bankruptcy Mortgage Loan. Such repurchases would have the effect of increasing the rate of prepayment of the Mortgage Loans. Pursuant to the related Pooling and Servicing Agreement, the Depositors will make substantially identical representations and warranties with respect to the Mortgage Loans conveyed by the Depositors thereunder. Upon the discovery by any of the Depositors, the Representative, any Originator, the Servicer, any Subservicer, the Custodian, the Credit Provider, if any, the Trustee or any other party specified in such Pooling and Servicing Agreement that any of the representations and warranties described above have been breached in any material respect as of the Closing Date, with the result that the interests of the holders of the related Securities in the related Mortgage Loan or the interests of the Credit Provider or any party specified in such Pooling and Servicing Agreement are materially and adversely affected, the party discovering such breach is required to give prompt written notice to the other parties. Within 60 days (or such other period as may be specified in the related Prospectus Supplement) of the earlier to occur of its discovery or its receipt of notice of any such breach, the Servicer is required to (i) cure or cause the respective Originator to cure such breach in all material respects, (ii) remove each Mortgage Loan which has given rise to the requirement for action, or cause the respective Originator to substitute one or more Qualified Substitute Mortgage Loans and, if the outstanding principal balance of such Qualified Substitute Mortgage Loans plus accrued and unpaid interest thereon as of the date of such substitution is less than the outstanding principal balance, plus accrued and unpaid interest thereon and any unreimbursed Servicing Advances, of the replaced Mortgage Loans as of the date of substitution, deliver or cause the respective Originator to deliver a Substitution Adjustment to the Servicer, to become part of the amount remitted by the Servicer to the Trustee on the related Payment Date, or (iii) purchase or cause the respective Originator to purchase such Mortgage Loan at a price equal to the outstanding principal balance of such Mortgage Loan as of the date of purchase plus all accrued and unpaid interest on such outstanding principal balance computed at the Mortgage Interest Rate, net of the Servicing Fee if the Representative is the Servicer, plus the amount of any unreimbursed Servicing Advances made by the Servicer, and deposit such purchase price into the Principal and Interest Account on the next succeeding Determination Date or other date specified in the related Pooling and Servicing Agreement; provided, however, that if a REMIC election has been made with respect to the related Series of Securities, no such 41 133 purchase or substitution may be made if such Mortgage Loan is not in default or no default as to such Mortgage Loan is imminent unless there shall have been delivered to the Trustee an opinion of counsel knowledgeable in federal income tax matters which states that such a purchase or substitution would not constitute a prohibited transaction under the REMIC Provisions (defined herein) or cause the REMIC to fail to qualify as such at any time the related Securities are outstanding. The obligation of the Depositors and the Originators to cure, substitute or purchase any Mortgage Loan as described above will constitute the sole remedy respecting a material breach of any such representation or warranty to the holders of the related Securities or the Trustee. The obligation of the Depositors to so cure, substitute or purchase shall be limited to the obligation of the Servicer to cause the Originators to do so. The Depositors will have no substantial assets other than certain Securities retained by them issued by trusts formed by the Depositors. PAYMENTS ON THE MORTGAGE LOANS Unless otherwise specified in the related Prospectus Supplement, each Pooling and Servicing Agreement will require the Servicer to cause to be established and maintained an account (the "Principal and Interest Account") at an institution meeting certain ratings and other criteria set forth in the Pooling and Servicing Agreement (an "Eligible Account"), into which it is required to deposit certain payments received in respect of the Mortgage Loans, as more fully described below. Unless otherwise specified in the related Prospectus Supplement, all funds in the Principal and Interest Account are required to be held (i) uninvested, either in trust or insured by the Federal Deposit Insurance Corporation up to the limits provided by law, (ii) invested in certain permitted investments, which are generally limited to United States government securities and other high-quality investments and repurchase agreements or similar arrangements with respect to such investments, (iii) invested in certain asset management accounts maintained by the Trustee or (iv) invested in such other investments which the Insurer and the Rating Agencies may approve ("Permitted Instruments"). Unless otherwise specified in the related Prospectus Supplement, any investment earnings on funds held in the Principal and Interest Account will be for the account of the Servicer. Unless otherwise specified in the related Prospectus Supplement, the Servicer is required to use its reasonable efforts to deposit into the Principal and Interest Account within one business day and in any event to deposit within two business days of receipt all Monthly Payments received on or after the related Cut-off Date (other than amounts received on or after the Cut-off Date in respect of interest accrued on the Mortgage Loans prior to the Cut-off Date) and all Principal Prepayments and Curtailments collected on or after the Cut-off Date (net of the Representative's Yield and the Servicing Fee with respect to each Mortgage Loan and other servicing compensation payable to the Servicer as permitted by the Pooling and Servicing Agreement), all Net Liquidation Proceeds, Insurance Proceeds, Released Mortgaged Property Proceeds, any amounts paid in connection with the repurchase of any Mortgage Loan, the amount of any Substitution Adjustments, the amount of any losses incurred in connection with investments in Permitted Instruments and certain amounts relating to insufficient insurance policies and REO Property. Unless otherwise specified in the related Prospectus Supplement, the Servicer may make withdrawals from the Principal and Interest Account only for the following purposes: (i) for deposit to the Collection Account no later than the third business day preceding each Monthly Deposit Date (defined below), if any, and each Payment Date, the Excess Spread (defined below), if any, and the Available Payment Amount for the related Monthly Period (defined below). "Excess Spread" means generally the aggregate excess, if any, of interest accrued on the related Mortgage Loans during the Due Period over interest accrued on the related Securities at the applicable Securities Interest Rates on the related Payment Date. The "Monthly Deposit Date" is the day of each month other than a month in which a Payment Date occurs specified in the related Prospectus Supplement with respect to a Series of Securities providing for Payments to be made less frequently than monthly. A "Monthly Period" is the calendar month preceding the month in which the related Monthly Deposit Date or Payment Date occurs and, if Payment Dates for a Series of Securities occur monthly, may be identical to the Due Period; (ii) to reimburse itself for any accrued unpaid Servicing Fees and unreimbursed Servicing Advances. Unless otherwise specified in the related Prospectus Supplement, the Servicer's right to 42 134 reimburse itself for unpaid Servicing Fees and unreimbursed Servicing Advances will be limited to late collections on the related Mortgage Loan, including Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds and such other amounts as may be collected by the Servicer from the related Mortgagor or otherwise relating to the Mortgage Loan in respect of which such unreimbursed amounts are owed; The Servicer's rights to such reimbursement will be prior to the rights of holders of the related Securities unless the Representative is the Servicer and the Representative or any Originator is required to purchase or substitute a Mortgage Loan pursuant to the Pooling and Servicing Agreement and the Transfer Agreement, in which case the Servicer's right to such reimbursement shall be junior to the payment to such holders of the purchase price or Substitution Adjustment; (iii) to withdraw any amount received from a Mortgagor that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction; (iv) to make investments in Permitted Instruments and, after effecting the remittance described in clause (i) above, to pay itself interest earned in respect of Permitted Instruments or on funds deposited in the Principal and Interest Account; (v) to withdraw any funds deposited in the Principal and Interest Account that were not required to be deposited therein (such as servicing compensation) or were deposited therein in error; (vi) to pay itself the Servicing Fee and any other permitted servicing compensation to the extent not previously retained or paid; (vii) to withdraw funds necessary for the conservation and disposition of REO Property; (viii) to make Servicing Advances, as more fully described below; and (ix) with respect to a Bankruptcy Loan, to remit to the applicable Depositor certain payments, as provided in the Pooling and Servicing Agreement; and (x) to clear and terminate the Principal and Interest Account upon the termination of the Pooling and Servicing Agreement. Unless otherwise specified in the related Prospectus Supplement, the Servicer is required to wire transfer to the Collection Account the amount described in clause (i) above no later than the third business day preceding each Monthly Deposit Date, if any, and each Payment Date. ADVANCES FROM THE PRINCIPAL AND INTEREST ACCOUNT; SERVICING ADVANCES Unless otherwise specified in the related Prospectus Supplement, not later than the close of business on the third business day prior to each Monthly Deposit Date, if any, and each Payment Date, the Servicer is required to withdraw from amounts on deposit in the Principal and Interest Account and held for future distribution and remit for deposit in the Collection Account an amount (each, an "Advance"), to be distributed on the related Payment Date, equal to the sum of the interest portions of the aggregate amount of Monthly Payments (net of the Servicing Fee and if so specified in the related Pooling and Servicing Agreement, the Excess Spread) accrued during the related Monthly Period, but uncollected as of the close of business on the last day of the related Monthly Period. The Servicer generally shall not be required to make such Advance from its own funds or be liable for the recovery thereof from collections on the related Mortgage Loans or otherwise. In the course of performing its servicing obligations, the Servicer will pay all reasonable and customary "out-of-pocket" costs and expenses incurred in the performance of its servicing obligations ("Servicing Advances"), including, but not limited to, the cost of (i) maintaining REO Properties; (ii) any enforcement or judicial proceedings, including foreclosures; and (iii) the management and liquidation of Mortgaged Property acquired in satisfaction of the related Mortgage. Unless otherwise provided in the related Pooling and Servicing Agreement, the Servicer may pay all or a portion of any Servicing Advance out of excess amounts 43 135 on deposit in the Principal and Interest Account and held for future distribution on the date on which such Servicing Advance is made. Any such excess amounts so used will be required to be replaced by the Servicer by deposit to the Principal and Interest Account no later than the date specified in the related Pooling and Servicing Agreement. Unless otherwise specified in the related Prospectus Supplement, the Servicer may recover Servicing Advances to the extent permitted by the Mortgage Loans or, if not theretofore recovered from the Mortgagor on whose behalf such Servicing Advance was made, from late collections on the related Mortgage Loan, including Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds and such other amounts as may be collected by the Servicer from the Mortgagor or otherwise relating to the Mortgage Loan. To the extent the Servicer, in its good faith business judgment, determines that certain Servicing Advances, as described in the Pooling and Servicing Agreement, will not be ultimately recoverable from late collections, Insurance Proceeds, Liquidation Proceeds on the related Mortgage Loans or otherwise ("Nonrecoverable Advances"), the Servicer may reimburse itself from the amounts available after distributions to the holders of Securities and payment of certain other fees and expenses. The Servicer is not required to make any Servicing Advance which it determines would be a Nonrecoverable Advance. DISTRIBUTIONS The Trustee is required to establish a trust account (referred to herein as the "Collection Account", but which may have such other designation as is set forth in the related Prospectus Supplement) into which there shall be deposited amounts transferred by the Servicer from the Principal and Interest Account. The Collection Account is required to be maintained as an Eligible Account. Amounts on deposit in the Collection Account may be invested in Permitted Instruments and other investments specified in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, on each Monthly Deposit Date, if any, and each Payment Date the Trustee is required to withdraw from the Collection Account and distribute the amounts set forth in the related Prospectus Supplement, to the extent available, in the priority set forth therein, which generally will include (in no particular order of priority): (i) deposits into any account established for the purpose of paying credit enhancement fees and premiums; (ii) if a Spread Account, Reserve Fund or similar account is established with respect to a Series of Securities, deposits into such fund or account of the Excess Spread or other amounts required to be deposited therein; (iii) payments to the holders of the Securities on account of interest and principal, in the order and manner set forth in the related Prospectus Supplement; (iv) reimbursement of the Servicer and/or the Representative for amounts expended by the Servicer or the Representative and reimbursable thereto under the related Pooling and Servicing Agreement but not previously reimbursed; (v) payments to the Servicer of an amount equal to Nonrecoverable Advances previously made by the Servicer and not previously reimbursed; and (vi) after the payments and deposits described above and in the related Prospectus Supplement, the balance, if any, to the persons specified in the related Prospectus Supplement. The amount available to make the payments described above will generally equal (a) the sum of (i) the Available Payment Amount for the related Due Period and (ii) the amount available under any credit enhancement, including amounts withdrawn from any Spread Account or Reserve Fund, less (b) the amount of the premiums or fees payable to the Credit Provider, if any, during the related Due Period. 44 136 Generally, to the extent a Credit Provider makes payments to holder of Securities, such Credit Provider will be subrogated to the rights of such holders with respect to such payments and shall be deemed, to the extent of the payments so made, to be a registered holder of such Securities. For purposes of the provisions described above, the following terms have the respective meanings ascribed to them below, each determined as of any Payment Date. "Available Payment Amount" generally means the result of (a) collections on or with respect to the Mortgage Loans received by the Servicer during each month in the related Due Period, net of the Servicing Fee paid to the Servicer during each month in the related Due Period and reimbursements for accrued unpaid Servicing Fees and for certain expenses paid by the Servicer, plus (b) the amount of any Advances, less, if so specified in the related Prospectus Supplement, (c) the Excess Spread or other amounts specified in such Prospectus Supplement. "Basic Principal Amount" means the sum of (i) the principal portion of each Monthly Payment received by the Servicer or any Subservicer during the related Due Period, (ii) all Curtailments and all Principal Prepayments received during such Due Period (or the applicable period (the "Prepayment Period") specified in the related Prospectus Supplement), (iii) the principal portion of all Insurance Proceeds, Released Mortgaged Property Proceeds and Net Liquidation Proceeds received during the related Due Period, (iv) (a) that portion of the purchase price of any purchased Mortgage Loans which represents principal and (b) any Substitution Adjustments deposited into the Collection Account as of the related Determination Date and (v) the Principal Balance of each Mortgage Loan as of the beginning of the related Due Period which became a Liquidated Mortgage Loan during such Due Period (exclusive of any principal payments in respect thereof described in the preceding clauses (i) through (iv)), less the amount of Special Payments, if any, paid to the holders of the Securities on any Special Payment Date occurring in the related Accrual Period. "Mortgage Loan Losses" means, for Mortgage Loans that become Liquidated Mortgage Loans during the related Due Period, the amount, if any, by which (i) the sum of the outstanding principal balance of each such Mortgage Loan (determined immediately before such Mortgage Loan became a Liquidated Mortgage Loan) and accrued and unpaid interest thereon at the Mortgage Interest Rate to the date on which such Mortgage Loan became a Liquidated Mortgage Loan exceeds (ii) the Net Liquidation Proceeds received during such Due Period in connection with the liquidation of such Mortgage Loan which have not theretofore been used to reduce the Principal Balance of such Mortgage Loan. "Payment Date" means the monthly, quarterly or other periodic date specified in the related Prospectus Supplement on which payments will be made to holders of the related Securities. "Special Payment Date" means the day on which a special redemption of or special remittance to holders of one or more Classes of Securities of a Series will be made, as specified in the related Prospectus Supplement. "Special Record Date" means the record date established with respect to a Special Payment Date as specified in the related Prospectus Supplement. "Special Payment Amount" means the amount of a special remittance or special redemption price paid to holders of one or more classes of Securities of a Series, as specified in the related Prospectus Supplement. SPECIAL PAYMENTS If so specified in the related Prospectus Supplement, a Series of Securities providing for Payment Dates occurring other than monthly may provide for special payments ("Special Payments") to be made to holders of Securities of one or more Classes in the amount (the "Special Payment Amount") and on the dates ("Special Payment Dates") specified in such Prospectus Supplement. The related Prospectus Supplement will describe the circumstances under which such Special Payments will be made, which may be as a result of receipt of Principal Prepayments in excess of a specified amount or otherwise. Unless otherwise specified in the related Prospectus Supplement, such Special Payments will result in amounts which would otherwise have been distributed on the next succeeding Payment Date being paid instead on one or more Special Payment Dates. 45 137 OPTIONAL DISPOSITION OF MORTGAGE LOANS If so specified in the related Prospectus Supplement, the Servicer, the Depositors or the holders of the Class of Securities or such other person specified in such Prospectus Supplement may cause the Trust to sell all of the Mortgage Loans and all REO Properties when the Pool Principal Balance declines to the percentage of the Original Pool Principal Balance specified in the related Prospectus Supplement, when the outstanding principal balance of a Class of Securities specified in the related Prospectus Supplement declines to the percentage of the original principal balance of such Class specified in the related Prospectus Supplement or at such other time as is specified in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, the related Pooling and Servicing Agreement will establish a minimum price at which such Mortgage Loans and REO Properties may be sold generally equal to the principal amount thereof plus accrued interest thereon. Such minimum price may include certain expenses and other amounts or such party as is specified in the related Prospectus Supplement may be required to pay all or a portion of such expenses or other amounts at the time of sale. Unless otherwise specified in the related Prospectus Supplement, the proceeds of any such sale will be distributed to holders of the Securities on the Payment Date next following the date of disposition. MANDATORY DISPOSITION OF MORTGAGE LOANS If so specified in the related Prospectus Supplement, the Servicer, the Depositors or such other entities as may be specified in such Prospectus Supplement may be required to effect early retirement of a Series of Securities by soliciting competitive bids for the purchase of the assets of the related Trust or otherwise, under the circumstances set forth in such Prospectus Supplement. The procedures for the solicitation of such bids will be described in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, the Representative, the Servicer, the Originators and any Underwriter (defined herein) will be permitted to submit bids. If so specified in the related Prospectus Supplement, a minimum bid or reserve price may be established. If so specified in the related Prospectus Supplement, the Underwriter or such other entity specified in such Prospectus Supplement will be required to confirm that the accepted bid will result in the sale of the assets of the Trust at their fair market value. FORWARD COMMITMENTS; PREFUNDING If so specified in the related Prospectus Supplement, a Pooling and Servicing Agreement or other agreement may provide for the transfer by the Depositors of additional Mortgage Loans to the related Trust after the Closing Date for the related Securities. In such case, it is expected that the related Transfer Agreement will provide for a concurrent transfer of such additional Mortgage Loans from one or more Originators to the Depositors. Such additional Mortgage Loans will be required to conform to the requirements set forth in the related Pooling and Servicing Agreement or other agreement providing for such transfer. As specified in the related Prospectus Supplement, such transfer may be funded by the application for a specified period of all or a portion of payments on the Mortgage Loans originally included in the related Mortgage Pool or by the establishment of a Prefunding Account (a "Prefunding Account"). If a Prefunding Account is established, all or a portion of the proceeds of the sale of one or more Classes of Securities of the related Series will be deposited in such account to be released as additional Mortgage Loans are transferred. Unless otherwise specified in the related Prospectus Supplement, a Prefunding Account will be required to be maintained as an Eligible Account. The related Pooling and Servicing Agreement or other agreement providing for the transfer of additional Mortgage Loans will generally establish a specified period of time within which such transfers must be made. Unless otherwise specified in the related Prospectus Supplement, amounts set aside to fund such transfers (whether in a Prefunding Account or otherwise) and not so applied within the required period of time will be deemed to be principal prepayments and applied in the manner set forth in such Prospectus Supplement. 46 138 REPORTS TO HOLDERS On each Payment Date, there will be forwarded to each holder a statement setting forth, among other things, the information as to such Payment Date required by the related Pooling and Servicing Agreement, which generally will include, except as otherwise provided therein, if applicable: (i) the Available Payment Amount (and any portion of the Available Payment Amount that has been deposited in the Collection Account but may not be withdrawn therefrom pursuant to an order of a United States bankruptcy court of competent jurisdiction imposing a stay pursuant to Section 362 of the United States Bankruptcy Code); (ii) the principal balance of each class of Securities as reported in the report for the immediately preceding Payment Date, or, with respect to the first Payment Date for a Series of Securities, the Original Principal Balance of such Class; (iii) the number and Principal Balances of all Mortgage Loans which were the subject of Principal Prepayments during the related Due Period and the amount of any Special Payments made during the related Accrual Period; (iv) the amount of all Curtailments which were received during the related Due Period; (v) the principal portion of all Monthly Payments received during the related Due Period; (vi) the amount of interest received on the Mortgage Loans during the related Due Period; (vii) the aggregate amount of the Advances to be made with respect to the Payment Date; (viii) certain delinquency and foreclosure information as described more fully in the related Pooling and Servicing Agreement, and the amount of Mortgage Loan Losses during the related Due Period; (ix) the amount of interest and principal due to the holders of each Class of Securities of such Series on such Payment Date; (x) the amount then available in any Spread Account or Reserve Account; (xi) the amount of the payments, if any, to be made from any credit enhancement on the Payment Date; (xii) the amount to be distributed to the holders of any subordinated or residual securities on the Payment Date; (xiii) the principal balance of each Class of Securities of such Series after giving effect to the payments to be made on the Payment Date; (xiv) with respect to the Mortgage Pool, the weighted average maturity and the weighted average Mortgage Interest Rate of the Mortgage Loans as of the last day of the related Due Period; (xv) the amount of all payments or reimbursements to the Servicer for accrued unpaid Servicing Fees, unreimbursed Servicing Advances and interest in respect of Permitted Instruments or funds on deposit in the Principal and Interest Account and certain other amounts during the related Due Period; (xvi) the Pool Principal Balance as of the immediately preceding Payment Date, the Pool Principal Balance after giving effect to payments received and Mortgage Loan Losses incurred during the related Due Period and the ratio of the Pool Principal Balance to the Original Pool Principal Balance. As of any Payment Date, the "Pool Principal Balance" equals the aggregate outstanding principal balance of all Mortgage Loans, as reduced by the aggregate Mortgage Loan Losses, at the end of the related Due Period; (xvii) certain information with respect to the funding, availability and release of monies from any Spread Account or Reserve Fund; 47 139 (xviii) the number of Mortgage Loans outstanding at the beginning and at the end of the related Due Period; (xiv) the amounts that are reimbursable to the Servicer, the Representative or the Depositors, as appropriate; and (xv) such other information as the holders reasonably require. The Servicer will also be required to furnish to any holder upon request (i) annual audited financial statements of the Servicer for one or more of the most recently completed three fiscal years for which such statements are available, and (ii) interim unaudited financial statements of the Servicer relating to periods subsequent to the most recent annual audited period. DESCRIPTION OF CREDIT ENHANCEMENT To the extent specified in the related Prospectus Supplement, credit enhancement for one or more Classes of a Series of Securities may be provided by one or more of a letter of credit, financial guaranty insurance policy, reserve fund, spread account, cash collateral account, mortgage pool insurance policy, special hazard insurance policy or other type of credit enhancement. Credit enhancement may also be provided by overcollateralization or by subordination of one or more Classes of Securities of a Series to one or more other Classes of Securities of such Series. Any credit enhancement will be limited in amount and scope of coverage. Unless otherwise specified in the related Prospectus Supplement, credit enhancement for a Series of Securities will not be available for losses incurred with respect to any other Series of Securities. To the extent credit enhancement for any Series of Securities is exhausted, or losses are incurred which are not covered by such credit enhancement, the holders of the Securities will bear all further risk of loss. The amounts and types of credit enhancement, as well as the provider thereof (the "Credit Provider"), if applicable, with respect to each Series of Securities will be set forth in the related Prospectus Supplement. To the extent provided in the applicable Prospectus Supplement and the related Pooling and Servicing Agreement, any credit enhancement may be periodically modified, reduced or substituted for as the aggregate principal balance of the related Mortgage Pool decreases, upon the occurrence of certain events or otherwise. Unless otherwise specified in the related Prospectus Supplement, to the extent permitted by the applicable Rating Agencies and provided that the then current rating of the affected Securities is not reduced or withdrawn as a result thereof, any credit enhancement may be cancelled or reduced in amount or scope of coverage or both. The descriptions of credit enhancement arrangements included in this Prospectus or any Prospectus Supplement and the coverage thereunder do not purport to be complete and are qualified in their entirety by reference to the actual forms of governing documents, copies of which will be available upon request. Financial Guaranty Insurance Policy. If so specified in the related Prospectus Supplement, a financial guaranty insurance policy or surety bond (a "Securities Insurance Policy") may be obtained and maintained for a Class or Series of Securities. The issuer of the Securities Insurance Policy (the "Insurer") will be described in the related Prospectus Supplement and a copy of the form of Securities Insurance Policy will be filed with the related Current Report on Form 8-K. Unless otherwise specified in the related Prospectus Supplement, a Securities Insurance Policy will be unconditional and irrevocable and will guarantee to holders of the applicable Securities that an amount equal to the full amount of distributions due to such holders will be received by the Trustee or its agent on behalf of such holders for distribution on each Payment Date. The specific terms of any Securities Insurance Policy will be set forth in the related Prospectus Supplement. A Securities Insurance Policy may have limitations and generally will not insure the obligation of the Depositors or any Originator to purchase or substitute for a defective Mortgage Loan and will not guarantee any specific rate of principal prepayments. Unless otherwise specified in the related Prospectus Supplement, the Insurer will be subrogated to the rights of each holder to the extent the Insurer makes payments under the Securities Insurance Policy. 48 140 Letter of Credit. If so specified in the related Prospectus Supplement, all or a component of credit enhancement for a Class or a Series of Securities may be provided by a letter of credit (a "Letter of Credit") issued by a bank or other financial institution (a "Letter of Credit Issuer") identified in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, each Letter of Credit will be irrevocable. A Letter of Credit may provide coverage with respect to one or more Classes of Certificates or the underlying Mortgage Loans or, if specified in the related Prospectus Supplement, may support a specified obligation or be provided in lieu of the funding with cash of a Reserve Fund or Spread Account (each as defined below). The amount available, conditions to drawing, if any, and right to reimbursement with respect to a Letter of Credit will be specified in the related Prospectus Supplement. A Letter of Credit will expire on the date specified in the related Prospectus Supplement, unless earlier terminated or extended in accordance with its terms. Mortgage Pool Insurance Policy. If so specified in the related Prospectus Supplement, credit enhancement with respect to a Series of Securities may be provided by a mortgage pool insurance policy (a "Pool Insurance Policy") issued by the insurer (a "Pool Insurer") specified in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, each Pool Insurance Policy will, subject to limitations described in such Prospectus Supplement, insure against losses due to defaults in the payment of principal or interest on the underlying Mortgage Loans up to the amount specified in such Prospectus Supplement (or in a Current Report on Form 8-K). The Pooling and Servicing Agreement with respect to any Series of Securities for which a Pool Insurance Policy is provided will require the Servicer or other party specified therein to use reasonable efforts to maintain the Pool Insurance Policy and to present claims to the Pool Insurer in the manner required thereby. No Pool Insurance Policy will be a blanket policy against loss and will be subject to the limitations and conditions precedent described in the related Prospectus Supplement. Special Hazard Insurance Policy. If so specified in the related Prospectus Supplement, credit enhancement with respect to a Series of Securities may be provided in part by an insurance policy (a "Special Hazard Policy") covering losses due to physical damage to a Mortgaged Property other than a loss of the type covered by a standard hazard insurance policy or flood insurance policy or losses resulting from the application of co-insurance clauses contained in standard hazard insurance policies. The Prospectus Supplement relating to a Series of Securities for which a Special Hazard Policy is provided will identify the issuer of such policy and any limitations on coverage. No Special Hazard Policy will cover extraordinary losses such as those due to war, civil insurrection, governmental action, errors in design or workmanship, chemical contamination or similar causes. Each Special Hazard Policy will contain an aggregate limit on claims specified in the related Prospectus Supplement. No claim will be paid under any Special Hazard Policy unless hazard insurance on the Mortgaged Property is in force and protection and preservation expenses have been paid. Spread Account and Reserve Fund. If so specified in the related Prospectus Supplement, all or any component of credit enhancement for a Series of Securities may be provided by a reserve fund (a "Reserve Fund") or a spread account (a "Spread Account"). A Reserve Fund or Spread Account may be funded by a combination of cash, one or more letters of credit or one or more Permitted Instruments provided by the Depositors or other party identified in the related Prospectus Supplement, amounts otherwise distributable to one or more Classes of Securities subordinated to one or more other Classes of Securities or all or any portion of Excess Spread. If so specified in the related Prospectus Supplement, a Reserve Fund for a Series of Securities may be funded in whole or in part on the applicable Closing Date. If so specified in the related Prospectus Supplement, cash deposited in a Reserve Fund or a Spread Account may be withdrawn and replaced with one or more letters of credit or Permitted Instruments. A Reserve Fund or Spread Account may be pledged or otherwise made available to a Credit Provider. If so specified in the related Prospectus Supplement, a Reserve Fund or Spread Account may not be deemed part of the assets of the related Trust or may be deemed to be pledged or provided by one or more of the Depositors, the holders of the Class of Securities otherwise entitled to the amounts deposited in such account or such other party as is identified in such Prospectus Supplement. Cash Collateral Account. If so specified in the related Prospectus Supplement, all or any portion of credit enhancement for a Series of Securities may be provided by the establishment of a cash collateral 49 141 account (a "Cash Collateral Account"). A Cash Collateral Account will be similar to a Reserve Fund or Spread Account except that generally a Cash Collateral Account is funded initially by a loan from a cash collateral lender (the "Cash Collateral Lender"), the proceeds of which are invested with the Cash Collateral Lender or other eligible institution. Unless otherwise specified in the related Prospectus Supplement, the Cash Collateral Account will be required to be maintained as an Eligible Account. The loan from the Cash Collateral Lender will be repaid from Excess Spread, if any, or such other amounts as are specified in the related Prospectus Supplement. Amounts on deposit in the Cash Collateral Account will be available in generally the same manner described above with respect to a Spread Account or Reserve Fund. As specified in the related Prospectus Supplement, a Cash Collateral Account may be deemed to be part of the assets of the related Trust, may be deemed to be part of the assets of a separate cash collateral trust or may be deemed to be property of the party specified in the related Prospectus Supplement and pledged for the benefit of the holders of one or more Classes of Securities of a Series. Subordination. If so specified in the related Prospectus Supplement, distributions of scheduled principal, Principal Prepayments, Curtailments, interest or any combination thereof otherwise payable to one or more Classes of Securities of a Series ("Subordinated Securities") may instead be payable to holders of one or more other Classes of Securities of such Series ("Senior Securities") under the circumstances and to the extent specified in such Prospectus Supplement. A Class of Securities may be subordinated to one or more Classes of Securities and senior to one or more other Classes of Securities of a Series. If so specified in the related Prospectus Supplement, delays in receipt of scheduled payments on the Mortgage Loans and losses on defaulted Mortgage Loans will be borne first by the various Classes of Subordinated Securities and thereafter by the various Classes of Senior Securities, in each case under the circumstances and subject to the limitations specified in such Prospectus Supplement. The aggregate losses in respect of defaulted Mortgage Loans which must be borne by the Subordinated Securities by virtue of subordination and the amount of the distributions otherwise distributable to the Subordinated Securities that will be distributable to Senior Securities on any Payment Date may be limited as specified in the related Prospectus Supplement or the availability of subordination may otherwise be limited as specified in the related Prospectus Supplement. If losses or delinquencies were to exceed the amounts payable and available to holders of Subordinated Securities of a Series or if such amounts were to exceed any limitation on the amount of subordination available, holders of Senior Securities of such Series could experience losses. In addition, if so specified in the related Prospectus Supplement, amounts otherwise payable to holders of Subordinated Securities on any Payment Date may be deposited in a Reserve Fund or Spread Account, as described above. Such deposits may be made on each Payment Date, on each Payment Date for a specified period or to the extent necessary to cause the balance in such account to reach or maintain a specified amount, as specified in the related Prospectus Supplement, and thereafter, amounts may be released from such Reserve Fund or Spread Account in the amounts and under the circumstances specified in such Prospectus Supplement. Distributions may be allocated as among Classes of Senior Securities and as among Classes of Subordinated Securities in order of their final scheduled payment dates, in accordance with a schedule or formula or otherwise, as specified in the related Prospectus Supplement. As between Classes of Subordinated Securities, payments to holders of Senior Securities on account of delinquencies or losses and deposits to any Reserve Fund or Spread Account will be allocated as specified in the related Prospectus Supplement. Principal Prepayments and Curtailments may be paid disproportionately to Classes of Senior Securities pursuant to a "shifting interest" structure or otherwise, as specified in the related Prospectus Supplement. Other Credit Enhancement. Credit enhancement may also be provided for a Series of Securities in the form of overcollateralization, surety bond, insurance policy or other type of credit enhancement approved by the applicable Rating Agencies to cover one or more risks with respect to the Mortgage Loans or the Securities, as specified in the related Prospectus Supplement. 50 142 PAYMENT OF CERTAIN EXPENSES If so specified in the related Prospectus Supplement, in order to provide for the payment of the fees of the Credit Provider, if any, the Trustee may be required to establish a Credit Enhancement Account and to deposit therein on the dates specified in the related Prospectus Supplement, from amounts on deposit in the Collection Account, in the priority indicated, an amount that is sufficient to pay the premiums or fees due to the Credit Provider. Unless otherwise specified in the related Prospectus Supplement, each Pooling and Servicing Agreement will require the Servicer to pay to the Trustee(s) from time to time their respective fees and the reasonable expenses, disbursements and advances incurred or made by them. The Trustee will be permitted under the Pooling and Servicing Agreement on each Payment Date to pay, from amounts on deposit in the Collection Account and after making any required distributions to holders, any amounts then due and owing representing fees of the Trustee(s) that have not been paid by the Servicer after written demand therefor. SERVICING COMPENSATION As compensation for servicing and administering the Mortgage Loans, the Servicer is entitled to a fee in the amount specified in the related Prospectus Supplement (the "Servicing Fee"), payable monthly from the interest portion of monthly payments on the related Mortgage Loans, Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds and certain other late collections on the related Mortgage Loans. In addition to the Servicing Fee, the Servicer will generally be entitled under the related Pooling and Servicing Agreement to retain as additional servicing compensation any assumption and other administrative fees (including bad check charges, late payment fees and similar fees), the excess of any Net Liquidation Proceeds over the outstanding principal balance of a Liquidated Mortgage Loan, to the extent not otherwise required to be remitted to the Indenture Trustee for deposit into the Collection Account and not constituting any part of the Representative's Yield, and interest paid on funds on deposit in the Principal and Interest Account. SERVICING STANDARDS General Servicing Standards. The Servicer will agree to service the Mortgage Loans in accordance with the Pooling and Servicing Agreement and, in servicing and administering the Mortgage Loans, to employ or cause to be employed procedures, including collection, foreclosure and REO Property management procedures, and exercise the same care it customarily employs and exercises in servicing and administering mortgage loans for its own account, in accordance with accepted first and second mortgage servicing practices of prudent lending institutions and giving due consideration to the holders', and any Credit Provider's reliance on the Servicer. The interests of the holders of each Class of Securities of any Series and the Credit Provider, if any, may differ with respect to servicing decisions which may affect the rate at which prepayments are received. For example, holders of certain Classes of Securities may prefer that "due-on-sale" clauses be waived in the event of a sale of the underlying Mortgaged Property, that delinquent Mortgagors be granted extensions or other accommodations and that liquidations of Mortgage Loans be deferred, if an increase in the rate of principal prepayments would have an adverse effect on the yield to investors in such Securities. Depending on the timing of such prepayments, holders of other classes of Securities may prefer that "due-on- sale" clauses be enforced or that other actions be taken which would increase prepayments. No holder of a Security will have the right to make any decisions with respect to the underlying Mortgage Loans. The Servicer will have the right and obligation to make such decisions in accordance with its normal servicing procedures and the standards set forth in the related Pooling and Servicing Agreement. In certain cases, the consent or approval of the Credit Provider, if any, may be permitted or required. The interests of the Credit Provider, if any, with respect to, among other things, matters which affect the timing of payments and prepayments may not be the same as those of the holders of each Class of Securities of such Series. Hazard Insurance. The Servicer will cause to be maintained fire and hazard insurance with extended coverage (sometimes referred to as "standard hazard insurance") customary in the area where the Mortgaged Property is located, in an amount which is at least equal to the least of (i) the outstanding Principal Balance 51 143 owing on the Mortgage Loan, (ii) the full insurable value of the premises securing the Mortgage Loan and (iii) the minimum amount required to compensate for damage or loss on a replacement cost basis. Generally, if (i) the Mortgaged Property is in an area identified in the Federal Register by the Flood Emergency Management Agency as Flood Zone "A", (ii) flood insurance has been made available and (iii) the Servicer determines that such insurance is necessary in accordance with accepted first and second mortgage servicing practices of prudent lending institutions, the Servicer will be required to cause to be purchased a flood insurance policy with a generally acceptable insurance carrier, in an amount representing coverage not less than the least of (a) the outstanding principal balance of the Mortgage Loan, (b) the full insurable value of the Mortgaged Property, or (c) the maximum amount of insurance available under the National Flood Insurance Act of 1968, as amended. The Servicer will also be required to maintain on REO Property, to the extent such insurance is available, fire and hazard insurance in the applicable amounts described above, liability insurance and, to the extent required and available under the National Flood Insurance Act of 1968, as amended, and the Servicer determines that such insurance is necessary in accordance with accepted first and second mortgage servicing practices of prudent lending institutions, flood insurance in an amount equal to that required above. Any amounts collected by the Servicer under any such policies (other than amounts to be applied to the restoration or repair of the Mortgaged Property, or to be released to the Mortgagor in accordance with customary first and second mortgage servicing procedures) will be deposited in the Principal and Interest Account, subject to retention by the Servicer to the extent such amounts constitute servicing compensation or to withdrawal pursuant to the related Pooling and Servicing Agreement. If the Servicer obtains and maintains a blanket policy insuring against fire and hazards of extended coverage on all of the Mortgage Loans, then, to the extent such policy names the Servicer as loss payee and provides coverage in an amount equal to the aggregate outstanding principal balance on the Mortgage Loans without co-insurance, the Servicer will be deemed conclusively to have satisfied its obligations with respect to fire and hazard insurance coverage. Enforcement of Due on Sale Clauses. When a Mortgaged Property has been or is about to be conveyed by the Mortgagor, the Servicer, on behalf of the Trustee, is required, to the extent it has knowledge of such conveyance or prospective conveyance, to enforce the rights of the Trustee as the mortgagee of record to accelerate the maturity of the related Mortgage Loan under any "due-on-sale" clause contained in the related Mortgage or Mortgage Note; provided, however, that the Servicer will not be permitted to exercise any such right if the "due-on-sale" clause, in the reasonable belief of the Servicer, is not enforceable under applicable law. In such event, the Servicer will be required to enter into an assumption and modification agreement with the person to whom such property has been or is about to be conveyed, pursuant to which such person becomes liable under the Mortgage Note and, unless prohibited by applicable law or the Mortgage Note or Mortgage, the Mortgagor remains liable thereon. The Servicer will also be authorized (with the prior approval of any Credit Provider, if required) to enter into a substitution of liability agreement with such person, pursuant to which the original Mortgagor is released from liability and such person is substituted as Mortgagor and becomes liable under the Mortgage Note. Realization Upon Defaulted Mortgage Loans. The Servicer is required to foreclose upon or otherwise comparably effect the ownership in the name of the Trustee on behalf of the holders of the related Securities of Mortgaged Properties relating to defaulted Mortgage Loans as to which no satisfactory arrangements can be made for collection of delinquent payments; provided, however, that the Servicer will not be required to foreclose if it determines that foreclosure would not be in the best interests of the holders or any Credit Provider. In connection with such foreclosure or other conversion, the Servicer is required to exercise collection and foreclosure procedures with the same degree of care and skill in its exercise or use as it would exercise or use under the circumstances in the conduct of its own affairs. Collection of Mortgage Loan Payments. Each Pooling and Servicing Agreement will require the Servicer to make reasonable efforts to collect all payments called for under the terms and provisions of the Mortgage Loans. Consistent with the foregoing, the Servicer may at its own discretion waive any late payment charge, assumption fee or any penalty interest in connection with the prepayment of a Mortgage Loan or any other fee or charge which the Servicer would be entitled to retain as Servicing Compensation and may waive, vary or modify any term of any Mortgage Loan or consent to the postponement of strict compliance with any 52 144 such term or in any matter grant indulgence to any Mortgagor, subject to the limitations set forth in the related Pooling and Servicing Agreement. USE OF SUBSERVICERS The Servicer will be permitted under each Pooling and Servicing Agreement to enter into Subservicing Agreements for any servicing and administration of Mortgage Loans with any institution which is in compliance with the laws of each state necessary to enable it to perform its obligations under such Subservicing Agreement and is either (i) designated by FNMA or the Federal Home Loan Mortgage Corporation ("FHLMC") as an approved Depositor-Servicer for first and second mortgage loans or (ii) is an affiliate or a wholly owned subsidiary of the Servicer. Notwithstanding any Subservicing Agreement, unless otherwise specified in the related Prospectus Supplement, the Servicer will not be relieved of its obligations under a Pooling and Servicing Agreement, and the Servicer shall be obligated to the same extent and under the same terms and conditions as if it alone were servicing and administering the Mortgage Loans. The Servicer will be entitled to enter into any agreement with a subservicer for indemnification of the Servicer by such subservicer and nothing contained in any Pooling and Servicing Agreement shall be deemed to limit or modify such indemnification. SERVICING CERTIFICATES AND AUDITS The Servicer is required to deliver, not later than the last day of the fourth month following the end of the Servicer's fiscal year, commencing in the year specified in the related Pooling and Servicing Agreement, an Officers' Certificate stating that (i) the Servicer has fully complied with the provisions of the Pooling and Servicing Agreement which relate to the servicing and administration of the Mortgage Loans, (ii) a review of the activities of the Servicer during such preceding year and of performance under the Pooling and Servicing Agreement has been made under such officers' supervision, and (iii) to the best of such officers' knowledge, based on such review, the Servicer has fulfilled all its obligations under the Pooling and Servicing Agreement for such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officers and the nature and status thereof including the steps being taken by the Servicer to remedy such default. The Servicer is required to cause to be delivered, not later than the last day of the fourth month following the end of the Servicer's fiscal year, commencing in the year set forth in the related Pooling and Servicing Agreement, a letter or letters of a firm of independent certified public accountants reasonably acceptable to the Trustee and any Owner Trustee stating that such firm has, with respect to the Servicer's overall servicing operations, examined such operations in accordance with the requirements of the Uniform Single Audit Program for Mortgage Bankers, and stating such firm's conclusions relating thereto. LIMITATIONS ON LIABILITY OF THE SERVICER AND ITS AGENTS Each Pooling and Servicing Agreement will provide that the Servicer and any director, officer, employee or agent of the Servicer may rely on any document of any kind that is reasonably and in good faith believed to be genuine and adopted or signed by the proper authorities respecting any matters arising under the Pooling and Servicing Agreement. In addition, the Servicer will not be required to appear with respect to, prosecute or defend any legal action that is not incidental to the Servicer's duty to service the Mortgage Loans in accordance with the related Pooling and Servicing Agreement, other than certain claims made by third parties with respect to such Pooling and Servicing Agreement. REMOVAL AND RESIGNATION OF SERVICER Unless otherwise specified in the related Prospectus Supplement, any Credit Provider or the holders of Securities of a Series representing a majority in principal amount of Securities of such Series, voting as a single class (a "Majority in Aggregate Voting Interest"), with the consent of any Credit Provider, may, pursuant to the related Pooling and Servicing Agreement, remove the Servicer upon the occurrence and 53 145 continuation beyond the applicable cure period of any of the following events (each a "Servicer Termination Event"): (i) (A) an Event of Nonpayment (defined below); (B) the failure by the Servicer to make any required Servicing Advance, to the extent such failure materially and adversely affects the interests of any Credit Provider or the holders of the Securities of such Series; or (C) any other failure by the Servicer to remit to holders of the Securities of such Series or to the Trustee or any Owner Trustee for the benefit of the holders of the Securities of such Series, any payment required to be made under the terms of the related Pooling and Servicing Agreement which continues unremedied after the date upon which written notice of such failure, requiring the same to be remedied, shall have been given to the Servicer; or (ii) failure by the Servicer duly to observe or perform, in any material respect, any other covenants, obligations or agreements of the Servicer as set forth in the related Pooling and Servicing Agreement, which failure continues unremedied for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Servicer; or (iii) a decree or order of a court or agency or supervisory authority having jurisdiction for the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against the Servicer and such decree or order shall have remained in force, undischarged or unstayed for a period of 60 days; or (iv) the Servicer shall consent to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to the Servicer or of or relating to all or substantially all of the Servicer's property; or (v) the Servicer shall admit in writing its inability to pay its debts as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; or (vi) the Servicer shall fail for 60 days to pay, or bond against, an unappealable, undischarged, unvacated and unstayed final judgment by a court of competent jurisdiction in an aggregate amount set forth in the related Pooling and Servicing Agreement; or (vii) Under certain circumstances, the aggregate Mortgage Loan Losses on the related Mortgage Pool shall exceed certain thresholds described in the related Pooling and Servicing Agreement. "Event of Nonpayment" means, with respect to any Payment Date, unless otherwise specified in the related Prospectus Supplement, the failure of the sum of (i) the amounts withdrawn from the Principal and Interest Account during the related Accrual Period, (ii) income accrued on the amounts in the Collection Account during such Accrual Period, (iii) Advances made during such Accrual Period and (iv) amounts withdrawn from any Reserve Fund or Spread Account on such Payment Date, when taken together (but not including any amounts subject to any automatic stay under applicable bankruptcy law), to be sufficient to pay all amounts due to holders of such Securities on such Payment Date; together with any fees or premiums due to any Credit Provider; provided, that an Event of Nonpayment shall not occur if such insufficiency results from a failure by any Credit Provider to perform in accordance with the terms of the related Pooling and Servicing Agreement and credit enhancement documents or the failure by the Trustee to perform in accordance with the related Pooling and Servicing Agreement. Unless otherwise specified in the related Prospectus Supplement, the Depositors may, with the consent of any Credit Provider and holders representing a majority in aggregate Percentage Interest of each Class of Securities of a Series, remove the Servicer upon 90 days' prior written notice. No such removal shall be effective until the appointment and acceptance of a successor Servicer other than the Trustee (unless the Trustee agrees to serve) meeting the requirements described below and otherwise acceptable to any Credit Provider and majority in Percentage Interest of each Class of Securities of such Series. Unless otherwise specified in the related Prospectus Supplement, the Servicer may not assign the related Pooling and Servicing Agreement nor resign from the obligations and duties thereby imposed on it except by mutual consent of the Servicer, the Representative (if the Representative is not the Servicer), any Credit Provider, the Trustee, any Owner Trustee and the Majority in Aggregate Voting Interest or upon the 54 146 determination that the Servicer's duties thereunder are no longer permissible under applicable law and such incapacity cannot be cured by the Servicer. No such resignation shall become effective until a successor has assumed the Servicer's responsibilities and obligations in accordance with the Pooling and Servicing Agreement. Unless otherwise specified in the related Prospectus Supplement, upon removal or resignation of the Servicer other than as described in the second preceding paragraph, the Trustee will be the successor servicer (the "Successor Servicer"). The Trustee, as Successor Servicer, is obligated to make Servicing Advances and certain other advances unless it determines reasonably and in good faith that such advances would not be recoverable. If, however, the Trustee is unwilling or unable to act as Successor Servicer, or if the Majority in Aggregate Voting Interest or any Credit Provider so requests in writing, the Trustee may appoint, or petition a court of competent jurisdiction to appoint, any established mortgage loan servicing institution acceptable to such Credit Provider having a net worth of not less than the amount set forth in the related Pooling and Servicing Agreement and which is approved as a servicer by FNMA and FHLMC as the Successor Servicer in the assumption of all or any part of the responsibilities, duties or liabilities of the Servicer. The Trustee and any other Successor Servicer in such capacity is entitled to the same reimbursement for advances and other Servicing Compensation as the Servicer. See "Servicing Compensation" above. REGISTRATION AND TRANSFER OF THE SECURITIES If so specified in the related Prospectus Supplement, one or more Classes of Securities of a Series will be issued in definitive certificated form and will be transferable and exchangeable at the office of the registrar identified in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, no service charge will be made for any such registration or transfer of such Securities, but the owner may be required to pay a sum sufficient to cover any tax or other governmental charge. If so specified in the related Prospectus Supplement, one or more Classes of Securities of a Series ("Book-Entry Securities") may be initially represented by one or more certificates registered in the name of The Depository Trust Company ("DTC") or other securities depository and be available only in the form of book-entries. Any Book-Entry Securities will initially be registered in the name of Cede, the nominee of DTC. DTC is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC accepts securities for deposit from its participating organizations ("Participants") and facilitates the clearance and settlement of securities transactions between Participants in such securities through electronic book-entry changes in accounts of Participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks and trust companies and clearing corporations and may include certain other organizations. Indirect access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly ("Indirect Participants"). Beneficial owners ("Owners") that are not Participants but desire to purchase, sell or otherwise transfer ownership of Book-Entry Offered Securities may do so only through Participants (unless and until Definitive Securities, as defined below, are issued). In addition, Owners will receive all distributions of principal of, and interest on, the Book-Entry Securities from the Trustee or any Trustee, as the case may be, through DTC and Participants. Owners will not receive or be entitled to receive certificates representing their respective interests in the Book-Entry Offered Securities, except under the limited circumstances described below. Unless and until Definitive Securities (as defined below) are issued, it is anticipated that the only "holder" of Book-Entry Securities of any Series will be Cede, as nominee of DTC. Owners will only permitted to exercise the rights of holders indirectly through Participants and DTC. While any Book-Entry Securities of a Series are outstanding (except under the circumstances described below), under the rules, regulations and procedures creating and affecting DTC and its operations (the "Rules"), DTC is required to make book-entry transfers among Participants on whose behalf it acts with 55 147 respect to the Book-Entry Securities and is required to receive and transmit distributions of principal of, and interest on, the Book-Entry Securities. Participants with whom Owners have accounts with respect to Book-Entry Securities are similarly required to make book-entry transfers and receive and transmit such distributions on behalf of their respective Owners. Accordingly, although Owners will not possess certificates, the Rules provide a mechanism by which Owners will receive distributions and will be able to transfer their interests. Unless and until Definitive Securities are issued, Owners who are not Participants may transfer ownership of Book-Entry Securities of a Series only through Participants by instructing such Participants to transfer Book-Entry Securities, by book-entry transfer, through DTC for the account of the purchasers of such Book-Entry Securities, which account is maintained with their respective Participants. Under the Rules and in accordance with DTC's normal procedures, transfers of ownership of Book-Entry Securities will be executed through DTC and the accounts of the respective Participants at DTC will be debited and credited. Similarly, the respective Participants will make debits or credits, as the case may be, on their records on behalf of the selling and purchasing Owners. Book-Entry Securities of a Series will be issued in registered form to Owners, or their nominees, rather than to DTC (such Book-Entry Securities being referred to herein as "Definitive Securities") only under the circumstances provided in the related Pooling and Servicing Agreement, which generally will include, except if otherwise provided therein, if (i) DTC or the Servicer advises the Trustee and any Owner Trustee in writing that DTC is no longer willing or able to discharge properly its responsibilities as nominee and depository with respect to the Book-Entry Securities of such Series and the Servicer is unable to locate a qualified successor, (ii) the Servicer, at its sole option, elects to terminate the book-entry system through DTC or (iii) after the occurrence of a Servicer Termination Event, a majority of the aggregate Percentage Interest of any Class of Securities of such Series advises DTC in writing that the continuation of a book-entry system through DTC (or a successor thereto) to the exclusion of any physical certificates being issued to Owners is no longer in the best interests of Owners of such Class of Securities. Upon issuance of Definitive Securities of a Series to Owners, such Book-Entry Securities will be transferable directly (and not exclusively on a book-entry basis) and registered holders will deal directly with the Trustee or any Owner Trustee, as the case may be, with respect to transfers, notices and distributions. DTC has advised the Servicer and the Depositors that, unless and until Definitive Securities are issued, DTC will take any action permitted to be taken by a holder only at the direction of one or more Participants to whose DTC accounts the Securities are credited. DTC has advised the Servicer and the Depositors that DTC will take such action with respect to any Percentage Interests of the Book-Entry Securities of a Series only at the direction of and on behalf of such Participants with respect to such Percentage Interests of the Book-Entry Securities. DTC may take actions, at the direction of the related Participants, with respect to some Book-Entry Securities which conflict with actions taken with respect to other Book-Entry Securities. CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS The following discussion contains summaries of certain legal aspects of mortgage loans that are general in nature. Because such legal aspects are governed in part by applicable state laws (which laws may differ substantially from one another), the summaries do not purport to be complete nor to reflect the laws of any particular state nor to encompass the laws of all states in which the Mortgage Properties may be situated. The summaries are qualified in their entirety by reference to the applicable federal and state laws governing the Mortgage Loans. GENERAL The Mortgage Loans will be secured by either deeds of trust or mortgages, depending upon the prevailing practice in the state in which the Mortgaged Property subject to a Mortgage Loan is located. A mortgage conveys legal title to or creates a lien upon the property to the mortgagee subject to a condition subsequent, i.e., the payment of the indebtedness secured thereby. There are two parties to a mortgage, the mortgagor, who is the borrower and homeowner, and the mortgagee, who is the lender. Under the mortgage instrument, the 56 148 mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a deed of trust is similar to a mortgage, a deed of trust has three parties, the borrower-homeowner called the trustor (similar to a mortgagor), a lender called the beneficiary (similar to a mortgagee), and a third-party grantee called the trustee. Under a deed of trust, the borrower grants the property, irrevocably until the debt is paid, in trust, generally with a power of sale, to the trustee to secure payment of the obligation. The trustee's authority under a deed of trust and the mortgagee's authority under a mortgage are governed by law, the express provisions of the deed of trust or mortgage, and, in some cases, the directions of the beneficiary. Some states use a security deed or deed to secure debt which is similar to a deed of trust except that it has only two parties: a grantor (similar to a mortgagor) and a grantee (similar to a mortgagee). Mortgages, deeds of trust and deeds to secure debt are not prior to liens for real estate taxes and assessments and other charges imposed under governmental police powers. Priority between mortgages, deeds of trust and deeds to secure debt and other encumbrances depends on their terms in some cases and generally on the order of recordation of the mortgage, deed of trust or the deed to secure debt in the appropriate recording office. If so specified in the related Prospectus Supplement, a Mortgage Pool may include loans on units in cooperatives ("Cooperative Loans"). Cooperative Loans are evidenced by notes secured by security interests in shares issued by cooperatives, which are corporations entitled to be treated as housing cooperatives under federal tax law, and in the related proprietary leases or occupancy agreements granting rights to occupy specific dwelling units within the cooperative buildings. The security agreement will create a lien upon or grant a title interest in the property which it covers, the priority of which lien will depend on the terms of the agreement and the order of recordation in the appropriate recording office. Ownership of a unit in a cooperative is held through the ownership of stock in the corporation, together with the related proprietary lease or occupancy agreement. Such ownership interest is generally financed through a cooperative share loan evidenced by a promissory note and secured by an assignment of and a security interest in the proprietary lease or occupancy agreement and a security interest in the related cooperative shares. Each cooperative owns in fee or has a leasehold interest in the real property and improvements, including all separate dwelling units therein. The cooperative is responsible for property management and generally for the payment of real estate taxes, insurance and similar charges, the cost of which is shared by the owners. The cooperative building or underlying land may be subject to one or more mortgages (generally incurred in connection with the construction or purchase of the building) for which the cooperative is responsible. The interest of an occupant under proprietary leases or occupancy agreements is generally subordinate to that of the holder of such a mortgage or land lease. If the cooperative is unable to meet the payment obligations under such mortgage or any land lease, the holder of such mortgage or land lease could foreclose the mortgage or terminate the land lease, which may have the effect of terminating all proprietary leases or occupancy agreements. In the event of such foreclosure or termination, the value of any collateral held by a lender which financed the purchase by a tenant/shareholder of cooperative shares or, in the case of the Mortgage Loans, the collateral securing the Cooperative Loans could be eliminated or significantly reduced. FORECLOSURE IN GENERAL Foreclosure of a mortgage is generally accomplished by judicial action. The action is initiated by the service of legal pleadings upon all parties having an interest in the real property. Delays in completion of the foreclosure may occasionally result from difficulties in locating necessary parties defendant. Judicial foreclosure proceedings are often not contested by any of the parties defendant. Foreclosure of a deed of trust or a security deed is generally accomplished by a non-judicial trustee's sale under a specific provision in the deed of trust or security deed which authorizes the sale of the property to a third party upon any default by the borrower under the terms of the note, deed of trust or security deed. 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 default and notice of sale. In addition, the trustee must provide notice in some states to any other individual having an interest in the real property, including any junior lienholders. 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 57 149 expenses incurred in enforcing the obligations. Generally, state laws require that a copy of the notice of sale be posted on the property and sent to all parties having an interest in the real property. In case of foreclosure under either a mortgage or a deed of trust, the sale by the referee or other designated officer or by the trustee is often a public sale. 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 subject to the lien of the mortgage or the deed of trust may have deteriorated during the foreclosure proceedings, a third party may be unwilling to purchase the property at a foreclosure sale. Potential buyers may further question the prudence of purchasing property at a foreclosure sale as a result of several court decisions permitting such a sale to be rescinded as a fraudulent conveyance. However, in light of the recent United States Supreme Court decision in BFP v. Resolution Trust Corporation, as Receiver of Imperial Federal Savings Ass'n., the ability to rescind a sale under fraudulent conveyance theories should be limited to state law. The Supreme Court in BFP held that a non-collusive, regularly-conducted foreclosure sale under applicable state law was not a fraudulent transfer under Section 548 of the current United States Bankruptcy Code and, therefore, could not be rescinded in favor of the bankrupt's estate, even though the foreclosure sale was held while the debtor was insolvent and not more than one year prior to the filing of the bankruptcy petition, because the price paid at such a foreclosure sale is conclusively presumed to constitute "reasonably equivalent value" under the United States Bankruptcy Code. For these reasons, it is common for the lender to purchase the property from the trustee or referee for an amount equal to the principal amount of the indebtedness secured by the mortgage or deed of trust, accrued and unpaid interest and the expenses of foreclosure. The lender thereby assumes the burdens of ownership, including the obligation to pay taxes, obtain casualty insurance and to make such repairs at its own expense as are necessary to render the property suitable for sale. In some states there is a statutory minimum purchase price which the lender may offer for the property. The lender will commonly obtain the services of a real estate broker and pay the broker's commission in connection with the sale of the property. Depending upon market conditions, the ultimate proceeds of the sale of the property may not equal the lender's investment in the property. Under the Pooling and Servicing Agreement (and the REMIC Provisions of the Code, if applicable), the Servicer may hire an independent contractor to operate any REO Property. The costs of such operation may be significantly greater than the cost of direct operation by the Servicer. Some states impose prohibitions or limitations on remedies available to the mortgagee, including the right to recover the debt from the mortgagor. See "Anti-Deficiency Legislation and Other Limitations on Lenders" herein. JUNIOR MORTGAGES Some of the Mortgage Loans may be secured by second or more junior mortgages or deeds of trust, which are subordinate to first or more senior mortgages or deeds of trust held by other lenders. The rights of the holders, as the holders of a junior deed of trust or a junior mortgage, are subordinate in lien and in payment to those of the holder of the senior mortgage or deed of trust, including the prior rights of the senior mortgagee or beneficiary to receive and apply hazard insurance and condemnation proceeds and, upon default of the mortgagor, to cause a foreclosure on the property. Upon completion of the foreclosure proceedings by the holder of the senior mortgage the junior mortgagee's or junior beneficiary's lien will be extinguished unless the junior mortgagee satisfies the defaulted senior loan or asserts its subordinate interest in a property in foreclosure proceedings. See "Foreclosure in General" herein. Furthermore, the terms of the second or more junior mortgage or deed of trust are subordinate to the terms of the first or senior mortgage or deed of trust. In the event of a conflict between the terms of the senior mortgage or deed of trust and the junior mortgage or deed of trust, the terms of the senior mortgage deed of trust will govern generally. Upon a failure of the mortgagor or trustor to perform any of its obligations, the senior mortgagee or beneficiary, subject to the terms of the senior mortgage or deed of trust, may have the right to perform the obligation itself. Generally, all sums so expended by the mortgagee or beneficiary become part of the indebtedness secured by the mortgage or deed of trust. To the extent a senior mortgagee expends 58 150 such sums, such sums will generally have priority over all sums due under the junior mortgage. See "Special Considerations -- Risks of the Mortgages -- Nature of Security" for a further discussion of certain risks associated with junior mortgage loans. RIGHTS OF REDEMPTION In some states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors are given a statutory period in which to redeem the property from the foreclosure sale. In some states, redemption may occur only upon payment of the entire principal balance of the loan, accrued interest and expenses of foreclosure. In other states, redemption may be authorized if the former borrower pays only a portion of the sums due. The effect of a statutory right of redemption is to diminish the ability of the lender to sell the foreclosed property. The rights of redemption would defeat the title of any purchaser from the lender subsequent to foreclosure or sale under a deed of trust. Consequently, the practical effect of the redemption right is to force the lender to retain the property and pay the expenses of ownership until the redemption period has expired. ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS Certain states have imposed statutory prohibitions which limit the remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some states, statutes limit the right of the beneficiary or mortgagee to obtain a deficiency judgment against the borrower following foreclosure or sale under a deed of trust. A deficiency judgment would be a personal judgment against the former borrower equal in most cases to the difference between the net amount realized upon the public sale of the real property and the amount due to the lender. Other statutes require the beneficiary or mortgagee to exhaust the security afforded under a deed of trust or mortgage by foreclosure in an attempt to satisfy the full debt before bringing a personal action against the borrower. Finally, other statutory provisions limit any deficiency judgment against the former borrower following a judicial sale to the excess of the outstanding debt over the fair market value of the property at the time of the public sale. The purpose of these statutes is generally to prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment against the former borrower as a result of low or no bids at the judicial sale. In addition to laws limiting or prohibiting deficiency judgments, numerous other statutory provisions, including the federal bankruptcy laws and state laws affording relief to debtors, may interfere with or affect the ability of the secured mortgage lender to realize upon collateral and/or enforce a deficiency judgment. For example, with respect to federal bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a mortgage loan on a debtor's residence by paying arrearages within a reasonable time period and reinstating the original mortgage loan payment schedule even though the lender accelerated the mortgage loan and final judgment of foreclosure had been entered in state court provided no sale of the residence had yet occurred prior to the filing of the debtor's petition. Some courts with federal bankruptcy jurisdiction have approved plans, based on the particular facts of the reorganization case, that effected the curing of a mortgage loan default by paying arrearages over a number of years. Courts with federal bankruptcy jurisdiction have also indicated that the terms of a mortgage loan secured by property of the debtor may be modified. These courts have allowed modifications that include reducing the amount of each monthly payment, changing the rate of interest, altering the repayment schedule, forgiving all or a portion of the debt and reducing the lender's security interest to the value of the residence, thus leaving the lender a general unsecured creditor for the difference between the value of the residence and the outstanding balance of the loan. Generally, however, the terms of a mortgage loan secured only by a mortgage on real property that is the debtor's principal residence may not be modified pursuant to a plan confirmed pursuant to Chapter 13 except with respect to mortgage payment arrearages, which may be cured within a reasonable time period. As a result of an amendment to the federal bankruptcy laws effective for cases filed after October 22, 1995, a Chapter 11 plan similarly may not modify the terms of a mortgage loan secured only by a mortgage on real property that is the debtor's principal residence. The Code provides priority to certain tax liens over the lien of the mortgage. In addition, substantive requirements are imposed upon mortgage lenders in connection with the origination and the servicing of 59 151 mortgage loans by numerous federal and some state consumer protection laws. These laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and related statutes. These federal laws impose specific statutory liabilities upon lenders who originate mortgage loans and who fail to comply with the provisions of the applicable laws. In some cases, this liability may affect assignees of the Mortgage Loans. ENFORCEABILITY OF CERTAIN PROVISIONS Unless otherwise specified in the related Prospectus Supplement, all of the Mortgage Loans will include a debt-acceleration clause, which permits the lender to accelerate the debt upon a monetary default of the borrower, after the applicable cure period. The courts of all states will enforce clauses providing for acceleration in the event of a material payment default. However, courts of any state, exercising equity jurisdiction, may refuse to allow a lender to foreclose a mortgage or deed of trust when an acceleration of the indebtedness would be inequitable or unjust and the circumstances would render the acceleration unconscionable. Some courts have imposed general equitable principles to limit the remedies available in connection with foreclosure. These equitable principles are generally designed to relieve the borrower from the legal effect of his defaults under the loan documents. For example, some courts have required that the lender undertake affirmative and expensive actions to determine the causes for the borrower's default and the likelihood that the borrower will be able to reinstate the loan. In some cases, courts have substituted their judgment for the lenders' judgment and have required that lenders reinstate loans or recast payment schedules in order to accommodate borrowers who are suffering from temporary financial disability. In other cases, courts have limited the right of the lenders to foreclose if the default under the mortgage instrument or deed of trust is not monetary, such as the borrower's failure to maintain adequately the property or the borrower's execution of a second mortgage or deed of trust affecting the property. Finally, some courts have been willing to relieve a borrower from the consequences of the default if the borrower has not received adequate notice of the default. The Mortgage Loans will generally contain due-on-sale clauses, which permit the lender to accelerate the maturity of the Mortgage Loan if the borrower sells, transfers, or conveys the related Mortgaged Property. The enforceability of these clauses has been the subject of legislation or litigation in many states. Some jurisdictions automatically enforce such clauses, while others require a showing of reasonableness and hold, on a case-by-case basis, that a "due on sale" clause may be invoked only where a sale threatens the legitimate security interests of the lender. The Garn-St. Germain Depository Institutions Act of 1982 purports to preempt state laws which prohibit the enforcement of "due-on-sale" clauses in certain loans made after October 15, 1982. The Servicer may thus be able to accelerate the Mortgage Loans that were originated after that date and contain a "due-on-sale" provision, upon transfer of an interest in the related Mortgaged Property, regardless of its ability to demonstrate that a sale threatens its legitimate security interest. Each Pooling and Servicing Agreement will provide that the Servicer, on behalf of the Trustee, will enforce any right of the Trustee as the mortgagee of record to accelerate a Mortgage Loan in the event of a sale or other transfer of the related Mortgaged Property unless, in the Servicer's reasonable judgment, doing so would materially increase the risk of default or delinquency on, or materially impair the security for, such Mortgage Loan. APPLICABILITY OF USURY LAWS Title V of the Depository Institutions Deregulation and Monetary Control Act of 1980, enacted in March, 1980 ("Title V"), provides that state usury limitations shall not apply to certain types of residential first mortgage loans originated by certain lenders after March 31, 1980. A similar federal statute was in effect with respect to mortgage loans made during the first three months of 1980. The statute authorized any state to reimpose interest rate limits by adopting, before April 1, 1983, a law or constitutional provision which expressly rejects application of the federal law. In addition, even where Title V is not so rejected, any state is authorized by the law to adopt a provision limiting discount points or other charges on mortgage loans covered by Title V. Certain states have taken action to reimpose interest rate limits and/or to limit discount points or 60 152 other charges. The Depositors will represent and warrant in each Pooling and Servicing Agreement that each related Mortgage Loan was originated in compliance with applicable state law in all material respects. ENVIRONMENTAL LEGISLATION Certain states impose a statutory lien for associated costs on property that is the subject of a cleanup action by the state on account of hazardous wastes or hazardous substances released or disposed of on the property. Such a lien will generally have priority over all subsequent liens on the property and, in certain of these states, will have priority over prior recorded liens including the lien of a mortgage. In addition, under federal environmental legislation and possibly under state law in a number of states, a secured party which takes a deed in lieu of foreclosure or acquires a mortgaged property at a foreclosure sale may be liable for the costs of cleaning up a contaminated site. Although such costs could be substantial, it is unclear whether they would be imposed on a secured lender (such as the related Trust). CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following is a general summary of certain federal income tax consequences of the purchase, ownership and disposition of the Securities. This summary does not purport to address all federal income tax matters that may be relevant to purchasers of Securities, and is directed solely to investors that hold the Securities as capital assets within the meaning of section 1221 of the Internal Revenue Code of 1986 (the "Code") and to investors that do not hold the Securities as part of a larger transaction such as a hedge, straddle or conversion transaction. It does not address tax consequences that may be relevant to particular holders subject to special treatment under federal income tax law (such as, banks and other financial institutions, insurance companies, regulated investment companies, real estate investment trusts, dealers in securities, tax-exempt entities, or investors whose "functional currency" is not the United States dollar). Prospective investors are urged to consult their own tax advisers in determining the federal, state, local, foreign and any other tax consequences to them of the purchase, ownership and disposition of the Securities. The following summary is based upon current provisions of the Code, the Treasury regulations promulgated thereunder and judicial or ruling authority, all of which are subject to change, which change may be retroactive. No ruling on any of the issues discussed below will be sought from the Internal Revenue Service ("IRS"). The tax consequences of the purchase, ownership and disposition of the Securities will depend in large part on whether or not an election is made to treat the issuing Trust or any segregated pool of assets therein as one or more real estate mortgage investment conduits ("REMICs") within the meaning of section 860D of the Code. A Trust or any segregated pool of assets therein as to which one or more REMIC elections will be made will be referred to as a "REMIC Pool" and its related Securities will be referred to as "REMIC Certificates." FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES REMIC ELECTIONS Upon issuance of each series of REMIC Certificates, special federal tax counsel to the Trust specified in the related Prospectus Supplement ("Tax Counsel") will deliver its opinion generally to the effect that, assuming compliance with all provisions of the Agreement, each related REMIC Pool will qualify as a REMIC, and the related REMIC Certificates will be treated either as regular interests in the REMIC ("Regular Certificates") or as residual interests in the REMIC ("Residual Certificates"). Regular Certificates generally will be treated as debt instruments issued by the REMIC. The holder of a Residual Certificate will be subject to the special rules described below under which the holder generally will take into account for Federal income tax purposes its pro rata share of the net income or loss of the REMIC. If a REMIC Pool fails to comply with one or more of the ongoing requirements of the Code for REMIC status during any taxable year, the Code provides that the REMIC Pool will not be treated as a REMIC for 61 153 such year and thereafter. In that event, such REMIC Pool may be taxable as a separate corporation under Treasury regulations, and the related REMIC Certificates may not be accorded the status or given the tax treatment described below. Although the Code authorizes the Treasury Department to issue regulations providing relief in the event of an inadvertent termination of REMIC status, no such regulations have been issued. Any such relief, moreover, may be accompanied by sanctions, such as the imposition of a corporate tax on all or a portion of the REMIC Pool's income for the period in which the requirements for such status are not satisfied. The Agreement will include provisions designed to maintain the REMIC Pool's status as a REMIC. It is not anticipated that the status of any REMIC Pool as a REMIC will be terminated. STATUS OF REMIC CERTIFICATES It is unclear whether property acquired by foreclosure held pending sale and the amount held in a Spread Account or Reserve Fund (or similar accounts) would be considered to be part of the Mortgage Loans, or whether such assets otherwise would receive the same treatment as the Mortgage Loans, for purposes of sections 856(c)(6)(B) and 7701(a)(19)(C) of the Code. REGULAR CERTIFICATES General. In general, stated interest, original issue discount and market discount received or accrued on a Regular Certificate will be ordinary income, and principal payments on a Regular Certificate will be a return of capital to the extent of the Certificateholder's basis in the Regular Certificate allocable to those payments. A holder of a Regular Certificate must use the accrual method of accounting with respect to that Certificate regardless of the method of accounting otherwise used. Original Issue Discount. Certain REMIC Regular Certificates may be issued with "original issue discount" within the meaning of section 1273(a) of the Code. A holder of a Regular Certificate having original issue discount generally must include original issue discount in ordinary income as it accrues in advance of receipt of the cash attributable to the discount regardless of the method of accounting otherwise used. Section 1272(a)(6) of the Code requires that a prepayment assumption be used with respect to Mortgage Loans held by a REMIC in computing the accrual of original issue discount on REMIC Regular Certificates issued by that REMIC, and that adjustments be made in the amount and rate of accrual of such discount to reflect differences between the actual prepayment rate and the prepayment assumption. The prepayment assumption is to be determined in a manner prescribed in Treasury regulations; those regulations have not been issued. The legislative history of the REMIC provisions indicates that the regulations will provide that the prepayment assumption used with respect to a REMIC Regular Certificate must be the same as that used in pricing the initial offering of such REMIC Regular Certificate. The prepayment assumption used by the Company in reporting original issue discount for each series of REMIC Regular Certificates (the "Prepayment Assumption") will be consistent with this standard and will be disclosed in the related Prospectus Supplement. The Company makes no representation that the Mortgage Loans will in fact prepay at a rate conforming to the Prepayment Assumption or at any other rate. The amount of original issue discount, if any, on a Regular Certificate is the excess of its "stated redemption price at maturity" over its "issue price." The issue price of a Regular Certificate in a particular class is the first price at which a substantial amount of the Regular Certificates of that class is first sold to the public (excluding bond houses, brokers and underwriters). Unless specified otherwise in the Prospectus Supplement, the Company will determine original issue discount by including the amount paid by an initial Regular Certificateholder for accrued interest that relates to a period prior to the issue date of the Regular Certificate in the issue price of a Regular Certificate and will include in the stated redemption price at maturity any interest paid on the first Payment Date to the extent such interest is attributable to a period in excess of the number of days between the issue date and such first Payment Date. The stated redemption price of a Regular Certificate is equal to the total of all payments due on the Regular Certificate other than payments of qualified stated interest. "Qualified stated interest" includes interest that is unconditionally payable at least annually at a single fixed rate, or in the case of a variable rate debt instrument, at a "qualified 62 154 floating rate," an "objective rate," a combination of a single fixed rate and one or more "qualified floating rates" or one "qualified inverse floating rate," or a combination of "qualified floating rates" that generally does not operate in a manner that accelerates or defers interest payments on such REMIC Regular Certificate. In the case of REMIC Regular Certificates bearing adjustable interest rates, the determination of the total amount of original issue discount and the timing of the inclusion thereof will vary according to the characteristics of such REMIC Regular Certificates. Generally, original issue discount will accrue on the Certificates at the same rate it would accrue if the Certificates were to bear interest at a fixed rate based on the rate that would be in effect if the index remained constant after the Closing Date (or, possibly, the pricing date). Notwithstanding the general definition, under a statutory de minimis rule, original issue discount on a Regular Certificate will be treated as zero if such discount is less than 0.25 percent of the stated redemption price at maturity of such Regular Certificate multiplied by its weighted average life. The weighted average life of a Regular Certificate is apparently computed for this purpose as the sum, for all distributions included in the stated redemption price at maturity of the Regular Certificate, of the amounts determined by multiplying (i) the number of complete years (rounding down for partial years) from the issue date until the date on which each such distribution is scheduled to be made (presumably taking into account the Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount of such distribution and the denominator of which is the Regular Certificate's stated redemption price at maturity. The Treasury regulations pertaining to original issue discount (the "OID Regulations") provide a special application of the de minimis rule for certain debt instruments where the interest payable for the first period is at a rate less than that which applies in all other periods. In such cases, the OID Regulations provide that the Regular Certificate would be treated as having de minimis original issue discount if the greater of (i) the excess of its stated principal amount over its issue price or (ii) the amount of the "foregone interest" does not exceed the amount that would otherwise be treated as de minimis original issue discount under the rules described above, but treating as the stated redemption price at maturity for that purpose, the sum of the issue price and the greater of the amounts in clauses (i) or (ii). Foregone interest for this purpose is the amount of additional stated interest that would be required to be payable on the Regular Certificate during the period of the teaser rate, interest holiday or other shortfall so that all stated interest would be qualified stated interest. If original issue discount is treated as zero under these rules, all stated interest payments are treated as qualified stated interest and the actual amount of original issue discount must be allocated to the principal distributions on the Regular Certificate and, when each such distribution is received, gain equal to the discount allocated to such distribution will be recognized. One or more classes of Regular Certificates may entitle the holder to payments of a portion of the interest but not a corresponding portion of the principal of Mortgage Loans held in the REMIC Pool ("Stripped REMIC Certificates") or otherwise provide for interest that is disproportionately high relative to the principal amount. Although the matter is not free from doubt, the Company intends to treat all of the payments on such Certificates as part of their stated redemption price at maturity. If such Certificates are not treated as having original issue discount, it is likely that such Certificates will be treated as having been issued at a premium. See "Regular Certificates -- Premium" below. In addition, the holder of such a Certificate may be entitled to recognize a loss (which may be treated as a capital loss) at such time and in such amount as it is determined that the Certificateholder's adjusted basis exceeds all future payments to be received on such REMIC Certificates, assuming no future prepayments occur with respect to the Mortgage Loans. A Certificateholder generally must include in gross income for any taxable year the sum of the "daily portions" of the original issue discount that accrue on the Regular Certificate for each day during the Certificateholder's taxable year on which the Regular Certificate is held. A calculation will be made of the portion of the original issue discount that accrues on each Regular Certificate during each "accrual period," which in general is the period corresponding to the period between Payment Dates or other interest compounding periods. Under the OID Regulations, the accrual periods may be of any length and may vary in length over the term of the debt instrument, provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs on the final day of an accrual period or on the first day 63 155 of an accrual period. The original issue discount accruing during any accrual period is divided by the number of days in the period to determine the daily portion of original issue discount for each day in the period. For a Regular Certificate, original issue discount accruing in an accrual period is the excess, if any, of (i) the sum of (a) the present value of the remaining payments to be made on the Regular Certificate as of the end of that accrual period and (b) the payments made on the Regular Certificate during the accrual period that are included in the stated redemption price at maturity of the Regular Certificate, over (ii) the adjusted issue price of the Regular Certificate at the beginning of the accrual period. For this purpose, the present value of the remaining payments to be made on a Regular Certificate is calculated based on (i) the Prepayment Assumption, (ii) the yield to maturity of the Regular Certificate as of the Closing Date (taking into account the Prepayment Assumption) and (iii) events (including actual prepayments) that have occurred prior to the end of the accrual period. The adjusted issue price of a Regular Certificate at the beginning of any accrual period equals the issue price of the Regular Certificate increased by the aggregate amount of original issue discount that accrued on that Regular Certificate in all such prior periods and reduced by the amount of payments included in the stated redemption price at maturity of the Regular Certificate in prior accrual periods. In general, the daily portions of original issue discount required to be included in income by the holder of a Regular Certificate (other than a Stripped REMIC Certificate) will increase if prepayments on the Mortgage Loans exceed the Prepayment Assumption, and generally will decrease (but not below zero for any period) if those prepayments are slower than the Prepayment Assumption. A subsequent purchaser of a Regular Certificate at a price greater than the Regular Certificate's "adjusted issue price" but less than its remaining stated redemption price also will be required to include in gross income the daily portions of the original issue discount on the Regular Certificate. With respect to such a purchaser, the daily portion for any day is reduced by an amount equal to the product of (i) such daily portion and (ii) a fraction, the numerator of which is the amount, if any, by which the price paid by such purchaser for the Regular Certificate exceeds the adjusted issue price and the denominator of which is the excess of the sum of all amounts payable on the Regular Certificate after the purchase date, other than payments of qualified stated interest, over the Regular Certificate's adjusted issue price. The adjusted issue price of a Regular Certificate on any given day is equal to its issue price, increased by all original issue discount previously includible with respect to such Regular Certificate and reduced by the amount of all previous distributions with respect to such Regular Certificate included in such Regular Certificate's stated redemption price at maturity. Market Discount. The holder of a Regular Certificate purchased at a market discount will be subject to the market discount provisions of the Code. In general, "market discount" is the amount by which the stated redemption price at maturity (or, in the case of a Regular Certificate issued with original issue discount, the revised issue price) of the Regular Certificate exceeds the purchaser's basis in a Regular Certificate. The holder of a Regular Certificate that has market discount generally will be required to include accrued market discount in ordinary income to the extent payments includible in the stated redemption price at maturity of such Regular Certificate are received. The purchaser of a Regular Certificate that has market discount also will be required to treat a portion of any gain on a sale or exchange of the Regular Certificate as ordinary income to the extent of the market discount that accrued to the date of disposition and was not previously included in ordinary income. Unless otherwise provided in Treasury regulations that have not yet been issued, it is anticipated that market discount on a Regular Certificate will accrue at the holder's option (i) on the basis of a constant interest rate, (ii) ratably based on the ratio of stated interest payable in the current period to all interest remaining to be paid in the case of a Regular Certificate issued without original issue discount, or (iii) ratably based on the ratio of the amount of original issue discount accrued in the current period to all remaining original issue discount in the case of a Regular Certificate issued with original issue discount, in each case computed taking into account the Prepayment Assumption. A purchaser of a Regular Certificate that has market discount may be required to defer recognition of a portion of interest expense attributable to any indebtedness incurred or continued to purchase or carry the Regular Certificate. The amount of this deferred interest expense in any taxable year generally would not exceed the accrued market discount for the year, and the deferred expense generally is allowed as a deduction not later than the year in which the related market discount income is recognized. Alternatively, a 64 156 Certificateholder may elect to include market discount in income currently as it accrues on all market discount obligations that the Certificateholder acquires in that taxable year or thereafter, in which case the rules described above relating to the treatment of market discount, as well as the interest deferral rule will not apply. Notwithstanding the above rules, market discount on a Regular Certificate will be considered to be zero under a de minimis rule that is similar to the de minimis rule applied for purposes of determining whether a Regular Certificate has original issue discount. Premium. A Regular Certificate purchased at a cost greater than its remaining stated redemption price at maturity is considered to be purchased at a premium. The holder of such a Regular Certificate may elect under section 171 of the Code to amortize the premium under the constant interest method. That election will apply to all premium obligations that the holder owns or subsequently acquires. In addition, it appears that the same rules that apply to the accrual of market discount on installment obligations are intended to apply in amortizing premium on installment obligations such as the Regular Certificates, although it is unclear whether the alternatives to the constant interest method described above under "Market Discount" are available. The portion of the premium deductible pursuant to an election under section 171 of the Code and allocable to a particular period will be treated as a reduction in interest payments on the Regular Certificate during that period. A Certificateholder who neither has in place nor makes an election to amortize bond premium could be required to allocate that premium among the principal payments to be received on that instrument and recognize the premium as a loss (which would be a capital loss if the Certificate is held as a capital asset) as those principal payments are received. Interest Election. Under the OID Regulations, Regular Certificateholders generally may elect to include all accrued interest on a Regular Certificate in gross income using the constant yield to maturity method. For purposes of this election, interest includes stated interest, original issue discount, de minimis original issue discount, market discount, de minimis market discount and unstated interest, as adjusted by any premium. If a Certificateholder makes such an election and (i) the Regular Certificate has amortizable bond premium, the Certificateholder is deemed to have made an election to amortize bond premium or (ii) the Regular Certificate has market discount, the Certificateholder is deemed to have made an election to include market discount in income currently. See "Premium" and "Market Discount" above. A Regular Certificateholder should consult its tax adviser before making this election. Sale or Exchange of Regular Certificates. If a holder sells or exchanges a Regular Certificate, the Certificateholder will recognize gain or loss equal to the difference, if any, between the amount realized and its adjusted basis in the Regular Certificate. The adjusted basis of a Regular Certificate generally will equal its initial cost, increased by any original issue discount or market discount previously included in the seller's gross income with respect to the Regular Certificate and reduced by the payments previously received on the Regular Certificate, other than payments of qualified stated interest, and by any amortized premium. In general, except as described above with respect to market discount, and except for certain financial institutions subject to section 582(c) of the Code, any gain or loss on the sale or exchange of a Regular Certificate recognized by an investor who holds the Regular Certificate as a capital asset (within the meaning of section 1221 of the Code), will be capital gain or loss and will be long-term or short-term depending on whether the Regular Certificate has been held for more than one year. Gain from the disposition of a Regular Certificate that otherwise might be capital gain will be treated as ordinary income to the extent that the gain does not exceed the excess, if any, of (i) the amount that would have been includible in the gross income of the holder if the yield on the Regular Certificate were 110% of the applicable federal rate under section 1274(d) of the Code as of the date of purchase, over (ii) the amount of income actually includible in the gross income of such holder with respect to the Regular Certificate. Treatment of Subordinated Certificates. As described above under "Description of the Securities -- Credit Enhancement -- Subordination," certain series of REMIC Certificates may contain one or more classes of Regular REMIC Certificates that are subordinate to one or more other classes of Regular REMIC Certificates (the "Subordinated Certificates" and "Senior Certificates," respectively), Holders of Subordinated Certificates will be required to report income with respect to such Certificates on the accrual method of accounting without giving effect to delays or reductions in distributions attributable to defaults and 65 157 delinquencies on the Mortgage Loans, except to the extent it can be established that such amounts are uncollectible. In addition, holders of Subordinated Certificates will be required to treat amounts transferred to any Reserve Fund as having been distributed to them. As a result, the amount of income reported by a holder of a Subordinated Certificate in any period could significantly exceed the amount of cash distributed to such holder in that period. The holder generally will be allowed a loss (or will be allowed to report less income) where either principal or previously accrued interest are determined to be uncollectible with respect to the Subordinated Certificate, although the timing and character of such losses (or reductions in income) are uncertain. TAXATION OF RESIDUAL CERTIFICATES General. Generally, holders of Residual Certificates ("Residual Certificateholders") will take into account as ordinary income or loss for federal income tax purposes, the "daily portions" of REMIC taxable income or net loss. The daily portions of REMIC taxable income or net loss for a Residual Certificateholder are determined by allocating to each day in any calendar quarter its ratable portion of the REMIC's taxable income or net loss for such calendar quarter, and by allocating such daily portion among the Residual Certificateholders in proportion to their respective holdings of Residual Certificates of a series on that day. A Residual Certificateholder also must include in income any distributions from the REMIC in excess of the Residual Certificateholder's adjusted basis in the Residual Certificate. Certain adjustments to the income of a subsequent holder of a Residual Certificate may be required when the Residual Certificate was purchased at a price that is greater or less than the adjusted basis (determined in the manner discussed below) that the Residual Certificate would have if held by an initial holder. Nevertheless, in the absence of Treasury regulations or clarifying legislation, it is uncertain whether any adjustments would be required. Method of Computing REMIC Taxable Income. In general, REMIC taxable income is determined in the same manner as the taxable income of an individual having the calendar year as the taxable year and using the accrual method of accounting, with certain exceptions. For these purposes, REMIC taxable income generally means the excess of (i) the REMIC's gross income (including interest, original issue discount and market discount, if any) on the Mortgage Loans owned by the REMIC, plus income on reinvestment of cash flows and investment of assets in the Reserve Fund and amortization of any premium with respect to the Regular Certificates, over (ii) deductions, including interest and original issue discount on the Regular Certificates, servicing fees on the Mortgage Loans, other administrative expenses, and deduction or amortization of premium, if any, with respect to the Mortgage Loans or the mortgage loans. Under the Treasury regulations pertaining to the REMIC provisions of the Code (the "REMIC Regulations"), section 163(d) of the Code does not apply to limit a REMIC's deductions for any interest expense, and for purposes of determining a REMIC's bad debt deduction, debt owed to the REMIC is not treated as nonbusiness debt under section 166(d) of the Code. In addition, under the REMIC Regulations, any gain or loss from the disposition of any asset, including a qualified mortgage (as defined in section 860G(a)(3) of the Code) or a permitted investment (as defined in section 860G(a)(5) of the Code) is treated as ordinary gain or loss. For purposes of determining REMIC taxable income or net loss, the REMIC's aggregate basis in the collateral is the fair market value thereof immediately after transfer to the REMIC. Under the REMIC Regulations, that basis is equal to the aggregate of the issue prices of all regular and residual interests in the REMIC. Generally, the 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 "Regular Certificates -- Original Issue Discount," without regard to the de minimis rule described therein. The REMIC will have discount income in respect of a Mortgage Loan if, in general, the basis of the REMIC allocable thereto is exceeded by the unpaid principal balance thereof. In respect of Mortgage Loans that have discount, REMIC taxable income will take into account discount that accrues during the taxable year as it accrues under a constant yield method. Generally, if the REMIC's basis allocable to a Mortgage Loan exceeds the unpaid principal balance thereof, the REMIC will be considered to have acquired the Mortgage Loan at a premium equal to the amount of the excess, which premium may be amortized under a constant interest method as described above under "Regular Certificates -- Premium." 66 158 The taxable income recognized by a Residual Certificateholder in any taxable year will be affected by, among other factors, the relationship between the timing of recognition of interest and original issue discount and market discount income (or amortization of premium) with respect to Mortgage Loans, and the timing of deductions for interest (including original issue discount) on the Regular Certificates. Where the Mortgage Loans bear interest at a fixed rate, mismatching of that timing may result from the fact that interest expense deductions, expressed as a percentage of the outstanding principal amount of the REMIC Regular Certificates, will increase over time as the earlier classes of REMIC Regular Certificates are paid, whereas interest income with respect to any given Mortgage Loan generally will remain constant over time as a percentage of the outstanding principal amount of that loan. When there is more than one class of Regular Certificates that pay principal sequentially, this mismatching of income and deductions is likely to occur in the early years following issuance of the REMIC Certificates when principal payments are being made in respect of the earlier classes of REMIC Regular Certificates particularly if the Mortgage Loans were acquired at a discount. In those circumstances, Residual Certificateholders may require sufficient other sources of cash to pay any federal, state or local income or franchise taxes due as a result of the mismatching. The mismatching of income and deductions described in this paragraph, if present with respect to a series of REMIC Certificates, may have a significant adverse effect upon a Residual Certificateholder's after-tax rate of return. Losses. The amount of any net loss of the REMIC that may be taken into account by a Residual Certificateholder is limited to the Residual Certificateholder's 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. Any loss so disallowed may be carried over indefinitely, and may be used only to offset any income generated by the Residual Certificate. The adjusted basis of a Residual Certificate is equal to the amount paid therefor, increased by the amount of any income allocated to the Residual Certificateholder and decreased (but not below zero) by the amount of cash distributed, the fair market value of property distributed and any loss allocated to the Residual Certificateholder. The ability of a Residual Certificateholder that is an individual or a closely held corporation to take into account losses from the REMIC also may be subject to other limitations under the Code. Limitations on Offset or Exemption of REMIC Income. A portion of the REMIC taxable income includible in determining the Federal income tax liability of a Residual Certificateholder will be subject to special treatment. That portion, referred to as the "excess inclusion," is equal to the excess, if any, of the Residual Certificateholder's allocable share of REMIC taxable income for a calendar quarter, over the sum of the "daily accruals" with respect to the Residual Certificate for days during the calendar quarter that the Residual Certificateholder held the Residual Certificate. The daily accruals for each day during a calendar quarter generally are determined by allocating to each day in the calendar quarter its ratable portion of the product of (i) 120% of the long-term applicable federal rate that would have applied to the Residual Certificate (if it were a debt instrument issued on the day the REMIC was formed) under section 1274(d) of the Code, and (ii) the adjusted issue price of the Residual Certificate at the beginning of the quarterly period. The adjusted issue price of the Residual Certificate at the beginning of a quarter is the issue price of the Residual Certificate (generally determined as if the Residual Certificate were a debt instrument), increased by the amount of the daily accruals of REMIC income for all prior quarters and decreased (but not below zero) by any distributions made with respect to the REMIC Residual Certificate prior to the beginning of the quarterly period. To the extent provided in Treasury regulations that have not yet been issued if the aggregate value of the REMIC Residual Certificates is not considered to be "significant," then a Residual Certificateholder's entire share of REMIC taxable income will be treated as excess inclusions. Unless otherwise stated in the Prospectus Supplement with respect to any Residual Certificates offered by such Prospectus Supplement, it is expected that the value of the Residual Certificates will not be significant. The portion of a Residual Certificateholder's REMIC taxable income consisting of the "excess inclusion" may not be offset by other deductions, including net operating losses or net operating loss carryforwards, on the Residual Certificateholder's federal income tax return. Further, if the Residual Certificateholder is an organization subject to the tax on unrelated business income imposed by section 511 of the Code, the Residual Certificateholder's excess inclusion will be treated as unrelated business taxable income of the Residual 67 159 Certificateholder. Pursuant to the REMIC Regulations, if a Residual Certificateholder is a member of an affiliated group filing a consolidated income tax return, the taxable income of the affiliated group cannot be less than the sum of the excess inclusions attributable to all residual interests held by the members of the affiliated group. In addition, under Treasury regulations that have not yet been issued, if a real estate investment trust owns a Residual Certificate, a portion of dividends paid by the real estate investment trust would be treated as excess inclusions in the hands of its shareholders with the same consequences as excess inclusions attributed directly to a Residual Certificateholder. Similar rules will apply to Residual Certificates that are held by regulated investment companies, common trust funds or certain cooperative corporations. Prohibited Transactions and Other Taxes on the REMIC. Income from certain transactions by the REMIC, called prohibited transactions, will not be part of the calculation of income or loss includible in the federal income tax returns of Residual Certificateholders, but rather will be taxed directly to the REMIC at a 100% rate. In addition, no loss or deduction allocable to a prohibited transaction is taken into account in determining the taxable income or net loss of the REMIC. Prohibited transactions generally include (i) subject to certain limited exceptions (which exceptions include the liquidation of the REMIC, a "clean-up call" of one class of interests and the repurchase of a defective mortgage loan), the disposition of any mortgage loan; (ii) the receipt of income attributable to any asset that is not the type of mortgage loan or other investment that the REMIC is permitted to hold; (iii) the receipt of compensation for services; or (iv) the receipt of gain from disposition of temporary investments between Payment Dates other than pursuant to a qualified liquidation. In addition, a 100% tax is imposed on the amount of any contribution of property made to the REMIC after its initial formation (excluding certain specified contributions such as cash payments in the nature of guarantees). An additional tax may be imposed on income from property acquired by the REMIC upon foreclosure of a Mortgage Loan. Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a Residual Certificate, the Residual Certificateholder will recognize gain or loss equal to the excess, if any, of the amount realized over the adjusted basis (as described above under "Losses") of the REMIC Residual Certificate at the time of the sale or exchange. In addition, a cash distribution to a Residual Certificateholder from the REMIC is treated as gain from the sale or exchange of the Residual Certificate to the extent that the amount of the distribution exceeds such adjusted basis. For corporate taxpayers, there is no preferential rate afforded to long-term capital gains. For individual taxpayers, all long-term capital gains are subject to a maximum nominal rate of tax of 28% (although the effective rate may be somewhat higher in certain circumstances). In addition, in certain circumstances, if a Residual Certificate is transferred to a "Disqualified Organization" (as defined below), a tax will be imposed on the transferor. See "Residual Certificates Transferred to or Held by Disqualified Organizations." Under the REMIC Regulations, a transfer of a "noneconomic residual interest" to a U.S. Person is disregarded for all federal tax purposes unless no significant purpose of the transfer was to impede the assessment or collection of tax. A Residual Certificate is treated as constituting a noneconomic residual interest for this purpose unless, at the time of the transfer, (i) the present value of the expected future distributions on the Residual Certificate is no less than the product of the present value of the "anticipated excess inclusions" with respect to the Residual Certificate and the highest rate applicable to domestic corporations for the year in which the transfer occurs and (ii) the transferor reasonably expects that the transferee will receive distributions from the REMIC in an amount sufficient to satisfy the income tax liability on any "excess inclusions" at or after the time the liability accrues. The anticipated excess inclusions are the excess inclusions that are anticipated to accrue to each calendar quarter, or portion thereof, following the transfer of the Residual Certificate, determined as of the date the Residual Certificate is transferred and based on events that have occurred up to the time of the transfer and on the Prepayment Assumption and any required or permitted clean up calls or required liquidation. See "Taxation of REMIC Certificates -- Original Issue Discount" and "Limitations on Offset or Exemption of REMIC Income." 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 (had "improper knowledge") that the transferee would be unwilling or unable to pay taxes due on its share of the taxable income of the REMIC. Under the REMIC Regulations, a transferor is presumed not to have improper knowledge if (i) the transferor conducted, at the 68 160 time of the transfer, a reasonable investigation of the financial condition of the transferee and, as a result of the investigation, the transferor 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 (ii) the transferee represents to the transferor that it understands that, as the holder of the noneconomic 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. Under the REMIC Regulations, a transfer of a Residual Certificate that has "tax avoidance potential" to a person who is not a U.S. Person is disregarded for all federal tax purposes. For this purpose a Residual Certificate has tax avoidance potential unless at the time of the transfer (i) the transferor reasonably expects that, for each excess inclusion, the REMIC will distribute to the transferee Residual Certificateholder, an amount that will equal at least thirty percent of the excess inclusion, and that each such amount will be distrusted at or after the time at which the excess inclusion accrues and not later than the close of the calendar year following the calendar year of accrual. The REMIC Regulations provide that a transferor has a reasonable expectation if the thirty percent test would be satisfied were the REMIC's qualified mortgages to prepay at each rate within a range of rates from fifty percent to two hundred percent of the rate assumed under section 1272(a)(6) of the Code with respect to the qualified mortgages (or the rate that would have been assumed had the mortgages been issued with original issue discount). A transfer of a Residual Certificate to a person who is not a U.S. Person, however, is not disregarded if income from the Residual Certificate is subject to tax under section 871(b) or section 882 of the Code in the hands of the transferee. Moreover, if a person who is not a U.S. Person transfers a Residual Certificate to a U.S. Person, and if the transfer has the effect of allowing the transferor to avoid tax on accrued excess inclusions, then the transfer is disregarded and the transferor continues to be treated as the owner of the Residual Certificate for purposes of sections 871(a), 881, 1441 and 1442 of the Code. As used herein, a U.S. Person is a citizen or resident of the United States, a corporation or partnership organized in or under the laws of the United States or any political subdivision thereof or an estate or trust the income of which is includible in gross income for U.S. tax purposes regardless of its source. See "Limitations on Offset or Exemption of REMIC Income" and "Other Matters Relating to REMIC Certificates -- Taxation of Certain Foreign Investors -- Residual Certificates." Except as provided in Treasury regulations that have not yet been issued, the wash sale rules of section 1091 of the Code will apply to the disposition of a Residual Certificate where, during the period beginning six months before the sale or disposition of the REMIC Residual Certificate and ending six months after the sale or disposition, the seller of the Residual Certificate acquires (or enters into any other transaction that results in the application of 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 comparable to a Residual Certificate. Application of these wash sale rules would result in the deferral of recognition of any loss on the sale of the Residual Certificate. RESIDUAL CERTIFICATES TRANSFERRED TO OR HELD BY DISQUALIFIED ORGANIZATIONS Regardless of whether any gain or loss is recognized on the transfer of a Residual Certificate, a tax is imposed on the transferor of a Residual Certificate where the transfer is to certain specified entities generally including governmental entities or any other entities that are exempt from U.S. tax including the tax on unrelated business income (collectively, "Disqualified Organizations"). If a transfer of a Residual Certificate to a Disqualified Organization is made through an agent for the Disqualified Organization (including a nominee, broker or middleman), then the tax is imposed on the agent. The tax is imposed at the highest rate applicable to domestic corporations based on the present value of expected excess inclusions (see "Limitations on Offset or Exemption of REMIC Income" above). The REMIC Regulations provide that the anticipated excess inclusions must be determined as of the date the Residual Certificate is transferred and must be based on (i) events that have occurred up to the time of the transfer, (ii) the Prepayment Assumption, and (iii) any required or permitted clean up calls, or required qualified liquidation. In addition, the REMIC Regulations provide that the present value of the anticipated excess inclusions is determined by discounting the anticipated excess inclusions from the end of each remaining calendar quarter in which those excess inclusions are 69 161 expected to accrue to the date the disqualified organization acquires the Residual Certificate. The discount rate to be used for this present value computation is the applicable Federal rate as specified in section 1274(d)(1) of the Code that would apply to a debt instrument that was issued on the date the disqualified organization acquired the residual interest and whose term ended on the close of the last quarter in which excess inclusions were expected to accrue with respect to the Residual Certificate. The transferor is relieved of the tax liability if it receives in good faith from the transferee (i) an affidavit stating that the transferee is not a Disqualified Organization or (ii) the transferee's social security number and an affidavit stating that the social security number is that of the transferee. Because a requirement for qualification as a REMIC is that reasonable efforts must be made to ensure that Residual Certificates are not held by Disqualified Organizations, the ability of a Residual Certificate to be transferred may be conditioned upon the Trustee's receipt of an affidavit representing that the proposed transferee is not a Disqualified Organization. If a Residual Certificate is held by a "pass-through entity" (such as a partnership, trust, real estate investment trust, regulated investment company, or common trust fund), a tax is imposed at the highest rate applicable to domestic corporations on the pass-through entity if a record holder of interest in the entity is a Disqualified Organization. The tax would be imposed on the portion of the excess inclusion income relating to the Residual Certificate allocable to the Disqualified Organization interest holder. If a nominee holds an interest in a pass-through entity for a Disqualified Organization, then the tax is imposed on the nominee. Any tax imposed on a pass-through entity is deductible against the gross amount of ordinary income of the pass-through entity. No tax, however, will be imposed during any period if (i) the record holder of an interest in the pass-through entity furnishes to the pass-through entity an affidavit that the record holder is not a Disqualified Organization, (ii) the record holder's social security number and an affidavit stating that the social security number is that of the record holder, and (iii) during such period, the pass-through entity does not have actual knowledge that the affidavit is false. OTHER MATTERS RELATING TO REMIC CERTIFICATES Liquidation of the REMIC. If a REMIC adopts a plan of complete liquidation, and sells all of its assets (other than cash) within the 90-day period beginning on the date of the adoption of the plan of liquidation, then the REMIC will not be subject to an entity-level tax on the sale of its assets, provided that the REMIC credits or distributes in liquidation all of the sale proceeds plus its cash (other than amounts retained to meet claims) to holders of all REMIC Certificates within the 90-day period. It is unclear whether that the termination of the REMIC will be treated as a sale or exchange of a Residual Certificateholder's Residual Certificate, in which case, a Residual Certificateholder would be entitled to recognize a gain (or loss) at that time equal to the amount of the excess (or shortfall) of the cash or fair market value of other property distributed in liquidation over the adjusted basis in the Residual Certificate remaining upon termination of the REMIC. The amount of such gain (or loss) may be treated as a capital loss for certain taxpayers, although not for financial institutions subject to the provisions of section 582(c) of the Code. Reporting and Other Administrative Matters. For federal income tax purposes, the REMIC must adopt a calendar year as its taxable year and must file annual federal information and tax returns and other reports with the IRS and furnish reports to Certificateholders as specified in temporary Treasury regulations (the "Temporary Regulations") and Treasury regulations. Pursuant to Treasury regulations, reports will be made annually to the IRS and to holders of record that are not excepted from the reporting requirements regarding information with respect to the interest paid or accrued on the Regular Certificates, original issue discount, if any, accrued on the Regular Certificates, the portion of the Regular Certificates (and income therefrom) that is eligible for each special tax status described above, and certain information necessary to compute the accrual of any market discount or the amortization of any premium on the Regular Certificates. Quarterly reports will be made to the holders of Residual Certificates with regard to REMIC taxable income, excess inclusions and allocable investment expenses of the REMIC required to be taken into account by the holder of the Residual Certificate. These quarterly reports will be filed with the IRS on an annual basis. The Temporary Regulations also provide that quarterly reports must be made of the REMIC's investment expenses to holders of Regular Certificates where such allocations are required. The REMIC also is subject to the procedural and administrative rules of the Code applicable to partnerships including the determination of any adjustments to, 70 162 among other things, items of REMIC income gain, loss, deduction or credit by the IRS in a unified administrative proceeding. In this connection, a holder of a Residual Certificate may be required to act as the "tax matters person" of the REMIC. Certain Noncorporate Investors. Under section 67 of the Code, an individual, estate or trust may deduct certain itemized deductions only to the extent that the aggregate of these itemized deductions exceeds two percent of the taxpayer's adjusted gross income. These itemized deductions include expenses paid or incurred for the production or collection of income, or the management, conservation or maintenance of property held for the production of income. In the case of a REMIC, these deductions may include deductions for servicing expenses with respect to the Mortgage Loans, compensation paid to the Servicer of a series of Certificates, or other administrative expenses, if any, of the REMIC. In the case of a REMIC that is similar to a traditional single-class mortgage pass-through arrangement (including a pass-through arrangement with senior and subordinated interests), a pro rata portion of the expenses that are deductible under section 212 of the Code would be allocated among all of the holders of interests in the REMIC and would be taken into account by holders who are individuals, estates or trusts (where interests are held either directly or indirectly through certain pass-through entities) as a "gross-up" to income, against which deductions for those expenses would be available subject to the limitations of section 67 of the Code. Nevertheless, for other REMICs, these deductions would be allocated only to holders of the Residual Certificates. Taxation of Certain Foreign Investors -- Regular Certificates. For purposes of this discussion, a "Foreign Holder" is a Certificateholder who holds a REMIC Certificate and who is not (i) a citizen or resident of the United States, (ii) a corporation or partnership organized in or under the laws of the United States or any political subdivision thereof or (iii) an estate or trust the income of which is includible in gross income for U.S. tax purposes regardless of its source. A Foreign Holder that is not subject to Federal income tax as a result of any direct or indirect connection with the United States in addition to its ownership of a Regular Certificate will not be subject to federal income 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 does not own actually or constructively a 10% or greater interest in the Residual Certificates. To qualify for this tax exemption, the Foreign Holder will be required to provide 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 an IRS Form W-8 or substantially similar substitute form, generally must be provided in the year a payment occurs or in either of the two preceding years. 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 U.S. Federal income tax unless either (i) the Foreign Holder is a nonresident 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 (ii) the gain is effectively connected with the conduct by the Foreign Holder of a trade or business within the United States. It appears a Regular Certificate will not be includible in the estate of a Foreign Holder and would not be subject to U.S. estate taxes. Taxation of Certain Foreign Investors -- Residual Certificates. Amounts paid to Residual Certificateholders who are Foreign Holders are treated as interest for purposes of the 30% U.S. withholding tax. The U.S. Department of the Treasury has promulgated regulations that provide that interest payments to the holder of a Residual Certificate is treated as having been paid with respect to the obligations held by the REMIC for purposes of determining whether the payments are eligible for the portfolio interest exemption. Such regulations do not allow any payments representing the "excess inclusion" portion of the REMIC's income to be eligible for the portfolio interest exemption. In addition, a Residual Certificateholder will not be entitled to any exemption from the 30% withholding tax or a reduced treaty rate to the extent of that portion of REMIC taxable income that constitutes an "excess inclusion." See "Taxation of REMIC Certificates -- Taxation of Residual Certificates -- Limitations on Offset or Exemption of REMIC Income." If the amounts allocable to Residual Certificateholders who are Foreign Holders are effectively connected with the conduct of a trade or business within the United States by such Foreign Holders, 30% (or lower treaty rate) withholding will not 71 163 apply. Instead, the amounts allocable to such Foreign Holders will be subject to U.S. federal income tax at regular graduated rates. It is possible that the activities of the REMIC could by themselves result in the Residual Certificateholder's being considered to be conducting a trade or business in which case amounts paid to Residual Certificateholders would be so effectively connected. If 30% (or lower treaty rate) withholding is applicable, such amounts will be taken into account for purposes of withholding only when paid or otherwise distributed (or when the REMIC Residual Certificate is disposed of) under rules similar to those that govern withholding upon disposition of debt instruments that have original issue discount. However, the Code grants the U.S. Department of the Treasury authority to issue regulations requiring that the amounts includible be taken into account earlier than otherwise provided where necessary to prevent avoidance of tax. This latter rule may apply where the Residual Certificates do not have significant value. Backup Withholding. Under certain circumstances interest (and original issue discount, if any), principal or proceeds of the sale of a Regular Certificate may be subject to "backup withholding" of U.S. Federal income tax at a 31% rate. Backup withholding does not apply to corporations and certain other exempt recipients, which may be required to establish their exempt status. Backup withholding generally applies if, among other circumstances, a non-exempt Regular Certificateholder who is a U.S. person fails to furnish its taxpayer identification number or, when applicable, a Form 4224. Backup withholding generally does not apply to a Foreign Holder if the Foreign Holder provides the statement necessary to establish the exemption from federal income tax on interest on the Regular Certificate. Special backup withholding rules may apply when a payment is made through one or more financial institutions or by a custodian, nominee, broker or other agent of the beneficial owner of a Regular Certificate. 72 164 FEDERAL INCOME TAX CONSEQUENCES FOR NOTES AND CERTIFICATES AS TO WHICH NO REMIC ELECTION IS MADE CERTIFICATES AND NOTES If a REMIC election will not be made with respect to a Trust which issues both Notes and Certificates, upon the issuance of such Securities, Tax Counsel will deliver its opinion generally to the effect that, for federal income tax purposes, assuming compliance with all provisions of the related Agreement, (i) the Notes will be treated as indebtedness and (ii) the Trust will not be treated as an association or publicly traded partnership taxable as a corporation. The Depositors, the Representative, their affiliates and the Servicer will have agreed, and the holders of Notes and Certificates will agree by their purchase of Notes and Certificates, to treat the Trust as a partnership with the assets of the partnership being the assets held by the Trust, the partners of the partnership being the Certificateholders and the Notes being debt of the partnership, in each case for purposes of federal and state income tax, franchise tax and any other tax measured in whole or in part by income. The proper characterization, however, of the arrangement involving the Trust, the Notes and the Certificates is not clear because there is no authority on transactions closely comparable to that contemplated herein, and it is possible that the IRS could take the position that the Notes and one or more classes of Certificates represent interests in the assets of the Trust or that one or more classes of Certificates represent indebtedness. If one or more classes of Certificates with maturities different from the Notes are treated as indebtedness or a substitute for indebtedness, then the Trust may be treated as a "taxable mortgage pool" taxable as a corporation. If the Trust were taxable as a corporation for federal income tax purposes, the Trust would be subject to corporate income tax. Any such corporate income tax could materially reduce or eliminate cash that would otherwise be distributable with respect to the Notes and the Certificates (and the Certificateholders and possibly the Noteholders could be liable for any such tax that is unpaid by the Trust). The following discussion assumes that the Trust will be treated as a partnership with the assets of the partnership being the assets held by the Trust, the partners of the partnership being the Certificateholders and the Notes being debt of the partnership. The Notes will not be treated as assets described in section 7701(a)(19)(C) of the Code, and probably will not be treated as "real estate assets" within the meaning of section 856(c)(6)(B) of the Code. Income derived from the Notes probably will not be treated as "interest on obligations secured by mortgages on real property or on interests in real property" within the meaning of section 856(c)(3)(B) of the Code. For any Certificateholder that is a "real estate investment trust" within the meaning of section 856 of the Code, the related Certificates will be treated as "real estate assets" within the meaning of section 856(c)(6)(B) of the Code. However, no comparable authority exists that would allow a thrift institution that is a Certificateholder to treat the related Certificates as assets described in section 7701(a)(19)(C) of the Code. If any class of Certificates were treated as indebtedness, those Certificates would not be treated as assets described in section 7701(a)(19)(C) of the Code, and probably would not be treated as "real estate assets" within the meaning of section 856(c)(6)(B) of the Code. Income derived from the Certificates probably would not be treated as "interest on obligations secured by mortgages on real property or on interests in real property" within the meaning of section 856(c)(3)(B) of the Code. TAXATION OF THE NOTES The Notes and a Noteholder generally will be treated in the manner described above under "Federal Income Tax Consequences for REMIC Certificates -- Regular Certificates," except that the accrual method of accounting for income on the Notes will be required for cash method taxpayers and the 110% of the applicable federal rate rule described under "Sale or Exchange of Regular Certificates" will not apply. TAXATION OF THE CERTIFICATES PARTNERSHIP TAXATION Assuming the Trust is classified as a partnership for Federal income tax purposes, the Trust will not be subject to federal income tax as an entity. Instead, each Certificateholder will report on its federal income tax 73 165 return for each year during which the Certificateholders are deemed to be partners in the Trust such Certificateholder's distributive share of the items of income, gain, loss and deduction of the Trust. The characterization of an item of income, gain, loss or deduction (e.g., as capital gain or interest income) will usually be the same for the Certificateholders as it is for the Trust. Generally, a Certificateholder will include in its taxable year its share of the Trust's tax items of the Trust taxable year ending within or with such Certificateholder's taxable year. Generally, under relevant Treasury regulations, a partnership must adopt the taxable year of partners owning a majority interest in partnership profits and capital; if there is no such taxable year, it must adopt the taxable year of all partners owning five percent or more of the partnership profits or capital; if there is no such taxable year, it must adopt the taxable year that results in the least aggregate deferral of income to the partners. Although it is likely that these rules will result in the Trust's taxable year being the calendar year, it is impossible to predict the Trust's year with any certainty until the identity of the Certificateholders is known. Upon request, Certificateholders will be required to inform the Trust of their taxable year. FORMATION OF THE TRUST; CODE SECTION 708 TERMINATION; MORTGAGE LOANS PREMIUM The Depositors will be the initial partners in the Trust. The Depositors' bases in their respective Trust interests will equal their respective bases in the Mortgage Loans they transfer to the Trust. The Trust will execute and deliver the Certificates to the Depositors. The Trust will issue Notes and distribute the proceeds to the Depositors. The Depositors will then sell one or more classes of Certificates to the Certificateholders and may later sell a portion of one or more classes of Certificates to an affiliate. The first sale will probably cause the Trust to be terminated for tax purposes under section 708(b) of the Code which provides for the termination of a partnership if partners possessing at least a 50 percent interest in partnership capital and profits sell their interests within a twelve-month period. If the Trust is not terminated as a result of the first sale, it would be terminated as a result of the second sale. Upon a termination under section 708 of the Code, the Trust will be deemed to distribute the Mortgage Loans to its partners, the Certificateholders, in complete liquidation, and the Certificateholders will be deemed to recontribute the Mortgage Loans to a new tax partnership. Generally, the basis of assets received by a partner upon complete liquidation of a partnership equals the partner's basis in its partnership interest, reduced by any cash distributed to the partner as part of the same transaction. A partnership's basis in assets contributed to it by a partner equals the partner's basis in that asset. Thus, if the Trust is deemed terminated as a result of the sale of one or more classes of Certificates to Certificateholders, the related Certificateholders will be deemed to receive a distribution of an interest in the Mortgage Loans, to hold those Mortgage Loans with a basis equal to their fair market value and to recontribute the Mortgage Loans to the Trust with that basis. It is anticipated that initially the fair market value of the interest in the Mortgage Loans held by the Certificateholders exceed the basis of that interest in the hands of the Trust. The net effect of a section 708 termination thus is likely to increase the Trust's basis in the Mortgage Loans to reflect that excess. If the Trust is deemed to terminate after the sale of one or more classes of Certificates to Depositors' affiliate, the Trust's basis in its Mortgage Loans will be increased to also reflect the excess of the fair market value of the interest in Mortgage Loans indirectly sold to Depositors' affiliate over the Trust's initial basis in that interest. As discussed above, the net effect of a section 708 termination of the Trust in connection with the formation of the Trust will be to increase the Trust's basis in the Mortgage Loans. That increase will result in the basis of the Mortgage Loans being greater than their stated principal amount, so that the Mortgage Loans will be deemed held with a premium. That premium will result in the Trust recognizing a deduction over the life of the Mortgage Loans. PARTNERSHIP INCOME AND ALLOCATIONS The Trust's income will consist primarily of interest and finance charges earned on the Mortgage Loans (including appropriate adjustments for market discount, original issue discount, and bond premium) and any gain upon collection or disposition of the Mortgage Loans. The Trust's deductions will consist primarily of 74 166 interest accruing with respect to the Notes, servicing and other fees, premium deductions described immediately above and losses or deductions upon collection or disposition of the Mortgage Loans. The tax items of a partnership are allocable to the partners in accordance with the Code, Treasury regulations and the partnership agreement (here, the Trust Agreement and related documents). The allocations will be set forth in the Agreement and the related Prospectus Supplement. Additionally, most or all of the taxable income allocated to a Certificateholder that is a pension, profit sharing or employee benefit plan or other tax-exempt entity (including an individual retirement account) will constitute "unrelated business taxable income" generally taxable to such a holder under the Code. An individual taxpayer may generally deduct miscellaneous itemized deductions (which do not include interest expenses) only to the extent they exceed two percent of adjusted gross income, and, in addition, certain other limitations may apply. These limitations probably apply to an individual Certificateholders' respective share of expenses of the Trust (including fees to the Servicer) and might result in such holder being taxed on an amount of income that exceeds the amount of cash actually distributed to such holder over the life of the Trust. The Trust intends to make all tax calculations relating to income and allocations to Certificateholders on an aggregate basis. If the IRS were to require that such calculations be made separately for each Mortgage Loan, the Trust might be required to incur additional expense, but it is believed that there would not be a material adverse effect on Certificateholders. PREMIUM/DISCOUNT The Trust's basis in the Mortgage Loans may be greater or less than the remaining principal balance of the Mortgage Loans at the time of purchase. If so, the Mortgage Loans will have been acquired at a premium or discount, as the case may be. If any Mortgage Loans are deemed to be acquired by the Trust at a discount, the Trust will make an election that will result in any market discount on the Mortgage Loans being included in income currently as such discount accrues over the life of the Mortgage Loans. Accordingly, all discount, whether original issue discount or market discount, will be taxed as it accrues. As indicated above, the Trust will calculate its deductions attributable to the premium on an aggregate basis, but might be required to recompute it on a Mortgage Loan by Mortgage Loan basis. SECTION 708 TERMINATION As noted above, under section 708 of the Code, the Trust will be deemed to terminate for federal income tax purposes if 50 percent or more of the capital and profits interests of the Trust are sold or exchanged within a 12-month period. Such a termination may occur as a result of trades by the Certificateholders. The Trust will not comply with certain technical requirements that might apply when such a constructive termination occurs. As a result, the Trust may be subject to certain tax penalties and may incur additional expenses if it is required to comply with those requirements. Furthermore, the Trust might not be able to comply due to lack of data. DISPOSITION OF CERTIFICATES Generally, capital gain or loss will be recognized on a sale of Certificates in an amount equal to the difference between the amount realized and the seller's tax basis in the Certificates sold. A holder's tax basis in a Certificate will generally equal the holder's cost increased by the holder's share of net income of the Trust, and decreased by any distributions received with respect to such Certificate and by the holder's share of any net losses of the Trust. In addition, both the tax basis in the Certificate and the amount realized on a sale of a Certificate would include the holder's share of the Notes and other liabilities of the Trust. A holder acquiring Certificates at different prices may be required to maintain a single aggregate adjusted tax basis in such Certificates, and, upon sale or other disposition of some of the Certificates, allocate a portion of such aggregate tax basis to the Certificates sold (rather than maintaining a separate tax basis in each Certificate for purposes of computing gain or loss on a sale of that Certificate). 75 167 Any gain on the sale of a Certificate attributable to the holder's share of unrecognized accrued market discount, if any, on the Mortgage Loans would generally be treated as ordinary income to the holder and would give rise to special tax reporting requirements. The Trust does not expect to have any other assets that would give rise to such special reporting requirements. Thus, to avoid those special reporting requirements, the Trust will elect to include market discount in income as it accrues. If a holder of a Certificate is required to recognize an aggregate amount of income (not including income attributable to disallowed itemized deductions described above) over the life of the Certificate that exceeds the aggregate cash distributions with respect thereto, such excess will generally give rise to a capital loss upon the retirement of the Certificate. ALLOCATIONS BETWEEN TRANSFEREES In general, the Trust's taxable income and losses will be determined monthly and the tax items for a particular calendar month will be apportioned among the Certificateholders in proportion to the principal amount of Certificates or, in the case of Certificates that provide for the payment of amounts based on a notional principal amount, the notional principal amount, owned by them as of the first business day of the subsequent month. As a result, a holder purchasing Certificates may be allocated tax items (which will affect its tax liability and tax basis) attributable to periods before the actual transaction. The use of such a monthly convention may not be permitted by existing Treasury regulations. If a monthly convention is not allowed (or only applies to transfers of less than all of the partner's interest), taxable income or losses of the Trust might be reallocated among the Certificateholders. The Owner Trustee (technically acting on behalf of the Depositor that serves as the Tax Matters Partner) is authorized to revise the Trust's method of allocation between transferors and transferees to conform to a method permitted by the Code and Treasury regulations. TRANSFEREES OF CERTIFICATES/SECTION 754 ELECTION In the event that a Certificateholder sells its Certificates at a profit (loss), the purchasing Certificateholder will have a higher (lower) basis in the Certificates than the selling Certificateholder had. The tax basis of the Trust's assets will not be adjusted to reflect that higher (or lower) basis unless the Trust were to file an election under section 754 of the Code. In order to avoid the administrative complexities that would be involved in keeping accurate accounting records, as well as potentially onerous information reporting requirements, the Trust will not make such election. As a result, Certificateholders might be allocated a greater or lesser amount of Trust income than would be appropriate based on their own purchase price for Certificates. For example, a Certificateholder who purchases the Certificate from an original holder for a price that exceeds the principal amount with respect to such Certificate would be allocated the same amount of Trust income that the original Certificateholder would have been allotted and will not be entitled to amortize the excess of its purchase price over the principal amount with respect to such Certificate. Such holder will have a capital loss upon the final payment and cancellation of such Certificate. ADMINISTRATIVE MATTERS The Owner Trustee is required to keep or have kept complete and accurate books of the Trust. Such books will be maintained for financial reporting and tax purposes on an accrual basis and the fiscal year of the Trust will, unless another year is required under the rules discussed under "Partnership Taxation" above, be the calendar year. The Owner Trustee, acting on behalf of the Depositor that serves as the Trust's Tax Matters Partner, will file a partnership information return (IRS Form 1065) with the IRS for each taxable year of the Trust and will report each Certificateholder's allocable share of items of Trust income and expense to holders and the IRS on Schedule K-1. The Trust will provide the Schedule K-1 information to nominees that fail to provide the Trust with the information statement described below and such nominees will be required to forward such information to the beneficial owners of the Certificates. Generally, holders must file tax returns that are consistent with the information return filed by the Trust or be subject to penalties unless the holder notifies the IRS of all such inconsistencies. 76 168 One of the Depositors, as the Tax Matters Partner, will be responsible for representing the Certificateholders in any dispute with the IRS. The Code provides for administrative examination of a partnership as if the partnership were a separate and distinct taxpayer. Generally, the statute of limitations for partnership items does not expire before three years after the date on which the partnership information return is filed. Any adverse determination following an audit of the return of the Trust by the appropriate taxing authorities could result in an adjustment of the returns of the Certificateholders causing the Certificateholders to pay additional tax, interest and possibly, penalties. Under certain circumstances, a Certificateholder may be precluded from separately litigating a proposed adjustment to the items of the Trust. An adjustment could also result in an audit of a Certificateholder's returns and adjustments of items not related to the income and losses of the Trust. FOREIGN CERTIFICATEHOLDERS The ownership by Foreign Holders of Certificates may subject the Trust and Certificateholders to burdensome U.S. withholding tax and reporting requirements. BACKUP WITHHOLDING Distributions made on the Certificates and proceeds from the sale of the Certificates will be subject to a backup withholding tax of 31% if, in general, the Certificateholder fails to comply with certain identification procedures, unless the holder is an exempt recipient under applicable provisions of the Code as described above under "Federal Income Tax Consequences for REMIC Certificates -- Other Matters Relating to REMIC Certificates-Backup Withholding." CERTAIN STATE TAX CONSEQUENCES Each holder of a Security may be liable for state and local income taxes payable in the state or locality in which it is a resident or conducts or is deemed to conduct business and where an election is not made to treat the Trust as a REMIC, a holder of a Security representing an ownership interest in the related Trust may also be liable for such taxes in any state or locality in which the Trust conducts or is deemed to conduct business. The income tax laws of each state and locality may differ from the above discussion of federal income tax laws so each prospective purchaser of a Security should consult its own tax counsel with respect to potential state and local income taxes payable as a result of its purchase of a Security. ERISA CONSIDERATIONS The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and Section 4975 of the Code impose certain requirements on employee benefit plans and certain other plans and arrangements, including individual retirement accounts and annuities, Keogh plans and collective investment funds and insurance company general or separate accounts in which such plans, accounts or arrangements are invested, that are subject to ERISA and/or Section 4975 of the Code ("Plans"), and on persons who are fiduciaries with respect to such Plans, in connection with the investment of "plan assets" of such Plans. ERISA generally imposes on Plan fiduciaries certain general fiduciary requirements, including those of investment prudence and diversification and the requirement that a Plan's investments be made in accordance with the documents governing the Plan. Generally, any person who has discretionary authority or control respecting the management or disposition of Plan assets, and any person who provides investment advice with respect to such assets for a fee, is a fiduciary with respect to such Plan assets. ERISA and Section 4975 of the Code also prohibit a broad range of transactions involving assets of a Plan and persons ("Parties in Interest") who have certain specified relationships to the Plan, unless a statutory or administrative exemption is available. Certain Parties in Interest that participate in a prohibited transaction may be subject to a penalty imposed under ERISA and/or an excise tax imposed pursuant to Section 4975 of the Code, unless a statutory or administrative exemption is available. These prohibited transactions generally are set forth in Section 406 of ERISA and Section 4975 of the Code. 77 169 Any Plan fiduciary or other investor considering whether to purchase any Securities on behalf of or with "plan assets" of any Plan should consult with its counsel and refer to the applicable Prospectus Supplement for guidance regarding the ERISA considerations applicable to the Securities offered thereby. Certain employee benefit plans, such as governmental plans (as defined in Section 3(32) of ERISA) and, if no election has been made under Section 410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not subject to the requirements of ERISA or Section 4975 of the Code. Accordingly, assets of such plans may be invested in the Securities without regard to the ERISA considerations described herein and in the applicable Prospectus Supplement, subject to the provisions of other applicable federal and state law. However, any such plan which is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code is subject to the prohibited transaction rules set forth in Section 503 of the Code. LEGAL INVESTMENT Unless otherwise specified in the related Prospectus Supplement, no Class of Securities of a Series will constitute "mortgage related securities" under the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because the related Mortgage Pool will include Mortgage Loans that are secured by second Mortgages. Investors should consult their own legal advisers in determining whether and to what extent any Class of Securities of a Series constitutes legal investments for such investors. USE OF PROCEEDS Unless otherwise specified in the related Prospectus Supplement, substantially all of the net proceeds to be received from each sale of the Series of Securities will be received, directly or indirectly, by the Depositors. In the aggregate, the Originators will contribute or otherwise transfer the related Mortgage Loans to the Depositors in return for cash, stock or other property as specified in the related Prospectus Supplement. PLAN OF DISTRIBUTION The Securities of each Series may be sold to or through underwriters (the "Underwriters") by a negotiated firm commitment underwriting and public reoffering by the Underwriters or such other underwriting arrangement as may be specified in the related Prospectus Supplement or may be placed either directly or through agents. The Depositors intend that Securities will be offered through such various methods from time to time and that offerings may be made concurrently through more than one of such methods or that an offering of a particular Series of Securities may be made through a combination of such methods. The distribution of Securities 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 such prevailing market prices or in negotiated transactions or otherwise at varying prices to be determined at the time of sale. In connection with the sale of the Securities, Underwriters or agents may receive compensation in the form of discounts, concessions or commissions. Underwriters may sell Securities to certain dealers at prices less a concession. Underwriters may allow and such dealers may reallow a concession to certain other dealers. Underwriters, dealers and agents that participate in the distribution of the Securities of a Series may be deemed to be underwriters and any discounts or commissions received by them from the Depositors or the related Trust and any profit on the resale of the Securities by them may be deemed to be underwriting discounts and commissions under the Securities Act of 1933. Any such Underwriters or agents will be identified, and any such compensation received from the Depositors or the related Trust will be described, in the related Prospectus Supplement. Under agreements which may be entered into by the Depositors and, if so specified in the related Prospectus Supplement, by the Originators, Underwriters and agents who participate in the distribution of the 78 170 Securities may be entitled to indemnification by the Depositors or the Originators, as the case may be, against certain liabilities, including liabilities under the Securities Act of 1933. The Underwriters may, from time to time, buy and sell Securities, but there can be no assurance that an active secondary market will develop and there is no assurance that any such market, if established, will continue. RATINGS Each Class of Securities of a Series will be rated at their initial issuance in one of the four highest categories by at least one Rating Agency. 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. No person is obligated to maintain the rating on any Security, and, accordingly, there can be no assurance that the ratings assigned to a Security upon initial issuance will not be lowered or withdrawn by a Rating Agency at any time thereafter. In general, ratings address credit risk and do not represent any assessment of the likelihood or rate of principal prepayments. LEGAL MATTERS Certain legal matters relating to the Securities will be passed upon for the Depositors and EquiCredit by Hutchins, Wheeler & Dittmar, A Professional Corporation, Boston, Massachusetts. 79 171 INDEX OF PRINCIPAL DEFINITIONS
TERM PAGE - ----------------------------------------------------------------------------------- ---------- Accrual Period..................................................................... 6,37 Accrual Securities................................................................. 6,37 Actuarial Mortgage Loan............................................................ 20 Adjustable Rate Mortgages.......................................................... 19 Advance............................................................................ 10,43 ARMs............................................................................... 19 Available Payment Amount........................................................... 45 Bankruptcy Plan.................................................................... 20 Balloon Loans...................................................................... 16 Barnett Banks...................................................................... 24 Basic Principal Amount............................................................. 7,38,45 Book-Entry Securities.............................................................. 7,37,55 Cash Collateral Account............................................................ 50 Cash Collateral Lender............................................................. 50 Cede............................................................................... 7,37 Certificates....................................................................... 36 Class.............................................................................. 2,5 Closing Date....................................................................... 5 Code............................................................................... 11,61 Collection Account................................................................. 44 Combined Loan-to-Value Ratio....................................................... 19 Commission......................................................................... 3 Company............................................................................ 14 Cooperative Loans.................................................................. 57 Credit Provider.................................................................... 48 Curtailments....................................................................... 6,37 Custodian.......................................................................... 40 Cut-off Date....................................................................... 5 Debt-to-Income Ratio............................................................... 28 Definitive Securities.............................................................. 56 Depositors......................................................................... 4 Determination Date................................................................. 6 Disqualified Organization.......................................................... 69 DTC................................................................................ 7,37,55 Due Period......................................................................... 6,37 Eligible Account................................................................... 42 ERISA.............................................................................. 12,77 EquiCredit......................................................................... 1,4,24 EquiCredit Corporation............................................................. 24 Equity Protection Act.............................................................. 17 Event of Nonpayment................................................................ 54 Excess Spread...................................................................... 42 FHLMC.............................................................................. 53 Fitch.............................................................................. 11,13 Fixed Monthly Debt................................................................. 28 FNMA............................................................................... 35
80 172
TERM PAGE - ----------------------------------------------------------------------------------- ---------- Gross Margin....................................................................... 20 Holders............................................................................ 7 Home Equity Loan Ratio............................................................. 19 Illinois Land Trust................................................................ 38 Indenture Trustee.................................................................. 4 Index.............................................................................. 20 Indirect Participants.............................................................. 7,37,55 Insolvency Laws.................................................................... 17 Insurance Proceeds................................................................. 7,38 Insurer............................................................................ 49 IRS................................................................................ 61 Issuer............................................................................. 4 Letter of Credit................................................................... 49 Letter of Credit Issuer............................................................ 49 Liquidated Mortgage Loan........................................................... 7,38 Liquidation Proceeds............................................................... 7,38 Majority in Aggregate Voting Interest.............................................. 54 Market Discount.................................................................... 64 Maximum Mortgage Rate.............................................................. 20 Minimum Mortgage Rate.............................................................. 20 Monthly Deposit Date............................................................... 5,43 Monthly Payments................................................................... 6,37 Monthly Period..................................................................... 43 Moody's............................................................................ 11,13 Mortgage........................................................................... 1,8 Mortgage File...................................................................... 38 Mortgage Interest Rate............................................................. 8 Mortgage Loan...................................................................... 1,5,8 Mortgage Loan Losses............................................................... 45 Mortgage Loan Schedule............................................................. 38 Mortgage Pool...................................................................... 1,5,8 Mortgaged Property................................................................. 1,8 Mortgagor.......................................................................... 14 Mortgage related securities........................................................ 12 Net Liquidation Proceeds........................................................... 7,38 Nonrecoverable Advances............................................................ 44 Notes.............................................................................. 36 OID Regulations.................................................................... 63 Original issue discount............................................................ 62 Original Pool Principal Balance.................................................... 8,19 Originator......................................................................... 1,4 OSCC-Florida....................................................................... 24 Owners............................................................................. 55 Owner Trustee...................................................................... 4,23 Participants....................................................................... 7,37,55 Parties in Interest................................................................ 77 Partnership........................................................................ 11 Pass-through entity................................................................ 70
81 173
TERM PAGE - ----------------------------------------------------------------------------------- ---------- Payment Cap........................................................................ 20 Payment Date....................................................................... 5,45 Percentage Interest................................................................ 7,36 Periodic Cap....................................................................... 20 Permitted Instruments.............................................................. 42 Plans.............................................................................. 77 Pooling and Servicing Agreement.................................................... 23 Pool Insurance Policy.............................................................. 49 Pool Insurer....................................................................... 49 Pool Principal Balance............................................................. 47 Prefunding Account................................................................. 9,46 Prepayment Assumption.............................................................. 62 Prepayment Period.................................................................. 37,45 Primary Servicing Portfolio........................................................ 35 Principal and Interest Account..................................................... 42 Principal Prepayments.............................................................. 6,37 Qualified Substitute Mortgage Loan................................................. 39 Quality Control Audits............................................................. 34 Rating Agency...................................................................... 11,13 Real estate assets................................................................. 12 Record Date........................................................................ 6 Regular Certificates............................................................... 62 Released Mortgaged Property Proceeds............................................... 7,38 Relief Act......................................................................... 18 REMIC.............................................................................. 11,61 REMIC Certificates................................................................. 61 REMIC Regulations.................................................................. 66 REO Properties..................................................................... 9 Representative..................................................................... 1,4 Representative's Yield............................................................. 10 Reserve Fund....................................................................... 49 Residual Certificateholders........................................................ 66 Residual Certificates.............................................................. 61 Rule of 78s Mortgage Loan.......................................................... 20 Rules.............................................................................. 55 Securities......................................................................... 1 Securities Insurance Policy........................................................ 48 Securities Interest Rate........................................................... 5,36 Senior Liens....................................................................... 11,15 Senior Certificates................................................................ 65 Senior Securities.................................................................. 50 Series............................................................................. 1 Servicer........................................................................... 1,4 Servicer Termination Event......................................................... 54 Servicing Advances................................................................. 43 Servicing Fee...................................................................... 10,51 Simple Interest Mortgage Loan...................................................... 20 SMMEA.............................................................................. 78
82 174
TERM PAGE - ----------------------------------------------------------------------------------- ---------- S&P................................................................................ 11,13 Special Hazard Policy.............................................................. 49 Special Payment Amount............................................................. 45 Special Payment Date............................................................... 22,45 Special Payments................................................................... 22,45 Special Record Date................................................................ 45 Spread Account..................................................................... 49 Standard hazard insurance.......................................................... 51 Stripped REMIC Certificates........................................................ 63 Subordinated Certificates.......................................................... 65 Subordinated Securities............................................................ 50 Substitution Adjustment............................................................ 40 Successor Servicer................................................................. 55 Tax Counsel........................................................................ 61 Title V............................................................................ 60 Transfer Agreement................................................................. 5,38 Trust.............................................................................. 1,4 Trust Agreement.................................................................... 23 Trustee............................................................................ 4,23 Underwriters....................................................................... 78 Underwriting Program............................................................... 27 Weighted average life.............................................................. 23
83 175 NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE REPRESENTATIVE, EITHER DEPOSITOR OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY BY ANY ONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT. ------------------ TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUPPLEMENT Summary of Terms............................ S-4 Risk Factors................................ S-19 Description of the Mortgage Pool............ S-21 Mortgage Pool Statistics.................... S-23 Certain Yield and Prepayment Considerations............................ S-35 The Originators and the Servicer-Origination, Foreclosure and Loss Experience................................ S-41 Description of the Certificates............. S-43 The Trustee................................. S-57 The Securities Insurance Policy and the Insurer................................... S-57 ERISA Considerations........................ S-60 Legal Investment............................ S-63 Use of Proceeds............................. S-63 Underwriting................................ S-63 Experts..................................... S-64 Ratings..................................... S-64 Legal Matters............................... S-64 Appendix A.................................. A-1 Appendix B.................................. B-1 Annex I..................................... I-1 PROSPECTUS Available Information....................... 3 Reports to Holders.......................... 3 Incorporation of Certain Documents by Reference................................. 3 Summary of Prospectus....................... 4 Risk Factors................................ 13 Description of the Mortgage Pools........... 19 Certain Yield and Prepayment Considerations............................ 22 The Trusts.................................. 23 The Depositors, the Servicer, the Representative and the Originators........ 24 Description of the Securities............... 36 Certain Legal Aspects of the Mortgage Loans..................................... 56 Certain Federal Income Tax Consequences..... 61 Certain State Tax Consequences.............. 77 ERISA Considerations........................ 77 Legal Investment............................ 78 Use of Proceeds............................. 78 Plan of Distribution........................ 78 Ratings..................................... 79 Legal Matters............................... 79
UNTIL JUNE 19, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS AND A PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND A PROSPECTUS SUPPLEMENT WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. EQCC HOME EQUITY LOAN TRUST 1997-1 $196,833,000 CLASS A-1 CERTIFICATES 6.31% PASS-THROUGH RATE $18,259,000 CLASS A-2 CERTIFICATES 6.61% PASS-THROUGH RATE $127,073,000 CLASS A-3 CERTIFICATES 6.84% PASS-THROUGH RATE $47,407,000 CLASS A-4 CERTIFICATES 7.16% PASS-THROUGH RATE $25,494,000 CLASS A-5 CERTIFICATES 7.31% PASS-THROUGH RATE $33,989,000 CLASS A-6 CERTIFICATES 7.56% PASS-THROUGH RATE $50,000,000 CLASS A-7 CERTIFICATES 7.12% PASS-THROUGH RATE $101,043,000 CLASS A-10 CERTIFICATES ADJUSTABLE PASS-THROUGH RATE EQCC RECEIVABLES CORPORATION EQCC ASSET BACKED CORPORATION DEPOSITORS EQUICREDIT CORPORATION OF AMERICA SERVICER SALOMON BROTHERS INC CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS PRUDENTIAL SECURITIES INCORPORATED - ------------------------ PROSPECTUS SUPPLEMENT MARCH 21, 1997 -----END PRIVACY-ENHANCED MESSAGE-----