10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
Commission File No. 1-31753

CapitalSource Inc.

(Exact name of registrant as specified in its charter)

Delaware	35-2206895
(State of Incorporation)	(I.R.S. Employer Identification No.)

4445 Willard Avenue, 12th Floor
Chevy Chase, MD 20815
(Address of Principal Executive Offices, Including Zip Code)
(800) 370-9431

(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:

(Title of Each Class)	(Name of Exchange on Which Registered)
Common Stock, par value $0.01 per share	New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes  o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes  þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

þ Large accelerated filer	o Accelerated filer
o Non-accelerated filer	o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes   þ No

The aggregate market value of the Registrant’s Common Stock, par value $0.01 per share, held by nonaffiliates of the Registrant, as of June 30, 2007 was $3,041,811,254.

As of February 15, 2008, the number of shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding was 224,734,693.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of CapitalSource Inc.’s Proxy Statement for the 2008 annual meeting of shareholders, a definitive copy of which will be filed with the SEC within 120 days after the end of the year covered by this Form 10-K, are incorporated by reference herein as portions of Part III of this Form 10-K.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	2
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	35
Item 2.	Properties	35
Item 3.	Legal Proceedings	37
Item 4.	Submission of Matters to a Vote of Security Holders	37
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	37
Item 6.	Selected Financial Data	40
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	74
	Management Report on Internal Controls Over Financial Reporting	76
	Report of Independent Registered Public Accounting Firm on Internal Controls Over Financial Reporting	77
Item 8.	Financial Statements and Supplementary Data	78
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	142
Item 9A.	Controls and Procedures	142
Item 9B.	Other Information	142
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	143
Item 11.	Executive Compensation	144
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	144
Item 13.	Certain Relationships and Related Transactions, and Director Independence	144
Item 14.	Principal Accounting Fees and Services	144
PART IV
Item 15.	Exhibits and Financial Statement Schedules	145
	Signatures	146
	Index to Exhibits	147
	Certifications

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PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K, including the footnotes to our audited consolidated financial statements included herein, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to numerous assumptions, risks, and uncertainties. All statements contained in this Form 10-K that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “expect,” “estimate,” “plan,” and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results) involve risks, uncertainties and contingencies, many of which are beyond our control which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such statements for a variety of factors, including without limitation: changes in economic or market conditions; continued or worsening disruptions in credit markets may make it difficult for us to obtain debt financing on attractive terms or at all and could prevent us from optimizing the amount of leverage we employ; movements in interest rates and lending spreads may adversely affect our borrowing strategy; we may be unsuccessful in pursuing our deposit funding strategy, despite significant efforts; competitive and other market pressures could adversely affect loan pricing; the nature, extent, and timing of any governmental actions and reforms, or changes in tax laws or regulations affecting REITs; hedging activities may result in reported losses not offset by gains reported in our consolidated financial statements; and other factors described in this Form 10-K and documents filed by us with the SEC. All forward-looking statements included in this Form 10-K are based on information available at the time the statement is made.

We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

The information contained in this section should be read in conjunction with our audited consolidated financial statements and related notes and the information contained elsewhere in this Form 10-K, including that set forth under Item 1A, Risk Factors.

ITEM 1.   BUSINESS

Overview

We are a commercial finance, investment and asset management company focused on the middle market. We operate as a real estate investment trust (“REIT”) and provide senior and subordinate commercial loans, invest in real estate and residential mortgage assets, and engage in asset management and servicing activities.

We operate as three reportable segments: 1) Commercial Finance, 2) Healthcare Net Lease, and 3) Residential Mortgage Investment. Our Commercial Finance segment comprises our commercial lending business activities; our Healthcare Net Lease segment comprises our direct real estate investment business activities; and our Residential Mortgage Investment segment comprises our residential mortgage investment activities. For financial information about our segments, see Note 24, Segment Data, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

Through our Commercial Finance segment activities, our primary goal is to be the leading provider of financing to middle market businesses that require customized and sophisticated financing. We provide a wide range of financial products that we negotiate and structure on a client-specific basis through direct interaction with the owners and senior managers of our clients. We also originate and participate in broadly syndicated debt financings for larger businesses. We seek to add value to our clients’ businesses by providing tailored financing that meets their specific business needs and objectives. As of December 31, 2007, we had 1,214 loans outstanding under which we had funded an aggregate of $9.9 billion and committed to lend up to an additional $4.7 billion.

Through our Healthcare Net Lease segment activities, we invest in income-producing healthcare facilities, principally long-term care facilities in the United States. We provide lease financing to skilled nursing facilities and, to a lesser extent, assisted living facilities, rehabilitation and acute care facilities. As of December 31, 2007, we had

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$1.0 billion in direct real estate investments comprised of 186 healthcare facilities that were leased to 41 tenants through long-term, triple-net operating leases.

Through our Residential Mortgage Investment segment activities we invest in certain residential mortgage assets to optimize our REIT structure. As of December 31, 2007, our residential mortgage investment portfolio totaled $6.1 billion, which included investments in residential mortgage loans and residential mortgage-backed securities (“RMBS”). Over 99% of our investments in RMBS are represented by mortgage-backed securities that were issued and guaranteed by Fannie Mae or Freddie Mac (hereinafter, “Agency MBS”). In addition, we hold mortgage-related receivables secured by prime residential mortgage loans.

In our Commercial Finance and Healthcare Net Lease segments, the financing needs of our clients are often specific to their particular business or situation. We believe we can most successfully meet these needs and manage risk through industry or sector expertise and flexibility in structuring financings. We offer a range of senior and subordinate mortgage loans, real estate lease financing, asset-based loans, cash flow loans and equity investments to our clients. Because we believe specialized industry and/or sector knowledge is important to successfully serve our client base, we originate, underwrite and manage our financings through three focused commercial financing businesses organized around our areas of expertise. Focusing our efforts in these specific sectors, industries and markets allows us to rapidly design and implement products that satisfy the special financing needs of our clients.

These three primary commercial finance businesses are:

•  Corporate Finance, which generally provides senior and subordinate loans through direct origination and participation in widely syndicated loan transactions;

•  Healthcare and Specialty Finance, which, including our Healthcare Net Lease segment activities, generally provides first mortgage loans, asset-based revolving lines of credit, and other cash flow loans to healthcare businesses and a broad range of other companies and makes investments in income-producing healthcare facilities, particularly long-term care facilities; and

•  Structured Finance, which generally engages in commercial and residential real estate finance and also provides asset-based lending to finance companies.

Although we make loans as large as $400 million, our average commercial loan size was $8.1 million as of December 31, 2007, and our average loan exposure by client was $13.0 million as of December 31, 2007. Our commercial loans generally have a maturity of two to five years with a weighted average maturity of 3.3 years as of December 31, 2007. Substantially all of our commercial loans require monthly interest payments at variable rates and, in many cases, our commercial loans provide for interest rate floors that help us maintain our yields when interest rates are low or declining. We price our loans based upon the risk profile of our clients. As of December 31, 2007, our geographically diverse client base consisted of 759 clients with headquarters in 48 states, the District of Columbia, Puerto Rico and select international locations, primarily in Canada and Europe.

Deposit Based Funding

Maintaining broad and diverse funding sources has been a key to our funding strategy since inception. We have identified obtaining deposit based funding as a potentially attractive method of further broadening and diversifying our funding.

In May 2007, we announced an agreement to acquire TierOne Corporation (“TierOne”), the holding company for TierOne Bank, a Lincoln, Nebraska-based thrift with more than $3.5 billion in assets and $2.4 billion of deposits as of September 30, 2007. The transaction was approved by TierOne shareholders on November 29, 2007. TierOne Bank offers customers a wide variety of full-service consumer, commercial and agricultural banking products and services through a network of 69 banking offices located in Nebraska, Iowa and Kansas and nine loan production offices located in Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina. As of December 31, 2007, the stock and cash merger under the original terms was valued at approximately $25.80 per share of TierOne common stock. We originally entered into the TierOne transaction to achieve our strategic goal of obtaining a depository charter to join our direct lending platform with the stability, efficiency and diversity of a sound community banking franchise. The transaction remains subject to approval by the Office of Thrift Supervision.

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Because the transaction was not completed by its nine-month anniversary, February 17, 2008, both parties have the right to terminate the transaction, and our Board of Directors has authorized our Chairman and Chief Executive Officer to either terminate the merger or negotiate new terms for the transaction.

In 2005, we applied for an Industrial Loan Corporation (“ILC”) charter with the State of Utah and for federal deposit insurance with the Federal Deposit Insurance Corporation (“FDIC”). We anticipate that once operational, the ILC would enable us to obtain an additional source of funding for our loans by raising wholesale deposits in the brokered deposit market. In March 2007, the FDIC approved our application for federal deposit insurance, subject to certain conditions. The Order issued by the FDIC expires on March 20, 2008 if the conditions of the Order have not been met. We have requested an extension of the expiration date to December 31, 2008 as it has taken longer than anticipated to satisfy certain conditions in the Order. The extension request is currently pending with the FDIC. We cannot assure you that the FDIC will act on our extension request prior to the expiration of the Order, or if it does act, that it will approve our request. If the FDIC does not grant our extension request, the Order will expire.

Impact of Recent Market Conditions

During the second half of 2007, we witnessed a significant disruption in the capital markets that affected many financial institutions. What began with concerns about rising delinquencies and potential defaults in sub-prime mortgages and related securities broadened to affect the mortgage markets more generally and, ultimately, all credit markets. The effects of this disruption resulted in a substantial reduction in liquidity for certain assets, greater pricing for risk and de-leveraging.

During the second half of 2007, we saw and continue to see negative effects from the disruption in the form of a higher cost of funds on our borrowings as measured by a spread to LIBOR. We also expect to experience greater difficulty and higher cost in securing term debt for our loans, especially commercial real estate.

Due to the market disruption, the financings we completed during the second half of 2007 were more expensive and provided lower leverage than similar financings we completed prior to that period. We expect to see higher borrowing costs and potentially lower advance rates on our secured credit facilities as we seek to renew them in 2008. We may not be able to renew all of those facilities at their existing commitment levels. However, our commercial finance business model has been built around low leverage, and we do not seek to maximize leverage. As a result, we believe we can withstand some reduction in the advance rates of our facilities and expect to retain sufficient committed capacity to fund our business. While we expect the trend toward lower leverage and incrementally more expensive financings to continue in 2008, we believe that these same market conditions that adversely affect us as a borrower have allowed and will continue to allow us, as a lender, to structure new loans on more favorable terms and at higher yields.

It is possible this market disruption could adversely affect the U.S. economy as a whole. While to date we have not seen signs of material deterioration in the credit performance of our portfolio, further declines in economic conditions could adversely affect our clients’ ability to fulfill their obligations to us and our ability to fund our business activities.

During 2007, we also saw decreases in the carrying value of certain of our residential mortgage investments, representing a decline of approximately 1.2% in the value of the portfolio, as the market dislocation impacted the pricing relationship between mortgage assets (including Agency MBS that we own) and low risk fixed income securities. Our investment strategy explicitly contemplates the potential for upward and downward shifts in the carrying value of the portfolio, including shifts of the magnitude that we saw during 2007. We believe that these reductions in value are temporary in nature. Given our intention to hold the investments to maturity, temporary variations in value up or down have no material impact on our investment strategy.

Change in Reportable Segments

Prior to 2006, we operated as a single business segment as substantially all of our activity was related to our commercial finance business. On January 1, 2006, we began presenting financial results through two reportable segments: 1) Commercial Lending & Investment and 2) Residential Mortgage Investment. Our Commercial

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Lending & Investment segment comprised our commercial lending and direct real estate investment business activities and our Residential Mortgage Investment segment comprised all of our activities related to our investments in residential mortgage loans and RMBS. Beginning in the fourth quarter of 2007, we are presenting financial results through three reportable segments: 1) Commercial Finance, 2) Healthcare Net Lease, and 3) Residential Mortgage Investment. Changes have been made in the way management organizes financial information to make operating decisions, resulting in the activities previously reported in the Commercial Lending & Investment segment being disaggregated into the Commercial Finance segment and the Healthcare Net Lease segment as described above. We have reclassified all comparative prior period segment information to reflect our three reportable segments. For financial information about our segments, see Note 24, Segment Data, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

Loan Products, Service Offerings and Investments

Commercial Finance Segment

The types of loan products and services offered by each of our commercial finance businesses share common characteristics, and we generally underwrite the same types of loans across our three commercial finance businesses using similar criteria. When opportunities arise, we may offer a combination of products to a particular client. This single source approach often allows us to close transactions faster than our competitors by eliminating the need for complicated and time-consuming intercreditor negotiations. Our primary commercial loan products, services and investments are as follows:

•  Senior Secured Loans.  We make senior secured asset-based and cash flow loans. A loan is a “senior” loan when we have a first priority lien in the collateral securing the loan. Asset-based loans are collateralized by specified assets of the client, generally the client’s accounts receivable and/or inventory. Cash flow loans are made based on our assessment of a client’s ability to generate cash flows sufficient to repay the loan and to maintain or increase its enterprise value during the term of the loan. Our senior cash flow term loans generally are secured by a security interest in all or substantially all of a client’s assets. In some cases, the equity owners of a client pledge their stock in the client to us as further collateral for the loan.

•  First Mortgage Loans.  We make term loans secured by first mortgages. We make mortgage loans to clients including owners and operators of senior housing and skilled nursing facilities; owners and operators of office, industrial, hospitality, multi-family and residential properties; resort and residential developers; hospitals and companies backed by private equity firms that frequently obtain mortgage-related financing in connection with buyout transactions.

•  Term B, Second Lien and Mezzanine Loans.  We make Term B, second lien and mezzanine loans. A Term B loan is a loan that shares a first priority lien in a client’s collateral with the client’s other senior debt but that comes after other senior secured debt in order of payment preference, and accordingly, generally involves greater risk of loss than a senior secured loan. Term B loans are senior loans and, therefore, are included with senior secured loans in our portfolio statistics. A second lien loan is a loan that has a lien on the client’s collateral that is junior in order of priority and also comes after the senior debt in order of payment. We also make mezzanine loans that may not share in the same collateral package as the client’s senior loans, may have no security interest in any of the client’s assets and are junior to any lien holder both as to collateral (if any) and payment. A mezzanine loan generally involves greater risk of loss than a senior loan or a Term B loan.

•  Equity Investments.  We commonly acquire equity in a borrower at the same time and on substantially the same terms as the private equity sponsor that is investing in the borrower with our loan proceeds. These equity investments generally represent less than 5% of a borrower’s equity.

•  HUD Mortgage Originations.  As a strategic supplement to our real estate lending business, we also act as an agent for the United States Department of Housing and Urban Development, or HUD, for the origination of federally insured mortgage loans through the Federal Housing Authority, or FHA. Because we are a fully approved FHA Title II mortgagee, we have the ability to originate, underwrite, fund and service mortgage loans insured by the FHA. FHA is a branch of HUD, which works through approved lending institutions to provide federal mortgage and loan insurance for housing and healthcare facilities.

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Healthcare Net Lease Segment

•  Direct Real Estate Investments.  We invest in income-producing healthcare facilities, principally long-term care facilities located in the United States. These facilities are generally leased through long-term, triple-net operating leases. Under a typical triple-net lease, the client agrees to pay a base monthly operating lease payment, subject to annual escalations, and all facility operating expenses, including real estate taxes, as well as make capital improvements. Although, to date these real estate investments have been in healthcare facilities, we expect to consider sale leaseback transactions with prospective clients in other industries that might find this financing product desirable.

Residential Mortgage Investment Segment

•  Residential Mortgage-Backed Securities.  We invest in RMBS, which are securities collateralized by residential mortgage loans. These securities include Agency MBS and RMBS issued by non-government-sponsored entities that are credit-enhanced through the use of subordination or in other ways that are inherent in a corresponding securitization transaction (“Non-Agency MBS”). Substantially all of our Agency and Non-Agency MBS are collateralized by adjustable rate mortgage loans, including hybrid adjustable rate mortgage loans. We account for our Agency MBS as debt securities that are classified as trading investments and included in mortgage-backed securities pledged, trading on our accompanying audited consolidated balance sheets. We account for our Non-Agency MBS as debt securities that are classified as available-for-sale and included in investments on our accompanying audited consolidated balance sheets.

•  Mortgage-Related Receivables.  We own beneficial interests in special purpose entities (“SPEs”) that acquired and securitized pools of residential mortgage loans. We are the primary beneficiary of these SPEs and, therefore, consolidate the assets and liabilities of such entities for financial statement purposes. The SPEs’ interest in the underlying mortgage loans constitutes, for accounting purposes, receivables secured by the underlying mortgage loans. As a result, through consolidation, we recognized on our accompanying audited consolidated balance sheets mortgage-related receivables, as well as the principal amount of related debt obligations incurred by SPEs to fund the origination of such receivables. Such mortgage-related receivables maintain all of the economic attributes of the underlying mortgage loans legally held in trust by such SPEs and, as a result of our interest in such SPEs, we maintain all of the economic benefits and related risks of ownership of the underlying mortgage loans.

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As of December 31, 2007, our portfolio of loan products, service offerings and investments by type was as follows (percentages by gross carrying values):

Loan Products, Service Offerings and Investments by Type

(1) Includes Term B loans.

Commercial Finance Segment Overview

Portfolio Composition

The composition of our Commercial Finance segment portfolio as of December 31, 2007 and 2006, was as follows:

	December 31,
	2007		2006
	($ in thousands)
Commercial loans	$	9,867,737	$	7,850,198
Investments		227,144		150,090
Total	$	10,094,881	$	8,000,288

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Our total commercial loan portfolio reflected in the statistics below includes loans, loans held for sale and receivables under reverse-repurchase agreements. The composition of our commercial loan portfolio by loan type and by commercial finance business as of December 31, 2007 and 2006, was as follows:

	December 31,
	2007				2006
	($ in thousands)
Composition of loan portfolio by loan type:
Senior secured loans(1)	$	5,695,167	58	%	$	4,704,166	60	%
First mortgage loans(1)		2,995,048	30			2,542,222	32
Subordinate loans		1,177,522	12			603,810	8
Total	$	9,867,737	100	%	$	7,850,198	100	%
Composition of loan portfolio by business:
Corporate Finance	$	2,979,241	30	%	$	2,234,734	29	%
Healthcare and Specialty Finance		2,934,666	30			2,775,748	35
Structured Finance		3,953,830	40			2,839,716	36
Total	$	9,867,737	100	%	$	7,850,198	100	%

(1) Includes Term B loans.

As of December 31, 2007, our commercial loan portfolio was well diversified, with 1,214 loans to 759 clients operating in multiple industries. We use the term “client” to mean the legal entity that is the party to whom we lend pursuant to a loan agreement. As of December 31, 2007, our Corporate Finance, Healthcare and Specialty Finance and Structured Finance businesses had commitments to lend up to an additional $0.6 billion, $2.0 billion and $2.1 billion, respectively, to 262, 287 and 210 existing clients, respectively. Commitments do not include transactions for which we have signed commitment letters but not yet signed definitive binding agreements. Throughout this section, unless specifically stated otherwise, all figures relate to our commercial loans outstanding as of December 31, 2007.

Our commercial loan portfolio by industry as of December 31, 2007, was as follows (percentages by gross carrying values as of December 31, 2007):

Commercial Loan Portfolio By Industry (1)

(1) Industry classification is based on the North American Industry Classification System (NAICS).

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As of December 31, 2007, our commercial loans ranged in size from $0.1 million to $341.5⁽¹⁾ million. Our commercial loan portfolio by loan balance as of December 31, 2007, was as follows:

Commercial Loan Portfolio By Loan Balance

(1) This balance represents loans on 62 properties in six states owned by one of our clients.

Our commercial loan portfolio by client balance as of December 31, 2007, was as follows:

Commercial Loan Portfolio By Client Balance

We may have more than one loan to a client and its related entities. For purposes of determining the portfolio statistics in this Form 10-K, we count each loan or client separately and do not aggregate loans to related entities.

No client accounted for more than 10% of our total revenues in 2007. The principal executive offices of our clients were located in 48 states, the District of Columbia, Puerto Rico and selected international locations, primary

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in Canada and Europe. As of December 31, 2007, the largest geographical concentration was Florida, which made up approximately 15% of the outstanding aggregate balance of our commercial loan portfolio. In addition, 5% of the outstanding aggregate balance of our commercial loan portfolio as of December 31, 2007, comprised international borrowers, primarily located in Canada and Europe. For the year ended December 31, 2007, less than 10% of our revenues were generated through our foreign operations. As of December 31, 2007, our largest loan was $341.5 million, and the combined total of the outstanding aggregate balances of our largest ten loans represented 17% of our commercial loan portfolio.

Our commercial loan portfolio by geographic region as of December 31, 2007, was as follows:

Commercial Loan Portfolio By Geographic Region

(1) Includes all jurisdictions that have a loan balance that is less than 1% of the aggregate outstanding balance of our commercial loan portfolio.

Our commercial loans primarily provide financing at variable interest rates. In many cases, we include an interest rate floor in our loans to mitigate the risk of declining yields if interest rates fall. Whether we are able to include an interest rate floor in the pricing of a particular loan is determined by a combination of factors, including the potential client’s need for capital and the degree of competition we face in the origination of loans of the proposed type.

Our commercial loans have stated maturities at origination that generally range from two to five years. As of December 31, 2007, the weighted average maturity and weighted average remaining life of our entire commercial loan portfolio was approximately 3.3 years and 3.2 years, respectively. Our clients typically pay us an origination fee based on a percentage of the commitment amount and may also be required to pay other fees for some years following origination. They may also pay us a fee based on any undrawn commitments, as well as a collateral management fee in the case of our asset-based revolving loans.

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The number of loans, average loan size, number of clients and average loan size per client by commercial finance business as of December 31, 2007, were as follows:

							Average Loan
	Number		Average		Number of		Size per
	of Loans		Loan Size		Clients		Client
	($ in thousands)
Composition of loan portfolio by business:
Corporate Finance		542	$	5,497		262	$	11,371
Healthcare and Specialty Finance		410		7,158		287		10,225
Structured Finance		262		15,091		210		18,827
Overall loan portfolio		1,214		8,128		759		13,001

Healthcare Net Lease Segment Overview

Portfolio Composition

We acquire real estate for long-term investment purposes. These real estate investments are generally long-term care facilities leased through long-term, triple-net operating leases. We had $1.0 billion in direct real estate investments as of December 31, 2007, which consisted primarily of land and buildings.

Our direct real estate investment portfolio by geographic region as of December 31, 2007, was as follows:

Healthcare Net Lease Portfolio By Geographic Region

(1) Includes all states that have a direct real estate investment balance that is less than 1% of the aggregate direct real estate investment balance.

No client accounted for more than 10% of our total revenues in 2007. As of December 31, 2007, the largest geographical concentration was Florida, which made up approximately 34% of our direct real estate investment portfolio. As of December 31, 2007, the single largest industry concentration in our direct real estate investment portfolio was skilled nursing, which made up approximately 98% of the investments.

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Our direct real estate investment portfolio by asset balance as of December 31, 2007, was as follows:

Healthcare Net Lease Portfolio By Asset Balance

See Item 2, Properties, for information about our direct real estate investment properties.

Residential Mortgage Investment Segment Overview

Portfolio Composition

As of December 31, 2007 and 2006, our portfolio of residential mortgage investments was as follows:

	December 31,
	2007		2006
	($ in thousands)
Mortgage-related receivables(1)	$	2,041,917	$	2,295,922
Residential mortgage-backed securities:
Agency		4,060,605		3,502,753
Non-Agency		4,632		34,243
Total	$	6,107,154	$	5,832,918

(1) Represents secured receivables that are backed by adjustable-rate residential prime mortgage loans.

As of December 31, 2007, we owned $4.0 billion in Agency MBS that were pledged as collateral for repurchase agreements used to finance the acquisition of these investments. As of December 31, 2007, our portfolio of Agency MBS comprised hybrid adjustable-rate securities with varying fixed period terms issued and guaranteed by Fannie Mae or Freddie Mac. The coupons on the loans underlying these securities are fixed for a specified period of time and then reset annually thereafter. The weighted average net coupon of Agency MBS in our portfolio was 5.07% as of December 31, 2007, and the weighted average reset date for the portfolio was approximately 41 months.

As further discussed in Note 4, Mortgage-Related Receivables and Related Owner Trust Securitizations, of our accompanying audited consolidated financial statements for the year ended December 31, 2007, we had $2.0 billion in mortgage-related receivables that were secured by prime residential mortgage loans as of December 31, 2007. As of December 31, 2007, the weighted average interest rate on such receivables was 5.38%, and the weighted average contractual maturity was approximately 28 years.

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Financing

We depend on external financing sources to fund our operations. We employ a variety of financing arrangements, including repurchase agreements, secured and unsecured credit facilities, term debt, convertible debt, subordinated debt and equity. We expect that we will continue to seek external financing sources in the future. We cannot assure you, however, that we will have access to any of these funding sources. Our existing financing arrangements are described in further detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.

Competition

Our markets are highly competitive and are characterized by competitive factors that vary based upon product and geographic region. We compete with a large number of financial services companies, including:

•  specialty and commercial finance companies;

•  commercial banks;

•  REITS and other real estate investors;

•  private investment funds;

•  investment banks;

•  insurance companies; and

•  asset management companies.

Some of our competitors have substantial market positions. Many of our competitors are large companies that have substantial capital, technological and marketing resources. Some of our competitors also have access to lower cost of capital. We believe we compete based on:

•  in-depth knowledge of our clients’ industries or sectors and their business needs from information, analysis, and effective interaction between the clients’ decision-makers and our experienced professionals;

•  our breadth of product offerings and flexible and creative approach to structuring products that meet our clients’ business and timing needs; and

•  our superior client service.

Regulation

Some aspects of our operations are subject to supervision and regulation by governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things:

•  regulate credit activities, including establishing licensing requirements in some jurisdictions;

•  regulate mortgage lending activities, including establishing licensing requirements in some jurisdictions;

•  establish the maximum interest rates, finance charges and other fees we may charge our clients;

•  govern secured transactions;

•  require specified information disclosures to our clients;

•  set collection, foreclosure, repossession and claims handling procedures and other trade practices;

•  regulate our clients’ insurance coverage;

•  regulate our HUD mortgage origination business;

•  prohibit discrimination in the extension of credit and administration of our loans; and

•  regulate the use and reporting of certain client information.

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In addition, many of the healthcare clients of Healthcare and Specialty Finance are subject to licensure, certification and other regulation and oversight under the applicable Medicare and Medicaid programs. These regulations and governmental oversight indirectly affect our business in several ways as discussed below and in Risk Factors on page 17.

•  With limited exceptions, the law prohibits payment of amounts owed to healthcare providers under the Medicare and Medicaid programs to be directed to any entity other than actual providers approved for participation in the applicable programs. Accordingly, while we lend money that is secured by pledges of Medicare and Medicaid receivables, if we were required to invoke our rights to the pledged receivables, we would be unable to collect receivables payable under these programs directly. We would need a court order to force collection directly against these governmental payers.

•  Hospitals, nursing facilities and other providers of healthcare services are not always assured of receiving Medicare and Medicaid reimbursement adequate to cover the actual costs of operating the facilities. Many states are presently considering enacting, or have already enacted, reductions in the amount of funds appropriated to healthcare programs resulting in rate freezes or reductions to their Medicaid payment rates and often curtailments of coverage afforded to Medicaid enrollees. Most of our healthcare clients depend on Medicare and Medicaid reimbursements, and reductions in reimbursements caused by either payment cuts or census declines from these programs may have a negative impact on their ability to generate adequate revenues to satisfy their obligations to us. There are no assurances that payments from governmental payors will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for coverage under these programs.

•  For our clients to remain eligible to receive reimbursements under the Medicare and Medicaid programs, the clients must comply with a number of conditions of participation and other regulations imposed by these programs, and are subject to periodic federal and state surveys to ensure compliance with various clinical and operational covenants. A client’s failure to comply with these covenants and regulations may cause the client to incur penalties and fines and other sanctions, or lose its eligibility to continue to receive reimbursements under the programs, which could result in the client’s inability to make scheduled payments to us.

Taxation as a REIT

When we filed our federal income tax return for the year ended December 31, 2006, we elected REIT status under the Internal Revenue Code (the “Code”). To continue to qualify as a REIT, we are required to distribute at least 90% of our REIT taxable income to our shareholders and meet the various other requirements imposed by the Code, through actual operating results, asset holdings, distribution levels and diversity of stock ownership. As a REIT, we generally are not subject to corporate-level income tax on the earnings distributed to our shareholders that we derive from our REIT qualifying activities. We are subject to corporate-level tax on the earnings we derive from our taxable REIT subsidiaries (“TRSs”). If we fail to qualify as a REIT in any taxable year, all of our taxable income for that year, would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax. In addition, we also will be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost, unless we were entitled to relief under specific statutory provisions. We are still subject to foreign, state and local taxation in various foreign, state and local jurisdictions, including those in which we transact business or reside.

As certain of our subsidiaries are TRSs, we continue to report a provision for income taxes within our consolidated financial statements. We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates for the periods in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the change.

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Employees

As of December 31, 2007, we employed 562 people. We believe that our relations with our employees are good.

Executive Officers

Our executive officers and their ages and positions are as follows:

Name	Age		Position
John K. Delaney		44	Chairman of the Board of Directors and Chief Executive Officer
Dean C. Graham		42	President and Chief Operating Officer
Bryan M. Corsini		46	Executive Vice President and Chief Credit Officer
Thomas A. Fink		44	Senior Vice President and Chief Financial Officer
Steven A. Museles		44	Executive Vice President, Chief Legal Officer and Secretary
Michael C. Szwajkowski		41	President — Structured Finance
David C. Bjarnason		38	Chief Accounting Officer (1)
Donald F. Cole		37	Interim Chief Accounting Officer (2)

(1)	On January 23, 2008, Mr. Bjarnason notified us of his resignation, to be effective the later of February 27, 2008 and the day we file this Form 10-K with the Securities and Exchange Commission, in each case after the filing of this Form 10-K. Mr. Bjarnason resigned to pursue an opportunity in Seattle, Washington.
(2)	On February 12, 2008, we appointed Donald F. Cole to be our interim principal accounting officer while we conduct a search for a new permanent principal accounting officer. Mr. Cole’s appointment will be effective on the later of March 1, 2008 and the day after we file this Form 10-K with the Securities and Exchange Commission.

Biographies for our executive officers are as follows:

John K. Delaney, a co-founder of the company, is Chairman of our Board and Chief Executive Officer. He has been the Chief Executive Officer and has served on our Board since our inception in 2000. Mr. Delaney received his undergraduate degree from Columbia University and his juris doctor degree from Georgetown University Law Center.

Dean C. Graham has served as the President and Chief Operating officer since January 2006. Mr. Graham served as the President — Healthcare and Specialty Finance from February 2005 until assuming his current responsibilities and as the Managing Director — Group Head of our Healthcare Finance group from September 2001 through January 2005. Mr. Graham received an undergraduate degree from Harvard College, a juris doctor degree from the University of Virginia School of Law and a masters degree from the University of Cambridge.

Bryan M. Corsini has served as our Executive Vice President and Chief Credit Officer since our inception in 2000. Mr. Corsini received his undergraduate degree from Providence College and was licensed in 1986 in the state of Connecticut as a certified public accountant.

Thomas A. Fink has served as our Senior Vice President and Chief Financial Officer since May 2003. Prior to joining CapitalSource, Mr. Fink worked as an independent management and finance consultant from December 2001 to May 2003. Mr. Fink received his undergraduate degree from the University of Notre Dame and his masters of business administration from the University of Chicago Graduate School of Business.

Steven A. Museles has served as our Executive Vice President, Chief Legal Officer and Secretary since our inception in 2000. Mr. Museles received his undergraduate degree from the University of Virginia and his juris doctor degree from Georgetown University Law Center.

Michael C. Szwajkowski has served as the President — Structured Finance since February 2005. Mr. Szwajkowski served as the Managing Director — Group Head of our Structured Finance group from September 2001

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until assuming his current responsibilities. Mr. Szwajkowski received his undergraduate degree from Bowdoin College and a masters of business administration from the University of Chicago Graduate School of Business.

David C. Bjarnason has served as our Chief Accounting Officer since July 2006. Prior to joining us, from March 2003 until June 2006, Mr. Bjarnason was employed at Freddie Mac, where he was a finance officer responsible for the development and administration of accounting policy related to various investment, funding, financial risk management and securitization-related matters. From 1999 until February 2003, Mr. Bjarnason worked in the Global Capital Markets practice at Deloitte & Touche LLP. Mr. Bjarnason received his undergraduate degree in accounting from the College of William & Mary and was licensed in 1993 in the state of New York as a certified public accountant.

Donald F. Cole, an employee since March 2001, has served as our Chief Administrative Officer since January 2007 and a member of our Executive Committee since 2004. Mr. Cole served as our Chief Operations Officer from February 2005 until January 2007 and our Chief Information Officer from July 2003 until February 2005. He was promoted from loan officer to Control Systems Officer in 2002 and then to Director of Operations in January 2003. Mr. Cole earned both his undergraduate degree and his masters of business administration from the State University of New York at Buffalo and his juris doctor degree from the University of Virginia School of Law and was licensed in 1995 in the state of New York as a certified public accountant.

Other Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on our website at www.capitalsource.com as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission or by contacting Dennis Oakes, Vice President — Investor Relations, at 212-321-7212 or doakes@capitalsource.com.

We also provide access on our website to our Principles of Corporate Governance, Code of Business Conduct and Ethics, the charters of our Audit, Compensation, Credit Policy and Nominating and Corporate Governance Committees and other corporate governance documents. Copies of these documents are available to any shareholder upon written request made to our corporate secretary at our Chevy Chase, Maryland address. In addition, we intend to disclose on our website any changes to, or waivers for executive officers from, our Code of Business Conduct and Ethics.

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ITEM 1A.   RISK FACTORS

Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently believe are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline. You should know that many of the risks described may apply to more than just the subsection in which we grouped them for the purpose of this presentation. As a result, you should consider all of the following risks, together with all of the other information in this Annual Report on Form 10-K, before deciding to invest in our common stock.

Risks Impacting Our Funding and Growth

Our ability to grow our business depends on our ability to obtain external financing, which could be challenging if the existing credit market disruption continues or worsens.

We require a substantial amount of money to make new loans and to fund obligations to existing clients. As a REIT, we are dependent on external sources of capital to fund our business. This dependence results from the requirement that, to qualify as a REIT, we generally have to distribute to our shareholders 90% of our REIT taxable income, including taxable income where we do not receive corresponding cash. To date, we have obtained the cash required for our operations through the issuance of equity, convertible debentures and subordinated debt, and by borrowing money through credit facilities, securitization transactions (hereinafter “term debt”) and repurchase agreements. Our continued access to these and other types of external capital depends upon a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings, cash distributions and the market price of our common stock. Sufficient funding or capital may not be available to us on terms that are acceptable to us, particularly if the existing credit markets disruption continues or worsens. If we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the market price of our common stock and our ability to pay dividends to our shareholders.

If our lenders terminate or fail to renew any of our credit facilities or repurchase agreements, we may not be able to continue to fund our business.

As of December 31, 2007, we had nine credit facilities totaling $5.6 billion in commitments and 14 repurchase agreements totaling $3.9 billion in commitments. These credit facilities contain customary representations and warranties, covenants, conditions, events of default and cross-defaults that if breached, not satisfied or triggered could result in termination of the facilities. We may not be able to extend the term of any of our credit facilities or obtain sufficient funds to repay any amounts outstanding under any credit facility before it expires, either from one or more replacement financing arrangements or an alternative debt or equity financing. Consequently, if one or more of these facilities were to terminate prior to its expected maturity date or if any such facility were not renewed upon its maturity, our liquidity position could be materially adversely affected, and we may not be able to satisfy our outstanding loan commitments, originate new loans or continue to fund our operations.

Our liquidity position could be adversely affected if we were unable to complete additional term debt transactions on favorable terms or at all.

We have completed several term debt transactions involving loans in our commercial lending portfolio through which we raised a significant amount of debt capital to pay down our borrowings under our credit facilities and to create additional liquidity under our credit facilities for use in funding our loans.

Relevant considerations regarding our ability to complete additional term debt transactions include:

•  to the extent that the capital markets generally, and the asset-backed securities market in particular, suffers continued disruptions, we may be unable to complete term debt transactions on favorable terms or at all;

•  disruptions in the credit quality and performance of our loan portfolio, particularly that portion which has been previously securitized and serves as collateral for existing term debt, could reduce or eliminate investor demand for our term debt in the future;

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•  our ability to service our loan portfolio must continue to be perceived as adequate to make the securities issued attractive to investors;

•  any material downgrade or withdrawal of ratings given to securities previously issued in our term debt transactions or to us as a servicer would reduce demand for additional term debt by us; and

•  structural changes imposed by the rating agencies or investors may reduce the leverage we are able to obtain, increase the cost and otherwise adversely affect the efficiency of our term debt transactions as evidenced by the last two term debt transactions we completed in 2007.

If we are unable to continue completing term debt transactions on favorable terms or at all, our ability to obtain the capital needed for us to continue to fund our business would be adversely affected. Lack of access to adequate capital could have a material adverse effect on our growth and stock price.

The cash flows we receive from the interests we retain in our term debt could be delayed or reduced due to the requirements of the term debt, which could impair our ability to originate new loans or fund commitments under existing loans.

We generally retain the most junior classes of securities issued in our term debt transactions. Our receipt of future cash flows on those junior securities is governed by provisions that control the distribution of cash flows from the loans included in our term debt transactions, which cash flows are tied to the performance of the underlying loans. To the extent the loans fail to perform in accordance with their terms, the timing and amount of the cash flows we receive from loans included in our term debt transactions would be adversely affected.

The poor performance of a pool of loans we securitize could increase the expense of our subsequent securitizations, which could have a material adverse effect on our results of operations, financial condition and business.

The poor performance of a pool of loans that we securitize could increase the expense and lower our leverage on any subsequent securitization we bring to market. Increased expenses on our securitizations could reduce the net interest income we receive on our loan portfolio. A change in the market’s demand for our term debt or a decline or further disruption in the securitization market generally could have a material adverse effect on our results of operations, financial condition and business prospects.

Fluctuating interest rates could adversely affect our profit margins and ability to grow our business.

We borrow money from our lenders at variable interest rates. We generally lend money at variable rates based on either the prime or LIBOR rates. Our operating results and cash flow depend on the difference between the interest rate at which we borrow funds and the interest rate at which we lend these funds.

Interest on some of our borrowings is based in part on the rates and maturities at which vehicles sponsored by our lenders issue asset backed commercial paper. Changes in market interest rates or the relationship between market interest rates and asset backed commercial paper rates could increase the effective cost at which we borrow funds under some of our debt facilities.

In addition, changes in market interest rates, or in the relationships between short-term and long-term market interest rates, or between different interest rate indices, could affect the interest rates charged on interest earning assets differently than the interest rates paid on interest bearing liabilities, which could result in an increase in interest expense relative to our interest income.

Our use of significant leverage could adversely affect our residential mortgage-backed securities portfolio and negatively affect cash available for distribution to our shareholders.

We have borrowed significant funds to finance the acquisition of our portfolio of residential mortgage loans and mortgage-backed securities. Our use of repurchase agreements to finance the purchase of residential mortgage loans and mortgage-backed securities exposes us to the risk that a decrease in the value of such assets may cause our lenders to make margin calls that we may not be able to satisfy. If we fail to meet a margin call, or if we are required

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to sell residential mortgage loans and/or mortgage-backed securities to meet a margin call or because our lenders fail to renew our borrowings and we cannot access replacement borrowings, we may suffer losses and our ability to comply with the REIT asset tests could be materially adversely affected.

Our lenders could terminate us as servicer of loans held as collateral for our credit facilities or term debt, which would adversely affect our ability to manage our portfolio and borrow funds.

Upon the occurrence of specified servicer defaults, our lenders under our credit facilities and the holders of our asset-backed notes issued in our term debt may elect to terminate us as servicer of the loans under the applicable facility or term debt and appoint a successor servicer or replace us as cash manager for our secured facilities and term debt. If we were terminated as servicer, we would no longer receive our servicing fee. In addition, because there could be no assurance that any successor servicer would be able to service the loans according to our standards, the performance of our loans could be materially adversely affected and our income generated from those loans significantly reduced.

Hedging against interest rate exposure may materially adversely affect our earnings.

We have entered into interest rate swap agreements and other contracts for interest rate risk management purposes. Our hedging activity varies in scope based on a number of factors, including the level of interest rates, the type of portfolio investments held, and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:

•  interest rate hedging can be expensive, particularly during periods of volatile interest rates;

•  available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

•  the duration of the hedge may not match the duration of the related liability or asset;

•  the amount of income that a REIT may earn from hedging transactions to offset interest rate losses is limited by federal tax provisions governing REITs;

•  the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

•  the party owing money in the hedging transaction may default on its obligation to pay.

Because we do not employ hedge accounting, our hedging activity may materially adversely affect our earnings. Therefore, while we pursue such transactions to reduce our interest rate risks, it is possible that changes in interest rates may result in losses that we would not otherwise have incurred if we had not engaged in any such hedging transactions. For additional information about our hedging instruments, see Note 20, Derivative Instruments, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

Hedging instruments involve inherent risks and costs.

The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and, thus, increase our hedging costs during periods when interest rates are volatile or rising. Furthermore, the enforceability of agreements associated with derivative instruments we use may depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. In the event of default by a counterparty to hedging arrangements, we may lose unrealized gains associated with such contracts and may be required to execute replacement contract(s) on market terms which may be less favorable to us. Although generally we seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

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We may enter into derivative contracts that could expose us to contingent liabilities in the future.

Part of our investment strategy involves entering into derivative contracts that require us to fund cash payments in certain circumstances. Our ability to fund these contingent liabilities will depend on the liquidity of our assets and access to capital at the time, and the need to fund these contingent liabilities could materially adversely impact our financial condition. For additional information about our derivatives, see Note 20, Derivative Instruments, of our accompanying audited consolidated financial statements for the year ended December 31, 2007.

Risks Related to Our Operations as a REIT

We have limited experience operating as a REIT.

On January 1, 2006, we began operating as a REIT and formally elected REIT status when we filed our tax return for the year ended December 31, 2006. Our senior management has limited experience in managing a portfolio of assets under the highly complex tax rules governing REITs, which may hinder our ability to achieve our investment objectives. In addition, maintaining our REIT qualification will influence the types of investments we are able to make. We cannot assure you that we will be able to continue to operate our business successfully within the REIT structure or in a manner that enables us consistently to pay dividends to our shareholders. In addition, our decision to convert to REIT status has imposed added challenges on our senior management and other employees, who together monitor our REIT compliance obligations, develop new product offerings consistent with our REIT status and make appropriate alterations to our loan origination, marketing and monitoring efforts.

We could lack access to funds to meet our dividend and tax obligations.

As a REIT, we are required to distribute at least 90% of our REIT taxable income, excluding capital gains, to maintain our REIT qualification, and we need to distribute 100% of our REIT taxable income, including capital gains, to eliminate federal income tax liability. Moreover, we are subject to a 4% excise tax on the excess of the required distribution over the sum of the amounts actually distributed and amounts retained for which federal income tax was paid, if the amount we distribute during a calendar year (plus excess distributions made in prior years) does not equal at least the sum of 85% of our REIT ordinary income for the year, 95% of our REIT capital gain net income for the year and any undistributed taxable income from prior taxable years. We also could be required to pay taxes and liabilities attributable to periods and events prior to our REIT election and additional taxes if we were to fail to qualify as a REIT in any given year. The amount of funds, if any, available to us could be insufficient to meet our dividend and tax obligations.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities and limit our ability to fund dividend payments using cash generated through our TRSs.

To maintain our qualification as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders and the ownership of our stock. Compliance with the REIT requirements may hinder our ability to make certain attractive investments, including investments in the businesses conducted by our TRSs.

Our ability to receive dividends from the TRSs from which we would make distributions to our shareholders is limited by the rules with which we must comply to maintain our status as a REIT. In particular, at least 75% of the value of our total assets must be represented by “real estate assets,” cash, cash items, and government securities. Real estate assets include debt instruments secured by mortgages on real property, shares of other REITs, and stock or debt instruments held for less than one year purchased with the proceeds of an offering of shares or long-term debt. In addition, at least 75% of our gross income for each taxable year as a REIT must be derived from interest on obligations secured by mortgages on real property or interests in real property, certain gains from the sale or other disposition of such obligations, and certain other types of real estate income. No more than 25% of our gross income may consist of dividends from the TRSs and other non-qualifying types of income. As a result, even if our non-REIT activities conducted through TRSs were to be highly profitable, we might be limited in our ability to receive dividends from the TRSs in an amount necessary to fund required dividends to our shareholders.

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If we fail to qualify as a REIT in any given year, we will have reduced funds available for distribution to our shareholders and our income will be subject to taxation at regular corporate rates.

Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations and the possibility of future changes in the law or our circumstances, we might not satisfy the requirements applicable to REITs for any particular taxable year. Furthermore, our qualification as a REIT depends on our continuing satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements. Our ability to satisfy the asset tests will depend upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise determination. Our compliance with the REIT annual income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. With respect to our compliance with the REIT organizational requirements, the Internal Revenue Service, or IRS, could contend that our ownership interests in TRSs or securities of other issuers would give rise to a violation of the REIT requirements.

If in any taxable year we fail to qualify as a REIT,

•  we will not be allowed a deduction for distributions to shareholders in computing our taxable income;

•  we will be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates.

Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our shareholders, which in turn would likely have a material adverse impact on the value of our common stock. In addition, we would be disqualified from treatment as a REIT for the four taxable years following the year during which the qualification was lost, unless we were entitled to relief under certain statutory provisions. If we were to avail ourselves of one or more of these statutory savings provisions to maintain our REIT status, we nevertheless could be required to pay penalty taxes of $50,000 or more for each failure. As a result, net income and the funds available for distribution to our shareholders could be reduced for up to five years or longer, which would have a continuing material adverse impact on the value of our common stock. Even if we continue to qualify as a REIT, any gain or income recognized by our TRSs, either as a result of regular operations or in connection with our REIT election related restructuring transactions, will be subject to federal corporate income tax and applicable state and local taxes.

Our business activities are potentially subject to prohibited transactions tax or corporate level tax.

REITs are generally passive entities and thus only can engage in those activities permitted by the Code, which for us generally includes our real estate based lending activities and the complementary activities in which we engage, such as direct real estate investment transactions and acquiring whole pools of mortgage loans and mortgage-backed securities. Accordingly, we conduct our non-real estate lending activities through multiple TRSs, which are subject to corporate level tax, because such activities generate non-qualifying REIT income.

Also, we limit the asset disposition activity that we engage in directly (that is, outside of our TRSs) because certain asset dispositions conducted regularly and directly by us could constitute “prohibited transactions” that could be subject to a 100% penalty tax. In general, prohibited transactions are defined by the Code to be sales or other dispositions of property held primarily for sale to customers in the ordinary course of a trade or business other than property with respect to which a “foreclosure property” election is made. By conducting our business in this manner, we believe that we satisfy the REIT requirements of the Code and avoid the 100% tax that could be imposed if a REIT were to conduct a prohibited transaction; however, this operational constraint may prevent us from disposing of one or more of our real estate-based loans to obtain liquidity or to reduce potential losses with respect to non-performing assets. We may not always be successful, however, in limiting such activities to any TRSs. Therefore, we could be subject to the 100% prohibited transactions tax if such instances were to occur.

The requirements of the Investment Company Act impose limits on our operations that impact the way we acquire and manage our assets and operations.

We conduct our operations so as not to be required to register as an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act. We believe that we are primarily engaged in

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the business of commercial lending and real estate investment, and not in the business of investing, reinvesting, and trading in securities, and therefore are not required to register under the Investment Company Act.

While we do not believe we are engaged in an investment company business, we nevertheless endeavor to conduct our operations in a manner that would permit us to rely on one or more exemptions under the Investment Company Act. Our ability to rely on these exemptions may limit the types of loans we originate and the types of other assets we acquire.

One of our wholly owned TRSs, CapitalSource Finance LLC (“Finance”), is a guarantor on certain of our convertible debentures that were offered to the public in a registered offering. This guarantee could be deemed to cause Finance to have outstanding securities for purposes of the Investment Company Act. Finance or other subsidiaries may guarantee future indebtedness from time to time. Even if one or more of our subsidiaries were deemed to be engaged in investment company business, and the provisions of the Investment Company Act were deemed to apply on an individual basis to our wholly owned subsidiaries, generally they could rely on an exemption from registration under the Investment Company Act for entities who do not offer securities to the public and do not have more than 100 security holders. Because it is possible that this exemption could be deemed unavailable to Finance, we also conduct Finance’s business in a manner that we believe would permit it to rely on exemption from registration under the Investment Company Act.

If we or any subsidiary were required to register under the Investment Company Act and could not rely on an exemption or exclusion, we or such subsidiary could be characterized as an investment company. Such characterization would require us to either (i) change the manner in which we conduct our operations, or (ii) register the relevant entity as an investment company. Any modification of our business plan for these purposes could have a material adverse effect on us. Further, if we or a subsidiary were determined to be an unregistered investment company, we or such subsidiary:

•  could be subject to monetary penalties and injunctive relief in an action brought by the SEC;

•  may be unable to enforce contracts with third parties, and third parties could seek to rescind transactions undertaken during the period it was established that we or such subsidiary was an unregistered investment company;

•  would have to significantly reduce the amount of leverage we currently employ in our business;

•  would have to restructure our operations dramatically;

•  may have to raise substantial amounts of additional equity to come into compliance with the limitations prescribed under the Investment Company Act; and

•  may have to terminate agreements with our affiliates.

Any of these results likely would have a material adverse effect on our business, our financial results and our ability to pay dividends to stockholders.

Rapid changes in the values of our residential mortgage loans and mortgage-backed securities and other real estate assets may make it more difficult for us to maintain our REIT status or exemption from the Investment Company Act.

If the market value or income potential of our mortgage-backed securities and our other real estate assets declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income and/or liquidate our non-qualifying assets to maintain our REIT status and/or our exemption from the Investment Company Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of many of our assets. We may have to make investment decisions that we otherwise would not make absent the REIT and Investment Company Act considerations.

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Legislative or other actions affecting REITs could have a negative effect on us.

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification.

Changes in taxation of corporate dividends may adversely affect the value of our common stock.

The maximum marginal rate of tax payable by domestic noncorporate taxpayers on dividends received from a regular “C” corporation under current law generally is 15% through 2010, as opposed to higher ordinary income rates. The reduced tax rate, however, does not apply to ordinary income dividends paid to domestic noncorporate taxpayers by a REIT on its stock, except for certain limited amounts. Although the earnings of a REIT that are distributed to its stockholders generally remain subject to less federal income taxation than earnings of a non-REIT “C” corporation that are distributed to its stockholders net of corporate-level income tax, legislation that extends the application of the 15% rate to dividends paid after 2010 by “C” corporations could cause domestic noncorporate investors to view the stock of regular “C” corporations as more attractive relative to the stock of a REIT, because the dividends from regular “C” corporations would continue to be taxed at a lower rate while distributions from REITs (other than distributions designated as capital gain dividends) are generally taxed at the same rate as the investor’s other ordinary income.

Risks Related to Our Lending Activities

We may not recover all amounts that are contractually owed to us by our borrowers.

We charged off $57.5 million in loans for the year ended December 31, 2007, and expect to experience charge offs in the future. If we were to experience material losses on our portfolio in the future, such losses would have a material adverse effect on our ability to fund our business and on our revenues, net income and assets, to the extent the losses exceed our allowance for loan losses.

In addition, like other commercial finance companies, we have experienced missed and late payments, failures by clients to comply with operational and financial covenants in their loan agreements and client performance below that which we expected when we originated the loan. Any of the events described in the preceding sentence may be an indication that our risk of credit loss with respect to a particular loan has materially increased.

We make loans to privately owned small and medium-sized companies that present a greater risk of loss than loans to larger companies.

Our portfolio consists primarily of commercial loans to small and medium-sized, privately owned businesses. Compared to larger, publicly owned firms, these companies generally have more limited access to capital and higher funding costs, may be in a weaker financial position and may need more capital to expand or compete. These financial challenges may make it difficult for our clients to make scheduled payments of interest or principal on our loans. Accordingly, loans made to these types of clients entail higher risks than loans made to companies who are able to access traditional credit sources.

We may not have all of the material information relating to a potential client at the time that we make a credit decision with respect to that potential client or at the time we advance funds to the client. As a result, we may suffer losses on loans or make advances that we would not have made if we had all of the material information.

There is generally no publicly available information about the privately owned companies to which we lend. Therefore, we must rely on our clients and the due diligence efforts of our employees to obtain the information that we consider when making our credit decisions. To some extent, our employees depend and rely upon the management of these companies to provide full and accurate disclosure of material information concerning their

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business, financial condition and prospects. We may not have access to all of the material information about a particular client’s business, financial condition and prospects, or a client’s accounting records may be poorly maintained or organized. In such instances, we may not make a fully informed credit decision which may lead, ultimately, to a failure or inability to recover our loan in its entirety.

Increases in interest rates could negatively affect our borrowers’ ability to repay their loans.

Most of our loans bear interest at variable interest rates. If interest rates increase, interest obligations of our clients will also increase. Some of our clients may not be able to make the increased interest payments, resulting in defaults on their loans.

A client’s fraud could cause us to suffer losses.

The failure of a client to accurately report its financial position, compliance with loan covenants or eligibility for initial or additional borrowings could result in the loss of some or all of the principal of a particular loan or loans including, in the case of revolving loans, amounts we may not have advanced had we possessed complete and accurate information.

Some of our clients require licenses, permits and other governmental authorizations to operate their businesses, which may be revoked or modified by applicable governmental authorities. Any revocation or modification could have a material adverse effect on the business of a client and, consequently, the value of our loan to that client.

In addition to clients in the healthcare industry subject to Medicare and Medicaid regulation, other clients in specified industries require permits and licenses from various governmental authorities to operate their businesses. These governmental authorities may revoke or modify these licenses or permits if a client is found in violation of any regulation to which it is subject. In addition, these licenses may be subject to modification by order of governmental authorities or periodic renewal requirements. The loss of a permit, whether by termination, modification or failure to renew, could impair the client’s ability to continue to operate its business in the manner in which it was operated when we made our loan to it, which could impair the client’s ability to generate cash flows necessary to service our loan or repay indebtedness upon maturity, either of which outcomes would reduce our revenues, cash flow and net income. See the Regulation section of Item 1, Business, above for additional discussion of specific regulatory and governmental oversight applicable to many of our healthcare clients.

We make loans to commercial real estate developers. These clients face a variety of risks relating to development, construction and renovation projects, any of which may negatively impact their results of operations and impair their ability to pay principal and interest on our loans to them.

We make loans to clients for development, construction and renovation projects. The ability of these clients to make required payments to us on these loans is subject to the risks associated with these projects. An unsuccessful development, construction or renovation project could limit that client’s ability to repay its obligations to us.

Our loans to foreign clients may involve significant risks in addition to the risks inherent in loans to U.S. clients.

Loans to foreign clients may expose us to risks not typically associated with loans to U.S. clients. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility.

To the extent that any of our loans are denominated in foreign currency, these loans will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political

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developments. We may employ hedging techniques to minimize these risks, but we can offer no assurance that these strategies will be effective.

Our debtor-in-possession loans may have a higher risk of default.

From time-to-time we make “debtor-in-possession” loans to clients that have filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code that are used by these clients to fund on-going operations as part of the reorganization process. While our security position for these loans is generally better than that of the other asset-based loans we make, there may be a higher risk of default on these loans due to the uncertain business prospects of these clients and the inherent risks with the bankruptcy process. Furthermore, if our calculations as to the outcome or timing of a reorganization are inaccurate, the client may not be able to make payments on the loan on time or at all.

Our concentration of loans to a limited number of borrowers within a particular industry, such as the commercial real estate or healthcare industry, or region could impair our revenues if the industry or region were to experience economic difficulties or changes in the regulatory environment.

Defaults by our clients may be correlated with economic conditions affecting particular industries or geographic regions. As a result, if any particular industry or geographic region were to experience economic difficulties, the overall timing and amount of collections on our loans to clients operating in those industries or geographic regions may differ from what we expected and result in material harm to our revenues, net income and assets. For example, as of December 31, 2007, loans representing 21% of the aggregate outstanding balance of our loan portfolio were secured by commercial real estate other than healthcare facilities. If the commercial real estate sector were to experience economic difficulties, we could suffer losses on these loans. In addition, as of December 31, 2007, loans representing 20% of the aggregate outstanding balance of our loan portfolio were to clients in the healthcare industry. Reimbursements under the Medicare and Medicaid programs comprise the bulk of the revenues of many of these clients. Our clients’ dependence on reimbursement revenues could cause us to suffer losses in several instances.

•  If clients fail to comply with operational covenants and other regulations imposed by these programs, they may lose their eligibility to continue to receive reimbursements under the program or incur monetary penalties, either of which could result in the client’s inability to make scheduled payments to us.

•  If reimbursement rates do not keep pace with increasing costs of services to eligible recipients, or funding levels decrease as a result of increasing pressures from Medicare and Medicaid to control healthcare costs, our clients may not be able to generate adequate revenues to satisfy their obligations to us.

•  If a healthcare client were to default on its loan, we would be unable to invoke our rights to the pledged receivables directly as the law prohibits payment of amounts owed to healthcare providers under the Medicare and Medicaid programs to be directed to any entity other than the actual providers. Consequently, we would need a court order to force collection directly against these governmental payors. There is no assurance that we would be successful in obtaining this type of court order.

As of December 31, 2007, our ten largest clients collectively accounted for approximately 19% of the aggregate outstanding balance of our commercial loan portfolio, and our largest client accounted for approximately 3.46% of the aggregate outstanding balance of our commercial loan portfolio.

Because of the nature of our loans and the manner in which we disclose client and loan concentrations, it may be difficult to evaluate our risk exposure to any particular client or group of related clients.

We use the term “client” to mean the legal entity that is the borrower party to a loan agreement with us. We have several clients that are related to each other through common ownership and/or management. Because we underwrite all of these loans separately, we report each loan to one of these clients as a separate loan and each client as a separate client. In situations where clients are related through common ownership, to the extent the common owner suffers financial distress, the common owner may be unable to continue to support our clients, which could, in turn, lead to financial difficulties for those clients. Further, some of our healthcare clients are managed by the

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same entity and, to the extent that management entity suffers financial distress or is otherwise unable to continue to manage the operations of the related clients, those clients could, in turn, face financial difficulties. In both of these cases, our clients could have difficulty servicing their debt to us, which could have an adverse effect on our financial condition.

We may be unable to recognize or act upon an operational or financial problem with a client in a timely fashion so as to prevent a loss of our loan to that client.

Our clients may experience operational or financial problems that, if not timely addressed by us, could result in a substantial impairment or loss of the value of our loan to the client. We may fail to identify problems because our client did not report them in a timely manner or, even if the client did report the problem, we may fail to address it quickly enough or at all. As a result, we could suffer loan losses which could have a material adverse effect on our revenues, net income and results of operations.

We may make errors in evaluating information reported by our clients and, as a result, we may suffer losses on loans or advances that we would not have made if we had properly evaluated the information.

We underwrite our loans based on detailed financial information and projections provided to us by our clients. Even if clients provide us with full and accurate disclosure of all material information concerning their businesses, our investment officers, underwriting officers and credit committee members may misinterpret or incorrectly analyze this information. Mistakes by our staff and credit committee may cause us to make loans that we otherwise would not have made, to fund advances that we otherwise would not have funded or result in losses on one or more of our existing loans.

Our balloon loans and bullet loans may involve a greater degree of risk than other types of loans.

As of December 31, 2007, approximately 93% of the outstanding balance of our loans comprised either balloon loans or bullet loans. A balloon loan is a term loan with a series of scheduled payment installments calculated to amortize the principal balance of the loan so that, upon maturity of the loan, more than 25%, but less than 100%, of the loan balance remains unpaid and must be satisfied. A bullet loan is a loan with no scheduled payments of principal before the maturity date of the loan. All of our revolving loans and some of our term loans are bullet loans.

Balloon loans and bullet loans involve a greater degree of risk than other types of loans because they require the borrower to, in many cases, make a large, final payment upon the maturity of the loan. The ability of a client to make this final payment upon the maturity of the loan typically depends upon its ability either to generate sufficient cash flow to repay the loan prior to maturity, to refinance the loan or to sell the related collateral securing the loan, if any. The ability of a client to accomplish any of these goals will be affected by many factors, including the availability of financing at acceptable rates to the client, the financial condition of the client, the marketability of the related collateral, the operating history of the related business, tax laws and the prevailing general economic conditions. Consequently, a client may not have the ability to repay the loan at maturity, and we could lose some or all of the principal of our loan.

We are limited in pursuing certain of our rights and remedies under our Term B, second lien and mezzanine loans, which may increase our risk of loss on these loans.

We make Term B, second lien and mezzanine loans. Term B loans generally are senior secured loans that are equal as to collateral and junior as to right of payment to clients’ other senior debt. Second lien loans are junior as to both collateral and right of payment to clients’ senior debt. Mezzanine loans may not have the benefit of any lien against a client’s collateral and are junior to any lienholder both as to collateral and payment. Collectively, second lien and mezzanine loans comprised 12% of the aggregate outstanding balance of our loan portfolio as of December 31, 2007. As a result of the subordinate nature of these loans, we may be limited in our ability to enforce our rights to collect principal and interest on these loans or to recover any of the loan balance through our right to foreclose upon collateral. For example, we typically are not contractually entitled to receive payments of principal on a subordinated loan until the senior loan is paid in full, and may only receive interest payments on a Term B, second lien or mezzanine loan if the client is not in default under its senior loan. In many instances, we are also

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prohibited from foreclosing on a Term B, second lien or mezzanine loan until the senior loan is paid in full. Moreover, any amounts that we might realize as a result of our collection efforts or in connection with a bankruptcy or insolvency proceeding under a Term B, second lien or mezzanine loan must generally be turned over to the senior lender until the senior lender has realized the full value of its own claims. These restrictions may materially and adversely affect our ability to recover the principal of any non-performing Term B, second lien or mezzanine loans.

The collateral securing a loan may not be sufficient to protect us from a partial or complete loss if we have not properly obtained or perfected a lien on such collateral or if the loan becomes non-performing, and we are required to foreclose.

While most of our loans are secured by a lien on specified collateral of the client, there is no assurance that we have obtained or properly perfected our liens, or that the value of the collateral securing any particular loan will protect us from suffering a partial or complete loss if the loan becomes non-performing and we move to foreclose on the collateral.

Our cash flow loans are not fully covered by the value of assets or collateral of the client and, consequently, if any of these loans becomes non-performing, we could suffer a loss of some or all of our value in the loan.

Cash flow lending involves lending money to a client based primarily on the expected cash flow, profitability and enterprise value of a client rather than on the value of its assets. These loans tend to be among the largest and to pose the highest risk of loss upon default in our portfolio. As of December 31, 2007, approximately 52% of the loans in our portfolio were cash flow loans under which we had advanced 36% of the aggregate outstanding loan balance of our portfolio. While in the case of our senior cash flow loans we generally take a lien on substantially all of the client’s assets, the value of those assets is typically substantially less than the amount of money we advance to a client under a cash flow loan. When a cash flow loan becomes non-performing, our primary recourse to recover some or all of the principal of our loan is to force the sale of the entire company as a going concern. We could also choose to restructure the company in a way we believe would enable it to generate sufficient cash flow over time to repay our loan. Neither of these alternatives may be an available or viable option or generate enough proceeds to repay the loan. If we were a subordinate lender rather than the senior lender in a cash flow loan, our ability to take remedial action would be constrained by our agreement with the senior lender.

We are not the agent for a portion of our loans and, consequently, have little or no control over how those loans are administered or controlled.

We are neither the agent of the lending group that receives payments under the loan nor the agent of the lending group that controls the collateral for purposes of administering the loan on loans comprising approximately 15% of the aggregate outstanding balance of our loan portfolio as of December 31, 2007. When we are not the agent for a loan, we may not receive the same financial or operational information as we receive for loans for which we are the agent and, in many instances, the information on which we must rely is provided to us by the agent rather than directly by the client. As a result, it may be more difficult for us to track or rate these loans than it is for the loans for which we are the agent. Additionally, we may be prohibited or otherwise restricted from taking actions to enforce the loan or to foreclose upon the collateral securing the loan without the agreement of other lenders holding a specified minimum aggregate percentage, generally a majority or two-thirds of the outstanding principal balance. It is possible that an agent for one of these loans may not manage the loan to our standards or may choose not to take the same actions to enforce the loan or to foreclose upon the collateral securing the loan that we would or would not take if we were agent for the loan.

We are the agent for loans in which syndicates of lenders participate and, in the event of a loss on any such loan, we could have liability to other members of the syndicate related to our management and servicing of the loan.

We are often the agent representing a syndicate of multiple lenders that has made a loan. In that capacity, we may act on behalf of our co-lenders in administering the loan, receiving all payments under the loan and/or controlling the collateral for purposes of administering the loan. As of December 31, 2007, we were either the

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paying, administrative or the collateral agent or all for a group of third-party lenders for loans with outstanding commitments of $12.4 billion. When we are the agent for a loan, we often receive financial and/or operational information directly from the borrower and are responsible for providing some or all of this information to our co-lenders. We may also be responsible for taking actions on behalf of the lending group to enforce the loan or to foreclose upon the collateral securing the loan. It is possible that as agent for one of these loans we may not manage the loan to the applicable standard. In addition, we may choose a different course of action than one or more of our co-lenders would take to enforce the loan or to foreclose upon the collateral securing the loan if our co-lenders were in a position to manage the loan. If we do not administer these loans in accordance with our obligations and the applicable legal standards and the lending syndicate suffered a loss on the loan, we may have liability to our co-lenders.

We may purchase distressed loans at amounts that may exceed what we are able to recover on these loans.

We may purchase loans of companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization and liquidation proceedings. Although these investments may result in significant returns to us, they involve a substantial degree of risk. Any one or all of the loans which we purchase may be unsuccessful or not show any return for a considerable period of time. The level of analytical sophistication, both financial and legal, necessary for making a profit on the purchase of loans to companies experiencing significant business and financial difficulties is particularly high. We may not correctly evaluate the value of the assets collateralizing the loans or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to a distressed company, we may lose the entire amount of our loan, may be required to accept cash or securities with a value less than our purchase price and/or may be required to accept payment over an extended period of time.

We may not retain control over our joint venture investments, which may increase the risk of loss with respect to such investments.

We are party to joint ventures and may enter into additional joint ventures. We may not have control of the operations of the joint ventures in which we invest. Therefore, these investments may, under certain circumstances, involve risks such as the possibility that our partner in an investment might become bankrupt or have economic or business interests or goals that are inconsistent with ours, or be in a position to take action contrary to our instructions or requests or our policies or objectives. As a result, these investments may be subject to more risk than investments for which we have full operational or management responsibility.

Our loans could be subject to equitable subordination by a court which would increase our risk of loss with respect to such loans.

Courts may apply the doctrine of equitable subordination to subordinate the claim or lien of a lender against a borrower to claims or liens of other creditors of the borrower, when the lender or its affiliates is found to have engaged in unfair, inequitable or fraudulent conduct. The courts have also applied the doctrine of equitable subordination when a lender or its affiliates is found to have exerted inappropriate control over a client, including control resulting from the ownership of equity interests in a client. We have made direct equity investments or received warrants in connection with the origination of loans representing approximately 21% of the aggregate outstanding loan balance of our loan portfolio as of December 31, 2007. Payments on one or more of our loans, particularly a loan to a client in which we also hold an equity interest, may be subject to claims of equitable subordination. If we were deemed to have the ability to control or otherwise exercise influence over the business and affairs of one or more of our clients resulting in economic hardship to other creditors of our client, this control or influence may constitute grounds for equitable subordination and a court may treat one or more of our loans as if it were unsecured or common equity in the client. In that case, if the client were to liquidate, we would be entitled to repayment of our loan on a pro-rata basis with other unsecured debt or, if the effect of subordination was to place us at the level of common equity, then on an equal basis with other holders of the client’s common equity only after all of the client’s obligations relating to its debt and preferred securities had been satisfied.

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We may incur lender liability as a result of our lending activities.

A number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. We may be subject to allegations of lender liability. We cannot assure you that these claims will not arise or that we will not be subject to significant liability if a claim of this type did arise.

We have engaged in the past, and may engage in the future, in lending transactions with affiliates of our directors. Because of the conflicts of interest inherent in these transactions, their terms may not be in our shareholders’ best interests.

As of December 31, 2007, we had 17 loans representing $188.4 million in committed funds to companies affiliated with our directors. We may make additional loans to affiliates of our directors in the future. Our conflict of interest policies, which generally require these transactions to be approved by the disinterested members of our board (or a committee thereof), may not be successful in eliminating the influence of conflicts. These transactions may divert our resources and benefit our directors and their affiliates to the detriment of our shareholders.

If we violate HUD lending requirements, we could lose our ability to originate HUD mortgage loans, which could adversely affect our financial results.

As a FHA Title II mortgagee, or approved mortgagee, we could lose our ability to originate, underwrite and service FHA insured loans if, among other things, we commit fraud, violate anti-kickback laws, violate identity of interest rules, engage in a continued pattern of poor underwriting, or the FHA loans we originate show a high frequency of loan defaults. Our inability to engage in our HUD business would lead to a decrease in our net income. See the Regulation section of Item 1, Business, above, for additional information.

If we do not obtain the necessary state licenses and approvals, we will not be allowed to acquire, fund or originate residential mortgage loans and other loans in some states, which would adversely affect our operations.

We engage in consumer mortgage lending activities which involve the collection of numerous accounts, as well as compliance with various federal, state and local laws that regulate consumer lending. Many states in which we do business require that we be licensed, or that we be eligible for an exemption from the licensing requirement, to conduct our business. We cannot assure you that we will be able to obtain all the necessary licenses and approvals, or be granted an exemption from the licensing requirements, that we will need to maximize the acquisition, funding or origination of residential mortgages or other loans or that we will not become liable for a failure to comply with the myriad of regulations applicable to our lines of business. See the Regulation section of Item I, Business, above for additional information.

Our commitments to lend additional sums to existing clients exceed our resources available to fund these commitments.

As of December 31, 2007, the amount of our unfunded commitments to extend credit to our clients exceeded our unused funding sources and unrestricted cash by $813.3 million. Commitments do not include transactions for which we have signed commitment letters but not yet signed definitive binding agreements. We expect that our commercial loan commitments will continue to exceed our available funds indefinitely. Our obligation to fund unfunded commitments is based on our clients’ ability to provide additional collateral to secure the requested additional fundings, the additional collateral’s satisfaction of eligibility requirements and our clients’ ability to meet certain other preconditions to borrowing. In some case unfunded commitments do not require additional collateral to be provided by a debtor as a prerequisite to future fundings by us. We believe that we have sufficient funding capacity to meet short-term needs related to unfunded commitments. If we do not have sufficient funding capacity to satisfy our commitments, our failure to satisfy our full contractual funding commitment to one or more of our

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clients could create breach of contract liability for us and damage our reputation in the marketplace, which could have a material adverse effect on our business.

We are in a highly competitive business and may not be able to take advantage of attractive opportunities.

The commercial finance industry is highly competitive. We have competitors who also make the same types of loans to the small and medium-sized privately owned businesses that are our target clients.

Our competitors include a variety of:

•  specialty and commercial finance companies;

•  commercial banks;

•  REITS and other real estate investors;

•  private investment funds;

•  investment banks;

•  insurance companies; and

•  asset management companies.

Some of our competitors have greater financial, technical, marketing and other resources than we do. They also have greater access to capital than we do and at a lower cost than is available to us. Furthermore, we would expect to face increased price competition if finance companies seek to expand within or enter our target markets. Increased competition could cause us to reduce our pricing and lend greater amounts as a percentage of a client’s eligible collateral or cash flows. Even with these changes, in an increasingly competitive market, we may not be able to attract and retain new clients and sustain the rate of growth that we have experienced to date, and our market share and future revenues may decline. If our existing clients choose to use competing sources of credit to refinance their loans, the rate at which loans are repaid may be increased, which could change the characteristics of our loan portfolio as well as cause our anticipated return on our existing loans to vary.

Risks Related to Our Residential Mortgage Investment Portfolio

Increases or decreases in interest rates could negatively affect the value of our mortgage investments and related financing and risk management instruments and, as a result, could reduce our earnings and negatively affect the amount of cash available for distribution to our shareholders.

In most cases, a mortgage investment will decline in value if long-term interest rates increase and increase in value if rates decrease. To the extent not matched by offsetting changes in fair value of hedging arrangements, changes in the market value of the mortgage investment may ultimately reduce earnings or result in losses. In this case, cash available for distribution to our shareholders would be negatively affected. Market values of mortgage investments may also decline without any general increase in interest rates for a number of reasons, such as increases in defaults, increases in voluntary prepayments and widening of credit spreads.

A significant risk associated with our residential mortgage investment portfolio of is the risk that both long-term and short-term interest rates will increase or decrease significantly. If long-term rates were to increase significantly, the market value of residential mortgage investments would decline and the weighted average life of the investments would increase. To the extent not offset by changes in fair value of hedging arrangements, we could realize a loss if such securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on the repurchase agreements we enter into to finance residential mortgage investments.

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Prepayment rates that vary from expectations could negatively affect the value of our residential mortgage investments, and, therefore, could reduce earnings and cash available for distribution to our shareholders.

In the case of residential mortgage loans, there are seldom restrictions on borrowers’ abilities to prepay their loans. Homeowners tend to prepay mortgage loans faster when interest rates decline. Consequently, owners of the loans or securities backed by the loans have to reinvest the money received from the prepayments at the lower prevailing interest rates, resulting in reductions in fair value of the investments to the extent not offset by changes in fair value of hedges. This volatility in prepayment rates may affect our ability to maintain targeted amounts of leverage on our mortgage investment portfolio and may result in reduced earnings or losses for us and negatively affect the cash available for distribution to our shareholders.

Some of the investments in our residential mortgage investment portfolio are likely to have limited liquidity and, as a result, there will be uncertainty as to the value of these investments.

Some of our residential mortgage investment portfolio is likely to be in forms that have limited liquidity or are not publicly-traded. The fair value of securities and other investments that have limited liquidity or are not publicly-traded may not be readily determinable. Because these valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. The value of our common stock could be materially adversely affected if our determinations regarding the fair value of these investments are materially higher than the values that we ultimately realize upon their disposal.

The mortgage loans underlying our residential mortgage investments are subject to delinquency, foreclosure and loss, which could result in losses to us.

We invest in residential mortgage related receivables that are secured by pools of residential mortgage loans. Accordingly, these investments are subject to all of the risks of the underlying mortgage loans. Residential mortgage loans are secured by single-family residential property. They are subject to risks of delinquency, foreclosure and loss. The ability of a borrower to repay a loan secured by a residential property depends on the income or assets of the borrower, and many factors may impair borrowers’ abilities to repay their loans. Foreclosure of a mortgage loan can be expensive and lengthy. Our investments in mortgage related receivables would be adversely affected by defaults under the loans underlying such securities. To the extent losses are realized on the loans underlying the mortgage related receivables in which we invest, we may not recover a portion or all of the amount invested in such mortgage related receivables.

Risks Related to our Direct Real Estate Investments

We are exposed to liabilities, including environmental liabilities, with respect to properties to which we take title.

Owning title to real estate can subject us to liabilities for injury to persons on the property or property damage. To the extent that any such liabilities are not adequately covered by insurance, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

We could be subject to environmental liabilities with respect to properties we own. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances, or chemical releases, at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

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We may experience losses if the creditworthiness of our tenants deteriorates and they are unable to meet their obligations under our leases.

We own the properties leased to tenants from whom we receive rents during the terms of our leases. A tenant’s ability to pay rent is determined by the creditworthiness of the tenant. If a tenant’s credit deteriorates, the tenant may default on its obligations under our lease and the tenant may also become bankrupt. The bankruptcy or insolvency or other failure to pay of our tenants is likely to adversely affect the income produced by many of our direct real estate investments.

The operators of our healthcare properties are faced with increased litigation, rising insurance costs and enhanced government scrutiny that may affect their ability to make payments to us.

Advocacy groups that monitor the quality of care at healthcare facilities, have sued healthcare operators and called upon state and federal legislatives to enhance their oversight of trends in healthcare facility ownership and quality of care. Patients have also sued healthcare facility operators and have, in certain cases, succeeded in winning very large damage awards for alleged abuses. The effect of this litigation and potential litigation in the future has been to materially increase the costs incurred by our operators for monitoring and reporting quality of care compliance. In addition, the cost of medical malpractice and liability insurance has increased and may continue to increase so long as the present litigation environment affecting the operations of healthcare facilities continues. Increased costs could limit our operators’ ability to make payments to us, potentially decreasing our revenue and increasing our collection and litigation costs. To the extent we are required to remove or replace the operators of our healthcare properties, our revenue from those properties could be reduced or eliminated for an extended period of time.

Since real estate investments are illiquid, we may not be able to sell properties when we desire.

Real estate investments generally cannot be sold quickly. We may not be able to vary our portfolio promptly in response to continued changes in the real estate market. This inability to respond to changes in the performance of our investments could adversely affect our ability to service our debt. The real estate market is affected by many factors that are beyond our control, including:

•  changes in interest rates and in the availability, costs and terms of financing;

•  adverse changes in national and local economic and market conditions;

•  the ongoing need for capital improvements, particularly in older structures;

•  changes in governmental laws and regulations, fiscal policies and zoning and other ordinances and costs of compliance with laws and regulations;

•  changes in operating expenses; and

•  civil unrest, acts of war and natural disasters, including earthquakes and floods, which may result in uninsured and underinsured losses.

We cannot predict how long it may take us to find a willing purchaser and to close the sale of a property. We also cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. In addition, there are provisions under the federal income tax laws applicable to REITs that may limit our ability to recognize the full economic benefit from a sale of our assets. State laws mandate certain procedures for property foreclosures, and in certain states, we would face a time consuming foreclosure process, during which time the property could be subject to waste. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our operating results and financial condition.

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Risks Related to our Common Stock

Our cash dividends are not guaranteed and may fluctuate; we could reduce or eliminate dividends on our common stock.

Our board of directors, in its sole discretion, will determine the amount and frequency of dividends to be provided to our shareholders based on consideration of a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments. Consequently, our dividend levels may fluctuate, and the level of dividends we pay could be less than expected. If we lower our dividend or elect or are required to retain rather than distribute our income, our stock price could be adversely affected.

Acquisitions may adversely impact our business.

As part of our business strategy, we have in the past purchased other finance companies as well as loan portfolios and related assets from other finance companies, and we expect to continue these activities in the future. We also may acquire portfolios of real estate, as in our direct real estate investment transactions in 2007 and 2006. Future acquisitions may result in potentially dilutive issuances of equity securities and the incurrence of additional debt. In addition, we may face additional risks from future acquisitions, such as TierOne, including:

•  difficulties in integrating the operations, services, products and personnel of the acquired company or asset portfolio;

•  heightened risks of credit losses as a result of acquired assets not having been originated by us in accordance with our rigorous underwriting standards;

•  the diversion of management’s attention from other business concerns;

•  the potentially adverse effects that acquisitions may have in terms of the composition and performance of our assets;

•  the potential loss of key employees of the acquired company; and

•  inability to meet regulatory requirements applicable to us if the acquired company’s business is subject to regulation.

An investment in our shares of common stock involves tax concerns in addition to those affecting our REIT status.

We may face other tax liabilities as a REIT that reduce our cash flow.  We may be subject to certain taxes on our income and assets, including state or local income, property and transfer taxes, such as mortgage recording taxes. Any of these taxes would decrease cash available for distribution to our shareholders. In addition, to meet the REIT qualification requirements, and to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we hold some of our assets through TRSs. TRSs are corporations subject to corporate-level income tax at regular rates. The rules applicable to TRSs limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. We cannot assure you that we will be able to avoid application of the 100% excise tax imposed on certain non-arm’s length transactions.

If, during the ten-year period beginning on the first day of the first taxable year for which we qualified as a REIT, we recognize gain on the disposition of any property that we held as of such date, then, to the extent of the excess of (i) the fair market value of such property as of such date over (ii) our adjusted income tax basis in such property as of such date, we will be required to pay a corporate-level federal income tax on such gain at the highest regular corporate rate. Although we have no present intention to dispose of any property in a manner that would trigger such tax consequences, such dispositions could occur in the future.

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In addition, the IRS may assert liabilities against us for corporate income taxes for taxable years prior to the time we qualified as a REIT, in which case we will owe these taxes plus interest and penalties, if any. Moreover, any increase in taxable income will result in an increase in accumulated undistributed earnings and profits, which could require us to pay additional taxable dividends to our then-existing shareholders within 90 days of the relevant determination.

State tax laws may not conform to federal tax law.  Though we expect to qualify as a REIT for federal income tax purposes in 2007, our qualification as a REIT under the laws of each individual state depends, among other things, on that state’s conformity with federal tax law. If you live in a state whose tax laws do not conform to the federal tax treatment of REITs, even if we do not do business in that state, cash distributions to you may be characterized as ordinary income rather than capital gains for purposes of computing your state taxes. You should consult with your tax advisor concerning the state tax consequences of an investment in our common shares.

We and some of our shareholders could have federal income tax liability if we recognize any “excess inclusion income.”  If we own a residual interest in either a real estate mortgage investment conduit, or REMIC, or taxable mortgage pool, we will be required to allocate excess inclusion income among our shareholders (and, in certain cases, holders of our convertible debt) to the extent that such amounts exceed our REIT taxable income, excluding any net capital gain. To the extent that a shareholder (and, in certain cases, holders of our convertible debt) is allocated a portion of our excess inclusion income, such excess inclusion income (i) would not be allowed to be offset by any net operating losses otherwise available to the shareholder, (ii) would be subject to tax as unrelated business taxable income in the hands of most types of shareholders that are otherwise generally exempt from federal income tax, and (iii) would be subject to federal withholding tax at the maximum rate (30%), generally being ineligible for a reduction or elimination of such tax under an applicable income tax treaty, in the hands of foreign shareholders. Generally, to the extent that we allocate any excess inclusion income to certain “disqualified shareholders” that are not subject to federal income taxation notwithstanding the foregoing sentence, we would be subject to tax on such excess inclusion income at the highest tax rate. Tax-exempt investors, non-U.S. shareholders and shareholders with net operating losses should carefully consider the tax consequences described above and are urged to consult their tax advisors in connection with their decision to invest in our shares of common stock.

Complying with REIT requirements may limit our ability to hedge effectively.  The existing REIT provisions of the Internal Revenue Code substantially limit our ability to hedge mortgage-backed securities and related borrowings. Under these provisions, our annual gross income from qualifying hedges of our borrowings, together with any other income not generated from qualifying real estate assets, is limited to 25% or less of our gross income. In addition, we must limit our aggregate gross income from non-qualifying hedges, fees and certain other non-qualifying sources to 5% or less of our annual gross income. As a result, we might in the future have to limit our use of advantageous hedging techniques or implement those hedges through a TRS. These changes could increase the cost of our hedging activities or leave us exposed to greater risks associated with changes in interest rates than we would otherwise want to bear.

If a substantial number of shares available for sale are sold in a short period of time, the market price of our common stock could decline.

If our existing shareholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. As of February 15, 2008, we had 224,734,693 shares of common stock outstanding and options then exercisable for 5,130,103 shares were held by our employees and directors. Subject, in some cases, to Rule 144 compliance, all of these shares are eligible for sale in the public market. The perception in the public market that our existing shareholders might sell shares of common stock could also depress our market price. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

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Some provisions of Delaware law and our certificate of incorporation and bylaws may deter third parties from acquiring us.

Our certificate of incorporation and bylaws provide for, among other things:

•  a classified board of directors;

•  restrictions on the ability of our shareholders to fill a vacancy on the board of directors;

•  REIT ownership limits;

•  the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without shareholder approval; and

•  advance notice requirements for shareholder proposals.

We also are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which restricts the ability of any shareholder that at any time holds more than 15% of our voting shares to acquire us without the approval of shareholders holding at least 662/3% of the shares held by all other shareholders that are eligible to vote on the matter. Our board of directors has provided a waiver to Farallon Capital Management and its affiliates to acquire common stock in excess of 15% for purposes of Section 203 of the Delaware General Corporation Law.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take other corporate actions than you desire.

Insiders continue to have substantial control over us and could limit your ability to influence the outcome of key transactions, including a change of control.

Our directors and executive officers and entities affiliated with them beneficially owned approximately 37% of the outstanding shares of our common stock as of December 31, 2007. As a result, these shareholders, if acting together, would be able to influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our shareholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES

Our headquarters are located in Chevy Chase, Maryland, a suburb of Washington, D.C., where we lease office space under long-term operating leases. This office space houses the bulk of our technology and administrative functions and serves as the primary base for our operations. We also maintain offices in Arizona, California, Connecticut, Florida, Georgia, Illinois, Maine, Maryland, Massachusetts, Missouri, New York, Ohio, Pennsylvania, Tennessee, Texas, Utah and in Europe. We believe our leased facilities are adequate for us to conduct our business.

Our Healthcare Net Lease segment acquires real estate for long-term investment purposes. These real estate investments primarily consist of long-term care facilities generally leased through long-term, triple-net operating leases. We had $1.0 billion in direct real estate investments as of December 31, 2007, which consisted primarily of land and buildings. As of December 31, 2007, 129 of our direct real estate investments, with a total carrying value of $695.0 million, were pledged as collateral to certain of our borrowings. For additional information about our borrowings, see Note 11, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

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Our direct real estate investment properties as of and for the year ended December 31, 2007, were as follows:

	Number of							Total
Facility Location	Facilities			Capacity(1)		Investment(2)		Revenues(3)
						($ in thousands)
Assisted Living Facilities:
Florida		5			261	$	8,668	$	829
Indiana		1			99		2,108		129
Wisconsin		1			20		760		38
		7			380		11,536		996
Long-Term Acute Care Facilities:
Florida		1			185		6,609		817
Kansas		1			39		384		35
Nevada		1			61		2,825		322
		3			285		9,818		1,174
Skilled Nursing Facilities:
Alabama		1			174		8,436		839
Arizona		2			174		9,912		1,208
Arkansas		2			185		1,771		157
California		1			99		4,845		408
Colorado		3			453		9,133		751
Florida		56			6,895		330,279		36,794
Indiana		13			1,363		54,196		5,681
Iowa		1			201		11,505		1,274
Kansas		2			190		3,858		310
Kentucky		5			344		23,282		2,352
Maryland		3			438		27,117		2,616
Massachusetts		2			219		15,571		1,252
Mississippi		6			574		44,237		4,242
Nevada		3			407		19,607		2,295
New Mexico		1			102		3,263		276
North Carolina		6			682		41,937		3,293
Ohio		3			349		20,864		1,864
Oklahoma		5			697		19,425		1,527
Pennsylvania		4			600		24,396		2,565
Tennessee		10			1,589		96,596		9,829
Texas		47			5,574		206,067		13,522
Washington(4)		—			—		—		29
Wisconsin		5			537		19,953		1,759
		181			21,846		996,250		94,843
Less multi-function facilities(5)		(5	)		—		—		—
Total owned properties		186			22,511	$	1,017,604	$	97,013

(1)	Capacity of assisted living and long-term acute care facilities, which are apartment-like facilities, is stated in units (studio, one or two bedroom apartments). Capacity of skilled nursing facilities is measured by licensed bed count.
(2)	Represents the acquisition costs of the assets less any related accumulated depreciation as of December 31, 2007.
(3)	Represents the amount of operating lease income recognized in our audited consolidated statement of income for the year ended December 31, 2007.
(4)	During the year ended December 31, 2007, we sold the only property that we owned in the state of Washington.
(5)	Three of our properties in Florida each serve as both an assisted living facility and a skilled nursing facility. One of our properties in Kansas serves as both a long-term acute care facility and a skilled nursing facility.

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ITEM 3.   LEGAL PROCEEDINGS

From time to time, we are party to legal proceedings. We do not believe that any currently pending or threatened proceeding, if determined adversely to us, would have a material adverse effect on our business, financial condition or results of operations, including our cash flows.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of our security holders during the fourth quarter of 2007.

PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “CSE.” The high and low sales prices for our common stock as reported by the NYSE for the quarterly periods during 2007 and 2006, were as follows:

	High		Low
2007:
Fourth Quarter	$	22.42	$	14.05
Third Quarter	$	25.10	$	14.76
Second Quarter	$	27.40	$	23.65
First Quarter	$	28.28	$	22.39
2006:
Fourth Quarter	$	28.57	$	25.66
Third Quarter	$	26.05	$	22.39
Second Quarter	$	25.50	$	21.80
First Quarter	$	25.35	$	21.52

On February 15, 2008, the last reported sale price of our common stock on the NYSE was $16.44 per share.

Holders

As of December 31, 2007, there were 2,046 holders of record of our common stock. The number of holders does not include individuals or entities who beneficially own shares but whose shares, are held of record by a broker or clearing agency, but does include each such broker or clearing agency as one recordholder. American Stock Transfer & Trust Company serves as transfer agent for our shares of common stock.

Dividend Policy

From our initial public offering in August 2003 through December 31, 2005, we did not pay any dividends. We began paying dividends in 2006 in conjunction with our decision to operate as a REIT.

In January 2006, we paid a special dividend of $2.50 per share, or $350.9 million in the aggregate, representing our cumulative undistributed earnings and profits, including earnings and profits of some of our predecessor entities, from our inception through December 31, 2005. We paid this special dividend $70.2 million in cash and $280.7 million in 12.3 million shares of common stock.

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Starting with the first quarter of 2006, we have paid a regular quarterly dividend. We declared and paid dividends as follows:

	Dividends Declared
	and Paid per Share
	2007		2006
Fourth Quarter	$	0.60	$	0.55
Third Quarter		0.60		0.49
Second Quarter		0.60		0.49
First Quarter		0.58		0.49
Total dividends declared and paid	$	2.38	$	2.02

For shareholders who held our shares for the entire year, the $2.38 per share dividend paid in 2007 was classified for tax reporting purposes as follows: 31.50% ordinary dividends, 0.09% short-term capital gain, 1.36% long-term capital gain, and 67.05% return on capital. Of the sum of ordinary dividends and short-term capital gains, 20.79% was considered excess inclusion income.

We intend to continue to pay regular cash quarterly dividends that, on an annual basis, represent at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid. Our actual dividend payments on our common stock are subject to final approval from our Board of Directors and are based on our results of operations, cash flow and prospects at the time, as well as any contractual limitations in our debt instruments.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

A summary of our repurchases of shares of our common stock for the three months ended December 31, 2007, was as follows:

					Shares Purchased		Maximum Number
	Total Number		Average		as Part of Publicly		of Shares that May
	of Shares		Price Paid		Announced Plans		Yet be Purchased
	Purchased(1)		per Share		or Programs		Under the Plans
October 1 — October 31, 2007		5,583	$	17.44		—		—
November 1 — November 30, 2007		13,969		14.93		—		—
December 1 — December 31, 2007		89,915		19.12		—		—
Total		109,467	$	18.50		—		—

(1) Represents the number of shares acquired as payment by employees of applicable statutory minimum withholding taxes owed upon vesting of restricted stock granted under the CapitalSource Inc. Third Amended and Restated Equity Incentive Plan.

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Performance Graph

The following graph compares the performance of our common stock during the period beginning on August 7, 2003, the date of our initial public offering, to December 31, 2007, with the S&P 500 Index and the S&P 500 Financials Index. The graph depicts the results of investing $100 in our common stock, the S&P 500 Index, and the S&P 500 Financials Index at closing prices on August 7, 2003, assuming all dividends were reinvested. Historical stock performance during this period may not be indicative of future stock performance.

	Base		Period
	Period		Ended		Year Ended December 31,
Company/Index	8/7/03		12/31/2003		2004		2005		2006		2007
CapitalSource Inc.	$	100	$	119.1	$	141.0	$	136.0	$	179.4	$	128.9
S&P 500 Index		100		115.0		127.5		133.8		154.9		163.5
S&P 500 Financials Index		100		113.5		125.9		134.0		159.7		130.0

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ITEM 6.   SELECTED FINANCIAL DATA

You should read the data set forth below in conjunction with our consolidated financial statements and related notes, Management’s Discussion and Analysis of Financial Condition and Results of Operations and other financial information appearing elsewhere in this report. The following tables show selected portions of historical consolidated financial data as of and for the five years ended December 31, 2007. We derived our selected consolidated financial data as of and for the five years ended December 31, 2007, from our audited consolidated financial statements, which have been audited by Ernst & Young LLP, independent registered public accounting firm.

	Year Ended December 31,
	2007			2006		2005		2004		2003
	($ in thousands, except per share data)
Results of operations:
Interest income	$	1,277,903		$	1,016,533	$	514,652	$	313,827	$	175,169
Fee income		162,395			170,485		130,638		86,324		50,596
Total interest and fee income		1,440,298			1,187,018		645,290		400,151		225,765
Operating lease income		97,013			30,742		—		—		—
Total investment income		1,537,311			1,217,760		645,290		400,151		225,765
Interest expense		847,241			606,725		185,935		79,053		39,956
Net investment income		690,070			611,035		459,355		321,098		185,809
Provision for loan losses		78,641			81,562		65,680		25,710		11,337
Net investment income after provision for loan losses		611,429			529,473		393,675		295,388		174,472
Depreciation of direct real estate investments		32,004			11,468		—		—		—
Other operating expenses		235,987			204,584		143,836		107,748		67,807
Total other (expense) income		(74,650	)		37,328		19,233		17,781		25,815
Noncontrolling interests expense		4,938			4,711		—		—		—
Net income before income taxes and cumulative effect of accounting change		263,850			346,038		269,072		205,421		132,480
Income taxes(1)		87,563			67,132		104,400		80,570		24,712
Net income before cumulative effect of accounting change		176,287			278,906		164,672		124,851		107,768
Cumulative effect of accounting change, net of taxes		—			370		—		—		—
Net income	$	176,287		$	279,276	$	164,672	$	124,851	$	107,768
Net income per share:
Basic	$	0.92		$	1.68	$	1.36	$	1.07	$	1.02
Diluted	$	0.91		$	1.65	$	1.33	$	1.06	$	1.01
Average shares outstanding:
Basic		191,697,254			166,273,730		120,976,558		116,217,650		105,281,806
Diluted		193,282,656			169,220,007		123,433,645		117,600,676		107,170,585
Cash dividends declared per share	$	2.38		$	2.02	$	0.50	$	—	$	—

(1) As a result of our decision to elect REIT status beginning with the tax year ended December 31, 2006, we provided for income taxes for the years ended December 31, 2007 and 2006, based on effective tax rates of 39.4% and 39.9%, respectively, for the income earned by our TRSs. We did not provide for any income taxes for the income earned by our qualified REIT subsidiaries for the years ended December 31, 2007 and 2006. We provided for income taxes on the consolidated income earned based on a 33.2%, 19.4%, 38.8% and 39.2% effective tax rates in 2007, 2006, 2005, and 2004, respectively. We provided for income taxes on the income earned from August 7, 2003, through December 31, 2003, based on a 38.0% effective tax rate. Prior to our reorganization as a “C” corporation on August 6, 2003, we operated as a limited liability company and did not provide for income taxes as all income taxes were paid directly by our members.

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	December 31,
	2007			2006			2005			2004			2003
	($ in thousands)
Balance sheet data:
Mortgage-related receivables, net	$	2,041,917		$	2,295,922		$	39,438		$	—		$	—
Mortgage-backed securities pledged, trading		4,060,605			3,502,753			323,370			—			—
Total loans, net(1)		9,581,718			7,599,231			5,779,966			4,140,381			2,339,089
Direct real estate investments, net		1,017,604			722,303			—			—			—
Total assets		18,040,349			15,210,574			6,987,068			4,736,829			2,567,091
Repurchase agreements		3,910,027			3,510,768			358,423			—			8,446
Credit facilities		2,207,063			2,251,658			2,450,452			964,843			736,700
Term debt		7,255,675			5,809,685			1,779,748			2,186,311			920,865
Other borrowings		1,594,870			1,288,575			786,959			555,000			—
Total borrowings		14,967,635			12,860,686			5,375,582			3,706,154			1,666,011
Total shareholders’ equity		2,582,271			2,093,040			1,199,938			946,391			867,132
Portfolio statistics:
Number of loans closed to date		2,457			1,986			1,409			923			504
Number of loans paid off to date		(1,243	)		(914	)		(486	)		(275	)		(87	)
Number of loans		1,214			1,072			923			648			417
Total loan commitments	$	14,602,398		$	11,929,568		$	9,174,567		$	6,379,012		$	3,673,369
Average outstanding loan size	$	8,128		$	7,323		$	6,487		$	6,596		$	5,796
Average balance of loans outstanding during year	$	8,858,968		$	6,971,908		$	5,046,704		$	3,287,734		$	1,760,638
Employees as of year end		562			548			520			398			285

(1) “Total loans, net” include receivables under reverse-repurchase agreements, loans held for sale and loans, net of deferred loan fees and discounts and an allowance for loan losses.

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	Year Ended December 31,
	2007			2006			2005			2004			2003
Performance ratios:
Return on average assets(1)		1.05	%		2.22	%		3.04	%		3.59	%		4.34	%
Return on average equity(1)		7.41	%		14.63	%		15.05	%		14.17	%		12.37	%
Yield on average interest earning assets		9.31	%		9.80	%		12.15	%		11.59	%		11.92	%
Cost of funds		6.01	%		5.79	%		4.43	%		3.08	%		3.32	%
Net finance margin		4.20	%		4.94	%		8.65	%		9.30	%		9.81	%
Operating expenses as a percentage of average total assets		1.59	%		1.72	%		2.65	%		3.09	%		3.58	%
Operating expenses (excluding direct real estate investment depreciation) as a percentage of average total assets		1.40	%		1.62	%		2.65	%		3.09	%		3.58	%
Efficiency ratio (operating expenses/net interest and fee income and other income)		43.55	%		33.32	%		30.05	%		31.80	%		32.01	%
Efficiency ratio (operating expenses excluding direct real estate depreciation/net interest and fee income and other income)		38.35	%		31.55	%		30.05	%		31.80	%		32.01	%
Credit quality and leverage ratios:
Loans 60 or more days contractual delinquent as a percentage of loans (as of year end)		0.75	%		1.12	%		0.70	%		0.76	%		0.18	%
Loans on non-accrual status as a percentage of loans (as of year end)		1.73	%		2.34	%		2.30	%		0.53	%		0.36	%
Impaired loans as a percentage of loans (as of year end)		3.23	%		3.58	%		3.33	%		0.77	%		0.63	%
Net charge offs (as a percentage of average loans)		0.64	%		0.69	%		0.27	%		0.26	%		0.00	%
Allowance for loan losses as a percentage of loans (as of year end)		1.41	%		1.54	%		1.46	%		0.82	%		0.75	%
Total debt to equity (as of year end)		5.80	x		6.14	x		4.48	x		3.93	x		1.93	x
Equity to total assets (as of year end)		14.31	%		13.76	%		17.17	%		19.98	%		33.78	%

(1) Adjusted to reflect results from our reorganization in 2003 as a “C” corporation. As a limited liability company prior to the August 6, 2003 reorganization, we did not provide for income taxes as all income taxes were paid directly by the members. As a “C” corporation, CapitalSource Inc. is responsible for the payment of all federal and state corporate income taxes. For the year ended December 31, 2003, return on average assets and return on average equity were calculated based on unaudited pro forma net income that includes provision for income taxes with a combined federal and state effective tax rate of 38.0%.

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview and Highlights

We are a commercial finance, investment and asset management company focused on the middle market. We operate as a REIT and provide senior and subordinate commercial loans, invest in real estate and residential mortgage assets, and engage in asset management and servicing activities.

Through our commercial finance activities, our primary goal is to be the leading provider of financing to middle market businesses that require customized and sophisticated financing. We operate through three primary commercial finance businesses:

•  Corporate Finance, which generally provides senior and subordinate loans through direct origination and participation in widely syndicated loan transactions;

•  Healthcare and Specialty Finance, which, including our Healthcare Net Lease segment activities, generally provides first mortgage loans, asset-based revolving lines of credit, and other cash flow loans to healthcare businesses and a broad range of other companies and makes investments in income-producing healthcare facilities, particularly long-term care facilities; and

•  Structured Finance, which generally engages in commercial and residential real estate finance and also provides asset-based lending to finance companies.

To optimize our REIT structure, we also invest in certain residential mortgage assets which included investments in residential mortgage loans and RMBS as of December 31, 2007.

Consolidated Results of Operations

We operate as three reportable segments: 1) Commercial Finance, 2) Healthcare Net Lease, and 3) Residential Mortgage Investment. Our Commercial Finance segment comprises our commercial lending business activities; our Healthcare Net Lease segment comprises our direct real estate investment business activities; and our Residential Mortgage Investment segment comprises our residential mortgage investment activities.

Prior to 2006, we operated as a single business segment as substantially all of our activity was related to our commercial finance business. On January 1, 2006, we began presenting financial results through two reportable segments: 1) Commercial Lending & Investment and 2) Residential Mortgage Investment. Our Commercial Lending & Investment segment comprised our commercial lending and direct real estate investment business and our Residential Mortgage Investment segment comprised all of our activities related to our investments in residential mortgage loans and RMBS. Beginning in the fourth quarter of 2007, we are presenting financial results through three reportable segments: 1) Commercial Finance, 2) Healthcare Net Lease, and 3) Residential Mortgage Investment. Changes have been made in the way management organizes financial information to make operating decisions, resulting in the activities previously reported in the Commercial Lending & Investment segment being disaggregated into the Commercial Finance segment and the Healthcare Net Lease segment as described above. We have reclassified all comparative prior period segment information to reflect our three reportable segments. The discussion that follows differentiates our results of operations between our segments.

Explanation of Reporting Metrics

Interest Income.  In our Commercial Finance segment, interest income represents interest earned on our commercial loans. Although the majority of these loans charge interest at variable rates that generally adjust daily, we also have a number of loans charging interest at fixed rates. In our Healthcare Net Lease segment, interest income represents interest earned on cash and restricted cash. In our Residential Mortgage Investment segment, interest income consists of coupon interest and the amortization of purchase discounts and premiums on our investments in RMBS and mortgage-related receivables, which are amortized into income using the interest method.

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Fee Income.  In our Commercial Finance segment, fee income represents net fee income earned from our commercial loan operations. Fee income primarily includes the amortization of loan origination fees, net of the direct costs of origination, prepayment-related fees as well as other fees charged to borrowers.

Operating Lease Income.  In our Healthcare Net Lease segment, operating lease income represents lease income earned in connection with our direct real estate investments. Our operating leases typically include fixed rental payments, subject to escalation over the life of the lease. We generally project a minimum escalation rate for the leases and recognize operating lease income on a straight-line basis over the life of the lease. We currently do not generate any operating lease income in our Commercial Finance segment or our Residential Mortgage Investment segment.

Interest Expense.  Interest expense is the amount paid on borrowings, including the amortization of deferred financing fees. In our Commercial Finance segment, our borrowings consist of repurchase agreements, secured and unsecured credit facilities, term debt, convertible debt and subordinated debt. In our Healthcare Net Lease segment, our borrowings consist of a secured credit facility, mortgage debt and allocated intercompany debt. In our Residential Mortgage Investment segment, our borrowings consist of repurchase agreements and term debt. The majority of our borrowings charge interest at variable rates based primarily on one-month LIBOR or Commercial Paper (“CP”) rates plus a margin. Currently, our convertible debt, three series of our subordinated debt, our term debt recorded in connection with our investments in mortgage-related receivables and the intercompany debt within our Healthcare Net Lease segment bear a fixed rate of interest. Deferred financing fees and the costs of issuing debt, such as commitment fees and legal fees, are amortized over the estimated life of the borrowing. Loan prepayments may materially affect interest expense on our term debt since in the period of prepayment the amortization of deferred financing fees and debt acquisition costs is accelerated.

Provision for Loan Losses.  We record a provision for loan losses in both our Commercial Finance segment and our Residential Mortgage Investment segment. The provision for loan losses is the periodic cost of maintaining an appropriate allowance for loan losses inherent in our commercial finance portfolio and in our portfolio of residential mortgage-related receivables. As the size and mix of loans within these portfolios change, or if the credit quality of the portfolios change, we record a provision to appropriately adjust the allowance for loan losses. We do not have any loan receivables in our Healthcare Net Lease segment.

Other Income.  In our Commercial Finance segment, other income (expense) consists of gains (losses) on the sale of loans, gains (losses) on the sale of debt and equity investments, unrealized appreciation (depreciation) on certain investments, gains (losses) on derivatives, due diligence deposits forfeited, fees associated with the United States Department of Housing and Urban Development, or HUD, origination activities, unrealized appreciation (depreciation) of our equity interests in certain non-consolidated entities, third-party servicing income, income from our management of various loans held by third parties and other miscellaneous fees and expenses not attributable to our commercial finance operations. In our Healthcare Net Lease segment, other income (expense) consists of gain (loss) on the sale of assets. In our Residential Mortgage Investment segment, other income (expense) consists of realized and unrealized appreciation (depreciation) on certain of our residential mortgage investments and gains (losses) on derivatives that are used to hedge the residential mortgage investment portfolio.

Operating Expenses.  In our Commercial Finance segment, operating expenses include compensation and benefits, professional fees, travel, rent, insurance, depreciation and amortization, marketing and other general and administrative expenses. In our Healthcare Net Lease segment, operating expenses include depreciation of direct real estate investments, professional fees, an allocation of overhead expenses (including compensation and benefits) and other direct expenses. In our Residential Mortgage Investment segment, operating expenses include compensation and benefits, professional fees paid to our investment manager and other direct expenses.

Income Taxes.  We elected REIT status under the Code when we filed our tax return for the year ended December 31, 2006. As a REIT, we generally are not subject to corporate-level income tax on the earnings distributed to our shareholders that we derive from our REIT qualifying activities, but are subject to corporate-level tax on the earnings we derive from our TRSs. We do not expect income from our Healthcare Net Lease segment or Residential Mortgage Investment segment to be subject to corporate-level tax as all assets in these segments are considered REIT qualifying assets. A significant portion of our income from our Commercial Finance segment will remain subject to corporate-level income tax as many of the segment’s assets are originated and held in our TRSs.

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We were responsible for paying federal, state and local income taxes on all of our income for the year ended December 31, 2005.

Adjusted Earnings.  Adjusted earnings represents net income as determined in accordance with U.S. generally accepted accounting principles (“GAAP”), adjusted for certain items, including real estate depreciation, amortization of deferred financing fees, non-cash equity compensation, realized and unrealized gains and losses on investments in RMBS and related derivatives, unrealized gains and losses on other derivatives and foreign currencies, net unrealized gains and losses on investments, provision for loan losses, charge offs, recoveries, nonrecurring items and the cumulative effect of changes in accounting principles. We view adjusted earnings and the related per share measures as useful and appropriate supplements to net income and net income per share. These measures serve as an additional measure of our operating performance because they facilitate evaluation of the company without the effects of certain adjustments determined in accordance with GAAP that may not necessarily be indicative of current operating performance. Adjusted earnings should not be considered as an alternative to net income or cash flows (each computed in accordance with GAAP). Instead, adjusted earnings should be reviewed in connection with net income and cash flows from operating, investing and financing activities in our consolidated financial statements, to help analyze how our business is performing. Adjusted earnings and other supplemental performance measures are defined in various ways throughout the REIT industry. Investors should consider these differences when comparing our adjusted earnings to other REITs.

Operating Results for the Years Ended December 31, 2007, 2006 and 2005

Our results of operations in 2007 were driven primarily by a challenging credit market environment, our continued asset growth and the impact of our REIT election. As further described below, the most significant factors influencing our consolidated results of operations for 2007 were:

•  Mark to market losses on our Residential Mortgage Investment Portfolio;

•  Losses on derivatives and other investments in our Commercial Finance segment;

•  Reduced prepayment-related fee income and reduced gains on equity sales;

•  Growth in our commercial loan portfolio;

•  Increased borrowings;

•  Increased operating lease income related to our direct real estate investments;

•  Decreased operating expenses as a percentage of average assets;

•  Decreased lending spreads; and

•  Increased borrowing spreads.

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Our consolidated operating results for the year ended December 31, 2007, compared to the year ended December 31, 2006, and for the year ended December 31, 2006, compared to the year ended December 31, 2005, were as follows:

	Year Ended											Year Ended
	December 31,											December 31,
	2007			2006		$ Change			% Change			2006		2005		$ Change			% Change
	($ in thousands)											($ in thousands)
Interest income	$	1,277,903		$	1,016,533	$	261,370			26	%	$	1,016,533	$	514,652	$	501,881			98	%
Fee income		162,395			170,485		(8,090	)		(5	)		170,485		130,638		39,847			31
Operating lease income		97,013			30,742		66,271			216			30,742		—		30,742			N/A
Interest expense		847,241			606,725		240,516			40			606,725		185,935		420,790			226
Provision for loan losses		78,641			81,562		(2,921	)		(4	)		81,562		65,680		15,882			24
Depreciation of direct real estate investments		32,004			11,468		20,536			179			11,468		—		11,468			N/A
Other operating expenses		235,987			204,584		31,403			15			204,584		143,836		60,748			42
Other (expense) income		(74,650	)		37,328		(111,978	)		(300	)		37,328		19,233		18,095			94
Noncontrolling interests expense		4,938			4,711		227			5			4,711		—		4,711			N/A
Income taxes		87,563			67,132		20,431			30			67,132		104,400		(37,268	)		(36	)
Cumulative effect of accounting change, net of taxes		—			370		(370	)		N/A			370		—		370			N/A
Net income		176,287			279,276		(102,989	)		(37	)		279,276		164,672		114,604			70

Our consolidated yields on income earning assets and the costs of interest bearing liabilities for the years ended December 31, 2007 and 2006, were as follows:

	Year Ended December 31,
	2007							2006
	Weighted		Net		Average			Weighted		Net		Average
	Average		Investment		Yield/			Average		Investment		Yield/
	Balance		Income		Cost			Balance		Income		Cost
	($ in thousands)
Interest earning assets:
Interest income			$	1,277,903		8.26	%			$	1,016,533		8.39	%
Fee income				162,395		1.05					170,485		1.41
Total interest earning assets(1)	$	15,472,459		1,440,298		9.31		$	12,112,492		1,187,018		9.80
Total direct real estate investments		947,929		97,013		10.23			260,313		30,742		11.81
Total income earning assets		16,420,388		1,537,311		9.36			12,372,805		1,217,760		9.84
Total interest bearing liabilities(2)		14,105,355		847,241		6.01			10,479,447		606,725		5.79
Net finance spread			$	690,070		3.35	%			$	611,035		4.05	%
Net finance margin						4.20	%						4.94	%

(1)	Interest earning assets include cash, restricted cash, mortgage-related receivables, RMBS, loans, and investments in debt securities.
(2)	Interest bearing liabilities include repurchase agreements, secured and unsecured credit facilities, term debt, convertible debt and subordinated debt.

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Operating Expenses

The increase in consolidated operating expenses from 2006 to 2007 was primarily due to a $21.8 million increase in total employee compensation and an increase of $21.2 million in depreciation and amortization expense primarily resulting from increases in our direct real estate investments over the previous year. The higher employee compensation was attributable to a $12.5 million increase in incentive compensation, including an increase in restricted stock awards, and a $6.1 million increase in employee salaries. For the years ended December 31, 2007 and 2006, incentive compensation totaled $81.7 million and $69.2 million, respectively. Incentive compensation comprises annual bonuses, as well as stock options and restricted stock awards, which generally have vesting periods ranging from eighteen months to five years. The remaining increase in operating expenses for the year ended December 31, 2007 was primarily attributable to a $2.6 million increase in administrative expenses and a $2.1 million increase in rent expense.

The increase in consolidated operating expenses from 2006 to 2005 was primarily due to higher total employee compensation, which increased $40.9 million, or 43%. The higher employee compensation was attributable to an increase in our average number of employees to 555 for the year ended December 31, 2006, from 457 for the year ended December 31, 2005, as well as higher incentive compensation, including an increase in the value of restricted stock awards and stock options granted. For the years ended December 31, 2006 and 2005, incentive compensation totaled $69.2 million and $44.5 million, respectively. Incentive compensation comprises annual bonuses, as well as stock options and restricted stock awards, which generally have a three- to five-year vesting period. The remaining increase in operating expenses for the year ended December 31, 2006, was primarily attributable to an increase of $12.2 million in professional fees, an increase of $2.2 million in travel and entertainment expenses and an increase of $3.5 million in other general business expenses.

Income Taxes

As a result of our decision to elect REIT status beginning with the tax year ended December 31, 2006, we provided for income taxes for the years ended December 31, 2007 and 2006, based on effective tax rates of 39.4% and 39.9%, respectively, for the income earned by our TRSs. We did not provide for any income taxes for the income earned by our qualified REIT subsidiaries for the years ended December 31, 2007 and 2006. We provided for income taxes on the consolidated income earned based on a 33.2%, 19.4% and 38.8% effective tax rates in 2007, 2006 and 2005, respectively. Our overall effective tax for the year ended December 31, 2006 included the reversal of $4.7 million in net deferred tax liabilities relating to REIT qualifying activities, into income, in connection with our REIT election. The increased effective tax rate on consolidated net income for the year ended December 31, 2007, compared to the year ended December 31, 2006, is due to our TRSs accounting for a greater percentage of our annual consolidated net income in 2007 than in 2006. All of our consolidated net income for the year ended December 31, 2005 was subject to income tax, which resulted in a higher effective tax rate.

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Adjusted Earnings

Adjusted earnings, as previously defined, were $448.2 million, or $2.32 per diluted share, for the year ended December 31, 2007, and $425.7 million, or $2.51 per diluted share, for the year ended December 31, 2006. A reconciliation of our reported net income to adjusted earnings for the years ended December 31, 2007 and 2006, was as follows:

	December 31,
	2007		2006
	($ in thousands, except per
	share data)
Net income	$	176,287	$	279,276
Add:
Real estate depreciation and amortization(1)		31,785		10,323
Amortization of deferred financing fees(2)		29,783		30,842
Non-cash equity compensation		44,488		33,294
Net realized and unrealized losses on residential mortgage investment portfolio, including related derivatives(3)		81,022		5,862
Unrealized losses (gains) on derivatives and foreign currencies, net		51,233		(1,470	)
Unrealized losses on investments, net		12,615		7,524
Provision for loan losses		78,641		81,662
Recoveries(4)		—		—
Less:
Charge offs(5)		57,679		16,510
Nonrecurring items(6)		—		4,725
Cumulative effect of accounting change, net of taxes		—		370
Adjusted earnings	$	448,175	$	425,708
Net income per share:
Basic — as reported	$	0.92	$	1.68
Diluted — as reported	$	0.91	$	1.65
Average shares outstanding:
Basic — as reported		191,697,254		166,273,730
Diluted — as reported		193,282,656		169,220,007
Adjusted earnings per share:
Basic	$	2.34	$	2.56
Diluted(7)	$	2.32	$	2.51
Average shares outstanding:
Basic		191,697,254		166,273,730
Diluted(8)		194,792,918		171,551,972

(1)	Depreciation and amortization for direct real estate investments only. Excludes depreciation for corporate leasehold improvements, fixed assets and other non-real estate items.
(2)	Includes amortization of deferred financing fees and other non-cash interest expense.
(3)	Includes adjustments to reflect the realized gains and losses and the period change in fair value of RMBS and related derivative instruments.
(4)	Includes all recoveries on loans during the period.
(5)	To the extent we experience losses on loans for which we specifically provided a reserve prior to January 1, 2006, there will be no adjustment to earnings. All charge offs incremental to previously established allocated reserves will be deducted from net income.
(6)	Represents the write-off of a net deferred tax liability recorded in connection with our conversion to a REIT for the year ended December 31, 2006.
(7)	Adjusted to reflect the impact of adding back noncontrolling interests expense totaling $3.1 million and $4.7 million for the years ended December 31, 2007 and 2006, to adjusted earnings due to the application of the if-converted method on non-managing member units, which are considered dilutive to adjusted earnings per share, but are antidilutive to GAAP net income per share.
(8)	Adjusted to include average non-managing member units of 1,113,259 and 2,331,965 for the years ended December 31, 2007 and 2006, respectively, which were considered dilutive to adjusted earnings per share, but are antidilutive to GAAP net income per share.

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Comparison of the Years Ended December 31, 2007 and 2006

We have reclassified all comparative prior period segment information to reflect our three reportable segments. The discussion that follows differentiates our results of operations between our segments. All references to commercial loans below include loans, loans held for sale and receivables under reverse-repurchase agreements.

Commercial Finance Segment

Our Commercial Finance segment operating results for the year ended December 31, 2007, compared to the year ended December 31, 2006, were as follows:

	Year Ended December 31,
	2007			2006			$ Change			% Change
	($ in thousands)
Interest income	$	928,190		$	749,011		$	179,179			24	%
Fee income		162,395			170,485			(8,090	)		(5	)
Interest expense		481,605			344,988			136,617			40
Provision for loan losses		77,576			81,211			(3,635	)		(4	)
Operating expenses		220,550			193,053			27,497			14
Other income		883			37,297			(36,414	)		(98	)
Noncontrolling interests expense		(1,037	)		(806	)		(231	)		(29	)
Income taxes		87,563			67,132			20,431			30
Cumulative effect of accounting change, net of taxes		—			370			(370	)		N/A
Net income		225,211			271,585			(46,374	)		(17	)

Interest Income

The increase in interest income was due to the growth in average interest earning assets, primarily loans, of $2.0 billion, or 28%. This increase was partially offset by a decrease in the interest component of yield to 9.96% for the year ended December 31, 2007, from 10.28% for the year ended December 31, 2006. The decrease in the interest component of yield was primarily due to a decrease in our lending spread, partially offset by an increase in short-term interest rates. During the year ended December 31, 2007, our commercial finance spread to average one-month LIBOR was 4.71% compared to 5.19% for the year ended December 31, 2006. This decrease in lending spread reflects overall trends in financial markets, the increase in competition in our markets, as well as the changing mix of our commercial finance portfolio as we continue to pursue the expanded opportunities afforded to us by our REIT election. As a REIT, we can make the same, or better, after tax return on loans with a lower interest rate than on loans with a higher interest rate held prior to becoming a REIT. Fluctuations in yields are driven by a number of factors, including changes in short-term interest rates (such as changes in the prime rate or one-month LIBOR), the coupon on new loan originations, the coupon on loans that pay down or pay off and modifications of interest rates on existing loans.

Fee Income

The decrease in fee income was primarily the result of a decrease in prepayment-related fee income, which totaled $56.1 million for the year ended December 31, 2007, compared to $66.7 million for the year ended December 31, 2006. Prepayment-related fee income contributed 0.60% and 0.92% to yield for the years ended December 31, 2007 and 2006, respectively. Yield from fee income, including prepayment related fees, decreased to 1.74% for the year ended December 31, 2007, from 2.34% for the year ended December 31, 2006.

Interest Expense

We fund our growth largely through debt. The increase in interest expense was primarily due to an increase in average borrowings of $2.0 billion, or 35%. Our cost of borrowings increased to 6.31% for the year ended December 31, 2007, from 6.12% for the year ended December 31, 2006. This increase was the result of higher

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LIBOR and CP rates on which interest on our term securitizations and credit facilities are based. The increase was also the result of higher borrowing spreads and higher deferred financing fees on some of our term securitizations and on some of our credit facilities, and increases in the cost of our convertible debt following the exchange in April 2007.

Net Finance Margin

Net finance margin, defined as net investment income (which includes interest and fee income less interest expense) divided by average income earning assets, was 6.54% for the year ended December 31, 2007, a decrease of 135 basis points from 7.89% the year ended December 31, 2006. The decrease in net finance margin was primarily due to the increase in interest expense resulting from higher leverage, a higher cost of funds, and a decrease in yield on total income earning assets. Net finance spread, which represents the difference between our gross yield on income earning assets and the cost of our interest bearing liabilities, was 5.40% for the year ended December 31, 2007, a decrease of 110 basis points from 6.50% for the year ended December 31, 2006. Gross yield is the sum of interest and fee income divided by our average income earning assets. The decrease in net finance spread is attributable to the changes in its components as described above.

The yields of income earning assets and the costs of interest bearing liabilities in our Commercial Finance segment for the years ended December 31, 2007 and 2006, were as follows:

	Year Ended December 31,
	2007							2006
	Weighted		Net		Average			Weighted		Net		Average
	Average		Investment		Yield/			Average		Investment		Yield/
	Balance		Income		Cost			Balance		Income		Cost
	($ in thousands)
Interest earning assets:
Interest income			$	928,190		9.96	%			$	749,011		10.28	%
Fee income				162,395		1.74					170,485		2.34
Total interest earning assets(1)	$	9,316,088		1,090,585		11.70		$	7,284,243		919,496		12.62
Total interest bearing liabilities(2)		7,633,687		481,605		6.31			5,639,481		344,988		6.12
Net finance spread			$	608,980		5.39	%			$	574,508		6.50	%
Net finance margin						6.54	%						7.89	%

(1)	Interest earning assets include cash, restricted cash, loans and investments in debt securities.
(2)	Interest bearing liabilities include repurchase agreements, secured and unsecured credit facilities, term debt, convertible debt and subordinated debt.

Provision for Loan Losses

The decrease in the provision for loan losses was the result of recognizing fewer allocated reserves during the year ended December 31, 2007.

Operating Expenses

The increase in operating expenses is due to the same factors which contributed to the increase in the consolidated operating expenses as described above. Operating expenses as a percentage of average total assets decreased to 2.31% for the year ended December 31, 2007, from 2.60% for the year ended December 31, 2006.

Other (Expense) Income

The decrease in other income was primarily attributable to a $48.6 million increase in net unrealized losses on derivative instruments, a $10.4 million increase in losses on foreign currency exchange and a $4.5 million decrease

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in the receipt of break-up fees. These decreases were partially offset by a $9.2 million increase in income relating to our equity interests in various investees that are not consolidated for financial statement purposes, an $8.9 million increase in net realized and unrealized gains in our equity investments and a $5.8 million increase in gains related to the sale of loans.

Our unrealized losses on derivative instruments were primarily due to the unrealized net change in the fair value of swaps used in hedging certain of our assets and liabilities to minimize our exposure to interest rate movements. We do not apply hedge accounting to these swaps and, as a result, changes in the fair value of such swaps are recognized in GAAP net income, while changes in the fair value of the underlying hedged exposures are not. To correct for this asymmetry and reflect the unrealized nature of the changes in fair value of such swaps, any such unrealized losses are added to, or any unrealized gains are subtracted from, GAAP earnings for purposes of determining our adjusted earnings, as previously defined.

Healthcare Net Lease Segment

Our Healthcare Net Lease segment operating results for the year ended December 31, 2007, compared to the year ended December 31, 2006, were as follows:

	Year Ended December 31,
	2007		2006			$ Change		% Change
			($ in thousands)
Operating lease income	$	97,013	$	30,742		$	66,271		216	%
Interest expense		41,047		11,176			29,871		267
Depreciation of direct real estate investments		32,004		11,468			20,536		179
Other operating expenses		9,437		2,891			6,546		226
Other (expense) income(1)		993		(2,497	)		3,490		140
Noncontrolling interests expense		5,975		5,517			458		8
Net income (loss)		9,543		(2,807	)		12,350		440

(1) Includes interest income.

Operating Lease Income

The increase in operating lease income is due to an increase in our direct real estate investments, which are leased to healthcare industry clients through long-term, triple-net operating leases. During the years ended December 31, 2007 and 2006, our average balance of direct real estate investments was $947.9 million and $260.3 million, respectively.

Interest Expense

The increase in interest expense was primarily due to an increase in average borrowings of $413.3 million, or 225%, corresponding to an increase in the size of the portfolio. Our cost of borrowings increased to 6.87% for the year ended December 31, 2007, from 6.08% for the year ended December 31, 2006. Our overall borrowing spread to average one-month LIBOR for the year ended December 31, 2007, was 1.62% compared to 0.99% for the year ended December 31, 2006.

Net Finance Margin

Net finance margin, defined as net investment income (which includes interest and operating lease income less interest expense) divided by average income earning assets, was 5.84% for the year ended December 31, 2007, a decrease of 142 basis points from 7.26% for the year ended December 31, 2006. Net finance spreads were 3.36% and 5.73%, respectively, for the years ended December 31, 2007 and 2006. Net finance spread is the difference between yield on interest earning assets and the cost of our interest bearing liabilities. The decrease in net finance spread is attributable to the changes in its components as described above.

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Depreciation of Direct Real Estate Investments

The increase in depreciation was due to increases in our direct real estate investments over the previous year. As of December 31, 2007, we had $1.0 billion in direct real estate investments, an increase of $295.3 million, or 40.9%, from December 31, 2006.

Other Operating Expenses

The increase in operating expenses was consistent with the increase in operating expenses in the Commercial Finance Segment. Operating expenses as a percentage of average total assets decreased to 0.95% for the year ended December 31, 2007, from 1.04% for the year ended December 31, 2006.

Residential Mortgage Investment Segment

Our Residential Mortgage Investment segment operating results for the year ended December 31, 2007, compared to the year ended December 31, 2006, were as follows:

	Year Ended December 31,
	2007			2006		$ Change			% Change
				($ in thousands)
Interest income	$	348,351		$	267,522	$	80,829			30	%
Interest expense		324,589			250,561		74,028			30
Provision for loan losses		1,065			351		714			203
Operating expenses		6,000			8,640		(2,640	)		(31	)
Other (expense) income		(75,164	)		2,528		(77,692	)		(3,073	)
Net (loss) income		(58,467	)		10,498		(68,965	)		(657	)

Interest Income

The increase in interest income was primarily due to the growth in average interest earning assets of $1.3 billion, or 27%.

Interest Expense

The increase in interest expense was primarily due to an increase in average borrowings of $1.2 billion, or 26%, corresponding to an increase in the size of the portfolio. Our cost of borrowings increased to 5.53% for the year ended December 31, 2007, from 5.38% for the year ended December 31, 2006. This increase was primarily due to an increase in the short term interest rate market index on which our cost of borrowings is based.

Operating Expenses

The decrease in operating expenses was primarily due to a decrease in compensation and benefits and professional fees. Operating expenses as a percentage of average total assets decreased to 0.11% for the year ended December 31, 2007, from 0.18% for the year ended December 31, 2006.

Other (Expense) Income

The net loss was attributable to net realized and unrealized losses on derivative instruments related to our residential mortgage investments of $79.6 million and other-than-temporary declines in the fair value of our Non-Agency MBS of $30.4 million. These losses were partially offset by net unrealized gains on our Agency MBS of $34.9 million. The value of Agency MBS relative to risk-free investments was impacted during the year ended December 31, 2007 by the broad credit market disruption.

Comparison of the Years Ended December 31, 2006 and 2005

All amounts below relate only to our Commercial Finance segment for the year ended December 31, 2006 and are compared to our consolidated results for the year ended December 31, 2005, as substantially all activity for the

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year ended December 31, 2005, was related to commercial finance activity. All references to commercial loans below include loans, loans held for sale and receivables under reverse-repurchase agreements.

Commercial Finance Segment

Our Commercial Finance segment operating results for the year ended December 31, 2006, compared to the year ended December 31, 2005, were as follows:

	Year Ended December 31,
	2006			2005		$ Change			% Change
				($ in thousands)
Interest income	$	749,011		$	514,652	$	234,359			46	%
Fee income		170,485			130,638		39,847			31
Interest expense		344,988			185,935		159,053			86
Provision for loan losses		81,211			65,680		15,531			24
Operating expenses		193,053			143,836		49,217			34
Other income		37,297			19,233		18,064			94
Noncontrolling interests expense		(806	)		—		(806	)		N/A
Income taxes		67,132			104,400		(37,268	)		(36	)
Cumulative effect of accounting change, net of taxes		370			—		370			N/A
Net income		271,585			164,672		106,913			65

Interest Income

The increase was due to the growth in average interest earning assets, primarily loans, of $2.0 billion, or 37%, as well as an increase in the interest component of yield to 10.28% for the year ended December 31, 2006, from 9.69% for the year ended December 31, 2005. The increase in the interest component of yield was largely due to the increase in short-term interest rates, partially offset by a decrease in our lending spread. During the year ended December 31, 2006, our commercial lending spread to average one-month LIBOR was 5.19% compared to 6.31% for the year ended December 31, 2005. This decrease in lending spread reflects overall trends in financial markets, the increase in competition in our markets, as well as the changing mix of our commercial finance portfolio as we pursue the expanded opportunities afforded to us by our decision to elect to be taxed as a REIT. By operating as a REIT, we can make the same, or better, after tax return on a loan with a lower interest rate than on a loan with a higher interest rate held prior to our decision to elect to be taxed as a REIT. Fluctuations in yields are driven by a number of factors, including changes in short-term interest rates (such as changes in the prime rate or one-month LIBOR), the coupon on new loan originations, the coupon on loans that pay down or pay off and modifications of interest rates on existing loans.

Fee Income

The increase in fee income was primarily the result of the growth in interest earning assets as well as an increase in prepayment-related fee income, which totaled $66.7 million for the year ended December 31, 2006, compared to $34.4 million for the year ended December 31, 2005. Prepayment-related fee income contributed 0.92% and 0.65%, to yield for the years ended December 31, 2006 and 2005, respectively. Yield from fee income decreased to 2.34% for the year ended December 31, 2006, from 2.46% for year ended December 31, 2005.

Interest Expense

We fund our growth largely through borrowings. The increase in interest expense was primarily due to an increase in average borrowings of $1.4 billion, or 34%, as well as rising interest rates during the year. Our cost of borrowings increased to 6.12% for the year ended December 31, 2006, from 4.43% for the year ended December 31, 2005. This increase was the result of rising interest rates, the use of our unsecured credit facility, which has a higher borrowing spread relative to our secured credit facilities, and an increase in the amortization of deferred financing

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fees. The increase in deferred financing fees was primarily due to additional financings and higher loan prepayments on loans that secure our term debt. These increases were partially offset by lower borrowing margins and our use of more cost effective sources of financing. Our overall borrowing spread to average one-month LIBOR for the year ended December 31, 2006, was 1.03% compared to 1.05% for the year ended December 31, 2005.

Net Finance Margin

Net finance margin, defined as net investment income (which includes interest and fee income less interest expense) divided by average income earning assets, was 7.89% for the year ended December 31, 2006, a decrease of 76 basis points from 8.65% for the year ended December 31, 2005. The decrease in net finance margin was primarily due to the increase in interest expense resulting from a higher cost of funds, offset partially by an increase in yield on total income earning assets resulting from higher loan prepayments. Net finance spread, which represents the difference between our gross yield on income earning assets and the cost of our interest bearing liabilities, was 6.50% for the year ended December 31, 2006, a decrease of 122 basis points from 7.72% for the year ended December 31, 2005. Gross yield is the sum of interest, fee and operating lease income divided by our average income earning assets. The decrease in net finance spread is attributable to the changes in its components as described above.

The yields of income earning assets and the costs of interest bearing liabilities in our Commercial Finance segment for the year ended December 31, 2006 and 2005, were as follows:

	Year Ended December 31,
	2006							2005
	Weighted		Net		Average			Weighted		Net		Average
	Average		Investment		Yield/			Average		Investment		Yield/
	Balance		Income		Cost			Balance		Income		Cost
	($ in thousands)
Interest earning assets:
Interest income			$	749,011		10.28	%			$	514,652		9.69	%
Fee income				170,485		2.34					130,638		2.46
Total interest earning assets(1)	$	7,284,243		919,496		12.62		$	5,309,530		645,290		12.15
Total interest bearing liabilities(2)		5,639,481		344,988		6.12			4,193,128		185,935		4.43
Net finance spread			$	574,508		6.50	%			$	459,355		7.72	%
Net finance margin						7.89	%						8.65	%

(1)	Interest earning assets include cash, restricted cash, loans and investments in debt securities.
(2)	Interest bearing liabilities include repurchase agreements, secured and unsecured credit facilities, term debt, convertible debt and subordinated debt.

Provision for Loan Losses

The increase in the provision for loan losses is the result of growth in our commercial loan portfolio, an increase in the balance of impaired loans in the portfolio and additional allocated reserves recorded during the year ended December 31, 2006.

Operating Expenses

The increase in operating expenses is due to the same factors which contributed to the increase in the consolidated operating expenses described above. Operating expenses as a percentage of average total assets decreased to 2.60% for the year ended December 31, 2006, from 2.65% for the year ended December 31, 2005.

Other Income

The increase in other income was primarily attributable to the receipt of a break-up fee of $4.5 million related to a prospective loan, a $2.9 million increase in net realized and unrealized gains in our equity investments, a

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$2.6 million increase on net gains on derivatives, a $2.1 million increase in income relating to our equity interests in certain non-consolidated entities and a $1.9 million increase in diligence deposits forfeited. These increases were partially offset by a $3.1 million decrease in third-party servicing fees.

Included in unrealized gains on derivative instruments is not only the change in fair value of these instruments, but also the net of interest income and expense accruals related to certain of our derivatives.

Financial Condition

Commercial Finance Segment

Portfolio Composition

We provide commercial loans to clients that require customized and sophisticated financing. We also selectively make equity investments. The composition of our Commercial Finance segment portfolio as of December 31, 2007 and 2006, was as follows:

	December 31,
	2007		2006
	($ in thousands)
Commercial loans	$	9,867,737	$	7,850,198
Investments		227,144		150,090
Total	$	10,094,881	$	8,000,288

Our total commercial loan portfolio reflected in the portfolio statistics below includes loans, loans held for sale and receivables under reverse-repurchase agreements. The composition of our commercial loan portfolio by loan type and by commercial finance business as of December 31, 2007 and 2006, was as follows:

	December 31,
	2007				2006
	($ in thousands)
Composition of loan portfolio by loan type:
Senior secured loans(1)	$	5,695,167	58	%	$	4,704,166	60	%
First mortgage loans(1)		2,995,048	30			2,542,222	32
Subordinate loans		1,177,522	12			603,810	8
Total	$	9,867,737	100	%	$	7,850,198	100	%
Composition of loan portfolio by business:
Corporate Finance	$	2,979,241	30	%	$	2,234,734	29	%
Healthcare and Specialty Finance		2,934,666	30			2,775,748	35
Structured Finance		3,953,830	40			2,839,716	36
Total	$	9,867,737	100	%	$	7,850,198	100	%

(1) Includes Term B loans.

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We may have more than one loan to a client and its related entities. For purposes of determining the portfolio statistics in this section, we count each loan or client separately and do not aggregate loans to related entities. The number of loans, average loan size, number of clients and average loan size per client by commercial finance business as of December 31, 2007, were as follows:

							Average Loan
	Number		Average		Number of		Size per
	of Loans		Loan Size		Clients		Client
	($ in thousands)
Composition of loan portfolio by business:
Corporate Finance		542	$	5,497		262	$	11,371
Healthcare and Specialty Finance		410		7,158		287		10,225
Structured Finance		262		15,091		210		18,827
Overall loan portfolio		1,214		8,128		759		13,001

The scheduled maturities of our commercial loan portfolio by loan type as of December 31, 2007, were as follows:

	Due in		Due in
	One Year		One to		Due After
	or Less		Five Years		Five Years		Total
	($ in thousands)
Scheduled maturities by loan type:
Senior secured loans(1)	$	575,728	$	4,556,300	$	563,139	$	5,695,167
First mortgage loans(1)		1,182,592		1,681,152		131,304		2,995,048
Subordinate loans		67,161		451,729		658,632		1,177,522
Total	$	1,825,481	$	6,689,181	$	1,353,075	$	9,867,737

(1) Includes Term B loans.

The dollar amounts of all fixed-rate and adjustable-rate commercial loans by loan type as of December 31, 2007, were as follows:

	Adjustable		Fixed
	Rates		Rates		Total
	($ in thousands)
Composition of loan portfolio by loan type:
Senior secured loans(1)	$	5,661,098	$	34,069	$	5,695,167
First mortgage loans(1)		2,673,877		321,171		2,995,048
Subordinate loans		1,048,738		128,784		1,177,522
Total	$	9,383,713	$	484,024	$	9,867,737
Percentage of total loan portfolio		95%		5%		100%

(1) Includes Term B loans.

As of December 31, 2007, our Corporate Finance, Healthcare and Specialty Finance and Structured Finance businesses had commitments to lend up to an additional $0.6 billion, $2.0 billion and $2.1 billion, respectively, to 262, 287 and 210 existing clients, respectively. Commitments do not include transactions for which we have signed commitment letters but not yet signed definitive binding agreements. Throughout 2007, the mix of outstanding loans in our commercial loan portfolio has shifted to a greater percentage of first mortgage and asset-based loans, including complementary fixed rate and low leverage real estate products, which have become more attractive as a result of our status as a REIT.

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Credit Quality and Allowance for Loan Losses

As of December 31, 2007 and 2006, the principal balances of loans 60 or more days contractually delinquent, non-accrual loans and impaired loans in our commercial finance portfolio were as follows:

	December 31,
Commercial Loan Asset Classification	2007			2006
	($ in thousands)
Loans 60 or more days contractually delinquent	$	74,298		$	88,067
Non-accrual loans(1)		170,522			183,483
Impaired loans(2)		318,945			281,377
Less: loans in multiple categories		(226,021	)		(230,469	)
Total	$	337,744		$	322,458
Total as a percentage of total loans		3.42%			4.11%

(1)

Includes commercial loans with an aggregate principal balance of $55.5 million and $47.0 million as of December 31, 2007 and 2006, respectively, which were also classified as loans 60 or more days contractually delinquent. As of December 31, 2007 and 2006, there were no loans classified as held for sale that were placed on non-accrual status.

(2)

Includes commercial loans with an aggregate principal balance of $55.5 million and $47.0 million as of December 31, 2007 and 2006, respectively, which were also classified as loans 60 or more days contractually delinquent, and commercial loans with an aggregate principal balance of $170.5 million and $183.5 million as of December 31, 2007 and 2006, respectively, which were also placed on non-accrual status.

Reflective of principles established in Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS No. 114”), we consider a loan to be impaired when, based on current information, we determine that it is probable that we will be unable to collect all amounts due according to the contractual terms of the original loan agreement. In this regard, impaired loans include those loans where we expect to encounter a significant delay in the collection of, and/or shortfall in the amount of contractual payments due to us as well as loans that we have assessed as impaired, but for which we ultimately expect to collect all payments.

During the year ended December 31, 2007, commercial loans with an aggregate carrying value of $189.6 million as of December 31, 2007, were involved in troubled debt restructurings as defined by SFAS No. 15, Accounting for Debtors and Creditors for Troubled Debt Restructurings. As of December 31, 2007, commercial loans with an aggregate carrying value of $263.9 million were involved in troubled debt restructurings. Additionally, under SFAS No. 114, loans involved in troubled debt restructurings are also assessed as impaired, generally for a period of at least one year following the restructuring. The allocated reserve for commercial loans that were involved in troubled debt restructurings was $23.1 million as of December 31, 2007. For the year ended December 31, 2006, commercial loans with an aggregate carrying value of $194.7 million as of December 31, 2006, were involved in troubled debt restructurings. The allocated reserve for commercial loans that were involved in troubled debt restructurings was $31.5 million as of December 31, 2006.

Middle market lending involves credit risks that we believe will result in further credit losses in our portfolio. We have provided an allowance for loan losses to cover estimated losses inherent in our commercial loan portfolio. Our allowance for loan losses was $138.9 million and $120.6 million as of December 31, 2007 and 2006, respectively. These amounts equate to 1.41% and 1.54% of gross loans as of December 31, 2007 and 2006, respectively. Of our total allowance for loan losses as of December 31, 2007 and 2006, $27.4 million and $37.8 million, respectively, were allocated to impaired loans. During the years ended December 31, 2007 and 2006, we charged off loans totaling $57.5 million and $48.0 million, respectively. Net charge offs as a percentage of average loans were 0.64% and 0.69% for the years ended December 31, 2007 and 2006, respectively.

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Investments

We commonly make investments in our clients in connection with our loans. These investments usually comprise equity interests such as common stock, preferred stock, limited liability company interests, limited partnership interests and warrants, but sometimes are in the form of subordinated debt if that is the form in which the equity sponsor makes its investment.

As of December 31, 2007 and 2006, the carrying values of our investments in our Commercial Finance segment were $227.1 million and $150.1 million, respectively. Included in these balances were investments carried at fair value totaling $27.9 million and $34.6 million, respectively.

Healthcare Net Lease Segment

Direct Real Estate Investments

We acquire real estate for long-term investment purposes. These real estate investments are generally long-term care facilities leased through long-term, triple-net operating leases. Under a typical triple-net lease, the client agrees to pay a base monthly operating lease payment and all facility operating expenses as well as make capital improvements. As of December 31, 2007 and 2006, we had $1.0 billion and $722.3 million, respectively, in direct real estate investments, which consisted primarily of land and buildings.

Residential Mortgage Investment Segment

Portfolio Composition

We invest directly in residential mortgage investments and as of December 31, 2007 and 2006, our portfolio of residential mortgage investments was as follows:

	December 31,
	2007		2006
	($ in thousands)
Mortgage-related receivables(1)	$	2,041,917	$	2,295,922
Residential mortgage-backed securities:
Agency(2)		4,060,605		3,502,753
Non-Agency(2)		4,632		34,243
Total	$	6,107,154	$	5,832,918

(1)	Represents secured receivables that are backed by adjustable-rate residential prime mortgage loans.
(2)	See following paragraph for a description of these securities.

We invest in RMBS, which are securities collateralized by residential mortgage loans. Agency MBS include mortgage-backed securities that were issued and are guaranteed by Fannie Mae or Freddie Mac. We also have invested in Non-Agency MBS, which are RMBS issued by non-government sponsored entities that are credit-enhanced through the use of subordination or in other ways. Substantially all of our RMBS are collateralized by adjustable rate residential mortgage loans, including hybrid adjustable rate mortgage loans. We account for our Agency MBS as debt securities that are classified as trading investments and included in mortgage-backed securities pledged, trading on our accompanying audited consolidated balance sheets. We account for our Non-Agency MBS as debt securities that are classified as available-for-sale and included in investments on our accompanying audited consolidated balance sheets. The coupons on the loans underlying RMBS are fixed for stipulated periods of time and then reset annually thereafter. The weighted average net coupon of Agency MBS in our portfolio was 5.07% as of December 31, 2007, and the weighted average reset date for the portfolio was approximately 41 months. The weighted average net coupon of Non-Agency MBS in our portfolio was 7.9% as of December 31, 2007. The fair values of our Agency MBS and Non-Agency MBS were $4.1 billion and $4.6 million, respectively, as of December 31, 2007.

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As of December 31, 2007, we had $2.0 billion in mortgage-related receivables secured by prime residential mortgage loans. As of December 31, 2007, the weighted average interest rate on these receivables was 5.38%, and the weighted average contractual maturity was approximately 28 years. See further discussion on our accounting treatment of mortgage-related receivables in Note 4, Mortgage-Related Receivables and Related Owner Trust Securitizations, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

During 2007, we also saw decreases in the carrying value of certain of our residential mortgage investments, representing a decline of approximately 1.2% in the value of the portfolio, as the market dislocation impacted the pricing relationship between mortgage assets (including Agency MBS that we own) and low risk fixed income securities. We actively manage the interest rate risk associated with this portfolio pursuant to a risk management strategy that is further described below in Market Risk Management. Our investment strategy explicitly contemplates the potential for upward and downward shifts in the carrying value of the portfolio, including shifts of the magnitude that we saw during 2007. We believe that these reductions in value are temporary in nature. Given our intention to hold the investments to maturity, temporary variations in value up or down have no material impact on our investment strategy.

Credit Quality and Allowance for Loan Losses

As of December 31, 2007 and 2006, mortgage-related receivables, whose underlying mortgage loans are 90 or more days past due or were in the process of foreclosure and foreclosed were as follows:

	December 31
	2007			2006
	($ in thousands)
Mortgage-related receivables whose underlying mortgage loans are 90 or more days past due or are in the process of foreclosure	$	14,751		$	2,364
Percentage of mortgage-related receivables		0.72	%(1)		0.10	%
Foreclosed assets	$	3,264			—
Percentage of mortgage-related receivables		0.16	%		—

(1) By comparison, in its January 2008 Monthly Summary Report, Fannie Mae reported a serious delinquency rate (“SDQ”) of 0.98% for December 2007, for conventional single family loans that are three months or more past due or in foreclosure process while, in its January 2008 Monthly Volume Summary, Freddie Mac reported an SDQ of 0.65% for December 2007, for comparable types of single family loans.

In connection with recognized mortgage-related receivables, we recorded provisions for loan losses of $1.1 million and $0.4 million for the years ended December 31, 2007 and 2006, respectively. During the year ended December 31, 2007, we charged off $0.7 million of these mortgage-related receivables. The allowance for loan losses was $0.8 million and $0.4 million as of December 31, 2007 and 2006, respectively, and was recorded in the accompanying audited consolidated balance sheets as a reduction to the carrying value of mortgage-related receivables. For the year ended December 31, 2007, we recognized $0.2 million in realized losses on such mortgage-related receivables.

Financing

We have financed our investments in RMBS primarily through repurchase agreements. As of December 31, 2007 and 2006, our outstanding repurchase agreements totaled $3.9 billion and $3.4 billion, respectively. As of December 31, 2007, repurchase agreements that we executed had maturities of between seven days and 13 months and a weighted average borrowing rate of 5.12%.

Our investments in residential mortgage-related receivables were financed primarily through debt issued in connection with two securitization transactions. As of December 31, 2007, the total outstanding balance of these debt obligations was $2.0 billion. The interest rates on all classes of the notes within each securitization are fixed for various periods of time and then reset annually thereafter, with a weighted average interest rate of 4.94% as of December 31, 2007. The notes within each securitization are expected to mature at various dates through 2036.

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The interest rates on our repurchase agreements, securitization-based debt and other financings may change at different times and in different magnitudes than the interest rates earned on our residential mortgage investments. See Market Risk Management below for a discussion of our interest rate risk management program related to our residential mortgage investment portfolio.

Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements, which include funding our existing commercial loan and investment commitments, repaying borrowings, paying dividends and for other general business purposes. Commitments do not include transactions for which we have signed commitment letters but not yet signed definitive binding agreements. Our primary sources of funds consist of cash flows from operations, borrowings under our repurchase agreements, credit facilities, term debt, subordinated debt and convertible debt, proceeds from issuances of equity and other sources. We believe these sources of financing are sufficient to meet our short-term liquidity needs.

In 2005, we applied for an Industrial Loan Corporation (“ILC”) charter with the State of Utah and for federal deposit insurance with the Federal Deposit Insurance Corporation (“FDIC”). We anticipate that once operational, the ILC would enable us to obtain an additional source of funding for our loans by raising wholesale deposits in the brokered deposit market. In March 2007, the FDIC approved our application for federal deposit insurance, subject to certain conditions. The Order issued by the FDIC expires on March 20, 2008 if the conditions of the Order have not been met. We have requested an extension of the expiration date to December 31, 2008 as it has taken longer than anticipated to satisfy certain conditions in the Order. The extension request is currently pending with the FDIC. We cannot assure you that the FDIC will act on our extension request prior to the expiration of the Order, or if it does act, that it will approve our request. If the FDIC does not grant our extension request, the Order will expire.

If the TierOne merger does not close and our ILC does not become operational, we expect to continue to fund our business using our primary sources of funds identified above.

As of December 31, 2007, the amount of our unfunded commitments to extend credit to our clients exceeded our unused funding sources and unrestricted cash by $813.3 million, a decrease of $288.0, or 26% from December 31, 2006. Commitments do not include transactions for which we have signed commitment letters but not yet signed definitive binding agreements. We expect that our commercial loan commitments will continue to exceed our available funds indefinitely. Our obligation to fund unfunded commitments is generally based on our clients’ ability to provide additional collateral to secure the requested additional fundings, the additional collateral’s satisfaction of eligibility requirements and our clients’ ability to meet specified preconditions to borrowing. In some cases, our unfunded commitments do not require additional collateral to be provided by a debtor as a prerequisite to future fundings by us. We believe that we have sufficient funding capacity to meet short-term needs related to unfunded commitments. If we do not have sufficient funding capacity to satisfy our commitments, our failure to satisfy our full contractual funding commitment to one or more of our clients could create breach of contract and lender liability for us and damage our reputation in the marketplace, which could have a material adverse effect on our business.

As discussed below, we have funded and expect to continue to fund purchases of residential mortgage investments primarily through repurchase agreements and term debt using leverage consistent with industry standards for these assets.

We determine our long-term liquidity and capital resource requirements based on the growth rate of our portfolio and other assets. Additionally, as a REIT, our growth must be funded largely by external sources of capital due to the requirement to distribute at least 90% of our REIT taxable income to our shareholders. We are not required to distribute the taxable income related to our TRSs and, therefore, have the flexibility to retain these earnings. We intend to pay dividends equal to at least 90% of our REIT taxable income. We may cause our TRSs to pay dividends to us to increase our REIT taxable income, subject to the REIT gross income limitations. If we are limited in the amount of dividends we can receive from our TRSs, we intend to use other sources of cash to fund dividend payments.

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We anticipate that we will need to raise additional capital from time to time to support our growth. We plan to continue to raise equity and, assuming the current dislocation in the credit markets improves, we plan to continue to access the debt markets for capital and to continue to explore additional sources of financing. We expect these financings will include additional secured and unsecured credit facilities, secured and unsecured term debt, subordinated debt, repurchase agreements, equity-related securities such as convertible debt and/or other financing sources. We cannot assure you, however, that we will have access to any of these funding sources in the future.

Cash and Cash Equivalents

As of December 31, 2007 and 2006, we had $178.7 million and $396.2 million, respectively, in cash and cash equivalents. We invest cash on hand in short-term liquid investments.

We had $513.8 million and $240.9 million of restricted cash as of December 31, 2007 and 2006, respectively. The restricted cash primarily represents both principal and interest collections on loans collateralizing our term debt and on loans pledged to our credit facilities. We also have restricted cash representing other items such as client holdbacks, escrows and securities pledged as collateral to secure our repurchase agreements and related derivatives. Principal repayments, interest rate swap payments, interest payable and servicing fees are deducted from the monthly principal and interest collections funded by loans collateralizing our credit facilities and term debt, and the remaining restricted cash is returned to us and becomes unrestricted at that time.

Sources and Uses of Cash

For the years ended December 31, 2007, 2006 and 2005, we used cash from operations of $752.8 million, $0.4 million and $224.7 million, respectively. Included within these amounts are cash outflows related to the purchase of loans held for sale and Agency MBS that are classified as trading investments.

Cash from our financing activities is generated from proceeds from our issuances of equity, borrowings on our repurchase agreements, credit facilities and term debt and from our issuances of convertible debt and subordinated debt. Our financing activities primarily use cash to repay term debt borrowings and to pay cash dividends. For the years ended December 31, 2007, 2006 and 2005, we generated cash flow from financing activities of $2.2 billion, $4.8 billion and $2.1 billion, respectively.

Investing activities primarily relate to loan origination, purchases of residential mortgage investments, primarily mortgage-related receivables, and acquisitions of direct real estate investments. For the years ended December 31, 2007, 2006 and 2005, we used cash in investing activities of $1.7 billion, $4.8 billion and $1.7 billion, respectively.

Borrowings

As of December 31, 2007 and 2006, we had outstanding borrowings totaling $15.0 billion and $12.9 billion, respectively. Borrowings under our repurchase agreements, credit facilities, term debt, convertible debt and subordinated debt have supported our growth. For a detailed discussion of our borrowings, see Note 11, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

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Our funding sources, maximum facility amounts, amounts outstanding, and unused capacity, subject to certain minimum equity requirements and other covenants and conditions as of December 31, 2007, were as follows:

	Maximum
	Facility		Amount		Unused
Funding Source	Amount		Outstanding		Capacity(1)
	($ in thousands)
Repurchase agreements	$	4,210,027	$	3,910,027	$	300,000
Credit facilities		5,632,101		2,207,063		3,425,038
Term debt(2)		7,405,675		7,255,675		150,000
Other borrowings(3)		—		1,594,870		—
Total	$	17,247,803	$	14,967,635	$	3,875,038

(1)	Excludes issued and outstanding letters of credit totaling $110.5 million as of December 31, 2007.
(2)	As of December 31, 2007, only our series 2006-A class A-R, variable funding note provides the ability for additional capacity.
(3)	As of December 31, 2007, our other borrowings, which includes convertible debt, subordinated debt, and mortgage debt, did not provide any ability for us to draw down additional amounts.

Our overall debt strategy emphasizes diverse sources of financing, including both secured and unsecured financings. As of December 31, 2007, approximately 88% of our debt was collateralized by our loans, equity investments, direct real estate investments and residential mortgage investments and approximately 12% was unsecured. We intend to increase our percentage of unsecured debt over time through both unsecured credit facilities and unsecured term debt. In April 2007, Standard and Poor’s issued a BBB- senior unsecured debt rating and Fitch Ratings affirmed our BBB- senior unsecured debt rating. We may apply for ratings from other rating agencies and our goal is to improve all of these ratings over time. As our ratings improve, we expect to be able to issue more unsecured debt relative to the amount of our secured debt. In any case, we intend to maintain prudent levels of leverage and currently expect our debt-to-equity ratio on the combined portfolios of our Commercial Finance segment and Healthcare Net Lease segment to remain below 5x.

During the second half of 2007, we saw and continue to see negative effects from the credit market disruption in the form of a higher cost of funds on borrowings as measured by a spread to LIBOR. As a result, financings completed during the second half of 2007 were more expensive and provided lower leverage than similar financings we completed prior to that period. We expect to experience greater difficulty and higher cost in securing term debt for our loans, especially commercial real estate. We also expect to see higher borrowing costs and potentially lower advance rates on our secured credit facilities as we seek to renew them in 2008. We may not be able to renew all of those facilities at their existing commitment levels. However, our commercial finance business model has been built around low leverage, and we do not seek to maximize leverage. As a result, we believe we can withstand some reduction in the advance rates of our facilities and expect to retain sufficient committed capacity to fund our business. While we expect the trend toward lower leverage and incrementally more expensive financings to continue in 2008, we believe that these same market conditions that adversely affect us as a borrower have allowed and will continue to allow us, as a lender, to structure new loans on more favorable terms and at higher yields.

Repurchase Agreements

As of December 31, 2007, we had 12 repurchase agreements with various financial institutions, which we used to finance the purchases of RMBS during the year ended December 31, 2007. The terms of our borrowings pursuant to repurchase agreements typically reset every 30 days. During the year ended December 31, 2007, we negotiated longer terms for some of these repurchase agreements with several counterparties. As a result, as of December 31, 2007, approximately 37% of the borrowings outstanding under repurchase agreements had terms ranging from 30 days to 1.25 years. Agency MBS and short term liquid investments collateralize our repurchase agreements as of December 31, 2007. Substantially all of our repurchase agreements and related derivative instruments require us to deposit additional collateral if the market value of existing collateral declines below specified margin requirements, which may require us to sell assets to reduce our borrowings.

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Credit Facilities

Our committed credit facility capacities were $5.6 billion and $5.0 billion as of December 31, 2007 and 2006, respectively. As of December 31, 2007, we had nine credit facilities, seven of which are secured and two of which are unsecured, with a total of 25 financial institutions. We primarily use these facilities to fund our assets and for general corporate purposes. To date, many of our assets have been held, or warehoused, in our secured credit facilities until we complete a term debt transaction in which we securitize a pool of our assets from these facilities. We primarily use the proceeds from our term debt transactions to pay down our credit facilities, which results in increased capacity to redraw on them as needed.

As of December 31, 2007, our credit facilities’ maturity dates, committed capacities and outstanding principal balances were as follows:

	Committed			Principal
	Capacity			Outstanding
	($ in thousands)
Unsecured credit facility scheduled to mature February 19, 2008(1)	$	75,120		$	71,338
Secured credit facility scheduled to mature March 26, 2008		200,000			89,120
Secured credit facility scheduled to mature August 1, 2008		1,500,000			500,000
Secured credit facility scheduled to mature April 10, 2009		220,000	(2)		40,971
Secured credit facility scheduled to mature April 27, 2009		1,400,000	(2)		442,150
Secured credit facility scheduled to mature June 27, 2009		700,000	(2)		352,481
Unsecured credit facility scheduled to mature March 13, 2010(3)		1,070,000			480,238
Secured credit facility scheduled to mature July 19, 2010		102,206			102,206
Secured credit facility scheduled to mature September 30, 2010		364,775			128,559
Total	$	5,632,101		$	2,207,063

(1)	Our CAD75 million credit facility matured on February 19, 2008, as scheduled, and was not renewed. At maturity, we repaid the outstanding balance using cash from our operating accounts and by drawing on other credit facilities. We do not expect the absence of this credit facility to materially affect our liquidity.
(2)	Credit facility is subject to 364-day liquidity renewal. On termination or maturity, amounts due under the credit facility may, in the absence of a default, be repaid from proceeds from amortization of the collateral pool.
(3)	As of December 31, 2007, the scheduled maturity date was March 13, 2009. In February 2008, we exercised our option to extend the maturity date of the credit facility to March 13, 2010.

As of February 27, 2008 our credit facilities’ committed capacity totaled $5.5 billion.

During 2007, we entered into four new credit facilities and amended various terms in certain of our existing credit facilities. For further information on our credit facilities, see Note 11, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

Term Debt

For our Commercial Finance segment, we have raised capital by securitizing pools of assets from our portfolio in permanent, on-balance-sheet term debt securitizations. For the year ended December 31, 2007, we completed four term debt securitizations totaling $3.2 billion. As of December 31, 2007, the outstanding balance of our term debt securitizations was $5.2 billion. For further information on these term debt securitizations, see Note 11, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

Owner Trust Term Debt

Within our Residential Mortgage Investment segment, we own beneficial interests in securitization trusts (the “Owner Trusts”), which, in 2006, issued $2.4 billion in senior notes and $105.6 million in subordinated notes backed by $2.5 billion of a diversified pool of adjustable rate commercial loans. As of December 31, 2007, the

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outstanding balance of our Owner Trust term debt was $2.0 billion. For further information on this debt, see Note 4, Mortgage-Related Receivables and Related Owner Trust Securitizations, and Note 11, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

Convertible Debt

We have raised capital through the issuance of convertible debt. During 2007, we issued one series of convertible debt, totaling $250.0 million. During 2007, we also completed exchange offers related to our two series of convertible debt issued in 2004. As of December 31, 2007, the outstanding balance of our convertible debt was $780.6 million. For further information on our convertible debt, see Note 11, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

Subordinated Debt

We have raised junior subordinated capital through the issuance of trust preferred securities. During 2007,we issued two series of subordinated debt, totaling $79.9 million. As of December 31, 2007, the outstanding balance of our subordinated debt was $529.9 million. For further information our subordinated debt, see Note 11, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

Mortgage Debt

For our Healthcare Net Lease segment, we use mortgage loans to finance certain of our direct real estate investments. As of December 31, 2007, the outstanding balance of our mortgage debt was $284.4 million. For further information on such mortgage loans, see Note 11, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

Debt Covenants

We, and some of our wholly owned subsidiaries, are required to comply with financial and non-financial covenants related to our debt financings and our servicing of loans collateralizing our secured credit facilities and term debt. Failure to meet the covenants could result in the servicing being transferred to another servicer. The notes under the trusts established in connection with our term debt include accelerated amortization provisions that require cash flows to be applied to pay the noteholders if the notes remain outstanding beyond the stated maturity dates.

Equity

We offer a Dividend Reinvestment and Stock Purchase Plan (the “DRIP”) to current and prospective shareholders. Participation in the DRIP allows common shareholders to reinvest cash dividends and to purchase additional shares of our common stock, in some cases at a discount from the market price. During the years ended December 31, 2007 and 2006, we received proceeds of $607.8 million and $191.0 million, respectively, related to the direct purchase of 31.7 million and 7.7 million shares of our common stock pursuant to the DRIP, respectively. In addition, we received proceeds of $106.7 million and $17.2 million related to cash dividends reinvested in 5.4 million and 0.7 million shares of our common stock during the years ended December 31, 2007 and 2006, respectively.

Special Purpose Entities

We use SPEs as an integral part of our funding activities. We commonly service loans that we have transferred to these vehicles. The use of these special purpose entities is generally required in connection with our secured debt financings in order to legally isolate from us loans that we transfer to these vehicles if we were to be in bankruptcy.

We also use special purpose entities to facilitate the issuance of collateralized loan obligation transactions that are further described below in Commitments, Guarantees & Contingencies. Additionally, we purchase beneficial ownership interests in residential mortgage assets that are held by special purpose entities established by third parties.

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We evaluate all SPEs with which we are affiliated to determine whether such entities must be consolidated for financial statement purposes. If we determine that such entities represent variable interest entities as defined by FASB Interpretation No. 46 (Revised 2003), Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51, (“FIN 46(R)”), we consolidate these entities if we also determine that we are the primary beneficiary of the entity. For special purpose entities for which we determine we are not the primary beneficiary, we account for our economic interests in these entities in accordance with the nature of our investments. As further discussed in Note 4, Mortgage-Related Receivables and Related Owner Trust Securitizations, in February 2006, we acquired beneficial interests in two special purpose entities that acquired and securitized pools of residential mortgage loans. In accordance with the provisions of FIN 46(R), we determined that we were the primary beneficiary of these SPEs and, therefore, consolidated the assets and liabilities of such entities for financial statement purposes. Additionally, and as further discussed in Note 11, Borrowings, the assets and related liabilities of all special purpose entities that we use to issue our term debt are recognized on our accompanying audited consolidated balance sheets as of December 31, 2007 and 2006.

Commitments, Guarantees & Contingencies

As of December 31, 2007 and 2006, we had unfunded commitments to extend credit to our clients of $4.7 billion and $4.1 billion, respectively. Commitments do not include transactions for which we have signed commitment letters but not yet signed definitive binding agreements. We expect that our commercial loan commitments will continue to exceed our available funds indefinitely. Our obligation to fund unfunded commitments is generally based on our clients’ ability to provide additional collateral to secure the requested additional fundings, the additional collateral’s satisfaction of eligibility requirements and our clients’ ability to meet specified preconditions to borrowing. In some cases, our unfunded commitments do not require additional collateral to be provided by a debtor as a prerequisite to future fundings by us. Our failure to satisfy our full contractual funding commitment to one or more of our clients could create lender liability and breach of contract liability for us and damage our reputation in the marketplace, which could have a material adverse effect on our business. We currently believe that we have sufficient funding capacity to meet short-term needs related to unfunded commitments.

We have non-cancelable operating leases for office space and office equipment. The leases expire over the next ten years and contain provisions for certain annual rental escalations. A discussion of these contingencies is included in Note 18, Commitments and Contingencies, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

As of December 31, 2007, we had issued $226.4 million in letters of credit which expire at various dates over the next six years. If a borrower defaults on its commitment(s) subject to any letter of credit issued under these arrangements, we would be responsible to meet the borrower’s financial obligation and would seek repayment of that financial obligation from the borrower. A discussion of these contingencies is included in Note 18, Commitments and Contingencies, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

As of December 31, 2007, we had identified conditional asset retirement obligations primarily related to the future removal and disposal of asbestos that is contained within certain of our direct real estate investment properties. For reasons further discussed in Note 18, Commitments and Contingencies, in our accompanying audited consolidated financial statements for the year ended December 31, 2007, no liability for conditional asset retirement obligations was recorded on our accompanying audited consolidated balance sheet as of December 31, 2007.

We have provided a financial guarantee to a third-party warehouse lender that financed the purchase of approximately $344 million of commercial loans by a special purpose entity to which one of our other wholly owned indirect subsidiaries provides advisory services in connection with such purchases of commercial loans. We have provided the warehouse lender with a limited guarantee under which we agreed to assume a portion of net losses realized in connection with those loans held by the special purpose entity up to a specified loss limit. The guarantee is scheduled to expire on September 18, 2008, but may terminate earlier to the extent that the warehouse facility is refinanced prior to the guarantee’s expiry. In accordance with the provisions of FIN 46(R) and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, we determined that we are not required to recognize the assets and liabilities of this special purpose entity for

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financial statement purposes as of December 31, 2007. This special purpose entity was formed to eventually complete collateralized loan obligation transactions for which we would serve as advisor. In light of current conditions in the markets for third-party managed collateralized loan obligation transactions, we do not expect to close this transaction in 2008.

In connection with certain securitization transactions, we typically make customary representations and warranties regarding the characteristics of the underlying transferred assets. Prior to any securitization transaction, we perform due diligence with respect to the assets to be included in the securitization transaction to ensure that they satisfy the representations and warranties.

In our capacity as originator and servicer in certain securitization transactions, we may be required to repurchase or substitute loans which breach a representation and warranty as of their date of transfer to the securitization vehicle.

From time to time we are party to legal proceedings. We do not believe that any currently pending or threatened proceeding, if determined adversely to us, would have a material adverse effect on our business, financial condition or results of operations, including our cash flows.

Contractual Obligations

In addition to our scheduled maturities on our debt, we have future cash obligations under various types of contracts. We lease office space and office equipment under long-term operating leases and we have committed to contribute up to an additional $15.1 million to 15 private equity funds, and $0.8 million to an equity investment. The contractual obligations under our debt are included in the accompanying audited consolidated balance sheet as of December 31, 2007. The expected contractual obligations under our debt, operating leases and commitments under non-cancelable contracts as of December 31, 2007, were as follows:

	Repurchase		Credit		Term		Convertible		Subordinated		Mortgage
	Agreements		Facilities(1)		Debt(2)		Debt(3)		Debt(4)		Debt		Other(5)		Total
							($ in thousands)
2008	$	3,796,396	$	660,457	$	705,999	$	—	$	—	$	—	$	9,248	$	5,172,100
2009		113,631		1,315,840		814,699		219,106		—		284,363		8,139		2,755,778
2010		—		230,766		1,396,363		—		—		—		7,757		1,634,886
2011		—		—		933,661		316,162		—		—		7,215		1,257,038
2012		—		—		962,738		245,362		—		—		6,757		1,214,857
Thereafter		—		—		2,445,574		—		529,877		—		8,696		2,984,147
Total	$	3,910,027	$	2,207,063	$	7,259,034	$	780,630	$	529,877	$	284,363	$	47,812	$	15,018,806

(1)	The contractual obligations for credit facilities are computed based on the stated maturities of the facilities not considering optional annual renewals.
(2)	Excludes net unamortized discounts of $3.4 million. The underlying loans are subject to prepayment, which could shorten the life of the term debt transactions; conversely, the underlying loans may be amended to extend their term, which may lengthen the life of the term debt transactions. At our option, we may substitute loans for prepaid loans up to specified limitations, which may also impact the life of the term debt transactions. In addition, the contractual obligations for our term debt transactions are computed based on the estimated life of the instrument. The contractual obligations for the Owner Trust term debt are computed based on the estimated lives of the underlying adjustable rate prime residential mortgage whole loans.
(3)	The contractual obligations for convertible debt are computed based on the initial put/call date. The legal maturities of the convertible debt are 2034 and 2037. For further discussion of terms of our convertible debt and factors impacting their maturity see Note 2, Summary of Significant Accounting Policies, and Note 11, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.
(4)	The contractual obligations for subordinated debt are computed based on the legal maturities, which are between 2035 and 2037.
(5)	Includes operating leases and non-cancelable contracts.

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In addition to the contractual obligations in the table above, as of December 31, 2007, we had $16.7 million, $2.2 million and $110.5 million in unrecognized tax benefits, accrued interest expense and penalties, and issued letters of credit, respectively. As of December 31, 2007, sufficient information was not available to determine the settlement dates of these obligations.

We enter into derivative contracts under which we either receive cash or are required to pay cash to counterparties depending on changes in interest rates. Derivative contracts are carried at fair value on the accompanying audited consolidated balance sheet as of December 31, 2007, with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The fair value of the contracts changes daily as market interest rates change. Further discussion of derivative instruments is included in Note 2, Summary of Significant Accounting Policies, and Note 20, Derivative Instruments, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

Credit Risk Management

Credit risk is the risk of loss arising from adverse changes in a client’s or counterparty’s ability to meet its financial obligations under agreed-upon terms. Credit risk exists primarily in our lending, leasing and derivative portfolios. The degree of credit risk will vary based on many factors including the size of the asset or transaction, the credit characteristics of the client, the contractual terms of the agreement and the availability and quality of collateral. We manage credit risk of our derivatives and credit-related arrangements by limiting the total amount of arrangements outstanding with an individual counterparty, by obtaining collateral based on management’s assessment of the client and by applying uniform credit standards maintained for all activities with credit risk.

Our Credit Committee evaluates and approves credit standards and oversees the credit risk management function related to our commercial loans, direct real estate investments and other investments. The Credit Committee’s primary responsibilities include ensuring the adequacy of our credit risk management infrastructure, overseeing credit risk management strategies and methodologies, monitoring conditions in real estate and other markets having an impact on lending activities, and evaluating and monitoring overall credit risk.

Commercial Finance Segment

Credit risk management for the commercial loan portfolio begins with an assessment of the credit risk profile of a client based on an analysis of the client’s financial position. As part of the overall credit risk assessment of a client, each commercial credit exposure or transaction is assigned a risk rating that is subject to approval based on defined credit approval standards. While rating criteria vary by product, each loan rating focuses on the same three factors: credit, collateral, and financial performance. Subsequent to loan origination, risk ratings are monitored on an ongoing basis. If necessary, risk ratings are adjusted to reflect changes in the client’s or counterparty’s financial condition, cash flow or financial situation. We use risk rating aggregations to measure and evaluate concentrations within portfolios. In making decisions regarding credit, we consider risk rating, collateral, industry and single name concentration limits.

We use a variety of tools to continuously monitor a client’s or counterparty’s ability to perform under its obligations. Additionally, we syndicate loan exposure to other lenders, sell loans and use other risk mitigation techniques to manage the size and risk profile of our loan portfolio.

Residential Mortgage Investment Segment

The largest asset class in our residential mortgage investment portfolio is Agency MBS. For all Agency MBS we benefit from a full guarantee from Fannie Mae or Freddie Mac, and look to this guarantee to mitigate the risk of changes in the credit performance of the mortgage loans underlying the Agency MBS. However, variation in the level of credit losses may impact the duration of our investments since a credit loss results in the prepayment of the relevant loan by the guarantor. The second largest asset class in our residential mortgage investment portfolio is mortgage related receivables. With respect to mortgage-related receivables, we are directly exposed to the level of

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credit losses on the underlying mortgage loans. With respect to Non- Agency MBS we are exposed to changes in the credit performance of the mortgage loan underlying these assets and the value or performance of our investment may be impacted by higher levels of credit losses, depending on the specific provisions of the relevant securitizations.

Concentrations of Credit Risk

In our normal course of business, we engage in commercial finance and leasing activities with clients primarily throughout the United States. As of December 31, 2007, the single largest industry concentration was skilled nursing, which made up approximately 15% of our commercial loan portfolio. As of December 31, 2007, the largest geographical concentration was Florida, which made up approximately 15% of our commercial loan portfolio. As of December 31, 2007, the single largest industry concentration in our direct real estate investment portfolio was skilled nursing, which made up approximately 98% of the investments. As of December 31, 2007, the largest geographical concentration in our direct real estate investment portfolio was Florida, which made up approximately 34% of the investments.

Derivative Counterparty Credit Risk

Derivative financial instruments expose us to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where we are in a favorable position. Credit risk related to derivative financial instruments is considered and provided for separately from the allowance for loan losses. We manage the credit risk associated with various derivative agreements through counterparty credit review and monitoring procedures. We obtain collateral from certain counterparties and monitor all exposure and collateral requirements daily. We continually monitor the fair value of collateral received from counterparties and may request additional collateral from counterparties or return collateral pledged as deemed appropriate. Our agreements generally include master netting agreements whereby the counterparties are entitled to settle their positions “net.” As of December 31, 2007 and 2006, the gross positive fair value of our derivative financial instruments were $82.9 million and $23.7 million, respectively. Our master netting agreements reduced the exposure to this gross positive fair value by $58.0 million and $16.1 million as of December 31, 2007 and 2006, respectively. We did not hold collateral against derivative financial instruments as of December 31, 2007 and 2006. Accordingly, our net exposure to derivative counterparty credit risks as of December 31, 2007 and 2006, was $24.9 million and $7.6 million, respectively.

Market Risk Management

Market risk is the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions such as market movements. This risk is inherent in the financial instruments associated with our operations and/or activities including loans, securities, short-term borrowings, long-term debt, trading account assets and liabilities and derivatives. Market-sensitive assets and liabilities are generated through loans associated with our traditional lending activities and market risk mitigation activities.

The primary market risk to which we are exposed is interest rate risk, which is inherent in the financial instruments associated with our operations, primarily including our loans, residential mortgage investments and borrowings. Our traditional loan products are non-trading positions and are reported at amortized cost. Additionally, debt obligations that we incur to fund our business operations are recorded at historical cost. While GAAP requires a historical cost view of such assets and liabilities, these positions are still subject to changes in economic value based on varying market conditions. Interest rate risk is the effect of changes in the economic value of our loans, and our other interest rate sensitive instruments and is reflected in the levels of future income and expense produced by these positions versus levels that would be generated by current levels of interest rates. We seek to mitigate interest rate risk through the use of various types of derivative instruments. For a detailed discussion of our derivatives, see Note 20, Derivative Instruments, of our accompanying audited consolidated financial statements for the year ended December 31, 2007.

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Interest Rate Risk Management — Commercial Finance Segment & Healthcare Net Lease Segment

Interest rate risk in our Commercial Finance and Healthcare Net Lease segments refers to the change in earnings that may result from changes in interest rates, primarily various short-term interest rates, including LIBOR-based rates and the prime rate. We attempt to mitigate exposure to the earnings impact of interest rate changes by conducting the majority of our lending and borrowing on a variable rate basis. The majority of our commercial loan portfolio bears interest at a spread to the prime rate or a LIBOR-based rate with almost all of our other loans bearing interest at a fixed rate. The majority of our borrowings bear interest at a spread to LIBOR or CP, with the remainder bearing interest at a fixed rate. We are also exposed to changes in interest rates in certain of our fixed rate loans and investments. We attempt to mitigate our exposure to the earnings impact of the interest rate changes in these assets by engaging in hedging activities as discussed below.

The estimated (decreases) increases in net interest income for a 12-month segments based on changes in the interest rates applied to the combined portfolios of our Commercial Finance segment and Healthcare Net Lease segment as of December 31, 2007, were as follows ($ in thousands):

Rate Change
(Basis Points)
−100	$	(14,880	)
− 50		(9,240	)
+  50		11,040
+ 100		23,160

For the purposes of the above analysis, we included related derivatives, excluded principal payments and assumed a 75% advance rate on our variable rate borrowings.

Approximately 34% of the aggregate outstanding principal amount of our commercial loans had interest rate floors as of December 31, 2007. The loans with interest rate floors as of December 31, 2007, were as follows:

	Amount		Percentage of
	Outstanding		Total Portfolio
	($ in thousands)
Loans with contractual interest rates:
Exceeding the interest rate floor	$	2,858,057		29	%
At the interest rate floor		97,953		1
Below the interest rate floor		441,163		4
Loans with no interest rate floor		6,470,564		66
Total	$	9,867,737		100	%

We use interest rate swaps to hedge the interest rate risk of certain fixed rate assets. We also enter into additional basis swap agreements to hedge basis risk between our LIBOR-based term debt and the prime-based loans pledged as collateral for that debt. These interest rate swaps modify our exposure to interest rate risk by synthetically converting fixed rate and prime rate loans to one-month LIBOR. Additionally, we use offsetting interest rate caps to hedge loans with embedded interest rate caps. Our interest rate hedging activities partially protect us from the risk that interest collected under fixed-rate and prime rate loans will not be sufficient to service the interest due under the one-month LIBOR-based term debt.

We also use interest rate swaps to hedge the interest rate risk of certain fixed rate debt. These interest rate swaps modify our exposure to interest rate risk by synthetically converting fixed rate debt to one-month LIBOR.

We have also entered into spot and short-dated forward exchange agreements to minimize exposure to foreign currency risk arising from foreign denominated loans.

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Interest Rate Risk Management — Residential Mortgage Investment Segment

We are exposed to changes in interest rates in our residential mortgage investment portfolio and related financings based on changes in the level and shape of the yield curve, volatility of interest rates and mortgage prepayments. Changes in interest rates are a significant risk to our residential mortgage investment portfolio. As interest rates increase, the market value of residential mortgage investments may decline while financing costs could rise, to the extent not mitigated by positions intended to hedge these movements. Conversely, if interest rates decrease, the market value of residential mortgage investments may increase while financing costs could decline, also to the extent not mitigated by positions intended to hedge these movements. In addition, changes in the interest rate environment may affect mortgage prepayment rates. For example, in a rising interest rate environment, mortgage prepayment rates may decrease, thereby extending the duration of our investments.

The majority of our residential mortgage investments are collateralized with mortgages that have a fixed interest rate for a certain period of time followed by an adjustable rate period in which the adjustments are subject to annual and lifetime caps. Our liabilities include repurchase agreements indexed to an interest rate market index such as LIBOR and securitized term debt financing through debt obligations secured by the residential mortgage loans securing our mortgage-related receivables.

The estimated changes in fair value based on changes in interest rates applied to our residential mortgage investment portfolio as of December 31, 2007, were as follows:

Rate Change	Estimated Decrease			Percentage of Total
(Basis Points)	in Fair Value			Segment Assets
	($ in thousands)
−100	$	(3,961	)		(0.06	)%
− 50		(807	)		(0.01	)
+  50		(858	)		(0.01	)
+ 100		(4,204	)		(0.07	)

For the purposes of the above analysis, our residential mortgage investment portfolio includes all of our investments in residential mortgage-related receivables, Agency MBS, repurchase agreements with remaining terms longer than 30 days, term debt and related derivatives as of December 31, 2007.

In connection with our residential mortgage investments and related financings, we follow a risk management program designed to mitigate the risk of changes in fair value of our residential mortgage investments due to shifts in interest rates. Specifically, we seek to eliminate the effective duration gap associated with our assets and liabilities. To accomplish this objective, we use a variety of derivative instruments such as interest rate swaps, interest rate caps, swaptions, treasury future contracts and Euro dollar futures contracts. These derivative transactions convert the short-term financing of our repurchase agreements to term financing matched to the expected duration of our residential mortgage investments.

To the extent necessary and based on established risk criteria, we will adjust the mix of financing and hedges as market conditions and asset performance evolves to maintain a close alignment between our assets and our liabilities. In addition, we have contracted with an external investment advisor, BlackRock Financial Management, Inc., to provide analytical, risk management and other advisory services in connection with interest rate risk management on this portfolio.

Critical Accounting Estimates

Accounting policies are integral to understanding our Management’s Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in accordance with GAAP requires management to make certain judgments and assumptions based on information that is available at the time of the financial statements in determining accounting estimates used in the preparation of such statements. Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, in our accompanying audited consolidated financial statements for the year ended December 31, 2007 and our critical accounting estimates are described in this section. Accounting estimates are considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the accounting estimate was

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made and if different estimates reasonably could have been used in the reporting period, or if changes in the accounting estimate are reasonably likely to occur from period to period that would have a material impact on our financial condition, results of operations or cash flows. Management has discussed the development, selection and disclosure of these critical accounting estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure related to these estimates.

Allowance for Loan Losses

The allowance for loan losses is management’s estimate of probable losses inherent in the loan portfolio. Management periodically performs detailed reviews of this portfolio to determine if impairment has occurred and to assess the adequacy of the allowance for loan losses, based on historical and current trends and other factors affecting loan losses. Additions to the allowance for loan losses are charged to current period earnings through the provision for loan losses. Amounts determined to be uncollectible are charged directly against the allowance for loan losses, while amounts recovered on previously charged-off accounts increase the allowance.

The commercial loan portfolio comprises large balance, non-homogeneous exposures. These loans are evaluated individually and are risk-rated based upon borrower, collateral and industry-specific information that management believes is relevant to determining the occurrence of a loss event and measuring impairment. Management establishes specific allowances for commercial loans determined to be individually impaired. The allowance for loan losses is estimated by management based upon the borrower’s overall financial condition, financial resources, payment history and, when applicable, the estimated realizable value of any collateral. In addition to the specific allowances for impaired loans, we maintain allowances that are based on an evaluation for impairment of certain commercial and residential portfolios. These allowances are based on historical experience, concentrations, current economic conditions and performance trends within specific portfolio segments. Certain considerations are made in relation to the length and severity of outstanding balances. We generally do not factor in guarantees from our capital call agreements with our borrowers’ private equity sponsors in determining the overall allowance for loan losses. However, when performing the SFAS No. 114 analysis on an individual troubled loan, we do not consider any applicable borrower guarantees when calculating our potential for a specific loss.

The process for determining the reserve factors and the related level of loan loss reserves is subject to numerous estimates and assumptions that require judgment about the timing, frequency and severity of credit losses that could materially affect the provision for loan losses and, therefore, net income. In this case, management is required to make judgments related, but not limited, to: (i) risk ratings for pools of commercial loans; (ii) market and collateral values and discount rates for individually evaluated loans; (iii) loss rates used for commercial loans; (iv) adjustments made to assess current events and conditions; (v) considerations regarding domestic economic uncertainty; and (vi) overall credit conditions.

Our allowance for loan losses is sensitive to the risk rating assigned to commercial loans and to corresponding reserve factors that we use to estimate the allowance and that are reflective of historical losses. We have assigned reserve factors to the loans in our portfolio, which dictate the percentage of the total outstanding loan balance that we reserve. We review the loan portfolio information regularly to determine whether it is necessary for us to further revise our reserve factors. The reserve factors used in the calculation were determined by analyzing the following elements:

•  the types of loans, for example, whether the loan is underwritten based on the borrower’s assets, real estate or cash flow;

•  our historical losses with regard to the loan types;

•  our expected losses with regard to the loan types; and

•  the internal credit rating assigned to the loans.

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The sensitivity of our allowance for loan losses to potential changes in our reserve factors (in terms of basis points) applied to our overall loan portfolio as of December 31, 2007, was as follows:

	Estimated Increase
Change in Reserve Factors	(Decrease) in the
(Basis Points)	Allowance for Loan Losses
	($ in thousands)
+ 50	$	49,339
+ 25		24,669
−25		(24,669	)
−50		(42,797	)

These sensitivity analyses do not represent management’s expectations of the deterioration, or improvement, in risk ratings, but are provided as hypothetical scenarios to assess the sensitivity of the allowance for loan losses to changes in key inputs. We believe the reserve factors currently in use are appropriate. If our internal credit ratings, reserve factors or specific reserves for impaired loans are not accurate, our allowance for loan losses may be misstated. In addition, our operating results are sensitive to changes in the reserve factors utilized to determine our related provision for loan losses.

We also consider whether losses may have been incurred in connection with unfunded commitments to lend although, in making this assessment, we exclude from consideration those commitments for which funding is subject to our approval based on the adequacy of underlying collateral that is required to be presented by a borrower or other terms and conditions.

Fair Value of Certain Financial Instruments

A portion of our assets are accounted for at fair value, which is defined in GAAP as the amount at which an asset or liability could be exchanged between willing parties, other than in a forced liquidation or sale. Investments in debt securities that are classified as trading, as well as derivative instruments that are not designated in hedging relationships, are periodically adjusted to fair value through earnings. Investments in debt securities that are classified as available-for-sale are adjusted to fair value through accumulated other comprehensive income, while loans held for sale are recorded at the lower of carrying value or fair value. Additionally, the fair value of equity investments is estimated for purposes of assessing and measuring such assets for impairment purposes.

The estimation of fair values reflects our judgments regarding appropriate valuation methods and assumptions. The selection of a method to estimate fair value for each type of financial instrument depends on the reliability and availability of relevant market data. The amount of judgment involved in estimating the fair value of a financial instrument is affected by a number of factors, such as the type of instrument, the liquidity of the markets for the instrument and the contractual characteristics of the instrument. Judgments in these cases include, but are not limited to:

•  Selection of third-party market data sources;

•  Evaluation of the expected reliability of the estimate;

•  Reliability, timeliness and cost of alternative valuation methodologies; and

•  Selection of proxy instruments, as necessary.

For financial instruments that are actively traded in the marketplace or whose values are based on readily available market value data, little, if any, subjectivity is applied when determining the instrument’s fair value. When observable market prices and data do not exist, significant management judgment is necessary to estimate fair value. In those cases, small changes in assumptions could result in significant changes in valuation.

The financial instruments we hold that require the most complex judgments and assumptions involve equity investments that do not have readily determinable fair values and/or are not publicly traded. Each of these investments is valued using an internally developed model. This model utilizes industry valuation benchmarks, such as multiples of earnings before interest, taxes, depreciation, and amortization (EBITDA) ranging from three to ten times, depending on the industry, to determine a value for the underlying enterprise. We reduce this value by debt

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outstanding to arrive at an estimated equity value of the enterprise. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the pricing indicated by the external event will be used to corroborate our private equity valuation. Securities that are traded in the over-the-counter market or on a stock exchange generally will be valued at the prevailing bid price on the valuation date. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily ascertainable market value, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

Income Taxes

We elected REIT status under the Code when we filed our federal tax return for the year ended December 31, 2006. Accordingly, we generally are not subject to corporate-level income tax on the earnings distributed to our shareholders that are derived from our REIT qualifying activities, but are subject to corporate-level income tax on the earnings we derive from our TRSs. If we fail to qualify as a REIT in any taxable year, all of our taxable income for that year would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax. In addition, we also will be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost, unless we were entitled to relief under specific statutory provisions. We are still subject to foreign, state and local taxation in various foreign, state and local jurisdictions, including those in which we transact business or reside.

In order to estimate our corporate-level income taxes as a REIT, we must determine the amount of our net income derived from our TRSs during the entire taxable year, and if any, expected undistributed REIT taxable income. If our estimates of the source of the net income are not appropriate, income taxes could be materially different from amounts reported in our quarterly and annual consolidated statements of income.

We will continue to be subject to corporate-level income tax on the earnings we derive from our TRSs. As more fully described in Note 2, Summary of Significant Accounting Policies, and Note 14, Income Taxes, of the accompanying audited consolidated financial statements for the year ended December 31, 2007, we account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). Accrued income taxes, reported as a component of other liabilities on our consolidated balance sheet, represent the net amount of current income taxes we expect to pay or receive from various taxing jurisdictions attributable to our operations to date. We consider many factors in filing income tax returns, including statutory, judicial and regulatory guidance, in estimating the appropriate accrued income taxes for each jurisdiction.

In applying the principles of SFAS 109, we monitor relevant tax authorities and change our estimate of accrued income taxes due to changes in income tax laws and their interpretation by the courts and regulatory authorities. These revisions of our estimate of accrued income taxes, which also may result from our own income tax planning and from the resolution of income tax controversies, can materially affect our operating results for any given reporting period.

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ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain financial market risks, which are discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Market Risk Management section. In addition, for a detailed discussion of our derivatives, see Note 20, Derivative Instruments and Note 21, Credit Risk, in our accompanying audited consolidated financial statements for the year ended December 31, 2007.

Equity Price Risk

As further described in Note 11, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2007, we have outstanding 1.25% senior convertible debentures (the “1.25% Debentures”) and 3.5% senior convertible debentures (the 3.5% Debentures”). In 2007, we completed exchange offers related to our 1.25% Debentures and 3.5% Debentures in which we issued 1.625% senior subordinated convertible debentures (the “1.625% Debentures”) and 4% senior subordinated convertible debentures (the “4% Debentures”). In addition, in 2007, we issued 7.25% senior subordinated convertible debentures (the “7.25% Debentures” and together with the 1.25%, 1.625%, 3.5% and 4% Debentures, the “Debentures”).

Our 1.25% Debentures and 1.625% Debentures would be convertible into our common stock at a conversion price of $22.41 per share, subject to adjustment upon the occurrence of specified events. As of December 31, 2007, each $1,000 of the aggregate outstanding principal of the 1.25% Debentures and 1.625% Debentures would be convertible into 44.6188 shares of our common stock, subject to adjustment upon the occurrence of specified events.

Our 3.5% Debentures and 4% Debentures would be convertible into our common stock at a conversion price of $23.43 per share, subject to adjustment upon the occurrence of specified events. As of December 31, 2007, each $1,000 of the aggregate outstanding principal of the 3.5% Debentures and 4% Debentures would be convertible into 42.6739 shares of our common stock, subject to adjustment upon the occurrence of specified events.

Our 7.25% Debentures would be convertible into our common stock at a conversion price of $27.09 per share, subject to adjustment upon the occurrence of specified events. As of December 31, 2007, each $1,000 of the aggregate outstanding principal of the 7.25% Debentures would be convertible into 36.9079 shares of our common stock, subject to adjustment upon the occurrence of specified events.

Holders of the Debentures may convert their debentures prior to maturity only if: (1) the sale price of our common stock reaches specified thresholds, (2) the trading price of the Debentures falls below a specified threshold, (3) the Debentures have been called for redemption, or (4) specified corporate transactions occur.

In addition, in the event of a significant change in our corporate ownership or structure, the holders may require us to repurchase all or any portion of their Debentures for 100% of the principal amount.

Should we be required to repurchase the 7.25% Debentures at any of the redemption dates, we are required to satisfy all principal and accrued interest requirements with respect thereto in cash. Should we be required to repurchase any other series of our Debentures at any of the redemption dates, or if any series of our Debentures are converted, our intent is to satisfy all principal and accrued interest requirements in cash.

Concurrently with our sale of the 1.25% Debentures, we entered into two separate call option transactions with an affiliate of one of the initial purchasers, in each case covering the same number of shares as into which the 1.25% Debentures would be convertible. In one transaction, we purchased a call option at a strike price equal to the conversion price of the 1.25% Debentures, adjusted for the effect of dividends paid on our common stock. This option expires on March 15, 2009 and requires physical settlement. We intend to exercise this call option from time to time as necessary to acquire shares that we may be required to deliver upon receipt of a notice of conversion of the 1.25% Debentures. In the second transaction, we sold a call option to one of the initial purchasers for the purchase of up to 7.4 million of our common shares at a strike price of approximately $31.4402 per share, adjusted for the effect of dividends paid on our common stock. This call option expires at various dates from March 2009 through June 2009 and must be settled in net shares. The net effect of entering into these call option transactions was to minimize potential dilution as a result of the conversion of the 1.25% Debentures by increasing the effective conversion prices of the 1.25% Debentures to a 75% premium over the March 15, 2004 closing price of our common stock. The call

74

option transactions were settled at a net cost of approximately $25.6 million, which we paid from the proceeds of our sale of the 1.25% Debentures and was included as a net reduction in shareholders’ equity in the accompanying audited consolidated balance sheets. In connection with the exchange offer related to the 1.25% Debentures, we amended the document governing our call option transactions to provide, among other things, for those documents to relate to shares issuable upon conversion of both the 1.25% Debentures and the 1.625% Debentures.

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MANAGEMENT REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING

The management of CapitalSource Inc. (“CapitalSource”) is responsible for establishing and maintaining adequate internal control over financial reporting. CapitalSource’s internal control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

CapitalSource’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment we believe that, as of December 31, 2007, the company’s internal control over financial reporting is effective based on those criteria.

CapitalSource’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the effectiveness of the company’s internal control over financial reporting. This report appears on page 77.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders of CapitalSource Inc.

We have audited CapitalSource Inc.’s (“CapitalSource”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). CapitalSource’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, CapitalSource Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CapitalSource Inc. as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007 and our report dated February 25, 2008 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

McLean, Virginia

February 25, 2008

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements
For the Years Ended December 31, 2007, 2006 and 2005

Report of Independent Registered Public Accounting Firm	79
Consolidated Balance Sheets as of December 31, 2007 and 2006	80
Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005	81
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007, 2006 and 2005	82
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005	83
Notes to the Consolidated Financial Statements	84

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of CapitalSource Inc.

We have audited the accompanying consolidated balance sheets of CapitalSource Inc. (“CapitalSource”) as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of CapitalSource’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial position of CapitalSource Inc. at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, CapitalSource adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, as of January 1, 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of CapitalSource’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2008 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

McLean, Virginia

February 25, 2008

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CapitalSource Inc.

Consolidated Balance Sheets

	December 31,			December 31,
	2007			2006
	($ in thousands)
ASSETS
Cash and cash equivalents	$	178,699		$	396,151
Restricted cash		513,803			240,904
Mortgage-related receivables, net		2,041,917			2,295,922
Mortgage-backed securities pledged, trading		4,060,605			3,502,753
Receivables under reverse-repurchase agreements		—			51,892
Loans held for sale		94,327			26,521
Loans:
Loans		9,773,410			7,771,785
Less deferred loan fees and discounts		(147,089	)		(130,392	)
Less allowance for loan losses		(138,930	)		(120,575	)
Loans, net		9,487,391			7,520,818
Direct real estate investments, net		1,017,604			722,303
Investments		231,776			184,333
Other assets		414,227			268,977
Total assets	$	18,040,349		$	15,210,574
LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	3,910,027		$	3,510,768
Credit facilities		2,207,063			2,251,658
Term debt		7,255,675			5,809,685
Other borrowings		1,594,870			1,288,575
Other liabilities		444,997			200,498
Total liabilities		15,412,632			13,061,184
Noncontrolling interests		45,446			56,350
Shareholders’ equity:
Preferred stock (50,000,000 shares authorized; no shares outstanding)		—			—
Common stock ($0.01 par value, 500,000,000 shares authorized; 220,704,800 and 182,752,290 shares issued, respectively; 220,704,800 and 181,452,290 shares outstanding, respectively)		2,207			1,815
Additional paid-in capital		2,902,501			2,139,421
Accumulated deficit		(327,387	)		(20,735	)
Accumulated other comprehensive income, net		4,950			2,465
Treasury stock, at cost		—			(29,926	)
Total shareholders’ equity		2,582,271			2,093,040
Total liabilities, noncontrolling interests and shareholders’ equity	$	18,040,349		$	15,210,574

See accompanying notes.

80

CapitalSource Inc.

Consolidated Statements of Income

	Year Ended December 31,
	2007			2006		2005
	($ in thousands, except per share data)
Net investment income:
Interest income	$	1,277,903		$	1,016,533	$	514,652
Fee income		162,395			170,485		130,638
Total interest and fee income		1,440,298			1,187,018		645,290
Operating lease income		97,013			30,742		—
Total investment income		1,537,311			1,217,760		645,290
Interest expense		847,241			606,725		185,935
Net investment income		690,070			611,035		459,355
Provision for loan losses		78,641			81,562		65,680
Net investment income after provision for loan losses		611,429			529,473		393,675
Operating expenses:
Compensation and benefits		157,755			135,912		95,008
Depreciation of direct real estate investments		32,004			11,468		—
Other administrative expenses		78,232			68,672		48,828
Total operating expenses		267,991			216,052		143,836
Other income (expense):
Diligence deposits forfeited		4,822			6,462		4,557
Gain on investments, net		20,987			12,101		9,194
(Loss) gain on derivatives		(46,150	)		2,485		(101	)
(Loss) gain on residential mortgage investment portfolio		(75,164	)		2,528		(2,074	)
Other income, net of expenses		20,855			13,752		7,657
Total other (expense) income		(74,650	)		37,328		19,233
Noncontrolling interests expense		4,938			4,711		—
Net income before income taxes and cumulative effect of accounting change		263,850			346,038		269,072
Income taxes		87,563			67,132		104,400
Net income before cumulative effect of accounting change		176,287			278,906		164,672
Cumulative effect of accounting change, net of taxes		—			370		—
Net income	$	176,287		$	279,276	$	164,672
Net income per share:
Basic	$	0.92		$	1.68	$	1.36
Diluted	$	0.91		$	1.65	$	1.33
Average shares outstanding:
Basic		191,697,254			166,273,730		120,976,558
Diluted		193,282,656			169,220,007		123,433,645

See accompanying notes.

81

CapitalSource Inc.

Consolidated Statements of Shareholders’ Equity

												Accumulated
			Additional									Other			Treasury			Total
	Common		Paid-in			Accumulated			Deferred			Comprehensive			Stock,			Shareholders’
	Stock		Capital			Deficit			Compensation			Income, net			at cost			Equity
	($ in thousands)
Total shareholders’ equity as of December 31, 2004	$	1,179	$	761,579		$	233,033		$	(19,162	)	$	(312	)	$	(29,926	)	$	946,391
Net income		—		—			164,672			—			—			—			164,672
Other comprehensive income:
Unrealized losses, net of tax		—		—			—			—			(1,027	)		—			(1,027	)
Total comprehensive income																			163,645
Dividends paid		—		—			(350,922	)		—			—			—			(350,922	)
Proceeds from issuance of common stock, net		192		414,484			—			—			—			—			414,676
Stock option expense		—		325			—			—			—			—			325
Exercise of options		4		2,425			—			—			—			—			2,429
Restricted stock activity		29		64,255			—			(65,255	)		—			—			(971	)
Amortization of deferred compensation		—		—			—			18,688			—			—			18,688
Tax benefit on purchase of call option		—		3,534			—			—			—			—			3,534
Tax benefit on exercise of options		—		2,053			—			—			—			—			2,053
Tax benefit on vesting of restricted stock grants		—		90			—			—			—			—			90
Total shareholders’ equity as of December 31, 2005		1,404		1,248,745			46,783			(65,729	)		(1,339	)		(29,926	)		1,199,938
Net income		—		—			279,276			—			—			—			279,276
Other comprehensive income:
Unrealized gains, net of tax		—		—			—			—			3,804			—			3,804
Total comprehensive income																			283,080
Cumulative effect of accounting change, net of taxes		—		(370	)		—			—			—			—			(370	)
Dividends paid		—		8,503			(346,746	)					——			—			(338,243	)
Issuance of common stock, net		391		912,767			—			—			—			—			913,158
Stock option expense		—		8,598			—			—			—			—			8,598
Exercise of options		7		7,043			—			—			—			—			7,050
Restricted stock activity		13		(50,146	)		(48	)		65,729			—			—			15,548
Tax benefit on exercise of options		—		3,018			—			—			—			—			3,018
Tax benefit on vesting of restricted stock grants		—		1,263			—			—			—			—			1,263
Total shareholders’ equity as of December 31, 2006		1,815		2,139,421			(20,735	)		—			2,465			(29,926	)		2,093,040
Net income		—		—			176,287			—			—			—			176,287
Other comprehensive income:
Unrealized gains, net of tax		—		—			—			—			2,485			—			2,485
Total comprehensive income																			178,772
Cumulative effect of adoption of FIN 48		—		—			(5,702	)		—			—			—			(5,702	)
Dividends paid		—		10,064			(477,237	)		—			—			—			(467,173	)
Issuance of common stock, net		379		695,718			—			—			—			29,926			726,023
Stock option expense		—		7,569			—			—			—			—			7,569
Exercise of options		4		4,746			—			—			—			—			4,750
Restricted stock activity		9		22,752			—			—			—			—			22,761
Beneficial conversion option on convertible debt		—		20,177			—			—			—			—			20,177
Tax benefit on exercise of options		—		1,077			—			—			—			—			1,077
Tax benefit on vesting of restricted stock grants		—		977			—			—			—			—			977
Total shareholders’ equity as of December 31, 2007	$	2,207	$	2,902,501		$	(327,387	)	$	—		$	4,950		$	—		$	2,582,271

See accompanying notes.

82

CapitalSource Inc.

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2007			2006			2005
	($ in thousands)
Operating activities:
Net income	$	176,287		$	279,276		$	164,672
Adjustments to reconcile net income to net cash used in operating activities:
Stock option expense		7,569			8,598			325
Restricted stock expense		36,921			24,695			18,754
(Gain) loss on extinguishment of debt		(678	)		2,497			—
Non-cash prepayment fee		—			(8,353	)		—
Cumulative effect of accounting change, net of taxes		—			(370	)		—
Amortization of deferred loan fees and discounts		(88,558	)		(86,248	)		(77,009	)
Paid-in-kind interest on loans		(30,053	)		331			(7,931	)
Provision for loan losses		78,641			81,562			65,680
Amortization of deferred financing fees and discounts		47,672			41,232			23,220
Depreciation and amortization		35,891			14,755			2,629
Provision (benefit) for deferred income taxes		41,793			(20,699	)		(7,214	)
Non-cash (gain) loss on investments, net		(865	)		8,024			(5,855	)
Non-cash loss (gain) on property and equipment disposals		1,037			(404	)		—
Unrealized loss (gain) on derivatives and foreign currencies, net		42,599			(1,470	)		101
Unrealized loss on residential mortgage investment portfolio, net		75,507			4,758			2,074
Net increase in mortgage-backed securities pledged, trading		(498,249	)		(400,230	)		(323,370	)
Amortization of discount on residential mortgage investments		(39,380	)		(32,090	)		—
Increase in loans held for sale, net		(598,897	)		(9,143	)		(59,589	)
(Increase) decrease in other assets		(234,964	)		10,285			(14,327	)
Increase (decrease) in other liabilities		194,974			82,576			(6,869	)
Cash used in operating activities		(752,753	)		(418	)		(224,709	)
Investing activities:
(Increase) decrease in restricted cash		(272,899	)		47,538			(47,609	)
Decrease (increase) in mortgage-related receivables, net		267,056			(2,343,273	)		(39,438	)
Decrease (increase) in receivables under reverse-repurchase agreements, net		51,892			(18,649	)		(33,243	)
Increase in loans, net		(1,454,861	)		(1,912,839	)		(1,515,382	)
Acquisition of real estate, net of cash acquired		(248,120	)		(498,005	)		—
Acquisition of investments, net		(28,766	)		(32,670	)		(73,202	)
Acquisition of property and equipment, net		(5,379	)		(4,605	)		(4,458	)
Cash used in investing activities		(1,691,077	)		(4,762,503	)		(1,713,332	)
Financing activities:
Payment of deferred financing fees		(53,107	)		(56,623	)		(23,680	)
Borrowings under repurchase agreements, net		399,259			393,114			358,423
(Repayments of) borrowings on credit facilities, net		(47,414	)		130,567			1,485,609
Borrowings of convertible debt		245,000			—			—
Borrowings of term debt		2,860,607			5,508,204			1,158,485
Repayments of term debt		(1,503,018	)		(1,548,875	)		(1,565,082	)
Borrowings of subordinated debt		75,630			206,685			225,000
Proceeds from issuance of common stock, net of offering costs		714,490			603,422			414,676
Proceeds from exercise of options		4,750			7,050			2,429
Tax benefits on share-based payments		2,054			4,281			—
Payment of dividends		(471,873	)		(412,649	)		—
Cash provided by financing activities		2,226,378			4,835,176			2,055,860
(Decrease) increase in cash and cash equivalents		(217,452	)		72,255			117,819
Cash and cash equivalents as of beginning of year		396,151			323,896			206,077
Cash and cash equivalents as of end of year	$	178,699		$	396,151		$	323,896
Supplemental information:
Cash paid during the year for:
Interest	$	768,259		$	524,759		$	155,499
Income taxes, net of refunds		93,221			89,835			110,545
Noncash transactions from investing and financing activities:
Issuance of common stock in connection with dividends and real estate acquisition	$	—		$	309,736		$	—
Acquisition of real estate		110,675			235,766			—
Assumption of term debt		71,027			—			—
Assumption of intangible lease liability		30,476			—			—
Real estate acquired through foreclosure		20,225			—			—
Conversion of noncontrolling interests into common stock		11,533			—			—
Receipt of short-term note receivable related to the sale of real estate owned		—			—			13,500
Change in fair value of standby letters of credit		(104	)		1,565			10,180
Acquisition of investments in unconsolidated trusts		2,544			6,522			6,994
Beneficial conversion option on convertible debt		20,177			—			—

See accompanying notes.

83

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1.   Organization

CapitalSource Inc. (“CapitalSource”), a Delaware corporation, is a commercial finance, investment and asset management company operating as a real estate investment trust (“REIT”) and providing a broad array of financial products to middle market businesses. We primarily provide and invest in the following products:

•  First Mortgage Loans — Commercial loans that are secured by first mortgages on the property of the client;

•  Senior Secured Asset-Based Loans — Commercial loans that are underwritten based on our assessment of the client’s eligible collateral, including accounts receivable, real estate related receivables and/or inventory;

•  Senior Secured Cash Flow Loans — Commercial loans that are underwritten based on our assessment of a client’s ability to generate cash flows sufficient to repay the loan and maintain or increase its enterprise value during the term of the loan, thereby facilitating repayment of the principal at maturity;

•  Direct Real Estate Investments — Investments in income-producing healthcare facilities that are generally leased through long-term, triple-net operating leases;

•  Term B, Second Lien and Mezzanine Loans — Commercial loans, including subordinated mortgage loans, that come after a client’s senior term loans in right of payment or upon liquidation;

•  Equity Investments — Opportunistic equity investments, typically in conjunction with commercial financing relationships and on the same terms as other equity investors; and

•  Residential Mortgage Investments — Investments in residential mortgage loans and residential mortgage-backed securities that constitute qualifying REIT assets.

We operate as three reportable segments: 1) Commercial Finance, 2) Healthcare Net Lease, and 3) Residential Mortgage Investment. Our Commercial Finance segment comprises our commercial lending business activities; our Healthcare Net Lease segment comprises our direct real estate investment business activities; and our Residential Mortgage Investment segment comprises our residential mortgage investment activities.

Prior to 2006, we operated as a single business segment as substantially all of our activity was related to our commercial finance business. On January 1, 2006, we began presenting financial results through two reportable segments: 1) Commercial Lending & Investment and 2) Residential Mortgage Investment. Our Commercial Lending & Investment segment comprised our commercial lending and direct real estate investment business activities and our Residential Mortgage Investment segment comprised all of our activities related to our investments in residential mortgage loans and residential mortgage-backed securities (“RMBS”). Beginning in the fourth quarter of 2007, we are presenting financial results through three reportable segments: 1) Commercial Finance, 2) Healthcare Net Lease, and 3) Residential Mortgage Investment. Changes have been made in the way management organizes financial information to make operating decisions, resulting in the activities previously reported in the Commercial Lending & Investment segment being disaggregated into the Commercial Finance segment and the Healthcare Net Lease segment as described above. We have reclassified all comparative prior period segment information to reflect our three reportable segments.

Note 2.   Summary of Significant Accounting Policies

Our financial reporting and accounting policies conform to U.S. generally accepted accounting principles (“GAAP”).

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect 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 income and expenses during the reporting period. Management has made significant estimates in certain areas, including

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valuing certain financial instruments and other assets, assessing financial instruments and other assets for impairment and determining the allowance for loan losses. Actual results could differ from those estimates.

Principles of Consolidation

The accompanying financial statements reflect our consolidated accounts, including those of our majority-owned subsidiaries and variable interest entities (“VIEs”) where we determined that we are the primary beneficiary. All significant intercompany accounts and transactions have been eliminated.

Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. For the purpose of reporting cash flows, cash and cash equivalents include collections from our borrowers, amounts due from banks, U.S. Treasury bills, overnight investments and commercial paper with an initial maturity of three months or less.

Loans

Loans held in our portfolio are recorded at the principal amount outstanding, net of deferred loan costs or fees and any discounts received or premiums paid on purchased loans. The balance of loans includes accrued interest and paid-in-kind (“PIK”) interest. Deferred costs or fees, discounts and premiums are amortized over the contractual term of the loan, adjusted for actual prepayments, using the interest method. We use contractual payment terms to determine the constant yield needed to apply the interest method.

Loans held for sale are accounted for at the lower of cost or fair value, which is determined on an individual loan basis, and include loans we originated or purchased that we intend to sell all or part of that loan in the secondary market. Direct loan origination costs or fees, discounts and premiums are deferred at origination of the loan.

As part of our management of the loans held in our portfolio, we will occasionally transfer loans from held in portfolio to held for sale. Upon transfer, the cost basis of those loans is reduced by the amount of the corresponding allowance allocable to the transferred loans. The loans are accounted for at the lower of cost or fair value, with valuation changes recorded in other income, net of expenses in the accompanying audited consolidated statements of income. Gains or losses on these loans are also recorded in other income, net of expenses in the accompanying audited consolidated statements of income. In certain circumstances, loans designated as held for sale may later be transferred back to the loan portfolio based upon our intent to retain the loan. We transfer these loans to our portfolio at the lower of cost or fair value.

Allowance for Loan Losses

Our allowance for loan losses represents management’s estimate of incurred loan losses inherent in the our loan portfolio as of the balance sheet date. The estimation of the allowance is based on a variety of factors, including past loan loss experience, the current credit profile of our borrowers, adverse situations that have occurred that may affect the borrowers’ ability to repay, the estimated value of underlying collateral and general economic conditions. Losses are recognized when available information indicates that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.

We perform periodic and systematic detailed reviews of our loan portfolios to identify credit risks and to assess the overall collectibility of those portfolios. The allowance on certain pools of loans with similar characteristics is based on aggregated portfolio segment evaluations generally by loan type and is estimated using reserve factors that are reflective of estimated historical and industry loss rates. The commercial portfolios are reviewed on an individual loan basis. Loans subject to individual reviews are analyzed and segregated by risk according to our internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, industry performance trends, geographic or obligor concentrations within each portfolio segment, and any other pertinent information (including individual valuations on nonperforming loans in

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairment of a Loan, (“SFAS No. 114”)) are factored in the estimation of the allowance for loan losses. The historical loss experience is updated quarterly to incorporate the most recent data reflective of the current economic environment.

If necessary, a specific allowance for loan losses is established for individual impaired commercial loans. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the agreement. Once a loan has been identified as individually impaired, management measures impairment in accordance with SFAS No. 114. Individually impaired loans are measured based on the present value of payments expected to be received, observable market prices, or for loans that are solely dependent on the collateral for repayment, the estimated fair value of the collateral. We generally do not factor in guarantees from or capital call agreements with our borrowers’ private equity sponsors in determining the overall allowance for loan losses. If the recorded investment in impaired loans exceeds the present value of payments expected to be received, a specific allowance is established as a component of the allowance for loan losses.

When available information confirms that specific loans or portions thereof are uncollectible, these amounts are charged off against the allowance for loan losses. To the extent we later collect amounts previously charged off, we will recognize a recovery in income for the amount received.

We also consider whether losses may have been incurred in connection with unfunded commitments to lend although, in making this assessment, we exclude from consideration those commitments for which funding is subject to our approval based on the adequacy of underlying collateral that is required to be presented by a client or other terms and conditions.

Investments in Debt Securities and Equity Securities That Have Readily Determinable Fair Values

All debt securities, as well as all purchased equity securities that have readily determinable fair values, are classified on our consolidated balance sheets based on management’s intention on the date of purchase. All RMBS that we purchase and classify as trading investments are stated at fair value with unrealized gains and losses included in gain (loss) on residential mortgage investment portfolio on the accompanying audited consolidated statements of income. All other debt securities, as well as equity investments in publicly traded entities, are classified as available-for-sale and carried at fair value with net unrealized gains and losses included in accumulated other comprehensive income (loss) on our accompanying audited consolidated balance sheets on an after-tax basis.

Investments in Equity Securities That Do Not Have Readily Determinable Fair Values

Purchased common stock or preferred stock that is not publicly traded and/or does not have a readily determinable fair value is accounted for pursuant to the equity method of accounting if our ownership position is large enough to significantly influence the operating and financial policies of an investee. This is generally presumed to exist when we own between 20% and 50% of a corporation, or when we own greater than 5% of a limited partnership or limited liability company. Our share of earnings and losses in equity method investees is included in other income, net of expenses in the accompanying audited consolidated statements of income. If our ownership position is too small to provide such influence, the cost method is used to account for the equity interest.

For investments accounted for using the cost or equity method of accounting, management evaluates information such as budgets, business plans, and financial statements of the investee in addition to quoted market prices, if any, in determining whether an other-than-temporary decline in value exists. Factors indicative of an other-than-temporary decline in value include, but are not limited to, recurring operating losses and credit defaults. We compare the estimated fair value of each investment to its carrying value each quarter. For any of our investments in which the estimated fair value is less than its carrying value, we consider whether the impairment of that investment is other-than-temporary.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

If it has been determined that an investment has sustained an other-than-temporary decline in its value, the equity interest is written down to its fair value through income and a new carrying value for the investment is established.

Realized gains or losses resulting from the sale of investments are included in gain on investments, net in the accompanying audited consolidated statements of income.

Mortgage-Related Receivables

Investments in mortgage-related receivables are recorded at amortized cost. Premiums and discounts that relate to such receivables are amortized into interest income over the estimated lives of such assets using the interest method.

Transfers of Financial Assets

We account for transfers of commercial loans and other financial assets to third parties or special purpose entities (“SPEs”) that we establish as sales if we determine that we have relinquished effective control over the assets. In such transactions, we allocate the recorded carrying amount of transferred assets between retained and sold interests based upon their relative fair values. We record gains and losses based upon the difference of proceeds received and the carrying amount of transferred assets that are allocated to sold interests.

We account for transfers of financial assets in which we receive cash consideration, but for which we determine that we have not relinquished control, as secured borrowings.

Investments in Warrants and Options

In connection with certain lending arrangements, we sometimes receive warrants or options to purchase shares of common stock or other equity interests from a client without any payment of cash in connection with certain lending arrangements. These investments are initially recorded at estimated fair value. The carrying value of the related loan is adjusted to reflect an original issue discount equal to the estimated fair value ascribed to the equity interest. Such original issue discount is accreted to fee income over the contractual life of the loan in accordance with our income recognition policy.

Warrants and options that are assessed as within the scope of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), as amended and interpreted, are subsequently measured at fair value through earnings as a component of gain on investments, net on the accompanying audited consolidated statements of income.

Deferred Financing Fees

Deferred financing fees represent fees and other direct incremental costs incurred in connection with our borrowings. These amounts are amortized into income as interest expense over the estimated life of the borrowing using the interest method.

Property and Equipment

Property and equipment are stated at cost and depreciated or amortized using the straight-line method over the following estimated useful lives:

Buildings and improvements	10 to 40 years
Leasehold improvements	Remaining lease term
Computer software	3 years
Equipment	5 years
Furniture	7 years

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Direct Real Estate Investments

We allocate the purchase price of our direct real estate investments to net tangible and identified intangible assets acquired, primarily lease intangibles, based on their fair values. In making estimates of fair values for purposes of allocating the purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired and liabilities assumed.

Our direct real estate investments are generally leased through long-term, triple-net operating leases. Under a typical triple-net lease, the client agrees to pay all facility operating expenses, as well as make capital improvements.

Depreciation is computed on a straight-line basis over the estimated useful lives ranging from 10 to 40 years for buildings. Equipment related to our direct real estate investments is depreciated in accordance with our property and equipment policy, as outlined above.

In assessing lease intangibles, we recognize above-market and below-market in-place lease values for acquired operating leases based on the present value of the difference between: (1) the contractual amounts to be received pursuant to the leases negotiated and in-place at the time of acquisition of the facilities; and (2) management’s estimate of fair market lease rates for the facility or equivalent facility, measured over a period equal to the remaining non-cancelable term of the lease. Factors to be considered for lease intangibles also include estimates of carrying costs during hypothetical lease-up periods, market conditions, and costs to execute similar leases. The capitalized above-market or below-market lease values are classified as other assets and other liabilities, respectively, and are amortized to operating lease income over the remaining non-cancelable term of each lease. We also acquire select direct real estate investments through transactions in which we typically execute long-term triple-net leases, at market rates, simultaneously with such acquisitions.

We recognize impairment losses on direct real estate investments and the related intangible assets when indicators of impairment are present and the net undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such carrying amount is in excess of the estimated cash flows from the operation and disposal of the property, we would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to the estimated fair market value. We assess our direct real estate investments and the related intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

Interest and Fee Income Recognition on Loans

Interest and fee income, including income on impaired loans and fees due at maturity, is recorded on an accrual basis to the extent that such amounts are expected to be collected. Carrying value adjustments of revolving lines of credit are amortized into interest and fee income over the contractual life of a loan on a straight line basis, while carrying value adjustments of all other loans are amortized into earnings over the contractual life of a loan using the interest method.

Loan origination fees are deferred and amortized as adjustments to the related loan’s yield over the contractual life of the loan. We do not take loan fees into income when a loan closes. In connection with the prepayment of a loan, any remaining unamortized deferred fees for that loan are accelerated and, depending upon the terms of the loan, there may be an additional fee that is charged based upon the prepayment and recognized in the period of the prepayment.

We accrete any discount from purchased loans into fee income in accordance with our policies up to the amount of contractual interest and principal payments expected to be collected. If management assesses that, upon purchase, a portion of contractual interest and principal payments are not expected to be collected, a portion of the discount will not be accreted (non-accretable difference).

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We will generally place a loan on non-accrual status if a loan is 90 days or more past due, or we expect that the borrower will not be able to service its debt and other obligations. When a loan is placed on non-accrual status, the recognition of interest and fee income on that loan will stop until factors indicating doubtful collection no longer exist and the loan has been brought current. Payments received on non-accrual loans are applied to principal. On the date the borrower pays all overdue amounts in full, the borrower’s loan will emerge from non-accrual status and all overdue charges (including those from prior years) are recognized as interest income in the current period.

Operating Lease Income Recognition

Substantially all of our direct real estate investments are leased through long-term, triple-net operating leases and typically include fixed rental payments, subject to escalation over the life of the lease. We recognize operating lease income on a straight-line basis over the life of the lease when collectibility is reasonably assured.

Income Recognition and Impairment Recognition on Securities

For most of our investments in debt securities, we use the interest method to amortize deferred items, including premiums, discounts and other basis adjustments, such as changes in commitment-period fair value, into interest income over the estimated lives of the securities.

Declines in the fair value of debt securities classified as available-for-sale securities are recognized in earnings when we have concluded that a decrease in the fair value of a security is other-than-temporary. This review considers a number of factors, including the severity of the decline in fair value, credit ratings and the length of time the investment has been in an unrealized loss position. We recognize impairment when quantitative and qualitative factors indicate that we may not recover the unrealized loss. One of the factors we consider is our intent and ability to hold the investment until a point in time at which recovery can be reasonably expected to occur. We apply significant judgment in determining whether impairment loss recognition is appropriate. Debt securities that are classified as trading are not assessed for impairment.

We apply the provisions of the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets (“EITF 99-20”), to investments in securitized assets that are classified as available-for-sale and assessed as being within the scope of such guidance. In this case, changes in the effective yield due to changes in estimated cash flows are recognized on a prospective basis as adjustments to interest income in future periods. Additionally, we follow the provisions of such guidance for purposes of assessing and measuring impairment in connection with such investments. In this case, we would recognize an impairment loss when the fair value of a security declines below its recognized carrying amount and an adverse change in expected cash flows has occurred. Determination of whether an adverse change has occurred involves judgment about expected prepayments and credit events.

Derivative Instruments

We enter into derivative contracts to manage the various risks associated with certain assets, liabilities, or probable forecasted transactions. On the date we enter into a derivative contract, the derivative instrument is designated as: (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (a “fair value” hedge); (2) a hedge of the variability in expected future cash flows associated with an existing recognized asset or liability or a probable forecasted transaction (a “cash flow” hedge); or (3) held for other risk management purposes (“non-accounting hedge”).

In a fair value hedge, changes in the fair value of the hedging derivative are recognized in earnings and offset by recognizing changes in the fair value of the hedged item attributable to the risk being hedged. To the extent that the hedge is ineffective, the changes in fair value of the derivative and hedged item will not offset and the difference is reflected in income.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings during the same period in which the hedged item affects earnings. The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in income.

Our derivatives are recorded in other assets or other liabilities, as appropriate, on our accompanying audited consolidated balance sheets. The changes in fair value of non-accounting hedges and interest accrued in connection with such derivatives are recognized in other income, net of expenses on the accompanying audited consolidated statements of income.

Fair value and cash flow hedge designations are only made to the extent that (i) a derivative is expected to be highly effective at hedging a designated risk and (ii) we formally document the relationship between the hedging instruments and hedged items, including the related risk management objective and strategy.

We discontinue hedge accounting when (1) we determine that a derivative is no longer expected to be effective in offsetting changes in the fair value or cash flows of the designated hedged item; (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is de-designated as a fair value or cash flow hedge; or (4) for a cash flow hedge, it is not probable that the forecasted transaction will occur by the end of the originally specified time period.

If we determine that a derivative no longer qualifies as a fair value or cash flow hedge and hedge accounting is discontinued, the derivative (if retained) will continue to be recorded on the balance sheet at its fair value with changes in fair value included in current income. For a discontinued fair value hedge, the previously hedged item is no longer adjusted for changes in fair value.

When hedge accounting is discontinued in a cash flow hedge because it is not probable that a forecasted transaction will occur, the derivative will continue to be recorded on the balance sheet at its fair value with changes in fair value included in current earnings, and the gains and losses in accumulated other comprehensive income will be recognized immediately in earnings. When hedge accounting is discontinued in a cash flow hedge because the hedging instrument is sold, terminated or de-designated as a hedge, the amount reported in accumulated other comprehensive income through the date of sale, termination, or de-designation will continue to be reported in accumulated other comprehensive income until the forecasted transaction affects earnings.

As of December 31, 2007, we had no derivatives designated as accounting hedges.

Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase

Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. Our policy is to obtain the use of securities purchased under agreements to resell. The market value of the underlying securities that collateralize the related receivable on agreements to resell is monitored, including accrued interest. We may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.

In instances where we acquire mortgage-backed securities through repurchase agreements with the same counterparty from whom the investments were purchased, we account for the purchase commitment and repurchase agreement on a net basis and record a forward commitment to purchase mortgage-backed securities as a derivative instrument. Such forward commitments are recorded at fair value with subsequent changes in fair value recognized in income. Additionally, we record the cash portion of our investment in mortgage-backed securities as a mortgage related receivable on our accompanying audited consolidated balance sheets.

Income Taxes

When we filed our federal income tax return for the year ended December 31, 2006, we elected REIT status under the Internal Revenue Code (the “Code”). To continue to qualify as a REIT, we are required to distribute at

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

least 90% of our REIT taxable income to our shareholders and meet the various other requirements imposed by the Code, through actual operating results, asset holdings, distribution levels and diversity of stock ownership. As a REIT, we generally are not subject to corporate-level income tax on the earnings distributed to our shareholders that we derive from our REIT qualifying activities. We are subject to corporate-level tax on the earnings we derive from our taxable REIT subsidiaries (“TRSs”). If we fail to qualify as a REIT in any taxable year, all of our taxable income for that year, would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax. In addition, we also will be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost, unless we were entitled to relief under specific statutory provisions. We are still subject to foreign, state and local taxation in various foreign, state and local jurisdictions, including those in which we transact business or reside.

As certain of our subsidiaries are TRSs, we continue to report a provision for income taxes within our consolidated financial statements. We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates for the periods in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the change.

Net Income Per Share

Basic net income per share is based on the weighted-average number of common shares outstanding during each period. Diluted net income per share is based on the weighted average number of common shares outstanding during each period, plus common share equivalents computed for stock options, stock units, stock dividends declared, restricted stock and the conversion premium on our convertible debt using the treasury stock method. Diluted net income per share is adjusted for the effects of other potentially dilutive financial instruments only in the periods in which such effect is dilutive.

Stock-Based Compensation

We adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”), which is a revision of SFAS No. 123, Accounting for Stock-Based Payment (“SFAS No. 123”), using the modified prospective method on January 1, 2006. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. See Note 17, Stock-Based Compensation, for further discussion.

Bonuses

Bonuses are accrued ratably, pursuant to a variable methodology partially based on the performance of CapitalSource, over the annual performance period in accordance with Accounting Principles Board (“APB”) Opinion No. 28, Interim Financial Reporting.

On a quarterly basis, management recommends a bonus accrual to the compensation committee pursuant to our variable bonus methodology. This recommendation is in the form of a percentage of regular salary paid and is based upon the cumulative regular salary paid from the start of the annual performance period through the end of the particular quarterly reporting period. In developing its recommendation to the compensation committee, management analyzes certain key performance metrics for CapitalSource, including actual and forecasted returns on equity. The actual bonus accrual recorded is that amount approved each quarter by the compensation committee.

Marketing

Marketing costs, including advertising, are expensed as incurred.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Segment Reporting

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), requires that a public business enterprise report financial and descriptive information about its reportable operating segments including a measure of segment profit or loss, certain specific revenue and expense items and segment assets. We operate as three reportable segments: 1) Commercial Finance, 2) Healthcare Net Lease, and 3) Residential Mortgage Investment. Our Commercial Finance segment comprises our commercial lending business activities; our Healthcare Net Lease segment comprises our direct real estate investment business activities; and our Residential Mortgage Investment segment comprises our residential mortgage investment activities.

New Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (“SFAS No. 155”), which amends SFAS No. 133, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”). SFAS No. 155 clarifies that derivative instruments embedded within beneficial interests in securitized financial assets are subject to SFAS No. 133 and, in instances where an embedded derivative must otherwise be bifurcated, permits an entity the option of adjusting the host instrument to fair value through earnings. In addition, SFAS No. 155 introduces new guidance concerning derivative instruments that a qualifying special-purpose entity may hold under SFAS No. 140. We adopted SFAS No. 155 on January 1, 2007 and it did not have a material effect on our consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets — An Amendment of FASB Statement No. 140 (“SFAS No. 156”), which amends SFAS No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities using either an amortization- or fair value-based method. SFAS No. 156 also requires separate presentation of servicing assets and liabilities subsequently measured at fair value in the balance sheet and additional disclosures for all separately recognized servicing assets and liabilities. We adopted SFAS No. 156 on January 1, 2007 and it did not have a material effect on our consolidated financial statements. We subsequently measure recognized servicing assets and servicing liabilities by amortizing such amounts in proportion to and over the period of estimated net servicing income or loss, while periodically assessing servicing assets for impairment and servicing liabilities for increased obligation.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation requires recognition of the impact of a tax position if that position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In addition, FIN 48 provides measurement guidance whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit to recognize in the financial statements. As a result of our adoption of FIN 48 on January 1, 2007, we recognized an approximate $5.7 million increase in the liability for unrecognized tax benefits. This increase was accounted for as an increase to the January 1, 2007 balance of accumulated deficit. See Note 14, Income Taxes, for further discussion of our income taxes and our adoption of FIN 48.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. This statement applies whenever other accounting standards require or permit fair value measurement. The effective date for SFAS No. 157 is the beginning of the first fiscal year beginning after November 15,

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2007. In February 2008, the FASB issued FSP SFAS 157-2, Effective Date of FASB Statement No. 157 (“FSP SFAS 157-2”), which delays the effective date of SFAS No. 157 for all nonfinancial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until years beginning after November 15, 2008. Therefore, we have not yet applied the provisions of SFAS No. 157 to items such as indefinite-lived intangible assets and long-lived assets measured at fair value for an impairment assessment. Effective January 1, 2008, we adopted the provisions of SFAS No. 157 except for items covered by FSP SFAS 157-2 and it did not have a significant effect on fair value measurements in our consolidated financial statements. We have not completed our assessment of the impact of the adoption of FSP SFAS 157-2 on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which permits all entities to choose to measure eligible financial assets and liabilities at fair value. The fair value option may be applied on an instrument by instrument basis, and once elected, the option is irrevocable. The effective date for SFAS No. 159 is the beginning of the first fiscal year beginning after November 15, 2007. We decided not to elect the fair value option for any eligible financial assets and liabilities. Accordingly, the initial application of SFAS No. 159 did not have any effect on our consolidated financial statements.

In June 2007, the FASB ratified EITF No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”), which requires income tax benefits from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units and outstanding equity share options (“affected securities”) to be recognized as an increase in additional paid-in capital and to be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. The effective date for EITF 06-11 is the beginning of the first fiscal year beginning after September 15, 2007. Accordingly, EITF 06-11 will be applied prospectively to the income tax benefits of dividends declared on affected securities on or after January 1, 2008. We do not expect the adoption of EITF 06-11 to have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No. 141(R)”), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The effective date for SFAS No. 141(R) is for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We plan to adopt SFAS No. 141(R) on January 1, 2009. We have not completed our assessment of the impact of the adoption of SFAS No. 141(R) on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51. (“SFAS No. 160”), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 also amends certain consolidation procedures for consistency with the requirements of FASB Statement No. 141(R). The effective date for SFAS No. 160 is the beginning of the first fiscal year beginning after December 15, 2008. We plan to adopt SFAS No. 160 on January 1, 2009. We have not completed our assessment of the impact of the adoption of SFAS No. 160 on our consolidated financial statements.

Reclassifications

Certain amounts in prior year’s consolidated financial statements have been reclassified to conform to the current year presentation.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3.   Restricted Cash

Restricted cash as of December 31, 2007 and 2006 was as follows:

	December 31,
	2007		2006
	($ in thousands)
Principal and interest collections on loans held by trusts (see Note 11)	$	250,657	$	173,982
Interest collections on loans pledged to credit facilities (see Note 11)		64,715		27,609
Prime brokerage securities (1)		157,329		32,493
Accounts held by direct real estate investments		40,210		6,274
Other		892		546
Total	$	513,803	$	240,904

(1) As of December 31, 2007, the Prime brokerage securities consisted of short-term discount notes issued by Federal Home Loan Bank and Freddie Mac.

For the monthly interest collections related to the credit facilities and term debt after deducting interest rate swap payments, interest payable and servicing fees, the remaining restricted cash is returned to us and becomes unrestricted at that time.

Note 4.   Mortgage-Related Receivables and Related Owner Trust Securitizations

In February 2006, we purchased beneficial interests in special purpose entities (“SPEs”) that acquired and securitized pools of adjustable rate, prime residential mortgage loans. In accordance with the provisions of FASB Interpretation No. 46 (Revised 2003), Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51 (“FIN 46(R)”), we determined that we were the primary beneficiary of the SPEs and, therefore, consolidated the assets and liabilities of such entities for financial statement purposes. In so doing, we also determined that the SPEs’ interest in the underlying mortgage loans constituted, for accounting purposes, receivables secured by underlying mortgage loans. As a result, through consolidation, we recorded mortgage-related receivables, as well as the principal amount of related debt obligations incurred by SPEs to fund the origination of these receivables, on our accompanying audited consolidated balance sheets as of December 31, 2007 and 2006. Recourse is limited to our purchased beneficial interests in the respective securitization trusts.

Recognized mortgage-related receivables are, in economic substance, mortgage loans. Such mortgage loans are all prime, hybrid adjustable-rate loans. At acquisition by us, mortgage loans that back mortgage-related receivables had a weighted average loan-to-value ratio of 73% and a weighted average Fair Isaac & Co. (“FICO”) score of 737.

As of December 31, 2007 and 2006, the carrying amounts of our residential mortgage-related receivables, including accrued interest and the unamortized balance of purchase discounts, were $2.0 billion and $2.3 billion, respectively. As of December 31, 2007 and 2006, the weighted average interest rates on such receivables were 5.38%, and the weighted average contractual maturities were approximately 28 years and 29 years, respectively. As of December 31, 2007, approximately 95% of recognized mortgage-related receivables were financed with permanent term debt that was recognized by us through the consolidation of the referenced SPEs.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2007 and 2006, mortgage-related receivables, whose underlying mortgage loans are 90 days or more days past due or were in the process of foreclosure and foreclosed were as follows:

	December 31,
	2007			2006
	($ in thousands)
Mortgage-related receivables whose underlying mortgage loans are 90 or more days past due or are in the process of foreclosure	$	14,751		$	2,364
Percentage of mortgage-related receivables		0.72	%(1)		0.10	%
Foreclosed assets	$	3,264			—
Percentage of mortgage-related receivables		0.16	%		—

(1) By comparison, in its January 2008 Monthly Summary Report, Fannie Mae reported a serious delinquency rate (“SDQ”) of 0.98% for December 2007, for conventional single family loans that are three months or more past due or in foreclosure process while, in its January 2008 Monthly Volume Summary, Freddie Mac reported an SDQ of 0.65% for December 2007, for comparable types of single family loans.

In connection with recognized mortgage-related receivables, we recorded provisions for loan losses of $1.1 million and $0.4 million for the years ended December 31, 2007 and 2006, respectively. During the year ended December 31, 2007, we charged off $0.7 million of these mortgage-related receivables. The allowance for loan losses was $0.8 million and $0.4 million as of December 31, 2007 and 2006, respectively, and was recorded in the accompanying audited consolidated balance sheets as a reduction to the carrying value of mortgage-related receivables. For the year ended December 31, 2007, we recognized $0.2 million in realized losses on such mortgage-related receivables.

Note 5.   Residential Mortgage-Backed Securities and Certain Derivative Instruments

We invest in RMBS, which are securities collateralized by residential mortgage loans. These securities include mortgage-backed securities that were issued and are guaranteed by Fannie Mae or Freddie Mac (hereinafter, “Agency MBS”). We also invest in RMBS issued by non-government-sponsored entities that are credit-enhanced through the use of subordination or in other ways (hereinafter, “Non-Agency MBS”). All of our Agency MBS are collateralized by adjustable rate residential mortgage loans, including hybrid adjustable rate mortgage loans. We account for our Agency MBS as debt securities that are classified as trading investments and included in mortgage-backed securities pledged, trading on our accompanying consolidated balance sheets. We account for our Non-Agency MBS as debt securities that are classified as available-for-sale and included in investments on our accompanying consolidated balance sheets. For additional information about our Non-Agency MBS, see Note 7, Investments.

As of December 31, 2007 and 2006, we owned $4.0 billion and $3.5 billion, respectively, in Agency MBS that were pledged as collateral for repurchase agreements used to finance the acquisition of these investments. As of December 31, 2007 and 2006, our portfolio of Agency MBS comprised hybrid adjustable-rate securities with varying fixed period terms issued and guaranteed by Fannie Mae or Freddie Mac. The weighted average net coupon of Agency MBS in our portfolio was 5.07% and 4.89% as of December 31, 2007 and 2006, respectively.

As of December 31, 2007 and 2006, the fair value of Agency MBS in our portfolio was $4.1 billion and $3.5 billion, respectively. For the years ended December 31, 2007 and 2006, we recognized $34.9 million and $3.8 million of unrealized gains, related to these investments as a component of (loss) gain on residential mortgage investment portfolio in the accompanying audited consolidated statements of income. During the year ended December 31, 2006, we recognized a net unrealized loss of $10.8 million in (loss) gain on residential mortgage investment portfolio related to period changes in the fair value of our forward commitments to purchase Agency MBS that were being accounted for on a net basis.

We use various derivative instruments to hedge the interest rate risk associated with the mortgage investments in our portfolio with the risk management objective to maintain a zero duration position. We account for these

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

derivative instruments pursuant to the provisions of SFAS No. 133 and, as such, adjust these instruments to fair value through income as a component of (loss) gain on residential mortgage investment portfolio in the accompanying audited consolidated statements of income. During the years ended December 31, 2007, 2006 and 2005, we recognized net realized and unrealized losses of $79.6 million, net realized and unrealized gains of $18.1 million and net realized and unrealized losses of $3.0 million, respectively, related to these derivative instruments. These amounts include interest-related accruals that we recognize in connection with the periodic settlement of these instruments.

Note 6.   Commercial Loans and Credit Quality

As of December 31, 2007 and 2006, our total commercial loan portfolio had an outstanding balance of $9.9 billion and $7.9 billion, respectively. Included in these amounts were loans held for sale with outstanding balances of $94.3 million and $26.5 million as of December 31, 2007 and 2006, respectively, and receivables under reverse-repurchase agreements with an outstanding balance of $51.9 million as of December 31, 2006. We had no receivables under reverse-repurchase agreements as of December 31, 2007. Our loans held for sale were recorded at the lower of cost or fair value on the accompanying audited consolidated balance sheets. During the year ended December 31, 2007, we transferred $531.1 million of loans designated as held for sale back to the loan portfolio based upon our intent to retain the loans for investment. During the years ended December 31, 2007, 2006 and 2005, we recognized net gains on the sale of loans of $9.1 million, $2.0 million and $1.3 million, respectively.

Also included in loans on the accompanying audited consolidated balance sheets are purchased loans, which totaled $638.4 million and $447.9 million as of December 31, 2007 and 2006, respectively. The accretable discount on purchased loans as of December 31, 2007 and 2006 totaled $22.5 million and $7.5 million, respectively, which is reflected in deferred loan fees and discounts in our accompanying audited consolidated balance sheets. During the years ended December 31, 2007 and 2006, we accreted $5.9 million and $4.3 million, respectively, into fee income from purchased loan discounts. For the year ended December 31, 2007, we had $20.9 million of additions to accretable discounts.

Credit Quality

As of December 31, 2007 and 2006, the principal balances of loans 60 or more days contractually delinquent, non-accrual loans and impaired loans in our commercial finance portfolio were as follows:

	December 31,
Commercial Loan Asset Classification	2007			2006
	($ in thousands)
Loans 60 or more days contractually delinquent	$	74,298		$	88,067
Non-accrual loans(1)		170,522			183,483
Impaired loans(2)		318,945			281,377
Less: loans in multiple categories		(226,021	)		(230,469	)
Total	$	337,744		$	322,458
Total as a percentage of total loans at year end		3.42%			4.11%

(1)

Includes commercial loans with an aggregate principal balance of $55.5 million and $47.0 million as of December 31, 2007 and 2006, respectively, which were also classified as loans 60 or more days contractually delinquent. As of December 31, 2007 and 2006, there were no loans classified as held for sale that were placed on non-accrual status.

(2)

Includes commercial loans with an aggregate principal balance of $55.5 million and $47.0 million as of December 31, 2007 and 2006, respectively, which were also classified as loans 60 or more days contractually delinquent, and commercial loans with an aggregate principal balance of $170.5 million and $183.5 million as of December 31, 2007 and 2006, respectively, which were also classified as loans on non-accrual status. The carrying values of impaired commercial loans were $311.6 and $275.3 million as of December 31, 2007 and 2006, respectively.

Reflective of principles established in SFAS No. 114, we consider a loan to be impaired when, based on current information, we determine that it is probable that we will be unable to collect all amounts due in accordance with the

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

contractual terms of the original loan agreement. Impaired loans include loans for which we expect to encounter a significant delay in the collection of, and/or shortfall in the amount of contractual payments due to us, as well as loans that we have assessed as impaired, but for which we ultimately expect to collect all payments. As of December 31, 2007 and 2006, we had $119.7 million and $95.7 million of impaired commercial loans, respectively, with allocated reserves of $27.4 million and $37.8 million, respectively. As of December 31, 2007 and 2006, we had $199.2 million and $185.7 million, respectively, of commercial loans that we assessed as impaired and for which we did not record any allocated reserves based upon our belief that it is probable that we will ultimately collect all principal and interest amounts due.

The average balances of impaired commercial loans during the years ended December 31, 2007, 2006 and 2005 were $308.4 million, $238.6 million and $159.8 million, respectively. The total amounts of interest income that were recognized on impaired commercial loans during the years ended December 31, 2007, 2006 and 2005, were $19.7 million, $10.0 million and $11.3 million, respectively. The amounts of cash basis interest income that were recognized on impaired commercial loans during the years ended December 31, 2007, 2006 and 2005, were $18.5 million, $8.8 million and $7.9 million, respectively. If the non-accrual commercial loans had performed in accordance with their original terms, interest income would have been higher than reported by $35.2 million, $23.9 million and $11.0 million for the years ended December 31, 2007, 2006 and 2005, respectively.

During the year ended December 31, 2007, commercial loans with an aggregate carrying value of $189.6 million, as of December 31, 2007, were involved in a troubled debt restructuring as defined by SFAS No. 15, Accounting for Debtors and Creditors for Troubled Debt Restructurings. As of December 31, 2007, commercial loans with an aggregate carrying value of $263.9 million were involved in a troubled debt restructuring. Additionally, under SFAS No. 114, loans involved in a troubled debt restructuring are also assessed as impaired, generally for a period of at least one year following the restructuring. The allocated reserve for commercial loans that were involved in a troubled debt restructuring was $23.1 million as of December 31, 2007. For the year ended December 31, 2006, commercial loans with an aggregate carrying value of $194.7 million as of December 31, 2006, were involved in troubled debt restructurings. The allocated reserve for commercial loans that were involved in troubled debt restructurings was $31.5 million as of December 31, 2006.

Activity in the allowance for loan losses related to our Commercial Finance segment for the years ended December 31, 2007, 2006 and 2005, was as follows:

	Year Ended December 31,
	2007			2006			2005
	($ in thousands)
Balance as of beginning of year	$	120,575		$	87,370		$	35,208
Provision for loan losses		77,576			81,211			65,680
Charge offs, net of recoveries		(57,489	)		(48,006	)		(13,518	)
Transfers to held for sale		(1,732	)		—			—
Balance as of end of year	$	138,930		$	120,575		$	87,370

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 7.   Investments

Investments as of December 31, 2007 and 2006, were as follows:

	December 31,
	2007		2006
	($ in thousands)
Investments carried at cost	$	117,112	$	71,386
Investments carried at fair value:
Investments available-for-sale(1)		13,440		61,904
Warrants		19,065		6,908
Investments accounted for under the equity method		82,159		44,135
Total	$	231,776	$	184,333

(1) Amount includes $4.6 million and $34.2 million of Non-Agency MBS, as of December 31, 2007 and 2006, respectively, with maturity dates greater than ten years, and an investment in a subordinated note of a collateralized loan obligation of $5.3 million and $6.0 million as of December 31, 2007 and 2006, respectively, that matures in 2020 and a $3.0 million corporate debt security that matures in 2013.

For the years ended December 31, 2007, 2006 and 2005, we sold available-for-sale investments for $7.1 million, $48.0 million and $6.7 million, respectively, recognizing gross pretax gains of $5.2 million, $0.3 million and $4.2 million, respectively.

Unrealized gains (losses) on investments carried at fair value as of December 31, 2007 and 2006, were as follows:

	December 31, 2007
			Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	($ in thousands)
Investments available-for-sale(1)	$	13,640	$	13	$	(213	)	$	13,440
Warrants(2)		20,152		3,883		(4,970	)		19,065
Total	$	33,792	$	3,896	$	(5,183	)	$	32,505

	December 31, 2006
			Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	($ in thousands)
Investments available-for-sale(1)	$	57,817	$	4,621	$	(534	)	$	61,904
Warrants(2)		7,884		2,828		(3,804	)		6,908
Total	$	65,701	$	7,449	$	(4,338	)	$	68,812

(1)	Unrealized gains and losses on available-for-sale securities are included in accumulated other comprehensive income (loss), net on the accompanying audited consolidated balance sheets, to the extent that the losses are not considered other-than-temporary impairments.
(2)	Unrealized gains and losses on warrants are included in gain on investments, net on the accompanying audited consolidated statements of income.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2007 and 2006, our investments that were in an unrealized loss position for which other-than-temporary impairments have not been recognized were as follows:

	December 31,
	2007				2006
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
	($ in thousands)
Investments carried at cost	$	5,314	$	13,844	$	—	$	—
Investments available-for-sale:
Debt securities		171		3,306		729		20,167
Total	$	5,485	$	17,150	$	729	$	20,167

During the year ended December 31, 2007, we evaluated each of these investments for impairment by considering the length of time and extent to which the market value has been less than the cost basis. We recorded other-than-temporary declines in the fair value of our Non-Agency MBS of $30.4 million, as a component of (loss) gain on residential mortgage investment portfolio in the accompanying audited consolidated statements of income in accordance with EITF No. 99-20. During the year ended December 31, 2007, we also recorded an other-than-temporary decline in the fair value of an investment in a subordinated note of a collateralized loan obligation of $0.7 million as a component of other income, net of expense in the accompanying audited consolidated statements of income. We did not record any other-than-temporary declines in the fair value of our investments during the year ended December 31, 2006. As of December 31, 2007 and 2006, all of our investments that were in an unrealized loss position had been in an unrealized loss position for less than 12 months.

During the years ended December 31, 2007, 2006 and 2005, we recorded other-than-temporary impairments of $8.5 million, $5.3 million and $5.2 million, respectively, relating to our investments carried at cost.

As of December 31, 2007, we had commitments to contribute up to an additional $15.1 million to 15 private equity funds and $0.8 million to an equity investment. Commitments do not include transactions for which we have signed commitment letters but not yet signed definitive binding agreements.

Certain investments are subject to clawback or put/call right provisions. The investment and carrying value information is net of any restrictions related to the warrant or underlying shares/units.

Note 8.   Guarantor Information

The following represents the supplemental consolidating condensed financial information of CapitalSource Inc., which, as discussed in Note 11, Borrowings, is the issuer of both Senior Debentures and Subordinated Debentures (together, the “Debentures”, or “Contingent Convertibles”), and CapitalSource Finance LLC (“CapitalSource Finance”), which is a guarantor of the Debentures, and our subsidiaries that are not guarantors of the Debentures as of December 31, 2007 and 2006, and for the years ended December 31, 2007, 2006 and 2005. CapitalSource Finance, a 100% owned indirect subsidiary of CapitalSource Inc., has guaranteed the Senior Debentures, fully and unconditionally, on a senior basis and has guaranteed the Subordinated Debentures, fully and unconditionally, on a senior subordinate basis. Through October 12, 2005, CSE Holdings LLC, formerly CapitalSource Holdings Inc. (“CSE Holdings”), was also a guarantor of the Senior Debentures. On October 12, 2005, CSE Holdings merged with and into CapitalSource Inc. with CapitalSource Inc. as the surviving entity. The following condensed consolidating financial statements include the activity of CSE Holdings for the period ended October 12, 2005. Separate consolidated financial statements of each guarantor are not presented, as we have determined that they would not be material to investors.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Balance Sheet

December 31, 2007

				CapitalSource Finance LLC
				Combined			Combined			Other Non-
				Non-Guarantor			Guarantor			Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
ASSETS
Cash and cash equivalents	$	—		$	151,511		$	19,005		$	8,183		$	—		$	178,699
Restricted cash		—			80,782			168,928			264,093			—			513,803
Mortgage-related receivables, net		—			—			—			2,041,917			—			2,041,917
Mortgage-backed securities pledged, trading		—			—			—			4,060,605			—			4,060,605
Loans held for sale		—			78,675			15,652			—			—			94,327
Loans:
Loans		—			4,215,031			488,166			5,070,770			(557	)		9,773,410
Less deferred loan fees and discounts		—			(37,052	)		(60,984	)		(49,053	)		—			(147,089	)
Less allowance for loan losses		—			—			(107,611	)		(31,319	)		—			(138,930	)
Loans, net		—			4,177,979			319,571			4,990,398			(557	)		9,487,391
Direct real estate investments, net		—			—			—			1,017,604			—			1,017,604
Investment in subsidiaries		3,777,732			—			1,079,432			1,217,739			(6,074,903	)		—
Intercompany note receivable		75,000			9			78,295			(239,261	)		85,957			—
Investments		—			122,240			39,536			70,000			—			231,776
Other assets		18,046			48,729			113,104			255,504			(21,156	)		414,227
Total assets	$	3,870,778		$	4,659,925		$	1,833,523		$	13,686,782		$	(6,010,659	)	$	18,040,349
LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	—		$	12,674		$	—		$	3,897,353		$	—		$	3,910,027
Credit facilities		480,237			932,195			—			794,631			—			2,207,063
Term debt		—			2,570,125			6,114			4,679,987			(551	)		7,255,675
Other borrowings		780,630			—			529,877			284,363			—			1,594,870
Other liabilities		27,640			18,634			79,793			340,092			(21,162	)		444,997
Intercompany note payable		—			46,849			—			(132,806	)		85,957			—
Total liabilities		1,288,507			3,580,477			615,784			9,863,620			64,244			15,412,632
Noncontrolling interests		—			34			—			45,430			(18	)		45,446
Shareholders’ equity:
Preferred stock		—			—			—			—			—			—
Common stock		2,207			—			—			—			—			2,207
Additional paid-in capital		2,902,501			524,914			90,979			3,256,263			(3,872,156	)		2,902,501
(Accumulated deficit) retained earnings		(327,387	)		549,305			1,121,325			516,216			(2,186,846	)		(327,387	)
Accumulated other comprehensive income, net		4,950			5,195			5,435			5,253			(15,883	)		4,950
Total shareholders’ equity		2,582,271			1,079,414			1,217,739			3,777,732			(6,074,885	)		2,582,271
Total liabilities, noncontrolling interests and shareholders’ equity	$	3,870,778		$	4,659,925		$	1,833,523		$	13,686,782		$	(6,010,659	)	$	18,040,349

100

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Balance Sheet

December 31, 2006

				CapitalSource Finance LLC
				Combined			Combined			Other Non-
				Non-Guarantor			Guarantor			Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
ASSETS
Cash and cash equivalents	$	157		$	238,224		$	46,723		$	111,047		$	—		$	396,151
Restricted cash		—			55,631			122,655			62,618			—			240,904
Mortgage-related receivables, net		—			—			—			2,295,922			—			2,295,922
Mortgage-backed securities pledged, trading		—			—			—			3,502,753			—			3,502,753
Receivables under reverse-repurchase agreements		—			51,892			—			—			—			51,892
Loans held for sale		—			26,521			—			—			—			26,521
Loans:
Loans		52			4,050,786			762,653			2,968,938			(10,644	)		7,771,785
Less deferred loan fees and discounts		—			(33,348	)		(58,203	)		(38,841	)		—			(130,392	)
Less allowance for loan losses		—			—			(101,938	)		(18,637	)		—			(120,575	)
Loans, net		52			4,017,438			602,512			2,911,460			(10,644	)		7,520,818
Direct real estate investments, net		—			—			—			722,303			—			722,303
Investment in subsidiaries		3,030,807			—			926,709			1,133,651			(5,091,167	)		—
Intercompany (due to) due from		(98,737	)		—			(138,447	)		237,184			—			—
Intercompany note receivable		75,000			2,137			11,194			—			(88,331	)		—
Investments		—			118,380			31,710			34,243			—			184,333
Other assets		20,770			25,741			61,024			187,088			(25,646	)		268,977
Total assets	$	3,028,049		$	4,535,964		$	1,664,080		$	11,198,269		$	(5,215,788	)	$	15,210,574
LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	—		$	63,260		$	—		$	3,447,508		$	—		$	3,510,768
Credit facilities		355,685			998,972			—			897,001			—			2,251,658
Term debt		—			2,504,472			10,729			3,295,558			(1,074	)		5,809,685
Other borrowings		555,000			—			446,393			287,182			—			1,288,575
Other liabilities		24,324			29,220			73,307			108,863			(35,216	)		200,498
Intercompany note payable		—			13,331			—			75,000			(88,331	)		—
Total liabilities		935,009			3,609,255			530,429			8,111,112			(124,621	)		13,061,184
Noncontrolling interests		—			8			—			56,350			(8	)		56,350
Shareholders’ equity:
Preferred stock		—			—			—			—			—			—
Common stock		1,815			—			—			—			—			1,815
Additional paid-in capital		2,139,421			564,687			272,828			2,777,426			(3,614,941	)		2,139,421
(Accumulated deficit) retained earnings		(20,735	)		359,678			857,927			250,613			(1,468,218	)		(20,735	)
Accumulated other comprehensive income, net		2,465			2,336			2,896			2,768			(8,000	)		2,465
Treasury stock, at cost		(29,926	)		—			—			—			—			(29,926	)
Total shareholders’ equity		2,093,040			926,701			1,133,651			3,030,807			(5,091,159	)		2,093,040
Total liabilities, noncontrolling interests and shareholders’ equity	$	3,028,049		$	4,535,964		$	1,664,080		$	11,198,269		$	(5,215,788	)	$	15,210,574

101

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Statement of Income

Year Ended December 31, 2007

				CapitalSource Finance LLC						Other
				Combined			Combined			Non-
				Non-Guarantor			Guarantor			Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
Net investment income:
Interest income	$	12,205		$	476,798		$	84,899		$	719,772		$	(15,771	)	$	1,277,903
Fee income		—			72,814			55,447			34,134			—			162,395
Total interest and fee income		12,205			549,612			140,346			753,906			(15,771	)		1,440,298
Operating lease income		—			—			—			97,013			—			97,013
Total investment income		12,205			549,612			140,346			850,919			(15,771	)		1,537,311
Interest expense		55,052			236,533			46,171			525,256			(15,771	)		847,241
Net investment (loss) income		(42,847	)		313,079			94,175			325,663			—			690,070
Provision for loan losses		—			—			64,657			13,984			—			78,641
Net investment (loss) income after provision for loan losses		(42,847	)		313,079			29,518			311,679			—			611,429
Operating expenses:
Compensation and benefits		1,194			20,781			135,676			104			—			157,755
Depreciation of direct real estate investments		—			—			—			32,004			—			32,004
Other administrative expenses		50,979			6,319			57,271			9,951			(46,288	)		78,232
Total operating expenses		52,173			27,100			192,947			42,059			(46,288	)		267,991
Other income (expense):
Diligence deposits forfeited		—			—			4,822			—			—			4,822
Gain (loss) on investments, net		—			22,028			(1,475	)		434			—			20,987
Gain (loss) on derivatives		—			544			8,534			(55,228	)		—			(46,150	)
Loss on residential mortgage investment portfolio		—			—			—			(75,164	)		—			(75,164	)
Other income, net of expenses		—			18,133			47,766			1,244			(46,288	)		20,855
Earnings in subsidiaries		271,307			—			297,473			225,698			(794,478	)		—
Intercompany		—			(29,195	)		32,007			(2,812	)		—			—
Total other income (expense)		271,307			11,510			389,127			94,172			(840,766	)		(74,650	)
Noncontrolling interests expense		—			26			—			4,922			(10	)		4,938
Net income before income taxes		176,287			297,463			225,698			358,870			(794,468	)		263,850
Income taxes		—			—			—			87,563			—			87,563
Net income	$	176,287		$	297,463		$	225,698		$	271,307		$	(794,468	)	$	176,287

102

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Statement of Income

Year Ended December 31, 2006

				CapitalSource Finance LLC
				Combined			Combined			Other
				Non-Guarantor			Guarantor			Non-Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
Net investment income:
Interest income	$	10,297		$	454,786		$	78,620		$	485,255		$	(12,425	)	$	1,016,533
Fee income		—			96,535			17,318			56,632			—			170,485
Total interest and fee income		10,297			551,321			95,938			541,887			(12,425	)		1,187,018
Operating lease income		—			—			—			30,742			—			30,742
Total investment income		10,297			551,321			95,938			572,629			(12,425	)		1,217,760
Interest expense		34,878			221,180			35,156			327,936			(12,425	)		606,725
Net investment (loss) income		(24,581	)		330,141			60,782			244,693			—			611,035
Provision for loan losses		—			—			71,714			9,848			—			81,562
Net investment (loss) income after provision for loan losses		(24,581	)		330,141			(10,932	)		234,845			—			529,473
Operating expenses:
Compensation and benefits		—			21,514			114,398			—			—			135,912
Depreciation of direct real estate investments		—			—			—			11,468			—			11,468
Other administrative expenses		23,694			4,550			50,164			5,311			(15,047	)		68,672
Total operating expenses		23,694			26,064			164,562			16,779			(15,047	)		216,052
Other income (expense):
Diligence deposits forfeited		—			(128	)		6,590			—			—			6,462
Gain on investments, net		—			11,864			237			—			—			12,101
(Loss) gain on derivatives		—			(721	)		2,644			562			—			2,485
Gain on residential mortgage investment portfolio		—			—			—			2,528			—			2,528
Other income, net of expenses		75,017			8,690			22,589			(2,497	)		(90,047	)		13,752
Earnings in subsidiaries		327,534			—			292,851			180,717			(801,102	)		—
Intercompany		—			(30,930	)		30,930			—			—			—
Total other income (expense)		402,551			(11,225	)		355,841			181,310			(891,149	)		37,328
Noncontrolling interests expense		—			9			—			4,710			(8	)		4,711
Net income before income taxes and cumulative effect of accounting change		354,276			292,843			180,347			394,666			(876,094	)		346,038
Income taxes		—			—			—			67,132			—			67,132
Net income before cumulative effect of accounting change		354,276			292,843			180,347			327,534			(876,094	)		278,906
Cumulative effect of accounting change, net of taxes		—			—			370			—			—			370
Net income	$	354,276		$	292,843		$	180,717		$	327,534		$	(876,094	)	$	279,276

103

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Statement of Income

Year Ended December 31, 2005

				CapitalSource Finance LLC						Other
				Combined			Combined			Non-
				Non-Guarantor			Guarantor			Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
Net investment income:
Interest income	$	1,154		$	424,017		$	90,435		$	1,685		$	(2,639	)	$	514,652
Fee income		—			44,244			86,394			—			—			130,638
Total interest and fee income		1,154			468,261			176,829			1,685			(2,639	)		645,290
Interest expense		16,748			167,524			4,112			190			(2,639	)		185,935
Net investment (loss) income		(15,594	)		300,737			172,717			1,495			—			459,355
Provision for loan losses		—			—			64,768			912			—			65,680
Net investment (loss) income after provision for loan losses		(15,594	)		300,737			107,949			583			—			393,675
Operating expenses:
Compensation and benefits		—			2,267			92,701			40			—			95,008
Other administrative expenses		530			1,225			46,645			428			—			48,828
Total operating expenses		530			3,492			139,346			468			—			143,836
Other income (expense):
Diligence deposits forfeited		—			—			4,557			—			—			4,557
(Loss) gain on investments, net		(2,109	)		—			11,303			—			—			9,194
Gain (loss) on derivatives		—			1,803			(1,904	)		—			—			(101	)
Loss on residential mortgage investment portfolio		—			—			—			(2,074	)		—			(2,074	)
Other income, net of expenses		—			6,332			1,325			—			—			7,657
Earnings in subsidiaries		287,305			—			296,415			—			(583,720	)		—
Intercompany		—			(8,965	)		8,965			—			—			—
Total other income (expense)		285,196			(830	)		320,661			(2,074	)		(583,720	)		19,233
Net income (loss) before income taxes		269,072			296,415			289,264			(1,959	)		(583,720	)		269,072
Income taxes		104,400			—			—			—			—			104,400
Net income (loss)	$	164,672		$	296,415		$	289,264		$	(1,959	)	$	(583,720	)	$	164,672

104

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Statement of Cash Flows

Year Ended December 31, 2007

				CapitalSource Finance LLC						Other
				Combined			Combined			Non-
				Non-Guarantor			Guarantor			Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
Operating activities:
Net income	$	176,287		$	297,463		$	225,698		$	271,307		$	(794,468	)	$	176,287
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Stock option expense		—			475			7,094			—			—			7,569
Restricted stock expense		—			4,082			32,839			—			—			36,921
Gain on extinguishment of debt		—			—			—			(678	)		—			(678	)
Amortization of deferred loan fees and discounts		—			(26,287	)		(34,368	)		(27,903	)		—			(88,558	)
Paid-in-kind interest on loans		—			(7,839	)		(14,390	)		(7,824	)		—			(30,053	)
Provision for loan losses		—			—			64,658			13,983			—			78,641
Amortization of deferred financing fees and discounts		5,174			15,926			474			26,098			—			47,672
Depreciation and amortization		—			325			3,388			32,178			—			35,891
Provision for deferred income taxes		—			—			—			41,793			—			41,793
Non-cash (gain) loss on investments, net		—			(4,018	)		3,125			28			—			(865	)
Non-cash (gain) loss on property and equipment disposals		—			(1,372	)		1,254			1,155			—			1,037
Unrealized (gain) loss on derivatives and foreign currencies, net		—			(7,476	)		(7,084	)		57,159			—			42,599
Unrealized loss on residential mortgage investment portfolio, net		—			—			—			75,507			—			75,507
Net increase in mortgage-backed securities pledged, trading		—			—			—			(498,249	)		—			(498,249	)
Amortization of discount on residential mortgage investments		—			—			—			(39,380	)		—			(39,380	)
Increase in loans held for sale, net		—			(174,006	)		(53,781	)		(371,110	)		—			(598,897	)
Decrease (increase) in intercompany note receivable		—			2,128			(67,101	)		239,261			(174,288	)		—
Decrease (increase) in other assets		1,219			(2,419	)		(11,186	)		(218,088	)		(4,490	)		(234,964	)
Increase (decrease) in other liabilities		3,004			(9,541	)		(17,033	)		204,490			14,054			194,974
Net transfers with subsidiaries		(804,649	)		(191,085	)		(418,611	)		619,877			794,468			—
Cash (used in) provided by operating activities		(618,965	)		(103,644	)		(285,024	)		419,604			(164,724	)		(752,753	)
Investing activities:
Increase in restricted cash		—			(25,151	)		(46,273	)		(201,475	)		—			(272,899	)
Decrease in mortgage-related receivables, net		—			—			—			267,056			—			267,056
Decrease in receivables under reverse-repurchase agreements, net		—			51,892			—			—			—			51,892
Decrease (increase) in loans, net		52			(2,931	)		243,125			(1,685,020	)		(10,087	)		(1,454,861	)
Acquisition of real estate, net of cash acquired		—			—			—			(248,120	)		—			(248,120	)
Disposal (acquisition) of investments, net		—			38,755			(3,012	)		(64,509	)		—			(28,766	)
Acquisition of property and equipment, net		—			(45	)		(5,334	)		—			—			(5,379	)
Cash provided by (used in) investing activities		52			62,520			188,506			(1,932,068	)		(10,087	)		(1,691,077	)
Financing activities:
Payment of deferred financing fees		(2,862	)		(27,259	)		(2,215	)		(20,771	)		—			(53,107	)
Increase (decrease) in intercompany note payable		—			33,518			—			(207,806	)		174,288			—
(Repayments of) borrowings under repurchase agreements, net		—			(50,586	)		—			449,845			—			399,259
Borrowings on (repayments of) credit facilities, net		124,551			(66,776	)		—			(105,189	)		—			(47,414	)
Borrowings of convertible debt		245,000			—			—			—			—			245,000
Borrowings of term debt		—			1,137,477			232			1,722,375			523			2,860,607
Repayments of term debt		—			(1,071,963	)		(4,847	)		(426,208	)		—			(1,503,018	)
Borrowings of subordinated debt		—			—			75,630			—			—			75,630
Proceeds from issuance of common stock, net of offering costs		714,490			—			—			—			—			714,490
Proceeds from exercise of options		4,750			—			—			—			—			4,750
Tax benefits on share-based payments		—			—			—			2,054			—			2,054
Payment of dividends		(467,173	)		—			—			(4,700	)		—			(471,873	)
Cash provided by (used in) financing activities		618,756			(45,589	)		68,800			1,409,600			174,811			2,226,378
Decrease in cash and cash equivalents		(157	)		(86,713	)		(27,718	)		(102,864	)		—			(217,452	)
Cash and cash equivalents as of beginning of year		157			238,224			46,723			111,047			—			396,151
Cash and cash equivalents as of end of year	$	—		$	151,511		$	19,005		$	8,183		$	—		$	178,699

105

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Statement of Cash Flows

Year Ended December 31, 2006

				CapitalSource Finance LLC
				Combined			Combined			Other
				Non-Guarantor			Guarantor			Non-Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
Operating activities:
Net income	$	354,276		$	292,843		$	180,717		$	327,534		$	(876,094	)	$	279,276
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Stock option expense		—			580			8,018			—			—			8,598
Restricted stock expense		—			2,611			22,084			—			—			24,695
Loss on extinguishment of debt		—			—			—			2,497			—			2,497
Non-cash prepayment fee		—			—			(8,353	)		—			—			(8,353	)
Cumulative effect of accounting change, net of taxes		—			—			(370	)		—			—			(370	)
Amortization of deferred loan fees and discounts		—			(45,732	)		5,045			(45,561	)		—			(86,248	)
Paid-in-kind interest on loans		—			6,941			(3,733	)		(2,877	)		—			331
Provision for loan losses		—			—			71,714			9,848			—			81,562
Amortization of deferred financing fees and discounts		3,146			23,305			487			14,294			—			41,232
Depreciation and amortization		—			172			2,887			11,696			—			14,755
Benefit for deferred income taxes		—			—			—			(20,699	)		—			(20,699	)
Non-cash loss on investments, net		—			7,993			31			—			—			8,024
Non-cash (gain) loss on property and equipment disposals		—			(676	)		272			—			—			(404	)
Unrealized loss (gain) on derivatives and foreign currencies, net		60			1,734			(1,835	)		(1,429	)		—			(1,470	)
Unrealized loss on residential mortgage investment portfolio, net		—			—			—			4,758			—			4,758
Net increase in mortgage-backed securities pledged, trading		—			—			—			(400,230	)		—			(400,230	)
Amortization of discount on residential mortgage investments		—			—			—			(32,090	)		—			(32,090	)
Increase in loans held for sale, net		—			(9,143	)		—			—			—			(9,143	)
(Increase) decrease in intercompany note receivable		(75,000	)		5,666			24,094			—			45,240			—
Decrease (increase) in other assets		10,448			(3,312	)		(12,994	)		(9,503	)		25,646			10,285
Increase in other liabilities		21,324			6,309			31,751			50,580			(27,388	)		82,576
Net transfers with subsidiaries		(883,951	)		(36,257	)		(147,904	)		192,018			876,094			—
Cash (used in) provided by operating activities		(569,697	)		253,034			171,911			100,836			43,498			(418	)
Investing activities:
Decrease (increase) in restricted cash		—			70,201			30,644			(53,307	)		—			47,538
Increase in mortgage-related receivables, net		—			—			—			(2,343,273	)		—			(2,343,273	)
Increase in receivables under reverse-repurchase agreements, net		—			(18,649	)		—			—			—			(18,649	)
(Increase) decrease in loans, net		(112	)		108,596			(563,769	)		(1,460,370	)		2,816			(1,912,839	)
Acquisition of real estate, net of cash acquired		—			—			—			(498,005	)		—			(498,005	)
Disposal (acquisition) of investments, net		33,683			(94,145	)		47,521			(19,729	)		—			(32,670	)
Acquisition of property and equipment, net		—			(1,630	)		(2,975	)		—			—			(4,605	)
Cash provided by (used in) investing activities		33,571			64,373			(488,579	)		(4,374,684	)		2,816			(4,762,503	)
Financing activities:
Payment of deferred financing fees		(3,140	)		(21,554	)		(5,322	)		(26,607	)		—			(56,623	)
(Decrease) increase in intercompany note payable		(20,327	)		(9,433	)		—			75,000			(45,240	)		—
Borrowings under repurchase agreements, net		—			16,104			—			377,010			—			393,114
Borrowings on (repayments of) credit facilities, net		355,685			(939,301	)		—			714,183			—			130,567
Borrowings of term debt		—			2,063,522			5,786			3,439,970			(1,074	)		5,508,204
Repayments of term debt		—			(1,333,586	)		(329	)		(214,960	)		—			(1,548,875	)
Borrowings of subordinated debt		—			—			206,685			—			—			206,685
Proceeds from issuance of common stock, net of offering costs		603,422			—			—			—			—			603,422
Proceeds from exercise of options		7,050			—			—			—			—			7,050
Tax benefits on share-based payments		—			—			—			4,281			—			4,281
Payment of dividends		(408,445	)		—			—			(4,204	)		—			(412,649	)
Cash provided by (used in) financing activities		534,245			(224,248	)		206,820			4,364,673			(46,314	)		4,835,176
(Decrease) increase in cash and cash equivalents		(1,881	)		93,159			(109,848	)		90,825			—			72,255
Cash and cash equivalents as of beginning of year		2,038			145,065			156,571			20,222			—			323,896
Cash and cash equivalents as of end of year	$	157		$	238,224		$	46,723		$	111,047		$	—		$	396,151

106

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Statement of Cash Flows

Year Ended December 31, 2005

				CapitalSource Finance LLC						Other
				Combined			Combined			Non-
				Non-Guarantor			Guarantor			Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
Operating activities:
Net income (loss)	$	164,672		$	296,415		$	289,264		$	(1,959	)	$	(583,720	)	$	164,672
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Stock option expense		325			—			—			—			—			325
Restricted stock expense		18,754			—			—			—			—			18,754
Amortization of deferred loan fees and discounts		—			—			(77,009	)		—			—			(77,009	)
Paid-in-kind interest on loans		—			(566	)		(5,433	)		(1,932	)		—			(7,931	)
Provision for loan losses		—			—			64,768			912			—			65,680
Amortization of deferred financing fees and discounts		2,341			20,061			816			2			—			23,220
Depreciation and amortization		—			—			2,629			—			—			2,629
Benefit for deferred income taxes		(7,214	)		—			—			—			—			(7,214	)
Non-cash loss (gain) on investments, net		1,683			—			(7,538	)		—			—			(5,855	)
Unrealized (gain) loss on derivatives and foreign currencies, net		—			(1,803	)		1,904			—			—			101
Unrealized loss on residential mortgage investment portfolio, net		—			—			—			2,074			—			2,074
Net increase in mortgage-backed securities pledged, trading		—			—			—			(323,370	)		—			(323,370	)
Increase in loans held for sale, net		—			(17,414	)		(42,175	)		—			—			(59,589	)
Increase in intercompany note receivable		—			(7,803	)		(2,689	)		—			10,492			—
Decrease (increase) in other assets		1,037			2,289			(2,908	)		(14,745	)		—			(14,327	)
Increase (decrease) in other liabilities		1,258			5,456			(12,397	)		1,453			(2,639	)		(6,869	)
Net transfers with subsidiaries		(568,957	)		(470,207	)		(579,629	)		1,035,073			583,720			—
Cash (used in) provided by operating activities		(386,101	)		(173,572	)		(370,397	)		697,508			7,853			(224,709	)
Investing activities:
(Increase) decrease in restricted cash		—			(100,498	)		58,543			(5,654	)		—			(47,609	)
Increase in mortgage-related receivables, net		—			—			—			(39,438	)		—			(39,438	)
Increase in receivables under reverse-repurchase agreements, net		—			(33,243	)		—			—			—			(33,243	)
(Increase) decrease in loans, net		—			(412,496	)		307,853			(1,413,378	)		2,639			(1,515,382	)
Acquisition of investments, net		(49,093	)		—			(24,109	)		—			—			(73,202	)
Disposal (acquisition) of property and equipment, net		—			5			(4,463	)		—			—			(4,458	)
Cash (used in) provided by investing activities		(49,093	)		(546,232	)		337,824			(1,458,470	)		2,639			(1,713,332	)
Financing activities:
Payment of deferred financing fees		(200	)		(15,472	)		(7,926	)		(82	)		—			(23,680	)
Increase (decrease) in intercompany note payable		20,327			(9,835	)		—			—			(10,492	)		—
Borrowings under repurchase agreements, net		—			47,157			—			311,266						358,423
Borrowings on credit facilities, net		—			973,430			42,179			470,000			—			1,485,609
Borrowings of term debt		—			1,141,825			16,660			—			—			1,158,485
Repayments of term debt		—			(1,442,768	)		(122,314	)		—			—			(1,565,082	)
Borrowings of subordinated debt		—			—			225,000			—			—			225,000
Proceeds from issuance of common stock, net of offering costs		414,676			—			—			—			—			414,676
Proceeds from exercise of options		2,429			—			—			—			—			2,429
Cash provided by financing activities		437,232			694,337			153,599			781,184			(10,492	)		2,055,860
Increase (decrease) in cash and cash equivalents		2,038			(25,467	)		121,026			20,222			—			117,819
Cash and cash equivalents as of beginning of year		—			170,532			35,545			—			—			206,077
Cash and cash equivalents as of end of year	$	2,038		$	145,065		$	156,571		$	20,222		$	—		$	323,896

107

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9.   Direct Real Estate Investments

Our direct real estate investments primarily consist of long term care facilities generally leased through long-term, triple-net operating leases. During the year ended December 31, 2007, our gross direct real estate investments increased by $327.3 million through the acquisition of 59 healthcare properties. Our direct real estate investments as of December 31, 2007 and 2006, were as follows:

	December 31,
	2007			2006
	($ in thousands)
Land	$	106,620		$	91,543
Buildings		902,863			607,833
Furniture		51,545			34,395
Accumulated depreciation		(43,424	)		(11,468	)
Total	$	1,017,604		$	722,303

Depreciation of direct real estate investments totaled $32.0 million and $11.5 million for the years ended December 31, 2007 and 2006, respectively. We had no direct real estate investments during the year ended December 31, 2005. We recognized $1.2 million in impairments on our direct real estate investments during the year ended December 31, 2007, which was recorded as a component of other income (expense) in our accompanying audited consolidated income statement for the year ended December 31, 2007. No property impairments were recognized during the year ended December 31, 2006.

As of December 31, 2007, 129 of our direct real estate investments, with a total carrying value of $695.0 million, were pledged as collateral to certain of our borrowings. See Note 11, Borrowings, for additional information about our borrowings.

The leases on our direct real estate investments expire at various dates through 2022 and typically include fixed rental payments, subject to escalation over the life of the lease. As of December 31, 2007, we expect to receive future minimum rental payments from our non-cancelable operating leases as follows ($ in thousands):

2008	$	100,900
2009		98,704
2010		97,880
2011		93,381
2012		89,611
Thereafter		403,982
	$	884,458

108

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 10.   Property and Equipment

We own property and equipment for use in our corporate operations. As of December 31, 2007 and 2006, property and equipment included in other assets on our accompanying audited consolidated balance sheets consisted of the following:

	December 31,
	2007			2006
	($ in thousands)
Equipment	$	9,377		$	8,342
Computer software		4,090			3,008
Furniture		5,837			4,557
Leasehold improvements		10,180			7,096
Accumulated depreciation and amortization		(12,721	)		(9,330	)
Total	$	16,763		$	13,673

In addition to the property and equipment above, as of December 31, 2007, we owned $29.1 million and $3.2 million, in buildings and land, respectively, that were leased to tenants. Accumulated depreciation on this leased property totaled $0.3 million as of December 31, 2007.

Depreciation of property and equipment totaled $3.7 million, $3.0 million and $2.6 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Note 11.   Borrowings

Repurchase Agreements

As of December 31, 2007, we had 12 repurchase agreements with various financial institutions used to finance the purchases of RMBS during the year ended December 31, 2007. As of December 31, 2007 and 2006, the aggregate amounts outstanding under our repurchase agreements used to finance purchases of RMBS were $3.9 billion and $3.4 billion, respectively. As of December 31, 2007 and 2006, repurchase agreements that we executed had weighted average borrowing rates of 5.12% and 5.32%, respectively, and weighted average remaining maturities of 2.5 months and 0.6 months, respectively. The terms of most of our borrowings pursuant to repurchase agreements typically reset every 30 days. During the year ended December 31, 2007, we negotiated longer terms for some of these repurchase agreements with several counterparties. As a result, as of December 31, 2007, approximately 37% of the borrowings outstanding under repurchase agreements had terms ranging from 30 days to 1.25 years. As of December 31, 2007, our repurchase agreements were collateralized by Agency MBS with a fair value of $4.1 billion, including accrued interest, and cash deposits of $29.2 million made to cover margin calls. As of December 31, 2006, our repurchase agreements were collateralized by Agency MBS with a fair value of $3.5 billion, including accrued interest, and cash deposits of $32.5 million made to cover margin calls.

Credit Facilities

We utilize both secured and unsecured credit facilities, primarily to fund our commercial loans, finance certain of our direct real estate investments and for general corporate purposes. Our committed credit facility capacities were $5.6 billion and $5.0 billion as of December 31, 2007 and 2006, respectively. Interest on our credit facility borrowings is charged at variable rates that may be based on one or more of one-month LIBOR, one-month EURIBOR, the applicable Commercial Paper (“CP”) rate, and/or Canadian Bankers Acceptance (“BA”) rate. As of December 31, 2007 and 2006, total undrawn capacities under our credit facilities were $3.4 billion and $2.7 billion, respectively.

109

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2007, our credit facilities’ committed capacity, principal outstanding, aggregate outstanding collateral balances, interest rates, maturity dates and maximum advance rates were as follows:

						Aggregate
						Outstanding				Maximum
	Committed			Principal		Collateral		Interest	Maturity	Advance
	Capacity			Outstanding		Balance(1)		Rate(2)	Date	Rate(3)
	($ in thousands)
Secured Credit Facilities:
CS Funding III	$	220,000	(4)	$	40,971	$	106,029	CP + 0.65%	April 10, 2009		85	%
CS Funding V		200,000			89,120		210,458	CP + 0.65%(5)	March 26, 2008		85	%
CS Funding VII		1,500,000			500,000		680,948	LIBOR + 0.90%	August 1, 2008		85	%
CS Funding VIII		102,206			102,206		151,696	CP + 0.75%	July 19, 2010		64	%
CSE QRS Funding I		1,400,000	(4)		442,150		593,501	CP + 0.75%	April 27, 2009		85	%
CSE QRS Funding II		700,000	(4)		352,481		476,266	LIBOR + 1.00%	June 27, 2009		85	%
CS Europe(6)		364,775			128,559		230,996	EURIBOR + 1.00%(7)	September 30, 2010		78	%
Total secured credit facilities		4,486,981			1,655,487		2,449,894
Unsecured Credit Facilities:
CS Canada ULC(8)		75,120			71,338		N/A	BA + 1.125%	February 19, 2008		N/A
CS Inc.		1,070,000			480,238		N/A	LIBOR + 1.125%(9)	March 13, 2010(10)		N/A
Total unsecured credit facilities		1,145,120			551,576		N/A
Total credit facilities	$	5,632,101		$	2,207,063	$	2,449,894

(1)	Represents the outstanding balances of the loans and other assets which are financed by the credit facility that are pledged as collateral to the credit facility.
(2)	As of December 31, 2007, the one-month LIBOR was 4.60%; the one-month EURIBOR was 4.28%; the BA rate was 4.61%; the CP rate for CS Funding III was 5.11%; the blended CP rate for CS Funding V was 5.27%; the CP rate for CS Funding VIII was 5.52%; and the blended CP rate for CSE QRS Funding I was 5.49%.
(3)	We may obtain financing, up to the specified percentage of the outstanding principal balance of real estate loans, real estate-related loans, commercial loans, or stock pledges of our equity investment subsidiaries that we transfer to the credit facilities, depending upon, among other factors, the type of loan and lien position, their current loan rating and priority of payment within the particular borrower’s capital structure and subject to certain concentration limits. Advance rates on individual eligible collateral range from 25% to the specified percentage.
(4)	Credit facility is subject to 364-day liquidity renewal. On termination or maturity, amounts due under the credit facility may, in the absence of a default, be repaid from proceeds from amortization of the collateral pool.
(5)	Borrowings in Euro and British Pounds Sterling (“GBP”) are at one-month EURIBOR and one-month GBP LIBOR + 0.65%, respectively.
(6)	CS Europe is a €250 million facility and the amounts presented were translated to United States Dollars (“USD”) using the spot rate as of December 31, 2007.
(7)	Borrowings in Euro or GBP are at EURIBOR or GBP LIBOR + 1.00%, respectively, and borrowings in USD are at LIBOR + 1.00%.
(8)	CS Canada ULC was a CAD75 million facility and the amounts presented were translated to USD using the spot rate as of December 31, 2007. This credit facility matured as scheduled and was not renewed.
(9)	LIBOR + 1.125% or at an alternative base rate, which is the greater of the prime rate for USD borrowings or the Federal Funds Rate + 0.50%, or for foreign currency borrowings, at the prevailing EURIBOR rate + 1.125% or GBP LIBOR + 1.125%.
(10)	As of December 31, 2007, the scheduled maturity date was March 13, 2009. In February 2008, we exercised our option to extend the maturity date of the credit facility to March 13, 2010.

110

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of February 27, 2008 our credit facilities’ committed capacity totaled $5.5 billion.

In December 2007, we amended our CS Inc. unsecured syndicated revolving credit facility with Wachovia Bank N.A. (“Wachovia”) to decrease the interest coverage ratio covenant to 1.15:1 and to add a new interest coverage ratio covenant that excludes liquid real estate assets of 1.4:1. There were no other material changes in the terms and conditions of the facility.

Term Debt

In conjunction with each of our term debt transactions, we established separate single purpose entities (collectively referred to as the “Issuers”), and contributed $10.5 billion in loans, or portions thereof, to the Issuers. Subject to the satisfaction of certain conditions and obligations, we remain servicer of the loans. Simultaneously with the initial contributions, the Issuers issued an aggregate of $9.4 billion of notes to institutional investors. We retained $1.1 billion in subordinated notes and 100% of the Issuers’ trust certificates or equity. The notes are collateralized by all or portions of specific commercial loans, totaling $6.2 billion as of December 31, 2007. During 2007, we issued $3.2 billion of term debt. We have treated the contribution of the loans to the Issuers and the related sale of notes by the Issuers as a financing arrangement under SFAS No. 140. As required by the terms of the Issuers, we have entered into interest rate swaps and/or interest rate caps to mitigate certain interest rate risks (see Note 20, Derivative Instruments).

Our outstanding term debt transactions in the form of asset securitizations as of December 31, 2007 and 2006, were as follows:

	Notes		Outstanding Balance as of December 31,				Interest Rate			Original Expected
	Issued		2007		2006		Spread(1)			Maturity Date
	($ in thousands)
2003-2
Class A	$	290,005	$	—	$	34,623		0.40	%	July 20, 2008
Class B		75,001		—		8,954		0.95	%	July 20, 2008
Class C		45,001		—		5,373		1.60	%	July 20, 2008
Class D		22,500		—		2,686		2.50	%	July 20, 2008
Class E(3)		67,502		—		—		N/A		N/A
		500,009		—		51,636
2004-1
Class A-1		218,000		—		—		0.13	%	N/A
Class A-2		370,437		1,295		52,701		0.33	%	September 22, 2008(2)
Class B		67,813		149		6,073		0.65	%	September 22, 2008(2)
Class C		70,000		154		6,269		1.00	%	September 22, 2008(2)
Class D		39,375		87		3,527		1.75	%	September 22, 2008(2)
Class E(3)		109,375		—		—		N/A		N/A
		875,000		1,685		68,570

111

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Notes		Outstanding Balance as of December 31,				Interest Rate			Original Expected
	Issued		2007		2006		Spread(1)			Maturity Date
	($ in thousands)
2004-2
Class A-1	$	453,000	$	—	$	—		0.13	%	June 20, 2007
Class A-2		232,000		—		—		0.25	%	July 20, 2008
Class A-3		113,105		—		104,444		0.31	%	April 20, 2009
Class B		55,424		—		26,025		0.43	%	June 20, 2009
Class C		94,221		—		44,242		0.85	%	August 20, 2009
Class D		52,653		—		24,724		1.55	%	August 20, 2009
Class E(3)		108,077		—		—		N/A		N/A
		1,108,480		—		199,435
2005-1
Class A-1		425,000		—		—		0.09	%	March 20, 2007
Class A-2		468,750		—		227,716		0.19	%	August 20, 2009
Class B		62,500		—		27,511		0.28	%	October 20, 2009
Class C		103,125		—		45,394		0.70	%	November 20, 2009
Class D		62,500		—		27,511		1.25	%	January 20, 2010
Class E(4)		71,875		—		8,803		3.15	%	February 22, 2010
Class F(3)		56,250		—		—		N/A		N/A
		1,250,000		—		336,935
2006-1
Class A		567,134		213,115		396,262		0.12	%	April 20, 2010
Class B		27,379		12,637		19,130		0.25	%	June 21, 2010
Class C		68,447		31,592		47,825		0.55	%	September 20, 2010
Class D		52,803		24,371		36,894		1.30	%	December 20, 2010
Class E(3)		31,290		—		—		2.50	%	June 20, 2011
Class F(3)		35,202		—		—		N/A		N/A
		782,255		281,715		500,111
2006-2
Class A-1		300,000		300,000		300,000		0.24	%	May 20, 2013
Class A-2		550,000		550,000		550,000		0.21	%	September 20, 2012
Class A-3		147,500		147,500		147,500		0.33	%	May 20, 2013
Class B		71,250		71,250		71,250		0.38	%	June 20, 2013
Class C		157,500		157,500		157,500		0.68	%	June 20, 2013
Class D		101,250		101,250		101,250		1.52	%	June 20, 2013
Class E(5)		56,250		19,349		19,212		2.50	%	June 20, 2013
Class F(3)		116,250		—		—		N/A		N/A
		1,500,000		1,346,849		1,346,712

112

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Notes		Outstanding Balance as of December 31,				Interest Rate			Original Expected
	Issued		2007		2006		Spread(1)			Maturity Date
	($ in thousands)
2006-A
Class A-1A	$	70,375	$	70,375	$	70,375		0.26	%	January 20, 2037
Class A-R(6)		200,000		50,000		—		0.27	%	January 20, 2037
Class A-2A		500,000		500,000		500,000		0.25	%	January 20, 2037
Class A-2B		125,000		125,000		125,000		0.31	%	January 20, 2037
Class B		82,875		82,875		82,875		0.39	%	January 20, 2037
Class C		62,400		62,400		62,400		0.65	%	January 20, 2037
Class D		30,225		30,225		30,225		0.75	%	January 20, 2037
Class E		30,225		30,225		30,225		0.85	%	January 20, 2037
Class F		26,650		26,650		26,650		1.05	%	January 20, 2037
Class G		33,150		33,150		33,150		1.25	%	January 20, 2037
Class H		31,200		31,200		31,200		1.50	%	January 20, 2037
Class J(3)		47,450		—		—		2.50	%	January 20, 2037
Class K(3)		60,450		—		—		N/A		N/A
		1,300,000		1,042,100		992,100
2007-1
Class A		586,000		428,245		—		0.13	%	May 21, 2012
Class B		20,000		14,616		—		0.31	%	July 20, 2012
Class C		84,000		61,387		—		0.65	%	February 20, 2013
Class D		48,000		35,078		—		1.50	%	September 20, 2013
Class E(3)		34,000		—		—		N/A		January 21, 2014
Class F(3)		28,000		—		—		N/A		N/A
		800,000		539,326		—
2007-A
Class A(7)		1,250,000		1,137,850		—		1.50	%	May 31, 2011
Class B(3)		83,333		—		—		N/A		May 31, 2011
		1,333,333		1,137,850		—
2007-2
Class A		400,000		400,000		—		1.10	%	October 21, 2019
Class B(3)		10,000		—		—		N/A		October 21, 2019
Class C(3)		90,000		—		—		N/A		October 21, 2019
		500,000		400,000		—

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Notes		Outstanding Balance as of December 31,				Interest Rate			Original Expected
	Issued		2007		2006		Spread(1)			Maturity Date
	($ in thousands)
2007-3
Class A	$	380,000	$	354,139	$	—		0.85	%	January 20, 2016
Class B		10,000		10,000		—		1.50	%	January 20, 2016
Class C		45,000		45,000		—		2.70	%	January 20, 2016
Class D(3)		4,000		—		—		N/A		January 20, 2016
Class E(3)		41,350		—		—		N/A		January 20, 2016
Class F(3)		49,428		—		—		N/A		January 20, 2016
		529,778		409,139		—
Total	$	10,478,855	$	5,158,664	$	3,495,499

(1)	The interest rate of 2006-A is based on three-month LIBOR, which was 4.70% and 5.36% as of December 31, 2007 and 2006, respectively. The interest rates of 2007-A and 2007-2 are based on CP rates, which were 5.61% and 5.29%, respectively, as of December 31, 2007. All of our other term debt transactions are based on one-month LIBOR, which was 4.60% and 5.32% as of December 31, 2007 and 2006, respectively.
(2)	These notes were repaid in January 2008.
(3)	Securities retained by CapitalSource.
(4)	Only $20.0 million of these securities were offered for sale. The remaining $51.9 million of the securities are retained by CapitalSource.
(5)	Only $20.0 million of these securities were offered for sale. The remaining $36.3 million of the securities are retained by CapitalSource.
(6)	Variable funding note.
(7)	These notes closed with an initial commitment amount of $1.25 billion and an initial funding amount of $1.07 billion. 2007-A allowed for replenishment through a revolving period that extended to November 30, 2007. During the revolving period, we had the option to increase the commitment amount of the Class A notes up to $1.5 billion, subject to certain limitations. The maximum amount drawn under 2007-A was $1.18 billion. As of December 31, 2007, we had no undrawn capacity under these notes.

Except for our series 2007-02 Term Debt (“2007-2”), series 2006-2 Term Debt (“2006-2”) and series 2006-A Term Debt (“2006-A”), the expected aforementioned maturity dates are based on the contractual maturities of the underlying loans held by the securitization trusts and an assumed constant prepayment rate of 10%. 2007-2, 2006-2 and 2006-A have replenishment periods that allow us, subject to certain restrictions, to reinvest principal payments into eligible new loan collateral and we assumed no prepayments would be made during these replenishment periods, but use a constant prepayment rate of 10% once the replenishment period ends. If the underlying loans experience delinquencies or have their maturity dates extended, the interest payments collected on them to repay the notes may be delayed. The notes issued by the Issuers include accelerated amortization provisions that require cash flows to be applied first to fully pay the noteholders if the notes remain outstanding beyond the stated maturity dates. If the accelerated amortization provisions are imposed, we would receive no cash flows from the term debt on our retained notes until the notes senior to ours are retired.

Owner Trust Term Debt

In February 2006, we purchased beneficial interests in securitization trusts (the “Owner Trusts”), which issued $2.4 billion in asset-backed notes through two on-balance sheet securitizations for the purpose of purchasing adjustable rate prime residential mortgage whole loans. These notes are backed by the $2.5 billion of residential mortgage loans purchased with the proceeds and simultaneously sold and deposited with the Owner Trusts. A third

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

party remains servicer of the mortgage loans. Legal title to the loans is held by the Owner Trusts as discussed in Note 4, Mortgage-Related Receivables and Related Owner Trust Securitizations. Senior notes rated “AAA” by Standard & Poor’s and Fitch Ratings and “Aaa” by Moody’s Investors Service, Inc. (the “Senior Notes”) were issued by the Owner Trusts in the public capital markets. The Owner Trusts also issued subordinate notes and ownership certificates, all of which we acquired and continue to hold. In accordance with SFAS No. 140, we were not the transferor in these securitizations. However, as the holder of the subordinate notes issued by the Owner Trusts, we determined that we were the primary beneficiary of the Owner Trusts in accordance with FIN 46(R). As the primary beneficiary, we consolidated the assets and liabilities of the Owner Trusts and recorded our investments in the mortgage loans as assets and the Senior Notes and subordinate notes as liabilities on our accompanying audited consolidated balance sheets. The holders of the Senior Notes have no recourse to the general credit of us. The two securitizations had aggregate outstanding balances of $2.0 billion and $2.3 billion as of December 31, 2007 and 2006, respectively.

In the first securitization, the Owner Trusts issued $1.5 billion in Senior Notes and $65.4 million in subordinate notes. The interest rates on the Class I-A1 and I-A2 Senior Notes have an initial fixed interest rate of 4.90% until the initial reset date of February 1, 2010. The interest rates on the Class II-A1 and II-A2 Senior Notes have an initial fixed interest rate of 4.70% until the initial reset date of October 1, 2010. The interest rates on the Class III-A1 and III-A2 Senior Notes have an initial fixed interest rate of 5.50% until the initial reset date of January 1, 2011. After the initial reset date, the interest rates on all classes of the Senior Notes will reset annually based on a blended rate of one-year constant maturity treasury index (“CMT”) plus 240 basis points, up to specified caps. These Senior Notes are expected to mature at various dates through March 25, 2036. One of our subsidiaries purchased the subordinate notes. The aggregate outstanding balances of these Senior Notes and subordinate notes were $1.2 billion and $1.4 billion as of December 31, 2007 and 2006, respectively.

In the second securitization, the Owner Trusts issued $940.9 million in Senior Notes and $40.2 million in subordinate notes. The interest rates on all classes of the Senior Notes have an initial fixed interest rate of 4.625% until the initial reset date of November 1, 2010. After the initial reset date, the interest rates of the Senior Notes will reset annually based on a blended rate of one-year CMT plus 225 basis points, up to specified caps. These Senior Notes are expected to mature on February 26, 2036. One of our subsidiaries purchased the subordinate notes. The aggregate outstanding balances of these Senior Notes and subordinate notes were $800.8 million and $858.5 million as of December 31, 2007 and 2006, respectively.

Other Borrowings

Other borrowings as of December 31, 2007 and 2006, were as follows:

	December 31,
	2007		2006
	($ in thousands)
Convertible debt	$	780,630	$	555,000
Subordinated debt		529,877		446,393
Mortgage debt		284,363		287,182
Total	$	1,594,870	$	1,288,575

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Convertible Debt

Our outstanding convertible debt transactions as of December 31, 2007 and 2006, and their applicable conversion rate and effective conversion price per share were as follows:

								Effective
	Outstanding Balance							Conversion
	as of December 31,					Conversion		Price per
Debentures	2007			2006		Rate(1)		Share(1)
	($ in thousands)
3.5% Senior Convertible Debentures due 2034	$	8,446		$	330,000		42.6739	$	23.43
1.25% Senior Convertible Debentures due 2034		47,620			225,000		44.6188		22.41
4% Senior Subordinated Convertible Debentures due 2034		321,554			—		42.6739		23.43
1.625% Senior Subordinated Convertible Debentures due 2034		177,380			—		44.6188		22.41
7.25% Senior Subordinated Convertible Debentures due 2037, net of discount		245,362			—		36.9079		27.09
Beneficial conversion option, net of amortization		(19,732	)		—		—		—
Total	$	780,630		$	555,000

(1) As of December 31, 2007, the Debentures may convert into the stated number of shares of common stock per $1,000 principal amount of debentures, subject to certain conditions. The conversion rates and prices of our convertible debt are subject to adjustment based on the average price of our common stock ten business days prior to the ex-dividend date and on the dividends we pay on our common stock. See below for further information regarding the adjustments of the conversion rates and prices.

In March 2004, we completed an offering of $225.0 million in aggregate principal amount of senior convertible debentures due 2034 (the “1.25% Debentures”) in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended. Until March 2009, the 1.25% Debentures will bear interest at a rate of 1.25%, after which time the debentures will not bear interest.

In addition, we used approximately $29.9 million of the proceeds to purchase 1,300,000 shares of our common stock. We also paid approximately $6.0 million of deferred financing fees from the proceeds of the convertible debt offering which are being amortized into interest expense through the date of the earliest point at which the holder can force conversion. We used the remainder of the net proceeds to repay outstanding indebtedness under certain of our credit facilities.

Concurrently with our sale of the 1.25% Debentures, we entered into two separate call option transactions with an affiliate of one of the initial purchasers, in each case covering the same number of shares as into which the 1.25% Debentures would be convertible. In one transaction, we purchased a call option at a strike price equal to the conversion price of the 1.25% Debentures, adjusted for the effect of dividends paid on our common stock. This option expires on March 15, 2009 and requires physical settlement. We intend to exercise this call option from time to time as necessary to acquire shares that we may be required to deliver upon receipt of a notice of conversion of the 1.25% Debentures. In the second transaction, we sold a call option to one of the initial purchasers for the purchase of up to 7.4 million of our common shares at a strike price of approximately $31.4402 per share, adjusted for the effect of dividends paid on our common stock. This call option expires at various dates from March 2009 through June 2009 and must be settled in net shares. The net effect of entering into these call option transactions was to minimize potential dilution as a result of the conversion of the 1.25% Debentures by increasing the effective conversion price of the 1.25% Debentures to a 75% premium over the March 15, 2004 closing price of our common stock. The call option transactions were settled at a net cost to us of approximately $25.6 million, which we paid from the proceeds of our sale of the 1.25% Debentures and was included as a net reduction in shareholders’ equity in the

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

accompanying audited consolidated balance sheets as of December 31, 2007 and 2006 in accordance with the guidance in EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“EITF 00-19”). Subsequent changes in the fair value of these call option transactions will not be recognized as long as the instruments remain classified in equity. In addition, the call option sold will be included in diluted net income per share using the treasury stock method.

In July 2004, we completed an offering of $330.0 million principal amount of 3.5% senior convertible debentures due 2034 (the “3.5% Debentures,” together with the 1.25% Debentures, the “Senior Debentures”) in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended.

The 3.5% Debentures will pay contingent interest, subject to certain limitations as described in the offering memorandum, beginning on July 15, 2011. This contingent interest feature is indexed to the value of our common stock, which is not clearly and closely related to the economic characteristics and risks of the 3.5% Debentures. In accordance with SFAS No. 133, the contingent interest feature represents an embedded derivative that must be bifurcated from its host instrument and accounted for separately as a derivative instrument. However, we determined that the fair value of the contingent interest feature at inception was zero based on our option to redeem the 3.5% Debentures prior to incurring any contingent interest payments. If we were to exercise this redemption option, we would not be required to make any contingent interest payments and, therefore, the holders of the 3.5% Debentures cannot assume they will receive those payments. We continue to conclude that the fair value of the contingent interest feature is zero.

We received net proceeds from the offering of approximately $321.4 million, after deducting the initial purchasers’ discounts and commissions and estimated expenses in the aggregate of approximately $8.6 million. We used the net proceeds from this offering to repay outstanding indebtedness under our credit facilities and for other general corporate purposes.

The Senior Debentures are unsecured and unsubordinated obligations, and are guaranteed by one of our wholly owned subsidiaries (see Note 8, Guarantor Information)

In April 2007, we completed exchange offers relating to our 1.25% Debentures and 3.5% Debentures. At closing, we issued $177.4 million in aggregate principal amount of a new series of senior subordinated convertible debentures due 2034, bearing interest at a rate of 1.625% per year until March 15, 2009 (the “1.625% Debentures”), in exchange for a like principal amount of our 1.25% Debentures. In addition, we issued $321.6 million in aggregate principal amount of a new series of 4% senior subordinated convertible debentures due 2034 (the “4% Debentures”) in exchange for a like principal amount of our 3.5% Debentures. The results of the exchange offers were as follows:

	Amount
	Outstanding		Amount
	Prior		Outstanding
	to Exchange		at Completion of
Securities	Offers		Exchange Offers
	($ in thousands)
3.5% Senior Convertible Debentures due 2034	$	330,000	$	8,446
1.25% Senior Convertible Debentures due 2034		225,000		47,620
4% Senior Subordinated Convertible Debentures due 2034		—		321,554
1.625% Senior Subordinated Convertible Debentures due 2034		—		177,380
Total	$	555,000	$	555,000

In addition, we amended the documents governing our call option transactions to provide, among other things, for those documents to relate to shares issuable upon conversion of both the 1.25% Debentures and the 1.625% Debentures.

As of December 31, 2007, both our 1.25% Debentures and our 1.625% Debentures would be convertible, subject to certain conditions, into 2.1 million and 7.9 million shares of our common stock, respectively, at a conversion rate of 44.6188 shares of common stock per $1,000 principal amount of debentures, representing an

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

effective conversion price of approximately $22.41 per share. The conversion rate and price will adjust each time we pay a dividend on our common stock, with the fair value of each adjustment taxable to the holders. The 1.25% Debentures and 1.625% Debentures are redeemable for cash at our option at any time on or after March 15, 2009 at a redemption price of 100% of their principal amount plus accrued interest. Holders of the 1.25% Debentures or 1.625% Debentures have the right to require us to repurchase some or all of their respective debentures for cash on March 15, 2009, March 15, 2014, March 15, 2019, March 15, 2024 and March 15, 2029 at a price of 100% of their principal amount plus accrued interest. Holders of the 1.25% Debentures or 1.625% Debentures also have the right to require us to repurchase some or all of their respective debentures upon certain events constituting a fundamental change.

As of December 31, 2007, both our 3.5% Debentures and our 4% Debentures would be convertible, subject to certain conditions, into 0.4 million and 13.7 million shares of our common stock, respectively, at a conversion rate of 42.6739 shares of common stock per $1,000 principal amount of debentures, representing an effective conversion price of approximately $23.43 per share. The conversion rate and price will adjust each time we pay a dividend on our common stock, with the fair value of each adjustment taxable to the holders. The 3.5% Debentures and 4% Debentures are redeemable for cash at our option at any time on or after July 15, 2011 at a redemption price of 100% of their principal amount plus accrued interest. Holders of the 3.5% Debentures or 4% Debentures have the right to require us to repurchase some or all of their respective debentures for cash on July 15, 2011, July 15, 2014, July 15, 2019, July 15, 2024 and July 15, 2029 at a price of 100% of their principal amount plus accrued interest. Holders of the 3.5% or 4% Debentures also have the right to require us to repurchase some or all of their respective debentures upon certain events constituting a fundamental change.

Because the terms of the 1.625% Debentures and the 4% Debentures are not substantially different from the Senior Debentures, as defined by EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments, we did not consider the consummation of the exchange offers to prompt an extinguishment of issued debt and, therefore, continued to amortize the remaining unamortized deferred financing fees over the remaining estimated lives of the 1.625% Debentures and the 4% Debentures. Additionally, all costs associated with the exchange offers were expensed as incurred.

In July 2007, we issued $250.0 million principal amount of 7.25% senior subordinated convertible notes due 2037 bearing interest at a rate of 7.25% per year until July 20, 2012 (the “7.25% Debentures” and together with the 1.625% Debentures and the 4% Debentures, the “Subordinated Debentures”). The 7.25% Debentures were sold at a price of 98% of the aggregate principal amount of the notes. The 7.25% Debentures had an initial conversion rate of 36.9079 shares of our common stock per $1,000 principal amount of notes, representing an initial conversion price of approximately $27.09 per share. The conversion rate and price will adjust if we pay dividends on our common stock greater than $0.60 per share, per quarter, with the fair value of each adjustment taxable to the holders.

The 7.25% Debentures are redeemable for cash at our option at any time on or after July 20, 2012 at a redemption price of 100% of their principal amount plus accrued interest. Holders of the 7.25% Debentures have the right to require us to repurchase some or all of their debentures for cash on July 15, 2012, July 15, 2017, July 15, 2022, July 15, 2027 and July 15, 2032 at a price of 100% of their principal amount plus accrued interest. Holders of the 7.25% Debentures also have the right to require us to repurchase some or all of their 7.25% Debentures upon certain events constituting a fundamental change.

The Subordinated Debentures are guaranteed on a senior subordinated basis by CapitalSource Finance (see Note 8, Guarantor Information). The Subordinated Debentures rank junior to all of our other existing and future secured and unsecured and unsubordinated indebtedness, including the outstanding Senior Debentures, and senior to our existing and future subordinated indebtedness.

The Subordinated Debentures provide for a make-whole amount upon conversion in connection with certain transactions or events that may occur prior to March 15, 2009, July 15, 2011 and July 15, 2012 for the 1.625% Debentures, the 4% Debentures and the 7.25% Debentures, respectively, which, under certain circumstances, will increase the conversion rate by a number of additional shares. The Subordinated Debentures do not provide for the payment of contingent interest.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Holders of each series of the Debentures may convert their debentures prior to maturity only if the following conditions occur:

1) The sale price of our common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous calendar quarter is greater than or equal to 120% of the applicable conversion price per share of our common stock on such last trading day;

2) During the five consecutive business day period after any five consecutive trading day period in which the trading price per debenture for each day of that period was less than 98% of the product of the conversion rate and the last reported sale price of our common stock for each day during such period (the “98% Trading Exception”); provided, however, that if, on the date of any conversion pursuant to the 98% Trading Exception that is on or after March 15, 2029 for the 1.25% Debentures or 1.625% Debentures, on or after July 15, 2019 for the 3.5% Debenture or 4% Debentures and on or after July 15, 2022 for the 7.25% Debentures, the last reported sale price of our common stock on the trading day before the conversion date is greater than 100% of the applicable conversion price, then holders surrendering debentures for conversion will receive, in lieu of shares of our common stock based on the then applicable conversion rate, shares of common stock with a value equal to the principal amount of the debentures being converted;

3) Specified corporate transactions occur such as if we elect to distribute to all holders of our common stock rights or warrants entitling them to subscribe for or purchase, for a period expiring within 45 days after the date of the distribution, shares of our common stock at less than the last reported sale price of a share of our common stock on the trading day immediately preceding the declaration date of the distribution; or distribute to all holders of our common stock, assets, debt securities or rights to purchase our securities, which distribution has a per share value as determined by our board of directors exceeding 5% of the last reported sale price of our common stock on the trading day immediately preceding the declaration date for such distribution;

4) We call any or all of the Debentures of such series for redemption, or

5) We are a party to a consolidation, merger or binding share exchange, in each case pursuant to which our common stock would be converted into cash or property other than securities.

We are unable to assess the likelihood of meeting conditions (1) or (2) above for the Debentures as both conditions depend on future market prices for our common stock and the Debentures. We believe that the likelihood of meeting conditions (3), (4) or (5) related to the specified corporate transactions occurring for the Debentures is remote since we have no current plans to distribute rights or warrants to all holders of our common stock, call any of our Debentures for redemption or enter a consolidation, merger or binding share exchange pursuant to which our common stock would be converted into cash or property other than securities.

Should we be required to repurchase the 7.25% Debentures at any of the redemption dates, we are required to satisfy all principal and accrued interest requirements with respect thereto in cash. Should we be required to repurchase any other series of our Debentures at any of the redemption dates, or if any series of our Debentures are converted, our intent is to satisfy all principal and accrued interest requirements with respect thereto in cash.

To the extent that the respective conversion prices are adjusted below the price of our common stock at the time the Debentures were issued, we are required to record a beneficial conversion option, which impacts both our net income and net income per share. For the year ended December 31, 2007, we recorded a $20.2 million beneficial conversion option related to the 3.5% Debentures and 4% Debentures, which will be amortized through July 15, 2011 in accordance with EITF No. 98-05, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios. We did not recognize any such beneficial conversion option prior to 2007.

EITF Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings Per Share (“EITF 04-8”) requires that the common stock underlying contingent convertible debt instruments such as our Contingent Convertibles should be included in diluted net income per share computations using the if-converted method regardless of whether the market price trigger or other contingent feature has been met. EITF 04-8

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

concluded that this new treatment should be applied retroactively, with the result that issuers of securities like our Contingent Convertibles would be required to restate previously issued diluted net income per share.

Under the terms of the indentures governing our Contingent Convertibles, we have the ability to make irrevocable elections to pay the principal balance of the Contingent Convertibles in cash upon any conversion prior to or at maturity. By making these elections, under current interpretations of SFAS No. 128, Earnings per Share (“SFAS No. 128”), and consistent with the provisions of EITF 90-19, Convertible Bonds with Issuer Option to Settle for Cash upon Conversion, the common stock underlying the principal amount of the Contingent Convertibles would not be required to be included in our calculation of diluted net income per share and would have no past or future impact on our diluted net income per share. The only impact on diluted net income per share from our Contingent Convertibles results from the application of the treasury stock method to any conversion spread on those instruments (see Note 16, Net Income per Share for further information). The FASB plans to issue an exposure draft in 2008 to revise SFAS No. 128. This exposure draft is expected to require instruments that can be settled in cash or shares be presumed to be settled in shares if the effect is dilutive. Prior to the effective date of the new standard, we intend to make irrevocable elections to pay the principal balance of each series of our Contingent Convertibles in cash.

Subordinated Debt

We have periodically issued subordinated debt to statutory trusts (“TP Trusts”) that are formed for the purpose of issuing preferred securities to outside investors, which we refer to as Trust Preferred Securities (“TPS”). We generally retain 100% of the common securities issued by the TP Trusts, representing 3% of their total capitalization. As of December 31, 2007, we had completed nine subordinated debt transactions, of which six bear interest at a floating interest rate and three bear fixed interest rates for a specified period and then bear interest at a floating interest rate until maturity. The terms of the subordinated debt issued to the TP Trusts and the TPS issued by the TP Trusts are substantially identical.

The TP Trusts are wholly owned indirect subsidiaries of CapitalSource. However, in accordance with the provisions of FIN 46(R), we have not consolidated the TP Trusts for financial statement purposes. We account for our investments in the TP Trusts under the equity method of accounting pursuant to APB No. 18, The Equity Method of Accounting for Investments in Common Stock.

120

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We had subordinated debt outstanding totaling $529.9 million and $446.4 million as of December 31, 2007 and 2006, respectively. As of December 31, 2007, our outstanding subordinated debt transactions were as follows:

		Trust Formation					Interest Rate as of
TPS Series		Date	Debt Issued		Maturity Date	Date Callable(1)	December 31, 2007
			(Amounts in
			thousands)
	2005-1	November 2005	$	103,093	December 15, 2035	December 15, 2010		6.94	%(2)
	2005-2	December 2005	$	128,866	January 30, 2036	January 30, 2011		6.82	%(3)
	2006-1	February 2006	$	51,545	April 30, 2036	April 30, 2011		6.96	%(4)
	2006-2	September 2006	$	51,550	October 30, 2036	October 30, 2011		6.97	%(5)
	2006-3	September 2006	€	25,775	October 30, 2036	October 30, 2011		6.66	%(6)
	2006-4	December 2006	$	51,545	January 30, 2037	January 30, 2012		6.93	%(2)
	2006-5	December 2006	$	25,774	January 30, 2037	January 30, 2012		6.93	%(2)
	2007-1	March 2007	$	38,660	April 30, 2037	April 30, 2012		6.93	%(2)
	2007-2	June 2007	$	41,238	July 30, 2037	July 30, 2012		6.93	%(2)

(1)	The subordinated debt is callable in whole or in part at par at any time after the stated date.
(2)	Bears interest at a floating interest rate equal to three-month LIBOR plus 1.95%, resetting quarterly at various dates.
(3)	Bears a fixed rate of interest of 6.82% through January 20, 2011 and then bears interest at a floating interest rate equal to three-month LIBOR plus 1.95%, resetting quarterly.
(4)	Bears a fixed rate of interest of 6.96% through April 1, 2011 and then bears interest at a floating interest rate equal to three-month LIBOR plus 1.95%, resetting quarterly.
(5)	Bears a fixed rate of interest of 6.97% through October 30, 2011 and then bears interest at a floating interest rate equal to three-month LIBOR plus 1.95%, resetting quarterly.
(6)	Bears interest at a floating interest rate equal to three-month EURIBOR plus 2.05%, resetting quarterly.

The subordinated debt described above is unsecured and ranks subordinate and junior in right of payment to all of our indebtedness.

Mortgage Debt

We use mortgage loans to finance certain of our direct real estate investments. We had mortgage debt totaling $284.4 million and $287.2 million as of December 31, 2007 and 2006, respectively. As of December 31, 2007, our mortgage debt comprised a senior $248.4 million loan and a $36.0 million mezzanine loan. Both loans mature on April 9, 2009. The interest rate under the senior loan is one-month LIBOR plus 1.54%, and the interest rate under the mezzanine loan is one-month LIBOR plus 4%.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Debt Maturities

The on balance sheet contractual obligations under our repurchase agreements, credit facilities, term debt, convertible debt, subordinated debt and mortgage debt as of December 31, 2007, were as follows:

							Other Borrowings
	Repurchase		Credit				Convertible		Subordinated		Mortgage
	Agreements		Facilities(1)		Term Debt(2)		Debt(3)		Debt(4)		Debt		Total
	($ in thousands)
2008	$	3,796,396	$	660,457	$	705,999	$	—	$	—	$	—	$	5,162,852
2009		113,631		1,315,840		814,699		219,106		—		284,363		2,747,639
2010		—		230,766		1,396,363		—		—		—		1,627,129
2011		—		—		933,661		316,162		—		—		1,249,823
2012		—		—		962,738		245,362		—		—		1,208,100
Thereafter		—		—		2,445,574		—		529,877		—		2,975,451
Total	$	3,910,027	$	2,207,063	$	7,259,034	$	780,630	$	529,877	$	284,363	$	14,970,994

(1)	The contractual obligations for credit facilities are computed based on the stated maturities of the facilities not considering optional annual renewals.
(2)	Excludes net unamortized discounts of $3.4 million. The underlying loans are subject to prepayment, which would shorten the life of the term debt transactions. The underlying loans may be amended to extend their term, which will lengthen the life of the term debt transactions. At our option, we may substitute for prepaid loans up to specified limitations, which may also impact the life of the term debt. Also, the contractual obligations for our term debt are computed based on the estimated life of the instrument. The contractual obligations for the Owner Trust term debt are computed based on the estimated lives of the underlying adjustable rate prime residential mortgage whole loans.
(3)	The contractual obligations for convertible debt are computed based on the initial put/call date. The legal maturity of our 7.25% Debentures is 2037 and the legal maturities of our other series of Debentures are 2034.
(4)	The contractual obligations for subordinated debt are computed based on the legal maturities, which are between 2035 and 2037.

Interest Expense

The weighted average interest rates on all of our borrowings, including amortization of deferred financing costs, for the years ended December 31, 2007, 2006 and 2005 were 6.0%, 5.8% and 4.4%, respectively.

Deferred Financing Costs

As of December 31, 2007 and 2006, deferred financing costs of $95.1 million and $71.3 million, respectively, net of accumulated amortization of $105.8 million and $80.1 million, respectively, were included in other assets in the accompanying audited consolidated balance sheets.

Covenants

We, and some of our wholly owned subsidiaries, are required to comply with financial and non-financial covenants related to our debt financings and our servicing of loans collateralizing our secured credit facilities and term debt. Failure to meet the covenants could result in the servicing being transferred to another servicer. The notes under the trusts established in connection with our term debt include accelerated amortization provisions that require cash flows to be applied to pay the noteholders if the notes remain outstanding beyond the stated maturity dates.

122

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 12.   Shareholders’ Equity

Common Stock Shares Outstanding

Common stock share activity for the years ended December 31, 2007, 2006 and 2005 was as follows:

Outstanding as of December 31, 2004	117,927,495
Issuance of common stock	19,250,000
Exercise of options	358,988
Issuance of shares under the Employee Stock Purchase Plan	66,881
Restricted stock and other stock grants, net	2,802,402
Outstanding as of December 31, 2005	140,405,766
Issuance of common stock	39,758,116
Exercise of options	692,375
Restricted stock and other stock grants, net	596,033
Outstanding as of December 31, 2006	181,452,290
Issuance of common stock	36,327,557
Sale of treasury stock	1,300,000
Exercise of options	339,201
Restricted stock and other stock grants, net	1,285,752
Outstanding as of December 31, 2007	220,704,800

In order to comply with the rules applicable to REITs, in January 2006, we paid a special dividend of $2.50 per share, or $350.9 million in the aggregate, representing our cumulative undistributed earnings and profits, including earnings and profits of some of our predecessor entities, from our inception through December 31, 2005. We paid this special dividend $70.2 million in cash and $280.7 million in 12.3 million shares of common stock, based on an imputed per share stock price of $22.85.

Dividend Reinvestment and Stock Purchase Plan

We offer a Dividend Reinvestment and Stock Purchase Plan (the “DRIP”) to current and prospective shareholders. Participation in the DRIP allows common shareholders to reinvest cash dividends and to purchase additional shares of our common stock, in some cases at a discount from the market price. During the years ended December 31, 2007 and 2006, we received proceeds of $607.8 million and $191.0 million, respectively, related to the direct purchase of 31.7 million and 7.7 million shares of our common stock pursuant to the DRIP, respectively. In addition, we received proceeds of $106.7 million and $17.2 million related to cash dividends reinvested in 5.4 million and 0.7 million shares of our common stock during the years ended December 31, 2007 and 2006, respectively.

Treasury Stock

In connection with the issuance of convertible debt as discussed in Note 11, Borrowings, we purchased 1,300,000 shares of our common stock in 2004 for an aggregate purchase price of approximately $29.9 million. During 2007, we issued all of these shares through the DRIP. We had no treasury stock as of December 31, 2007.

Equity Offerings

In October 2005, we sold 19.25 million shares of our common stock in a public offering at a price of $22.30 per share. In connection with this offering, we received net proceeds of $414.3 million, which were used to repay borrowings under our credit facilities. Affiliated purchasers, including John K. Delaney, CapitalSource Chairman and Chief Executive Officer, Jason M. Fish, CapitalSource Vice Chairman and former Chief Investment Officer,

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and other members of CapitalSource’s Board of Directors and their affiliates, including Farallon Capital Management, L.L.C. and Madison Dearborn Partners, LLC, purchased an aggregate of 4.3 million of the offered shares.

In March 2006, we sold 17.6 million shares of our common stock in a public offering at a price of $23.50 per share, including the 1.6 million shares purchased by the underwriters pursuant to their over-allotment option. Affiliates of Farallon Capital Management, L.L.C. bought 1.0 million of the offered shares. In connection with this offering, we received net proceeds of $395.7 million, which were used to repay outstanding borrowings under our credit facilities.

Note 13.   Employee Benefit Plan

Our employees are eligible to participate in the CapitalSource Finance LLC 401(k) Savings Plan (“401(k) Plan”), a defined contribution plan in accordance with Section 401(k) of the Internal Revenue Code of 1986, as amended. For the years ended December 31, 2007, 2006 and 2005, we contributed $1.9 million, $1.7 million and $1.3 million, respectively, in matching contributions to the 401(k) Plan.

Note 14.   Income Taxes

We elected REIT status under the Code when we filed our federal income tax return for the year ended December 31, 2006. To continue to qualify as a REIT, we are required to distribute at least 90% of our REIT taxable income to our shareholders and meet the various other requirements imposed by the Code, through actual operating results, asset holdings, distribution levels and diversity of stock ownership. As a REIT, we generally are not subject to corporate-level income tax on the earnings distributed to our shareholders that we derive from our REIT qualifying activities. We are subject to corporate-level tax on the earnings we derive from our TRSs. If we fail to qualify as a REIT in any taxable year, all of our taxable income for that year would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax. In addition, we also will be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost, unless we were entitled to relief under specific statutory provisions. We will still be subject to foreign, state and local taxation in various foreign, state and local jurisdictions, including those in which we transact business or reside.

As certain of our subsidiaries are TRSs, we continue to report a provision for income taxes within our consolidated financial statements. We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates for the periods in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the change.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of income tax expense for the years ended December 31, 2007, 2006 and 2005 were as follows:

	Year Ended December 31,
	2007		2006			2005
	($ in thousands)
Current:
Federal	$	37,135	$	74,095		$	95,254
State		6,229		13,736			16,360
Foreign		2,615		—			—
Total current		45,979		87,831			111,614
Deferred:
Federal		36,354		(18,382	)		(6,461	)
State		5,230		(2,317	)		(753	)
Foreign		—		—			—
Total deferred		41,584		(20,699	)		(7,214	)
Income tax expense	$	87,563	$	67,132		$	104,400

For the year ended December 31, 2007, we had approximately $7.8 million and $256.0 million of pre-tax income that was attributable to foreign and domestic operations, respectively.

Deferred income taxes are recorded when revenues and expenses are recognized in different periods for financial statement and income tax purposes. Net deferred tax assets are included in other assets in the accompanying audited consolidated balance sheets. The components of deferred tax assets and liabilities as of December 31, 2007 and 2006, were as follows:

	December 31,
	2007			2006
	($ in thousands)
Deferred tax assets:
Allowance for loan losses	$	33,098		$	24,722
Stock based compensation awards		12,678			10,581
Other		5,740			10,025
Total deferred tax assets		51,516			45,328
Valuation allowance		(1,767	)		(1,532	)
Total deferred tax assets, net of valuation allowance		49,749			43,796
Deferred tax liabilities:
Mark-to-market on loans		49,949			—
Net unrealized gain on investments		36			861
Property and equipment		325			205
Other, net		1,610			3,107
Total deferred tax liabilities		51,920			4,173
Net deferred tax (liabilities) assets	$	(2,171	)	$	39,623

During the year ended December 31, 2007 and 2006, we recorded valuation allowances of $1.8 million and $1.5 million, respectively, against our deferred tax assets related to foreign and state net operating loss carryforwards, $1.2 million and $1.1 million, respectively, of which does not expire and $0.5 million and $0.4 million, respectively, of which expires beginning in 2025. During the year ended December 31, 2005, we recorded valuation

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

allowances of $0.9 million against our deferred tax assets related to state net operating loss carryforwards. The entity which generated the losses elected REIT status when we filed our tax return for the year ended December 31, 2006. Therefore, the deferred tax asset and valuation allowance related to its state net operating losses were reversed into income during the year ended December 31, 2006.

The reconciliations of the effective income tax rate and the federal statutory corporate income tax rate for the years ended December 31, 2007, 2006 and 2005, were as follows:

	Year Ended December 31,
	2007			2006			2005
Federal statutory rate		35.0	%		35.0	%		35.0	%
Benefit of REIT election		(5.5	)		(16.8	)		—
State income taxes, net of federal tax benefit		3.1			2.1			3.5
Other		0.6			0.5			0.3
Discrete item — Benefit for reversal of net deferred tax liabilities(1)		—			(1.4	)		—
Effective income tax rate		33.2	%		19.4	%		38.8	%

(1) In connection with our REIT election, we reversed net deferred tax liabilities of $4.7 million, relating to REIT qualifying activities, into income during the year ended December 31, 2006.

As discussed in Note 2, Summary of Significant Accounting Polices, we adopted the provisions of FIN 48 on January 1, 2007. As a result of adopting FIN 48, we recognized an increase of approximately $5.7 million in the liability for unrecognized tax benefits, which was accounted for as an increase to accumulated deficit as of January 1, 2007. Our unrecognized tax benefits totaled $14.0 million, as of January 1, 2007, including $6.5 million that, if recognized, would affect the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows ($ in thousands):

Balance at January 1, 2007	$	13,998
Additions based on tax positions related to the current year		2,004
Additions for tax positions of prior years		718
Reductions for tax positions of prior years		—
Settlements		—
Balance at December 31, 2007	$	16,720

As of December 31, 2007, approximately $7.2 million of our unrecognized tax benefits would affect the effective tax rate. We do not currently anticipate such unrecognized tax benefits to significantly increase or decrease over the next 12 months; however, actual results could differ from those currently anticipated.

We recognize interest and penalties accrued related to unrecognized tax benefits as a component of income taxes. As of January 1, 2007, accrued interest expense and penalties totaled $1.5 million. For the year ended December 31, 2007, we recognized $0.7 million in interest expense and, as of December 31, 2007, accrued interest expense and penalties totaled $2.2 million.

We file income tax returns with the United States and various state, local and foreign jurisdictions and generally remain subject to examinations by these tax jurisdictions for tax years 2004 through 2006.

126

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 15.   Comprehensive Income

Comprehensive income for the years ended December 31, 2007, 2006 and 2005, was as follows:

	Year Ended December 31,
	2007			2006			2005
	($ in thousands)
Net income	$	176,287		$	279,276		$	164,672
Unrealized (loss) gain on available-for-sale securities, net of tax		(3,103	)		3,532			(807	)
Unrealized gain (loss) on foreign currency translation, net of tax		5,175			(826	)		—
Unrealized gain (loss) on cash flow hedges, net of tax		413			1,098			(220	)
Comprehensive income	$	178,772		$	283,080		$	163,645

Accumulated other comprehensive income, net as of December 31, 2007 and 2006, was as follows:

	December 31,
	2007			2006
	($ in thousands)
Unrealized (loss) gain on available-for-sale securities, net of tax	$	(389	)	$	2,714
Unrealized gain (loss) on foreign currency translation, net of tax		4,349			(826	)
Unrealized gain on cash flow hedges, net of tax		990			577
Accumulated other comprehensive income, net	$	4,950		$	2,465

127

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 16.   Net Income per Share

The computations of basic and diluted net income per share for the years ended December 31, 2007, 2006 and 2005, were as follows:

	Year Ended December 31,
	2007		2006		2005
	($ in thousands, except per share data)
Basic net income per share:
Net income	$	176,287	$	279,276	$	164,672
Average shares — basic		191,697,254		166,273,730		120,976,558
Basic net income per share	$	0.92	$	1.68	$	1.36
Diluted net income per share:
Net income	$	176,287	$	279,276	$	164,672
Average shares — basic		191,697,254		166,273,730		120,976,558
Effect of dilutive securities:
Stock dividend declared(1)		—		807,874		1,312,683
Option shares		340,328		483,301		699,804
Unvested restricted stock		1,120,000		1,341,067		439,448
Stock units		30,380		19,201		5,152
Non-managing member units		—		—		—
Conversion premium on the Debentures(2)		94,694		294,834		—
Written call option		—		—		—
Average shares — diluted		193,282,656		169,220,007		123,433,645
Diluted net income per share	$	0.91	$	1.65	$	1.33

(1)	All conditions were not met for inclusion in the basic net income per share calculation until such shares were issued on January 25, 2006.
(2)	For the year ended December 31, 2007, the conversion premiums on the 1.25% and 1.625% Debentures represent the dilutive shares based on a conversion price of $22.41. For the year ended December 31, 2006, the conversion premiums on the 1.25% and 3.5% Debentures, represent the dilutive shares based on conversion prices of $25.20 and $26.35, respectively.

The weighted average shares that have an antidilutive effect in the calculation of diluted net income per share and have been excluded from the computations above are as follows:

	Year Ended December 31,
	2007		2006		2005
Stock options		8,102,769		4,513,699		1,141,478
Non-managing member units		1,113,259		2,331,965		—
Shares subject to a written call option		7,401,420		7,401,420		7,401,420

For the year December 31, 2007, the conversion premiums on the 3.5% Debentures and 4% Debentures were considered to be antidilutive based on a conversion price of $23.43. As dividends are paid, the conversion prices related to our written call option, Senior Debentures, 1.625% Debentures, and 4% Debentures are adjusted. The conversion price related to the 7.25% Debentures will be adjusted only if we pay dividends on our common stock greater than $0.60 per share, per quarter. Also, we have excluded the shares underlying the principal balance of the Debentures for all periods presented.

128

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 17.   Stock-Based Compensation

Equity Incentive Plan

In April 2006, our shareholders adopted the CapitalSource Inc. Third Amended and Restated Equity Incentive Plan (the “Plan”), which amended the CapitalSource Inc. Second Amended and Restated Equity Incentive Plan adopted on August 6, 2003 in connection with our initial public offering. A total of 33.0 million shares of common stock are reserved for issuance under the Plan. The Plan will expire on the earliest of (1) the date as of which the Board of Directors, in its sole discretion, determines that the Plan shall terminate, (2) following certain corporate transactions such as a merger or sale of our assets if the Plan is not assumed by the surviving entity, (3) at such time as all shares of common stock that may be available for purchase under the Plan have been issued or (4) August 6, 2016. The Plan is intended to give eligible employees, members of the Board of Directors, and our consultants and advisors awards that are linked to the performance of our common stock. As of December 31, 2007, there were 11.4 million shares remaining available for issuance under the Plan.

Adoption of SFAS No. 123(R)

As discussed in Note 2, Summary of Significant Accounting Policies, we adopted SFAS No. 123(R) on January 1, 2006, as it relates to the Plan described above. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. SFAS No. 123(R) also requires the cash flows resulting from the tax benefits of tax deductions in excess of the compensation cost recognized from the exercise of stock options to be classified as financing cash flows, rather than as operating cash flows.

Prior to the adoption of SFAS No. 123(R), we accounted for share-based payments to employees using the intrinsic value method in accordance with APB 25 and related interpretations, as permitted under SFAS No. 123, and as such, generally recognized no compensation cost for employee stock options. In accordance with APB 25, compensation cost was only recognized for our options and restricted stock granted to employees where the exercise price was less than the market price of the underlying common stock on the date of grant. We adopted the fair value recognition provisions of SFAS No. 123(R) using the modified- prospective-transition method. Under this method, compensation cost recognized beginning on January 1, 2006, includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). In accordance with the modified-prospective-transition method, our consolidated financial statements from prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). In addition, under SFAS No. 123(R), an entity may elect to recognize compensation cost for an award with only service conditions that has a graded vesting schedule using either a straight-line recognition method or a graded vesting recognition method. We elected the straight-line recognition method for all awards with only service based vesting conditions. For awards having graded vesting schedules and performance or market based vesting conditions, we amortize compensation cost using the graded vesting recognition method.

Upon adoption of SFAS No. 123(R), we recorded a cumulative effect of accounting change of $0.4 million (or $0.00 per diluted share), net of taxes, in our accompanying audited consolidated statement of income for the year ended December 31, 2006, resulting from the requirement to estimate forfeitures for unvested awards at the date of grant instead of recognizing them as incurred.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table illustrates the effects on reported net income and net income per share as if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation for the year ended December 31, 2005, ($ in thousands, except per share data):

Net income as reported	$	164,672
Add back: Stock-based compensation expense from options included in reported net income, net of tax		199
Deduct: Total stock-based compensation expense determined under fair value-based method for all option awards, net of tax		(2,182	)
Pro forma net income	$	162,689
Net income per share:
Basic — as reported	$	1.36
Basic — pro forma	$	1.34
Diluted — as reported	$	1.33
Diluted — pro forma	$	1.32

Total compensation cost recognized in income pursuant to the Plan was $44.5 million, $33.3 million and $19.1 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Stock Options

Option activity for the year ended December 31, 2007 was as follows:

				Weighted		Weighted Average
				Average		Remaining
				Exercise		Contractual Life		Aggregate
	Options			Price		(in years)		Intrinsic Value
								($ in thousands)
Outstanding as of December 31, 2006		9,596,636		$	22.53
Granted		48,703			24.11
Exercised		(339,201	)		14.00
Forfeited		(239,218	)		20.65
Outstanding as of December 31, 2007		9,066,920		$	22.91		8.13	$	2,544
Vested or expected to vest as of December 31, 2007		8,953,059		$	22.92		8.14	$	2,544
Exercisable as of December 31, 2007		4,243,566		$	22.20		7.88	$	2,544

For the years ended December 31, 2007, 2006 and 2005, the weighted average grant date fair value of options granted was $1.60, $1.44, and $6.37, respectively. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005, was $3.8 million, $9.8 million and $6.0 million, respectively. As of December 31, 2007, the total unrecognized compensation cost related to nonvested options granted pursuant to the Plan was $4.3 million. This cost is expected to be recognized over a weighted average period of 2.4 years.

For awards containing only service and/or performance based vesting conditions, we use the Black-Scholes weighted average option-pricing model to estimate the fair value of each option grant on its grant date. During the year ended December 31, 2005, we used this model solely to determine the pro forma net income disclosures

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

required by SFAS No. 123. The weighted average assumptions used in this model for the years ended December 31, 2007, 2006 and 2005, were as follows:

	Year Ended December 31,
	2007	2006	2005
Dividend yield	10.4%	8.3%	2.1%
Expected volatility	23.3%	20.0%	29.0%
Risk-free interest rate	4.6%	5.0%	4.0%
Expected life	4.0 years	9.6 years	6.0 years

The dividend yield is computed based on annualized dividends and the average share price for the period. Prior to 2006, we did not pay dividends and this assumption was not applicable. Prior to 2006, expected volatility was based on the historical volatility of our common stock. In connection with our REIT election, we changed our method of computing the expected volatility to be based on the average volatility of the common stock of selected competitor REITs as our historical volatility is no longer an indicator of our future volatility. The risk-free interest rate is the U.S. Treasury yield curve in effect at the time of grant based on the expected life of options. The expected life of our options granted represents the period of time that options are expected to be outstanding. The expected life of our options increased during the year ended December 31, 2006, as a result of options granted to certain executives during the period which have a longer expected life.

We granted 3.5 million awards to our Chairman and Chief Executive Officer during the year ended December 31, 2006, that contained market based vesting conditions. For the awards containing market based vesting conditions, we used a lattice option-pricing model to estimate the fair value of each option grant on its grant date. No awards containing market based vesting conditions were issued during the year ended December 31, 2007.

The assumptions used in this model for the year ended December 31, 2006, were as follows:

Dividend yield	8.35	%
Expected volatility	19	%
Risk-free interest rate	4.99	%
Expected life	10 years

The dividend yield is computed based on anticipated annual dividends and the share price on the last day of the period. Our expected volatility is computed based on the average volatility of the common stock of selected competitor REITs as our historical volatility is not an indicator of our future volatility, as discussed above. The risk-free interest rate is the U.S. Treasury yield curve in effect at the time of grant based on the expected life of options. The expected life of our options granted represents the period of time that options are expected to be outstanding.

Restricted Stock

Restricted stock activity for the year ended December 31, 2007, was as follows:

				Weighted
				Average
				Grant-Date
	Shares			Fair Value
Nonvested as of December 31, 2006		4,469,157		$	22.82
Granted		2,182,710			23.55
Vested		(1,660,579	)		22.99
Forfeited		(248,932	)		23.13
Nonvested as of December 31, 2007		4,742,356		$	23.07

The fair value of nonvested restricted stock is determined based on the closing trading price of our common stock on the grant date, in accordance with the Plan. The weighted average grant date fair value of restricted stock

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granted during the years ended December 31, 2007, 2006 and 2005 was $23.55, $23.97 and $22.79, respectively. The total fair value of restricted stock that vested during the years ended December 31, 2007, 2006 and 2005 was $39.8 million, $26.8 million and $4.0 million, respectively. As of December 31, 2007, the total unrecognized compensation cost related to nonvested restricted stock granted pursuant to the Plan was $58.8 million, which is expected to be recognized over a weighed average period of 2.1 years.

Note 18.   Commitments and Contingencies

We have non-cancelable operating leases for office space and office equipment. The leases expire over the next ten years and contain provisions for certain annual rental escalations.

Future minimum lease payments under non-cancelable operating leases as of December 31, 2007, were as follows ($ in thousands):

2008	$	9,248
2009		8,139
2010		7,757
2011		7,215
2012		6,757
Thereafter		8,696
Total	$	47,812

In addition, in April 2007, we entered into a new lease for our corporate headquarters which requires estimated minimum payments of $7.9 million per year (subject to certain escalations) for a period of 15 years. We are currently in negotiations to materially reduce our commitment under this lease. Although the lease will not commence before June 1, 2009, there is no determinable lease commencement date as of December 31, 2007. As such, these payments are not included in the table above.

Rent expense was $9.7 million, $7.6 million and $6.8 million for the years ended December 31, 2007, 2006 and 2005, respectively.

As of December 31, 2007, we had issued $226.4 million in letters of credit which expire at various dates over the next six years. If a borrower defaults on its commitment(s) subject to any letter of credit issued under these arrangements, we would be responsible to meet the borrower’s financial obligation and would seek repayment of that financial obligation from the borrower. These arrangements qualify as a financial guarantee in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. As a result, we included the fair value of these obligations, totaling $5.9 million, in other liabilities in the accompanying audited consolidated balance sheet as of December 31, 2007.

As of December 31, 2007, we had identified conditional asset retirement obligations primarily related to the future removal and disposal of asbestos that is contained within certain of our direct real estate investment properties. The asbestos is appropriately contained and we believe we are compliant with current environmental regulations. If these properties undergo major renovations or are demolished, certain environmental regulations are in place, which specify the manner in which asbestos must be handled and disposed. Under FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations — An Interpretation of FASB No. 143, we are required to record the fair value of these conditional liabilities if they can be reasonably estimated. As of December 31, 2007, sufficient information was not available to estimate our liability for conditional asset retirement obligations as the obligations to remove the asbestos from these properties have indeterminable settlement dates. As such, no liability for conditional asset retirement obligations was recorded on our accompanying audited consolidated balance sheet as of December 31, 2007.

From time to time we are party to legal proceedings. We do not believe that any currently pending or threatened proceeding, if determined adversely to us, would have a material adverse effect on our business, financial condition or results of operations, including our cash flows.

132

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 19.   Related Party Transactions

We have from time to time in the past, and expect that we may from time to time in the future, make loans to or invest in the equity securities of companies in which our directors, executive officers, nominees for directors, 5% or more beneficial owners or their affiliates have material interests. Our Board of Directors, or a committee or disinterested directors, is charged with considering and approving these types of transactions. Management believes that each of our related party loans has been, and will continue to be, subject to the same due diligence, underwriting and rating standards as the loans that we make to unrelated third parties.

As of December 31, 2007 and 2006, we had committed to lend $188.4 million and $465.2 million, respectively, to such entities of which $124.0 million and $258.1 million, respectively, was outstanding. These loans bear interest ranging from 7.60% to 12.25% as of December 31, 2007 and 8.08% to 13.25% as of December 31, 2006. For the years ended December 31, 2007, 2006 and 2005, we recognized $13.0 million, $37.5 million and $19.7 million, respectively, in interest and fees from the loans to such entities.

Note 20.   Derivative Instruments

Interest Rate Risk

We enter into various derivative instruments to manage interest rate risk. The objective is to manage interest rate sensitivity by modifying the characteristics of certain assets and liabilities to reduce the adverse effect of changes in interest rates.

Interest rate swaps are contracts in which a series of interest rate cash flows, based on a specific notional amount and a fixed and variable interest rate, are exchanged over a prescribed period. Options are contracts that provide the right, but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time or on a specific date in exchange for the payment of a premium when the contract is issued. Swaptions are contracts that provide the right, but not the obligation, to enter into an interest rate swap agreement on a specified future date in exchange for the payment of a premium when the contract is issued. Caps and floors are contracts that transfer, modify, or reduce interest rate risk in exchange for the payment of a premium when the contract is issued. Euro dollar futures are contracts that cash settle on a future date based on a specific notional amount and a variable interest rate.

Foreign Exchange Risk

We enter into forward exchange contracts to manage foreign exchange risk. The objective is to manage the uncertainty of future foreign exchange rate fluctuations by contractually locking in current foreign exchange rates for the settlement of anticipated future cashflows.

Derivatives Designated as Hedging Instruments

In connection with the issuance of one series of our TPS, we entered into an interest rate swap. The objective of this instrument was to offset the changes in interest rate payments attributable to fluctuations in three-month LIBOR. This interest rate swap was designated as a cash flow hedge for accounting purposes until its termination in the third quarter of 2007. As of December 31, 2007, we had no derivatives designated as an accounting hedge. The fair value of this interest rate swap was $0.9 million as of December 31, 2006.

Derivatives Not Designated as Hedging Instruments

Interest Rate Swaps

We enter into interest rate swap agreements to minimize the economic effect of interest rate fluctuations specific to our fixed rate debt, certain fixed rate loans and certain sale-leaseback transactions. Interest rate fluctuations result in hedged assets and liabilities appreciating or depreciating in market value. Gain or loss on the derivative instruments will generally offset the effect of unrealized appreciation or depreciation of hedged assets

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and liabilities for the period the item is being hedged. As of December 31, 2007 and 2006, the fair values of these interest rate swaps were $(26.2) million and $2.1 million, respectively.

Basis Swaps

We enter into basis swap agreements to eliminate basis risk between our LIBOR-based term debt and the prime-based loans pledged as collateral for that debt. These basis swaps modify our exposure to interest risk typically by converting our prime rate loans to a one-month LIBOR rate. The objective of this swap activity is to protect us from risk that interest collected under the prime rate loans will not be sufficient to service the interest due under the one-month LIBOR-based term debt. These basis swaps are not designated as hedges for accounting purposes. During the years ended December 31, 2007, 2006 and 2005, we recognized a net loss of $1.8 million, $2.3 million and $0.5 million, respectively, related to the fair value of these basis swaps and cash payments made or received, which was recorded in gain (loss) on derivatives in the accompanying audited consolidated statements of income. As of December 31, 2007 and 2006, the fair values of the basis swaps were $(0.8) million and $(2.7) million, respectively.

Interest Rate Caps

The Issuers entered into interest rate cap agreements to hedge loans with embedded interest rate caps that are pledged as collateral for our term debt. Simultaneously, we entered into offsetting interest rate cap agreements with Wachovia. The interest rate caps are not designated as hedges for accounting purposes. Since the interest rate cap agreements are offsetting, changes in the fair value of the interest rate cap agreements have no impact on current period earnings.

Call Options

Concurrently with our sale of the 1.25% and 1.65%Debentures we entered into and amended two separate call option transactions. The objective of these transactions is to minimize potential dilution as a result of the conversion of the 1.25% and the 1.65% Debentures. These call options are not designated as hedges for accounting purposes and were initially recorded in shareholders’ equity in accordance with EITF 00-19. Subsequent changes in the fair value of these transactions will not be recognized as long as the instruments remain classified in shareholders’ equity. We reassess this classification on a quarterly basis to determine whether the call option transactions should be reclassified. We continue to believe that equity classification for these transactions is appropriate as of December 31, 2007. For further discussion of the terms of these transactions, see Note 11, Borrowings.

Forward Exchange Contracts

We have entered into forward exchange contracts to hedge anticipated loan syndications and foreign currency-denominated loans we originate against foreign currency fluctuations. These forward exchange contracts provide for a fixed exchange rate which has the effect of locking in the anticipated cash flows to be received from the loan syndication and the foreign currency-denominated loans. The fair value of these forward exchange contracts was $(0.5) million and $1.0 million as of December 31, 2007 and 2006, respectively.

Derivatives Related to Residential Mortgage Investments

In connection with our residential mortgage investments, we enter into interest rate swaps, interest rate swaptions, interest rate caps and Eurodollar futures contracts as part of our interest rate risk management program related to these investments. The objective of these instruments is to offset the changes in fair value of our residential mortgage investments. These derivatives are not designated as hedges for accounting purposes. During the years ended December 31, 2007, 2006 and 2005, we recognized net losses of $79.6 million, net gains of $18.1 million, and net losses of $3.0 million, respectively, related to the fair value of these derivatives and related cash payments which were recorded in (loss) gain on the residential mortgage investment portfolio in the

134

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

accompanying audited consolidated statements of income. As of December 31, 2007 and 2006, the fair value of these derivatives were $(84.5) million and $6.6 million, respectively.

Note 21.   Credit Risk

In the normal course of business, we utilize various financial instruments to manage our exposure to interest rate and other market risks. These financial instruments, which consist of derivatives and credit-related arrangements, involve, to varying degrees, elements of credit and market risk in excess of the amounts recorded on the accompanying audited consolidated balance sheets in accordance with GAAP.

Credit risk represents the potential loss that may occur because a party to a transaction fails to perform according to the terms of the contract. Market risk is the possibility that a change in market prices may cause the value of a financial instrument to decrease or become more costly to settle. The contract or notional amounts of financial instruments, which are not included in the accompanying audited consolidated balance sheets, do not necessarily represent credit or market risk. However, they can be used to measure the extent of involvement in various types of financial instruments.

We manage credit risk of our derivatives and credit-related arrangements by limiting the total amount of arrangements outstanding by an individual counterparty, by obtaining collateral based on management’s assessment of the client and by applying uniform credit standards maintained for all activities with credit risk.

Contract or notional amounts and the credit risk amounts for derivatives and credit-related arrangements as of December 31, 2007 and 2006, were as follows:

	December 31,
	2007				2006
	Contract or				Contract or
	Notional		Credit Risk		Notional		Credit Risk
	Amount		Amount		Amount		Amount
	($ in thousands)
Derivatives:
Interest rate swaps	$	9,624,814	$	73,449	$	5,924,805	$	13,879
Interest rate caps		1,180,359		2,476		914,877		3,006
Eurodollar futures		1,867,000		—		4,870,000		83
Interest rate swaptions		1,250,000		6,516		1,000,000		3,599
Call options		—		—		457,702		36,999
Forward exchange contracts		79,248		514		88,356		1,616
Total derivatives	$	14,001,421	$	82,955	$	13,255,740	$	59,182
Credit-related arrangements:
Commitments to extend credit	$	4,734,661	$	66,269	$	4,079,369	$	56,217
Commitments to extend letters of credit		186,359		5,889		252,814		10,574
Interest-only loans		6,961,595		6,961,595		5,251,354		5,251,354
Paid-in-kind interest on loans		69,274		69,274		31,592		31,592
Total credit-related arrangements	$	11,951,889	$	7,103,027	$	9,615,129	$	5,349,737

Derivatives

Derivatives expose us to credit and market risk. If the counterparty fails to perform, the credit risk is equal to the fair market value gain of the derivative. When the fair market value of a derivative contract is positive, this indicates the counterparty owes us, and therefore, creates a repayment risk for us. When the fair market value of a derivative contract is negative, we owe the counterparty and have no repayment risk. Market risk is the adverse

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effect that a change in interest rates has on the value of a financial instrument. We manage market risk by only using derivatives for hedging purposes against existing assets and liabilities. For further discussion regarding our derivative activities, see Note 20, Derivative Instruments.

Credit-Related Arrangements

As of December 31, 2007 and 2006, we had committed credit facilities to our borrowers of approximately $14.6 billion and $11.9 billion, respectively, of which approximately $4.7 billion and $4.1 billion, respectively, was unfunded. Commitments do not include transactions for which we have signed commitment letters but not yet signed definitive binding agreements. Our obligation to fund unfunded commitments is generally based on our client’s ability to provide the required collateral and to meet specified preconditions to borrowing. In some cases, our unfunded commitments do not require additional collateral to be provided by a debtor as a prerequisite to future fundings by us. Our failure to satisfy our full contractual funding commitment to one or more of our clients could create a breach of contract and lender liability for us and damage our reputation in the marketplace, which could have a material adverse effect on our business. We currently believe that we have sufficient funding capacity to meet short-term needs related to unfunded commitments.

We are obligated to provide standby letters of credit in conjunction with several of our lending arrangements not to exceed $393.9 million at any time during the term of the arrangement, with $222.6 million and $253.2 million of letters of credit issued as of December 31, 2007 and 2006, respectively. If a client defaults on its commitment(s) subject to any letter of credit issued under these arrangements, we would be responsible to meet the client’s financial obligation and would seek repayment of that financial obligation from the client. We currently do not anticipate that we will be required to fund commitments subject to any outstanding standby letters of credit.

Our interest-only loans consist of balloon and bullet loans, which collectively represent approximately 93% and 90% of our loan portfolio as of December 31, 2007 and 2006, respectively. A balloon loan is a term loan with a series of scheduled payment installments calculated to amortize the principal balance of the loan so that upon maturity of the loan more than 25%, but less than 100%, of the loan balance remains unpaid and must be satisfied. A bullet loan is a loan with no scheduled payments of principal before the maturity date of the loan. On the maturity date, the entire unpaid balance of the loan is due. Balloon loans and bullet loans involve a greater degree of credit risk than other types of loans because they require the client to make a large final payment upon the maturity of the loan.

Our PIK interest rate loans represent the deferral of either a portion or all of the contractual interest payments on the loan. At each payment date, any accrued and unpaid interest is capitalized and included in the loan’s principal balance. As of December 31, 2007 and 2006, the outstanding balance of our PIK loans was $939.0 million and $754.0 million, respectively. On the maturity date, the principal balance and the capitalized PIK interest are due. Loans with PIK interest have a greater degree of credit risk than other types of loans because they require the client to make a large final payment upon the maturity of the loan.

Concentrations of Credit Risk

In our normal course of business, we engage in commercial finance activities with clients throughout the United States. As of December 31, 2007, the single largest industry concentration was skilled nursing, which made up approximately 15% of our commercial loan portfolio. As of December 31, 2007, the largest geographical concentration was Florida, which made up approximately 15% of our commercial loan portfolio. As of December 31, 2007, the single largest industry concentration in our Healthcare Net Lease segment was skilled nursing, which made up approximately 98% of the investments. As of December 31, 2007, the largest geographical concentration in our Healthcare Net Lease segment was Florida, which made up approximately 34% of the investments.

136

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 22.   Estimated Fair Value of Financial Instruments

SFAS No. 107, Disclosures about Fair Value of Financial Instruments (“SFAS No. 107”), requires the disclosure of the estimated fair value of on- and off-balance sheet financial instruments. A financial instrument is defined by SFAS No. 107 as cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver to or receive cash or another financial instrument from a second entity on potentially favorable terms.

Fair value estimates are made at a point in time, based on relevant market data and information about the financial instrument. SFAS No. 107 specifies that fair values should be calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various financial instruments. Fair value estimates are based on judgments regarding current economic conditions, interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the estimated fair value may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect the estimates. Fair value estimates, methods and assumptions are set forth below for our financial instruments:

•  Cash and cash equivalents — The carrying amount is a reasonable estimate of fair value due to the short maturity of these instruments.

•  Restricted cash — The carrying amount is a reasonable estimate of fair value due to the nature of this instrument.

•  Mortgage-related receivables, net — The fair value is determined from dealer quotes for securities backed by similar receivables.

•  Mortgage-backed securities pledged, trading — The fair value, which represents the carrying value, is determined from quoted market prices.

•  Receivables under reverse-repurchase agreements — The carrying amount approximates fair value due to the short-term nature of this instrument.

•  Loans — The fair value of loans (including loans held for sale) is estimated using a combination of methods, including discounting estimated future cash flows, using quoted market prices for similar instruments or using quoted market prices for securities backed by similar loans.

•  Investments — For those investments carried at fair value, we determined the fair value based on quoted market prices, when available (see Note 7, Investments). For investments when no market information is available, we estimate fair value using various valuation tools including financial statements, budgets, and business plans as well as qualitative factors.

•  Repurchase agreements, credit facilities and term debt — Due to the adjustable rate nature of the borrowings, fair value is estimated to be the carrying value.

•  Owner Trust term debt — The fair value of the Owner Trust senior term debt is determined from dealer quotes on the associated senior notes issued by the Owner Trusts. The carrying amount we have recorded for the Owner Trust subordinated term debt approximates its fair value due to the nature of the instrument.

•  Convertible debt — The fair value is determined from quoted market prices.

•  Subordinated debt — The fair value is determined based on estimated market conditions using a discounted cash flow model.

•  Loan commitments and letters of credit — The fair value is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the current creditworthiness of the counterparties.

•  Derivatives — The fair value of the interest rate swaps, interest rate swaptions, call options, interest rate caps, forward exchange contracts and Eurodollar futures is the estimated amount that we would receive or pay to terminate the contract at the reporting date as determined from quoted market prices.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The carrying value approximates fair value for all financial instruments discussed above as of December 31, 2007 and 2006, except as follows:

	December 31,
	2007				2006
	Carrying Value		Fair Value		Carrying Value		Fair Value
	($ in thousands)
Assets:
Mortgage-related receivables, net	$	2,041,917	$	1,997,264	$	2,295,922	$	2,287,324
Loans, net		9,581,718		9,346,674		7,547,339		7,505,741
Investments carried at cost		117,112		143,284		71,386		109,556
Liabilities:
Owner Trust term debt		1,987,774		1,982,076		2,270,872		2,275,078
Convertible debt		780,630		749,107		555,000		647,728
Subordinated debt		529,877		452,305		446,393		443,915
Loan commitments and letters of credit		—		72,158		—		61,273

Note 23.   Unaudited Quarterly Information

Unaudited quarterly information for each of the three months in the years ended December 31, 2007 and 2006, was as follows:

	Three Months Ended
	December 31,			September 30,			June 30,		March 31,
	2007			2007			2007		2007
	($ in thousands)
Interest income	$	333,122		$	344,043		$	311,184	$	289,554
Fee income		37,974			29,338			45,056		50,027
Total interest and fee income		371,096			373,381			356,240		339,581
Operating lease income		27,079			27,490			22,156		20,288
Total investment income		398,175			400,871			378,396		359,869
Interest expense		227,547			232,754			200,291		186,649
Net investment income		170,628			168,117			178,105		173,220
Provision for loan losses		33,952			12,353			17,410		14,926
Net investment income after provision for loan losses		136,676			155,764			160,695		158,294
Depreciation of direct real estate investments		8,928			8,924			7,390		6,762
Operating expenses		62,165			56,209			59,053		58,560
Other (expense) income		(52,151	)		(49,627	)		21,079		6,049
Noncontrolling interests expense		1,154			1,182			1,272		1,330
Net income before income taxes		12,278			39,822			114,059		97,691
Income taxes		27,312			11,557			29,693		19,001
Net (loss) income	$	(15,034	)	$	28,265		$	84,366	$	78,690
Net (loss) income per share:
Basic	$	(0.07	)	$	0.15		$	0.45	$	0.44
Diluted		(0.07	)		0.15			0.45		0.43

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Three Months Ended
	December 31,		September 30,		June 30,		March 31,
	2006		2006		2006		2006
	($ in thousands)
Interest income	$	284,932	$	280,066	$	256,037	$	195,498
Fee income		38,385		53,955		36,603		41,542
Total interest and fee income		323,317		334,021		292,640		237,040
Operating lease income		11,568		7,855		6,694		4,625
Total investment income		334,885		341,876		299,334		241,665
Interest expense		184,907		170,118		153,918		97,782
Net investment income		149,978		171,758		145,416		143,883
Provision for loan losses		30,529		24,849		11,471		14,713
Net investment income after provision for loan losses		119,449		146,909		133,945		129,170
Depreciation of direct real estate investments		4,118		3,087		2,628		1,635
Other operating expenses		54,393		50,144		51,063		48,984
Other income		14,950		10,738		11,296		344
Noncontrolling interests expense		1,361		1,259		1,230		861
Net income before income taxes and cumulative effect of accounting change		74,527		103,157		90,320		78,034
Income taxes		14,187		22,304		17,531		13,110
Net income before cumulative effect of accounting change		60,340		80,853		72,789		64,924
Cumulative effect of accounting change, net of taxes		—		—		—		370
Net income	$	60,340	$	80,853	$	72,789	$	65,294
Net income per share:
Basic	$	0.35	$	0.47	$	0.43	$	0.44
Diluted		0.34		0.47		0.43		0.42

Note 24.   Segment Data

SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments including a measure of segment profit or loss, certain specific revenue and expense items and segment assets. We operate as three reportable segments: 1) Commercial Finance, 2) Healthcare Net Lease, and 3) Residential Mortgage Investment. Our Commercial Finance segment comprises our commercial lending business activities; our Healthcare Net Lease segment comprises our direct real estate investment business activities; and our Residential Mortgage Investment segment comprises our residential mortgage investment activities.

Prior to 2006, we operated as a single business segment as substantially all of our activity was related to our commercial finance business. On January 1, 2006, we began presenting financial results through two reportable segments: 1) Commercial Lending & Investment and 2) Residential Mortgage Investment. Our Commercial Lending & Investment segment comprised our commercial lending and direct real estate investment business activities and our Residential Mortgage Investment segment comprised all of our activities related to our investments in residential mortgage loans and RMBS. Beginning in the fourth quarter of 2007, we are presenting

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

financial results through three reportable segments: 1) Commercial Finance, 2) Healthcare Net Lease, and 3) Residential Mortgage Investment. Changes have been made in the way management organizes financial information to make operating decisions, resulting in the activities previously reported in the Commercial Lending & Investment segment being disaggregated into the Commercial Finance segment and the Healthcare Net Lease segment as described above. We have reclassified all comparative prior period segment information to reflect our three reportable segments. The financial results of our operating segments as of and for the year ended December 31, 2007 and 2006, were as follows:

	Year Ended December 31, 2007
							Residential
	Commercial			Healthcare			Mortgage			Consolidated
	Finance			Net Lease			Investment			Total
	($ in thousands)
Total interest and fee income	$	1,090,585		$	1,362		$	348,351		$	1,440,298
Operating lease income		—			97,013			—			97,013
Interest expense		481,605			41,047	(1)		324,589			847,241
Provision for loan losses		77,576			—			1,065			78,641
Operating expenses(2)		220,550			41,441			6,000			267,991
Other income (expense)(3)		883			(369	)		(75,164	)		(74,650	)
Noncontrolling interests expense		(1,037	)		5,975			—			4,938
Net income (loss) before income taxes		312,774			9,543			(58,467	)		263,850
Income taxes		87,563			—			—			87,563
Net income (loss)	$	225,211		$	9,543		$	(58,467	)	$	176,287
Total assets as of December 31, 2007	$	10,609,306		$	1,098,287		$	6,332,756		$	18,040,349

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Year Ended December 31, 2006
							Residential
	Commercial			Healthcare			Mortgage		Consolidated
	Finance			Net Lease			Investment		Total
	($ in thousands)
Total interest and fee income	$	919,496		$	—		$	267,522	$	1,187,018
Operating lease income		—			30,742			—		30,742
Interest expense		344,988			11,176	(1)		250,561		606,725
Provision for loan losses		81,211			—			351		81,562
Operating expenses(2)		193,053			14,359			8,640		216,052
Other (expense) income(3)		37,297			(2,497	)		2,528		37,328
Noncontrolling interests expense		(806	)		5,517			—		4,711
Net income (loss) before income taxes and cumulative effect of accounting change		338,347			(2,807	)		10,498		346,038
Income taxes		67,132			—			—		67,132
Net income (loss) before cumulative effect of accounting change		271,215			(2,807	)		10,498		278,906
Cumulative effect of accounting change, net of taxes		370			—			—		370
Net income (loss)	$	271,585		$	(2,807	)	$	10,498	$	279,276
Total assets as of December 31, 2006	$	8,445,216		$	790,233		$	5,975,125	$	15,210,574

(1)	Interest expense in our Healthcare Net Lease segment includes interest on its secured credit facility and mortgage debt as well as an allocation of interest on its allocated intercompany debt.
(2)	Operating expenses of our Healthcare Net Lease segment include depreciation of direct real estate investments, professional fees, an allocation of overhead expenses (including compensation and benefits) and other direct expenses. Operating expenses of our Residential Mortgage Investment segment consist primarily of direct expenses related to compensation and benefits and professional fees paid to our investment manager and other direct expenses.
(3)	Other (expense) income for our Residential Mortgage Investment segment includes the net of interest income and expense accruals related to certain of our derivatives along with the changes in fair value of our Agency MBS and related derivatives.

The accounting policies of each of the individual operating segments are the same as those described in Note 2, Summary of Significant Accounting Policies. Currently, substantially all of our business activities occur within the United States of America and therefore, no additional geographic disclosures are necessary.

141

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.   CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2007.

Reference is made to the Management Report on Internal Controls Over Financial Reporting on page 76.

ITEM 9B.   OTHER INFORMATION

None.

142

PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

A listing of our executive directors and their biographies are included under Item 1 in the section entitled “Executive Officers” on page 15 of this Form 10-K.

The members of our Board of Directors, their principal occupations and the Board committees on which they serve are as follows:

William G. Byrnes⁽¹⁾

Private Investor

John K. Delaney

Chief Executive Officer and Chairman of the Board

Frederick W. Eubank, II⁽²⁾⁽⁴⁾

Managing Partner, Wachovia Capital Partners 2000, LLC

Jason M. Fish⁽⁴⁾

Consultant and Vice Chairman of the Board

Andrew B. Fremder⁽³⁾⁽⁴⁾

Member and Consultant, Farallon Capital Management, L.L.C and Farallon Partners, L.L.C.

Sara L. Grootwassink⁽¹⁾⁽³⁾

Chief Financial Officer, Washington Real Estate Investment Trust

C. William Hosler⁽²⁾

Chief Financial Officer, Marcus & Millichap Holding Companies

Timothy M. Hurd⁽²⁾

Managing Director, Madison Dearborn Partners, LLC

Lawrence C. Nussdorf⁽¹⁾

President and Chief Operating Officer, Clark Enterprises, Inc.

Thomas F. Steyer⁽²⁾

Senior Managing Member and Acting Chief Investment Officer,

Farallon Capital Management, L.L.C and Farallon Partners, L.L.C.

Biographies for our non-management directors and additional information pertaining to directors and executive officers and our corporate governance are incorporated herein by reference to the registrant’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 1, 2008.

Our Chairman and Chief Executive Officer and Chief Financial Officer have delivered, and we have filed with this Form 10-K, all certifications required by rules of the SEC and relating to, among other things, the Company’s financial statements, internal controls and the public disclosures contained in this Form 10-K. In addition, on May 25, 2007, our Chairman and Chief Executive Officer certified to the NYSE that he was not aware of any violations by the Company of the NYSE’s corporate governance listing standards and, as required by the rules of the NYSE, expects to provide a similar certification following the 2008 Annual Meeting.

(1) Audit Committee

(2) Compensation Committee

(3) Nominating and Corporate Governance Committee

(4) Credit Policy Committee

143

ITEM 11.   EXECUTIVE COMPENSATION

Information pertaining to executive compensation is incorporated herein by reference to the registrant’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 1, 2008.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information pertaining to security ownership of management and certain beneficial owners of the registrant’s Common Stock is incorporated herein by reference to the registrant’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 1, 2008.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information pertaining to certain relationships and related transactions and director independence is incorporated herein by reference to the registrant’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 1, 2008.

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

Information pertaining to principal accounting fees and services is incorporated herein by reference to the registrant’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 1, 2008.

144

PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

15(a)(1) Financial Statements

The consolidated financial statements of the registrant as listed in the “Index to Consolidated Financial Statements” included in Item 8, Consolidated Financial Statements and Supplementary Data, on page 78 of this report, are filed as part of this report.

15(a)(2) Financial Statement Schedules

Consolidated financial statement schedules have been omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedules, or because the required information is provided in the consolidated financial statements or notes thereto.

15(a)(3) Exhibits

The exhibits listed in the accompanying Index to Exhibits are filed as part of this report.

145

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CAPITALSOURCE INC.

Date February 28, 2008	/s/  JOHN K. DELANEYJohn K. DelaneyChairman of the Board and Chief Executive Officer (Principal Executive Officer)
Date February 28, 2008	/s/  THOMAS A. FINKThomas A. FinkChief Financial Officer (Principal Financial Officer)
Date: February 28, 2008	/s/  DAVID C. BJARNASONDavid C. BjarnasonChief Accounting Officer (Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 28, 2008.

/s/  WILLIAM G. BYRNES	/s/  C. WILLIAM HOSLER
William G. Byrnes, Director	C. William Hosler, Director
/s/  FREDERICK W. EUBANK	/s/  TIMOTHY M. HURD
Frederick W. Eubank, Director	Timothy M. Hurd, Director
/s/  JASON M. FISH	/s/  LAWRENCE C. NUSSDORF
Jason M. Fish, Vice Chairman of the Board	Lawrence C. Nussdorf, Director
/s/  ANDREW M. FREMDER
Andrew M. Fremder, Director	Thomas F. Steyer, Director
/s/  SARA L. GROOTWASSINK
Sara L. Grootwassink, Director

146

INDEX TO EXHIBITS

Exhibit
No		Description
	2.1	Agreement and Plan of Merger, dated May 17, 2007, by and among CapitalSource Inc., CapitalSource TRS Inc. and TierOne Corporation (the schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K) (incorporated by reference to exhibit 2.1 to the Form 8-K filed by CapitalSource on May 23, 2007).
	3.1	Second Amended and Restated Certificate of Incorporation (incorporated by reference to exhibit 3.1 to the Form 8-K filed by CapitalSource on May 3, 2006).
	3.2	Amended and Restated Bylaws (composite version; reflects all amendments through October 30, 2007) (incorporated by reference to exhibit 3.2 to the Form 10-Q filed by CapitalSource on November 9, 2007).
	4.1	Form of Certificate of Common Stock of CapitalSource Inc. (incorporated by reference to exhibit 4.1 to the Registration Statement on Form S-8A 12B/A filed by CapitalSource on May 22, 2006).
	4.2	Indenture dated as of July 30, 2007, by and between CapitalSource Inc., as Obligator, and Wells Fargo Bank, N.A., as Trustee (incorporated by reference to exhibit 4.20 to the Form 10-Q filed by CapitalSource on November 9, 2007).
	4.2.1	First Supplemental Indenture dated as of July 30, 2007, by and between CapitalSource Inc., as Issuer, CapitalSource Finance LLC, as Guarantor, and Wells Fargo Bank, N.A., as Trustee (incorporated by reference to exhibit 4.20.1 to the Form 10-Q filed by CapitalSource on November 9, 2007).
	4.3	Form of 7.250% Senior Subordinated Convertible Note due 2037.†
	4.4	Indenture dated as of September 28, 2006, by and among CapitalSource Commercial Loan Trust 2006-2, as the Issuer, and Wells Fargo Bank, National Association, as the Indenture Trustee (incorporated by reference to exhibit 4.16 to the Form 8-K filed by CapitalSource on October 4, 2006).
	4.5	Indenture dated as of December 20, 2006, by and among CapitalSource Real Estate Loan Trust 2006-A, as the Issuer, CapitalSource Finance LLC, as Advancing Agent and Wells Fargo Bank, N.A., as Trustee, Paying Agent, Calculation Agent, Transfer Agent, Custodial Securities Intermediary, Backup Advancing Agent and Notes Registrar (incorporated by reference to exhibit 4.17 to the Form 8-K filed by CapitalSource on December 27, 2006).
	4.6	Indenture dated as of April 19, 2007, by and between CapitalSource Funding VII Trust, as the Issuer, and Wells Fargo Bank, National Association, as the Indenture Trustee (incorporated by reference to exhibit 4.19 to the Form 8-K filed by CapitalSource on April 25, 2007).
	10.1	Office Lease Agreement, dated as of December 8, 2000, by and between Chase Tower Associates, L.L.C. and CapitalSource Finance LLC, as amended (incorporated by reference to exhibit 10.1 to the Registration Statement on Form S-1/A (Reg. No. 333-106076) filed by CapitalSource on June 12, 2003).
	10.1.1	Third Amendment to Office Lease Agreement, dated as of August 1, 2003, by and between Chase Tower Associates, L.L.C. and CapitalSource Finance LLC (incorporated by reference to exhibit 10.1.1 to the Registration Statement on Form S-1 (Reg. No. 333-112002) filed by CapitalSource on February 2, 2004).
	10.2	Amended and Restated Registration Rights Agreement, dated August 30, 2002, among CapitalSource Holdings LLC and the holders parties thereto (incorporated by reference to exhibit 10.11 to the Registration Statement on Form S-1 (Reg. No. 333-106076) filed by CapitalSource on June 12, 2003).
	10.3	Amended Call Option Transaction Confirmation, dated as of April 4, 2007, between CapitalSource Inc. and JPMorgan Chase Bank (incorporated by reference to exhibit 10.23.1 to the Form 10-Q filed by CapitalSource on May 10, 2007).
	10.4	Amended Warrant Transaction Confirmation, dated as of April 4, 2007, between CapitalSource Inc. and JPMorgan Chase Bank (incorporated by reference to exhibit 10.23.2 to the Form 10-Q filed by CapitalSource on May 10, 2007).
	10.5	Call Option Transaction Confirmation, dated as of April 4, 2007, between CapitalSource Inc. and JPMorgan Chase Bank (incorporated by reference to exhibit 10.23.3 to the Form 10-Q filed by CapitalSource on May 10, 2007).

147

Exhibit
No		Description
	10.6	Fourth Amended and Restated Intercreditor and Lockbox Administration Agreement, dated as of June 30, 2005, among Bank of America, N.A., as Lockbox Bank, CapitalSource Finance LLC, as Originator, Original Servicer and Lockbox Servicer, CapitalSource Funding Inc., as Owner, and the Financing Agents (incorporated by reference to exhibit 10.39 to the Form 10-Q filed by CapitalSource on August 5, 2005).
	10.7	Fifth Amended and Restated Three Party Agreement Relating to Lockbox Services and Control, dated as of June 30, 2005, among Bank of America, N.A., as the Bank, CapitalSource Finance LLC, as Originator, Original Servicer and Lockbox Servicer, CapitalSource Funding Inc., as the Company, and the Financing Agents (incorporated by reference to exhibit 10.40 to the Form 10-Q filed by CapitalSource on August 5, 2005).
	10.8	Credit Agreement, dated as of March 14, 2006, among CapitalSource Inc., as Borrower, the Guarantors and Lenders as listed in the Credit Agreement, Wachovia Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender, Bank of America, N.A., as Issuing Lender, Wachovia Capital Markets, LLC, as Sole Bookrunner and Lead Arranger, and Bank of Montreal, Barclays Bank PLC and SunTrust Bank, as Co-Documentation Agents (composite version; reflects all amendments through December 19, 2007).†
	10.9	Amended and Restated Sale and Servicing Agreement, dated as of April 28, 2006, among CSE QRS Funding I LLC, as Seller, CSE Mortgage LLC, as Originator and Servicer, Variable Funding Capital Company LLC, as Conduit Purchaser, Wachovia Bank, National Association, as Swingline Purchaser, Wachovia Capital Markets, LLC, as Administrative Agent and VFCC Agent, and Wells Fargo Bank, National Association, as Backup Servicer and Collateral Custodian (composite version; reflects all amendments through May 1, 2007).†
	10.10	Sale and Servicing Agreement, dated as of September 28, 2006, by and among CapitalSource Commercial Loan Trust 2006-2, as the Issuer, CapitalSource Commercial Loan LLC, 2006-2, as the Trust Depositor, CapitalSource Finance LLC, as the Originator and as the Servicer, and Wells Fargo Bank, National Association, as the Indenture Trustee and as the Backup Servicer (incorporated by reference to exhibit 10.66 to the Form 8-K filed by CapitalSource on October 4, 2006).
	10.11	Servicing Agreement, dated as of December 20, 2006, by and among CapitalSource Real Estate Loan Trust 2006-A, as the Issuer, Wells Fargo Bank, N.A, as Trustee and as the Backup Servicer and CapitalSource Finance LLC, as Collateral Manager, Servicer and Special Servicer (incorporated by reference to exhibit 10.67 to the Form 8-K filed by CapitalSource on December 27, 2006).
	10.12	Collateral Management Agreement dated as of December 20, 2006, by and among CapitalSource Real Estate Loan Trust 2006-A, as the Issuer, and CapitalSource Finance LLC, as Collateral Manager (incorporated by reference exhibit 10.68 to the Form 8-K filed by CapitalSource on December 27, 2006).
	10.13	Sale and Servicing Agreement, dated as of April 19, 2007, by and among CapitalSource Funding VII Trust, as Issuer, as the Issuer, and CS Funding VII Depositor LLC, as Depositor, and CapitalSource Finance LLC, as Loan Originator and Servicer, and Wells Fargo Bank, National Association, as Indenture Trustee, Collateral Custodian and Backup Servicer (incorporated by reference to exhibit 10.73 to the Form 8-K filed by CapitalSource on April 25, 2007).
	10.13.1	First Amendment to the Sale and Servicing Agreement, dated as of August 2, 2007, by and among CapitalSource Funding VII Trust, as Issuer, as the Issuer, and CS Funding VII Depositor LLC, as Depositor, and CapitalSource Finance LLC, as Loan Originator and Servicer, and Wells Fargo Bank, National Association, as Indenture Trustee, Collateral Custodian and Backup Servicer (incorporated by reference to exhibit 10.75 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.13.2	Second Amendment to the Sale and Servicing Agreement, dated as of October 15, 2007, by and among CapitalSource Funding VII Trust, as Issuer, as the Issuer, and CS Funding VII Depositor LLC, as Depositor, and CapitalSource Finance LLC, as Loan Originator and Servicer, and Wells Fargo Bank, National Association, as Indenture Trustee, Collateral Custodian and Backup Servicer.†
	10.14	Amended and Restated Sale and Servicing Agreement, as of October 30, 2007, by and among CapitalSource Real Estate Loan LLC 2007-A, as the Seller, CSE Mortgage LLC, as the Originator and as the Servicer, Citicorp North America, Inc., as the Administrative Agent, and Wells Fargo Bank, National Association, as the Backup Servicer and as the Collateral Custodian.†

148

Exhibit
No			Description
	10.15		Sale and Contribution Agreement, dated as of September 10, 2007, by and between CapitalSource Real Estate Loan LLC 2007-A, as the Buyer and CSE Mortgage LLC, as the Seller (incorporated by reference to exhibit 10.83 to the Form 8-K filed by CapitalSource on September 14, 2007).
	10.16	*	Third Amended and Restated Equity Incentive Plan (composite version; reflects all amendments through March 8, 2007) (incorporated by reference to exhibit 10.12 to the Form 8-K filed by CapitalSource on March 13, 2007).
	10.17.1	*	Form of Non-Qualified Option Agreement (2005) (incorporated by reference to exhibit 10.1 to the Form 8-K filed by CapitalSource on January 31, 2005).
	10.17.2	*	Form of Non-Qualified Option Agreement (2007) (incorporated by reference to exhibit 10.81 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.17.3	*	Form of Non-Qualified Option Agreement (2008).†
	10.18.1	*	Form of Non-Qualified Option Agreement for Directors (2005) (incorporated by reference to exhibit 10.2 to the Form 8-K filed by CapitalSource on January 31, 2005).
	10.18.2	*	Form of Non-Qualified Option Agreement for Directors (2007) (incorporated by reference to exhibit 10.78 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.18.3	*	Form of Non-Qualified Option Agreement for Directors (2008).†
	10.19.1	*	Form of Restricted Stock Agreement (2005) (incorporated by reference to exhibit 10.3 to the Form 8-K filed by CapitalSource on January 31, 2005).
	10.19.2	*	Form of Restricted Stock Agreement (2007) (incorporated by reference to exhibit 10.79 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.19.3	*	Form of Restricted Stock Agreement (2008).†
	10.20.1	*	Form of Restricted Stock Agreement for Directors (2007) (incorporated by reference to exhibit 10.76 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.20.2	*	Form of Restricted Stock Agreement for Directors (2008).†
	10.21.1	*	Form of Restricted Unit Agreement (2007) (incorporated by reference to exhibit 10.70 to the Form 8-K filed by CapitalSource on March 13, 2007).
	10.21.2	*	Form of Restricted Stock Unit Agreement (2007) (incorporated by reference to exhibit 10.80 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.21.3	*	Form of Restricted Stock Unit Agreement (2008).†
	10.22.1	*	Form of Restricted Stock Unit Agreement for Directors (2007) (incorporated by reference to exhibit 10.77 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.22.2	*	Form of Restricted Stock Unit Agreement for Directors (2008).†
	10.23	*	CapitalSource Inc. Amended and Restated Deferred Compensation Plan (incorporated by reference to exhibit 10.21 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.24	*	Summary of Non-employee Director Compensation.†
	10.25	*	Form of Indemnification Agreement between the registrant and each of its non-employee directors (incorporated by reference to exhibit 10.4 to the Form 10-Q filed by CapitalSource on November 7, 2003).
	10.26	*	Form of Indemnification Agreement between the registrant and each of its employee directors (incorporated by reference to exhibit 10.5 to the Form 10-Q filed by CapitalSource on November 7, 2003).
	10.27	*	Form of Indemnification Agreement between the registrant and each of its executive officers (incorporated by reference to exhibit 10.6 to the Form 10-Q filed by CapitalSource on November 7, 2003).
	10.28	*	Employment Agreement, dated as of June 6, 2006, between CapitalSource Inc. and John K. Delaney (incorporated by reference to exhibit 10.1 to the Form 8-K filed by CapitalSource on June 8, 2006).
	10.28.1	*	Non-Qualified Option Agreement, dated as of June 6, 2006, between CapitalSource Inc. and John K. Delaney (included as Exhibit A of the Employment Agreement incorporated by reference to exhibit 10.3 to the Form 8-K filed by CapitalSource on June 8, 2006).

149

Exhibit
No			Description
	10.28.2	*	Non-Qualified Option Agreement, dated as of June 6, 2006, between CapitalSource Inc. and John K. Delaney (included as Exhibit B of the Employment Agreement incorporated by reference to exhibit 10.4 to the Form 8-K filed by CapitalSource on June 8, 2006).
	10.29	*	Employment Agreement, dated as of April 4, 2005, between CapitalSource Inc. and Dean C. Graham (incorporated by reference to exhibit 10.36 to the Form 10-Q filed by CapitalSource on August 5, 2005).
	10.29.1	*	Amendment to Employment Agreement, dated as of November 22, 2005, between CapitalSource Inc. and Dean C. Graham (incorporated by reference to exhibit 10.36.1 to the Form 10-K filed by CapitalSource on March 9, 2006).
	10.29.2	*	Amendment No. 2 to Employment Agreement, dated as of February 1, 2007, between CapitalSource Inc. and Dean C. Graham (incorporated by reference exhibit 10.36.2 to the Form 10-K filed by CapitalSource on March 1, 2007).
	10.30	*	Employment Agreement, dated as of April 22, 2005, between CapitalSource Inc. and Michael C. Szwajkowski (incorporated by reference to exhibit 10.38 to the Form 10-Q filed by CapitalSource on August 5, 2005).
	10.30.1	*	Amendment to Employment Agreement, dated as of November 22, 2005, between CapitalSource Inc. and Michael Szwajkowski (incorporated by reference to exhibit 10.38.1 to the Form 10-K filed by CapitalSource on March 9, 2006).
	10.31	*	Employment Agreement, dated as of November 22, 2005, between CapitalSource Inc. and Thomas A. Fink (incorporated by reference to exhibit 10.44 to the Form 10-K filed by CapitalSource on March 9, 2006).
	10.32	*	Non-Qualified Option Agreement, dated as of June 6, 2006, between CapitalSource Inc. and Jason M. Fish (incorporated by reference to exhibit 10.5 to the Form 8-K filed by CapitalSource on June 8, 2006).
	10.33	*	Consulting Agreement, dated as of January 2, 2007, between CapitalSource Inc. and Jason M. Fish (incorporated by reference to exhibit 10.69 to the Form 10-K filed by CapitalSource on March 1, 2007).
	10.34	*	Employment Agreement, dated as of February 1, 2007, between CapitalSource Inc. and Steven A. Museles.†
	12.1		Ratio of Earnings to Fixed Charges.†
	21.1		List of Subsidiaries.†
	23.1		Consent of Ernst & Young LLP.†
	31.1		Rule 13a — 14(a) Certification of Chairman of the Board and Chief Executive Officer.†
	31.2		Rule 13a — 14(a) Certification of Chief Financial Officer.†
	32		Section 1350 Certifications.†

† Filed herewith.

* Management contract or compensatory plan or arrangement.

The registrant agrees to furnish to the Commission, upon request, a copy of each agreement with respect to long-term debt not filed herewith in reliance upon the exemption from filing applicable to any series of debt which does not exceed 10% of the total consolidated assets of the registrant.

150

EX-4.3

Exhibit 4.3

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) (THE “DEPOSITARY,” WHICH TERM INCLUDES ANY SUCCESSOR DEPOSITARY FOR THE CERTIFICATES) TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT HEREIN IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

THE NOTES ARE BEING ISSUED WITH “ORIGINAL ISSUE DISCOUNT” FOR PURPOSES OF SECTIONS 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. A HOLDER OF NOTES MAY OBTAIN THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE AND YIELD TO MATURITY ON THE NOTES, DETERMINED BY CAPITALSOURCE INC., BY REGISTERED OR CERTIFIED MAIL IN A POST OFFICE LETTER BOX OR SENT BY TELECOPIER TRANSMISSION ADDRESSED AS FOLLOWS: TO CAPITALSOURCE INC., 4445 WILLARD AVENUE, 12TH FLOOR, CHEVY CHASE, MARYLAND 20815, TELECOPIER NO.: 301-841-2307, ATTENTION: CHIEF FINANCIAL OFFICER.

1

Exhibit 4.3

CAPITALSOURCE INC.

7.250% SENIOR SUBORDINATED CONVERTIBLE NOTE DUE 2037

CUSIP:	14055X AG7
ISIN:	US14055XAG79

No. 1 $250,000,000

CapitalSource Inc., a corporation duly organized and validly existing under the laws of the State of Delaware (herein called the “Company,” which term includes any successor corporation under the Indenture referred to on the reverse hereof), for value received hereby promises to pay to CEDE & CO. or its registered assigns, the principal sum set forth on Schedule I hereto on July 15, 2037 at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, dated as of July 30, 2007 (the “Original Indenture”) and the First Supplemental Indenture thereto, dated as of July 30, 2007 (the “First Supplemental Indenture” and together with the Original Indenture, the “Indenture”), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semiannually on January 15 and July 15 of each year, commencing January 15, 2008, on said principal sum at said office or agency, in like coin or currency, at the rate per annum of 7.250%. On January 15, 2008, the Company promises to pay to the Person entitled thereto as it appears in the Note Register on the Regular Record Date, which shall be January 1, 2008 (whether or not a Business Day), as provided in the Indenture, interest accruing at 7.250% per annum from, and including, the date of this 7.250% Senior Subordinated Convertible Note Due 2037 (“Note”). Except as otherwise provided in the Indenture, the interest payable on the Note pursuant to the Indenture on any January 15 or July 15 will be paid to the Person entitled thereto as it appears in the Note Register on the Regular Record Date, which shall be the January 1 or July 1 (whether or not a Business Day) next preceding such January 15 or July 15, as provided in the Indenture; provided, that any such interest not punctually paid or duly provided for shall be payable as provided in the Indenture. The Company shall pay interest (i) on any Notes in certificated form by check mailed to the address of the Person entitled thereto as it appears in the Note Register (or, upon written notice, by wire transfer in immediately available funds, if such Person is entitled to interest on Notes with an aggregate principal amount in excess of $2,000,000) or (ii) on any Global Note by wire transfer of immediately available funds to the account of the Depositary or its nominee.

Reference is made to the further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions giving the holder of this Note the right to convert this Note into Common Stock of the Company on the terms and subject to the limitations referred to on the reverse hereof and as more fully specified in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place.

This Note shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be construed in accordance with and governed by the laws of the State of New York (including Section 5-1401 of the New York General Obligations Law or any successor to such statute).

This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been manually signed by the Trustee or a duly authorized authenticating agent under the Indenture.

GUARANTEE

For value received, the undersigned hereby unconditionally guarantees to the holder of this Note the payment of principal of, and Interest on this Note in the amounts and at the time when due and Interest on the overdue principal and Interest, if any, of this Note, if lawful, and the payment of all other obligations of the Company under the Indenture or the Notes, to the holder of this Note and the Trustee, all in accordance with and subject to the terms and limitations of this Note and the Indenture. This Guarantee will not become effective until the Trustee duly executes the certificate of authentication on this Note.

CAPITALSOURCE FINANCE LLC
By:
	Name:
	Title:

2

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed.

CAPITALSOURCE INC.
By:
	Name:
	Title:

July 30, 2007

TRUSTEE’S CERTIFICATE OF AUTHENTICATION

THIS IS ONE OF THE NOTES DESCRIBED IN THE WITHIN-NAMED INDENTURE.

WELLS FARGO BANK, N.A., as Trustee
By:
	Name:
	Title:

3

[REVERSE OF NOTE]

CAPITALSOURCE INC.

7.250% SENIOR SUBORDINATED CONVERTIBLE NOTE DUE 2037

This Note is one of a duly authorized issue of Notes of the Company, designated as its Senior Subordinated Convertible Notes due 2037 (herein called the “Notes”), initially limited in aggregate principal amount to $287,500,000, issued and to be issued under and pursuant to an Indenture, dated as of July 30, 2007 (the “Original Indenture”) and the First Supplemental Indenture thereto, dated as of July 30, 2007 (the “First Supplemental Indenture” and, together with the Original Indenture, the “Indenture”), among the Company and CapitalSource Finance LLC, as guarantor (herein called the “Guarantor”), and Wells Fargo Bank, N.A., as trustee (herein called the “Trustee”), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company, the Guarantor and the holders of the Notes.

In case an Event of Default shall have occurred and be continuing, the principal of and accrued Interest on all Notes may be declared by either the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding, and upon said declaration shall become due and payable in the manner, with the effect and subject to the conditions provided in the Indenture.

The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of at least a majority in aggregate principal amount of the Notes at the time outstanding, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the holders of the Notes; provided, that no such supplemental indenture shall (A) extend the Stated Maturity of any Note, or (B) reduce the rate or extend the time for payment of Interest thereon, or (C) reduce the principal amount thereof, or (D) reduce any amount payable on redemption or repurchase thereof, or (E) impair the right of any holder to institute suit for the payment thereof, or (F) make the principal thereof or Interest thereon payable in any coin or currency other than that provided in the Notes, or (G) affect the obligation of the Company to redeem any Note on a Redemption Date in a manner adverse to the holders of Notes, or (H) affect the obligation of the Company to repurchase any Note upon the happening of a Fundamental Change in a manner adverse to the holders of Notes, or (I) affect the obligation of the Company to repurchase any Note on a Company Repurchase Date in a manner adverse to the holders of Notes, or (J) impair the right to convert the Notes into Common Stock subject to the terms set forth in the First Supplemental Indenture, including Section 9.07 thereof, or (K) reduce the number of shares of Common Stock, the amount of cash or the amount of other property receivable upon conversion, in each case, without the consent of the holder of each Note so affected, or (L) modify any of the provisions of Sections 512 and 1013 of the Original Indenture or Sections 5.03 and 6.03 of the First Supplemental Indenture, except to increase any such percentage or to provide that certain other provisions of this First Supplemental Indenture cannot be modified or waived without the consent of the holder of each Note so affected, or (M) reduce the quorum or voting requirements set forth in Article XV of the Original Indenture or (N) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all Notes then outstanding. Subject to the provisions of the Indenture, the holders of a majority in aggregate principal amount of the Notes at the time outstanding may on behalf of the holders of all of the Notes waive any past default or Event of Default under the Indenture and its consequences except (A) a default in the payment of Interest on or the principal of any of the Notes, (B) a failure by the Company to convert any Notes into Common Stock, cash or a combination of cash and Common Stock of the Company, (C) a default in the payment of the Redemption Price pursuant to Article III of the First Supplemental

4

Indenture, (D) a default in the payment of the Company Repurchase Price or Fundamental Change Repurchase Price pursuant to Article III of the First Supplemental Indenture, or (E) a default in respect of a covenant or provision of the Indenture which under Article VI of the First Supplemental Indenture cannot be modified or amended without the consent of the holders of each or all Notes then outstanding or affected thereby. Any such consent or waiver by the holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Note and any Notes which may be issued in exchange or substitution hereof, irrespective of whether or not any notation thereof is made upon this Note or such other Notes.

No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and Interest on this Note at the place, at the respective times, at the rate and in the coin or currency herein prescribed.

Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months.

The Notes are issuable in fully registered form, without interest coupons, in denominations of $1,000 principal amount and any multiple of $1,000. At the office or agency of the Company referred to on the face hereof, and in the manner and subject to the limitations provided in the Indenture, without payment of any service charge but with payment of a sum sufficient to cover any tax, assessment or other governmental charge that may be imposed in connection with any registration or exchange of Notes, Notes may be exchanged for a like aggregate principal amount of Notes of any other authorized denominations.

At any time on or after July 20, 2012 and prior to maturity, the Notes may be redeemed at the option of the Company, in whole or in part, in cash, or a combination of cash and shares of Common Stock, upon mailing a notice of such redemption not less than 30 days but not more than 60 days before the Redemption Date to the holders of Notes at their last registered addresses, all as provided in the Indenture, at a Redemption Price equal to 100% of the principal amount of Notes being redeemed plus accrued and unpaid Interest to, but excluding, the Redemption Date; provided, that if the applicable Redemption Date is an Interest Payment Date, the Interest payable on such Interest Payment Date shall be paid on such Interest Payment Date to the holders of record of such Notes on the applicable Record Date instead of the holders surrendering such Notes for redemption on such date.

In no event will any Note be redeemable at the option of the Company before July 20, 2012.

The Company may not give notice of any redemption of the Notes if a default in the payment of Interest on the Notes has occurred and is continuing.

The Notes are not subject to redemption through the operation of any sinking fund.

If a Fundamental Change occurs at any time prior to maturity of the Notes, each holder shall have the right, at such holder’s option, to require the Company to repurchase this Note for cash, or subject to certain conditions, Common Stock, on a Fundamental Change Repurchase Date, specified by the Company, which shall be no later than 30 Business Days after notice thereof, at a Fundamental Change Repurchase Price equal to at least 100% of the principal amount thereof, together with accrued Interest to, but excluding, the Fundamental Change Repurchase Date. The Company shall mail to all holders of record of the Notes a notice of the occurrence of a Fundamental Change and of the repurchase right arising as a result thereof on or before the 30th day after the occurrence of such Fundamental Change. For a Note to be so repurchased at the option of the holder, the Company must receive at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, such Note with the form entitled “Form of Fundamental Change Repurchase Notice” on the reverse thereof

5

duly completed, together with such Note, duly endorsed for transfer at any time prior to the close of business on the Business Day immediately preceding the Fundamental Change Repurchase Date.

Subject to the terms and conditions of the Indenture, the Company shall become obligated to repurchase, at the option of the holder, all or any portion of the Notes held by such holder on July 15, 2012, July 15, 2017, July 15, 2022, July 15, 2027, and July 15, 2032 in integral multiples of $1,000 at a Company Repurchase Price of 100% of the principal amount, plus any accrued and unpaid Interest on such Note to but excluding the Company Repurchase Date. To exercise such right, a holder shall deliver to the Company such Note with the form entitled “Form of Company Repurchase Election” on the reverse thereof duly completed, together with the Note, duly endorsed for transfer, at any time from the opening of business on the 20th Business Day prior to such Company Repurchase Date until the close of business on the Business Day immediately preceding the Company Repurchase Date, and shall deliver, or arrange for book-entry transfer of, the Notes to the Trustee (or other Paying Agent appointed by the Company) as set forth in the Indenture.

The Company Repurchase Price to be paid on any of July 15, 2012, July 15, 2017, July 15, 2022, July 15, 2027, and July 15, 2032 shall be paid in cash and the Fundamental Change Repurchase Price to be paid on any Fundamental Change Repurchase Date shall be paid in cash or Common Stock, subject to the terms and conditions of the Indenture.

Holders have the right to withdraw any Repurchase Election by delivering to the Trustee (or other Paying Agent appointed by the Company) a written notice of withdrawal up to the close of business on the Business Day immediately preceding the Repurchase Date, all as provided in the Indenture.

If money or Common Stock, if allowed under the Indenture, sufficient to pay the Repurchase Price with respect to all Notes or portions thereof to be repurchased as of any Repurchase Date is deposited with the Trustee (or other Paying Agent appointed by the Company), then on and after such Repurchase Date, such Notes will cease to be outstanding, Interest will cease to accrue on such Notes (or portions thereof), and the holder thereof shall have no other rights as such other than the right to receive the Repurchase Price upon surrender of such Note.

Subject to the occurrence of certain events and in compliance with the provisions of the Indenture, prior to the Stated Maturity of the Notes, the holder hereof has the right, at its option, to convert each $1,000 principal amount of the Notes into 36.9079 shares of the Common Stock (a Conversion Price of approximately $27.09 per share), as such shares shall be constituted at the date of conversion and subject to adjustment from time to time as provided in the Indenture, upon surrender of this Note with the form entitled “Form of Notice of Conversion” on the reverse hereof duly completed, to the Company at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, or at the option of such holder, the Corporate Trust Office, and, unless the shares issuable on conversion are to be issued in the same name as this Note, duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or by his duly authorized attorney. The Company will notify the holder thereof of any event triggering the right to convert the Notes as specified above in accordance with the Indenture.

If the Company (i) is a party to a consolidation, merger, statutory share exchange or combination, (ii) reclassifies the Common Stock, or (iii) sells or conveys its properties and assets substantially as an entirety to any Person, the right to convert a Note into shares of Common Stock will be changed into a right to convert it into the kind or amount of cash, securities or other property receivable upon such event, in each case in accordance with the Indenture.

6

No adjustment in respect of Interest on any Note converted or dividends on any shares issued upon conversion of such Note will be made upon any conversion except as set forth in the next sentence. If this Note (or portion hereof) is surrendered for conversion during the period from the close of business on any Record Date for the payment of Interest to the opening of business on the immediately following Interest Payment Date, this Note (or portion hereof being converted) must be accompanied by payment, in immediately available funds or other funds acceptable to the Company, of an amount equal to the Interest otherwise payable on such Interest Payment Date on the principal amount being converted; provided, that no such payment shall be required (1) if the Company has specified a Redemption Date that is after a Record Date and prior to the next Interest Payment Date, (2) if the Company has specified a Repurchase Date following a Fundamental Change that is after a Record Date and on or prior to the next Interest Payment Date or (3) to the extent of any Defaulted Interest, if any Defaulted Interest exists at the time of conversion with respect to such Note.

No fractional shares of Common Stock will be issued upon any conversion, but an adjustment and payment in cash will be made, as provided in the Indenture, in respect of any fraction of a share of Common Stock which would otherwise be issuable upon the surrender of any Note or Notes for conversion.

A Note in respect of which a holder is exercising its right to require repurchase upon a Fundamental Change or repurchase on a Repurchase Date may be converted only if such holder withdraws its election to exercise such right in accordance with the terms of the Indenture.

Upon due presentment for registration of transfer of this Note at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, a Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange thereof, subject to the limitations provided in the Indenture, without charge except for any tax, assessment or other governmental charge imposed in connection therewith.

The Company, the Guarantor, the Trustee, any authenticating agent, any Paying Agent, any Conversion Agent and any Note Registrar may deem and treat the registered holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon made by anyone other than the Company or any Note Registrar) for the purpose of receiving payment on or account of the principal hereof and the Interest hereon, for the conversion hereof and for all other purposes, and neither the Company nor the Trustee nor any other authenticating agent nor any Paying Agent nor other Conversion Agent nor any Note Registrar shall be affected by any notice to the contrary. All payments made to or upon the order of such registered holder shall, to the extent of the sum or sums paid, satisfy and discharge liability for monies payable on this Note.

No recourse for the payment of the principal of or Interest on this Note, or for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any obligation, covenant or agreement of the Company or the Guarantor in the Indenture or any supplemental indenture or in any Note, or because of the creation of any Indebtedness represented thereby, or for any of the obligations of the Guarantor under the Guarantee shall be had against any incorporator, shareholder, member, employee, agent, officer or director or subsidiary, as such, past, present or future, of the Company, the Guarantor, or of any successor corporation or limited liability company, either directly or through the Company, or the Guarantor, or any successor corporation or limited liability company, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released.

Terms used in this Note and defined in the Indenture are used herein as therein defined.

7

ABBREVIATIONS

The following abbreviations, when used in the inscription of the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations.

TEN COM —	as tenants in common	UNIF GIFT MIN ACT—                      Custodian
TEN ENT —	as tenant by the entireties	(Cust) (Minor)
JT TEN —	as joint tenants with right of	under Uniform Gifts to Minors Act
	survivorship and not as tenants in common

(State)                                                                

Additional abbreviations may also be used though not in the above list.

8

FORM OF
NOTICE OF CONVERSION

TO:   CAPITALSOURCE INC.

          WELLS FARGO BANK, N.A.

The undersigned registered owner of this Note hereby irrevocably exercises the option to convert this Note, or the portion thereof (which is $1,000 or a multiple thereof) below designated, into shares of Common Stock of CapitalSource Inc. and/or cash in accordance with the terms of the Indenture referred to in this Note, and directs that the shares issuable and deliverable and/or cash payable upon such conversion, together with any check in payment for fractional shares and any Notes representing any unconverted principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. Capitalized terms used herein but not defined shall have the meanings ascribed to such terms in the Indenture. If shares, any portion of this Note not converted or a check for cash payable are to be issued in the name of a person other than the undersigned, the undersigned will provide the appropriate information below and pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of Interest accompanies this Note.

Dated:                                         

Signature(s) 

Signature(s) must be guaranteed by an “eligible guarantor institution” meeting the requirements of the Note Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Note Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.

Signature Guarantee

NOTICE: The above signatures of the holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

9

Fill in the registration of shares of Common Stock if to be issued, and Notes if to be delivered, other than to and in the name of the registered holder:

(Name)                                                                         

(Street Address)                                                                       

(City, State and Zip Code)                                                       

Please print name and address

Principal amount to be converted (if less than all): $           

Social Security or Other Taxpayer Identification Number:                                                                         

10

FORM OF
FUNDAMENTAL CHANGE REPURCHASE NOTICE

TO:   CAPITALSOURCE INC.

          WELLS FARGO BANK, N.A.

The undersigned registered owner of this Note hereby irrevocably acknowledges receipt of a notice from CapitalSource Inc. (the “Company”) as to the occurrence of a Fundamental Change with respect to the Company and requests and instructs the Company to repurchase the entire principal amount of this Note, or the portion thereof (which is $1,000 or a multiple thereof) below designated, in accordance with the terms of the Indenture referred to in this Note at the price equal to at least 100% of such entire principal amount or portion thereof, together with accrued Interest to, but excluding, the Fundamental Change Repurchase Date, to the registered holder hereof. Capitalized terms used herein but not defined shall have the meanings ascribed to such terms in the Indenture.

Dated:                                         

Signature(s) 

NOTICE: The above signatures of the holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

Note Certificate Number (if applicable):                                                             

                    Principal amount to be repurchased (if less than all):                                                              

                             Social Security or Other Taxpayer Identification Number:                                                              

11

FORM OF
COMPANY REPURCHASE ELECTION

TO:   CAPITALSOURCE INC.

          WELLS FARGO BANK, N.A.

The undersigned registered owner of this Note hereby irrevocably acknowledges receipt of a notice from CapitalSource Inc. (the “Company”) regarding the right of holders to elect to require the Company to repurchase the Notes and requests and instructs the Company to repay the entire principal amount of this Note, or the portion thereof (which is $1,000 or an integral multiple thereof) below designated, in accordance with the terms of the Indenture at the price of 100% of such entire principal amount or portion thereof, together with accrued Interest to, but excluding, the Company Repurchase Date, to the registered holder hereof. Capitalized terms used herein but not defined shall have the meanings ascribed to such terms in the Indenture. The Notes shall be repurchased by the Company as of the Company Repurchase Date pursuant to the terms and conditions specified in the Indenture.

Dated:                                         

Signature(s) 

NOTICE: The above signatures of the holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

Note Certificate Number (if applicable):                                                             

                      Principal amount to be repurchased (if less than all):                                                               

                                Social Security or Other Taxpayer Identification Number:                                                                   

12

ASSIGNMENT

For value received                      hereby sell(s) assign(s) and transfer(s) unto                      (please insert social security or other Taxpayer Identification Number of assignee) the within Note, and hereby irrevocably constitutes and appoints                      attorney to transfer said Note on the books of the Company, with full power of substitution in the premises.

Dated:                                                             

Signature(s) 

Signature(s) must be guaranteed by an “eligible guarantor institution” meeting the requirements of the Note Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Note Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.

Signature Guarantee

NOTICE: The above signatures of the holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

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Schedule I

CAPITALSOURCE INC.

7.250% Senior Subordinated Convertible Notes due 2037

No. 1

		Notation Explaining	Authorized Signature
		Principal Amount	of Trustee or
Date	Principal Amount	Recorded	Custodian

EX-10.8

Exhibit 10.8

CREDIT AGREEMENT

among

CAPITALSOURCE INC.
as the Initial Borrower

THE GUARANTORS LISTED HEREIN,

THE LENDERS LISTED HEREIN,

WACHOVIA BANK, NATIONAL ASSOCIATION,
as the Administrative Agent, Swingline Lender, and Issuing Lender

BANK OF AMERICA, N.A.,
as Issuing Lender

WACHOVIA CAPITAL MARKETS, LLC,
as Sole Bookrunner and as Lead Arranger

BANK OF MONTREAL,

BARCLAYS BANK PLC,

and

SUNTRUST BANK,
as Co-Documentation Agents

March 14, 2006

(Composite Version; Reflects All Amendments through December 19, 2007)

TABLE OF CONTENTS

		Page
ARTICLE I     DEFINITIONS			1
Section 1.1.	Defined Terms		1
Section 1.2.	Other Definitional Provisions		27
Section 1.3.	Accounting Terms		27
Section 1.4.	Computation of Time Periods		28
Section 1.5.	Currencies Generally		28
ARTICLE II     THE LOANS; AMOUNT AND TERMS			29
Section 2.1.	Revolving Loans		29
Section 2.2.	Increase of the Commitments		31
Section 2.3.	Letter of Credit Subfacility		33
Section 2.4.	Swingline Loan Subfacility		37
Section 2.5.	Fees		39
Section 2.6.	Commitment Reductions		40
Section 2.7.	Prepayments		40
Section 2.8.	Minimum Principal Amounts		42
Section 2.9.	Default Rate and Payment Dates		42
Section 2.10.	Conversion Options		43
Section 2.11.	Computation of Interest and Fees		44
Section 2.12.	Pro Rata Treatment and Payments		45
Section 2.13.	Non-Receipt of Funds by the Administrative Agent		47
Section 2.14.	Inability to Determine Interest Rate		48
Section 2.15.	Illegality		48
Section 2.16.	Requirements of Law		49
Section 2.17.	Indemnity		50
Section 2.18.	Taxes		51
Section 2.19.	Indemnification; Nature of Issuing Lender’s Duties		53
Section 2.20.	Extension of Commitment Termination Date		54
Section 2.21.	Replacement of Lenders		55
Section 2.22.	Additional Limitations on CSF as Borrower		55
Section 2.23.	Several Liability of the Borrowers		55

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TABLE OF CONTENTS
(continued)

		Page
Section 2.24.	Currency Conversion of Loans		55
ARTICLE III     CONDITIONS PRECEDENT			55
Section 3.1.	Conditions to Closing.		55
Section 3.2.	Conditions to All Extensions of Credit		58
ARTICLE IV REPRESENTATIONS AND WARRANTIES			59
Section 4.1.	Existence and Power		59
Section 4.2.	Organizational and Governmental Authorization; No Contravention		59
Section 4.3.	Binding Effect		59
Section 4.4.	Financial Information		60
Section 4.5.	Litigation		60
Section 4.6.	Compliance with ERISA		60
Section 4.7.	Taxes		60
Section 4.8.	Subsidiaries		61
Section 4.9.	Investment Company Act		61
Section 4.10.	[Reserved]		61
Section 4.11.	Ownership of Property		61
Section 4.12.	No Default		61
Section 4.13.	Full Disclosure		61
Section 4.14.	Environmental Matters		62
Section 4.15.	Compliance with Laws		62
Section 4.16.	Capital Stock		62
Section 4.17.	Margin Stock		62
Section 4.18.	Insolvency		63
Section 4.19.	Available Unpledged Assets		63
Section 4.20.	Labor Matters		63
Section 4.21.	Patents, Trademarks, Etc.		63
Section 4.22.	Tax Shelter Regulations		63
Section 4.23.	All Consents Required		64
Section 4.24.	Selection Procedures		64

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TABLE OF CONTENTS
(continued)

		Page
Section 4.25.	[Reserved]		64
Section 4.26.	Credit and Collection Policy; Residential Mortgage Policies and Procedures		64
Section 4.27.	Compliance with OFAC Rules and Regulations		64
Section 4.28.	REIT Status		64
ARTICLE V     COVENANTS			65
Section 5.1.	Financial Statements		65
Section 5.2.	Certificates; Other Information		66
Section 5.3.	Payment of Taxes and Other Obligations		66
Section 5.4.	Notices		67
Section 5.5.	Inspection of Property, Books and Records		67
Section 5.6.	Acquisitions		68
Section 5.7.	Restricted Payments		68
Section 5.8.	Capital Expenditures		68
Section 5.9.	Additional Guarantors		69
Section 5.10.	Maintenance of Unsecured Debt Rating		69
Section 5.11.	Ownership of Credit Parties; Restrictions		69
Section 5.12.	Maintenance of Existence		69
Section 5.13.	Dissolution		69
Section 5.14.	Consolidations, Mergers and Sales of Assets		70
Section 5.15.	Use of Proceeds		70
Section 5.16.	Compliance with Laws		71
Section 5.17.	Insurance		71
Section 5.18.	Change in Fiscal Year		71
Section 5.19.	Maintenance of Property		71
Section 5.20.	Environmental Laws		71
Section 5.21.	[Reserved]		72
Section 5.22.	[Reserved]		72
Section 5.23.	Compliance with Material Contracts		72
Section 5.24.	Transactions with Affiliates		72

-iii-

TABLE OF CONTENTS
(continued)

		Page
Section 5.25.	[Reserved]		72
Section 5.26.	No Restrictive Agreement		72
Section 5.27.	Costs and Expenses		72
Section 5.28.	Additional Debt		73
Section 5.29.	[Reserved]		73
Section 5.30.	Credit and Collection Policy		73
Section 5.31.	REIT Status		73
Section 5.32.	Financial Covenants		73
Section 5.33.	Other		74
ARTICLE VI     [RESERVED]			74
ARTICLE VI     IEVENTS OF DEFAULT			74
Section 7.1.	Events of Default		74
Section 7.2.	Acceleration; Remedies		77
ARTICLE VIII     THE ADMINISTRATIVE AGENT			78
Section 8.1.	Appointment		78
Section 8.2.	Delegation of Duties		78
Section 8.3.	Exculpatory Provisions		78
Section 8.4.	Reliance by Administrative Agent		79
Section 8.5.	Notice of Default		79
Section 8.6.	Non-Reliance on Administrative Agent and Other Lenders		79
Section 8.7.	Indemnification		80
Section 8.8.	The Administrative Agent in Its Individual Capacity		80
Section 8.9.	Successor Administrative Agent		81
Section 8.10.	Other Agents		81
ARTICLE IX     MISCELLANEOUS			82
Section 9.1.	Amendments, Waivers and Release of Collateral		82
Section 9.2.	Notices		84
Section 9.3.	No Waiver; Cumulative Remedies		86
Section 9.4.	[Reserved]		86
Section 9.5.	Payment of Expenses and Taxes; Indemnification		86

-iv-

TABLE OF CONTENTS
(continued)

		Page
Section 9.6.	Successors and Assigns; Participations; Purchasing Lenders		87
Section 9.7.	Set-off		90
Section 9.8.	Table of Contents and Section Headings		91
Section 9.9.	Counterparts		91
Section 9.10.	Effectiveness		91
Section 9.11.	Severability		91
Section 9.12.	Integration		92
Section 9.13.	Governing Law		92
Section 9.14.	Consent to Jurisdiction and Service of Process		92
Section 9.15.	Confidentiality		92
Section 9.16.	Acknowledgments		93
Section 9.17.	Waivers of Jury Trial; Waiver of Consequential Damages		93
Section 9.18.	Patriot Act Notice		94
Section 9.19.	Judgment Shortfall		94
ARTICLE X     GUARANTY			94
Section 10.1.	The Guaranty		94
Section 10.2.	Bankruptcy		95
Section 10.3.	Nature of Liability		96
Section 10.4.	Independent Obligation		96
Section 10.5.	Authorization		96
Section 10.6.	Reliance		96
Section 10.7.	Waiver		96
Section 10.8.	Limitation on Enforcement		98
Section 10.9.	Confirmation of Payment		98
Section 10.10.	Limitation of Guaranty of CSF		98

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SCHEDULES

		Page
Schedule 1.1(a)	Residential Mortgage Policies and Procedures
Schedule 1.1(b)	Risk Rating Levels
Schedule 2.1(a)	Commitment Percentage
Schedule 2.3(i)	Existing Letters of Credit
Schedule 4.8	List of Subsidiaries
Schedule 4.16	List of Liens
Schedule 4.26	Credit and Collection Policy
Schedule 5.26	Permitted Transaction
Schedule 5.28	Existing Debt on Closing Date
Schedule 9.2	Lenders’ Lending Offices
	EXHIBITS
Exhibit A	Form of Notice of Borrowing
Exhibit B	Form of Revolving Note
Exhibit C	Form of Notice of Conversion
Exhibit D	Form of Secretary’s Certificate
Exhibit E	Form of Notice of Swingline Borrowing
Exhibit F	Form of Swingline Note
Exhibit G	Form of Solvency Certificate
Exhibit H	Form of Officer’s Compliance Certificate
Exhibit I	Form of Monthly Report
Exhibit J	Form of Commitment Transfer Supplement
Exhibit K	Form of Borrower Information Certificate
Exhibit L	Form of 2.18 Certificate
Exhibit M	Form of Facility Extension Request
Exhibit N	Form of Joinder Agreement
Exhibit O	Mandatory Cost Rate Formula

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     CREDIT AGREEMENT, dated as of March 14, 2006 and as amended through December 19, 2007 (this “Credit Agreement”), among CAPITALSOURCE INC., a Delaware corporation, CAPITALSOURCE TRS INC., a Delaware corporation (“TRS”), CAPITALSOURCE FINANCE LLC, a Delaware limited liability company (“CSF”), CSE MORTGAGE LLC, a Delaware limited liability company (“CSM”), and CAPITALSOURCE SF TRS INC., a Delaware corporation (“SFTRS” and, together with TRS, CSF and CSM, and any other Subsidiary of the Borrower that becomes a party to this Credit Agreement, collectively the “Guarantors” and individually a “Guarantor”), the several banks and other financial institutions from time to time parties to this Credit Agreement (collectively the “Lenders” and individually a “Lender”), WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association, as administrative agent for the Lenders hereunder (in such capacity, the “Administrative Agent” or the “Agent”), Swingline Lender, and Issuing Lender, and BANK OF AMERICA, N.A., as Issuing Lender.

WITNESSETH:

     WHEREAS, the Borrower has requested, and the Lenders have agreed, to extend certain credit facilities to the Borrower on the terms and conditions set forth herein;

     NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, such parties hereby agree as follows:

ARTICLE I

DEFINITIONS

     Section 1.1. Defined Terms.

     As used in this Credit Agreement, terms defined in the preamble to this Credit Agreement have the meanings therein indicated, and the following terms have the following meanings:

     “ABR Default Rate” shall have the meaning set forth in Section 2.9.

     “Acquisition” means the acquisition of (i) a controlling equity interest in another Person (including the purchase of an option, warrant or convertible or similar type security to acquire such a controlling interest at the time it becomes exercisable by the holder thereof), whether by purchase of such equity interest or upon exercise of an option or warrant for, or conversion of securities into, such equity interest, or (ii) assets of another Person which constitute all or any material part of the assets of such Person or of a line or lines of business conducted by such Person; provided, however, the term “Acquisition” shall exclude a Portfolio Investment.

     “Additional Credit Party” shall mean each Person that becomes a Guarantor by execution of a Joinder Agreement in accordance with Section 5.9.

     “Advances Outstanding” means on any day, the aggregate outstanding principal amount of all Revolving Loans, Swingline Loans and LOC Obligations.

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     “Affiliate” of any Person means (i) any other Person which directly, or indirectly through one or more intermediaries, controls such Person, (ii) any other Person which directly, or indirectly through one or more intermediaries, is controlled by or is under common control with such Person, or (iii) any other Person of which such Person owns, directly or indirectly, 20% or more of the common stock or equivalent equity interests. As used herein, the term “control” means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise; provided, however, the term “Affiliate” shall not include any Person that constitutes Investments in Equity Instruments.

     “Agreement” or “Credit Agreement” shall mean this Credit Agreement, as amended, modified or supplemented from time to time in accordance with its terms.

     “Agreement Currency” shall have the meaning set forth in Section 9.19(b).

     “Alternate Base Rate” shall mean, for any day, a rate per annum equal to (a) in the case of amounts denominated in Dollars, the greater of (i) the Prime Rate in effect on such day, and (ii) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%, (b) in the case of amounts denominated in Euro, the “main refinancing rate” as set by the European Central Bank in effect on such day plus 1/2 of 1% plus the Applicable Percentage, (c) in the case of amounts denominated in Pounds Sterling, the base rate as set by the Monetary Policy Committee of the Bank of England in effect on such day plus 1/2 of 1% plus the Applicable Percentage and (d) in the case of amounts denominated in any other Alternative Currency, the rate determined by the Administrative Agent, according to comparable financial benchmarks, in its reasonable discretion on such day. For purposes hereof: “Prime Rate” shall mean, at any time, the rate of interest per annum publicly announced or otherwise identified from time to time by Wachovia at its principal office in Charlotte, North Carolina as its prime rate. The parties hereto acknowledge that the rate announced publicly by Wachovia as its Prime Rate is an index or base rate and shall not necessarily be its lowest or best rate charged to its customers or other banks; and “Federal Funds Effective Rate” shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published on the next succeeding Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three (3) federal funds brokers of recognized standing selected by it. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive in the absence of manifest error) that it is unable to ascertain the Federal Funds Effective Rate, for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the Alternate Base Rate shall be determined without regard to clause (a)(ii) of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Federal Funds Effective Rate, the “main refinancing rate” as set by the European Central Bank or the base rate as set by the Monetary Policy Committee of the Bank of England shall be effective on the opening of business on the date of such change.

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     “Alternate Base Rate Loans” shall mean Loans that bear interest at an interest rate based on the Alternate Base Rate.

     “Alternative Currency” shall mean, at any time, any of Pounds Sterling, Euro and, with the agreement of each Lender, any other Foreign Currency, so long as, in respect of any such Foreign Currency, at such time, (a) such Foreign Currency is dealt with in the London interbank deposit market, (b) such Foreign Currency is freely transferable and convertible into Dollars in the London foreign exchange market and (c) no central bank or other governmental authorization in the country of issue of such Foreign Currency (including, in the case of Euro, any authorization by the European Central Bank) is required to permit use of such Foreign Currency by any Lender for making a Loan hereunder or to permit the Borrower to borrow and repay the principal thereof and to pay the interest thereon, unless such authorization has been obtained and is in full force and effect.

     “Alternative Currency Sub-Limit” shall have the meaning set forth in Section 2.1(a).

     “Applicable Creditor” shall have the meaning set forth in Section 9.19(b).

     “Applicable Law” shall mean for any Person or property of such Person, the organization and governing documents of such Person, all existing and future applicable laws, rules, regulations (including temporary and final income tax regulations), statutes, treaties, codes, ordinances, permits, certificates, executive orders, orders and licenses of and interpretations by any Governmental Authority (including, without limitation, usury laws, predatory lending laws, the Federal Truth in Lending Act, and Regulation Z and Regulation B of the Federal Reserve Board), and applicable judgments, decrees, injunctions, writs, orders, or line action of any court, arbitrator or other administrative, judicial, or quasi-judicial tribunal or agency of competent jurisdiction.

     “Applicable Percentage” shall mean, for Alternate Base Rate Loans denominated in any Alternative Currency, EURIBOR/LIBOR Rate Loans and LMIR Loans, the percentage set forth below opposite the Initial Borrower’s applicable senior unsecured debt rating in the column labeled “Alternative Currency Alternate Base Rate Loans, EURIBOR/LIBOR Rate Loans and LMIR Loans” and for the Commitment Fee, the percentage set forth below opposite the Initial Borrower’s applicable senior unsecured debt rating in the column labeled “Commitment Fee,” as applicable; provided that if the senior unsecured debt ratings from S&P, Moody’s and Fitch are different, and (a) two ratings are equal and higher than the third, the higher rating will apply, (b) two ratings are equal and lower than the third, the lower rating will apply, or (c) no ratings are equal, the intermediate rating will apply. In the event that the Initial Borrower shall maintain ratings from only two of Moody’s, Fitch and S&P and the Initial Borrower is split-rated and (i) the ratings differential is one level, the higher rating will apply, or (ii) the ratings differential is two levels or more, the rating immediately below the highest rating will apply. In the event that the Initial Borrower shall maintain ratings from only one of Moody’s, Fitch and S&P, the one rating shall apply.

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	Alternative Currency
	Alternate Base Rate Loans,
	EURIBOR/LIBOR Rate
Rating (S&P/Moody’s/Fitch)	Loans and LMIR Loans			Commitment Fee
A-/A3/A-		0.75	%		0.10	%
BBB+/Baa1/BBB+		0.875	%		0.125	%
BBB/Baa2/BBB		1.00	%		0.15	%
BBB—/Baa3/BBB—		1.125	%		0.20	%
BB+/Ba1/BB+		1.25	%		0.25	%
BB/Ba2/BB		1.50	%		0.30	%
< BB/Ba2/BB		1.75	%		0.35	%

The Applicable Percentage for Alternate Base Rate Loans denominated in any Alternative Currency, EURIBOR/LIBOR Rate Loans, LMIR Loans and the Commitment Fee shall be adjusted within three (3) Business Days of (A) Initial Borrower’s receipt of senior unsecured debt ratings from S&P and Moody’s (in addition to Initial Borrower’s current senior unsecured debt rating from Fitch), and (B) a change in such senior unsecured debt ratings.

     “Asset Based Loans” shall mean any revolving loan that is secured by a first priority security interest in the related Obligor’s accounts receivable, inventory or equipment, and provides the related Obligor with the option to receive additional borrowings thereunder based on the value of its eligible accounts receivable, inventory or equipment.

     “Assuming Lender” shall have the meaning set forth in Section 2.2(a).

     “Available Asset Coverage Ratio” shall mean the ratio of (a) the sum of the Initial Borrower’s and its Consolidated Subsidiaries (i) unencumbered and unrestricted cash and Cash Equivalents, and (ii) Qualified Available Unpledged Assets to (b) Senior Unsecured Debt of the Initial Borrower and its Consolidated Subsidiaries.

     “Available Unpledged Assets” means an amount equal to (without duplication) the sum of the Book Value (or in the case of Real Property Owned the Fair Market Value) of each of the following unencumbered assets:

               (a) 100% of Investment Loans that are a Risk Rated 1 Investment Loan to a Risk Rated 5 Investment Loan; plus

               (b) 50% of Investment Loans which are Real Estate Loans or Asset Based Loans that are a Risk Rated 6 Investment Loan; plus

               (c) 100% of CapitalSource Securitization Notes; plus

               (d) 70% of Investment Grade rated debt securities excluding securities issued by the Borrower, any Subsidiary or any Unrestricted Subsidiary; plus

               (e) 80% of Real Property Owned; plus

               (f) 50% of OREO Property; plus

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               (g) 50% of Investments in Equity Instruments to entities that are not Affiliates of any Credit Party; plus

               (h) 50% of the Fannie Mae Servicing Strips.

     “Average Portfolio Charged-Off Ratio” means the percentage equivalent of a fraction (a) the numerator of which is equal to the sum of the portion of the outstanding balance of all Investment Loans of the Initial Borrower and its Consolidated Subsidiaries that became Charged-Off Investment Loans (net of recoveries) during the preceding 12 months, and (b) the denominator of which is equal to a fraction the numerator of which is the sum of the outstanding balance of all Investment Loans at the beginning of each of the preceding 12 months, and the denominator of which is twelve; provided, that, Liquid Real Estate Assets shall not be included in the calculation of the Average Portfolio Charged-Off Ratio.

     “Bankruptcy Code” means the United States Bankruptcy Reform Act of 1978 (11 U.S.C. §§ 101, et. seq.), as amended from time to time.

     “Bank Subsidiary” means a Subsidiary that is a regulated depository institution and is so designated by the Initial Borrower in writing to the Administrative Agent.

     “Big 4 Accounting Firm” shall mean any of the following: PriceWaterhouseCoopers LLP; Deloitte & Touche LLP; Ernst & Young LLP; or KPMG LLP.

     “Book Value” means with respect to any asset, the value thereof as the same would be reflected on a consolidated balance sheet of the Initial Borrower and its Consolidated Subsidiaries as at such time in accordance with GAAP; provided, that, the Book Value of the Fannie Mae Servicing Strips shall in no event exceed 5.0 times the gross expected servicing strip over the next twelve-month period.

     “Borrower” means each of the Initial Borrower and CSF. If at any time there are Advances Outstanding from both the Initial Borrower and CSF, then the term “Borrower” shall mean the singular and the collective reference to each or all entities constituting or comprising Borrower, as the context may require.

     “Borrowing Date” shall mean, in respect of any Loan, the date such Loan is made.

     “Business Day” shall mean a day other than a Saturday, Sunday or other day on which commercial banks in Charlotte, North Carolina or New York, New York are authorized or required by law to close; provided, however, that (a) when used in connection with a rate determination, borrowing or payment in respect of any EURIBOR/LIBOR Rate Loan, LMIR Loan or Alternate Base Rate Loan denominated in an Alternative Currency, the term “Business Day” shall also exclude any day on which banks in London, England are not open for dealings in deposits of Dollars or Alternative Currencies, as applicable, in the London interbank market; and (b) when used in connection with a rate determination, borrowing or payment in any Alternative Currency, the term “Business Day” shall also exclude any day on which banks are not open for foreign exchange dealings between banks in the exchange of the home country of such Alternative Currency.

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     “Capital Expenditures” means for any period the sum of all capital expenditures incurred during such period by the Initial Borrower and its Consolidated Subsidiaries, as determined in accordance with GAAP.

     “Capital Lease” shall mean any lease of property, real or personal, the obligations with respect to which are required to be capitalized on a balance sheet of the lessee in accordance with GAAP.

     “CapitalSource Securitization Notes” shall mean any security or note rated at least “BB-” by S&P and “Ba3” by Moody’s and/or “BB-” by Fitch issued by CapitalSource Finance LLC, CSE Mortgage LLC or any subsidiary thereof, pursuant to a Securitization Transaction and which has been retained by such issuer or affiliate thereof.

     “Capital Stock” means, with respect to any Person, shares of capital stock of (or other ownership or profit interests in) such Person, warrants, options or other rights for the purchase or other acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or other acquisition from such Person of such shares (or such other interests), and other ownership or profit interests in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are authorized or otherwise existing on any date of determination.

     “Cash Equivalents” means: (i) marketable securities (A) issued or directly and unconditionally guaranteed as to interest and principal by the United States government or (B) issued by any agency of the United States government the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one (1) year after acquisition thereof; (ii) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after acquisition thereof and having, at the time of acquisition, a rating of at least A-1 from S&P or at least P-1 from Moody’s; (iii) commercial paper maturing no more than one year from the date of acquisition and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody’s; (iv) certificates of deposit or bankers’ acceptances issued or accepted by any Lender or by any commercial bank organized under the laws of the United States or any state thereof or the District of Columbia that is (A) “adequately capitalized” (as defined in the regulations of its primary Federal banking regulator) and (B) has Tier 1 capital (as defined in such regulations) of not less than $250,000,000, in each case maturing within one year after issuance or acceptance thereof; and (v) shares of any money market mutual or similar funds that (A) has substantially all of its assets invested continuously in the types of investments referred to in clauses (i) through (iv) above, (B) has net assets of not less than $500,000,000 and (C) has the highest rating obtainable from either S&P or Moody’s.

     “CERCLA” means the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. §9601 et seq. and its implementing regulations and amendments.

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     “CERCLIS” means the Comprehensive Environmental Response Compensation and Liability Information System established pursuant to CERCLA.

     “Change of Control” shall mean (a) any Person or two or more Persons acting in concert shall have acquired “beneficial ownership,” directly or indirectly, of, or shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of, or control over, Voting Stock of the Initial Borrower (or other securities convertible into such Voting Stock) representing 33-1/3% or more of the combined voting power of all Voting Stock of the Initial Borrower, (b) the replacement of greater than 50% of the Board of Directors of any Credit Party over a two year period from the directors who constituted the Board of Directors at the beginning of such period, and such replacements shall not have been approved or nominated by a vote of at least a majority of the Board of Directors of such Credit Party then still in office who were either members of such Board of Directors at the beginning of such period or whose election as a member of such Board of Directors was previously so approved, (c) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of greater than 50% of the value of the assets of the Initial Borrower and its Subsidiaries taken as a whole to any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), (d) the adoption by the stockholders of a Credit Party of a plan or proposal for the liquidation or dissolution of such Credit Party, or (e) at any time prior to the satisfaction of the Release Condition, the Initial Borrower shall fail to own, directly or indirectly, all of the issued and outstanding Capital Stock of CSF. Notwithstanding the foregoing, solely for the purpose of determining whether there has been a Change of Control pursuant to clause (a) above, any purchase by one or more Excluded Persons which increases any of such Excluded Persons’ direct or indirect ownership interest (whether individually or in the aggregate) in the Voting Stock of the Initial Borrower shall not constitute a Change of Control even if the amount of Voting Stock acquired or controlled by such Excluded Person(s) exceeds (whether individually or in the aggregate) 33-1/3% of the combined voting power of all Voting Stock of the Initial Borrower; provided, however, that for so long as any of such Excluded Persons’ direct or indirect ownership interest in the Voting Stock of the Initial Borrower exceeds (individually or in the aggregate) 33-1/3% of the combined voting power of all Voting Stock of the Initial Borrower, the initiation by the Initial Borrower of any action intended to terminate or having the effect of terminating the registration of its securities under Section 12(g) of the Exchange Act or intended to suspend or having the effect of suspending its obligation to file reports with the U.S. Securities and Exchange Commission under Sections 13 and 15(d) of the Exchange Act, shall constitute a Change of Control. “Excluded Person” shall mean each of John Delaney, Jason Fish, Farallon Capital Management, LLC, and Madison Dearborn Partners, LLC. As used herein, “beneficial ownership” shall have the meaning provided in Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act.

     “Charged-Off Investment Loan” means any Investment Loan of the Initial Borrower and its Consolidated Subsidiaries (or portion thereof deemed to be “charged-off”) as to which any of the following first occurs: (a) the Initial Borrower has determined in accordance with its Credit and Collection Policy that such asset is not collectible, or adequate collateral or other source of payment does not exist to repay the principal due, (b) (i) any principal or interest payments remain unpaid for at least ninety (90) days from the original due date for such payment, in which case 50% of the asset balance shall be deemed to be “charged-off”, and (ii) any principal or interest payments (other than in respect of default rate interest) remain unpaid for at least 180

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days from the original due date for such payment, in which case 100% of the asset balance shall be deemed to be “charged-off”, or (c) the Obligor is subject to an Insolvency Event, in which case not less than 50% of the asset balance shall be deemed to be “charged-off”.

     “Closing Date” shall mean the date of this Credit Agreement.

     “Code” means the Internal Revenue Code of 1986, as amended, or any successor Federal tax code. Any reference to any provision of the Code shall also be deemed to be a reference to any successor provision or provisions thereof.

     “Commitment” shall mean, with respect to each Lender, the commitment of such Lender to make Revolving Loans in an aggregate principal amount at any time outstanding up to an amount equal to such Lender’s Commitment Percentage of the Committed Amount as specified in Schedule 2.1(a) or in the Register, as such amount may be reduced or increased from time to time in accordance with the provisions hereof.

     “Commitment Fee” shall have the meaning set forth in Section 2.5(a).

     “Commitment Increase” shall have the meaning set forth in Section 2.2(a).

     “Commitment Increase Date” shall have the meaning set forth in Section 2.2(a).

     “Commitment Percentage” shall mean, for each Lender, the percentage identified as its Commitment Percentage on Schedule 2.1(a) or in the Register, as such percentage may be modified in connection with any assignment made in accordance with the provisions of Section 9.6(c), or any Commitment Increase made in accordance with the provisions of Section 2.2.

     “Commitment Termination Date” shall mean March 13, 2009, as it may be extended pursuant to Section 2.20 hereto.

     “Commitment Transfer Supplement” shall mean a Commitment Transfer Supplement, in substantially the form of Exhibit J.

     “Committed Amount” shall have the meaning set forth in Section 2.1(a).

     “Commonly Controlled Entity” shall mean an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code.

     “Compliance Certificate” shall have the meaning set forth in Section 5.2(a).

     “Consolidated Debt” shall mean as of the date of any determination thereof, the aggregate unpaid amount of all Debt of the Initial Borrower and its Consolidated Subsidiaries determined on a consolidated basis in accordance with GAAP.

     “Consolidated EBIT” means for a given period of the Initial Borrower and its Consolidated Subsidiaries determined on a consolidated basis in accordance with GAAP, (a) Net

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Income, plus (b) Interest Expense, plus (c) income tax payments minus (d) gains (and plus the losses) from discontinued operations.

     “Consolidated Subsidiary” means at any date any Subsidiary the accounts of which, in accordance with GAAP, would be consolidated with those of the Initial Borrower in its consolidated and consolidating financial statements as of such date.

     “Consolidated Tangible Net Worth” means, as of any date of determination, the assets less the liabilities of the Initial Borrower and its Consolidated Subsidiaries, less intangible assets (including goodwill), less loans or advances to stockholders, directors, officers or employees, all determined in accordance with GAAP.

     “Contractual Obligation” shall mean, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound.

     “Controlled Group” means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code.

     “Credit and Collection Policy” means the written credit policies and procedures manual of the Initial Borrower (which policies shall include without limitation policies on loss reserves, due diligence format, underwriting parameters and credit approval procedures) in the form provided to the Lenders prior to the Closing Date and attached hereto as Schedule 4.26, as it may be amended or supplemented from time to time in accordance with Section 5.30.

     “Credit Documents” shall mean this Credit Agreement, each of the Notes, the Letters of Credit, the LOC Documents, the Guaranty Agreement and all other agreements, documents, certificates and instruments delivered to the Administrative Agent or any Lender by any Credit Party in connection therewith (other than any agreement, document, certificate or instrument related to a Hedging Agreement).

     “Credit Party” shall mean any of the Borrower or Guarantors, and “Credit Parties” shall mean the Borrower and Guarantors collectively.

     “Credit Party Obligations” means all loans, advances, debts, liabilities and obligations, for monetary amounts owing by any Credit Party to the Lenders (including the Issuing Lender) and Administrative Agent, whenever arising, or any of their assigns, as the case may be, whether due or to become due, matured or unmatured, liquidated or unliquidated, contingent or non-contingent, and all covenants and duties regarding such amounts, of any kind or nature, present or future, arising under or in respect of any of this Credit Agreement, the Letters of Credit, the Notes, any fee letter (including, without limitation, any commitment letter) delivered in connection with this Credit Agreement or any Credit Document, as amended or supplemented from time to time, whether or not evidenced by any separate note, agreement or other instrument. The term Credit Party Obligations includes, without limitation, all Advances Outstanding, interest (including interest that accrues after the commencement against any Credit Party of any action under the Bankruptcy Code), breakage costs, fees, including, without limitation, any and all arrangement fees, loan fees, facility fees, and any and all other fees, expenses, costs,

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indemnities, or other sums (including reasonable attorney costs) chargeable to a Credit Party under any of the Credit Documents.

     “CSI” CapitalSource International Inc., a Delaware corporation.

     “Currency” shall mean Dollars or any Foreign Currency.

     “Customary Non-Recourse Exclusions” shall mean usual and customary exceptions and non-recourse carve-outs in non-recourse secured debt financings of real property including, without limitation, exceptions by reason of (i) any fraudulent misrepresentation made by the obligor in or pursuant to any document evidencing any Debt, (ii) any unlawful act on the part of the obligor in respect of the Debt, (iii) any waste or misappropriation of funds by the obligor in contravention of the provisions of the Debt, (iv) customary environmental indemnities associated with the Real Property securing the non-recourse debt financing, (v) voluntary bankruptcy of the obligor under the non-recourse debt financing or (vi) failure of the obligor to comply with applicable special purpose entity covenants, but excluding in each case exceptions by reason of (a) non-payment of the Debt (other than the first debt service payment thereon) incurred in such non-recourse financing, or (b) the failure of the relevant obligor to comply with financial covenants or similar financial requirements. For the avoidance of doubt, in the event the Borrower or any of its Subsidiaries shall become liable for one of the Customary Non-Recourse Exclusions, the guaranty will be included in Senior Unsecured Debt.

     “Debt” of any Person means at any date, without duplication (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (d) all obligations of such Person as lessee under Capital Leases, (e) all obligations of such Person to reimburse any bank or other Person in respect of amounts payable under a banker’s acceptance, (f) all obligations of such Person to redeem preferred stock of such Person (in the event such Person is a corporation), (g) all obligations (absolute or contingent) of such Person to reimburse any bank or other Person in respect of amounts which are available to be drawn or have been drawn under a letter of credit or similar instrument, (h) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, (i) all Debt of others guaranteed by such Person, (j) all obligations, direct or indirect (absolute or contingent) of such Person to repurchase property or assets sold or otherwise transferred by such Persons, (k) all indebtedness, obligations or liabilities of that Person in respect of derivatives, determined as of such date on a net mark-to-market basis in accordance with customary market practice, and (l) the principal portion of all obligations of such Person under any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product where such transaction in each case (i) is considered borrowed money indebtedness for tax purposes, and (ii) is classified as an operating lease under GAAP.

     “Default” shall mean any of the events specified in Section 7.1, whether or not any requirement for the giving of notice or the lapse of time, or both, or any other condition, has been satisfied.

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     “Defaulting Lender” shall mean, at any time, any Lender that, at such time (a) has failed to make a Loan required pursuant to the term of this Credit Agreement, including the funding of a Participation Interest in accordance with the terms hereof and such default remains uncured, (b) has failed to pay to the Administrative Agent or any Lender an amount owed by such Lender pursuant to the terms of this Credit Agreement and such default remains uncured, or (c) has been deemed insolvent or has become subject to a bankruptcy or insolvency proceeding or to a receiver, trustee or similar official.

     “Dollar Equivalent” shall mean, on any day, the spot selling rate at which the Administrative Agent offers to sell such Foreign Currency for Dollars in the London foreign exchange market at approximately 11:00 a.m., London time for delivery two (2) Business Days later.

     “Dollars” and “$” shall mean dollars in lawful currency of the United States of America.

     “Domestic Lending Office” shall mean, initially, the office of each Lender designated as such Lender’s Domestic Lending Office shown on Schedule 9.2; and thereafter, such other office of such Lender as such Lender may from time to time specify to the Administrative Agent and the Initial Borrower as the office of such Lender at which Alternate Base Rate Loans of such Lender are to be made.

     “Domestic Subsidiary” shall mean any Subsidiary that is organized and existing under the laws of the United States or any state or commonwealth thereof or under the laws of the District of Columbia.

     “Environmental Authorizations” means all licenses, permits, orders, approvals, notices, registrations or other legal prerequisites for conducting the business of the Credit Parties or their Subsidiaries required by any Environmental Requirement.

     “Environmental Laws” shall mean any and all applicable foreign, federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other requirement of Applicable Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time be in effect during the term of this Credit Agreement.

     “Environmental Liability” means any liability, whether accrued, contingent or otherwise, arising from and in any way associated with any Environmental Requirements.

     “Environmental Requirements” means any legal requirement relating to health, safety or the environment and applicable to the Credit Parties, any Subsidiary of the Credit Parties or the Properties, including but not limited to any such requirement under CERCLA or similar state legislation and all federal, state and local laws, ordinances, regulations, orders, writs, decrees and common law.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor law. Any reference to any provision of ERISA shall also be deemed to be a reference to any successor provision or provisions thereof.

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     “EURIBOR” means, in relation to any Loan to be advanced to, or owing by, any Borrower hereunder in Euro and any Interest Period relating thereto:

     (a) The percentage rate per annum equal to the offered quotation which appears on the Screen for a duration equal to or comparable to the duration of such Interest Period at or about 11.00 a.m. (Brussels time) two Business Days prior to such Interest Period; or

     (b) If no quotation for Euro for the relevant Interest Period is displayed and the Agent has not selected an alternative service on which a quotation is displayed, the rate offered by the principal London office of the Administrative Agent to leading banks in immediately available funds in the European interbank market at approximately 11:00 a.m., Brussels time two Business Days prior to such Interest Period.

     “EURIBOR/LIBOR Lending Office” shall mean, initially, the office of each Lender designated as such Lender’s EURIBOR/LIBOR Lending Office shown on Schedule 9.2; and thereafter, such other office of such Lender as such Lender may from time to time specify to the Administrative Agent and the Initial Borrower as the office of such Lender at which the EURIBOR/LIBOR Rate Loans of such Lender are to be made.

     “EURIBOR/LIBOR Rate Loan” shall mean: (a) in the case of Loans denominated in any Currency (other than Euro), any such Loan during any period in which it bears interest at a rate based upon the LIBOR Rate; and (b) in the case of Loans denominated in Euro, any such Loan during any period in which it bears interest at a rate based upon the EURIBOR.

     “Eurocurrency Reserve Percentage” shall mean for any day, the percentage (expressed as a decimal and rounded upwards, if necessary, to the next higher 1/100th of 1%) which is in effect for such day as prescribed by the Federal Reserve Board (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) in respect of Eurocurrency liabilities, as defined in Regulation D of such Board as in effect from time to time, or any similar category of liabilities for a member bank of the Federal Reserve System in New York City.

     “Euro” shall mean the lawful currency of the Participating Member States.

     “Event of Default” shall mean any of the events specified in Section 7.1; provided, however, that any requirement for the giving of notice or the lapse of time, or both, or any other condition, has been satisfied.

     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

     “Existing Letters of Credit” shall have the meaning set forth in Section 2.3(i).

     “Extension of Credit” shall mean, as to any Lender, the making of a Loan by such Lender or the issuance of, or participation in, a Letter of Credit by such Lender.

     “Facility Extension Request” shall have the meaning set forth in Section 2.20.

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     “Fair Market Value” shall mean with respect to Real Property Owned the “as is” appraised value of the Real Property Owned, provided that in no event shall the Fair Market Value of Real Property Owned be greater than 1.2 times the purchase price of the Real Property Owned.

     “Fannie Mae DUS Program” shall mean the Fannie Mae Delegated Underwriting and Servicing Program for the servicing of multifamily mortgage loans which back mortgage-backed securities.

     “Fannie Mae Servicing Strips” shall mean the unencumbered servicing strips of loans (excluding loans where the payment of principal or interest is more than sixty (60) days past due) originated and serviced by the Initial Borrower or any Consolidated Subsidiary under the Fannie Mae DUS Program.

     “Federal Funds Effective Rate” shall have the meaning set forth in the definition of “Alternate Base Rate”.

     “First Tier Domestic Subsidiary” shall mean a Domestic Subsidiary whose Capital Stock is directly owned by the Initial Borrower.

     “First Tier Foreign Subsidiary” shall mean a Subsidiary that is not a Domestic Subsidiary and whose Capital Stock is directly owned by the Initial Borrower.

     “Fiscal Month” means any fiscal month of the Initial Borrower.

     “Fiscal Quarter” means any fiscal quarter of the Initial Borrower.

     “Fiscal Year” means the fiscal year of the Initial Borrower for accounting purposes ending on December 31 of each calendar year and when preceded or followed by the designation of a calendar year (e.g. 2006 Fiscal Year means the Fiscal Year of the Initial Borrower ending on December 31 of such designated calendar year).

     “Fitch” means Fitch, Inc. or any successor thereto.

     “Foreign Currency” shall mean Euro, Pound Sterling and any other currency of a Permitted Country other than Dollars.

     “Foreign Currency Equivalent” shall mean, on any day, with respect to any amount in Dollars, the amount of Foreign Currency that would be required to purchase such amount of Dollars on such day, based on the rate appearing on the relevant display on the Reuters Monitor Money Rate Service for the sale of Dollars for such Foreign Currency in the London foreign exchange market at approximately 11:00 a.m. London time for delivery two (2) Business Days later, or, if not available, the spot selling rate at which the Administrative Agent offers to sell Dollars for such Foreign Currency in the London foreign exchange market at approximately 11:00 a.m., London time for delivery two (2) Business Days later.

     “Fronting Fee” shall have the meaning set forth in Section 2.5(b).

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     “GAAP” shall mean, except as provided in Section 1.3, generally accepted accounting principles in effect as of any date of determination in the United States of America applied on a consistent basis.

     “Government Acts” shall have the meaning set forth in Section 2.19.

     “Governmental Authority” means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, any court or arbitrator and any accounting board or authority (whether or not a part of the government) which is responsible for the establishment or interpretation of national or international accounting principles.

     “Guarantor” shall have the meaning set forth in the first paragraph of this Credit Agreement, and shall also include CSI so long as the Guaranty Agreement is in effect; provided, however, that for purposes of Article X the term “Guarantor” shall not include CSI.

     “Guaranty” shall mean the guaranty of the Guarantors set forth in Article X.

     “Guaranty Agreement” shall mean that certain Guaranty Agreement, dated as of December 20, 2006, made by and among the Initial Borrower, CSI and the Agent for the benefit each of the Lenders.

     “Hazardous Materials” includes, without limitation, (a) solid or hazardous waste, as defined in the Resource Conservation and Recovery Act of 1980, 42 U.S.C. §6901 et seq. and its implementing regulations and amendments, or in any applicable state or local law or regulation, (b) any “hazardous substance”, “pollutant” or “contaminant”, as defined in CERCLA, or in any applicable state or local law or regulation, (c) gasoline, or any other petroleum product or by-product, including crude oil or any fraction thereof, (d) toxic substances, as defined in the Toxic Substances Control Act of 1976, or in any applicable state or local law or regulation, and (e) insecticides, fungicides, or rodenticides, as defined in the Federal Insecticide, Fungicide, and Rodenticide Act of 1975, or in any applicable state or local law or regulation, as each such act, statute or regulation may be amended from time to time.

     “Hedging Agreement” shall mean, with respect to any Person, any agreement entered into to protect such Person against fluctuations in interest rates, or currency or raw materials values, including, without limitation, any interest rate swap, cap or collar agreement or similar arrangement between such Person and one or more counterparties, commodity purchase or option agreements or other interest or exchange rate hedging agreements.

     “Increasing Lender” shall have the meaning set forth in Section 2.2(a).

     “Initial Borrower” means CapitalSource Inc., a Delaware corporation.

     “Insolvency” shall mean, with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of such term as used in Section 4245 of ERISA.

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     “Insolvency Event” means with respect to a specified Person, (a) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable Insolvency Law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person’s affairs, and such decree or order shall remain unstayed and in effect for a period of sixty (60) consecutive days, or (b) the commencement by such Person of a voluntary case under any applicable Insolvency Law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due, or the taking of action by such Person in furtherance of any of the foregoing.

     “Insolvency Laws” means the Bankruptcy Code and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments, or similar debtor relief laws from time to time in effect affecting the rights of creditors generally.

     “Insolvency Proceeding” means any case, action or proceeding before any court or Governmental Authority relating to an Insolvency Event.

     “Interest Expense” means, with respect to a Person and for any period, the total consolidated interest expense (including, without limitation, capitalized interest expense and interest expense attributable to Capitalized Lease Obligations) of such Person.

     “Interest Payment Date” shall mean (a) as to any Alternate Base Rate Loan or LMIR Loan, the first day of each April, July, October and January and on the Commitment Termination Date, (b) as to any EURIBOR/LIBOR Rate Loan having an Interest Period of three (3) months or less, the last day of such Interest Period, and (c) as to any EURIBOR/LIBOR Rate Loan having an Interest Period longer than three (3) months, (i) each three (3) month anniversary following the first day of such Interest Period, and (ii) the last day of such Interest Period.

     “Interest Period” shall mean, with respect to any EURIBOR/LIBOR Rate Loan,

          (a) initially, the period commencing on the Borrowing Date or conversion date, as the case may be, with respect to such EURIBOR/LIBOR Rate Loan and ending one (1), two (2), three (3) or six (6) months thereafter, as selected by the Borrower in the Notice of Borrowing or Notice of Conversion given with respect thereto; and

          (b) thereafter, each period commencing on the last day of the immediately preceding Interest Period applicable to such EURIBOR/LIBOR Rate Loan and ending one (1), two (2), three (3) or six (6) months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not less than three (3) Business Days prior

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to the last day of the then current Interest Period with respect thereto; provided that the foregoing provisions are subject to the following:

               (i) if any Interest Period pertaining to a EURIBOR/LIBOR Rate Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day;

               (ii) any Interest Period pertaining to a EURIBOR/LIBOR Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the relevant calendar month;

               (iii) if the Borrower shall fail to give notice as provided above, the Borrower shall be deemed to have selected an Alternate Base Rate Loan to replace the affected EURIBOR/LIBOR Rate Loan;

               (iv) any Interest Period in respect of any Loan that would otherwise extend beyond the Commitment Termination Date shall end on the Commitment Termination Date; and

               (v) no more than ten EURIBOR/LIBOR Rate Loans may be in effect at any time. For purposes hereof, EURIBOR/LIBOR Rate Loans with different Interest Periods shall be considered as separate EURIBOR/LIBOR Rate Loans, even if they shall begin on the same date, although borrowings, extensions and conversions may, in accordance with the provisions hereof, be combined at the end of existing Interest Periods to constitute a new EURIBOR/LIBOR Rate Loan with a single Interest Period.

     “Investment” means any investment in any Person, whether by means of purchase or acquisition of obligations or securities of such Person, capital contribution to such Person, loan or advance to such Person, making of a time deposit with such Person, guarantee or assumption of any obligation of such Person or otherwise.

     “Investment Company Act” means the Investment Company Act of 1940, as amended, and all rules and regulations promulgated thereunder.

     “Investment Grade” shall mean an S&P rating of “BBB-” or better, a Fitch rating of “BBB-” or better, or a Moody’s rating of “Baa3” or better.

     “Investment Loan” means any senior or subordinated loan (including letters of credit issued under such loan) or lease (a) arising from the extension of credit to an Obligor by the Initial Borrower or a Consolidated Subsidiary (excluding an Unrestricted Subsidiary) in the ordinary course of business, (b) originated in accordance with the policies and procedures set forth in the Credit and Collection Policy, and (c) good and marketable title to which is owned by Initial Borrower or a Consolidated Subsidiary.

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     “Investments in Equity Instruments” means each Investment, that is made in accordance with the policies and procedures set forth in the Credit and Collection Policy, owned by the Initial Borrower or any Consolidated Subsidiary (excluding an Unrestricted Subsidiary) in (a) common stock, partnership interests or membership interests of any Person and that is classified as “Common Stock,” “Partnership Units” or “Membership Units” on the consolidated schedule of investments of the Initial Borrower for the then most recently ended Fiscal Quarter, (b) preferred stock (other than redeemable preferred stock) of any Person and that is classified as “Preferred Stock’ on the consolidated schedule of investments of the Initial Borrower for the then most recently ended Fiscal Quarter, (c) redeemable preferred stock of any Person and that is classified as “Redeemable Preferred Stock” on the consolidated schedule of investments of the Initial Borrower for the then most recently ended Fiscal Quarter, and (d) warrants to purchase common stock, partnership interests or membership interests of any Person and that is classified as “Common Stock Warrants,” “Partnership Unit Warrants” or “Membership Unit Warrants” on the consolidated schedule of investments of the Initial Borrower for the then most recently ended Fiscal Quarter.

     “Issuing Lender” shall mean Bank of America, N.A., Wachovia and any other consenting Lender in their capacity as such designated by the Initial Borrower with the consent of the Administrative Agent.

     “Issuing Lender Fees” shall have the meaning set forth in Section 2.5(c).

     “Joinder Agreement’ shall mean a Joinder Agreement in substantially the form of Exhibit N executed and delivered by an Additional Credit Party in accordance with the provisions of Section 5.9.

     “Judgment Currency” shall have the meaning set forth in Section 9.19(b).

     “Lender” shall have the meaning set forth in the first paragraph of this Credit Agreement.

     “Letters of Credit” shall mean any letter of credit issued by the Issuing Lender pursuant to the terms hereof as such letter of credit may be amended, modified, extended, renewed or replaced from time to time.

     “Letter of Credit Fee” shall have the meaning set forth in Section 2.5(b).

     “LIBOR” means, in relation to any Loan other than an Alternate Base Rate Loan, to be advanced to, or owing by, any Borrower hereunder in any Currency (other than Euro) and any Interest Period relating thereto the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on the Screen as the London interbank offered rate for deposits in such Currency at approximately 11:00 A.M. (London time) two (2) Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If, for any reason, such rate is not available with respect to amounts denominated in such Currency on the Screen, then “LIBOR” shall mean (with respect to amounts denominated in such Currency) the rate per annum at which deposits in such Currency in an amount comparable to the Loans then requested are being offered to leading banks at approximately 11:00 A.M. London time, two (2) Business Days prior to the commencement of the applicable Interest Period for settlement in immediately

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available funds by leading banks in the London interbank market for a period equal to the Interest Period selected, as determined by the Administrative Agent.

     “LIBOR Market Index Rate” means, for any day, the one-month LIBOR Rate for Dollar deposits as reported on the Telerate Service, Telerate Page 3750 as of 11:00 A.M., London time, on such day, or if such day is not a Business Day, then the immediately preceding Business Day (or if not so reported, then as determined by the Swingline Lender from another recognized source for interbank quotation).

     “LIBOR Rate” for any Loan other than an Alternate Base Rate Loan, in any Currency (other than Euro), shall mean a rate per annum (rounded upwards, if necessary, to the next higher 1/100th of 1%) determined by the Administrative Agent pursuant to the following formula:

LIBOR Rate =	LIBOR
	1.00 — Eurocurrency Reserve Percentage

     “Lien” means, with respect to any asset, any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, security interest, security title, preferential arrangement constituting a security interest or encumbrance or encumbrance of any kind in respect of such asset to secure or assure payment of a Debt or a Guarantee, whether by consensual agreement or by operation of statute or other law, or by any agreement, contingent or otherwise, to provide any of the foregoing. An asset shall be deemed to be subject to a Lien if such asset is held by a special purpose entity (including any SPE Subsidiary) and the equity interests of such entity are themselves subject to a Lien. For the purposes of this Credit Agreement, a Person shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset.

     “LMIR Loan” means a Swingline Loan, or portion thereof, during any period in which it bears interest at a rate based upon the LIBOR Market Index Rate.

     “Liquid Real Estate Assets” means (a) residential mortgage-backed securities that (i) have a rating of not less than “AA” by S&P/Fitch and “Aa2” by Moody’s, (ii) are purchased by Initial Borrower or its Consolidated Subsidiaries solely to meet REIT asset and income tests, and (iii) are leveraged through debt facilities utilizing leverage greater than 12 times the amount of equity investment in such Liquid Real Estate Assets and (b) residential mortgage whole loan purchases made by the Initial Borrower or its Consolidated Subsidiaries solely to meet REIT asset and income tests, all in accordance with the Residential Mortgage Policies and Procedures.

     “Loan” shall mean a Revolving Loan or a Swingline Loan, as appropriate.

     “LOC Commitment” shall mean the commitment of the Issuing Lender to issue Letters of Credit and with respect to each Lender that has a Commitment, the commitment of such Lender to purchase participation interests in the Letters of Credit in an amount equal to such Lender’s Commitment Percentage of LOC Committed Amount, as such amount may be reduced from time to time in accordance with the provisions hereof.

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     “LOC Committed Amount” shall have the meaning set forth in Section 2.3(a).

     “LOC Documents” shall mean, with respect to any Letter of Credit, such Letter of Credit, any amendments thereto, any documents delivered in connection therewith, any application therefor, and any agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (a) the rights and obligations of the parties concerned, or (b) any collateral security for such obligations.

     “LOC Obligations” shall mean, at any time, the sum of (a) the maximum amount which is, or at any time thereafter may become, available to be drawn under Letters of Credit then outstanding, assuming compliance with all requirements for drawings referred to in such Letters of Credit, plus (b) the aggregate amount of all drawings under Letters of Credit honored by the Issuing Lender but not theretofore reimbursed.

     “Mandatory Cost Rate” shall mean the percentage rate per annum calculated in accordance with and in the manner set forth in Exhibit O.

     “Mandatory LOC Borrowing” shall have the meaning set forth in Section 2.3(e).

     “Mandatory Swingline Borrowing” shall have the meaning set forth in Section 2.4(b)(ii).

     “Margin Stock” means “margin stock” as defined in Regulations T, U or X of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder.

     “Material Adverse Change” means the occurrence of a Material Adverse Effect.

     “Material Adverse Effect” means with respect to any event or circumstance, a material adverse effect on (a) the business, financial condition, operations, performance or properties of the Borrower and its Subsidiaries, taken as a whole, (b) the validity, enforceability or collectibility of this Credit Agreement or any other Credit Document, (c) the rights and remedies of the Administrative Agent or any Lender under this Credit Agreement or any Credit Document, or (d) the ability of the Borrower and its Subsidiaries, taken as a whole, to perform its obligations under this Credit Agreement or any other Credit Document.

     “Material Contract” shall mean (a) any contract or other agreement of the Initial Borrower or any of its Subsidiaries listed by the Initial Borrower as a “material contract” in its public filings with the SEC, and (b) any other written contract, agreement, permit or license, of the Borrower or any of its Subsidiaries the failure to comply with which could reasonably be expected to have a Material Adverse Effect.

     “Monthly Report” has the meaning set forth in Section 5.2(b).

     “Moody’s” means Moody’s Investors Service, Inc., or any successor thereto.

     “Multiemployer Plan” shall have the meaning set forth in Section 4001(a)(3) of ERISA.

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     “National Currency” shall mean the currency, other than Euro, of a member state of the European Union.

     “Net Income” means, as applied to any Person for any period, the aggregate amount of net income of such Person, after taxes, for such period, as determined in accordance with GAAP.

     “Net Proceeds of Capital Stock/Conversion of Debt” means any and all proceeds (whether cash or non-cash) or other consideration received by the Initial Borrower and its Consolidated Subsidiaries, on a consolidated basis, in respect of the issuance of Capital Stock to a Person other than the Initial Borrower (including, without limitation, the aggregate amount of any and all Debt converted into Capital Stock), after deducting therefrom all reasonable and customary costs and expenses incurred by the Initial Borrower and such Consolidated Subsidiary in connection with the issuance of such Capital Stock in each case to the extent classified as equity on the consolidated balance sheet of the Initial Borrower and its Consolidated Subsidiaries.

     “Note” or “Notes” shall mean the Revolving Notes, and/or the Swingline Note, collectively, separately or individually, as appropriate.

     “Notice of Borrowing” shall mean a request for a Revolving Loan borrowing pursuant to Section 2.1(b)(i).

     “Notice of Conversion” shall mean the written notice of extension or conversion as referenced and defined in Section 2.10(a).

     “Notice of Swingline Borrowing” shall mean a request for a Swingline Loan borrowing pursuant to Section 2.4(b)(i).

     “Obligor” means with respect to any Investment, the Person or Persons obligated to make payments pursuant to such Investment or in the case of Investments in Equity, the issuer of such equity, including any guarantor thereof.

     “OFAC” shall mean the U.S. Department of the Treasury’s Office of Foreign Assets Control.

     “OREO Property” shall mean real property, securing an Investment, that has been acquired by the Initial Borrower or an Affiliate of the Initial Borrower through foreclosure or a deed in lieu of foreclosure.

     “Other Parties” shall have the meaning set forth in Section 10.7(c).

     “Participant” shall have the meaning set forth in Section 9.6(b).

     “Participating Member State” shall mean any member state of the European Union that adopts or has adopted Euro as its lawful currency in accordance with legislation of the European Union relating to the European Economic and Monetary Union.

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     “Participation Interest” shall mean a participation interest purchased by (a) a Lender in LOC Obligations as provided in Section 2.3(c), or (b) a participation interest purchased by a Lender in Swingline Loans as provided in Section 2.4.

     “PATRIOT Act” shall have the meaning set forth in Section 9.18.

     “PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.

     “Permitted Country” means each of Australia, Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Japan, Luxembourg, Portugal, Spain, Sweden, Switzerland, The Netherlands, The United Kingdom or the United States of America.

     “Permitted Lien” means with respect to the interest of the Borrower or any Subsidiary in the collateral related to any Investment, any of the following as to which no enforcement, collection, execution, levy or foreclosure proceedings shall have been commenced: (a) materialmen’s, warehousemen’s, mechanics’ and other liens arising by operation of law in the ordinary course of business for sums not due or sums that are being contested in good faith; (b) Liens for federal, state, municipal and other local taxes if such taxes are not at the time due and payable or if the Obligor shall currently be contesting the validity thereof in good faith by appropriate proceedings; (c) Liens held by senior lenders with respect to Investments in subordinated debt; and (d) Liens in favor of a collateral agent on behalf of all noteholders of the related Obligor.

     “Permitted Lines of Business” shall mean the line or lines of business conducted by the Initial Borrower and its Subsidiaries on the Closing Date (including, among other things, the lines of business contemplated for a Bank Subsidiary, investment management business, financial services business, the loan servicing business, commercial lending business, real estate investment business and mortgage lending business).

     “Person” means an individual, a corporation, a limited liability company, a partnership (including without limitation, a joint venture), an unincorporated association, a trust or any other entity or organization, including, but not limited to, a government or political subdivision or an agency or instrumentality thereof.

     “Plan” means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (a) maintained by a member of the Controlled Group for employees of any member of the Controlled Group, or (b) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five (5) plan years made contributions.

     “Portfolio Investments” means Investments made by the Initial Borrower or a Consolidated Subsidiary in the ordinary course of business and consistently with practices existing on the date hereof in a Person that is accounted for under GAAP as a portfolio investment of the Initial Borrower.

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     “Pounds Sterling” shall mean the lawful currency of the United Kingdom.

     “Prime Rate” shall have the meaning set forth in the definition of Alternate Base Rate.

     “Properties” means all real property owned, leased or otherwise used or occupied by any Credit Party or any Subsidiary of a Credit Party, wherever located.

     “Purchasing Lender” shall have the meaning set forth in Section 9.6(c).

     “Qualified Available Unpledged Assets” shall mean Available Unpledged Assets (a) good and marketable title to which is 100% owned by the Initial Borrower or a Consolidated Subsidiary; provided, however, that Investment Loans to Obligors that are organized outside of the United States, Investments in Equity Instruments or debt securities of any Person located outside of the United States or any other Available Unpledged Assets located outside of the United States must be directly owned by any Credit Party to be deemed Qualified Available Unpledged Assets; (b) free and clear of any Lien or encumbrance of any Person (other than Permitted Liens), (c) that are not the subject of a contractual or other prohibition or restraint that, directly or indirectly, prohibits or restrains or has the effect of prohibiting or restraining (i) any Consolidated Subsidiary (that is not a Credit Party) from transferring the Available Unpledged Assets to any Credit Party, or (ii) the Initial Borrower or any Consolidated Subsidiary from granting the Administrative Agent and Lenders a Lien on such Available Unpledged Assets, (d) originated or acquired without any fraud or material misrepresentation, and (e) in material compliance with all Applicable Laws.

     “Real Estate Loans” shall mean any loan that is an extension of credit fully secured by and underwritten to the value of the related Obligor’s interest in real property.

     “Real Property Owned” shall mean any real property owned in fee simple by the Initial Borrower or a Consolidated Subsidiary of the Initial Borrower; provided, however, that such term shall not include OREO Properties.

     “Register” shall have the meaning set forth in Section 9.6(d).

     “Reimbursement Obligation” shall mean the obligation of the Borrower to reimburse the Issuing Lender pursuant to Section 2.3(d) for amounts drawn under Letters of Credit.

     “REIT” shall mean a “real estate investment trust” as defined in Section 856(c)(5)(B) of the Code.

     “Related Property” means with respect to any Investment, any property or other assets of the Obligor thereunder pledged as collateral to secure the repayment of such Investment.

     “Release Condition” means the satisfaction of each of the following conditions: (a) all indebtedness (as defined in Section 10.1) that CSF owes to the Administrative Agent and/or the Lenders in its capacity as a Borrower has been indefeasibly paid in full in cash (or, in the case of Letters of Credit of which CSF is the actual account party, each such Letter of Credit has been cash collateralized in an amount equal to 103% of the stated and undrawn amount of such Letter of Credit and in the Currency in which such Letter of Credit was issued and otherwise on terms

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and conditions satisfactory to the applicable Issuing Lender) and there remains no commitment to make Revolving Loans to CSF; (b) the Administrative Agent shall have received written notice from CSF of its desire to terminate its rights as a Borrower with respect to the Commitment and LOC Commitment in accordance with Section 2.6(a)(ii); and (c) no Default or Event of Default shall have occurred and be continuing at the time of such termination pursuant to Section 2.6(a)(ii) or would result from such termination or the termination of the Guaranty Agreement.

     “Relevant Time” shall have the meaning set forth in Section 2.22(c).

     “Reorganization” shall mean, with respect to any Multiemployer Plan, the condition that such Plan is in reorganization within the meaning of such term as used in Section 4241 of ERISA.

     “Reportable Event” shall mean any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty (30) day notice period is waived under PBGC Reg. §4043.

     “Required Lenders” shall mean Lenders holding in the aggregate more than 50% of the sum of all Loans and LOC Obligations then outstanding at such time plus the aggregate unused Commitments at such time (treating for purposes hereof in the case of LOC Obligations, in the case of the Issuing Lender and the Swingline Loans, in the case of the Swingline Lender, only the portion of the LOC Obligations of the Issuing Lender and Swingline Loans of the Swingline Lender which are not subject to the Participation Interests of the other Lenders and, in the case of the Lenders other than the Issuing Lender and the Swingline Lender, the Participation Interests of such Lenders in LOC Obligations and Swingline Loans hereunder as direct obligations); provided, however, that if any Lender shall be a Defaulting Lender at such time, then there shall be excluded from the determination of Required Lenders, Loans and LOC Obligations (including Participation Interests) owing to such Defaulting Lender and such Defaulting Lender’s Commitments, or after termination of the Commitments, the principal balance of the Loans and LOC Obligations owing to such Defaulting Lender.

     “Residential Mortgage Policies and Procedures” shall mean the written residential mortgage policies and procedures manual of the Initial Borrower in the form provided to the Lenders prior to the Closing Date and attached hereto as Schedule 1.1(a) as it may be amended or supplemented from time to time.

     “Responsible Officer” shall mean, as to (a) the Borrower, the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer, and (b) any other Credit Party, any duly authorized officer thereof.

     “Restricted Payment” means (a) any dividend or other distribution on any shares of the Initial Borrower’s Capital Stock (except dividends payable solely in shares of its Capital Stock) or (b) any payment on account of the purchase, redemption, retirement or acquisition of (i) any shares of the Initial Borrower’s Capital Stock (except shares acquired upon the conversion thereof into other shares of its capital stock) or (ii) any option, warrant or other right to acquire shares of the Initial Borrower’s Capital Stock.

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     “Revolving Loans” shall have the meaning set forth in Section 2.1.

     “Revolving Note” shall have the meaning set forth in Section 2.1(e).

     “Risk Rating Level” means risk rating levels of 1 through 6, each as determined by the Initial Borrower in accordance with the risk rating scale as denoted on Schedule 1.1(b), as of any date of determination, and pertaining to any Investment Loan.

1.	“Risk Rated 1 Investment Loan” means any Investment Loan with a Risk Rating Level of
2.	“Risk Rated 2 Investment Loan” means any Investment Loan with a Risk Rating Level of
3.	“Risk Rated 3 Investment Loan” means any Investment Loan with a Risk Rating Level of
4.	“Risk Rated 4 Investment Loan” means any Investment Loan with a Risk Rating Level of
5.	“Risk Rated 5 Investment Loan” means any Investment Loan with a Risk Rating Level of
6.	“Risk Rated 6 Investment Loan” means any Investment Loan with a Risk Rating Level of

     “S&P” shall mean Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., and any successor thereto.

     “Sanctioned Entity” shall mean (i) an agency of the government of, (ii) an organization directly or indirectly controlled by, or (iii) a person resident in a country that is subject to a sanctions program identified on the list maintained by OFAC and available at http://www.treas.gov/offices/eotffc/ofac/sanctions/index.html, or as otherwise published from time to time as such program may be applicable to such agency, organization or person.

     “Sanctioned Person” shall mean a person named on the list of Specially Designated Nationals or Blocked Persons maintained by OFAC available at http://www.treas.gov/offices/eotffc/ofac/sdn/index.html, or as otherwise published from time to time.

     “Screen” shall mean, for:

     (a) any Currency (other than Euro), the relevant display page for LIBOR for such Currency (as determined by the Administrative Agent) on the Telerate Service; provided that, if the Administrative Agent determines in its reasonable judgment that there is no such relevant display page for LIBOR for such Currency, “Screen” means the relevant display page for LIBOR for such Currency (as determined by the Administrative Agent) on the Reuters Monitor Money Rates Service; and

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     (b) the Euro, the relevant display page for EURIBOR on the Telerate Screen (as determined by the Administrative Agent), which page shall display an average rate of the Banking Federation of the European Union for Euro; provided that, if such page or such service shall cease to be available, such other page or such other service for the purpose of displaying an average rate of the Banking Federation of the European Union as the Agent shall select.

     “SEC” shall mean the United States Securities and Exchange Commission.

     “Securitization Transaction” means any financing transaction undertaken by the Initial Borrower or an Affiliate of the Initial Borrower that is secured, directly or indirectly, by an Investment Loan or Real Property Owned or any portion thereof or interest therein, including any sale, lease, whole loan sale, asset securitization, secured loan or other transfer of one or more Investment Loans or Real Property Owned or any portion thereof.

     “Senior Unsecured Debt” shall mean any Debt that is not secured by a Lien and is not junior in right to payment with respect to any other Debt. For clarity, (i) the amount of Senior Unsecured Debt attributable to a revolving loan facility shall be the amount of Debt outstanding as of the date of determination, (ii) guaranties in respect of non-recourse secured real property financings that are limited to Customary Non-Recourse Exclusions shall not constitute Senior Unsecured Debt, and (iii) redemption obligations in respect of preferred stock (unless expressly senior in accordance with its terms) are deemed junior in right of payment to other Debt.

     “SPE Subsidiary” means a bankruptcy remote, special purpose entity that is a Wholly Owned Subsidiary of the Initial Borrower, created for the sole purpose of, and whose only business shall be, acquisition of Investment Loans or Real Property Owned pursuant to a Securitization Transaction and those activities incidental to the Securitization Transaction.

     “Stockholders Equity” means, at any time, the stockholders’ equity of the Initial Borrower and its Consolidated Subsidiaries, as set forth or reflected on the most recent consolidated balance sheet of the Initial Borrower and its Consolidated Subsidiaries prepared in accordance with GAAP.

     “Subsidiary” shall mean, as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a “Subsidiary” or to “Subsidiaries” in this Credit Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower or the Guarantors; provided, however, that, the term “Subsidiary” shall not include any Person that constitutes an Investment in Equity Instruments; provided, further that the term “Subsidiary” shall not include an Unrestricted Subsidiary unless as noted otherwise.

     “Swingline Commitment” shall mean the commitment of the Swingline Lender to make Swingline Loans in an aggregate principal amount at any time outstanding up to the Swingline

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Committed Amount, and the commitment of the Lenders to purchase participation interests in the Swingline Loans as provided in Section 2.4(b)(ii), as such amounts may be reduced from time to time in accordance with the provisions hereof.

     “Swingline Committed Amount” shall mean the amount of the Swingline Lender’s Swingline Commitment as specified in Section 2.4(a).

     “Swingline Lender” shall mean Wachovia and any successor swingline lender in their capacity as such.

     “Swingline Loan” shall have the meaning set forth in Section 2.4(a).

     “Swingline Note” shall mean the promissory note of the Initial Borrower in favor of the Swingline Lender evidencing the Swingline Loans provided pursuant to Section 2.4(d), as such promissory note may be amended, modified, supplemented, extended, renewed or replaced from time to time.

     “Taxes” shall have the meaning set forth in Section 2.18(a).

     “Transferee” shall have the meaning assigned in Section 9.6(f).

     “Transfer Effective Date” shall have the meaning set forth in each Commitment Transfer Supplement.

     “UCC” means the Uniform Commercial Code as from time to time in effect in the applicable jurisdiction or jurisdictions.

     “United States” means the United States of America.

     “Unrestricted Subsidiary” means (a) any Bank Subsidiary, and (b) any other Subsidiary designated as an “Unrestricted Subsidiary” in writing by the Initial Borrower to the Administrative Agent from time to time and consented to by the Required Lenders.

     “Unsecured Debt” means, at any time, the aggregate unpaid principal amount of all Debt of the Initial Borrower and its Consolidated Subsidiaries other than Debt of the Initial Borrower or a Consolidated Subsidiary secured by any Lien.

     “Voting Stock” shall mean, with respect to any Person, Capital Stock issued by such Person the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such contingency.

     “Wachovia” shall mean Wachovia Bank, National Association, a national banking association.

     “WCM” shall mean Wachovia Capital Markets, LLC.

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     “Wholly Owned Subsidiary” means any Subsidiary all of the shares of Capital Stock or other ownership interests of which (except directors’ qualifying shares) are at the time directly or indirectly owned by the Initial Borrower.

     Section 1.2. Other Definitional Provisions.

          (a) Unless otherwise specified therein, all terms defined in this Credit Agreement shall have the defined meanings when used in the Notes or other Credit Documents or any certificate or other document made or delivered pursuant hereto.

          (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

          (c) The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Credit Agreement shall refer to this Credit Agreement as a whole and not to any particular provision of this Credit Agreement, and Section, subsection, Schedule and Exhibit references are to this Credit Agreement unless otherwise specified.

          (d) The words “include”, “includes” and “including” shall be deemed to be followed by “without limitation” whether or not they are in fact followed by such words or words of like import.

          (e) The words “writing”, “written” and comparable terms shall refer to printing, typing, computer disk, e-mail, facsimile and other means of reproducing words in a visible form.

          (f) References to any agreement or contract are to such agreement or contract as amended, restated, supplemented or otherwise modified from time to time in accordance with the terms hereof and thereof. References to any Person include the successors and permitted assigns of such Person.

     Section 1.3. Accounting Terms.

     Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP applied on a basis consistent with the most recent audited consolidated financial statements of the Initial Borrower and its Consolidated Subsidiaries delivered to the Lenders; provided that, if the Initial Borrower notifies the Administrative Agent that it wishes to amend any covenant in Section 5.32 to eliminate the effect of any change in GAAP on the operation of such covenant (or if the Administrative Agent notifies the Initial Borrower that the Required Lenders wish to amend Section 5.32 for such purpose), then the Initial Borrower’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Initial Borrower and the Required Lenders.

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     Section 1.4. Computation of Time Periods.

     All time references in this Credit Agreement and the other Credit Documents shall be to Charlotte, North Carolina time unless otherwise indicated. For purposes of computation of periods of time hereunder, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding.”

     Section 1.5. Currencies Generally.

          (a) At any time, any reference in the definition of the term “Alternative Currency” or in any other provision of this Credit Agreement to the Currency of any particular nation means the lawful currency of such nation at such time whether or not the name of such Currency is the same as it was on the date hereof. For purposes of determining (i) whether the amount of any Revolving Loan, together with all other Revolving Loans, Swingline Loans and LOC Obligations outstanding or to be borrowed or issued at the same time as such Revolving Loan, would exceed the Committed Amount then in effect, (ii) whether the LOC Obligations exceed the LOC Committed Amount, and (iii) whether any Lender’s Commitment Percentage of any Revolving Loan (together with its Commitment Percentage of all other Revolving Loans, Swingline Loans and LOC Obligations then outstanding or to be borrowed or issued at the same time as such Revolving Loan) would exceed the amount of such Lender’s Commitment, the outstanding principal amount of any Revolving Loan or LOC Obligation that is denominated in any Alternative Currency shall be deemed to be the Dollar Equivalent of such amount of Alternative Currency determined as of the date of such Revolving Loan or LOC Obligation. Wherever in this Credit Agreement in connection with a Revolving Loan or LOC Obligation an amount, such as a required minimum or multiple amount, is expressed in Dollars, but such Revolving Loan or LOC Obligation is denominated in any Alternative Currency, such amount shall be the relevant Foreign Currency Equivalent of such Dollar amount (rounded to the nearest one thousandth). In addition, for purposes of complying with any requirement of this Credit Agreement stated in Dollars or calculating any ratio or other test set forth in this Credit Agreement, the amount of any Revolving Loan and LOC Obligation that is denominated in any Alternative Currency shall be deemed to be the Dollar Equivalent of such amount of Alternative Currency determined as of the date of such calculation.

          (b) Each obligation hereunder of any party hereto that is denominated in the National Currency of a state that is not a Participating Member State on the date hereof shall, effective from the date on which such state becomes a Participating Member State, be redenominated in Euro in accordance with the legislation of the European Union applicable to the European Monetary Union; provided that, if and to the extent that any such legislation provides that any such obligation of any such party payable within such Participating Member State by crediting an account of the creditor can be paid by the debtor either in Euro or such National Currency, such party shall be entitled to pay or repay such amount either in Euro or in such National Currency. If the basis of accrual of interest or fees expressed in this Credit Agreement with respect to any Alternative Currency of any country that becomes a Participating Member State after the date on which such currency becomes an Alternative Currency shall be inconsistent with any

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convention or practice in the interbank market for the basis of accrual of interest or fees in respect of Euro, such convention or practice shall replace such expressed basis effective as of and from the date on which such state becomes a Participating Member State; provided that, with respect to any Revolving Loan denominated in such currency that is outstanding immediately prior to such date, such replacement shall take effect at the end of the Interest Period therefor.

          (c) Without prejudice to the respective liabilities of the Borrower to the Lenders and the Lenders to the Borrower under or pursuant to this Agreement, each provision of this Credit Agreement shall be subject to such reasonable changes of construction as the Administrative Agent may from time to time, in consultation with the Initial Borrower, reasonably specify to be necessary or appropriate to reflect the introduction or changeover to Euro in any country that becomes a Participating Member State after the date hereof; provided that the Administrative Agent shall provide the Initial Borrower and each Lender with prior notice of the proposed change with an explanation of such change in sufficient time to permit the Initial Borrower and the Lenders an opportunity to respond to such proposed change.

ARTICLE II

THE LOANS; AMOUNT AND TERMS

     Section 2.1. Revolving Loans.

          (a) Revolving Commitment. Prior to the Commitment Termination Date, subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans in Dollars or in any Alternative Currency to the Borrower (“Revolving Loans”) from time to time for the purposes hereinafter set forth; provided, however, that (i) with regard to each Lender individually, the sum of such Lender’s share of outstanding Revolving Loans, plus such Lender’s Commitment Percentage of outstanding Swingline Loans, plus such Lender’s Commitment Percentage of LOC Obligations shall not exceed such Lender’s Commitment Percentage of the aggregate Committed Amount, and (ii) with regard to the Lenders collectively, the Advances Outstanding shall not exceed the aggregate Committed Amount then in effect. For purposes hereof, the aggregate amount available hereunder shall be FIVE HUNDRED FORTY-FIVE MILLION DOLLARS ($545,000,000.00) (as such aggregate maximum amount may be (A) increased from time to time as provided in Section 2.2, and (B) reduced from time to time as provided in Section 2.6, the “Committed Amount”); provided, however, that the aggregate principal amount of all outstanding Revolving Loans and LOC Obligations in Alternative Currencies shall not exceed thirty percent (30%) of the Committed Amount (“Alternative Currency Sub Limit”). Revolving Loans denominated in Dollars may consist of Alternate Base Rate Loans or EURIBOR/LIBOR Rate Loans, or a combination thereof, as the Initial Borrower may request, and may be repaid and reborrowed in accordance with the provisions hereof. Revolving Loans denominated in any Alternative Currency may consist of Alternate Base Rate Loans or EURIBOR/LIBOR Rate Loans, or a combination thereof, as the Borrower may request, and may be repaid and reborrowed in accordance with the provisions hereof.

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Notwithstanding the foregoing, any Revolving Loans made on the Closing Date or on either of the two Business Days immediately following the Closing Date may only consist of Alternate Base Rate Loans denominated in Dollars. Any Loans denominated in Dollars shall be made by each Lender at its Domestic Lending Office and any Loans denominated in any Alternative Currency shall be made by each Lender at its EURIBOR/LIBOR Lending Office.

          (b) Revolving Loan Borrowings.

               (i) Notice of Borrowing. The Borrower shall request a Revolving Loan borrowing by written notice (or telephone notice promptly confirmed in writing which confirmation may be by fax) to the Administrative Agent not later than 11:00 A.M. on the same Business Day of the requested borrowing in the case of Alternate Base Rate Loans denominated in Dollars, and on the third Business Day prior to the date of the requested borrowing in the case of EURIBOR/LIBOR Rate Loans denominated in Dollars, and on the fourth Business Day prior to the date of the requested borrowing in the case of Alternate Base Rate Loans or EURIBOR/LIBOR Rate Loans denominated in any Alternative Currency. Each such request for borrowing shall be irrevocable and shall specify (A) that a Revolving Loan is requested, (B) the date of the requested borrowing (which shall be a Business Day), (C) the aggregate principal amount to be borrowed, and (D) whether the borrowing shall be comprised of Alternate Base Rate Loans, EURIBOR/LIBOR Rate Loans or a combination thereof, the Currency therefor, and if EURIBOR/LIBOR Rate Loans are requested, the Interest Period(s) therefor. A form of Notice of Borrowing (a “Notice of Borrowing”) is attached as Exhibit A. If the Borrower shall fail to specify in any such Notice of Borrowing (1) an applicable Interest Period in the case of a EURIBOR/LIBOR Rate Loan, then such notice shall be deemed to be a request for an Interest Period of one month, (2) the type of Revolving Loan requested, then such notice shall be deemed to be a request for an Alternate Base Rate Loan hereunder or (3) the Currency of the Revolving Loan requested, then such notice shall be deemed to be a request by the Initial Borrower for an Alternate Base Rate Loan denominated in Dollars hereunder. The Administrative Agent shall give notice to each Lender promptly upon receipt of each Notice of Borrowing, the contents thereof and each such Lender’s share thereof.

               (ii) Minimum Amounts. Each Revolving Loan shall be in a minimum aggregate amount of $5,000,000 and integral multiples of $100,000 in excess thereof (or the remaining amount of the Committed Amount, if less).

               (iii) Advances. Each Lender will make its Commitment Percentage of each Revolving Loan borrowing available to the Administrative Agent for the account of the applicable Borrower at the office of the Administrative Agent specified in Section 9.2, or at such other office as the Administrative Agent may designate in writing, upon reasonable advance notice by 1:00 P.M. on the date specified in the applicable Notice of Borrowing, in the Currency of such Revolving Loan and in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the applicable Borrower by the Administrative Agent by crediting the account of the applicable Borrower on the books of such office with the aggregate of the amounts made

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available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent.

          (c) Repayment. The principal amount of all Revolving Loans shall be due and payable in full in the Currency of such Revolving Loan on the Commitment Termination Date.

          (d) Interest. Subject to the provisions of Section 2.9, Revolving Loans shall bear interest as follows:

               (i) Alternate Base Rate Loans. During such periods as any Revolving Loans shall be comprised of Alternate Base Rate Loans, each such Alternate Base Rate Loan shall bear interest at a per annum rate equal to the Alternate Base Rate; and

               (ii) EURIBOR/LIBOR Rate Loans. During such periods as any Revolving Loans shall be comprised of EURIBOR/LIBOR Rate Loans, each such Loan denominated in (a) any Currency (other than Euro) shall bear interest at a per annum rate equal to the sum of the applicable LIBOR Rate plus the Applicable Percentage, and (b) Euro shall bear interest at a per annum rate equal to the sum of the applicable EURIBOR plus the Applicable Percentage.

Interest on Revolving Loans shall be payable in arrears on each Interest Payment Date.

          (e) Revolving Notes. The Borrower’s obligation to pay each Lender’s Revolving Loans shall be evidenced by a revolving note made payable to such Lender in substantially the form of Exhibit B, if requested by such Lender (“Revolving Note”).

     Section 2.2. Increase of the Commitments.

          (a) Requests for Increase by Initial Borrower. The Initial Borrower may, at any time, propose that the Commitments hereunder be increased (each such proposed increase being a “Commitment Increase”) by notice to the Administrative Agent, specifying each existing Lender (each an “Increasing Lender”) and/or each additional lender (each an “Assuming Lender”) that shall have agreed to an additional Commitment and the date on which such increase is to be effective (the “Commitment Increase Date”), which shall be a Business Day at least five (5) Business Days after delivery of such notice and thirty (30) days prior to the Commitment Termination Date; provided that:

               (i) the minimum amount of the Commitment of any Assuming Lender, and the minimum amount of the increase of the Commitment of any Increasing Lender, as part of such Commitment Increase shall be $5,000,000 or a larger multiple of $5,000,000 in excess thereof;

               (ii) immediately after giving effect to such Commitment Increase, the total Commitments of all of the Lenders hereunder shall not exceed $1,250,000,000 less the amount of any permanent reductions in the aggregate Committed Amount pursuant to Section 2.6(a);

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               (iii) each Increasing Lender and Assuming Lender shall be consented to by the Administrative Agent (which consent shall not be unreasonably withheld or delayed);

               (iv) each Assuming Lender shall be consented to by the Issuing Lender (which consent shall not be unreasonably withheld or delayed), provided, that, consent from the Issuing Lender shall not be required if the Assuming Lender has a senior unsecured debt rating from any two of S&P, Moody’s and Fitch equal to or higher than A- (or A3 with respect to Moody’s);

               (v) no Default shall have occurred and be continuing on such Commitment Increase Date or shall result from the proposed Commitment Increase;

               (vi) the representations and warranties contained in this Credit Agreement shall be true and correct on and as of the Commitment Increase Date as if made on and as of such date (or, if any such representation and warranty is expressly stated to have been made as of a specific date, such representations and warranties shall be true and correct as of such specific date);

               (vii) the conditions set forth in Section 3.2 shall be satisfied; and

               (viii) the Borrower shall, if requested, execute such Notes as are necessary to reflect the increase in the Commitments.

          (b) Effectiveness of Commitment Increase by Initial Borrower. The Assuming Lender, if any, shall become a Lender hereunder as of such Commitment Increase Date and the Commitment of any Increasing Lender and such Assuming Lender shall be increased as of such Commitment Increase Date; provided, that:

               (i) the Administrative Agent shall have received on or prior to 11:00 A.M., Charlotte, North Carolina time, on such Commitment Increase Date, a certificate of a duly authorized officer of the Initial Borrower stating that each of the applicable conditions to such Commitment Increase set forth in the foregoing paragraph (a) has been satisfied; and

               (ii) each Assuming Lender or Increasing Lender shall have delivered to the Administrative Agent, on or prior to 11:00 A.M., Charlotte, North Carolina time, on such Commitment Increase Date, an agreement, in form and substance satisfactory to the Initial Borrower and the Administrative Agent, pursuant to which such Lender shall, effective as of such Commitment Increase Date, undertake a Commitment or an increase of Commitment, duly executed by such Assuming Lender or Increasing Lender and the Initial Borrower and acknowledged by the Administrative Agent.

          (c) Recordation into Register. Upon its receipt of an agreement referred to in clause (b)(ii) above executed by an Assuming Lender or any Increasing Lender, together with the certificate referred to in clause (b)(i) above, the Administrative Agent shall, if such agreement has been completed, (i) accept such agreement, (ii) record the

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information contained therein in the Register, and (iii) give prompt notice thereof to the Initial Borrower.

          (d) Adjustments of Borrowings upon Effectiveness of Increase. In the event that the Administrative Agent shall have received notice from the Initial Borrower as to any agreement with respect to a Commitment Increase on or prior to the relevant Commitment Increase Date and the actions provided for in clauses (b)(i) and (b)(ii) above shall have occurred by 11:00 A.M., Charlotte, North Carolina time, on such Commitment Increase Date, the Administrative Agent shall notify the Lenders (including any Assuming Lenders) of the occurrence of such Commitment Increase Date promptly on such date by facsimile transmission or e-mail. On the date of such Commitment Increase, the Borrower shall (i) prepay the outstanding Revolving Loans (if any) in full, (ii) simultaneously borrow new Revolving Loans (which new Revolving Loans shall be Alternate Base Rate Loans denominated in the same Currency as the Revolving Loans prepaid) hereunder in an amount equal to such prepayment; provided that with respect to subclauses (i) and (ii), (A) the prepayment to, and borrowing from, any existing Lender shall be effected by book entry to the extent that any portion of the amount prepaid to such Lender will be subsequently borrowed from such Lender, and (B) the existing Lenders, the Increasing Lenders and the Assuming Lenders shall make and receive payments among themselves, in a manner acceptable to the Administrative Agent, so that, after giving effect thereto, the Loans are held ratably by the Lenders in accordance with the respective Commitments of such Lenders (after giving effect to such Commitment Increase), and (iii) pay to the Lenders the amounts, if any, payable under Section 2.17 as a result of any such prepayment. Concurrently therewith, the Lenders shall be deemed to have adjusted their participation interests in any outstanding LOC Obligations so that such interests are held ratably in accordance with their Commitments as so increased.

     Section 2.3. Letter of Credit Subfacility.

          (a) Issuance. Subject to Section 2.3(h) and the other terms and conditions hereof and of the LOC Documents, if any, and any other terms and conditions which the Issuing Lender may reasonably require, prior to the Commitment Termination Date the Issuing Lender shall issue, and the Lenders shall participate in, Letters of Credit for the account of the Borrower from time to time upon request in a form acceptable to the Issuing Lender; provided, however, that (i) the aggregate amount of LOC Obligations shall not at any time exceed TWO HUNDRED FIFTY MILLION DOLLARS ($250,000,000) (the “LOC Committed Amount”), (ii) the Advances Outstanding shall not at any time exceed the aggregate Committed Amount then in effect, (iii) the Advances Outstanding in Alternative Currencies shall not exceed the Alternative Currency Sub Limit, (iv) all Letters of Credit shall be issued in Dollars or in an Alternative Currency (without limiting the provisions of Section 2.3(h), Letters of Credit issued in Dollars shall only be issued for the account of the Initial Borrower and Letters of Credit issued in Alternative Currencies shall be issued for the account of any Borrower) and (v) Letters of Credit shall be issued for any lawful corporate purposes and may be issued as standby letters of credit, and trade letters of credit. Except for the Existing Letters of Credit or as otherwise expressly agreed upon by all the Lenders, no Letter of Credit shall have an

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original expiry date more than twelve (12) months from the date of issuance; provided, however, so long as no Default or Event of Default has occurred and is continuing and subject to the other terms and conditions to the issuance of Letters of Credit hereunder, the expiry dates of Letters of Credit may be extended annually or periodically from time to time at the request of the applicable Borrower or by operation of the terms of the applicable Letter of Credit to a date not more than twelve (12) months from the then current date of expiry; provided, further, that no Letter of Credit, as originally issued or as extended, shall have an expiry date extending beyond the date that is one month prior to the Commitment Termination Date. Furthermore, unless otherwise agreed to by the Issuing Lender, no trade Letter of Credit shall have an expiry date more than 180 days from the date of issuance. Notwithstanding the foregoing, with the consent of the Administrative Agent and the Issuing Lender, Letters of Credit may have an expiry date extending beyond the date that is one month prior to the Commitment Termination Date provided that the Borrower deposits cash collateral (30 days prior to the Commitment Termination Date) with the Issuing Lender in an amount equal to 103% of the stated and undrawn amount of the Letter of Credit and in the Currency in which such Letter of Credit was issued. Each Letter of Credit shall comply with the related LOC Documents. The issuance date and expiry date of each Letter of Credit shall be a Business Day. Except for the Existing Letters of Credit, any Letters of Credit issued hereunder shall be in a minimum original face amount of $25,000.

          (b) Notice and Reports. Unless otherwise agreed to by the Issuing Lender and the applicable Borrower, the request for the issuance of a standby Letter of Credit shall be submitted to the Issuing Lender at least three (3) Business Days prior to the requested date of issuance, and the request for the issuance of a trade Letter of Credit shall be submitted to the Issuing Lender at least one (1) Business Day prior to the requested date of issuance. The Issuing Lender will on the date of issuance of each Letter of Credit and promptly upon request provide to the Administrative Agent a detailed report specifying the Letters of Credit which are then issued and outstanding and any activity with respect thereto which may have occurred since the date of any prior report, and including therein, among other things, the account party, the beneficiary, the face amount, expiry date as well as any payments or expirations which may have occurred. The Issuing Lender will further provide to the Administrative Agent promptly upon request copies of the Letters of Credit. The Issuing Lender will provide to the Administrative Agent, and any requesting Lender, promptly upon request a summary report of the nature and extent of LOC Obligations then outstanding.

          (c) Participations. Each Lender (other than the Issuing Lender of such Letter of Credit), upon issuance of any Letter of Credit (or upon such Person becoming a Lender hereunder), shall be deemed to have purchased without recourse a risk participation from the Issuing Lender in such Letter of Credit and the obligations arising thereunder and any collateral relating thereto, in each case in an amount equal to its Commitment Percentage of the obligations under such Letter of Credit and shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and be obligated to pay to the Issuing Lender therefor and discharge when due, its Commitment Percentage of the obligations arising under such Letter of Credit. Without limiting the scope and nature of each Lender’s participation in any Letter of Credit, to the extent that the Issuing Lender

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has not been reimbursed as required hereunder or under any LOC Document, each such Lender shall pay to the Issuing Lender its Commitment Percentage of such unreimbursed drawing in the Currency of such unreimbursed drawing and in same day funds on the day of notification by the Issuing Lender of an unreimbursed drawing pursuant to the provisions of subsection (d) below. The obligation of each Lender to so reimburse the Issuing Lender shall be absolute and unconditional and shall not be affected by the occurrence of a Default, an Event of Default or any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of the Borrower to reimburse the Issuing Lender under any Letter of Credit, together with interest as hereinafter provided.

          (d) Reimbursement. In the event of any drawing under any Letter of Credit, the Issuing Lender will promptly notify the Initial Borrower and the Administrative Agent. The Borrower shall reimburse the Issuing Lender on the day of drawing under any Letter of Credit (either with the proceeds of a Revolving Loan obtained hereunder or otherwise) in the Currency of such drawing and in same day funds as provided herein or in the LOC Documents. If the Borrower shall fail to reimburse the Issuing Lender as provided herein, the unreimbursed amount of such drawing shall bear interest at a per annum rate equal to the Alternate Base Rate applicable to the Currency of such drawing plus 2%. Unless the Borrower shall immediately notify the Issuing Lender and the Administrative Agent of its intent to otherwise reimburse the Issuing Lender, the Borrower shall be deemed to have requested a Revolving Loan in the Currency and the amount of the drawing as provided in subsection (e) below, the proceeds of which will be used to satisfy the reimbursement obligations. The Borrower’s reimbursement obligations hereunder shall be absolute and unconditional under all circumstances irrespective of any rights of set-off, counterclaim or defense to payment the Borrower may claim or have against the Issuing Lender, the Administrative Agent, the Lenders, the beneficiary of the Letter of Credit drawn upon or any other Person, including without limitation any defense based on any failure of the Borrower to receive consideration or the legality, validity, regularity or unenforceability of the Letter of Credit. The Issuing Lender will promptly notify the other Lenders of the Currency and amount of any unreimbursed drawing and each Lender shall promptly pay to the Administrative Agent for the account of the Issuing Lender, in such Currency and in immediately available funds, the amount of such Lender’s Commitment Percentage of such unreimbursed drawing. Such payment shall be made on the day such notice is received by such Lender from the Issuing Lender if such notice is received at or before 2:00 P.M., otherwise such payment shall be made at or before 12:00 Noon on the Business Day next succeeding the day such notice is received. If such Lender does not pay such amount to the Issuing Lender in full upon such request, such Lender shall, on demand, pay to the Administrative Agent for the account of the Issuing Lender interest on the unpaid amount during the period from the date of such drawing until such Lender pays such amount to the Issuing Lender in full at a rate per annum equal to (i), if such unpaid amount is owed in Dollars and paid within two Business Days of such date, the Federal Funds Effective Rate, and thereafter at a rate equal to the Alternate Base Rate or (ii) if such unpaid amount is owed in any Alternative Currency, the Alternate Base Rate. Each Lender’s obligation to make such payment to the Issuing Lender, and the right of the Issuing Lender to receive the same, shall be absolute and unconditional, shall not be affected by

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any circumstance whatsoever and without regard to the termination of this Credit Agreement or the Commitments hereunder, the existence of a Default or Event of Default or the acceleration of the Credit Party Obligations hereunder and shall be made without any offset, abatement, withholding or reduction whatsoever.

          (e) Repayment with Revolving Loans. On any day on which the Borrower shall have requested, or been deemed to have requested, a Revolving Loan to reimburse a drawing under a Letter of Credit, the Administrative Agent shall give notice to the Lenders that a Revolving Loan has been requested or deemed requested in connection with a drawing under a Letter of Credit, in which case a Revolving Loan borrowing shall be immediately made comprised entirely of Revolving Loans in the Currency of such drawing and bearing interest at the Alternate Base Rate applicable to the Currency of such drawing (each such borrowing, a “Mandatory LOC Borrowing”) pro rata based on each Lender’s respective Commitment Percentage (determined before giving effect to any termination of the Commitments pursuant to Section 7.2) and the proceeds thereof shall be paid directly to the Issuing Lender for application to the respective LOC Obligations. Each Lender hereby irrevocably agrees to make such Revolving Loans immediately upon any such request or deemed request on account of each Mandatory LOC Borrowing in the amount and in the manner specified in the preceding sentence and on the same such date (or, in the case of Mandatory LOC Borrowings in Alternative Currency, on the next Business Day) notwithstanding that (i) the amount of Mandatory LOC Borrowing may not comply with the minimum amount for borrowings of Revolving Loans otherwise required hereunder, (ii) whether any conditions specified in Section 3.2 are then satisfied, (iii) whether a Default or an Event of Default then exists, (iv) failure for any such request or deemed request for Revolving Loan to be made by the time otherwise required in Section 2.1(b), (v) the date of such Mandatory LOC Borrowing, or (vi) any reduction in the Committed Amount after any such Letter of Credit may have been drawn upon. In the event that any Mandatory LOC Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to the Borrower), then each such Lender hereby agrees that it shall forthwith fund (as of the date the Mandatory LOC Borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) its Participation Interests in the outstanding LOC Obligations; provided, further, that in the event any Lender shall fail to fund its Participation Interest on the day the Mandatory LOC Borrowing would otherwise have occurred, then the amount of such Lender’s unfunded Participation Interest therein shall bear interest payable by such Lender to the Issuing Lender upon demand, at the rate equal to (i), if such unfunded Participation Interest is owed in Dollars and paid within two Business Days of such date, the Federal Funds Effective Rate, and thereafter at a rate equal to the Alternate Base Rate or (ii) if such unfunded Participation Interest is owed in any Alternative Currency, the Alternate Base Rate.

          (f) Modification, Extension. The issuance of any supplement, modification, amendment, renewal, or extension to any Letter of Credit shall, for purposes hereof, be treated in all respects the same as the issuance of a new Letter of Credit hereunder; provided that such supplement, modification, amendment, renewal or extension shall not

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cause the Borrower to pay an additional Fronting Fee on such Letter of Credit except for any Fronting Fees due with respect to any increase in the stated amount of such Letter of Credit.

          (g) Letter of Credit Governing Law. Unless otherwise expressly agreed by the Issuing Lender and the Initial Borrower, when a Letter of Credit is issued, (i) the rules of the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance) shall apply to each standby Letter of Credit, and (ii) the rules of the Uniform Customs and Practice for Documentary Credits, as most recently published by the International Chamber of Commerce at the time of issuance, shall apply to each trade Letter of Credit.

          (h) Designation of Subsidiaries as Account Parties. Notwithstanding anything to the contrary set forth in this Credit Agreement, including without limitation Section 2.3(a), a Letter of Credit issued hereunder may contain a statement to the effect that such Letter of Credit is issued for the account of a Subsidiary of the Initial Borrower; provided that, notwithstanding such statement, the Initial Borrower shall be the actual account party for all purposes of this Credit Agreement for such Letter of Credit and such statement shall not affect the Initial Borrower’s reimbursement obligations hereunder with respect to such Letter of Credit. In no event shall a Letter of Credit be issued for the account of an SPE Subsidiary in connection with a Securitization Transaction or for the account of a Bank Subsidiary. Nothing in this Section 2.3(h) shall be construed to require the Issuing Lender to issue Letters of Credit for the account of a Subsidiary of the Initial Borrower where the Subsidiary is the actual account party.

          (i) Existing Letters of Credit. The letters of credit previously issued by Bank of America, N.A. and identified on Schedule 2.3(i) (the “Existing Letters of Credit”) shall be deemed to be Letters of Credit issued by the Issuing Lender pursuant to the Credit Agreement and shall be expressly subject to all of the terms and conditions of this Section 2.3. Notwithstanding anything to the contrary set forth in the Existing Letters of Credit, the Initial Borrower shall be deemed to be the account party for all purposes of this Credit Agreement. The Letter of Credit Fee shall be payable with respect to the Existing Letters of Credit pursuant to Section 2.5(b) for the period commencing on the date of this Credit Agreement to the expiry date of the applicable Existing Letters of Credit.

     Section 2.4. Swingline Loan Subfacility.

          (a) Swingline Commitment. Prior to the Commitment Termination Date, subject to the terms and conditions hereof, the Swingline Lender, in its individual capacity, agrees to make certain revolving credit loans to the Initial Borrower (each a “Swingline Loan” and, collectively, the “Swingline Loans”) for the purposes hereinafter set forth; provided, however, that (i) the aggregate amount of Swingline Loans outstanding at any time shall not exceed ONE HUNDRED MILLION DOLLARS ($100,000,000) (the “Swingline Committed Amount”), and (ii) the sum of the Advances Outstanding shall not exceed the Committed Amount. Swingline Loans hereunder may

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be repaid and reborrowed in accordance with the provisions hereof. Swingline Loans shall be made only in Dollars.

          (b) Swingline Loan Borrowings.

               (i) Notice of Borrowing and Disbursement. The Swingline Lender will make Swingline Loans available to the Initial Borrower on any Business Day upon delivery of a Notice of Swingline Borrowing by the Initial Borrower to the Administrative Agent not later than 2:00 P.M. on such Business Day. A form of Notice of Swingline Borrowing (a “Notice of Swingline Borrowing”) is attached as Exhibit E. Swingline Loan borrowings hereunder shall be made in minimum amounts of $100,000 and in integral amounts of $100,000 in excess thereof.

               (ii) Repayment of Swingline Loans. Each Swingline Loan borrowing shall be due and payable upon the earlier of (a) thirty (30) days after the Swingline Loan advance and (b) the Commitment Termination Date. The Swingline Lender may, at any time, in its sole discretion, by written notice to the Initial Borrower and the Administrative Agent, demand repayment of its Swingline Loans by way of a Revolving Loan borrowing, in which case the Initial Borrower shall be deemed to have requested a Revolving Loan borrowing denominated in Dollars comprised entirely of Alternate Base Rate Loans in the amount of such Swingline Loans; provided, however that, in the following circumstances, any such demand shall also be deemed to have been given one Business Day prior to each of (A) the Commitment Termination Date, (B) the occurrence of any Event of Default described in Section 7.1(f), (C) acceleration of the Credit Party Obligations hereunder, whether on account of an Event of Default described in Section 7.1(f) or any other Event of Default, and (D) the exercise of remedies in accordance with the provisions of Section 7.2 hereof (each such Revolving Loan borrowing made on account of any such deemed request therefor as provided herein being hereinafter referred to as “Mandatory Swingline Borrowing”). Each Lender hereby irrevocably agrees to make such Revolving Loans promptly upon any such request or deemed request on account of each Mandatory Swingline Borrowing in the amount and in the manner specified in the preceding sentence and on the same such date notwithstanding (1) the amount of Mandatory Swingline Borrowing may not comply with the minimum amount for borrowings of Revolving Loans otherwise required hereunder, (2) whether any conditions specified in Section 3.2 are then satisfied, (3) whether a Default or an Event of Default then exists, (4) failure of any such request or deemed request for Revolving Loans to be made by the time otherwise required in Section 2.1(b)(i), (5) the date of such Mandatory Swingline Borrowing, or (6) any reduction in the Committed Amount or termination of the Commitments immediately prior to such Mandatory Swingline Borrowing or contemporaneously therewith. In the event that any Mandatory Swingline Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code), then each Lender hereby agrees that it shall forthwith purchase (as of the date the Mandatory Swingline Borrowing would otherwise have occurred, but adjusted for any payments received from the Initial Borrower on or after such date and prior to such purchase) from the Swingline Lender such participations in the outstanding Swingline Loans as shall be necessary to cause each such Lender to share in such

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Swingline Loans ratably based upon its respective Commitment Percentage (determined before giving effect to any termination of the Commitments pursuant to Section 7.2); provided that (x) all interest payable on the Swingline Loans shall be for the account of the Swingline Lender until the date as of which the respective participation is purchased, and (y) at the time any purchase of participations pursuant to this sentence is actually made, the purchasing Lender shall be required to pay to the Swingline Lender interest on the principal amount of such participation purchased for each day from and including the day upon which the Mandatory Swingline Borrowing would otherwise have occurred to but excluding the date of payment for such participation, at the rate equal to, if paid within two Business Days of the date of the Mandatory Swingline Borrowing, the Federal Funds Effective Rate, and thereafter at a rate equal to the Alternate Base Rate.

          (c) Interest on Swingline Loans. Subject to the provisions of Section 2.9(b), Swingline Loans shall bear interest at a per annum rate equal to the LIBOR Market Index Rate plus the Applicable Percentage. Interest on Swingline Loans shall be payable in arrears on each Interest Payment Date.

          (d) Swingline Note. The Swingline Loans shall be evidenced by a duly executed promissory note of the Initial Borrower to the Swingline Lender in the original amount of the Swingline Committed Amount and substantially in the form of Exhibit F.

     Section 2.5. Fees.

          (a) Commitment Fee. In consideration of the Commitment, the Borrower agrees to pay to the Administrative Agent, for the ratable benefit of the Lenders, a commitment fee (the “Commitment Fee”) in an amount equal to the Applicable Percentage per annum on the average daily unused amount of the Committed Amount during the calendar quarter for which such fee is payable. For purposes of computation of the Commitment Fee, LOC Obligations shall be considered usage, but Swingline Loans shall not be considered usage, of the Committed Amount. The Commitment Fee shall be payable quarterly in arrears not later than five (5) Business Days following the last day of each calendar quarter for the prior calendar quarter.

          (b) Letter of Credit Fees. In consideration of the LOC Commitments, the Borrower agrees to pay to the Administrative Agent for the ratable benefit of the Lenders (including the Issuing Lender) a fee (the “Letter of Credit Fee”) equal to the Applicable Percentage for EURIBOR/LIBOR Rate Loans per annum on the average daily maximum amount available to be drawn under each Letter of Credit from the date of issuance to the date of expiration. The Letter of Credit Fee shall be payable quarterly in arrears not later than five (5) Business Days following the last day of each calendar quarter for the prior calendar quarter. In addition to the Letter of Credit Fee, the Borrower agrees to pay to the Issuing Lender, for its own account, a fronting fee (the “Fronting Fee”) equal to the greater of (i) one-eighth of one percent (0.125%) of the face amount of each Letter of Credit when issued, or (ii) $250. The Fronting Fee shall be payable quarterly in arrears not later than five (5) Business Days following the last day of each calendar quarter for the prior calendar quarter.

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          (c) Issuing Lender Fees. In addition to the Letter of Credit Fees and Fronting Fee payable pursuant to subsection (b) above, the Borrower shall pay to the Issuing Lender for its own account the reasonable and customary charges from time to time of the Issuing Lender with respect to the amendment, transfer, administration, cancellation and conversion of, and drawings under, such Letters of Credit (collectively, the “Issuing Lender Fees”).

          (d) Administrative Fee. The Borrower agrees to pay to the Administrative Agent, for its own account, an annual administrative fee of $35,000, due and payable quarterly, in advance, commencing on the Closing Date until the Commitments have been terminated and the Credit Party Obligations have been paid in full.

          (e) No Duplication. The fees payable under this Section 2.5 shall be owed and payable by the Initial Borrower; provided that if there is more than one Borrower hereunder and each has any LOC Obligations outstanding, the fees payable in subsections (b) and (c) above shall be payable by the Borrower that is the actual account party.

     Section 2.6. Commitment Reductions.

          (a) Voluntary Reductions.

               (i) The Initial Borrower shall have the right to terminate or permanently reduce the unused portion of the Committed Amount or the Alternative Currency Sub Limit at any time or from time to time upon not less than three (3) Business Days’ (or four (4) Business Days in the case of the Alternative Currency Sub Limit) prior written notice to the Administrative Agent (which shall notify the Lenders thereof as soon as practicable) of such termination or reduction, which notice shall specify the effective date thereof and the amount of any such reduction which shall be in a minimum amount of $1,000,000 or a whole multiple of $1,000,000 in excess thereof and shall be irrevocable and effective upon receipt by the Administrative Agent; provided that no such reduction or termination shall be permitted if after giving effect thereto, and to any prepayments of the Revolving Loans made on the effective date thereof, the Advances Outstanding would exceed the aggregate Committed Amount and/or the Alternative Currency Sub Limit then in effect; provided, further that, in the case of the proposed reduction or termination of the Alternative Currency Sub Limit, no Default or Event of Default shall have occurred and be continuing at the time of such proposed reduction or termination or would result from such reduction or termination.

               (ii) CSF shall have the right to terminate its rights as a Borrower with respect to the Commitment and LOC Commitment hereunder at any time or from time to time upon not less than three (3) Business Days’ (or four (4) Business Days’ in the case of the Alternative Currency Sub Limit) prior written notice to the Administrative Agent (which shall notify the Lenders thereof as soon as practicable) of such termination, which notice shall specify the effective date thereof and shall be irrevocable and effective upon receipt by the Administrative Agent; provided that (1) all indebtedness (as defined in Section 10.1) that CSF owes to the Administrative Agent and/or the Lenders in its capacity as a Borrower has been indefeasibly paid in full in cash (or, in the case of Letters

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of Credit of which CSF is the actual account party, each such Letter of Credit has been cash collateralized in an amount equal to 103% of the stated and undrawn amount of such Letter of Credit and in the Currency in which such Letter of Credit was issued and otherwise on terms and conditions satisfactory to the applicable Issuing Lender), and (2) no Default or Event of Default shall have occurred and be continuing at the time of such termination pursuant to this Section 2.6(a) or would result from such termination or the termination of the Guaranty Agreement.

          (b) Commitment Termination Date. The Commitment, the Swingline Commitment and the LOC Commitment shall automatically terminate on the Commitment Termination Date.

     Section 2.7. Prepayments.

          (a) Optional Prepayments. The Borrower shall have the right to prepay Loans in whole or in part from time to time; provided, however, that each partial prepayment of Revolving Loans shall be in a minimum principal amount of $1,000,000 and integral multiples of $100,000 in excess thereof, and each partial prepayment of a Swingline Loan shall be in a minimum principal amount of $100,000 and integral multiples of $100,000 in excess thereof. The Borrower shall give irrevocable notice of such prepayment in writing to the Administrative Agent (which shall notify the Lenders thereof as soon as practicable), which notice shall be at least: (i) three (3) Business Days prior to the proposed date of prepayment in the case of EURIBOR/LIBOR Rate Loans denominated in Dollars, (ii) one (1) Business Day prior to the proposed date of prepayment of Alternate Base Rate Loans denominated in Dollars, and (iii) four (4) Business Days prior to the proposed date of prepayment of Alternate Base Rate Loans and/or EURIBOR/LIBOR Rate Loans denominated in any Alternative Currency. Amounts prepaid under this Section 2.7(a) shall be applied to the outstanding Loans as the Borrower may elect; provided, that each Lender shall receive its pro rata share of any such prepayment based on its Commitment Percentage. All prepayments under this Section 2.7(a) shall be subject to Section 2.17, but otherwise without premium or penalty. Interest on the principal amount prepaid shall be payable on the next occurring Interest Payment Date that would have occurred had such Loan not been prepaid or, at the request of the Administrative Agent, interest on the principal amount prepaid shall be due and payable on any date that a prepayment is made hereunder through the date of prepayment. Amounts prepaid on the Revolving Loans and Swingline Loans may be reborrowed in accordance with the terms hereof.

          (b) Mandatory Prepayments.

               (i) Committed Amount. If at any time after the Closing Date, the Advances Outstanding shall exceed the aggregate Committed Amount then in effect, the Borrower immediately shall prepay the Revolving Loans and Swingline Loans and (after all Revolving Loans and Swingline Loans have been repaid) cash collateralize the LOC Obligations in an amount sufficient to eliminate such excess. All amounts required to be paid pursuant to this Section 2.7(b)(i) shall be paid and applied as follows: (A) first to the payment of outstanding Swingline Loans, (B), second, to the payment of outstanding

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Revolving Loans in the Currency in which such loans are owed; and (C) third, to a cash collateral account in respect of LOC Obligations in the Currency in which such LOC Obligations were issued. All prepayments under this Section 2.7(b)(i) shall be subject to Section 2.17 and be accompanied by interest on the principal amount prepaid through the date of prepayment.

               (ii) If at any time after the Closing Date, the aggregate principal amount of all outstanding Revolving Loans denominated in any Alternative Currency plus all outstanding LOC Obligations denominated in any Alternative Currency shall exceed 105% of the aggregate Alternative Currency Sub-Limit, the Borrower immediately shall prepay such Alternative Currency Revolving Loans and (after all such Revolving Loans have been repaid) cash collateralize such LOC Obligations in an amount sufficient to eliminate such excess. All amounts required to be paid pursuant to this Section 2.7(b)(ii) shall be paid and applied as follows: (A) first, to the payment of outstanding Revolving Loans in the Currency in which such loans are owed; and (B) second, to a cash collateral account in respect of LOC Obligations in the Currency in which such LOC Obligations were issued. All prepayments under this Section 2.7(b)(ii) shall be subject to Section 2.17 and be accompanied by interest on the principal amount prepaid through the date of prepayment. For purposes of the calculations set forth in this Section 2.7(b)(ii), Revolving Loans and LOC Obligations denominated in Alternative Currencies shall be redenominated in Dollars in an amount equal to the Dollar Equivalent thereof.

     Section 2.8. Minimum Principal Amounts.

     All borrowings, payments and prepayments in respect of Revolving Loans shall be in such amounts and be made pursuant to such elections so that after giving effect thereto the aggregate principal amount of the Revolving Loans comprising any borrowing shall be $1,000,000 or a whole multiple of $100,000 in excess thereof.

     Section 2.9. Default Rate and Payment Dates.

          (a) If (i) all or a portion of the principal amount of any EURIBOR/LIBOR Rate Loan shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the rate that would otherwise be applicable thereto plus 2%, until the end of the Interest Period applicable thereto and thereafter the unpaid portion of such Revolving Loan shall, if such Revolving Loan is not denominated in Dollars, automatically be redenominated in Dollars on the last day of such Interest Period in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such overdue amount shall bear interest at a rate per annum which is equal to the Alternate Base Rate applicable to Dollars plus 2% (the “ABR Default Rate”), (ii) all or a portion of the principal amount of any Alternate Base Rate Loan shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the ABR Default Rate, (iii) if any interest payable on the principal amount of any Loan shall not be paid when due (after the applicable grace period), such overdue amount, if such Loan is not denominated in Dollars, shall automatically be

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redenominated in Dollars on the due date therefor in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such overdue amount shall bear interest at a rate per annum which is equal to the ABR Default Rate, and (iv) if any fee or other amount shall not be paid when due, such overdue amount shall bear interest at a rate per annum which is equal to the ABR Default Rate, in each case noted above from the date of such non-payment until such amount is paid in full (after as well as before judgment).

          (b) Upon the occurrence, and during the continuance, of any other Event of Default hereunder, the principal of and, to the extent permitted by law, interest on the Loans and any other amounts owing hereunder shall bear interest, payable on demand, at a per annum rate which is (A) in the case of principal, the rate that would otherwise be applicable thereto, plus 2%, or (B) in the case of interest, fees or other amounts, the Alternate Base Rate applicable to the Currency of such Loan plus 2% (after as well as before judgment). The Required Lenders shall have the right to revoke the imposition of any default interest imposed under this Section 2.9(b).

          (c) Interest on each Loan shall be payable in arrears on each Interest Payment Date; provided that interest accruing pursuant to subsection (b) of this Section 2.9 shall be payable from time to time on demand.

     Section 2.10. Conversion Options.

          (a) The Borrower may, in the case of Revolving Loans elect from time to time to convert Alternate Base Rate Loans to EURIBOR/LIBOR Rate Loans by giving the Administrative Agent at least: (i) three (3) Business Days’ prior irrevocable written notice of such election in the case of Loans denominated in Dollars and (ii) at least four (4) Business Days’ prior irrevocable written notice of such election in the case of Loans denominated in any Alternative Currency. In addition, the Borrower may elect from time to time to convert EURIBOR/LIBOR Rate Loans to Alternate Base Rate Loans by giving the Administrative Agent irrevocable written notice by 11:00 A.M. one Business Day prior to the proposed date of conversion. A form of Notice of Conversion is attached as Exhibit C (the “Notice of Conversion”). If the date upon which an Alternate Base Rate Loan is to be converted to a EURIBOR/LIBOR Rate Loan is not a Business Day, then such conversion shall be made on the next succeeding Business Day. All or any part of outstanding Alternate Base Rate Loans may be converted as provided herein; provided that (i) no Loan may be converted into a EURIBOR/LIBOR Rate Loan when any Default or Event of Default has occurred and is continuing, and (ii) partial conversions shall be in an aggregate principal amount of $1,000,000 or a whole multiple of $100,000 in excess thereof. EURIBOR/LIBOR Rate Loans may only be converted to Alternate Base Rate Loans on the last day of the applicable Interest Period. If the date upon which a EURIBOR/LIBOR Rate Loan is to be converted to an Alternate Base Rate Loan is not a Business Day, then such conversion shall be made on the next succeeding Business Day and during the period from such last day of an Interest Period to such succeeding Business Day such Loan shall bear interest as if it were an Alternate Base Rate Loan.

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          (b) Any EURIBOR/LIBOR Rate Loan may be continued as such upon the expiration of an Interest Period with respect thereto by the Borrower giving the Administrative Agent at least four (4) Business Days prior irrevocable notice of such election (or the Initial Borrower giving the Administrative Agent at least three (3) Business Days’ prior irrevocable written notice of such election in the case of EURIBOR/LIBOR Rate Loans denominated in Dollars); provided, that no EURIBOR/LIBOR Rate Loan may be continued as such when any Default or Event of Default has occurred and is continuing, in which case such Loan shall be automatically converted to an Alternate Base Rate Loan at the end of the applicable Interest Period with respect thereto. If the Borrower shall fail to give timely notice of an election to continue any EURIBOR/LIBOR Rate Loan, or the continuation of any EURIBOR/LIBOR Rate Loan is not permitted hereunder, such EURIBOR/LIBOR Rate Loan shall be automatically converted to an Alternate Base Rate Loan at the end of the applicable Interest Period with respect thereto.

     Section 2.11. Computation of Interest and Fees.

          (a) Interest payable hereunder with respect to any Alternate Base Rate Loan based on the Prime Rate or any Alternative Currency borrowing denominated in Pounds Sterling shall be calculated on the basis of a year of 365 days (or 366 days, as applicable) for the actual days elapsed. Subject to the foregoing, all fees, interest and all other amounts payable hereunder shall be calculated on the basis of a 360 day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Initial Borrower and the Lenders of each determination of EURIBOR and a LIBOR Rate on the Business Day of the determination thereof. Any change in the interest rate on a Loan resulting from a change in the Alternate Base Rate shall become effective as of the opening of business on the day on which such change in the Alternate Base Rate shall become effective. The Administrative Agent shall as soon as practicable notify the Initial Borrower and the Lenders of the effective date and the amount of each such change.

          (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Credit Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Initial Borrower, deliver to the Initial Borrower a statement showing the computations used by the Administrative Agent in determining any interest rate.

          (c) It is the intent of the Lenders and the Credit Parties to conform to and contract in strict compliance with applicable usury law from time to time in effect. All agreements between the Lenders and the Credit Parties are hereby limited by the provisions of this paragraph which shall override and control all such agreements, whether now existing or hereafter arising and whether written or oral. In no way, nor in any event or contingency (including but not limited to prepayment or acceleration of the maturity of any Loan), shall the interest taken, reserved, contracted for, charged, or received under this Credit Agreement, under the Notes or otherwise, exceed the maximum nonusurious amount permissible under Applicable Law. If, from any possible construction of this Credit Agreement or any other document, interest would otherwise be

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payable in excess of the maximum nonusurious amount, any such construction shall be subject to the provisions of this paragraph and such interest shall be automatically reduced to the maximum nonusurious amount permitted under Applicable Law, without the necessity of execution of any amendment or new document. If any Lender shall ever receive anything of value which is characterized as interest on the Loans under Applicable Law and which would, apart from this provision, be in excess of the maximum nonusurious amount, an amount equal to the amount which would have been excessive interest shall, without penalty, be applied to the reduction of the principal amount owing on the Loans and not to the payment of interest, or refunded to the Borrower or the other payor thereof if and to the extent such amount which would have been excessive exceeds such unpaid principal amount of the Loans. The right to demand payment of the Loans or any other amount required to be paid hereunder does not include the right to receive any interest which has not otherwise accrued on the date of such demand, and the Lenders do not intend to charge or receive any unearned interest in the event of such demand. All interest paid or agreed to be paid to the Lenders with respect to the Loans shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated, and spread throughout the full stated term (including any renewal or extension) of the Loans so that the amount of interest on account of such indebtedness does not exceed the maximum nonusurious amount permitted by Applicable Law.

     Section 2.12. Pro Rata Treatment and Payments.

          (a) Allocation of Payments Before Event of Default. Each borrowing of Revolving Loans and any reduction of the Commitments shall be made pro rata according to the respective Commitment Percentages of the Lenders. Each payment under this Credit Agreement or any Note shall be applied, first, to any fees then due and owing by the Borrower pursuant to Section 2.5, second, to interest then due and owing hereunder and under the Notes and, third, to principal then due and owing hereunder and under the Notes. Each payment on account of any fees pursuant to Section 2.5 shall be made pro rata in accordance with the respective amounts due and owing (except as to the Fronting Fees and the Issuing Lender Fees). Each optional prepayment on account of principal of the Loans shall be applied in accordance with Section 2.7(a); provided, that prepayments made pursuant to Section 2.15 shall be applied in accordance with such Section. Each mandatory prepayment on account of principal of the Loans shall be applied in accordance with Section 2.7(b). All payments (including prepayments) to be made by the Borrower on account of principal, interest and fees shall be made without defense, set-off or counterclaim (except as provided in Section 2.18(b)) and shall be made to the Administrative Agent for the account of the Lenders at the Administrative Agent’s office specified on Section 9.2 in immediately available funds not later than 1:00 P.M. on the date when due. All amounts owing under this Credit Agreement are payable in Dollars; provided, however, that the principal of, and interest on, any Revolving Loan denominated in any Alternative Currency (except as otherwise provided in Section 2.9), breakage costs relating to, and participations in, and reimbursements of drawings under Letters of Credit denominated in, any Alternative Currency, shall only be payable in such Alternative Currency. In addition, the cash collateralization of outstanding Letters of Credit denominated in any Alternative Currency (when required under this Credit Agreement) shall be in such Alternative Currency. The Administrative Agent shall

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distribute such payments to the Lenders entitled thereto promptly upon receipt in like funds as received. If any payment hereunder (other than payments on EURIBOR/LIBOR Rate Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a EURIBOR/LIBOR Rate Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day.

          (b) Allocation of Payments After Exercise of Remedies. Notwithstanding any other provisions of this Credit Agreement to the contrary, after the Commitments shall have been terminated and the Loans and all other amounts under this Credit Agreement shall have become due and payable in accordance with the terms of Section 7.2 hereof, all amounts collected or received by the Administrative Agent or any Lender on account of the Credit Party Obligations or any other amounts outstanding hereunder shall be paid over or delivered as follows:

          FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable attorneys’ and consultants’ fees) of the Administrative Agent in connection with enforcing the rights of the Lenders hereunder;

          SECOND, to payment of any fees owed to the Administrative Agent;

          THIRD, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation, reasonable attorneys’ and consultants’ fees) of each of the Lenders in connection with enforcing its rights under the Credit Documents or otherwise with respect to the Credit Party Obligations owing to such Lender;

          FOURTH, to the payment of all accrued fees and interest;

          FIFTH, to the payment of the outstanding principal amount of the Loans and the payment or cash collateralization of the outstanding LOC Obligations;

          SIXTH, to all other Credit Party Obligations and other obligations due and payable hereunder or otherwise and not repaid pursuant to clauses “FIRST” through “FIFTH” above; and

          SEVENTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus.

In carrying out the foregoing: (i) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category; (ii) each of the Lenders shall receive an amount equal to its pro rata share (based on the proportion of the then outstanding Loans and LOC Obligations held by such Lender) of amounts available to be applied pursuant to clauses “THIRD,” “FOURTH,” “FIFTH” and “SIXTH” above; and (iii) to the extent that any amounts available for distribution pursuant to clause “FIFTH” above are attributable to

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the issued but undrawn amount of outstanding Letters of Credit, such amounts shall be held by the Administrative Agent in a cash collateral account and applied (A) first, to reimburse the Issuing Lender from time to time for any drawings under such Letters of Credit, and (B) then, following the expiration of all Letters of Credit, to all other obligations of the types described in clauses “FIFTH” and “SIXTH” above in the manner provided in this Section 2.12(b).

     Section 2.13. Non-Receipt of Funds by the Administrative Agent.

     (a) Except as provided in Section 2.13(d), unless the Administrative Agent shall have been notified in writing by a Lender prior to the date a Loan is to be made by such Lender (which notice shall be effective upon receipt) that such Lender does not intend to make the proceeds of such Loan available to the Administrative Agent, the Administrative Agent may assume that such Lender has made such proceeds available to the Administrative Agent on such date, and the Administrative Agent may in reliance upon such assumption (but shall not be required to) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent, the Administrative Agent shall be able to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent’s demand therefor, the Administrative Agent will promptly notify the Initial Borrower, and the Borrower shall immediately pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from such Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding amount is recovered by the Administrative Agent at a per annum rate equal to (i) from the Borrower at the applicable rate for the applicable borrowing pursuant to the Notice of Borrowing, and (ii) from a Lender at the Federal Funds Effective Rate with respect to Loans denominated in Dollars and at the Alternative Base Rate with respect to Loans denominated in any Alternative Currency.

     (b) Except as provided in Section 2.13(d), unless the Administrative Agent shall have been notified in writing by the Borrower, prior to the date on which any payment is due from it hereunder (which notice shall be effective upon receipt) that the Borrower does not intend to make such payment, the Administrative Agent may assume that such Borrower has made such payment when due, and the Administrative Agent may in reliance upon such assumption (but shall not be required to) make available to each Lender on such payment date an amount equal to the portion of such assumed payment to which such Lender is entitled hereunder, and if the Borrower has not in fact made such payment to the Administrative Agent, such Lender shall, on demand, repay to the Administrative Agent the amount made available to such Lender. If such amount is repaid to the Administrative Agent on a date after the date such amount was made available to such Lender, such Lender shall pay to the Administrative Agent on demand interest on such amount in respect of each day from the date such amount was made available by the Administrative Agent to such Lender to the date such amount is recovered by the Administrative Agent at a per annum rate equal to the Federal Funds Effective Rate with respect to Loans denominated in Dollars and at the Alternative Base Rate with respect to Loans denominated in any Alternative Currency.

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     (c) A certificate of the Administrative Agent submitted to the Initial Borrower or any Lender with respect to any amount owing under this Section 2.13 shall be conclusive in the absence of manifest error.

     (d) On the date of any borrowing of a Revolving Loan in any Alternative Currency, the Administrative Agent shall make available to the applicable Borrower the proceeds of such borrowing only upon actual receipt by the Administrative Agent from each Lender of such Lender’s pro rata portion of such borrowing in such Alternative Currency. On the date that any payment of the principal of or interest on any Revolving Loan denominated in any Alternative Currency is due, the Administrative Agent shall make available to each Lender such Lender’s pro rata portion of such payment only upon actual receipt by the Administrative Agent from the Borrower of such payment.

     Section 2.14. Inability to Determine Interest Rate.

     Notwithstanding any other provision of this Credit Agreement, if (a) the Administrative Agent shall reasonably determine (which determination shall be conclusive and binding absent manifest error) that, by reason of circumstances affecting the relevant market, reasonable and adequate means do not exist for ascertaining EURIBOR and/or LIBOR for any Currency for any Interest Period, or (b) the Required Lenders shall reasonably determine (which determination shall be conclusive and binding absent manifest error) that EURIBOR and/or the LIBOR Rate does not adequately and fairly reflect the cost to such Lenders of funding EURIBOR/LIBOR Rate Loans that the Borrower has requested during such Interest Period, the Administrative Agent shall forthwith give telephone notice of such determination, confirmed in writing, to the Initial Borrower, and the Lenders at least two Business Days prior to the first day of such Interest Period. Unless the Initial Borrower shall have notified the Administrative Agent upon receipt of such telephone notice that it wishes to rescind or modify the request regarding such EURIBOR/LIBOR Rate Loans, any Loans that were requested to be made as EURIBOR/LIBOR Rate Loans shall be made as Alternate Base Rate Loans in the applicable Currency and any Loans that were requested to be converted into or continued as EURIBOR/LIBOR Rate Loans shall remain as or be converted into Alternate Base Rate Loans in the applicable Currency. Until any such notice has been withdrawn by the Administrative Agent, no further Loans shall be made as, continued as, or converted into, EURIBOR/LIBOR Rate Loans for the Interest Periods so affected.

     Section 2.15. Illegality.

     Notwithstanding any other provision of this Credit Agreement, if the adoption of or any change in any requirement of Applicable Law or in the interpretation or application thereof by the relevant Governmental Authority to any Lender shall make it unlawful for such Lender or its EURIBOR/LIBOR Lending Office to make or maintain EURIBOR/LIBOR Rate Loans in any Currency as contemplated by this Credit Agreement or to obtain in the interbank eurodollar market through its EURIBOR/LIBOR Lending Office the funds with which to make such Loans, (a) such Lender shall promptly notify the Administrative Agent and the Initial Borrower thereof, (b) the commitment of such Lender hereunder to make or continue EURIBOR/LIBOR Rate Loans in such Currency shall forthwith be suspended until the Administrative Agent shall give notice that the condition or situation which gave rise to the suspension shall no longer exist, and

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(c) such Lender’s Loans then outstanding as EURIBOR/LIBOR Rate Loans, if any, shall be converted on the last day of the Interest Period for such Loans or within such earlier period as required by law as Alternate Base Rate Loans. The Borrower hereby agrees promptly to pay any Lender, upon its demand, any additional amounts necessary to compensate such Lender for actual and direct costs (but not including anticipated profits) reasonably incurred by such Lender in making any repayment in accordance with this Section 2.15 including, but not limited to, any interest or fees payable by such Lender to lenders of funds obtained by it in order to make or maintain its EURIBOR/LIBOR Rate Loans hereunder. A certificate as to any additional amounts payable pursuant to this Section 2.15 submitted by such Lender, through the Administrative Agent, to the Initial Borrower shall be conclusive in the absence of manifest error. Each Lender agrees to use reasonable efforts (including reasonable efforts to change its EURIBOR/LIBOR Lending Office) to avoid or to minimize any amounts which may otherwise be payable pursuant to this Section 2.15; provided, however, that such efforts shall not cause the imposition on such Lender of any additional costs or legal or regulatory burdens deemed by such Lender to be material.

     Section 2.16. Requirements of Law.

     (a) If the adoption of or any change in any requirement of Applicable Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof:

          (i) shall subject such Lender to any tax of any kind whatsoever with respect to any Letter of Credit, any participation therein or any application relating thereto, any EURIBOR/LIBOR Rate Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for changes in the rate of tax on the overall net income of such Lender);

          (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of EURIBOR or the LIBOR Rate hereunder; or

          (iii) shall impose on such Lender any other condition;

and the result of any of the foregoing is to increase the cost to such Lender of making or maintaining EURIBOR/LIBOR Rate Loans or the Letters of Credit or the participations therein or to reduce any amount receivable hereunder or under any Note, then, in any such case, the Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such additional cost or reduced amount receivable which such Lender reasonably deems to be material as determined by such Lender with respect to its EURIBOR/LIBOR Rate Loans or Letters of Credit.

     (b) Without prejudice to paragraph (a) (but without double-counting), if and so long as any Lender is required by (i) the Bank of England or any other monetary or

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other authority of the United Kingdom or (ii) the European Central Bank to make special deposits, to maintain reserve asset ratios or to pay fees, in each case in respect of such Lender’s EURIBOR/LIBOR Rate Loans, such Lender may require the Borrower to pay, contemporaneously with each payment of interest on each of such Loans, additional interest on such Loan at a rate per annum equal to the Mandatory Cost Rate.

     (c) A certificate as to any additional amounts payable pursuant to this Section 2.16 submitted by such Lender, through the Administrative Agent, to the Initial Borrower shall be conclusive in the absence of manifest error. Each Lender agrees to use reasonable efforts (including reasonable efforts to change its Domestic Lending Office or EURIBOR/LIBOR Lending Office, as the case may be) to avoid or to minimize any amounts which might otherwise be payable pursuant to this paragraph of this Section 2.16; provided, however, that such efforts shall not cause the imposition on such Lender of any additional costs or legal or regulatory burdens deemed by such Lender to be material.

     (d) If any Lender shall have reasonably determined that the adoption of or any change in any requirement of Applicable Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any central bank or Governmental Authority made subsequent to the date hereof does or shall have the effect of reducing the rate of return on such Lender’s or such corporation’s capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender’s or such corporation’s policies with respect to capital adequacy) by an amount reasonably deemed by such Lender to be material, then from time to time, within fifteen (15) days after demand by such Lender, the Borrower shall pay to such Lender such additional amount as shall be certified by such Lender as being required to compensate it for such reduction. Such a certificate as to any additional amounts payable under this Section 2.16 submitted by a Lender (which certificate shall include a description of the basis for the computation), through the Administrative Agent, to the Initial Borrower shall be conclusive absent manifest error.

     (e) The agreements in this Section 2.16 shall survive the termination of this Credit Agreement and payment of the Notes and all other amounts payable hereunder.

     Section 2.17. Indemnity.

     The Borrower hereby agrees to indemnify each Lender and to hold such Lender harmless from any funding loss or expense which such Lender may sustain or incur as a consequence of (a) the failure by the Borrower to pay the principal amount of or interest on any Loan by such Lender in accordance with the terms hereof, (b) the failure of the Borrower to accept a borrowing after the Borrower has given a notice in accordance with the terms hereof, (c) the failure of the Borrower to make any prepayment after the Borrower has given a notice in accordance with the terms hereof, and/or (d) the making by the Borrower of a prepayment of a Loan, or the conversion thereof, on a day which is not the last day of the Interest Period with respect thereto,

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in each case including, but not limited to, any such loss or expense arising from interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain its Loans hereunder. In addition, the Borrower agrees to indemnify and hold each Lender harmless from any loss, cost or expense which such Lender may sustain or incur as a result or consequence of (a) the payment of any LOC Obligation denominated in Alternative Currency on a date other than the due date thereof or (b) the payment of any Credit Party Obligation denominated in Alternative Currency in a different Currency. A certificate as to any additional amounts payable pursuant to this Section 2.17 submitted by any Lender, through the Administrative Agent, to the Initial Borrower (which certificate must be delivered to the Administrative Agent within thirty (30) days following such default, prepayment or conversion) shall be conclusive in the absence of manifest error. The agreements in this Section 2.17 shall survive termination of this Credit Agreement and payment of the Notes and all other amounts payable hereunder.

     Section 2.18. Taxes.

     (a) All payments made by the Borrower hereunder or under any Note will be, except as provided in Section 2.18(b), made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any Governmental Authority or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding any tax imposed on or measured by the net income or profits of a Lender pursuant to the laws of the jurisdiction in which it is organized or the jurisdiction in which the principal office or applicable lending office of such Lender is located or any subdivision thereof or therein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as “Taxes”). If any Taxes are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Credit Agreement or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or in such Note. The Borrower will furnish to the Administrative Agent as soon as practicable after the date the payment of any Taxes is due pursuant to Applicable Law certified copies (to the extent reasonably available and required by law) of tax receipts evidencing such payment by the Borrower. The Borrower agrees to indemnify and hold harmless each Lender, and reimburse such Lender upon its written request, for the amount of any Taxes so levied or imposed and paid by such Lender.

     (b) Each Lender that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) agrees to deliver to the Initial Borrower and the Administrative Agent on or prior to the Closing Date, or in the case of a Lender that is an assignee or transferee of an interest under this Credit Agreement pursuant to Section 9.6(c) (unless the respective Lender was already a Lender hereunder immediately prior to such assignment or transfer), on the date of such assignment or transfer to such Lender, (i) if the Lender is a “bank” within the meaning of Section 881(c)(3)(A) of the Code, two accurate and complete original signed copies of Internal Revenue Service Form W-8BEN, W-8ECI or W-8IMY (or successor forms) certifying such Lender’s entitlement to a complete exemption from United States withholding tax with respect to payments to be

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made under this Credit Agreement and under any Note, or (ii) if the Lender is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code, Internal Revenue Service Form W-8BEN, W-8ECI or W-8IMY as set forth in clause (i) above, or (A) a certificate substantially in the form of Exhibit L (any such certificate, a “2.18 Certificate”), and (B) two accurate and complete original signed copies of Internal Revenue Service Form W-8BEN (or successor form) certifying such Lender’s entitlement to an exemption from United States withholding tax with respect to payments of interest to be made under this Credit Agreement and under any Note. In addition, each Lender agrees that it will deliver upon the Initial Borrower’s request updated versions of the foregoing, as applicable, whenever the previous certification has become obsolete or inaccurate in any material respect, together with such other forms as may be required in order to confirm or establish the entitlement of such Lender to a continued exemption from or reduction in United States withholding tax with respect to payments under this Credit Agreement and any Note. Notwithstanding anything to the contrary contained in Section 2.18(a), but subject to the immediately succeeding sentence, (1) the Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold Taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, fees or other amounts payable hereunder for the account of any Lender which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. federal income tax purposes to the extent that such Lender has not provided to the Initial Borrower U.S. Internal Revenue Service Forms that establish a complete exemption from such deduction or withholding, and (2) the Borrower shall not be obligated pursuant to Section 2.18(a) hereof to gross-up payments to be made to a Lender in respect of Taxes imposed by the United States if (I) such Lender has not provided to the Initial Borrower the Internal Revenue Service Forms required to be provided to the Initial Borrower pursuant to this Section 2.18(b), or (II) in the case of a payment, other than interest, to a Lender described in clause (ii) above, to the extent that such Forms do not establish a complete exemption from withholding of such Taxes. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 2.18, the Borrower agrees to pay additional amounts and to indemnify each Lender in the manner set forth in Section 2.18(a) (without regard to the identity of the jurisdiction requiring the deduction or withholding) in respect of any amounts deducted or withheld by it as described in the immediately preceding sentence as a result of any changes after the Closing Date in any Applicable Law, treaty, governmental rule, regulation, guideline or order, or in the interpretation thereof, relating to the deducting or withholding of Taxes.

     (c) Each Lender agrees to use reasonable efforts (including reasonable efforts to change its Domestic Lending Office or EURIBOR/LIBOR Lending Office, as the case may be) to avoid or to minimize any amounts which might otherwise be payable pursuant to this Section 2.18; provided, however, that such efforts shall not cause the imposition on such Lender of any additional costs or legal or regulatory burdens deemed by such Lender in its sole discretion to be material.

     (d) If the Borrower pays any additional amount pursuant to this Section 2.18 with respect to a Lender, such Lender shall use reasonable efforts to obtain a refund of tax or credit against its tax liabilities on account of such payment; provided that such

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Lender shall have no obligation to use such reasonable efforts if either (i) it is in an excess foreign tax credit position, or (ii) it believes in good faith, in its sole discretion, that claiming a refund or credit would cause adverse tax consequences to it. In the event that such Lender receives such a refund or credit, such Lender shall pay to the Initial Borrower an amount that such Lender reasonably determines is equal to the net tax benefit obtained by such Lender as a result of such payment by the Borrower. In the event that no refund or credit is obtained with respect to the Borrower’s payments to such Lender pursuant to this Section 2.18, then such Lender shall upon request provide a certification that such Lender has not received a refund or credit for such payments. Nothing contained in this Section 2.18 shall require a Lender to disclose or detail the basis of its calculation of the amount of any tax benefit or any other amount or the basis of its determination referred to in the proviso to the first sentence of this Section 2.18 to the Borrower or any other party.

     (e) The agreements in this Section 2.18 shall survive the termination of this Credit Agreement and the payment of the Notes and all other amounts payable hereunder.

     Section 2.19. Indemnification; Nature of Issuing Lender’s Duties.

     (a) In addition to its other obligations under Section 2.3, the Borrower hereby agrees to protect, indemnify, pay and save the Issuing Lender and each Lender harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys’ fees) that the Issuing Lender or such Lender may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit, or (ii) the failure of the Issuing Lender to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions, herein called “Government Acts”).

     (b) As between the Borrower and the Issuing Lender and each Lender, the Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. Neither the Issuing Lender nor any Lender shall be responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of a Letter of Credit to comply fully with conditions required in order to draw upon a Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) for errors in interpretation of technical terms; (vi) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under a Letter of Credit or of the proceeds thereof; and (vii) for any consequences arising from causes beyond the control of the Issuing Lender or any Lender, including, without

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limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of the Issuing Lender’s rights or powers hereunder.

     (c) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Issuing Lender or any Lender, under or in connection with any Letter of Credit or the related certificates, if taken or omitted in the absence of gross negligence or willful misconduct, shall not put such Issuing Lender or such Lender under any resulting liability to the Borrower. It is the intention of the parties that this Credit Agreement shall be construed and applied to protect and indemnify the Issuing Lender and each Lender against any and all risks involved in the issuance of the Letters of Credit, all of which risks are hereby assumed by the Borrower, including, without limitation, any and all risks of the acts or omissions, whether rightful or wrongful, of any Government Authority. The Issuing Lender and the Lenders shall not, in any way, be liable for any failure by the Issuing Lender or anyone else to pay any drawing under any Letter of Credit as a result of any Government Acts or any other cause beyond the control of the Issuing Lender and the Lenders.

     (d) Nothing in this Section 2.19 is intended to limit the reimbursement obligation of the Borrower contained in Section 2.3(d) hereof. The obligations of the Borrower under this Section 2.19 shall survive the termination of this Credit Agreement. No act or omissions of any current or prior beneficiary of a Letter of Credit shall in any way affect or impair the rights of the Issuing Lender and the Lenders to enforce any right, power or benefit under this Credit Agreement.

     (e) Notwithstanding anything to the contrary contained in this Section 2.19, the Borrower shall have no obligation to indemnify the Issuing Lender or any Lenders in respect of any liability incurred by the Issuing Lender or such Lender arising out of the gross negligence or willful misconduct of the Issuing Lender (including action not taken by the Issuing Lender or such Lender), as determined by a court of competent jurisdiction or pursuant to arbitration.

     Section 2.20. Extension of Commitment Termination Date.

     Prior to the two year anniversary of the Closing Date, Initial Borrower may extend the Commitment Termination Date to a date that is not later than twelve (12) months after the then-effective Commitment Termination Date, no more than one time, upon: (a) delivery of a Facility Extension Request in the form attached hereto as Exhibit M (the “Facility Extension Request”) to Administrative Agent; (b) payment to Administrative Agent for the benefit of the Lenders of a facility extension fee equal to twenty basis points (0.20%) on the then-existing Committed Amount (i.e., 0.20% times the Committed Amount); and (c) payment by Borrower of all fees and expenses to Administrative Agent and the Lenders to the extent then due. Such extension shall be evidenced by delivery of written confirmation of the same by Administrative Agent to Initial Borrower; provided, that:

          (i) no Default or Event of Default shall have occurred and be continuing; and

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          (ii) the representations and warranties contained in this Credit Agreement shall be true and correct on and as of the Facility Extension Request as if made on and as of such date (or, if any such representation and warranty is expressly stated to have been made as of a specific date, such representations and warranties shall be true and correct as of such specific date).

     Section 2.21. Replacement of Lenders.

     If Borrower becomes obligated to pay additional amounts to any Lender pursuant to Section 2.16 or Section 2.18, then Initial Borrower may within sixty (60) days thereafter designate another bank or financial institution which is acceptable to Agent in its reasonable discretion (such other bank or financial institution being called a “Replacement Lender”) to purchase the Loans of such Lender and such Lender’s rights hereunder, without recourse to or warranty by, or expense to, such Lender, for a purchase price equal to the outstanding principal amount of the Loans payable to such Lender plus any accrued but unpaid interest on such Loans and all accrued but unpaid fees owed to such Lender and any other amounts payable to such Lender under this Credit Agreement (all such amounts shall only be payable in the Currency in which they are owed under this Agreement), and to assume all the obligations of such Lender hereunder, and, upon such purchase and assumption (pursuant to a Commitment Transfer Supplement), such Lender shall no longer be a party hereto or have any rights hereunder (other than rights with respect to indemnities and similar rights applicable to such Lender prior to the date of such purchase and assumption) and shall be relieved from all obligations to Borrower hereunder, and the Replacement Lender shall succeed to the rights and obligations of such Lender hereunder. Nothing in this Section 2.21 shall be deemed to relieve Borrower of its obligation to pay additional amounts to any Lender pursuant to Section 2.16 or Section 2.18.

     Section 2.22. Additional Limitations on CSF as Borrower. Notwithstanding anything to the contrary contained in this Agreement (but subject to Section 2.3(h)), in no event shall any Revolving Loan or Letter of Credit be issued to, or for the account of, CSF if the Guaranty Agreement is not in full force and effect with respect to the Initial Borrower and CSI.

     Section 2.23. Several Liability of the Borrower. Without limiting the obligations of the Initial Borrower or CSI as a guarantor under the Guaranty Agreement or of CSF as a Guarantor under the Guaranty in Article X hereof, each Borrower shall be severally (and not jointly) liable for any and all of the Revolving Loans made directly to it as a Borrower, and Letters of Credit issued for the actual account of it as a Borrower.

     Section 2.24. Currency Conversion of Loans. Except as otherwise provided in Section 2.9, in no event shall the Currency in which any outstanding Alternate Base Rate Loan or EURIBOR/LIBOR Rate Loan is denominated be changed or converted into another Currency (including, without limitation, if any such Loan is converted to an Alternate Base Rate Loan or LIBOR Rate Loan pursuant to Section 2.10).

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ARTICLE III

CONDITIONS PRECEDENT

     Section 3.1. Conditions to Closing.

     This Credit Agreement shall become effective upon, and the obligation of each Lender to make the initial Loans, and the Issuing Lender to issue Letters of Credit on the Closing Date is subject to, the satisfaction of the following conditions precedent:

     (a) Execution of Credit Agreement and Credit Documents. The Administrative Agent shall have received (i) counterparts of this Credit Agreement, executed by a duly authorized officer of each party hereto, (ii) a Note, for the account of each Lender that requests a Note, (iii) for the account of the Swingline Lender, the Swingline Note, and (iv) counterparts of any other Credit Document, executed by the duly authorized officers of the parties thereto.

     (b) Authority Documents. The Administrative Agent shall have received the following:

          (i) Certificate of Incorporation, Etc. Copies of the certificate of incorporation or other charter or formation documents of each Credit Party certified to be true and complete as of a recent date by the appropriate governmental authority of the state of its incorporation or formation, as the case may be.

          (ii) Resolutions. Copies of resolutions of the board of directors or other comparable managing body of each Credit Party approving and adopting the Credit Documents, the transactions contemplated therein and authorizing execution and delivery thereof, certified by an officer or the managing member of such Credit Party as of the Closing Date to be true and correct and in force and effect as of such date.

          (iii) Bylaws. A copy of the bylaws and/or operating agreement of each Credit Party certified by an officer or managing member of such Credit Party as of the Closing Date to be true and correct and in force and effect as of such date.

          (iv) Good Standing. Copies of certificates of good standing, existence or its equivalent with respect to each Credit Party certified as of a recent date by the appropriate governmental authorities of the state of incorporation or formation, as the case may be, and each other state in which such Credit Party is qualified to do business.

          (v) Incumbency. An incumbency certificate of each Credit Party certified by a secretary or assistant secretary pursuant to the Secretary Certificate substantially in the form of Exhibit D (“Secretary’s Certificate”) to be true and correct as of the Closing Date, in form and substance satisfactory to Administrative Agent.

     (c) Personal Property Collateral. The Administrative Agent shall have received, in form and substance satisfactory to the Administrative Agent: (i) searches of UCC filings in the jurisdiction of the chief executive office and state of incorporation of

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each Credit Party and each jurisdiction where Credit Party’s personal property is located; and (ii) copies of the financing statements on file in such jurisdictions.

     (d) Legal Opinions of Counsel. The Administrative Agent shall have received an opinion of counsel for each Credit Party from Hogan and Hartson LLP dated the Closing Date and addressed to the Administrative Agent and the Lenders in form and substance satisfactory to Administrative Agent.

     (e) Fees. The Administrative Agent and the Lenders shall have received all fees, if any, owing pursuant to Section 2.5 and any fee or commitment letter.

     (f) Litigation. There shall not exist any pending or threatened litigation, investigation, bankruptcy or insolvency, injunction, order or claim affecting or relating to any Credit Party or any of their Subsidiaries, this Credit Agreement and the other Credit Documents, that has not been settled, dismissed, vacated, discharged or terminated prior to the Closing Date which could reasonably be expected to result in a Material Adverse Effect.

     (g) Government Consent. The Administrative Agent shall have received evidence that all governmental, shareholder and material third party consents and approvals necessary in connection with the financings and other transactions contemplated hereby have been obtained.

     (h) Compliance with Laws. The Loans and other transactions contemplated hereby shall be in compliance with all Applicable Laws and regulations (including all applicable securities and banking laws, rules and regulations).

     (i) Bankruptcy. There shall be no Insolvency Proceedings with respect to any Credit Party or any of their Subsidiaries.

     (j) Financial Statements. The Administrative Agent and the Lenders shall have received copies of the financial statements referred to in Section 5.1 hereof, each in form and substance satisfactory to it.

     (k) No Material Adverse Change. Since December 31, 2005, there has been no Material Adverse Change with respect to the Borrower and its Subsidiaries taken as a whole.

     (l) Financial Condition Certificate. The Administrative Agent shall have received a certificate, substantially in the form of Exhibit G (“Solvency Certificate”) and certified as accurate by a Responsible Officer, demonstrating compliance by the Borrower and its Subsidiaries as of the Closing Date with the financial covenants contained in Section 5.32 hereof.

     (m) Officer’s Certificate. The Administrative Agent shall have received a certificate executed by a Responsible Officer of each Credit Party as of the Closing Date stating that (i) no action, suit, investigation or proceeding is pending or, to the knowledge of each such Credit Party, threatened in any court or before any arbitrator or

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governmental instrumentality that purports to affect the Credit Parties or the transactions contemplated by the Credit Documents, if such action, suit, investigation or proceeding could reasonably be expected to have a Material Adverse Effect, and (ii) immediately after giving effect to this Credit Agreement (including the initial Loans hereunder), the other Credit Documents, and all the transactions contemplated therein or thereby to occur on such date, (A) no Default or Event of Default exists, and (B) all representations and warranties contained herein and in the other Credit Documents are true and correct in all material respects.

     (n) Borrower Information Certificate. The Administrative Agent shall have received a certificate substantially in the form of Exhibit K (“Borrower Information Certificate”), for benefit of itself and the Lenders, provided by each Credit Party that sets forth information required by the PATRIOT Act including, without limitation, the identity of each Credit Party, the name and address of each Credit Party and other information that will allow the Administrative Agent or any Lender, as applicable, to identify each Credit Party in accordance with the PATRIOT Act.

     (o) Additional Matters. All other documents and legal matters in connection with the transactions contemplated by this Credit Agreement shall be reasonably satisfactory in form and substance to the Administrative Agent and its counsel.

     Section 3.2. Conditions to All Extensions of Credit.

     The obligation of each Lender to make any Extension of Credit hereunder is subject to the satisfaction of the following conditions precedent on the date of making such Extension of Credit:

     (a) Representations and Warranties. The representations and warranties made by the Credit Parties herein or which are contained in any certificate furnished at any time under or in connection herewith shall be true and correct on and as of the date of such Extension of Credit as if made on and as of such date (except for those which expressly relate to an earlier date, in which case, such representations and warranties shall be true and correct as of such earlier date).

     (b) No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Extension of Credit to be made on such date unless such Default or Event of Default shall have been waived in accordance with this Credit Agreement.

     (c) Compliance with Covenants. Immediately after giving effect to the making of any such Extension of Credit, each Credit Party is in compliance with each of the covenants set forth herein.

     (d) Compliance with Commitments. Immediately after giving effect to the making of any such Extension of Credit (and the application of the proceeds thereof), (i) the sum of the aggregate principal amount of outstanding Revolving Loans, plus outstanding Swingline Loans, plus LOC Obligations shall not exceed the Committed Amount then in effect, (ii) the LOC Obligations shall not exceed the LOC Committed

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Amount, (iii) the Swingline Loans shall not exceed the Swingline Committed Amount, and (iv) the aggregate principal amount of outstanding Revolving Loans denominated in any Alternative Currency plus LOC Obligations denominated in any Alternative Currency shall not exceed the Alternative Currency Sub-Limit. For purposes of completing the calculations set forth in this Section 3.2(d), Revolving Loans and LOC Obligations denominated in Alternative Currencies shall be redenominated in Dollars in an amount equal to the Dollar Equivalent thereof.

     (e) Additional Conditions to Revolving Loans. If such Loan is made pursuant to Section 2.1, all applicable conditions set forth in such Section shall have been satisfied.

     (f) Additional Conditions to Letters of Credit. If such Extension of Credit is made pursuant to Section 2.3, all applicable conditions set forth in such Section shall have been satisfied.

     (g) Material Adverse Change. There shall have been no Material Adverse Change to the Credit Parties and their Subsidiaries taken as whole.

     Each request for an Extension of Credit and each acceptance by the Borrower of any such Extension of Credit shall be deemed to constitute a representation and warranty by each Credit Party as of the date of such Extension of Credit that the applicable conditions in paragraphs (a) through (g) of this Section 3.2 have been satisfied.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

     To induce the Lenders to enter into this Credit Agreement and to make the Extension of Credit herein provided for, each of the Credit Parties hereby represents and warrants to the Administrative Agent and to each Lender that:

     Section 4.1. Existence and Power. Each of the Credit Parties (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) is duly qualified to transact business in every jurisdiction where, by the nature of its business, such qualification is necessary, except for such jurisdictions where the failure to so qualify could not reasonably be expected to have a Material Adverse Effect, and (c) has all organizational powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except for those licenses, permits or other approvals, the absence of which could not reasonably be expected to have a Material Adverse Effect.

     Section 4.2. Organizational and Governmental Authorization; No Contravention. The execution, delivery and performance by each Credit Party of the Credit Documents to which each such Credit Party is a party (a) are within each such Credit Party’s organizational powers, (b) have been duly authorized by all necessary organizational action, (c) require no action by or in respect of, or filing with, any governmental body, agency or official, (d) do not contravene any provision of any Applicable Law or regulation or of the organizational documents of each Credit Party or of any judgment, injunction, order, decree, or constitute a default under any material agreement binding upon the Credit Parties or any of their Subsidiaries, and (e) do not result in

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the creation or imposition of any Lien on any asset of the Credit Parties or any of their Subsidiaries.

     Section 4.3. Binding Effect. This Credit Agreement constitutes a valid and binding agreement of each Credit Party enforceable in accordance with its terms, and the Notes and the other Credit Documents, when executed and delivered in accordance with this Credit Agreement, will constitute valid and binding obligations of the Credit Parties enforceable in accordance with their respective terms, provided that the enforceability hereof and thereof is subject in each case to general principles of equity and to Insolvency Laws.

     Section 4.4. Financial Information. (a) The consolidated balance sheet of the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries) as of December 31, 2005 and the related consolidated statements of income, shareholders’ equity and cash flows for the Fiscal Year then ended, reported on by a Big 4 Accounting Firm, copies of which have been delivered to each of the Lenders, fairly present, in conformity with GAAP, the consolidated financial position of the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries) as of such dates and their consolidated results of operations and cash flows for such periods stated.

     (b) Since December 31, 2005 there has been no event, act, condition or occurrence which has had or could reasonably be expected to have a Material Adverse Effect.

     Section 4.5. Litigation. There is no investigation, action, suit or proceeding pending, or to the knowledge of the Credit Parties threatened, against or affecting any Credit Party or any Subsidiary (including Unrestricted Subsidiaries) of a Credit Party before any court or arbitrator or any governmental body, agency or official which could reasonably be expected to have a Material Adverse Effect or which purports to affect the validity or enforceability of the Credit Documents.

     Section 4.6. Compliance with ERISA. (a) The Borrower and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA.

     (b) Neither the Borrower nor any member of the Controlled Group is or ever has been obligated to contribute to any Multiemployer Plan.

     (c) The assets of Borrower or any Subsidiary do not and will not constitute “plan assets,” within the meaning of ERISA, the Code and the respective regulations promulgated thereunder. The execution, delivery and performance of this Credit Agreement, and the borrowing and repayment of amounts hereunder, do not and will not constitute “prohibited transactions” under ERISA or the Code.

     Section 4.7. Taxes. There have been filed on behalf of the Borrower and its Subsidiaries all Federal tax returns and, to the Borrower’s knowledge all state and local income, excise, property and other tax returns which are required to be filed by them and all taxes due

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pursuant to such returns or pursuant to any assessment received by or on behalf of the Borrower or any Subsidiary have been paid prior to becoming delinquent (other than taxes currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Borrower). The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate.

     Section 4.8. Subsidiaries. Each of the Borrower’s Subsidiaries (including Unrestricted Subsidiaries) (a) is an entity duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, except as could not reasonably be expected to have a Material Adverse Effect, (b) is duly qualified to transact business in every jurisdiction where, by the nature of its business, such qualification is necessary, except for such jurisdictions where the failure to qualify could not reasonably be expected to have a Material Adverse Effect, and (c) has all organizational powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted except those licenses, permits or other approvals, the absence of which could not reasonably be expected to have a Material Adverse Effect. As of the date hereof, the Borrower has no Subsidiaries except those Subsidiaries listed on Schedule 4.8, which accurately sets forth each such Subsidiary’s complete name and jurisdiction of incorporation.

     Section 4.9. Investment Company Act. None of the Credit Parties is (i) an “investment company” or a company controlled by an “investment company” that has elected to be regulated as a “business development company” within the meaning of the Investment Company Act, or (ii) a person qualifying for treatment as a “regulated investment company” under the Code.

     Section 4.10. [Reserved]

     Section 4.11. Ownership of Property. Each Credit Party and each of their Subsidiaries has title to its properties sufficient for the conduct of its business.

     Section 4.12. No Default. None of the Credit Parties nor any of their respective Subsidiaries is in default under or with respect to any agreement, instrument or undertaking to which it is a party or by which it or any of its property is bound which could reasonably be expected to have a Material Adverse Effect. No event has occurred and is continuing and no condition exists, or would result from the Extension of Credit or from the application of the proceeds therefrom, which constitutes a Default or Event of Default.

     Section 4.13. Full Disclosure.

     (a) None of the factual information (other than projections) heretofore furnished (including any information furnished in public filings) in writing by any Credit Party for purposes of or in connection with this Credit Agreement contains any untrue statement of a material fact, or when taken together with all other written information so furnished omits to state any material fact necessary to make any information not materially misleading.

     (b) Any projections heretofore furnished by the Borrower to the Administrative Agent for purposes of or in connection with the Credit Agreement were

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prepared in good faith on the basis of the assumptions stated therein, which assumptions were fair in light of the conditions existing at the time of delivery of such forecasts, and represented, at the time of the delivery, the Borrower’s best estimate of its future financial performance.

     (c) Each Credit Party has disclosed to the Lenders in writing any and all facts which are reasonably likely to have a Material Adverse Effect.

     Section 4.14. Environmental Matters. Except as could not reasonably be expected to have a Material Adverse Effect:

     (a) None of the Credit Parties nor any of their Subsidiaries (including Unrestricted Subsidiaries) is subject to any Environmental Liability and none of the Credit Parties or any their Subsidiaries (including Unrestricted Subsidiaries) has been designated as a potentially responsible party under CERCLA. None of the Properties has been identified on any current or proposed (i) National Priorities List under 40 C.F.R. § 300, (ii) CERCLIS list, or (iii) any list arising from a state statute similar to CERCLA.

     (b) No Hazardous Materials have been or are being used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed or otherwise handled at, or shipped or transported to or from the Properties or are otherwise present at, on, in or under the Properties, or, to the best of the knowledge of any Credit Party, at or from any adjacent site or facility, except for Hazardous Materials, such as cleaning solvents, pesticides and other materials used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, and managed or otherwise handled in minimal amounts in the ordinary course of business in compliance with all applicable Environmental Requirements.

     (c) Each Credit Party and each of their Subsidiaries (including Unrestricted Subsidiaries) and Affiliates, has procured all Environmental Authorizations necessary for the conduct of its business, and is in compliance with all Environmental Requirements in connection with the operation of the Properties and the Credit Parties, and each of their respective Subsidiary’s (including Unrestricted Subsidiaries) and Affiliate’s, respective businesses.

     Section 4.15. Compliance with Laws. Each Credit Party and each Subsidiary (including Unrestricted Subsidiaries) of the Credit Parties is in compliance with all Applicable Laws, including, without limitation, all Environmental Laws except in such instances in which failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

     Section 4.16. Capital Stock. All Capital Stock, debentures, bonds, notes and all other securities of the Credit Parties and their Subsidiaries presently issued and outstanding are validly issued in accordance with all Applicable Laws, including, but not limited to, the “Blue Sky” laws of all applicable states and the federal securities laws. As of the Closing Date the issued shares of Capital Stock of each Credit Party’s respective Wholly Owned Subsidiaries are owned by the

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Credit Parties free and clear of any Lien or adverse claim except for Liens described on Schedule 4.16.

     Section 4.17. Margin Stock. None of the Credit Parties or any of their Subsidiaries is engaged in the business of extending credit for the purpose of “purchasing” or “carrying” any Margin Stock. The Credit Parties do not own any Margin Stock, and no portion of the proceeds of any Loan hereunder will be used, directly or indirectly, for the purpose of purchasing or carrying any Margin Stock, for the purpose of reducing or retiring any Debt that was originally incurred to purchase or carry any Margin Stock or for any other purpose that might cause any portion of such proceeds to be considered a “purpose credit” within the meaning of Regulation T, U or X of the Board of Governors of the Federal Reserve System. The Credit Parties will not take or permit to be taken any action that might cause any Credit Document to violate any regulation of the Board of Governors of the Federal Reserve System.

     Section 4.18. Insolvency. After giving effect to the execution and delivery of the Credit Documents and the Extension of Credit under this Credit Agreement, none of the Credit Parties will be “insolvent,” within the meaning of such term as defined in the Bankruptcy Code or Section 2 of the Uniform Fraudulent Transfer Act, or any other applicable state law pertaining to fraudulent transfers, as each may be amended from time to time, or be unable to pay its debts generally as such debts become due, or have an unreasonably small capital to engage in any business or transaction, whether current or contemplated.

     Section 4.19. Available Unpledged Assets. The information contained in the Monthly Report delivered pursuant to Section 5.2(b) is an accurate and complete listing in all material respects of all Qualified Available Unpledged Assets, and the information contained therein with respect to the identity of such Qualified Available Unpledged Assets and the amounts owing thereunder is true and correct in all material respects. The Borrower owns and has good and marketable title to the Qualified Available Unpledged Assets and each such Qualified Available Unpledged Asset and the Related Property is free and clear of any Lien of any Person (other than Permitted Liens).

     Section 4.20. Labor Matters. There are no significant strikes, lockouts, slowdowns or other labor disputes against the Credit Parties pending or, to the knowledge of the Credit Parties, threatened. The hours worked by and payment made to employees of the Credit Parties and each Subsidiary of the Credit Parties have not been in violation of the Fair Labor Standards Act or any other applicable federal, state or foreign law dealing with such matters, except in such instances in which the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

     Section 4.21. Patents, Trademarks, Etc. To the best of their knowledge, the Credit Parties and each Subsidiary of the Credit Parties owns, or is licensed to use, all patents, trademarks, trade names, copyrights, technology, know-how and processes, service marks and rights with respect to the foregoing that are (a) necessary for the conduct of their respective businesses as currently conducted, and (b) material to the businesses, financial condition, operations, or properties, of the Credit Parties and their Subsidiaries taken as a whole. To the Credit Parties knowledge, the use of such patents, trademarks, trade names, copyrights, technology, know-how, processes and rights with respect to the Credit Parties and their

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Subsidiaries, does not infringe on the rights of any Person in any manner which could reasonably be expected to cause a Material Adverse Effect.

     Section 4.22. Tax Shelter Regulations. Borrower does not intend to treat the Loans and advances and related transactions as being a “reportable transaction” (within the meaning of Treasury Regulation Section 1.6011-4). In the event Borrower determines to take any action inconsistent with such intention, it will promptly notify Administrative Agent thereof. If Borrower so notifies Administrative Agent, Borrower acknowledges that one or more of the Lenders may treat its Revolving Loans and/or its interest in Swingline Loans as part of a transaction that is subject to Treasury Regulation 301.6112-1, and that such Lender or Lenders, as applicable, will maintain the lists and other records required by such Treasury Regulation.

     Section 4.23. All Consents Required. All approvals, authorizations, consents, orders or other actions of any Person or of any Governmental Authority (if any) required in connection with the due execution, delivery and performance by the Credit Parties of this Credit Agreement and any Credit Document to which the Credit Parties are a party, have been obtained.

     Section 4.24. Selection Procedures. No procedures believed by the Credit Parties to be adverse to the interests of the Administrative Agent and the Lenders were utilized by the Credit Parties in identifying and/or selecting the Investments that are part of the Available Unpledged Assets and Qualified Available Unpledged Assets; it being understood that the selection procedures used by the Credit Parties for the inclusion of Investments in one or more of its Securitization Transactions or other financing facilities and which are solely intended to obtain the most beneficial advance rates thereunder and/or otherwise maximize the efficiency of such facilities shall not be deemed to be adverse procedures for the purposes of this Section.

     Section 4.25. [Reserved].

     Section 4.26. Credit and Collection Policy; Residential Mortgage Policies and Procedures. The copy of the Residential Mortgage Policies and Procedures and the Credit and Collection Policy, attached hereto as Schedule 1.1(a) and Schedule 4.26, respectively, are true, complete and accurate as of the Closing Date. Since the date hereof, there have been no material changes in any Credit and Collection Policy or the Residential Mortgage Policies and Procedures other than in accordance with this Credit Agreement. Since December 31, 2005, no Material Adverse Change has occurred in the overall rate of collection of the Investment Loans and Investments in Equity Instruments, and Borrower has at all times complied in all material respects and to the extent applicable with the Credit and Collection Policy with respect to each Investment Loan and each Investment in Equity Instruments.

     Section 4.27. Compliance with OFAC Rules and Regulations. None of the Borrower, any Subsidiary (including Unrestricted Subsidiaries) of the Borrower, any Guarantor, or, to the Borrower’s knowledge, any Affiliate of the Borrower or any Guarantor (i) is a Sanctioned Person, or (ii) derives any of its operating income from investments in, or transactions with, Sanctioned Persons or Sanctioned Entities. The proceeds of any Loan will not be used and have not been used to fund any operations in, finance any investments or activities in or make any payments to, a Sanctioned Person or a Sanctioned Entity.

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     Section 4.28. REIT Status. The Initial Borrower (a) operates its business so as to satisfy all requirements necessary to qualify as a REIT, and will not intentionally take any action that will cause Initial Borrower to fail to so qualify; (b) maintains adequate records so as to comply with all record-keeping requirements relating to its qualification as a REIT as required by the Code and applicable regulations of the Department of Treasury promulgated thereunder and will properly prepare and timely file with the Internal Revenue Service all returns and reports required thereby to qualify as a REIT; and (c) requested or will timely request from its shareholders all information required by the Code and applicable regulations of the Department of Treasury promulgated thereunder to qualify as a REIT.

ARTICLE V

COVENANTS

     Each Credit Party hereby covenants and agrees that, on the Closing Date, and thereafter for so long as this Credit Agreement is in effect and until the Commitments have terminated, no Note remains outstanding and unpaid and the Credit Party Obligations under the Credit Documents, together with interest, Commitment Fees and all other amounts owing to the Agent or any Lender hereunder, are paid in full:

     Section 5.1. Financial Statements.

     Initial Borrower shall furnish to the Administrative Agent and each of the Lenders:

     (a) Annual Financial Statements. As soon as available, but in any event within ten (10) days of the date the Initial Borrower is required to file its Form 10-K with the SEC (without giving effect to any extension of such due date, whether obtained by filing the notification permitted by Rule 12b-25 or any successor provision thereto or otherwise), a copy of the consolidated and consolidating balance sheet of the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries) as at the end of such Fiscal Year and the related consolidated and consolidating statements of income, cash flows and retained earnings of the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries) for such year, audited by a Big 4 Accounting Firm, setting forth in each case in comparative form the figures for the preceding Fiscal Year, reported on without a “going concern” or like qualification, exception or assumption, or qualification or assumption indicating that the scope of the audit was inadequate to permit such independent certified public accountants to certify such financial statements without such qualification;

     (b) Quarterly Financial Statements. As soon as available and in any event within ten (10) days of the date the Initial Borrower is required to file its Form 10-Q with the SEC (without giving effect to any extension of such due date, whether obtained by filing the notification permitted by Rule 12b-25 or any successor provision thereto or otherwise), a company-prepared consolidated and consolidating balance sheet of the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries) as at the end of such period and related company-prepared consolidated and consolidating statements of income, cash flows and retained earnings for the Initial Borrower and its

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Consolidated Subsidiaries (including Unrestricted Subsidiaries) for such quarterly period and for the portion of the Fiscal Year ending with such period, in each case setting forth in comparative form the figures for the corresponding period or periods of the preceding Fiscal Year (subject to normal recurring year-end audit adjustments) certified as to fairness of presentation, GAAP and consistency by the Chief Financial Officer of the Initial Borrower; and

all such financial statements to fairly present in all material respects the financial condition and results from operations of the entities and for the periods specified and to be prepared in reasonable detail and in accordance with GAAP (subject, in the case of interim statements, to normal year-end audit adjustments) applied consistently throughout the periods reflected therein and, if applicable, accompanied by a description of, and an estimation of the effect on the financial statements on account of, a change in the application of accounting principles as provided in Section 1.3.

     Section 5.2. Certificates; Other Information.

     Initial Borrower shall furnish to the Administrative Agent and each of the Lenders:

     (a) concurrently with the delivery of the financial statements referred to in Sections 5.1(a) and 5.1(b) above, a certificate of a Responsible Officer substantially in the form of Exhibit H (“Compliance Certificate”) stating that (i) such financial statements present fairly the financial position of the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries) for the periods indicated in conformity with GAAP applied on a consistent basis, (ii) each Credit Party during such period observed or performed in all material respects all of its covenants and other agreements, and satisfied in all material respects every condition, contained in this Credit Agreement to be observed, performed or satisfied by it, and (iii) such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and if any Default then exists, setting forth the details thereof and the action which the Initial Borrower is taking or proposes to take with respect thereto, and including calculations in reasonable detail required to indicate compliance with Sections 5.8, 5.28 and 5.32 as of the last day of such period;

     (b) within fifteen (15) Business Days after the end of each calendar month, a monthly report (the “Monthly Report”) signed by a Responsible Officer of the Initial Borrower and substantially in the form of Exhibit I; and

     (c) promptly, such additional financial and other information as the Administrative Agent, on behalf of any Lender, may from time to time reasonably request.

     Section 5.3. Payment of Taxes and Other Obligations.

     The Credit Parties will, and will cause each of their Subsidiaries (including Unrestricted Subsidiaries) to pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, (subject, where applicable, to specified grace periods) all (a) Federal taxes, and (b) promptly upon obtaining knowledge thereof, all state and local taxes,

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assessments and governmental charges the nonpayment of which could reasonably be expected to result in a material liability or asset impairment, and any additional costs that are imposed as a result of any failure to so pay, discharge or otherwise satisfy such taxes, obligations and liabilities, except when the amount or validity of any such taxes, obligations and liabilities is currently being contested in good faith by appropriate proceedings and reserves, if applicable, in conformity with GAAP with respect thereto have been provided on the books of the Credit Parties.

     Section 5.4. Notices.

     Immediately after any Credit Party becomes aware thereof give written notice to the Administrative Agent (which shall promptly transmit such notice to each Lender) of the occurrence of any Default or Event of Default, and promptly (but in no event later than three (3) Business Days after a Responsible Officer of any Credit Party obtains actual knowledge thereof) give written notice of the following to the Administrative Agent (which shall promptly transmit such notice to each Lender):

     (a) the occurrence of any default or event of default under any Contractual Obligation of any of the Credit Parties or any Subsidiary which could reasonably be expected to have a Material Adverse Effect or result in monetary liability in excess of $10,000,000;

     (b) any litigation, or any investigation or proceeding affecting any of the Credit Parties which, could reasonably be expected to have a Material Adverse Effect;

     (c) any order, judgment or decree exceeding $10,000,000 having been entered against any of the Credit Parties or any Subsidiary;

     (d) (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC (other than a Permitted Lien) or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan, or (ii) the institution of proceedings or the taking of any other action by the PBGC or any Credit Party or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan;

     (e) any notice of any material violation received by any Credit Party from any Governmental Authority; and

     (f) any other development or event which could reasonably be expected to have a Material Adverse Effect.

Each notice pursuant to this Section 5.4 shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Credit Party proposes to take with respect thereto. In the case of any notice of a Default or Event of Default, such Credit Party shall specify that such notice is a Default or Event of Default notice on the face thereof.

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     Section 5.5. Inspection of Property, Books and Records.

     Each Credit Party will: (a) keep, and will cause each Subsidiary (including Unrestricted Subsidiaries) to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities; (b) permit, and will cause each Subsidiary (including Unrestricted Subsidiaries) of the Credit Parties to permit, during regular business hours, upon not less than five (5) days prior notice which notice shall not be required in the case of a Default or an Event of Default having occurred, the Administrative Agent or its designee, at the expense of the Borrower, to perform periodic field audits and investigations of the Borrower and the Qualified Available Unpledged Assets, from time to time, provided that the field audits and investigations at the Borrower’s headquarters in Chevy Chase, Maryland shall be no more frequent than once each Fiscal Year (in the absence of an Event of Default); and (c) permit, and will cause each Subsidiary (including Unrestricted Subsidiaries) to permit, representatives of the Administrative Agent and any Lender at the expense of the Administrative Agent or such Lender, as applicable, prior to the occurrence of an Event of Default and at the Borrower’s expense after the occurrence of an Event of Default to visit and inspect, during regular business hours, any of their respective properties, to examine and make abstracts from any of their respective books and records (including computer tapes and disks) and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants. Each Credit Party agrees to cooperate and assist in such visits and inspections; provided that such visits and inspections shall be no more frequent than once each Fiscal Year so long as no Event of Default shall have occurred and be continuing, and as often as may reasonably be desired in the event that an Event of Default shall have occurred and be continuing.

     Section 5.6. Acquisitions.

     Neither the Borrower nor any Subsidiary of the Borrower shall consummate any Acquisition, unless (a) the line or lines of business of the Person to be acquired are substantially the same as or related to one or more Permitted Lines of Business, (b) no Default or Event of Default shall have occurred and be continuing either immediately prior to or immediately after giving effect to such Acquisition and no less than three (3) Business Days after the date such Acquisition is effective the Initial Borrower provides to the Administrative Agent and Lenders pro forma financial statements confirming the Initial Borrower will be in pro forma compliance with Section 5.32, and (c) the Person acquired shall be (i) a Subsidiary or merged into a Subsidiary or (ii) be merged into the Borrower immediately upon consummation of the Acquisition (or if assets are being acquired, the acquiror shall be the Borrower or a Subsidiary of the Borrower).

     Section 5.7. Restricted Payments.

     If a Default or Event of Default specified in Section 7.1(a) or Section 7.1(f) shall have occurred and be continuing, or if as a result of the occurrence of any other Event of Default the Credit Party Obligations have been accelerated pursuant to Section 7.2, the Credit Parties shall not make any Restricted Payment.

     Section 5.8. Capital Expenditures.

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     Capital Expenditures will not exceed in the aggregate in any Fiscal Year the sum of $25,000,000; provided, however, to the extent Capital Expenditures in any fiscal year are less than the amount permitted by this Section 5.8, such unused amounts may be carried forward to a subsequent period.

     Section 5.9. Additional Guarantors.

Initial Borrower will cause each of its First Tier Domestic Subsidiaries and each of its First Tier Foreign Subsidiaries, whether newly formed, after acquired or otherwise existing, to promptly (and in any event within thirty (30) days after such Subsidiary is formed or acquired (or such longer period of time as agreed to by the Administrative Agent in its reasonable discretion)) become a Guarantor hereunder by way of execution of a Joinder Agreement; provided that, First Tier Foreign Subsidiaries shall not be required to become a Guarantor if it would be unlawful or would cause any material adverse tax consequences to the Initial Borrower or such First Tier Foreign Subsidiary. The Initial Borrower may also at any time voluntarily cause any of its Wholly Owned Subsidiaries (other than First Tier Domestic Subsidiaries or First Tier Foreign Subsidiaries) to become a Guarantor hereunder by way of execution of a Joinder Agreement. In addition, Initial Borrower shall, and shall cause CSI to, enter into the Guaranty Agreement prior to or simultaneous with CSF becoming a Borrower hereunder and shall maintain, and shall cause CSI to maintain, the Guaranty Agreement in full force and effect and shall perform and observe all of the terms and provisions of the Guaranty Agreement to be performed or observed by it, and cause CSI to do the same, until such time as the Release Condition has been satisfied. Upon satisfaction of the Release Condition, the Guaranty Agreement shall be terminated and the Administrative Agent shall promptly (and in any event within five (5) Business Days after the written request of the Initial Borrower) execute such documents as may reasonably be requested by the Initial Borrower to evidence such termination.

     Section 5.10. Maintenance of Unsecured Debt Rating.

     Initial Borrower shall at all times maintain a senior unsecured debt rating by one of (a) Fitch, (b) S&P, or (c) Moody’s. In the event Initial Borrower shall maintain one senior unsecured debt rating such rating shall at all times be equal to or greater than (i) in the case of Fitch “BB-”, (ii) in the case of S&P “BB-”, and (iii) in the case of Moody’s “Ba3”. In the event Initial Borrower shall maintain two or more senior unsecured debt ratings, two of such ratings shall at all times be equal to or greater than (i) in the case of Fitch “BB-”, (ii) in the case of S&P “BB-”, and (iii) in the case of Moody’s “Ba3”.

     Section 5.11. Ownership of Credit Parties; Restrictions.

     No Credit Party shall sell, transfer, pledge or otherwise dispose of any Capital Stock or other equity interest in any other Credit Party that is a Subsidiary of the Initial Borrower and no Credit Party that is a Subsidiary of the Initial Borrower may issue or sell its Capital Stock, except that such Capital Stock or other equity interest may be transferred or issued to another Credit Party.

     Section 5.12. Maintenance of Existence.

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     Each Credit Party will and will cause each Subsidiary of a Credit Party, except as otherwise permitted by Section 5.13 and 5.14, to continue to engage in business of the same general type as any of the Permitted Lines of Business, preserve and maintain its existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified in good standing in each jurisdiction where the failure to maintain such existence, rights, franchises, privileges and qualification has had, or could reasonably be expected to have, a Material Adverse Effect.

     Section 5.13. Dissolution.

     None of the Credit Parties or any Subsidiary of a Credit Party shall suffer or permit dissolution or liquidation, except (a) through corporate reorganization, merger, asset sale or similar transaction to the extent permitted by Section 5.14; (b) the dissolution or liquidation of Subsidiaries which are not Credit Parties, provided that: (i) if such Subsidiary is a Wholly Owned Subsidiary, it transfers all of its assets to a Credit Party or a Wholly Owned Subsidiary prior to such liquidation or dissolution; (ii) such Subsidiary has no assets at the time of such liquidation or dissolution; and (iii) immediately after giving effect thereto no Default or Event of Default would exist.

     Section 5.14. Consolidations, Mergers and Sales of Assets. (a) None of the Credit Parties will, nor will they permit any Subsidiary of a Credit Party to, consolidate or merge with or into any other Person; provided that (i) any Credit Party may merge with another Person if (A) in the case of any Credit Party that is organized under the laws of the United States of America or one of its states, such Person is organized under the laws of the United States of America or one of its states, (B) a Credit Party is the entity surviving such merger or the surviving entity becomes a Credit Party hereunder upon the effectiveness of such merger, and in any consolidation or merger involving the Borrower, the Borrower shall be the surviving entity, and (C) immediately after giving effect to such merger, no Default or Event of Default shall have occurred and be continuing, and (ii) Subsidiaries of the Initial Borrower (which are not Credit Parties) may merge with (1) one another or into the Initial Borrower or any Credit Party, or (2) another Person in connection with a transaction permitted by, and subject to the satisfaction of the conditions set forth in, Section 5.6.

     (b) None of the Credit Parties will sell or otherwise dispose of assets except (i) any Credit Party may sell Portfolio Investments (including, but not limited to, Investment Loans and Investments in Equity Instruments) in the ordinary course of business, or (ii) any Credit Party may make any other disposition so long as prior to such sale no Default or Event of Default exists and immediately after giving effect to such sale, no Default or Event of Default shall exist; provided that the Credit Parties shall at all times be in compliance with Section 5.32.

     Section 5.15. Use of Proceeds.

     No Letter of Credit nor any portion of the proceeds of any Revolving Loan or any Swingline Loan will be used by any Borrower or any Subsidiary (as applicable) (a) directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock, or (b) for any purpose in violation of any Applicable Law or regulation. The

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proceeds of the Revolving Loans shall be used to fund Portfolio Investments made in the ordinary course of business of any Borrower or any Subsidiary and for general corporate purposes and proceeds of the Swingline Loans shall be used to fund Portfolio Investments made in the ordinary course of business of any Borrower or any Subsidiary and for general corporate purposes. Each Letter of Credit will be used by any Borrower or any Subsidiary for the benefit of Obligors under Investment Loans and for general corporate purposes in the ordinary course of business of the Borrower and its Subsidiaries. The proceeds of the Revolving Loans in any Alternative Currency shall be used by any Borrower or any Subsidiary (as applicable) solely to: (a) satisfy obligations, denominated in such Alternative Currency, in the ordinary course of such Person’s business; or (b) acquire Portfolio Investments; provided, that (i) such Portfolio Investments are in the same Alternative Currency and (ii) the issuer, in the case of equity interests, or the obligor, in the case of debt interests, is organized or incorporated under the laws of a jurisdiction of a Permitted Country.

     Section 5.16. Compliance with Laws.

     (a) Compliance with Laws. Each Credit Party will, and will cause each Subsidiary (including Unrestricted Subsidiaries) and each member of the Controlled Group to, comply with all Applicable Laws (including but not limited to those with respect to the Investment Loans and any Related Property), regulations and similar requirements of governmental authorities (including but not limited to PBGC), except where the necessity of such compliance is being contested in good faith through appropriate proceedings diligently pursued or where failure to comply could not be expected to cause a Material Adverse Effect.

     (b) ERISA Exemptions. No Credit Party shall permit any of its respective assets to become or be deemed to be “plan assets” within the meaning of ERISA, the Code and the respective regulations promulgated thereunder.

     Section 5.17. Insurance.

     Each Credit Party will maintain, and will cause each Subsidiary of a Credit Party to maintain (either in the name of such Credit Party or in such Subsidiary’s own name), insurance with financially sound and reputable insurance companies, in such amounts and against such risks as are customarily maintained by companies of established repute engaged in the same or similar business.

     Section 5.18. Change in Fiscal Year.

     The Borrower will not change its Fiscal Year without the consent of the Administrative Agent.

     Section 5.19. Maintenance of Property.

     Each Credit Party shall, and shall cause each Subsidiary of a Credit Party to, maintain all of its Properties and assets necessary for the conduct of its business in good condition, repair and working order, ordinary wear and tear excepted and subject to damage and destruction due to casualty events.

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     Section 5.20. Environmental Laws.

     Each Credit Party shall, and shall cause each Subsidiary (including Unrestricted Subsidiaries) to:

     (a) Comply in all material respects with all applicable Environmental Laws and obtain and comply in all material respects with and maintain any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws except, in each case, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect.

     (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same are being contested in good faith by appropriate proceedings or could not reasonably be expected to have a Material Adverse Effect.

     Section 5.21. [Reserved]

     Section 5.22. [Reserved]

     Section 5.23. Compliance with Material Contracts.

     Each Credit Party will, and will cause each Subsidiary to comply with all Material Contracts except, in each case, to the extent failure to do so could not reasonably be expected to have a Material Adverse Effect.

     Section 5.24. Transactions with Affiliates.

     None of the Credit Parties nor any Subsidiary of the Credit Parties shall enter into, or be a party to, any transaction with any Affiliate of any Credit Party or such Subsidiary (which Affiliate is not a Credit Party or a Subsidiary of a Credit Party), except as permitted by law and in the ordinary course of business and pursuant to terms which are no less favorable to such Credit Party or such Subsidiary than would be obtained in a comparable arm’s length transaction with a Person which is not an Affiliate; provided that this Section 5.24 shall not apply to: (a) the origination, administration or modification of an Investment Loan or an Investment in Equity Instruments; (b) the exercise of any right or remedy in connection with an Investment Loan or an Investment in Equity Instruments; or (c) the making of any Restricted Payment permitted pursuant to Section 5.7.

     Section 5.25. [Reserved].

     Section 5.26. No Restrictive Agreement.

     None of the Credit Parties will, and will not permit or cause any of their Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any restriction or encumbrance on (a) the ability of any Credit Party and its Subsidiaries to perform

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and comply with their respective obligations under the Credit Documents, (b) the ability of any Subsidiary of the Initial Borrower that is not a Credit Party (other than SPE Subsidiaries) to make any dividend payments or other distributions in respect of its Capital Stock, to repay Debt owed to any Credit Party or any other Subsidiary or to repay the Credit Party Obligations, except with respect to transactions described in Schedule 5.26; or (c) the ability of any Subsidiary of the Initial Borrower that is not a Credit Party (other than SPE Subsidiaries) to transfer any of its unencumbered assets or properties to any Credit Party or any other Subsidiary; provided, however, that the restriction in clause (c) above shall be limited to unencumbered assets or properties in an amount sufficient to satisfy the Available Asset Coverage Ratio set forth in Section 5.32(e).

     Section 5.27. Costs and Expenses.

     The Borrower shall satisfy all payment obligations under Section 9.5.

     Section 5.28. Additional Debt.

     The Borrower shall not issue, assume, create, incur or suffer to exist any Debt, except for: (a) the Debt owed to the Lenders, the Issuing Lender and Swingline Lender under this Credit Agreement and the Credit Documents; (b) the Debt existing and outstanding on the Closing Date described on Schedule 5.28; and (c) any additional Debt, provided that after giving effect to the incurrence of any such Debt, the Initial Borrower will be in compliance with the provisions of Section 5.32.

     Section 5.29. [Reserved].

     Section 5.30. Credit and Collection Policy.

     The Borrower will and will cause each Subsidiary of the Borrower to (a) comply in all material respects with the Credit and Collection Policy in regard to each Investment Loan and each Investment in Equity Instruments, and (b) furnish to the Administrative Agent and the Lenders, prior to its effective date, prompt notice of any material changes in the Credit and Collection Policy.

     Section 5.31. REIT Status.

     The Initial Borrower will satisfy all requirements necessary to qualify as a REIT.

     Section 5.32. Financial Covenants.

     For so long as this Credit Agreement is in effect and thereafter until the payment in full of the Credit Party Obligations, Initial Borrower shall not, directly or indirectly permit:

     (a) Consolidated Debt to Stockholders Equity Less Liquid Real Estate Assets. The ratio of the Consolidated Debt to Stockholders Equity, determined as of the last day of each Fiscal Quarter, to exceed 6.00 to 1.00; provided, however, such calculation shall exclude the effects of any Liquid Real Estate Assets that are acquired and levered by the Initial Borrower to enable the Initial Borrower to satisfy REIT asset and income tests.

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     (b) Consolidated Debt to Stockholders Equity. The ratio of the Consolidated Debt to Stockholders Equity, determined as of the last day of each Fiscal Quarter, to exceed (i) 11.00 to 1.00 at the end of each Fiscal Quarter from the Closing Date until and including the Fiscal Quarter ending December 31, 2006, and (ii) 10.0 to 1.00 at the end of each Fiscal Quarter thereafter.

     (c) Minimum Consolidated Tangible Net Worth. Consolidated Tangible Net Worth to be less than (i) $1,015,000,000, plus (ii) 70% of the cumulative Net Proceeds of Capital Stock/Conversion of Debt received at any time after December 31, 2005.

     (d) Asset Quality. The Average Portfolio Charged-Off Ratio shall not exceed 4.00%, as determined on the last day of each Fiscal Quarter.

     (e) Available Asset Coverage Ratio. The Available Asset Coverage Ratio on the last day of any calendar month shall not be less than 1.1 to 1.0; provided, however, that if the Initial Borrower receives a senior unsecured debt rating of “BBB-” (“Baa3” with respect to Moody’s) from any two of Fitch, S&P or Moody’s, the Available Asset Coverage Ratio shall be reduced to 1.0 to 1.0; provided, further, that the Initial Borrower shall not be required to satisfy the Available Asset Coverage Ratio with respect to any calendar month in which the Initial Borrower shall have a senior unsecured debt rating at the end of such month of “BBB” (“Baa2” with respect to Moody’s) or higher from any two of Fitch, S&P or Moody’s; provided, further, that if the Available Asset Coverage Ratio is not required to be calculated due to an upgrade in the Initial Borrower’s senior unsecured debt rating, then any subsequent Portfolio Investments contributed to the Bank Subsidiary shall not exceed $25,000,000 in the aggregate during each Fiscal Year in which such Available Asset Coverage Ratio is not required to be tested as of the end of such Fiscal Year. For the avoidance of doubt, if the Initial Borrower should at any time fail to maintain a senior unsecured debt rating of “BBB” (“Baa2” with respect to Moody’s) or higher from any two of Fitch, S&P or Moody’s, the Initial Borrower shall be required to meet the Available Asset Coverage Ratio.

     (f) Consolidated EBIT to Interest Expense. The ratio of Consolidated EBIT, for the preceding four quarter period, to Interest Expense of Initial Borrower and its Consolidated Subsidiaries for the preceding four quarter period, determined as of the last day of each Fiscal Quarter to be less than 1.15 to 1.0.

     (g) Consolidated EBIT to Interest Expense Less Liquid Real Estate Assets. The ratio of Consolidated EBIT, for the preceding four quarter period, to Interest Expense of Initial Borrower and its Consolidated Subsidiaries for the preceding four quarter period, determined as of the last day of each Fiscal Quarter to be less than 1.4 to 1.0; provided, however, such calculation shall exclude the effects of any Liquid Real Estate Assets that are acquired and levered by the Initial Borrower to enable the Initial Borrower to satisfy REIT asset and income tests.

     Section 5.33. Other.

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     Each Credit Party will furnish to the Administrative Agent such other information, documents, records or reports respecting the Portfolio Investments or the condition or operations, financial or otherwise, of the Credit Parties as the Administrative Agent, at the request of any Lender, may from time to time reasonably request in order to protect the interests of the Administrative Agent or the Lender under or as contemplated by this Credit Agreement.

ARTICLE VI

[RESERVED]

ARTICLE VII

EVENTS OF DEFAULT

     Section 7.1. Events of Default.

     An Event of Default shall exist upon the occurrence of any of the following specified events (each an “Event of Default”):

     (a) Payment Default. The Borrower shall fail to pay any principal on any Loan or Note when due (whether at maturity, by reason of acceleration or otherwise) in accordance with the terms thereof or hereof; or the Borrower shall fail to reimburse the Issuing Lender for any LOC Obligations when due (whether at maturity, by reason of acceleration or otherwise) in accordance with the terms hereof; or the Borrower shall fail to pay any interest on any Loan or Note or any fee or other amount payable hereunder when due (whether at maturity, by reason of acceleration or otherwise) in accordance with the terms thereof or hereof and such failure to pay any interest or any fee shall continue unremedied for three (3) Business Days.

     (b) Representations and Warranties. Any representation or warranty made or deemed made herein, or in any of the other Credit Documents or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Credit Agreement shall prove to have been incorrect, false or misleading in any material respect on or as of the date made or deemed made.

     (c) Covenant Default. (i) Any Credit Party shall fail to perform, comply with or observe any term, covenant or agreement applicable to it contained in Sections 5.1, 5.2, 5.4, 5.6, 5.7 through 5.15, 5.24, 5.28, 5.31 or 5.32 hereof; or (ii) any Credit Party shall fail to comply with any other covenant contained in this Credit Agreement or the other Credit Documents (other than as described in Sections 7.1(a) or 7.1(c)(i) above), and such breach or failure to comply remains uncured for thirty (30) calendar days after the earlier of (A) receipt by such Credit Party of written notice of such violation, breach, or failure to comply, and (B) the time at which such Credit Party knew or became aware, or should reasonably have known or been aware, of such violation, breach, or failure to comply.

     (d) Debt Payment Default. Any Credit Party or any Subsidiary of a Credit Party shall default in any payment of principal of or interest on any Debt (other than the

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Loans and Reimbursement Obligations) in an aggregate principal amount equal to or greater than $17,500,000 for Borrower and any of its Subsidiaries in the aggregate beyond any applicable grace period or cure period (not to exceed thirty (30) days), if any, provided in the instrument or agreement under which such Debt was created.

     (e) Debt Acceleration. Any event or condition shall occur which results in the acceleration of the maturity of Debt outstanding in an aggregate principal amount equal to or greater than $17,500,000 of the Borrower and its Subsidiaries or the mandatory prepayment (other than a mandatory prepayment required under the applicable Debt instrument or agreement as a result of an equity or debt issuance, disposition of assets, or casualty or condemnation event) or purchase of such Debt by the Borrower (or its designee) or such Subsidiary of the Borrower (or its designee) prior to the scheduled maturity thereof.

     (f) Bankruptcy Default. (i) Any Credit Party or any of their Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to have it judged bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or any Credit Party or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any Credit Party or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment, or (B) remains undismissed, undischarged or unbonded for a period of sixty (60) days; or (iii) there shall be commenced against any Credit Party or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; or (iv) any Credit Party or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii) or (iii) above; or (v) any Credit Party or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; provided, however, that the provisions of this clause (f) shall not apply to any special purpose entity established solely to finance real estate assets that has an aggregate fair market value of less than $15,000,000 at the time of any such bankruptcy, insolvency or reorganization, and there is no Material Adverse Effect as a result of any such bankruptcy, insolvency or reorganization.

     (g) Judgment Default. One or more judgments, orders, decrees or arbitration awards shall be entered against a Credit Party or any of its Subsidiaries involving in the aggregate a liability (to the extent not paid when due or covered by insurance) of $17,500,000 or more and all such judgments, orders, decrees or arbitration awards shall

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not have been paid and satisfied, vacated, discharged, stayed or bonded pending appeal within thirty (30) days from the entry thereof.

     (h) ERISA Default. The Borrower or any member of the Controlled Group shall fail to pay when due any material amount which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans shall be filed under Title IV of ERISA by the Borrower, any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within thirty (30) days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated.

     (i) Tax Lien. A federal tax lien shall be filed against the Borrower or any Subsidiary of the Borrower under Section 6323 of the Code or a lien of the PBGC shall be filed against the Borrower or any Subsidiary of the Borrower under Section 4068 of ERISA and in either case such lien shall remain undischarged for a period of twenty-five (25) days after the date of filing except when the amount or validity of such lien is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower.

     (j) Change of Control. A Change of Control shall have occurred.

     (k) [Reserved].

     (l) [Reserved].

     (m) Failure of Credit Documents. This Credit Agreement or any other Credit Document shall for any reason cease to be valid and binding obligations of the Borrower and each Credit Party thereto or any Person acting by or on behalf of any Credit Party shall deny or disaffirm such Person’s obligations under this Credit Agreement or any other Credit Document.

     (n) The Initial Borrower is not in compliance with the senior unsecured debt ratings set forth in Section 5.10.

     Section 7.2. Acceleration; Remedies.

     Upon the occurrence and during the continuation of an Event of Default, then, and in any such event, (a) if such event is an Event of Default specified in Section 7.1(f) above with respect to any Credit Party, automatically the Commitments shall immediately terminate and the Loans (with accrued interest thereon), and all other amounts under the Credit Documents (including without limitation the maximum amount of all contingent liabilities under Letters of Credit) shall immediately become due and payable, and the Borrower shall immediately pay to the Administrative Agent cash collateral as security for the LOC Obligations for subsequent

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drawings under then outstanding Letters of Credit in an amount equal to the maximum amount which may be drawn under Letters of Credit then outstanding, and (b) if such event is any other Event of Default, subject to the terms of Section 8.5, with the written consent of the Required Lenders, the Administrative Agent may, or upon the written request of the Required Lenders, the Administrative Agent shall, take any or all of the following actions: (i) by notice to the Initial Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; (ii) by notice of default to the Initial Borrower declare the Loans (with accrued interest thereon) and all other amounts owing under this Credit Agreement and the Notes to be due and payable forthwith and direct the Borrower to pay to the Administrative Agent cash collateral as security for the LOC Obligations for subsequent drawings under then outstanding Letters of Credit in an amount equal to the maximum amount of which may be drawn under Letters of Credit then outstanding, to be paid in the Alternative Currency in which such Letters of Credit were issued, whereupon the same shall immediately become due and payable; and/or (iii) exercise on behalf of the Lenders all of its other rights and remedies under this Credit Agreement, the other Credit Documents and Applicable Law. Except as expressly provided above in this Section 7.2, presentment, demand, protest and all other notices of any kind are hereby expressly waived by the Credit Parties.

ARTICLE VIII
THE ADMINISTRATIVE AGENT

     Section 8.1. Appointment.

     Each Lender hereby irrevocably designates and appoints Wachovia as the Administrative Agent of such Lender under this Credit Agreement, and each such Lender irrevocably authorizes Wachovia, as the Administrative Agent for such Lender, to take such action on its behalf under the provisions of this Credit Agreement and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Credit Agreement, together with such other powers as are reasonably incidental thereto. Each Lender acknowledges that the Credit Parties may rely upon action taken by the Administrative Agent on behalf of the Lenders hereunder. Notwithstanding any provision to the contrary elsewhere in this Credit Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Credit Agreement or otherwise exist against the Administrative Agent.

     Section 8.2. Delegation of Duties.

     The Administrative Agent may execute any of its duties under this Credit Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. Without limiting the foregoing, the Administrative Agent may appoint one of its affiliates as its agent to perform the functions of the Administrative Agent hereunder relating to the advancing of funds to the Borrower and distribution of funds to the Lenders and to perform such other related functions of the Administrative Agent hereunder as are reasonably incidental to such functions.

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     Section 8.3. Exculpatory Provisions.

     Neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact, Subsidiaries or Affiliates shall be (a) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Credit Agreement (except for its or such Person’s own gross negligence, fraud or willful misconduct), or (b) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Credit Party or any officer thereof contained in this Credit Agreement or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Credit Agreement or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any of the Credit Documents or for any failure of any Credit Party to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance by any Credit Party of any of the agreements contained in, or conditions of, this Credit Agreement, or to inspect the properties, books or records of the any Credit Party.

     Section 8.4. Reliance by Administrative Agent.

     (a) The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, statement, order or other document or conversation believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless an executed Commitment Transfer Supplement has been filed with the Administrative Agent pursuant to Section 9.6(c) with respect to the Loans evidenced by such Note. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Credit Agreement unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under any of the Credit Documents in accordance with a request of the Required Lenders or all of the Lenders, as may be required under this Credit Agreement, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes.

     (b) For purposes of determining compliance with the conditions specified in Section 3.1, each Lender that has signed this Credit Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender.

     Section 8.5. Notice of Default.

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     The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or the Borrower referring to this Credit Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided, however, that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders except to the extent that this Credit Agreement expressly requires that such action be taken, or not taken, only with the consent or upon the authorization of the Required Lenders, or all of the Lenders, as the case may be.

     Section 8.6. Non-Reliance on Administrative Agent and Other Lenders.

     Each Lender expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representation or warranty to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of any Credit Party, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower or any other Credit Party and made its own decision to make its Loans hereunder and enter into this Credit Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Credit Agreement, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower or any other Credit Party which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates.

     Section 8.7. Indemnification.

     The Lenders agree to indemnify the Administrative Agent in its capacity as such, the Issuing Lender in its capacity as such and the Swingline Lender in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Commitment Percentages in effect on the date on which indemnification is sought under this Section 8.7, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or

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disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Notes or any Reimbursement Obligation) be imposed on, incurred by or asserted against the Administrative Agent, the Issuing Lender or the Swingline Lender in any way relating to or arising out of any Credit Document or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent, the Issuing Lender or the Swingline Lender under or in connection with any of the foregoing; provided, however, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting from the gross negligence or willful misconduct of the Administrative Agent, the Issuing Lender or the Swingline Lender, as applicable, as determined by a court of competent jurisdiction. The agreements in this Section 8.7 shall survive the termination of this Credit Agreement and payment of the Notes, any Reimbursement Obligation and all other amounts payable hereunder.

     Section 8.8. The Administrative Agent in Its Individual Capacity.

     The Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though the Administrative Agent were not the Administrative Agent hereunder. With respect to the Loans made or renewed by it and any Note issued to it, the Administrative Agent shall have the same rights and powers under this Credit Agreement as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms “Lender” and “Lenders” shall include the Administrative Agent in its individual capacity.

     Section 8.9. Successor Administrative Agent.

     The Administrative Agent may resign as Administrative Agent upon thirty (30) days’ prior written notice to the Initial Borrower and the Lenders. If the Administrative Agent shall resign as Administrative Agent under this Credit Agreement and the other Credit Documents or if the Administrative Agent enters or becomes subject to receivership, then the Required Lenders shall appoint from among the Lenders a successor administrative agent for the Lenders, which successor agent shall be approved by the Initial Borrower (such approval not to be unreasonably withheld) so long as no Default or Event of Default has occurred and is continuing, whereupon such successor administrative agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term “Administrative Agent” shall mean such successor administrative agent effective upon such appointment and approval, and the former Administrative Agent’s rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Credit Agreement or any holders of the Notes. If no successor Administrative Agent has accepted appointment as Administrative Agent within thirty (30) days after the retiring Administrative Agent’s giving notice of resignation, the retiring Administrative Agent shall have the right, on behalf of the Lenders, to appoint a successor administrative agent, which successor shall be approved by the Initial Borrower (such approval not to be unreasonably withheld) so long as no Default or Event of Default has occurred and is continuing; provided, that, such successor administrative agent has minimum capital and surplus of at least $500,000,000. If no successor administrative agent has accepted appointment as Administrative

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Agent within sixty (60) days after the retiring Administrative Agent’s giving notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless become effective and the Lenders shall perform all duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor administrative agent as provided for above. After any retiring Administrative Agent’s resignation as Administrative Agent, the indemnification provisions of this Credit Agreement and the other Credit Documents and the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Credit Agreement.

     Section 8.10. Other Agents.

     None of the Lenders or other Persons identified on the facing page or signature pages of this Credit Agreement as a “syndication agent,” “documentation agent,” “co—agent,” “book manager,” “book runner,” “lead manager,” “arranger,” “lead arranger” or “co—arranger” shall have any right (except as expressly set forth herein), power, obligation, liability, responsibility or duty under this Credit Agreement other than, in the case of such Lenders, those applicable to all Lenders as such. Without limiting the foregoing, none of the Lenders or other Persons so identified shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders or other Persons so identified in deciding to enter into this Credit Agreement or in taking or not taking action hereunder.

ARTICLE IX

MISCELLANEOUS

     Section 9.1. Amendments, Waivers and Release of Collateral.

     Neither this Credit Agreement, nor any of the Notes, nor any of the other Credit Documents, nor any terms hereof or thereof may be amended, supplemented, waived or modified except in accordance with the provisions of this Section 9.1 nor may the Borrower or any Guarantor be released except in accordance with the provisions of this Section 9.1. The Required Lenders may, or, with the written consent of the Required Lenders, the Administrative Agent may, from time to time, (a) enter into with the Initial Borrower or any other Credit Party written amendments, supplements or modifications hereto and to the other Credit Documents for the purpose of adding any provisions to this Credit Agreement or the other Credit Documents or changing in any manner the rights of the Lenders or of the Borrower or any other Credit Party hereunder or thereunder, or (b) waive, on such terms and conditions as the Required Lenders may specify in such instrument, any of the requirements of this Credit Agreement or the other Credit Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, waiver, supplement, modification or release shall:

          (i) reduce the amount or extend the scheduled date of maturity of any Loan or Note or any installment thereon, or reduce the stated rate of any interest or fee payable hereunder (except in connection with a waiver of interest at the increased post-default rate set forth in Section 2.9(b) which shall be determined by a vote of the Required Lenders) or extend the scheduled date of any payment thereof or increase the

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amount or extend the expiration date of any Lender’s Commitment (except for the extension of the Commitment Termination Date pursuant to Section 2.20), in each case without the written consent of each Lender directly affected thereby; or

          (ii) amend, modify or waive any provision of this Section 9.1 or reduce the percentage specified in the definition of Required Lenders, without the written consent of all the Lenders; or

          (iii) amend, modify or waive any provision of Article VIII, without the written consent of the Administrative Agent; or

          (iv) release any Guarantor from the Guaranty hereunder or any guarantor under the Guaranty Agreement (except as otherwise permitted by Sections 5.9, 5.13 or 5.14), without the written consent of all the Lenders; or

          (v) cancel or forgive any amounts owing hereunder, without the written consent of all of the Lenders affected thereby; or

          (vi) subordinate the Loans to any other Debt without the written consent of all of the Lenders; or

          (vii) permit the Borrower to assign or transfer any of its rights or obligations under this Credit Agreement or other Credit Documents without the written consent of all of the Lenders; or

          (viii) amend, modify or waive any provision of the Credit Documents requiring consent, approval or request of the Required Lenders or all Lenders without the written consent of all of the Required Lenders or Lenders as appropriate; or

          (ix) amend, modify or waive the order in which Credit Party Obligations are paid in Section 2.12(b) without the written consent of each Lender directly affected thereby; or

          (x) amend or modify the provisions to the Credit Documents to permit the Borrower to obtain borrowings in currencies other than Dollars, Pounds Sterling or Euro, without the written consent of all the Lenders affected thereby; or

          (xi) amend or modify the definition of Credit Party Obligations to delete or exclude any obligation or liability described therein without the written consent of each Lender directly affected thereby;

provided, further, that no amendment, waiver or consent affecting the rights or duties of the Administrative Agent, or the Issuing Lender or the Swingline Lender under any Credit Document shall in any event be effective, unless in writing and signed by the Administrative Agent, or the Issuing Lender and/or the Swingline Lender, as applicable, in addition to the Lenders required hereinabove to take such action.

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     Any such waiver, any such amendment, supplement or modification and any such release shall apply equally to each of the Lenders and shall be binding upon the Borrower, the Lenders, the Administrative Agent and all future holders of the Notes. In the case of any waiver, the Borrower, the other Credit Parties, the Lenders and the Administrative Agent shall be restored to their former position and rights hereunder and under the outstanding Loans and Notes and other Credit Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon.

     Notwithstanding any of the foregoing to the contrary, the consent of the Borrower shall not be required for any amendment, modification or waiver of the provisions of Article VIII (other than the provisions of Section 8.9); provided, however, that the Administrative Agent will provide written notice to the Initial Borrower of any such amendment, modification or waiver. In addition, the Borrower and the Lenders hereby authorize the Administrative Agent to modify this Credit Agreement by unilaterally amending or supplementing Schedule 2.1(a) from time to time in the manner requested by the Initial Borrower, the Administrative Agent or any Lender in order to reflect any assignments or transfers of the Loans as provided for hereunder; provided, however, that the Administrative Agent shall promptly deliver a copy of any such modification to the Initial Borrower and each Lender.

     Notwithstanding the fact that the consent of all the Lenders is required in certain circumstances as set forth above, (A) each Lender is entitled to vote as such Lender sees fit on any bankruptcy reorganization plan that affects the Loans, and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code supersede the unanimous consent provisions set forth herein, and (B) the Required Lenders may consent to allow a Credit Party to use cash collateral (excluding cash collateral securing LOC Obligations) in the context of a bankruptcy or insolvency proceeding.

     If, in connection with any proposed amendment, modification, supplement, waiver or release (a “Proposed Change”) requiring the consent of all Lenders or all affected Lenders, the consent of Required Lenders is obtained, but the consent of other Lenders whose consent is required is not obtained (any such Lender whose consent is not obtained being referred to as a “Non-Consenting Lender”), then, so long as Agent is not a Non-Consenting Lender, at Initial Borrower’s request, Agent may within sixty (60) days thereafter designate another bank or financial institution which is acceptable to Agent in its reasonable discretion (such other bank or financial institution being called a “Replacement Lender”) to purchase the Loans of such Non-Consenting Lender and such Non-Consenting Lender’s rights hereunder, without recourse to or warranty by, or expense to, such Non-Consenting Lender, for a purchase price equal to the outstanding principal amount of the Loans payable to such Non-Consenting Lender plus any accrued but unpaid interest on such Loans and all accrued but unpaid fees owed to such Non-Consenting Lender and any other amounts payable to such Non-Consenting Lender under this Credit Agreement, and to assume all the obligations of such Non-Consenting Lender hereunder, and, upon such purchase and assumption (pursuant to a Commitment Transfer Supplement), such Non-Consenting Lender shall no longer be a party hereto or have any rights hereunder (other than rights with respect to indemnities and similar rights applicable to such Non-Consenting Lender prior to the date of such purchase and assumption) and shall be relieved from all

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obligations to Borrower hereunder, and the Replacement Lender shall succeed to the rights and obligations of such Non-Consenting Lender hereunder.

     Section 9.2. Notices.

     (a) Except as otherwise provided in Article II, all notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy or other electronic communications as provided below), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (i) when delivered by hand, (ii) when transmitted via telecopy (or other facsimile device) to the number set out herein, (iii) the day following the day on which the same has been delivered prepaid to a reputable national overnight air courier service, or (iv) the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid and return receipt requested, in each case, addressed as follows in the case of the Borrower, the other Credit Parties and the Administrative Agent, the Domestic Lending Offices set forth on Schedule 9.2 in the case of the Lenders, or to such other address as may be hereafter notified by the respective parties hereto and any future holders of the Notes:

The Borrower:	CapitalSource Inc.
	4445 Willard Avenue
	Chevy Chase, MD 20815
	Attention: Chief Financial Officer
	Telecopier: (301) 841-2307
with a copy to:	CapitalSource Inc.
	4445 Willard Avenue
	Chevy Chase, MD 20815
	Attention: Chief Legal Officer
	Telecopier: (301) 841-2380
The Guarantors:	c/o CapitalSource Inc.
	4445 Willard Avenue
	Chevy Chase, MD 20815
	Attention: Chief Financial Officer
	Telecopier: (301) 841-2307
with a copy to:	c/o CapitalSource Inc.
	4445 Willard Avenue
	Chevy Chase, MD 20815
	Attention: Chief Legal Officer
	Telecopier: (301) 841-2380

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The Administrative	Wachovia Bank, National Association
Agent:	201 South College Street
	NC0680/CP8
	Charlotte, North Carolina 28288-0608
	Attention: Syndication Agency Services
	Telecopier: (704) 383-0288
	Telephone: (704) 374-2698
with a copy to:	Wachovia Bank, National Association
	One Wachovia Center, Mail Code: NC0600
	Charlotte, North Carolina 28288-0608
	Attention: Paul Burkhart
	Telecopier: (704) 715-0067

provided, that, notices given by the Borrower pursuant to Section 2.1 or Section 2.10 hereof shall be effective only upon receipt thereof by the Administrative Agent.

     (b) Notices and other communications to the Lenders or the Administrative Agent hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent; provided, that, the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Section by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided further, that, approval of such procedures may be limited to particular notices or communications.

     Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement); provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.

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     Section 9.3. No Waiver; Cumulative Remedies.

     No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

     Section 9.4. [Reserved].

     Section 9.5. Payment of Expenses and Taxes; Indemnification.

          The Borrower agrees (a) to pay or reimburse the Administrative Agent and WCM for all reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation, negotiation, printing and execution of, and any amendment, supplement or modification to, this Credit Agreement and the other Credit Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, together with the reasonable fees and disbursements of counsel to the Administrative Agent, (b) to pay or reimburse each Lender and the Administrative Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Credit Agreement, the Notes and any other Credit Document, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent and to the Lenders (including reasonable allocated costs of in-house legal counsel of Administrative Agent), (c) on demand, to pay, indemnify, and hold each Lender, the Administrative Agent and WCM harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying stamp, excise and other similar taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, the Credit Documents and any such other documents, (d) defend, indemnify and hold harmless the Administrative Agent and the Lenders, and their respective Affiliates and their respective employees, agents, officers and directors, from and against any and all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Credit Parties or the Properties, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorney’s and consultant’s fees, investigation and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor, and (e) to pay, indemnify, and hold each Lender, the Administrative Agent and WCM and their Affiliates, employees, officers and directors harmless from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the use, or proposed use, of proceeds of the Loans or Letters of Credit, and (f) to pay, indemnify, and hold each Lender, the Administrative Agent and WCM and their Affiliates, employees, officers and directors harmless

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from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever to the extent arising from third party claims with respect to the execution, delivery, enforcement, performance and administration of the Credit Documents and any such other documents (all of the foregoing, collectively, the “indemnified liabilities”); provided, however, that the Borrower shall not have any obligation hereunder to the Administrative Agent, WCM or any Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Administrative Agent, WCM or such Lender, as determined by a court of competent jurisdiction. The agreements in this Section 9.5 shall survive repayment of the Loans, Notes, LOC Obligations and all other amounts payable hereunder.

     Section 9.6. Successors and Assigns; Participations; Purchasing Lenders.

     (a) This Credit Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Administrative Agent, all future holders of the Notes and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Credit Agreement or the other Credit Documents without the prior written consent of each Lender.

     (b) Any Lender may, in the ordinary course of its business and in accordance with Applicable Law, at any time sell to one or more banks or other entities (each, a “Participant”) participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender, or any other interest of such Lender hereunder, in each case in minimum amounts of $10,000,000 (or, if less, the entire amount of such Lender’s obligations, Commitments or other interests). In the event of any such sale by a Lender of participating interests to a Participant, such Lender’s obligations under this Credit Agreement to the other parties to this Credit Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Note for all purposes under this Credit Agreement, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Credit Agreement. No Lender shall transfer or grant any participation under which the Participant shall have rights to approve any amendment to or waiver of this Credit Agreement or any other Credit Document except to the extent such amendment or waiver would (i) extend the scheduled maturity of any Loan or Note or any installment thereon in which such Participant is participating (except in connection with the extension of the Commitment Termination Date pursuant to Section 2.20), or reduce the stated rate or extend the time of payment of interest or fees thereon (except in connection with a waiver of interest at the increased post-default rate) or reduce the principal amount thereof, or increase the amount of the Participant’s participation over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default shall not constitute a change in the terms of such participation, and that an increase in any Commitment or Loan shall be permitted without consent of a Participant if such Participant’s participation is not increased as a result thereof), or (ii) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Credit Agreement. In the case of any such participation, the Participant shall not have any rights under this Credit Agreement or any of the other Credit Documents

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(the Participant’s rights against such Lender in respect of such participation to be those set forth in the agreement executed by such Lender in favor of the Participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Lender had not sold such participation; provided, that, each Participant shall be entitled to the benefits of Sections 2.16, 2.17, 2.18, 2.19 and 9.5 with respect to its participation in the Commitments and the Loans outstanding from time to time; provided, further, that, no Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred.

     (c) Any Lender may, in the ordinary course of its business and in accordance with Applicable Law, at any time, sell or assign with the consent of the Administrative Agent and the Issuing Lender and, so long as no Default or Event of Default has occurred and is continuing, the Initial Borrower (in each case, which consent shall not be unreasonably withheld), to one or more additional banks, insurance companies or other financial institutions or any funds investing in bank loans (each, a “Purchasing Lender”), all or any part of its rights and obligations under this Credit Agreement and the Notes in minimum amounts of $10,000,000 (or, if less, the entire amount of such Lender’s Commitment), pursuant to a Commitment Transfer Supplement, executed by such Purchasing Lender, such transferor Lender, the Administrative Agent and, so long as no Default or Event of Default has occurred and is continuing, the Initial Borrower, and delivered to the Administrative Agent for its acceptance and recording in the Register; provided, however, that consent from the Issuing Lender shall not be required if the Purchasing Lender has a senior unsecured debt rating from any two of S&P, Moody’s and Fitch equal to or higher than A- (or A3 with respect to Moody’s); provided, further, that any sale or assignment to another Lender or to an Affiliate of an existing Lender shall not require the consent of the Administrative Agent, the Issuing Lender or the Borrower. Upon such execution, delivery, acceptance and recording, from and after the Transfer Effective Date specified in such Commitment Transfer Supplement, (i) the Purchasing Lender thereunder shall be a party hereto and, to the extent provided in such Commitment Transfer Supplement, have the rights and obligations of a Lender hereunder with a Commitment as set forth therein, and (ii) the transferor Lender thereunder shall, to the extent provided in such Commitment Transfer Supplement, be released from its obligations under this Credit Agreement (and, in the case of a Commitment Transfer Supplement covering all or the remaining portion of a transferor Lender’s rights and obligations under this Credit Agreement, such transferor Lender shall cease to be a party hereto). Such Commitment Transfer Supplement shall be deemed to amend this Credit Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender and the resulting adjustment of Commitment Percentages arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender under this Credit Agreement and the Notes. On or prior to the Transfer Effective Date specified in such Commitment Transfer Supplement, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent in exchange for the Notes delivered to the Administrative Agent pursuant to such Commitment Transfer Supplement new Notes to the order of such Purchasing Lender in an amount equal to the Commitment assumed by it pursuant to such Commitment

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Transfer Supplement and, unless the transferor Lender has not retained a Commitment hereunder, new Notes to the order of the transferor Lender in an amount equal to the Commitment retained by it hereunder. Such new Notes shall be dated the Closing Date and shall otherwise be in the form of the Notes replaced thereby. The Notes surrendered by the transferor Lender shall be returned by the Administrative Agent to the Initial Borrower marked “cancelled”.

     (d) The Administrative Agent shall maintain at its address referred to in Section 9.2 a copy of each Commitment Transfer Supplement delivered to it and a register (the “Register”) for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as the owner of the Loan recorded therein for all purposes of this Credit Agreement. The Register shall be available for inspection by the Initial Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice.

     (e) Upon its receipt of a duly executed Commitment Transfer Supplement, together with payment to the Administrative Agent by the transferor Lender or the Purchasing Lender (except for any assignment by a Lender to an Affiliate of such Lender), as agreed between them, of a registration and processing fee of $3,500 for each Purchasing Lender listed in such Commitment Transfer Supplement and the Notes, if any, subject to such Commitment Transfer Supplement, the Administrative Agent shall (i) accept such Commitment Transfer Supplement, (ii) record the information contained therein in the Register, and (iii) unless Initial Borrower’s consent to such assignment is not required give prompt notice of such acceptance and recordation to the Initial Borrower.

     (f) Each Credit Party authorizes each Lender to disclose to any Participant or Purchasing Lender (each, a “Transferee”) and any prospective Transferee any and all financial information in such Lender’s possession concerning the Borrower and its Affiliates which has been delivered to such Lender by or on behalf of a Credit Party pursuant to this Credit Agreement or which has been delivered to such Lender by or on behalf of a Credit Party in connection with such Lender’s credit evaluation of the Borrower and its Affiliates prior to becoming a party to this Credit Agreement, in each case subject to Section 9.15.

     (g) At the time of each assignment pursuant to this Section 9.6 to a Person which is not already a Lender hereunder and which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for federal income tax purposes, the respective assignee Lender shall provide to the Initial Borrower and the Administrative Agent the appropriate Internal Revenue Service Forms (and, if applicable, a 2.18 Certificate) described in Section 2.18.

     (h) Nothing herein shall prohibit any Lender from pledging or assigning any of its rights under this Credit Agreement (including, without limitation, any right to

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payment of principal and interest under any Note) to any Federal Reserve Bank in accordance with Applicable Laws.

     Section 9.7. Set-off.

     (a) Each Lender agrees that if any Lender (a “benefited Lender”) shall at any time receive any payment of all or part of its Loans, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to an Insolvency Event or otherwise) in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender’s Loans, or interest thereon, such benefited Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender’s Loan, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefited Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefited Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Borrowers and each other Credit Party agrees that each Lender so purchasing a portion of another Lender’s Loans may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion.

     (b) In addition to any rights and remedies of the Lenders provided by law (including, without limitation, other rights of set-off), each Lender and its Affiliates shall have the right, without prior notice to the Borrower or the applicable Credit Party, any such notice being expressly waived by the Credit Parties to the extent permitted by Applicable Law, upon the occurrence of any Event of Default, to setoff and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held by or owing to such Lender or any branch or agency thereof to or for the credit or the account of the Borrower or any other Credit Party, or any part thereof in such amounts as such Lender may elect, against and on account of the Loans and other Credit Party Obligations of the Borrower and the other Credit Parties to such Lender hereunder and claims of every nature and description of such Lender against the Borrower and the other Credit Parties, in any Currency, whether arising hereunder or, under any other Credit Document provided by such Lender pursuant to the terms of this Credit Agreement, as such Lender may elect, whether or not such Lender has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The aforesaid right of set-off may be exercised by such Lender against the Borrower, any other Credit Party or against any trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receiver or execution, judgment or attachment creditor of the Borrower or any other Credit Party, or against anyone else claiming through or against the Borrower or any other Credit Party, or any such trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor, notwithstanding the fact that such right of

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set-off shall not have been exercised by such Lender prior to the occurrence of any Default or Event of Default. Each Lender agrees promptly to notify the Initial Borrower and the Administrative Agent after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application.

     Section 9.8. Table of Contents and Section Headings.

     The table of contents and the Section and subsection headings herein are intended for convenience only and shall be ignored in construing this Credit Agreement.

     Section 9.9. Counterparts.

     This Credit Agreement may be executed by one or more of the parties to this Credit Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Credit Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent.

     Section 9.10. Effectiveness.

     This Credit Agreement shall become effective on the date on which all of the parties have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Administrative Agent or, in the case of the Lenders, shall have given to the Administrative Agent written, telecopied or telex notice (actually received) at such office that the same has been signed and mailed to it.

     Section 9.11. Severability.

     Any provision of this Credit Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

     Section 9.12. Integration.

     This Credit Agreement and the Notes, if any, represent the agreement of the Borrower, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent, the Borrower, or any Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the Notes, if any.

     Section 9.13. Governing Law.

     This Credit Agreement and the Notes and the rights and obligations of the parties under this Credit Agreement and the Notes shall be governed by, and construed and interpreted in

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accordance with, the law of the State of New York without regard to conflict of laws principles thereof (other than Sections 5-1401 and 5-1402 of the New York General Obligations Law).

     Section 9.14. Consent to Jurisdiction and Service of Process.

     Any legal action or proceeding with respect to this Credit Agreement or any other Credit Document shall be brought in the courts of the State of New York in New York County or of the United States for the Southern District of New York, and, by execution and delivery of this Credit Agreement, each Credit Party, the Administrative Agent and each Lender accepts, for itself and in connection with its Properties, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts and irrevocably agrees to be bound by any final judgment rendered thereby in connection with this Credit Agreement from which no appeal has been taken or is available. Each Credit Party, the Administrative Agent and each Lender irrevocably agrees that all service of process in any such proceedings in any such court may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid and return receipt requested, to it at its address set forth in Section 9.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto, such service being hereby acknowledged by the Borrower and the other Credit Parties to be effective and binding service in every respect. Each Credit Party, the Administrative Agent and the Lenders irrevocably waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any such action or proceeding in any such jurisdiction. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any Lender to bring proceedings against the Borrower in the court of any other jurisdiction.

     Section 9.15. Confidentiality.

     Each of the Administrative Agent, the Lenders and the Issuing Lender agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors, officers, employees, agents, advisors and other representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Credit Document or any action or proceeding relating to this Credit Agreement or any other Credit Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Credit Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the written consent of the Initial Borrower or (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent, any Lender, the Issuing Lender or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrower.

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     For purposes of this Section, “Information” means all information received from the Borrower or any of its Subsidiaries relating to the Borrower or any of its Subsidiaries or any of their respective businesses, other than any such information that is available to the Administrative Agent, any Lender or the Issuing Lender on a nonconfidential basis prior to disclosure by the Borrower or any of its Subsidiaries. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

     Section 9.16. Acknowledgments.

     The Borrower hereby acknowledges that:

     (a) it has been advised by counsel in the negotiation, execution and delivery of each Credit Document;

     (b) neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to the Borrower or any other Credit Party arising out of or in connection with this Credit Agreement and the relationship between Administrative Agent and Lenders, on one hand, and the Borrower, on the other hand, in connection herewith is solely that of debtor and creditor; and

     (c) no joint venture exists among the Lenders or among the Borrower and the Lenders.

     Section 9.17. Waivers of Jury Trial; Waiver of Consequential Damages.

     THE BORROWER, THE OTHER CREDIT PARTIES, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS CREDIT AGREEMENT OR ANY OTHER CREDIT DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. The Borrower, the other Credit Parties, the Administrative Agent and the Lenders agree not to assert any claim against any other party to this Credit Agreement or any of their respective directors, officers, employees, attorneys, Affiliates or agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to any of the transactions contemplated herein.

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     Section 9.18. PATRIOT Act Notice.

     Each Lender and the Administrative Agent (for itself and not on behalf of any other party) hereby notifies each Credit Party that, pursuant to the requirements of the USA PATRIOT Act, Title III of Pub. L. 107-56, signed into law October 26, 2001 (the “PATRIOT Act”), it is required to obtain, verify and record information that identifies each Credit Party, which information includes the name and address of each Credit Party and other information that will allow such Lender or the Administrative Agent, as applicable, to identify each Credit Party in accordance with the PATRIOT Act.

     Section 9.19. Judgment Shortfall.

     (a) If, for the purpose of obtaining judgment in any court, it is necessary to convert a sum owing hereunder in one Currency into another Currency, each party hereto agrees, to the fullest extent that it may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures in the relevant jurisdiction the first Currency could be purchased with such other Currency on the Business Day immediately preceding the day on which final judgment is given.

     (b) The obligations of the Borrower in respect of any sum due to any party hereto or any holder of the obligations owing hereunder (the “Applicable Creditor”) shall, notwithstanding any judgment in a Currency (the “Judgment Currency”) other than the Currency in which such sum is stated to be due hereunder (the “Agreement Currency”), be discharged only to the extent that, on the Business Day following receipt by the Applicable Creditor of any sum adjudged to be so due in the Judgment Currency, the Applicable Creditor may in accordance with normal banking procedures in the relevant jurisdiction purchase the Agreement Currency with the Judgment Currency; if the amount of the Agreement Currency so purchased is less than the sum due in accordance with this Agreement to the Applicable Creditor in the Agreement Currency, the Borrower agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Applicable Creditor against such loss and if the amount of the Agreement Currency so purchased exceeds the sum due in accordance with this Agreement to the Applicable Creditor in the Agreement Currency, the Applicable Creditor agrees to remit such excess to the Borrower. The obligations of the Borrower and Applicable Creditor contained in this Section 9.19 shall survive the termination of this Agreement and the payment of all other amounts owing hereunder.

     Section 9.20. Return of Notes.

     In the event of (i) any termination in full by the Initial Borrower or CSF of all rights with respect to the Commitment in accordance Section 2.6(a)(i) or 2.6(a)(ii), as applicable or (ii) the delivery of any new Note in replacement of a previously issued Note, the applicable Lender shall return to the Borrower any Notes previously issued to it relating to such terminated Commitment or replaced Note, as applicable and such Notes shall be marked “cancelled.” In the event that any Lender does not return its applicable Note or Notes as described in this Section 9.20 within forty-five (45) days after the written request of Borrower, Borrower shall be entitled

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to receive a lost note affidavit from such Lender including customary indemnifications reasonably satisfactory to Borrower with respect to the applicable unreturned Note or Notes.

ARTICLE X

GUARANTY

     Section 10.1. The Guaranty.

     In order to induce the Lenders to enter into this Credit Agreement and to extend credit hereunder and thereunder and in recognition of the direct benefits to be received by the Guarantors from the Extensions of Credit hereunder, each of the Guarantors hereby agrees with the Administrative Agent and the Lenders to unconditionally and irrevocably jointly and severally guarantee the full and prompt payment when due, whether upon maturity, by acceleration or otherwise, of any and all indebtedness of the Borrower to the Administrative Agent and the Lenders. If any or all of the indebtedness becomes due and payable hereunder, each Guarantor unconditionally promises to pay such indebtedness to the Administrative Agent, the Lenders, or their respective order, or demand, together with any and all reasonable expenses which may be incurred by the Administrative Agent or the Lenders in collecting any of the Credit Party Obligations. The word “indebtedness” is used in this Article X in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of the Borrower, including specifically all Credit Party Obligations, arising in connection with this Credit Agreement or the other Credit Documents, in each case, heretofore, now, or hereafter made, incurred or created, whether voluntarily or involuntarily, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether or not such indebtedness is from time to time reduced, or extinguished and thereafter increased or incurred, whether the Borrower may be liable individually or jointly with others, whether or not recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, and whether or not such indebtedness may be or hereafter become otherwise unenforceable. The guaranty set forth in this Article X is continuing guaranty and is a guaranty of payment and is not merely a guaranty of collection.

     Notwithstanding any provision to the contrary contained herein or in any other of the Credit Documents, to the extent the obligations of a Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of each such Guarantor hereunder shall be limited to the maximum amount that is permissible under Applicable Law (whether federal or state and including, without limitation, the Bankruptcy Code).

     Section 10.2. Bankruptcy.

     Additionally, each of the Guarantors unconditionally and irrevocably guarantees jointly and severally the payment of any and all Credit Party Obligations of the Borrower to the Lenders whether or not due or payable by the Borrower upon the occurrence of any of the events specified in Section 7.1(f), and unconditionally promises to pay such Credit Party Obligations to the Administrative Agent for the account of the Lenders, or order, on demand, in lawful money of the United States. Each of the Guarantors further agrees that to the extent that the Borrower

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or a Guarantor shall make a payment or a transfer of an interest in any property to the Administrative Agent or any Lender, which payment or transfer or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, or otherwise is avoided, and/or required to be repaid to the Borrower or a Guarantor, the estate of the Borrower or a Guarantor, a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such avoidance or repayment, the obligation or part thereof intended to be satisfied shall be revived and continued in full force and effect as if said payment had not been made.

     Section 10.3. Nature of Liability.

     The liability of each Guarantor hereunder is exclusive and independent of any security for or other guaranty of the Credit Party Obligations of the Borrower whether executed by any such Guarantor, any other guarantor or by any other party, and no Guarantor’s liability hereunder shall be affected or impaired by (a) any direction as to application of payment by the Borrower or by any other party, or (b) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other party as to the Credit Party Obligations of the Borrower, or (c) any payment on or in reduction of any such other guaranty or undertaking, or (d) any dissolution, termination or increase, decrease or change in personnel by the Borrower, or (e) any payment made to the Administrative Agent or the Lenders on the Credit Party Obligations which the Administrative Agent or such Lenders repay the Borrower pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and each of the Guarantors waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding.

     Section 10.4. Independent Obligation.

     The obligations of each Guarantor hereunder are independent of the obligations of any other Guarantor or the Borrower, and a separate action or actions may be brought and prosecuted against each Guarantor whether or not action is brought against any other Guarantor or the Borrower and whether or not any other Guarantor or the Borrower is joined in any such action or actions. Subject to the provisions of Section 10.2 regarding revival of Credit Party Obligations, the Guarantors’ joint and several liability with respect to the Credit Party Obligations shall not obligate them to pay any Credit Party Obligations which have already been fully satisfied.

     Section 10.5. Authorization.

     Each of the Guarantors authorizes the Administrative Agent and each Lender, without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing its liability hereunder, from time to time to (a) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of the Credit Party Obligations or any part thereof in accordance with this Credit Agreement, including any increase or decrease of the rate of interest thereon, (b) take and hold security from any Guarantor or any other party for the payment of this Guaranty or the Credit Party Obligations and exchange, enforce waive and release any such security, (c) apply such security and direct the order or manner of sale thereof as the Administrative Agent and the

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Lenders in their discretion may determine, and (d) release or substitute any one or more endorsers, Guarantors, the Borrower or other obligors.

     Section 10.6. Reliance.

     It is not necessary for the Administrative Agent or the Lenders to inquire into the capacity or powers of the Borrower or the officers, directors, members, partners or agents acting or purporting to act on its behalf, and any Credit Party Obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder.

     Section 10.7. Waiver.

     (a) Each of the Guarantors waives any right (except as shall be required by applicable statute and cannot be waived) to require the Administrative Agent or any Lender to (i) proceed against the Borrower, any other guarantor or any other party, (ii) proceed against or exhaust any security held from the Borrower, any other guarantor or any other party, or (iii) pursue any other remedy in the Administrative Agent’s or any Lender’s power whatsoever. Each of the Guarantors waives any defense based on or arising out of any defense of the Borrower, any other guarantor or any other party other than payment in full of the Credit Party Obligations (other than contingent indemnity obligations), including without limitation any defense based on or arising out of the disability of the Borrower, any other guarantor or any other party, or the unenforceability of the Credit Party Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower other than payment in full of the Credit Party Obligations. The Administrative Agent may, at its election, foreclose on any security held by the Administrative Agent by one or more judicial or nonjudicial sales (to the extent such sale is permitted by Applicable Law), or exercise any other right or remedy the Administrative Agent or any Lender may have against the Borrower or any other party, or any security, without affecting or impairing in any way the liability of any Guarantor hereunder except to the extent the Credit Party Obligations have been paid in full and the Commitments have been terminated. Each of the Guarantors waives any defense arising out of any such election by the Administrative Agent or any of the Lenders, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of the Guarantors against the Borrower or any other party or any security.

     (b) Each of the Guarantors waives all presentments, demands for performance, protests and notices, including without limitation notices of nonperformance, notice of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional Credit Party Obligations. Each Guarantor assumes all responsibility for being and keeping itself informed of the Borrower’s financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Credit Party Obligations and the nature, scope and extent of the risks which such Guarantor assumes and incurs hereunder, and agrees that neither the Administrative Agent nor any Lender shall have any duty to advise such Guarantor of information known to it regarding such circumstances or risks.

-98-

     (c) Each of the Guarantors hereby agrees it will not exercise any rights of subrogation which it may at any time otherwise have as a result of this Guaranty (whether contractual, under Section 509 of the U.S. Bankruptcy Code, or otherwise) to the claims of the Lenders against the Borrower or any other guarantor of the Credit Party Obligations of the Borrower owing to the Lenders (collectively, the “Other Parties”) and all contractual, statutory or common law rights of reimbursement, contribution or indemnity from any Other Party which it may at any time otherwise have as a result of this Guaranty until such time as the Credit Party Obligations shall have been paid in full and the Commitments have been terminated. Each of the Guarantors hereby further agrees not to exercise any right to enforce any other remedy which the Administrative Agent or the Lenders now have or may hereafter have against any Other Party, any endorser or any other guarantor of all or any part of the Credit Party Obligations of the Borrower and any benefit of, and any right to participate in, any security or collateral given to or for the benefit of the Lenders to secure payment of the Credit Party Obligations of the Borrower until such time as the Credit Party Obligations (other than contingent indemnity obligations) shall have been paid in full and the Commitments have been terminated.

     Section 10.8. Limitation on Enforcement.

     The Lenders agree that this Guaranty may be enforced only by the action of the Administrative Agent acting upon the instructions of the Required Lenders and that no Lender shall have any right individually to seek to enforce or to enforce this Guaranty, it being understood and agreed that such rights and remedies may be exercised by the Administrative Agent for the benefit of the Lenders under the terms of this Credit Agreement. The Lenders further agree that this Guaranty may not be enforced against any director, officer, employee or stockholder of the Guarantors.

     Section 10.9. Confirmation of Payment.

     The Administrative Agent and the Lenders will, upon request after payment of the indebtedness and obligations which are the subject of this Guaranty and termination of the Commitments relating thereto, confirm to the Borrower, the Guarantors or any other Person that such indebtedness and obligations have been paid and the Commitments relating thereto terminated, subject to the provisions of Section 10.2.

     Section 10.10. Limitation of Guaranty of CSF. Notwithstanding anything to contrary contained herein, CSF shall not be deemed a Guarantor with respect to any and all indebtedness that it owes to the Administrative Agent and the Lenders as a Borrower hereunder (but shall continue to be a Guarantor with respect to all other indebtedness).

Remainder of Page Intentionally Left Blank.
Signature Pages Follow.

-99-

     IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be duly executed and delivered by its proper and duly authorized officers as of the day and year first above written.

CAPITALSOURCE INC., a Delaware corporation
By:	/s/  JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Vice President and Treasurer
CAPITALSOURCE TRS INC., a Delaware corporation
By:	/s/  JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Vice President and Treasurer
CAPITALSOURCE FINANCE LLC, a Delaware limited liability company
By:	/s/  JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Vice President and Treasurer
CSE MORTGAGE LLC, a Delaware limited liability company
By:	/s/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Vice President and Treasurer
CAPITALSOURCE SF TRS INC., a Delaware limited liability company
By:	/s/  JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Vice President and Treasurer
CAPITALSOURCE INTERNATIONAL, INC., a Delaware corporation
By:	/s/  JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Vice President and Treasurer

Signatures Continued on Following Page

WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent, as Issuing Lender, and as a Lender
By:	/S/ MIKE ROMANZO
	Name:	Mike Romanzo, CFA
	Title:	Director

Signatures Continued on Following Page

BANK OF AMERICA, N.A., as Lender
By:	/S/ STEFANIE J. BRAN
	Name:	Stefanie J. Bran
	Title:	Vice President, Bank of America

Signatures Continued on Following Page

MORGAN STANLEY BANK, as a Lender
By:	/S/ DANIEL TWENGE
	Name:	Daniel Twenge
	Title:	Authorized Signatory, Morgan Stanley Bank

Signatures Continued on Following Page

SUNTRUST BANK, as a Lender
By:	/S/ ROBERT S. ASHCOM
	Name:	Robert S. Ashcom
	Title:	Director

Signatures Continued on Following Page

CREDIT SUISSE, CAYMAN ISLANDS BRANCH, as a Lender
By:	/s/ JAY CHALL
	Name:	Jay Chall
	Title:	Director
By:	/s/ MARKUS FRENZEN
	Name:	Markus Frenzen
	Title:	Assistant Vice President

Signatures Continued on Following Page

BMO CAPITAL MARKETS FINANCING, INC., as a Lender
By:	/S/ AMY K. DUMSER
	Name:	Amy K. Dumser
	Title:	Director

Signatures Continued on Following Page

BEAR STEARNS CORPORATE LENDING INC., as a Lender
By:	/S/ STEPHEN O’KEEFE
	Name:	Stephen O’Keefe
	Title:	Authorized Signatory

Signatures Continued on Following Page

JPMORGAN CHASE BANK, N.A., as a Lender
By:	/S/ RICHARD J. POWOROZNEK
	Name:	Richard J. Poworoznek
	Title:	Executive Director  JPMorgan Chase Bank, N.A.

Signatures Continued on Following Page

SOCIÉTÉ GÉNÉRALE, as a Lender
By:	/S/ SHELLEY YU
	Name:	Shelley Yu
	Title:	Vice President

Signatures Continued on Following Page

FORTIS CAPITAL GROUP, as a Lender
By:	/S/ SHANE KLEIN
	Name:	Shane Klein
	Title:	Senior Vice President
By:	/S/ CHRISTINE R. SEALE
	Name:	Christine R. Seale
	Title:	Senior Vice President

Signatures Continued on Following Page

TAIPEI FUBON COMMERCIAL BANK, NEW YORK AGENCY, as a Lender
By:	/S/ MONG SHYR WU
	Name:	Mong Shyr Wu
	Title:	V.P. & C.L.O.

Signatures Continued on Following Page

BANK OF COMMUNICATIONS CO., LTD., NEW YORK BRANCH, as a Lender
By:	/S/ SHELLEY HE
	Name:	Shelley He
	Title:	Deputy General Manager

Signatures Continued on Following Page

CITIBANK, N.A., as a Lender
By:	/S/ CATHERINE MORROW
	Name:	Catherine Morrow
	Title:	Vice President

EX-10.9

Exhibit 10.9

COMPOSITE VERSION
(THROUGH AMENDMENT 3)

AMENDED AND RESTATED
SALE AND SERVICING AGREEMENT

by and among

CSE QRS FUNDING I LLC,
as the Seller

CSE MORTGAGE LLC,
as the Originator and as the Servicer

EACH OF THE PURCHASERS AND PURCHASER AGENTS
FROM TIME TO TIME PARTY HERETO,

WACHOVIA CAPITAL MARKETS, LLC,
as the Administrative Agent and as the VFCC Agent

and

WELLS FARGO BANK, NATIONAL ASSOCIATION,
as the Backup Servicer and as the Collateral Custodian

Dated as of April 28, 2006

TABLE OF CONTENTS

			Page
ARTICLE I DEFINITION				8
	Section 1.1	Certain Defined Terms		8
	Section 1.2	Other Terms		58
	Section 1.3	Computation of Time Periods		59
	Section 1.4	Interpretation		59
	Section 1.5	Special Provisions Relating to Alternative Currency Loans		59
ARTICLE II PURCHASE OF THE VARIABLE FUNDING CERTIFICATES				60
	Section 2.1	The Variable Funding Certificates		60
	Section 2.2	[Reserved]		62
	Section 2.3	Procedures for Advances by Purchasers		62
	Section 2.4	Reduction of the Facility Amount; Mandatory and Optional
		Repayments		63
	Section 2.5	Determination of Interest		64
	Section 2.6	Percentage Evidenced by each Variable Funding Certificate		64
	Section 2.7	[Reserved]		64
	Section 2.8	Notations on Variable Funding Certificates		64
	Section 2.9	Settlement Procedures During the Revolving Period		64
	Section 2.10	Settlement Procedures During the Amortization Period		66
	Section 2.11	Collections and Allocations		67
	Section 2.12	Payments, Computations, Etc.		68
	Section 2.13	Optional Repurchase		69
	Section 2.14	Fees		69
	Section 2.15	Increased Costs; Capital Adequacy; Illegality		69
	Section 2.16	Taxes		71
	Section 2.17	Assignment of the Sale Agreement		72
	Section 2.18	Substitution of Assets		72
	Section 2.19	Optional Sales		74
	Section 2.20	Discretionary Sales		75
	Section 2.21	Required Equity Requirements		76
ARTICLE III CONDITIONS TO ADVANCES				77

i

TABLE OF CONTENTS
(continued)

			Page
	Section 3.1	Conditions to Closing and Initial Advance		77
	Section 3.2	Conditions Precedent to All Advances		78
ARTICLE IV REPRESENTATIONS AND WARRANTIES				80
	Section 4.1	Representations and Warranties of the Seller		80
	Section 4.2	Representations and Warranties of the Seller Relating
		to the Agreement and the Collateral		89
	Section 4.3	Representations and Warranties of the Servicer		90
	Section 4.4	Representations and Warranties of the Backup Servicer		93
	Section 4.5	Representations and Warranties of the Collateral Custodian		94
	Section 4.6	Breach of Certain Representations and Warranties		95
ARTICLE V GENERAL COVENANTS				96
	Section 5.1	Affirmative Covenants of the Seller		96
	Section 5.2	Negative Covenants of the Seller		99
	Section 5.3	Covenants of the Seller Relating to the Hedging of Assets		101
	Section 5.4	Affirmative Covenants of the Servicer		102
	Section 5.5	Negative Covenants of the Servicer		105
	Section 5.6	Affirmative Covenants of the Backup Servicer		106
	Section 5.7	Negative Covenants of the Backup Servicer		106
	Section 5.8	Affirmative Covenants of the Collateral Custodian		106
	Section 5.9	Negative Covenants of the Collateral Custodian		107
ARTICLE VI ADMINISTRATION AND SERVICING OF CONTRACTS				107
	Section 6.1	Designation of the Servicer		107
	Section 6.2	Duties of the Servicer		108
	Section 6.3	Authorization of the Servicer		109
	Section 6.4	Collection of Payments		110
	Section 6.5	Servicer Advances		112
	Section 6.6	Realization Upon Charged-Off Assets		112
	Section 6.7	Maintenance of Insurance Policies		113
	Section 6.8	Servicing Compensation		113
	Section 6.9	Payment of Certain Expenses by Servicer		113

ii

TABLE OF CONTENTS
(continued)

			Page
	Section 6.10	Reports		114
	Section 6.11	Annual Statement as to Compliance		114
	Section 6.12	Annual Independent Public Accountant’s Servicing Reports		115
	Section 6.13	Limitation on Liability of the Servicer and Others		115
	Section 6.14	The Servicer Not to Resign		115
	Section 6.15	Servicer Defaults		116
	Section 6.16	Appointment of Successor Servicer		117
ARTICLE VII THE BACKUP SERVICER				119
	Section 7.1	Designation of the Backup Servicer		119
	Section 7.2	Duties of the Backup Servicer		119
	Section 7.3	Merger or Consolidation		121
	Section 7.4	Backup Servicing Compensation		121
	Section 7.5	Backup Servicer Removal		121
	Section 7.6	Limitation on Liability		122
	Section 7.7	The Backup Servicer Not to Resign		122
ARTICLE VIII THE COLLATERAL CUSTODIAN				123
	Section 8.1	Designation of Collateral Custodian		123
	Section 8.2	Duties of Collateral Custodian		123
	Section 8.3	Merger or Consolidation		125
	Section 8.4	Collateral Custodian Compensation		125
	Section 8.5	Collateral Custodian Removal		125
	Section 8.6	Limitation on Liability		125
	Section 8.7	The Collateral Custodian Not to Resign		126
	Section 8.8	Release of Documents		126
	Section 8.9	Return of Required Asset Documents		127
	Section 8.10	Access to Certain Documentation and Information
		Regarding the Collateral; Audits		128
ARTICLE IX SECURITY INTEREST				128
	Section 9.1	Grant of Security Interest		128
	Section 9.2	Release of Lien on Collateral		129

iii

TABLE OF CONTENTS
(continued)

			Page
	Section 9.3	Further Assurances		129
	Section 9.4	Remedies		129
	Section 9.5	Waiver of Certain Laws		129
	Section 9.6	Power of Attorney		130
ARTICLE X TERMINATION EVENTS				130
	Section 10.1	Termination Events		130
	Section 10.2	Remedies		133
ARTICLE XI INDEMNIFICATION				134
	Section 11.1	Indemnities by the Seller		134
	Section 11.2	Indemnities by the Servicer		137
	Section 11.3	After-Tax Basis		137
ARTICLE XII THE ADMINISTRATIVE AGENT AND PURCHASER AGENTS				138
	Section 12.1	The Administrative Agent		138
	Section 12.2	The Purchaser Agents		140
	Section 12.3	Additional Agent		142
ARTICLE XIII MISCELLANEOUS				145
	Section 13.1	Amendments and Waivers		145
	Section 13.2	Notices, Etc.		145
	Section 13.3	Ratable Payments		145
	Section 13.4	No Waiver; Remedies		146
	Section 13.5	Binding Effect; Benefit of Agreement		146
	Section 13.6	Term of this Agreement		146
	Section 13.7	Governing Law; Consent to Jurisdiction; Waiver of
		Objection to Venue		146
	Section 13.8	Waiver of Jury Trial		146
	Section 13.9	Costs, Expenses and Taxes		147
	Section 13.10	No Proceedings		147
	Section 13.11	Recourse Against Certain Parties		148
	Section 13.12	Protection of Right, Title and Interest in the
		Collateral; Further Action Evidencing Advances		149
	Section 13.13	Confidentiality		150

iv

TABLE OF CONTENTS
(continued)

		Page
Section 13.14	Execution in Counterparts; Severability; Integration		152
Section 13.15	Waiver of Setoff		152
Section 13.16	Assignments		152
Section 13.17	Heading and Exhibits		152
Section 13.18	Loans Subject to Retained Interest Provisions		153
Section 13.19	Tax Treatment of Advances		153
Section 13.20	Original Sale and Servicing Agreement		153

EXHIBITS
EXHIBIT A-1	Form of Borrowing Notice (Advances and Reduction of Facility Amount)
EXHIBIT A-2	Form of Borrowing Notice (Reinvestments of Principal Collections)
EXHIBIT A-3	Form of Borrowing Base Certificate
EXHIBIT B-1	Form of Variable Funding Certificate (Purchasers)
EXHIBIT B-2	Form of Variable Funding Certificate (Additional Purchasers)
EXHIBIT C	Form of Monthly Report
EXHIBIT D	Form of Hedging Agreement (including Schedule and Confirmation)
EXHIBIT E-1	Form of Officer’s Certificate to Solvency (CSE QRS Funding I LLC)
EXHIBIT E-2	Form of Officer’s Certificate to Solvency (CSE Mortgage LLC)
EXHIBIT F-1	Form of Officer’s Closing Certificate (CSE QRS Funding I LLC)
EXHIBIT F-2	Form of Officer’s Closing Certificate (CSE Mortgage LLC)
EXHIBIT G-1	Form of Power of Attorney(CSE QRS Funding I LLC)
EXHIBIT G-2	Form of Power of Attorney(CSE Mortgage LLC)
EXHIBIT H	Form of Release of Required Asset Documents
EXHIBIT I	Form of Assignment of Mortgage
EXHIBIT J	Form of Servicer’s Certificate
EXHIBIT K	Form of Transferee Letter
EXHIBIT L	Form of Certificate of Outside Counsel

SCHEDULES

SCHEDULE I	Condition Precedent Documents
SCHEDULE II	List of Lock-Box Banks and Lock-Box Accounts
SCHEDULE III	Location of Required Asset Documents and Asset Files
SCHEDULE IV	Asset List
SCHEDULE V	Residential Mortgage Policies and Procedures

v

AMENDED AND RESTATED SALE AND SERVICING AGREEMENT

     THIS AMENDED AND RESTATED SALE AND SERVICING AGREEMENT (such agreement as amended, modified, waived, supplemented, restated or replaced from time to time, the “Agreement”) is made as of this 28th day of April, 2006, by and among:

     (1) CSE QRS FUNDING I LLC, a Delaware limited liability company, as the seller (together with its successors and assigns in such capacity, the “Seller”);

     (2) CSE MORTGAGE LLC, a Delaware limited liability company (“CSE Mortgage”), as the originator (together with its successors and assigns in such capacity, the “Originator”), and as the servicer (together with its successors and assigns in such capacity, the “Servicer”);

     (3) EACH OF THE PURCHASERS AND PURCHASER AGENTS FROM TIME TO TIME PARTY HERETO (together with their respective successors and assigns in such capacities, each a “Purchaser” and a “Purchaser Agent,” respectively);

     (4) WACHOVIA CAPITAL MARKETS, LLC, a Delaware limited liability company (“WCM”), as the administrative agent for the Purchaser Agents hereunder (together with its successors and assigns in such capacity, including any successor appointed pursuant to ARTICLE XII, the “Administrative Agent”), and as the Purchaser Agent for Variable Funding Capital Company LLC (together with its successors and assigns in such capacity, the “VFCC Agent”); and

     (5) WELLS FARGO BANK, NATIONAL ASSOCIATION (“Wells Fargo”), not in its individual capacity but as the backup servicer (together with its successors and assigns in such capacity, the “Backup Servicer”), and not in its individual capacity but as the collateral custodian (together with its successors and assigns in such capacity, the “Collateral Custodian”).

RECITALS

     WHEREAS, the Seller, the Originator, the Servicer, Variable Funding Capital Company LLC (together with its successors and assigns, “VFCC”), the VFCC Agent, the Administrative Agent, the Backup Servicer, the Collateral Custodian and Wachovia Bank, National Association, as Hedge Counterparty (as defined below) have heretofore executed and delivered that certain Sale and Servicing Agreement, dated as of December 28, 2005 (as amended, the “Original Sale and Servicing Agreement”);

     WHEREAS, Section 13.1 of the Original Sale and Servicing Agreement provides that no amendment shall be effective without the written agreement of the Seller, the Servicer, the Backup Servicer, the Collateral Custodian, the Administrative Agent, the Secured Parties and the Hedge Counterparty;

     WHEREAS, the Seller, the Originator, the Servicer, VFCC, Fairway Finance Company, LLC (together with its successors and assigns, “Fairway”), Park Avenue Receivables Company,

6

LLC (together with its successors and assigns, “Park Avenue”), the VFCC Agent, Harris Nesbitt Corp., as the Purchaser Agent for Fairway (together with its successors and assigns in such capacity, the “Fairway Agent”), JPMorgan Chase Bank, National Association, as the Purchaser Agent for Park Avenue (together with its successors and assigns in such capacity, the “Park Avenue Agent”), the Administrative Agent, the Backup Servicer, the Collateral Custodian and the Hedge Counterparty hereby desire to amend and restate the Original Sale and Servicing Agreement to (i) make Three Pillars and the Three Pillars Agent, parties thereto, (ii) increase the Facility Amount, and (iii) make such other changes as are necessary or in the interests of the parties;

     WHEREAS, each of the Seller, the Originator, the Servicer, VFCC, Fairway, Park Avenue, the VFCC Agent, the Fairway Agent, the Park Avenue Agent, the Administrative Agent, the Backup Servicer, the Collateral Custodian, and the Hedge Counterparty consents to the amendment and restatement of the Original Sale and Servicing Agreement pursuant to this Agreement; and

     WHEREAS, all other conditions precedent to the execution of this Agreement have been complied with.

     NOW, THEREFORE, based upon the foregoing Recitals, the mutual premises and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

ARTICLE I

DEFINITION

     Section 1.1 Certain Defined Terms.

     Certain capitalized terms used throughout this Agreement are defined above or in this Section 1.1. As used in this Agreement and its schedules, exhibits and other attachments, unless the context requires a different meaning, the following terms shall have the following meanings:

“1940 Act”: Defined in Section 10.1(i).

“Accrual Period”: (a) with respect to each Advance (or portion thereof) funded at an Interest Rate other than the CP Rate, (i) with respect to the first Payment Date, the period from and including the Closing Date to but excluding such first Payment Date and (ii) with respect to any subsequent Payment Date, the period from and including the previous Payment Date to but excluding such subsequent Payment Date, and (b) with respect to each Advance (or portion thereof) funded at an Interest Rate equal to the CP Rate, (i) with respect to the first Payment Date, the period from and including the Closing Date to and including the last day of the calendar month in which the Closing Date occurs and (ii) with respect to any subsequent Payment Date, the period ending on the last day of the calendar month immediately preceding the month in which the Payment Date occurs and commencing on the first (1st) day of such immediately preceding calendar month.

7

“Acquired Loan”: A Loan that is originated by a Person other than the Originator, CapitalSource Finance LLC or any of their respective Subsidiaries and acquired by the Originator in a “true sale” transaction pursuant to an acquisition agreement, provided that the foregoing shall exclude (i) any CS Funding III Asset that was not an “Acquired Loan” under and as defined in the CS Funding III Transaction and (ii) any Retained Interest.

“Acquisition Facility”: That certain Loan Certificate and Servicing Agreement, dated as of February 28, 2003, by and among CapitalSource Acquisition Funding LLC, as the seller, CapitalSource Finance LLC, as the originator and as the servicer, Variable Funding Capital Company LLC (formerly known as Variable Funding Capital Corporation), as the purchaser, Wachovia Capital Markets, LLC (f/k/a Wachovia Securities, Inc.), as the Administrative Agent and as the Purchaser Agent and Wells Fargo Bank, National Association, successor-by-merger to Wells Fargo Bank Minnesota, National Association, as the backup servicer and as the Collateral Custodian, as such agreement may be amended, modified, waived, supplemented or restated from time to time and including any document, certificate or agreement executed in connection therewith.

“Addition Date”: With respect to any Additional Assets, the date on which such Additional Assets become part of the Collateral.

“Additional Agent”: Each Person (together with its successors and assigns) that becomes a party to this Agreement as an Additional Agent, on behalf of any Additional Purchaser, pursuant to an Additional Purchaser Agreement.

“Additional Agent Fee Letter”: Each Additional Agent Fee Letter Agreement that shall be entered into by and among the Seller, the Servicer and such Additional Agent in connection with the transactions contemplated by this Agreement, as amended, modified, waived, supplemented, restated or replaced from time to time.

“Additional Agent’s Account”: A special account, designated by the Additional Agent in an Additional Purchaser Agreement, in the name of an Additional Agent maintained with the related Additional Purchaser.

“Additional Assets”: All Assets that become part of the Collateral after the Closing Date.

“Additional Purchaser”: Defined in Section 13.16.

“Additional Purchaser Agreement”: With respect to each Additional Purchaser, the Transferee Letter or Assumption Agreement relating to such Additional Purchaser.

“Adjusted Eurodollar Rate”: For any Accrual Period, an interest rate per annum equal to a fraction, expressed as a percentage and rounded upwards (if necessary) to the nearest 1/100 of 1%, (i) the numerator of which is equal to the LIBOR Rate for such Accrual Period and (ii) the denominator of which is equal to 100% minus the Eurodollar Reserve Percentage for such Accrual Period.

“Administrative Agent”: Defined in the Preamble of this Agreement.

8

“Advance”: Defined in Section 2.1(b).

“Advance Rate”: On any Determination Date, with respect to any Eligible Asset, the percentage set forth in the tables below, as determined by (i) the type of Eligible Asset, (ii) the Related Property classification of such Eligible Asset, (iii) the highest Concentration Percentage Range after the inclusion of such Eligible Asset in the Collateral and (iv) the LTV of such Eligible Asset, if applicable.

For the avoidance of doubt, the applicable Advance Rate for any Eligible Asset that constitutes Development Property shall be the Advance Rate for Development Property as set forth in the tables below, notwithstanding any other Related Property Classification that may be applicable to such Eligible Asset.

Senior Secured Loan and Sale/Leaseback Loan

Related Property	Concentration			Advance Rate
Classification	Percentage Range			LTV <=65%			LTV <=70%			LTV<=75%			LTV <=80%			LTV <=85%			LTV <=90%
Office Properties, Healthcare Properties, Industrial Properties and Retail Properties		≤ 30	%		—			—			80	%		75	%		65	%		60	%
	> 30% to ≤ 35%				—			—			75	%		70	%		60	%		55	%
		> 35	%		—			—			0	%		0	%		0	%		0	%
Multifamily Properties		≤ 30	%		—			—			80	%		75	%		70	%		65	%
	> 30% to ≤ 35%				—			—			75	%		70	%		65	%		60	%
		> 35	%		—			—			0	%		0	%		0	%		0	%
Hospitality Properties		≤ 30	%		80	%		75	%		70	%		65	%		0	%		0	%
	> 30% to ≤ 35%				75	%		70	%		65	%		60	%		0	%		0	%
		> 35	%		0	%		0	%		0	%		0	%		0	%		0	%
Mixed Use Properties		≤ 25	%		—			—			80	%		75	%		65	%		60	%
	> 25 to ≤ 30%				—			—			75	%		70	%		60	%		55	%
		> 30	%		—			—			0	%		0	%		0	%		0	%
Development Properties		≤ 20	%		—			—			80	%		75	%		65	%		60	%
	> 20% to ≤ 25%				—			—			70	%		65	%		55	%		50	%
	> 25% to ≤ 30%				—			—			60	%		55	%		45	%		40	%
	> 30% to ≤ 35%				—			—			50	%		45	%		35	%		30	%
		> 35	%		—			—			0	%		0	%		0	%		0	%

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Related Property	Concentration			Advance Rate
Classification	Percentage Range			LTV <=65%		LTV <=70%		LTV<=75%			LTV <=80%			LTV <=85%			LTV <=90%
Development Properties which constitute Condominium Conversions		≤ 15	%		—		—		80	%		75	%		65	%		60	%
	> 15% to ≤ 20%				—		—		70	%		65	%		55	%		50	%
	> 20% to ≤ 25%				—		—		60	%		55	%		45	%		40	%
	> 25% to ≤ 30%				—		—		50	%		45	%		35	%		30	%
		> 30	%		—		—		0	%		0	%		0	%		0	%
Land Development		≤ 15	%		—		—		80	%		75	%		65	%		60	%
	> 15% to ≤ 20%				—		—		75	%		70	%		60	%		55	%
	> 20% to ≤ 25%				—		—		70	%		65	%		55	%		50	%
	> 25% to ≤ 30%				—		—		65	%		60	%		50	%		45	%
		> 30	%		—		—		0	%		0	%		0	%		0	%
Other Property		≤ 10	%		—		—		80	%		75	%		65	%		60	%
		> 10	%		—		—		0	%		0	%		0	%		0	%

B-Note Loans

Related Property	Concentration			Advance Rate
Classification	Percentage Range			LTV<=75%			LTV <=80%			LTV <=85%			LTV <=90%
Office Properties, Healthcare Properties, Industrial Properties and Retail Properties		≤ 30	%		—			—			60	%		55	%
	> 30% to ≤ 35%				—			—			55	%		50	%
		> 35	%		—			—			0	%		0	%
Multifamily Properties		≤ 30	%		—			—			65	%		55	%
	> 30% to ≤ 35%				—			—			60	%		50	%
		> 35	%		—			—			0	%		0	%
Hospitality Properties		≤ 30	%		60	%		55	%		0	%		0	%
	> 30% to ≤ 35%				55	%		50	%		0	%		0	%
		> 35	%		0	%		0	%		0	%		0	%
Mixed Use Properties		≤ 25	%		—			—			60	%		55	%
	> 25 to ≤ 30%				—			—			55	%		50	%
		> 30	%		—			—			0	%		0	%
Development Properties		≤ 20	%		—			—			60	%		55	%
	> 20% to ≤ 25%				—			—			50	%		45	%
	> 25% to ≤ 30%				—			—			40	%		35	%
	> 30% to ≤ 35%				—			—			30	%		25	%
		> 35	%		—			—			0	%		0	%

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Related Property	Concentration
Classification	Percentage Range			Advance Rate
				LTV<=75%		LTV <=80%		LTV <=85%			LTV <=90%
Development Properties which constitute Condominium Conversions		≤ 15	%		—		—		60	%		55	%
	> 15% to ≤ 20%				—		—		50	%		45	%
	> 20% to ≤ 25%				—		—		40	%		35	%
	> 25% to ≤ 30%				—		—		30	%		25	%
		> 30	%		—		—		0	%		0	%
Land Development		≤ 15	%		—		—		60	%		55	%
	> 15% to ≤ 20%				—		—		55	%		50	%
	> 20% to ≤ 25%				—		—		50	%		45	%
	> 25% to ≤ 30%				—		—		45	%		40	%
		> 30	%		—		—		0	%		0	%
Other Property		≤ 10	%		—		—		60	%		55	%
		> 10	%		—		—		0	%		0	%

Mezzanine Loan

Related Property	Concentration						Advance Rate
Classification	Percentage Range
				LTV <=80%			LTV <=85%			LTV <=90%
Office Properties, Healthcare Properties, Industrial Properties and Retail Properties		≤ 30	%		—			—			50	%
	> 30% to ≤ 35%				—			—			45	%
		> 35	%		—			—			0	%
Multifamily Properties		≤ 30	%		—			—			50	%
	> 30% to ≤ 35%				—			—			45	%
		> 35	%		—			—			0	%
Hospitality Properties		≤ 30	%		50	%		0	%		0	%
	> 30% to ≤ 35%				45	%		0	%		0	%
		> 35	%		0	%		0	%		0	%
Mixed Use Properties		≤ 25	%		—			—			50	%
	> 25 to ≤ 30%				—			—			45	%
		> 30	%		—			—			0	%
Other Property		≤ 10	%		—			—			50	%
		> 10	%		—			—			0	%

Senior Secured ABL

Related Property	Concentration
Classification	Percentage Range			Advance Rate
Office Properties, Healthcare Properties, Industrial Properties and Retail Properties		≤ 30	%		85	%
	> 30% to ≤ 35%				80	%
		> 35	%		0	%
Multifamily Properties		≤ 30	%		85	%
	> 30% to ≤ 35%				80	%
		> 35	%		0	%

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Related Property	Concentration
Classification	Percentage Range			Advance Rate
Hospitality Properties		≤ 30	%		85	%
	> 30% to ≤ 35%				80	%
		> 35	%		0	%
Mixed Use Properties		≤ 25	%		85	%
	> 25 to ≤ 30%				80	%
		> 30	%		0	%
Development Properties		≤ 20	%		85	%
	> 20% to ≤ 25%				75	%
	> 25% to ≤ 30%				65	%
	> 30% to ≤ 35%				55	%
		> 35	%		0	%
Development Properties which constitute Condominium Conversions		≤ 15	%		85	%
	> 15% to ≤ 20%				75	%
	> 20% to ≤ 25%				65	%
	> 25% to ≤ 30%				55	%
		> 30	%		0	%
Land Development		≤ 15	%		85	%
	> 15% to ≤ 20%				80	%
	> 20% to ≤ 25%				75	%
	> 25% to ≤ 30%				70	%
		> 30	%		0	%
Other Property		≤ 10	%		85	%
		> 10	%		0	%

For purposes of calculating the Advance Rate with respect to any Acquired Loans, Assigned Loans, Agented Notes and Participation Loans, the applicable Advance Rate will be determined by reference to the type of underlying Loan being acquired, assigned, agented or participated in, as the case may be.

“Advances Outstanding”: On any day, the aggregate principal amount of all Advances outstanding on such day, after giving effect to all repayments of Advances and the making of new Advances on such day; provided that the “Advances Outstanding” under and as defined in the Original Sale and Servicing Agreement on and as of the Closing Date shall be deemed to be Advances Outstanding for all purposes of this Agreement.

“Affected Party”: The Administrative Agent, the Purchaser Agents, the Purchasers, each Liquidity Bank, all assignees and participants of the Purchasers and each Liquidity Bank, any successor to WCM as Administrative Agent and any sub-agent of the Administrative Agent and any successor to a Purchaser Agent.

“Affected Purchaser”: Defined in Section 13.1(c).

“Affiliate”: With respect to a Person, means any other Person that, directly or indirectly, controls, is controlled by or under common control with such Person, or is a director or officer of such Person. For purposes of this definition, “control” (including the terms “controlling,”

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“controlled by” and “under common control with”) when used with respect to any specified Person means the possession, direct or indirect, of the power to vote 20% or more of the voting securities of such Person or to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

“Agent’s Account”: With respect to (a) VFCC, the VFCC Agent’s Account, (b) Park Avenue, the Park Avenue Agent’s Account, (c) Fairway, the Fairway Agent’s Account, (d) Three Pillars, the Three Pillars Agent’s Account, or (d) any Additional Agent, any Additional Agent’s Account, in each case as applicable.

“Agented Notes”: With respect to any Loan, one or more promissory notes of an Eligible Obligor wherein (a) the note(s) are originated by the Originator in accordance with the Credit and Collection Policy as a part of a syndicated loan transaction that has been fully consummated between the Originator and the related Obligor (without regard to any subsequent syndication of such Loan) prior to such Agented Notes becoming part of the Collateral hereunder, (b) upon an assignment of the note under the Sale Agreement to the Seller, such original note will be endorsed to the Administrative Agent and held by the Collateral Custodian, on behalf of the Secured Parties, (c) the Seller, as assignee of the note, will have all of the rights but none of the obligations of the Originator with respect to such note and the Originator’s right, title and interest in and to the Related Property including the right to receive and collect payments directly in its own name and to enforce its rights directly against the Obligor thereof, (d) the note, if secured, is secured by an undivided interest in the Related Property that also secures and is shared by, on a pro rata basis, all other holders of such Obligor’s notes of equal priority and (e) CapitalSource Finance LLC or the Originator (or a wholly owned subsidiary of the Originator) is the collateral agent and payment agent for all noteholders of such Obligor.

“Aggregate Outstanding Asset Balance”: On any date of determination, the sum of the Outstanding Asset Balances of all Eligible Assets included as part of the Collateral on such date, minus the Outstanding Asset Balances of any Delinquent Assets. Notwithstanding anything to the contrary contained herein, for purposes of determining the Aggregate Outstanding Asset Balance, if any portion of an Asset is deemed to be “charged-off” in accordance with the provisions of the definition of Charged-Off Asset, then the entire Asset shall be deemed to have a zero Outstanding Asset Balance, except for purposes of calculating Average Pool Charged-Off Ratio.

“Aggregate Unpaids”: At any time, an amount equal to the sum of all unpaid Advances Outstanding, Interest, Breakage Costs, Hedge Breakage Costs and all other amounts owed by the Seller to the Purchasers, the Purchaser Agents, the Administrative Agent, the Backup Servicer, each Hedge Counterparty and the Collateral Custodian hereunder (including, without limitation, all Indemnified Amounts, other amounts payable under Article XI and amounts required under Section 2.9, Section 2.10, Section 2.14, Section 2.15 and Section 2.16 to the Affected Parties or Indemnified Parties) or under any Hedging Agreement (including, without limitation, payments in respect of the termination of any such Hedging Agreement) or by the Seller or any other Person under any fee letter (including, without limitation, the Purchaser Fee Letter, any Additional Agent Fee Letter, the Backup Servicer Fee Letter and the Collateral Custodian Fee Letter) delivered in connection with the transactions contemplated by this Agreement (whether due or accrued); provided that the “Aggregate Unpaids” under and as defined in the Original

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Sale and Servicing Agreement on and as of the Closing Date shall be deemed to be Aggregate Unpaids under and for all purposes of this Agreement.

“Allocation Adjustment Event”: With respect to each Loan included in the Collateral subject to the Retained Interest provisions of this Agreement, the occurrence of any one or more of the following under and as defined in any Permitted Securitization Transaction rated by the Rating Agencies, as applicable: (i) a “Servicer Default”, (ii) an “Event of Default” or (iii) an “Accelerated Amortization Event”.

“Alternative Currency”: At any time, any of Canadian Dollars, English Pounds Sterling or Euros.

“Alternative Rate”: An interest rate per annum equal to the Adjusted Eurodollar Rate; provided that the Alternative Rate shall be the Base Rate if a Eurodollar Disruption Event occurs.

“Amortization Period”: The period beginning on the Termination Date and ending on the Collection Date.

“Amsterdam Business Day”: Any day other than a Saturday or a Sunday on which banks are not required or authorized to be closed in Amsterdam, the Netherlands.

“Applicable Law”: For any Person or property of such Person, all existing and future applicable laws, rules, regulations (including proposed, temporary and final income tax regulations), statutes, treaties, codes, ordinances, permits, certificates, orders and licenses of and interpretations by any Governmental Authority (including, without limitation, usury laws, the Federal Truth in Lending Act, and Regulation Z and Regulation B of the Board of Governors of the Federal Reserve System), and applicable judgments, decrees, injunctions, writs, awards or orders of any court, arbitrator or other administrative, judicial, or quasi-judicial tribunal or agency of competent jurisdiction.

“Appraisal”: With respect to any Mortgaged Property as to which an appraisal is required or permitted to be performed pursuant to the terms of this Agreement, an appraisal performed in conformance with the guidelines of the Appraisal Institute.

“Appraisal Institute”: The international membership association of professional real estate appraisers.

“Asset Checklist”: The list of loan documents attached as Schedule 5 to the Acquisition Facility or an electronic list delivered by or on behalf of the Seller to the Collateral Custodian that identifies each of the items contained in the related Asset File, as amended from time to time.

“Asset Files”: With respect to any Asset and Related Security, copies of each of the Required Asset Documents and duly executed originals (to the extent required by the Credit and Collection Policy) and copies of any other Records relating to such Asset and Related Security.

“Asset List”: The Asset List provided by the Seller to the Administrative Agent and the Collateral Custodian, in the form of Schedule IV hereto, as such list may be amended, supplemented or modified from time to time in accordance with this Agreement.

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“Assets”: Loans, individually or collectively, as the context requires.

“Assigned Loan”: A Loan originated by a Person other than the Originator in which a constant percentage interest has been assigned to the Originator by such Person in accordance with the Credit and Collection Policy and (i) such transaction has been fully consummated prior to such Loan becoming part of the Collateral hereunder, (ii) the Originator is a party to a credit agreement and/or an assignment agreement and a promissory note with the Obligor with respect to such Loan, and (iii) the agent bank receives payment directly from the Obligor thereof on behalf of each lender that has been assigned a percentage interest in such Loan; provided that any such Loan shall exclude any Retained Interest.

“Assignment of Leases and Rents”: With respect to any Mortgaged Property, any assignment of leases, rents and profits or similar instrument executed by the Obligor, assigning to the mortgagee all of the income, rents and profits derived from the ownership, operation, leasing or disposition of all or a portion of such Mortgaged Property, whether contained in the Mortgage or in a document separate from the Mortgage, in the form that was duly executed, acknowledged and delivered, as amended, modified, renewed or extended through the date hereof and from time to time hereafter in accordance with the Credit and Collection Policy.

“Assignment of Mortgage”: As to each Loan secured by an Interest in Real Property, one or more assignments, notices of transfer or equivalent instruments, each in recordable form and sufficient under the laws of the relevant jurisdiction to reflect the transfer of the related Mortgage or similar security instrument and all other documents related to such Loan and to the Seller and to grant a perfected lien thereon by the Seller in favor of the Administrative Agent, on behalf of the Secured Parties, each such Assignment of Mortgage to be substantially in the form of Exhibit I hereto.

“Assumption Agreement”: Defined in Section 13.16(b).

“Availability”: At any time, an amount equal to the excess, if any, of (i) the amount by which the lesser of (a) the Facility Amount and (b) the Maximum Availability minus (ii) the Advances Outstanding on such day; provided that during the Amortization Period, the Availability shall be zero.

“Available Funds”: With respect to any Payment Date, all amounts received in the Collection Account (including, without limitation, any Collections on Assets included in the Collateral and earnings from Permitted Investments in the Collection Account) during the Collection Period that ended on the last day of the calendar month immediately preceding the calendar month in which such Payment Date occurs.

“Average Pool Charged-Off Ratio”: As of any Determination Date, the percentage equivalent of a fraction (i) the numerator of which is equal to the sum of the Outstanding Asset Balance of all Assets that became Charged-Off Assets (net of Recoveries during such Collection Period) during the Collection Period related to such Determination Date and each of the 11 preceding Determination Dates (or such lesser number as shall have elapsed as of such Determination Date), and (ii) the denominator of which is equal to a fraction the numerator of which is the sum of the Aggregate Outstanding Asset Balance as of the first day of the Collection Period related

15

to such Determination Date and each of the 11 preceding Determination Dates (or such lesser number as shall have elapsed as of such Determination Date) and the denominator of which is twelve (or the corresponding lesser number of Determination Dates included in the calculations described herein).

“Average Portfolio Charged-Off Ratio”: As of any Determination Date, the percentage equivalent of a fraction (i) the numerator of which is equal to the sum of the Portfolio Outstanding Asset Balance of all Portfolio Assets (excluding equity investments) that became Charged-Off Portfolio Assets (net of Recoveries during such Collection Period) during the Collection Period related to such Determination Date and each of the 11 preceding Determination Dates (or such lesser number as shall have elapsed as of such Determination Date), and (ii) the denominator of which is equal to a fraction the numerator of which is the sum of the Portfolio Outstanding Asset Balance (excluding equity investments) as of the first day of the Collection Period related to such Determination Date and each of the 11 preceding Determination Dates (or such lesser number as shall have elapsed as of such Determination Date) and the denominator of which is twelve (or the corresponding lesser number of Determination Dates included in the calculations described herein); provided that, such calculation shall exclude the effects of any Liquid Real Estate Assets that are acquired and levered by the Originator solely to satisfy REIT asset and income tests.

“Average Portfolio Delinquency Ratio”: As of any Determination Date, the percentage equivalent of a fraction the numerator of which is equal to the sum of the Portfolio Delinquency Ratio on such Determination Date and each of the two preceding Determination Dates (or such lesser number as shall have elapsed as of such Determination Date) and the denominator of which is equal to three (or the corresponding lesser number of Determination Dates included in the calculations described herein); provided that, such calculation shall exclude the effects of any Liquid Real Estate Assets that are acquired and levered by the Originator solely to satisfy REIT asset and income tests.

“Backup Servicer”: Wells Fargo Bank, National Association, not in its individual capacity, but solely as Backup Servicer, its successor in interest pursuant to Section 7.3 or such Person as shall have been appointed as Backup Servicer pursuant to Section 7.5.

“Backup Servicer Fee Letter”: The Backup Servicer Fee Letter, dated as of the date hereof, by and among the Servicer, the Administrative Agent, and the Backup Servicer, as such letter may be amended, modified, supplemented, restated or replaced from time to time.

“Backup Servicer Fee Rate”: The rate per annum set forth in the Backup Servicer Fee Letter as the “Backup Servicer Fee Rate.”

“Backup Servicer Termination Notice”: Defined in Section 7.5.

“Backup Servicing Fee”: Defined in the Backup Servicer Fee Letter.

“Banded Floating Rate Loan”: A Loan where the interest rate payable by the Obligor thereof fluctuates between a minimum interest rate and a maximum interest rate allowable under its Underlying Instruments.

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“Bankruptcy Code”: The United States Bankruptcy Reform Act of 1978 (11 U.S.C. § 101, et seq.), as amended from time to time.

“Base Rate”: On any date, a fluctuating interest rate per annum equal to the higher of (a) the Prime Rate or (b) the Federal Funds Rate plus 1.5%.

“Benefit Plan”: Any employee benefit plan as defined in Section 3(3) of ERISA in respect of which the Seller or any ERISA Affiliate of the Seller is, or at any time during the immediately preceding six years was, an “employer” as defined in Section 3(5) of ERISA.

“B-Note Loan”: Any Term Loan that (i) is a multilender loan, (ii) is secured by a first or second priority Lien on all of the Obligor’s assets constituting Related Property for the Loan, (iii) has a “first dollar” at risk not to exceed 65% of the Loan to Value Ratio and a “last dollar” at risk not to exceed 90% of the Loan to Value Ratio, and (iv) contains terms which, upon the occurrence of an event of default under the Loan Documents or in the case of any liquidation or foreclosure on the Related Property, provide that the principal of the Seller’s portion of such Loan would be paid only after the other lenders parties on the senior tranche related to such Loan are paid in full.

“Borrowing Base”: On any date of determination, the sum of (i) the Aggregate Outstanding Asset Balance and (ii) the Outstanding Asset Balances of all Additional Assets that are Eligible Assets to be included as part of the Collateral on such date minus (iii) the amount (calculated without duplication) by which such Eligible Assets exceed any applicable Pool Concentration Criteria.

“Borrowing Base Certificate”: Each certificate, in the form of Exhibit A-3, required to be delivered by the Seller along with each Borrowing Notice.

“Borrowing Notice”: Each notice, in the form of Exhibit A-1 or A-2 (as applicable), required to be delivered by the Seller (i) in respect of (a) the Initial Advance and each incremental Advance (as applicable), (b) any reduction of the Facility Amount or repayment of Advances Outstanding, or (c) any reinvestment of Principal Collections under Section 2.9(b); and (ii) on each Determination Date.

“Breakage Costs”: Any amount or amounts as shall compensate a Purchaser for any loss, cost or expense incurred by such Purchaser (as determined by such Purchaser’s Purchaser Agent in such Purchaser Agent’s sole discretion) as a result of (i) a prepayment by the Seller of Advances Outstanding or Interest or (ii) any difference between the CP Rate and the Adjusted Eurodollar Rate. All Breakage Costs shall be due and payable hereunder upon demand.

“Business Day”: Any day other than a Saturday or a Sunday on which (a) banks are not required or authorized to be closed in Minneapolis, Minnesota, New York City, New York, Charlotte, North Carolina, and (b) if the term “Business Day” is used in connection with the determination of the LIBOR Rate, dealings in United States dollar deposits are carried on in the London interbank market.

“Canadian Dollars”: The lawful currency of Canada.

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“Capital Stock”: Any capital stock or membership interests (in the case of a limited liability company) or equivalent equity interests of CapitalSource Inc. or any Consolidated Subsidiary (to the extent issued to a Person other than CapitalSource Inc.), whether common or preferred.

     “Change-in-Control”: Any of the following:

     (a) any Person or two or more Persons acting in concert shall have acquired “beneficial ownership,” directly or indirectly, of, or shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of, or control over, Voting Stock of any Credit Party (or other securities convertible into such Voting Stock) representing 33-1/3% or more of the combined voting power of all Voting Stock of such Credit Party;

     (b) the replacement of greater than 50% of the board of directors of any Credit Party over a two year period from the directors who constituted the board of directors at the beginning of such period, and such replacements shall not have been approved or nominated by a vote of at least a majority of the board of directors of such Credit Party then still in office who were either members of such board of directors at the beginning of such period or whose election as a member of such board of directors was previously so approved;

     (c) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of any Credit Party and its Subsidiaries taken as a whole to any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act);

     (d) the failure of CapitalSource Inc. to own (directly or through wholly owned subsidiaries), free and clear of all Liens, 99.9% of the outstanding Voting Stock of the Originator;

     (e) the creation or imposition of any Lien on any limited liability company membership interests in the Seller;

     (f) the failure by the Originator to own all of the limited liability company membership interests in the Seller;

     (g) the CSE Management Agreement shall fail to be in full force and effect; or

     (h) CapitalSource Finance LLC shall fail to be the sub-servicer.

Notwithstanding the foregoing, solely for the purpose of determining whether there has been a Change-in-Control pursuant to clause (a) above, any purchase by one or more Excluded Persons which increases any of such Excluded Persons’ direct or indirect ownership interest (whether individually or in the aggregate) in the Voting Stock of any Credit Party shall not constitute a Change-in-Control even if the amount of Voting Stock acquired or controlled by such Excluded Person(s) exceeds (whether individually or in the aggregate) 33-1/3% of the combined voting power of all Voting Stock of the Originator or CapitalSource Inc., as applicable; provided that for so long as any of such Excluded Persons’ direct or indirect ownership interest in the Voting Stock of the Originator or CapitalSource Inc. exceeds (individually or in the aggregate) 33-1/3%

18

of the combined voting power of all Voting Stock of the Originator or CapitalSource Inc, as applicable, the initiation by the Originator or CapitalSource Inc. of any action intended to terminate or having the effect of terminating the registration of its securities under Section 12(g) of the Exchange Act or intended to suspend or having the effect of suspending its obligation to file reports with the U.S. Securities and Exchange Commission under Sections 13 and 15(d) of the Exchange Act, shall constitute a Change-in-Control. “Excluded Person” shall mean each of John Delaney, Jason Fish, Farallon Capital Management, LLC, and Madison Dearborn Partners, LLC. As used herein, “beneficial ownership” shall have the meaning provided in Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act.

“Charged-Off Asset”: An Asset (or portion thereof deemed to be “charged-off”) as to which any of the following first occurs: (i) the Servicer has determined or should have reasonably determined in accordance with the Credit and Collection Policy that such Asset is not collectible, (ii) (a) all or any portion of one or more principal or interest payments (other than in respect of default rate interest) remain unpaid for at least ninety (90) days from the original due date for such payment (without giving effect to any Servicer Advance thereon), in which case not less than fifty percent (50%) of the Outstanding Asset Balance shall be deemed to be “charged-off” for purposes of this Agreement, and (b) all or any portion of one or more principal or interest payments (other than in respect of default rate interest) remain unpaid for at least one hundred and eighty (180) days from the original due date for such payment (without giving effect to any Servicer Advance thereon), in which case not less than one hundred percent (100%) of the Outstanding Asset Balance of an Asset shall be deemed to be “charged-off” for purposes of this Agreement, or (iii) (a) the Obligor thereof or any Person obligated thereon is subject to an Insolvency Event, in which case not less than fifty percent (50%) of the Outstanding Asset Balance of an Asset shall be deemed to be “charged-off” as of the date of the occurrence of such Insolvency Event for purposes of this Agreement, (b) the Obligor thereof or any Person obligated thereunder has suffered a material adverse change which materially affects its viability as a going concern as reasonably determined by the Servicer, or (c) adequate collateral or other source of payment does not exist to repay the full amount due to the Seller under the Asset as determined by the Servicer.

“Charged-Off Portfolio Asset”: A Portfolio Asset (or portion thereof deemed to be “charged-off”) (excluding equity investments) as to which any of the following first occurs: (i) the Servicer has determined or should have reasonably determined in accordance with the Credit and Collection Policy (or such similar policies and procedures utilized by the Servicer in servicing such Portfolio Asset) that such Portfolio Asset is not collectible, (ii) (a) all or any portion of one or more principal or interest payments (other than in respect of default rate interest) remain unpaid for at least ninety (90) days from the original due date for such payment (without giving effect to any Servicer Advance thereon), in which case not less than fifty percent (50%) of the Portfolio Outstanding Asset Balance of such Portfolio Asset shall be deemed to be “charged-off” for purposes of this Agreement, and (b) all or any portion of one or more principal or interest payments (other than in respect of default rate interest) remain unpaid for at least one hundred and eighty (180) days from the original due date for such payment (without giving effect to any Servicer Advance thereon), in which case not less than one hundred percent (100%) of the Portfolio Outstanding Asset Balance of such Portfolio Asset shall be deemed to be “charged-off” for purposes of this Agreement, or (iii) (a) the Obligor thereof or any Person obligated thereon is subject to an Insolvency Event, in which case not less than fifty percent (50%) of the Portfolio

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Outstanding Asset Balance of such Portfolio Asset shall be deemed to be “charged-off” as of the date of the occurrence of such Insolvency Event for purposes of this Agreement, (b) the Obligor or any Person obligated thereon has suffered a material adverse change which materially affects its viability as an ongoing concern as reasonably determined by the Servicer, or (c) adequate collateral or other source of payment does not exist to repay the principal due under the Portfolio Asset as determined by the Servicer.

“Clearing Agency”: An organization registered as a “clearing agency” pursuant to Section 17A of the Exchange Act.

“Closing Date”: April 28, 2006.

“Code”: The Internal Revenue Code of 1986, as amended from time to time.

“Collateral”: All right, title, and interest (whether now owned or hereafter acquired or arising, and wherever located) of the Seller in all accounts, cash and currency, chattel paper, tangible chattel paper, electronic chattel paper, copyrights, copyright licenses, equipment, fixtures, general intangibles, instruments, commercial tort claims, deposit accounts, inventory, investment property, letter-of-credit rights, software, supporting obligations, accessions, and other property consisting of, arising out of, or related to any of the following (in each case excluding the Retained Interest and the Excluded Amounts): (i) the Existing Assets and Additional Assets, and all monies due or to become due in payment under such Existing Assets and Additional Assets on and after the related Cut-Off Date, including but not limited to all Collections, but excluding any Excluded Amounts; and (ii) all Related Security with respect to the Assets referred to in clause (i), and (iii) all income and Proceeds of the foregoing.

“Collateral Custodian”: Wells Fargo Bank, National Association, not in its individual capacity, but solely as Collateral Custodian, its successor in interest pursuant to Section 8.3 or such Person as shall have been appointed Collateral Custodian pursuant to Section 8.5.

“Collateral Custodian Fee”: Defined in the Collateral Custodian Fee Letter.

“Collateral Custodian Fee Letter”: The Collateral Custodian Fee Letter, dated as of the date hereof, by and among the Originator, the Administrative Agent and the Collateral Custodian, as such letter may be amended, modified, supplemented, restated or replaced from time to time.

“Collateral Custodian Termination Notice”: Defined in Section 8.5.

“Collection Account”: Defined in Section 6.4(f).

“Collection Date”: The date following the Termination Date on which the Aggregate Unpaids have been reduced to zero and indefeasibly paid in full.

“Collection Period”: Each calendar month.

“Collections”: (a) All cash collections and other cash proceeds of any Asset, including, without limitation, Scheduled Payments, Finance Charges, Prepayments, Insurance Proceeds, all Recoveries or other amounts received in respect thereof but excluding any Excluded Amounts,

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(b) any cash proceeds or other funds received by the Seller or the Servicer with respect to any Related Security, (c) all payments received pursuant to any Hedging Agreement or Hedge Transaction and (d) all Deemed Collections.

“Commercial Paper Notes”: On any day, any short-term promissory notes of any Purchaser (or its related commercial paper issuer) issued in the commercial paper market.

“Commitment”: With respect to each Purchaser the commitment of such Purchaser to make Advances in accordance herewith in an amount not to exceed (i) (a) prior to the Termination Date, the dollar amount set forth opposite such Purchaser’s signature on the signature pages hereto or the signature pages of the Additional Purchaser Agreement relating to such Purchaser, as applicable, under the heading “Commitment” and (b) on or after the Termination Date, such Purchaser’s Pro Rata Share of the aggregate Advances Outstanding or (ii) as to Purchasers only, with respect to each Advance, the Pro Rata Share.

“Commitment Fee”: (a) With respect to any Purchaser, as defined in such Purchaser’s Purchaser Fee Letter and (b) with respect to any Additional Purchaser, as defined in such Additional Purchaser’s Additional Purchaser Fee Letter.

“Concentration Percentage Range”: The percentage equivalent of a fraction (i) the numerator of which is the Aggregate Outstanding Asset Balance of all Eligible Assets secured by Related Property of the same classification and (ii) the denominator of which is the total Aggregate Outstanding Asset Balance.

“Concentrations Effective Date”: The earlier of:

     (i) the date that is three months following the closing of a Permitted Securitization Transaction after the Closing Date; or

     (ii) the date on which the Aggregate Outstanding Asset Balance first equals or exceeds $100,000,000 following the more recent of (a) the Closing Date and (b) the closing of a Permitted Securitization Transaction after the Closing Date.

“Condominium Conversions”: Includes properties that have been, or are expected to be, converted to condominium for ownership. For the avoidance of doubt, Condominium Conversions shall also be considered Development Properties.

“Consolidated Funded Indebtedness”: As of any date of determination, all outstanding Indebtedness of the Originator and its Subsidiaries determined on a consolidated basis in accordance with GAAP.

“Consolidated Subsidiary”: At any date any Subsidiary the accounts of which, in accordance with GAAP, would be consolidated with those of CapitalSource Inc. in its consolidated and consolidating financial statements as of such date.

“Consolidated Tangible Net Worth”: As of any date of determination, the assets less the liabilities of any Person and its Subsidiaries on a consolidated basis, less intangible assets (including goodwill), all determined in accordance with GAAP.

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“Contractual Obligation”: With respect to any Person, any provision of any securities issued by such Person or any indenture, mortgage, deed of trust, contract, undertaking, agreement, instrument or other document to which such Person is a party or by which it or any of its property is bound or is subject.

“CP Rate”: For any day during any Accrual Period, the per annum rate equivalent to the weighted average of the per annum rates paid or payable by a Purchaser from time to time as interest on or otherwise (by means of interest rate hedges or otherwise taking into consideration any incremental carrying costs associated with short-term promissory notes issued by such Purchaser (or its related commercial paper issuer) maturing on dates other than those certain dates on which such Purchaser is to receive funds) in respect of the promissory notes issued by such Purchaser (or its related commercial paper issuer) that are allocated, in whole or in part, by such Purchaser’s Purchaser Agent (on its behalf) to fund or maintain the Advances Outstanding funded by such Purchaser during such period, as determined by such Purchaser’s Purchaser Agent (on its behalf) and reported to the Seller and the Servicer, which rates shall reflect and give effect to (i) the commissions of placement agents and dealers in respect of such promissory notes, to the extent such commissions are allocated, in whole or in part, to such promissory notes by such Purchaser’s Purchaser Agent (on its behalf) and (ii) other borrowings by such Purchaser, including, without limitation, borrowings to fund small or odd dollar amounts that are not easily accommodated in the commercial paper market; provided that if any component of such rate is a discount rate, in calculating the CP Rate, such Purchaser’s Purchaser Agent shall for such component use the rate resulting from converting such discount rate to an interest bearing equivalent rate per annum.

“Credit and Collection Policy”: The written credit policies and procedures manual of the Originator and the Servicer (which policies shall include without limitation policies on a risk rating system, due diligence format, underwriting parameters and credit approval procedures) in the form provided to the Administrative Agent prior to the Closing Date, as it may be as amended or supplemented from time to time in accordance with Section 5.1(h) and Section 5.4(f).

“Credit Party”: Any of CapitalSource Inc., CapitalSource TRS Inc., the Originator and any other Subsidiary of CapitalSource Inc. that becomes a party to that certain Credit Agreement, dated as of March 14, 2006, among CapitalSource Inc., as borrower, the guarantors named therein, the lender parties thereto, Wachovia, as administrative agent for the lenders, as swingline lender, and issuing lender, and Bank of America, N.A., as issuing lender, as such agreement is amended, modified, waived, supplemented or restated from time to time; and “Credit Parties” shall mean the foregoing collectively.

“CSE Management Agreement”: The management agreement, dated as of January 1, 2006, by and among CapitalSource Inc., CSE Mortgage LLC and CapitalSource Finance LLC, as the same may be amended, restated, modified or supplemented from time to time.

“CSE Prime Rate”: The rate designated by CSE Mortgage (or the originator of an Assigned Loan) from time to time and/or pursuant to the related Underlying Instruments as its prime rate in the United States, such rate to change as and when the designated rate changes; provided that

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the CSE Prime Rate is not intended to be the lowest rate of interest charged by CSE Mortgage (or such originator) in connection with extensions of credit to debtors.

“CSE LIBOR Rate”: The posted rate for thirty (30), sixty (60) or ninety (90) day, as applicable, deposits in Dollars appearing on Telerate Page 3750, as and when determined in accordance with the applicable Required Asset Documents.

“CS Funding III Asset”: Any Asset included in the Collateral on the date of the Initial Advance that was previously included in the “Collateral” under and as defined in the CS Funding III Transaction.

“CS Funding III Cut-Off Date”: With respect to any CS Funding III Asset, the applicable “Cut-Off Date” under and as defined in the CS Funding III Transaction.

“CS Funding III Transaction”: The transactions contemplated by the Sale and Servicing Agreement, dated as of April 20, 2004, among CapitalSource Funding III LLC, CapitalSource Finance LLC, Variable Funding Capital Company LLC (f/k/a Variable Funding Capital Corporation), each other commercial paper conduit from time to time party thereto, Wachovia Bank, National Association, Wachovia Capital Markets, LLC, each other purchaser agent from time to time party thereto, and Wells Fargo Bank, National Association, and the related “Transaction Documents” (as defined therein).

“Cut-Off Date”: With respect to each Asset and Additional Asset, the related Funding Date therefor.

“Currency”: Dollars or any Alternative Currency.

“Deemed Collection”: Defined in Section 2.4(c).

“Delayed-Draw Term Loan”: A Loan that is fully committed on the closing date thereof and is required by its terms to be fully funded in one or more installments on draw dates to occur within three years after the closing date thereof but which, once fully funded, has the characteristics of a Term Loan.

“Delinquent Asset”: An Asset (that is not a Charged-Off Asset) as to which either of the following first occurs: (a) all or any portion of one or more principal or interest payments (other than in respect of default rate interest) remain unpaid for at least sixty (60) days from the original due date for such payment (without giving effect to any Servicer Advance thereon) or (b) consistent with the Credit and Collection Policy such Asset would be classified as delinquent by the Servicer.

“Delinquent Portfolio Asset”: A Portfolio Asset (that is not a Charged-Off Portfolio Asset) (excluding equity investments) as to which either of the following first occurs: (a) all or any portion of one or more principal or interest payments (other than in respect of default rate interest) remain unpaid for at least sixty (60) days from the original due date for such payment (without giving effect to any Servicer Advance thereon) or (b) consistent with the Credit and Collection Policy (or such similar policies and procedures utilized by the Servicer in servicing such Portfolio Asset) such Portfolio Asset would be classified as delinquent by the Servicer.

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“Derivatives”: Any exchange-traded or over-the-counter (i) forward, future, option, swap, cap, collar, floor or foreign exchange contract or any combination thereof, whether for physical delivery or cash settlement, relating to any interest rate, interest rate index, currency, currency exchange rate, currency exchange rate index, debt instrument, debt price, debt index, depository instrument, depository price, depository index, equity instrument, equity price, equity index, commodity, commodity price or commodity index, (ii) any similar transaction, contract, instrument, undertaking or security, or (iii) any transaction, contract, instrument, undertaking or security containing any of the foregoing.

“Determination Date”: The last day of each Collection Period.

“Development Properties”: An existing property that is undergoing renovation or redevelopment that either (i) disrupts at least 30% of the occupancy of the property, or (ii) temporarily reduces the NOI of the property by more than 30%; provided that, a property will not be considered a Development Property after it has an occupancy rate of at least 80%.

“DIP Loan”: A loan to an Obligor that is a “debtor-in-possession” as defined under the Bankruptcy Code.

“Discretionary Sale”: Defined in Section 2.20.

“Discretionary Sale Date”: The Business Day identified by the Seller to the Administrative Agent in a Discretionary Sale Notice as the proposed date of a Discretionary Sale.

“Discretionary Sale Notice”: Defined in Section 2.20(a).

“Dollar Equivalent”: On any day, with respect to the amount of any Alternative Currency, the amount of Dollars that would be required to purchase such amount of Alternative Currency on such day, based on the spot selling rate from the prior Business Day as determined by the Servicer reported on Wall Street Journal to sell such Alternative Currency for Dollars in the London foreign exchange market.

“Dollars”: Means, and the conventional “$” signifies, the lawful currency of the United States.

“Eligible Asset”: On any date of determination, each Asset (A) for which the Administrative Agent, Collateral Custodian and Backup Servicer have received the following no later than 2:00 p.m. (Charlotte, North Carolina time) on the day prior to the related Funding Date: (1) a faxed copy of the duly executed original promissory note, master purchase agreement and purchase statements, Loan Register and Asset Checklist, as applicable, in a form and substance satisfactory to the Administrative Agent and, with respect to any Loans closed in escrow, a certificate (in the form of Exhibit L) from the counsel to the Originator or the Obligor of such Loans certifying the possession of the Required Asset Documents; provided that notwithstanding the foregoing, the Required Asset Documents (including any UCCs included in the Required Asset Documents) shall be in the possession of the Collateral Custodian within two Business Days of any related Funding Date as to any Additional Assets; (2) a Borrowing Notice delivered by the Seller to the Collateral Custodian and the Administrative Agent as part of the Borrowing Notice or Monthly Report delivered by the Servicer, (3) a Borrowing Base Certificate, and (4) a Certificate of Assignment (Exhibit A to the Sale Agreement, including Schedule I thereto);

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provided that if such Asset is part of a capital contribution to the Seller the Collateral Custodian shall have received the Required Asset Documents within three Business Days of receipt of the Certificate of Assignment and (B) that satisfies each of the following eligibility requirements, as applicable:

(1) With respect to any Asset:

     (a) the Asset, together with the Related Security, has been originated or acquired by the Originator, sold to the Seller pursuant to (and in accordance with) the Sale Agreement and the Seller has good title, free and clear of all Liens (other than Permitted Liens), on such Asset and Related Security;

     (b) the Asset, (i) (together with the Collections and Related Security related thereto) has been the subject of a grant by the Seller in favor of the Administrative Agent on behalf of the Secured Parties, of a first priority perfected security interest, and (ii) with respect to which, at the time of the sale of such Asset to the Seller, the Originator had a first priority (other than in the case of B-Note Loans or Mezzanine Loans) perfected security interest in the Related Property (other than additional or “boot” collateral) relating to such Loan;

     (c) at the time such Asset is included in the Collateral, the Asset (i) is not (and since its origination by the Originator or, in the case of Acquired Loans, acquisition by the Originator has never been) a Charged-Off Asset (either in whole or in part), (ii) is not past due in the case of a Loan, with respect to payments of principal or interest (provided that if such Asset is past due at the time it is included in the Collateral but not more than ten days past due, the Originator and the Servicer must reasonably believe that such Asset will promptly and in no event later than the date of the next Scheduled Payment due on such Asset, be brought current with respect to all payments due thereunder), and (iii) has never been more than sixty days past due, with respect to payments of principal or interest, or, in the case of Acquired Loans, to the best of the Originator’s knowledge after due inquiry, has never been more than sixty days past due in the twelve months prior to acquisition;

     (d) the Asset is an “eligible asset” as defined in Rule 3a-7 under the 1940 Act;

     (e) the Asset is a contract the purchase of which with the proceeds of Commercial Paper Notes would constitute a “current transaction” within the meaning of Section 3(a)(3) of the Securities Act of 1933, as amended;

     (f) the Asset is an “account”, “chattel paper”, “instrument” or a “general intangible” within the meaning of Article 9 of the UCC of all applicable jurisdictions;

     (g) the Obligor with respect to such Asset is an Eligible Obligor and such Asset is payable only in Dollars and does not permit the currency in which or the country in which such Asset is payable to be changed; provided that, notwithstanding the foregoing, any such Asset denominated in an Alternative Currency shall be deemed to satisfy the requirements in this clause that it be payable in Dollars if such Asset is subject to appropriate currency hedging as determined by the Administrative Agent in its sole discretion;

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     (h) the Asset is evidenced by a promissory note, Loan Register, security agreement, loan or note purchase agreement or other Underlying Instruments that have been duly authorized and executed, are in full force and effect and constitute the legal, valid, binding and absolute and unconditional payment obligation of the related Obligor, enforceable against such Obligor in accordance with their terms (subject to applicable bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally and to general principles of equity, whether considered in a suit at law or in equity), and there are no conditions precedent to the enforceability or validity of the Asset that have not been satisfied or validly waived;

     (i) the Asset does not contravene in any material respect any Applicable Laws (including, without limitation all applicable predatory and abusive lending laws and all laws, rules and regulations relating to usury, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices, licensing and privacy) and with respect to which no part thereof is in violation of any Applicable Law in any material respect;

     (j) neither the assignment of the Asset under the Sale Agreement by the Originator, the sale of the Asset hereunder or the granting of a security interest hereunder by the Seller violates, conflicts with or contravenes any Applicable Laws or any contractual or other restriction, limitation or encumbrance;

     (k) on or before the applicable Cut-Off Date, the Obligor of such Asset shall have been directed to make all payments to the Lock-Box or directly to the Lock-Box Account;

     (l) the Asset requires the Obligor thereof to maintain reasonable and customary property damage and loss insurance with respect to the real or personal property constituting the Related Property (if any) if such Related Property is of a type customarily so insured;

     (m) the Related Property (if any) (i) has not been foreclosed on or repossessed from the current Obligor by the Servicer, and (ii) has not suffered any material loss or damage that has not been repaired or restored or for which insurance proceeds are not available;

     (n) the Asset provides by its terms that the Obligor’s payment obligations are absolute and unconditional without any right of rescission, setoff, counterclaim or defense for any reason against the Originator and the Asset contains a clause that has the effect of unconditionally and irrevocably obligating the Obligor to make periodic payments (including taxes) notwithstanding any damage to, defects in, or destruction of the Related Property (if any) or any other event, including obsolescence of any property or improvements;

     (o) the Asset is not subject to any litigation, dispute, refund, claims of rescission, setoff, netting, counterclaim or defense whatsoever, including but not limited to, claims by or against the Obligor thereof or a payor to or account debtor of such Obligor;

     (p) the Asset requires the Obligor to maintain the Related Property in good condition and to bear all the costs of operating and maintaining same, including taxes and insurance relating thereto;

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     (q) the Asset shall not have been originated in, nor shall it be subject to the laws of, any jurisdiction under which the sale, transfer and assignment of such Asset under the Transaction Documents would be unlawful, void or voidable;

     (r) the Asset, together with the Required Asset Documents and Asset File related thereto, is assignable and does not require the consent of or notice to the Obligor to consummate the transactions contemplated by the Transaction Documents or contain any other restriction on the transfer or the assignment of the Asset for the purpose of consummating the transactions contemplated by the Transaction Documents other than a consent or waiver of such restriction that has been obtained prior to the date on which the Asset was sold to the Seller; provided that with respect to Loans which are secured by an interest in commercial real estate, the Required Asset Documents may restrict the transfer or the assignment of the related Loan so long as such Loan is freely assignable or transferable to a Qualified Transferee;

     (s) the Obligor of such Asset is legally responsible for all taxes relating to the Related Security or other security relating to such Asset, and all payments in respect of the Asset are required to be made free and clear of, and without deduction or withholding for or on account of, any taxes, unless such withholding or deduction is required by Applicable Law in which case the Obligor thereof is required to make “gross-up” payments that cover the full amount of any such withholding taxes on an after-tax basis;

     (t) the Asset complies with the representations and warranties made by the Seller and Servicer hereunder and all information provided by the Seller or the Servicer with respect to the Asset is true and correct in all material respects;

     (u) the Asset and the Related Security have not been sold, transferred, assigned or pledged by the Seller to any Person;

     (v) no selection procedure adverse to the interests of the Administrative Agent, the Purchaser Agents or the Secured Parties was utilized by the Seller or Originator in the selection of Asset for inclusion in the Collateral; it being understood that selection procedures used by the Seller or Originator for the inclusion of Assets in one or more of its various securitizations or other financing facilities and which are solely intended to obtain the most beneficial advance rates thereunder and/or otherwise maximize the efficiency of such facilities, shall not be deemed to be adverse procedures for purposes of this paragraph;

     (w) the Asset has not been compromised, adjusted, extended, satisfied, rescinded, set-off or modified by the Seller, the Originator or the Obligor with respect thereto, and no Asset is subject to compromise, adjustment, extension, satisfaction, rescission, set-off, counterclaim, defense, abatement, suspension, deferment, deductible, reduction, termination or modification, whether arising out of transactions concerning the Asset, or otherwise, by the Seller, the Originator or the Obligor with respect thereto except for amendments to such Asset otherwise permitted under Section 6.4(a) of this Agreement and in accordance with the Credit and Collection Policy;

     (x) the particular Asset is not one as to which the Seller has knowledge which should lead it to expect such Asset will not be paid in full;

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     (y) the Obligor of such Asset is not the subject of an Insolvency Event or Insolvency Proceedings;

     (z) the Asset is secured by a valid, perfected, first priority (other than with respect to B-Note Loans and Mezzanine Loans) security interest in all assets that constitute the collateral for the Asset (subject to Liens expressly permitted by the Underlying Instruments);

     (aa) all material consents, licenses, approvals or authorizations of, or registrations or declarations with, any Governmental Authority required to be obtained, effected or given in connection with the making or performance of the Asset have been duly obtained, effected or given and are in full force and effect;

     (bb) the Asset satisfies all applicable requirements of and was originated or acquired, underwritten and closed in accordance with the Credit and Collection Policy (including without limitation the execution by the Obligor of all documentation required by the Credit and Collection Policy);

     (cc) the Asset was generated in the ordinary course of the Originator’s business;

     (dd) the Asset arises pursuant to documentation with respect to which the Originator has performed all obligations required to be performed by it thereunder;

     (ee) the Asset is not Margin Stock;

     (ff) the acquisition of the Asset by the Seller will not cause the Seller or the pool of Collateral to be required to be registered as an investment company under the 1940 Act;

     (gg) the Asset is not subject to a guaranty by the Originator or any Affiliate thereof; and

     (hh) the proceeds of the Asset will not be used to finance “ground-up” construction activities; provided that financing for purposes of Land Development shall not be considered a “ground-up” construction activity.

(2) With respect to any Loan:

     (a) the Loan provides (i) for periodic payments of interest and/or principal in cash, which are due and payable on a monthly, quarterly or semi-annual basis unless otherwise consented to in writing by the Administrative Agent, and (ii) that the Servicer (or, with respect to Assigned Loans, that the agent bank or a majority of the related lenders) may accelerate all payments if the Obligor is in default under the Loan and any applicable grace period has expired (in the case of any B-Note Loan or Mezzanine Loan, subject to any applicable intercreditor or subordination agreement); provided that, Sale/Leaseback Loans shall provide for payments of interest and/or principal in cash, no less frequently than on a quarterly basis;

     (b) the Loan is underwritten as (i) a rediscount loan, (ii) a commercial real estate loan, or (iii) a Sale/Leaseback Loan, in each case pursuant to and in accordance with the Credit and Collection Policy;

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     (c) the Loan is a Sale/Leaseback Loan, Senior Secured ABL Loan, Senior Secured Loan, B-Note Loan or Mezzanine Loan;

     (d) the Loan has an original term to maturity of not more than 25 years;

     (e) the Loan provides for cash payments that fully amortize the Outstanding Asset Balance of such Loan on or by its maturity and does not provide for such Outstanding Asset Balance to be discounted pursuant to a prepayment in full;

     (f) the Loan does not permit the Obligor to defer all or any portion of the current cash interest due thereunder;

     (g) the Loan does not permit the payment obligation of the Obligor thereunder to be converted or exchanged for equity capital of such Obligor;

     (h) other than Participation Loans, Agented Notes and Assigned Loans, with respect to the Originator’s obligation to fund and the actual funding of the Loan by the Originator, the Originator has not assigned or granted participations to, in whole or in part;

     (i) except with respect to B-Note Loans, Mezzanine Loans and certain Loans that, in the Originator’s reasonable judgment cannot be cross-collateralized or cross-defaulted because of REIT eligibility criteria, if the Obligor of such Loan is the Obligor of more than one Loan, all such Loans are cross-collateralized and cross-defaulted;

     (j) the Loan does not represent capitalized interest or payment obligations relating to “put” rights;

     (k) the Loan is not a Loan or extension of credit by the Originator to the Obligor for the purpose of making any past due principal, interest or other payments due on such Loan;

     (l) the Originator (i) has completed to its satisfaction, in accordance with the Credit and Collection Policy, a due diligence audit and collateral assessment with respect to such Loan and (ii) has done nothing to impair the rights of the Administrative Agent, the Purchaser Agents or the Secured Parties with respect to the Loan, the Related Security, the Scheduled Payments or any income or Proceeds therefrom;

     (m) except with respect to B-Note Loans and Mezzanine Loans and, to the extent set forth in the definition thereof, the Loan is not subordinated to any other loan or financing to the related Obligor;

     (n) if the Loan is a Revolver, either it provides by its terms that any future funding thereunder is in the Originator’s sole and absolute discretion or it is subject to the Retained Interest provision of this Agreement;

     (o) the Face Amount of the Loan is the dollar amount thereof shown on the books and records of the Originator and Seller;

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     (p) with respect to B-Note Loans or Mezzanine Loans, the Originator has entered into an intercreditor agreement or subordination agreement (or such provisions are contained in the principal Underlying Instruments) with, or provisions for the benefit of, the senior lender, which agreement or provisions are assignable to and have been assigned to the Seller, and which provide that any standstill of remedies by the Originator or its assignee is limited (A) such that no standstill of remedies may be imposed unless (x) a default with respect to the senior obligation has occurred and is continuing and (y) in the case of such a default, other than a payment default, the Originator’s or assignee’s receipt from the senior lender or Obligor of a notice of default by the Obligor under the senior debt, and (B) to no longer than one hundred eighty (180) days in duration in the aggregate in any given year;

     (q) with respect to any Acquired Loan or Assigned Loan, such Loan has been re-underwritten by the Originator and satisfies all of the Originator’s underwriting criteria;

     (r) with respect to any Acquired Loan acquired from an Affiliate of the Originator, the Administrative Agent has received a satisfactory legal opinion concerning the acquisition of such Loan by the Originator in a true sale transaction;

     (s) with respect to any Acquired Loan that was acquired in a pool by the Originator along with one or more other Acquired Loans, the Administrative Agent has approved in writing such Loan for inclusion in the Collateral and has completed its own due diligence with respect to such Loan;

     (t) with respect to Agented Notes, the related Underlying Instruments (a) shall include a note purchase or similar agreement containing provisions relating to the appointment and duties of a payment agent and a collateral agent and intercreditor and (if applicable) subordination provisions, and (b) are duly authorized, fully and properly executed and are the valid, binding and unconditional payment obligation of the Obligor thereof;

     (u) with respect to Agented Notes, CapitalSource Finance LLC or the Originator (or a wholly owned subsidiary of the Originator) has been appointed the collateral agent of the security and the payment agent for all such notes prior to such Agented Note becoming a part of the Collateral;

     (v) with respect to Agented Notes, if the entity serving as the collateral agent of the security for all syndicated notes of the Obligor has or will change from the time of the origination of the notes, all appropriate assignments of the collateral agent’s rights in and to the collateral on behalf of the noteholders have been executed and filed or recorded as appropriate prior to such Agented Note becoming a part of the Collateral;

     (w) with respect to any Agented Note, all required notifications, if any, have been given to the collateral agent, the payment agent and any other parties required by the Required Asset Documents of, and all required consents, if any, have been obtained with respect to, the Originator’s assignment of such Agented Note and the Originator’s right, title and interest in the Related Property to the Seller and the Administrative Agent’s security interest therein on behalf of the secured parties;

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     (x) with respect to Agented Notes, the right to control the actions of and replace the collateral agent and/or the paying agent of the syndicated notes is to be exercised by at least a majority in interest of all holders of such Agented Notes;

     (y) with respect to Agented Notes, all syndicated notes of the Obligor of the same priority are cross-defaulted, the Related Property securing such notes is held by the collateral agent for the benefit of all holders of the syndicated notes and all holders of such notes (a) have an undivided interest in the collateral securing such notes, (b) share in the proceeds of the sale or other disposition of such collateral on a pro rata basis and (c) may transfer or assign their right, title and interest in the Related Property;

     (z) no portion of the proceeds used to make payments of principal or interest on such Loan have come from a new loan by the Originator;

     (aa) does not contain a confidentiality provision that restricts or purports to restrict the ability of the Administrative Agent or any Secured Party to exercise their rights under this Agreement, including, without limitation, their rights to review the Loan, the Required Asset Documents and Asset File;

     (bb) is not a consumer loan;

     (cc) is not a DIP loan; and

     (dd) none of the Loans secured by a Mortgage are high-cost loans as defined by applicable predatory- and abusive-lending laws.

(3) With respect to any Sale/Leaseback Loan:

     (a) the Originator or CapitalSource Finance LLC shall be the lender of record for such Loan; provided that with respect to any Sale/Leaseback Loan for which CapitalSource Finance LLC is the lender of record prior to such Sale/Leaseback Loan becoming part of the Collateral the Seller shall deliver a true sale opinion in form and substance acceptable to the Administrative Agent;

     (b) (i) the Collateral Custodian or an escrow agent (pursuant to an escrow agreement in form and substance acceptable to the Administrative Agent in its sole discretion) shall hold a Mortgage in blank for the benefit of each Purchaser with respect to all real property assets of the SPE Obligor and (ii) the Administrative Agent shall have the right to cause the Collateral Custodian (at the expense of the Originator) to file the Mortgage(s) for the benefit of the Administrative Agent and the Purchasers upon (A) the occurrence of a Termination Event or an Unmatured Termination Event or (B) a default or event of default (however defined or described) in the Underlying Instruments for such Sale/Leaseback Loan;

     (c) the Originator shall provide an indemnity to the Purchasers to cover any losses suffered by the Purchasers as a result of any Lien against any of the SPE Obligor’s assets that is pari passu or takes priority over the Liens granted pursuant to the Transaction Documents;

     (d) the Underlying Lessee is not an Affiliate of CapitalSource Inc. or its Subsidiaries;

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     (e) the SPE Obligor owns the fee simple or ground lease interest in the underlying property and shall not grant a Lien on such underlying property to any Person other than the Originator;

     (f) in no event shall the payments on the Lease abate or diminish, except:

     (I) upon a purchase by the Underlying Lessee of the underlying Property (the “Leased Property”) following (A) a condemnation with respect to the Leased Property, in which such a material part of the Leased Property is taken, or all points of ingress and/or egress to public roadways servicing the underlying property are materially impaired by a taking, so as to have a material adverse effect on Underlying Lessee’s business, and (B) the making of a rejectable offer (the “Rejectable Offer”) by the Underlying Lessee to SPE Obligor to purchase the Leased Property, together with all condemnation awards at a purchase price equal to the fair market value thereof as determined by an Appraisal on an as-is basis but disregarding the related condemnation but in no event shall such purchase price be less than the outstanding principal of and accrued interest on the related Sale/Leaseback Loan, and its acceptance by SPE Obligor,

     (II) upon the making of a Rejectable Offer following such condemnation and its rejection by SPE Obligor, such rejection to be conditioned upon (i) the prepayment by SPE Obligor of the Sale/Leaseback Loan at par plus any accrued interest or (ii) SPE Obligor providing assurances of such prepayment which are acceptable to the Administrative Agent,

     (III) upon the termination of the Underlying Lease following a casualty with respect to the Leased Property which renders the Leased Property unsuitable for its primary intended use, such termination to be conditioned upon (i) the prepayment by SPE Obligor of the Sale/Leaseback Loan at par plus any accrued interest or (ii) SPE Obligor providing assurances of such prepayment which are acceptable to the Administrative Agent, or

     (IV) in the event a condemnation or casualty described in clauses (I)(A) and (III) above, respectively, occurs in the final 12 months of the term of the Underlying Lease, the Underlying Lessee shall have the right to terminate the Underlying Lease with no further obligations thereunder other than the satisfaction of all accrued and unpaid obligations to the date of termination.

In the event that SPE Obligor accepts the Rejectable Offer, SPE Obligor shall convey title to the Leased Property by deed (or, in the case of a ground lease, assignment of its rights and obligations under such ground to the Underlying Lessee) and assign its rights and interests in the related condemnation awards to the Underlying Lessee upon payment of the purchase price therefor. In the event that the SPE Obligor rejects the Rejectable Offer, then subject to the Underlying Lessee’s satisfaction of all accrued and unpaid obligations to the date of termination, the Underlying Lessee shall have the right to terminate the Underlying Lease upon notice thereof;

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     (g) the terms of the Lease shall provide periodic payments (which shall not be subject to defense, set-off or counterclaim) from Underlying Lessee to SPE Obligor no less frequently than on a quarterly basis to equal the interest and principal payments on the related Loan, including with an appropriate rate of return to SPE Obligor which shall be similar to interest rates charged by Originator to other third parties on loans with a similar risk profile;

     (h) the term of the Lease shall be at least equal to the term of the related Loan;

     (i) the Underlying Lessee shall not be in default under the Lease at the time of contribution and thereafter shall not be in payment default;

     (j) any extraordinary payments by Underlying Lessee to SPE Obligor, including, but not limited to, default, bankruptcy and early lease termination payments (but excluding late payment fees) shall be applied to effectuate a reduction in the principal to the related Loan;

     (k) (i) the Underlying Lessee or SPE Obligor shall maintain risk property insurance in an amount at least equal to the full replacement cost of the underlying property, (ii) shall maintain general liability, business interruption and any other insurance agreed upon in the Lease and (iii) all such insurance policies shall name the Originator and each Purchaser as additional insured;

     (l) either the rights of the SPE Obligor under the Lease are freely assignable by the SPE Obligor or the Underlying Lessee has consented to the assignment of such rights to the Originator and its assignees;

     (m) the Loan shall contain customary representations, warranties, indemnities, events of default and remedies (including liquidated damages) similar to other transactions that Originator would make to a third party in an arms-length transaction; and

     (n) the Seller shall have a pledge of the SPE Obligor’s equity interest.

“Eligible Obligor”: On any date of determination, any Obligor that:

     (i) is a business organization (and not a natural person) duly organized and validly existing under the laws of its jurisdiction of organization and has a billing address within the United States,

     (ii) is a legal operating entity or holding company,

     (iii) has not entered into the Loan primarily for personal, family or household purposes,

     (iv) is not a Governmental Authority,

     (v) except with respect to Sale/Leaseback Loans to SPE Obligors, the Obligor is not an Affiliate of the Originator or Seller,

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     (vi) is not in the gaming (other than Obligors in the business of providing services to the gaming industry), nuclear waste or natural resource exploration/production and oil field service industries,

     (vii) is not engaged in the business of conducting proprietary research on new drug development,

     (viii) is not the subject of an Insolvency Proceeding,

     (ix) as of the applicable Cut-Off Date, has an Eligible Risk Rating, and

     (x) is not an Obligor of a Charged-Off Asset or Delinquent Asset; provided that with respect to an Obligor on any Loan previously financed pursuant to and in accordance with the terms and conditions of the Acquisition Facility, the Eligible Obligor criteria applicable to such Obligor (to the extent different than the foregoing) shall be limited to the criteria set forth in the definition of “Eligible Obligor” in the Acquisition Facility (which criteria are incorporated herein by reference along with any related terms, provisions and definitions mutatis mutandis as if set forth fully herein and notwithstanding any subsequent or contemporaneous termination of the Acquisition Facility (collectively, the “Incorporated Obligor Criteria”)) and such Obligor shall be deemed to be an Eligible Obligor or an ineligible Obligor for purposes of this Agreement, as the case may be, on any date of determination by virtue of such Obligor’s having satisfied or failed to satisfy each of the Eligible Obligor criteria and any Incorporated Obligor Criteria on such date.

“Eligible Repurchase Obligations”: Repurchase obligations with respect to any security that is a direct obligation of, or fully guaranteed by, the United States or any agency or instrumentality thereof the obligations of which are backed by the full faith and credit of the United States, in either case entered into with a depository institution or trust company (acting as principal) described in clauses (c)(2) and (c)(4) of the definition of Permitted Investments.

“Eligible Risk Rating”: With respect to a designated Obligor, a “Rating 1,” “Rating 2,” “Rating 3,” or, solely in the case of Assets originated or acquired by CapitalSource Inc. or its Affiliates longer than six months before the Asset becomes part of the Collateral, “Rating 4” each as determined in accordance with the Credit and Collection Policy.

“English Pound Sterling”: The lawful currency of the United Kingdom.

“Environmental Laws”: Any and all foreign, federal, state and local laws, statutes, ordinances, rules, regulations, permits, licenses, approvals, interpretations and orders of courts or Governmental Authorities, relating to the protection of human health or the environment, including, but not limited to, requirements pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of hazardous materials. Environmental Laws include, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. § 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. § 331 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. § 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. § 1251 et seq.), the Clean Air Act (42 U.S.C. § 7401 et seq.),

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the Toxic Substances Control Act (15 U.S.C. § 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. § 300, et seq.), the Environmental Protection Agency’s regulations relating to underground storage tanks (40 C.F.R. Parts 280 and 281), and the Occupational Safety and Health Act (29 U.S.C. § 651 et seq.), and the rules and regulations thereunder, each as amended or supplemented from time to time.

“ERISA”: The United States Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder.

“ERISA Affiliate”: (a) Any corporation that is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Seller, (b) a trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with the Seller, or (c) a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Seller, any corporation described in clause (a) above or any trade or business described in clause (b) above.

“Euro”: The lawful currency of the Participating Member States.

“Eurocurrency Liabilities”: Defined in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time.

“Eurodollar Disruption Event”: The occurrence of any of the following: (a) any Liquidity Bank shall have notified the Administrative Agent of a determination by such Liquidity Bank or any of its assignees or participants that it would be contrary to law or to the directive of any central bank or other governmental authority (whether or not having the force of law) to obtain Dollars in the London interbank market to fund any Advance, (b) any Liquidity Bank shall have notified the Administrative Agent of the inability, for any reason, of such Liquidity Bank or any of its assignees or participants to determine the Adjusted Eurodollar Rate, (c) any Liquidity Bank shall have notified the Administrative Agent of a determination by such Liquidity Bank or any of its assignees or participants that the rate at which deposits of Dollars are being offered to such Liquidity Bank or any of its assignees or participants in the London interbank market does not accurately reflect the cost to such Liquidity Bank, such assignee or such participant of making, funding or maintaining any Advance or (d) any Liquidity Bank shall have notified the Administrative Agent of the inability of such Liquidity Bank or any of its assignees or participants to obtain Dollars in the London interbank market to make, fund or maintain any Advance.

“Eurodollar Reserve Percentage”: For any period means the percentage, if any, applicable during such period (or, if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any basic, emergency, supplemental, marginal or other reserve requirements) with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term of one month.

“Excepted Person”: Defined in Section 13.13(a).

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“Excess Spread Account”: Defined in Section 6.4(g).

“Exchange Act”: The United States Securities Exchange Act of 1934, as amended.

“Excluded Amounts”: (a) Any amount received in the Lock-Box by, on or with respect to any Asset included as part of the Collateral, which amount is attributable to the payment of any tax, fee or other charge imposed by any Governmental Authority on such Asset, (b) any amount representing a reimbursement of insurance premiums and (c) any amount with respect to any Asset retransferred or substituted for upon the occurrence of a Warranty Event (if the Seller has decided that such Asset is no longer to be included in the Collateral) or that is otherwise replaced by a Substitute Asset (if the Seller has decided that such Asset is no longer to be included in the Collateral), to the extent such amount is attributable to a time after the effective date of such replacement.

“Existing Assets”: Each Asset purchased by the Seller under the Sale Agreement and owned by the Seller on the Closing Date.

“Face Amount”: With respect to any Asset, the Outstanding Asset Balance thereof shown on the applicable Asset List.

“Facility Amount”: The aggregate Commitments then in effect; provided that such amount may not at any time exceed $2,000,000,000 without the written agreement of the parties hereto; provided further that, on or after the Termination Date, the Facility Amount shall mean the Advances Outstanding.

“Facility Termination Date”: April 28, 2009, or such later date as the Administrative Agent and each Purchaser Agent, in its sole discretion, shall notify the Seller of in writing.

“Fairway”: Defined in the Recitals of this Agreement.

“Fairway Agent”: Defined in the Recitals of this Agreement.

“Fairway Agent’s Account”: A special account (ABA number 071000288; account number 2545804) in the name of BMO Capital Markets at Harris Trust and Savings Bank.

“FDIC”: The Federal Deposit Insurance Corporation, and any successor thereto.

“Federal Funds Rate”: For any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the overnight federal funds rates as in Federal Reserve Board Statistical Release H.15(519) or any successor or substitute publication selected by the Administrative Agent (or, if such day is not a Business Day, for the next preceding Business Day), or, if, for any reason, such rate is not available on any day, the rate determined, in the sole opinion of the Administrative Agent, to be the rate at which overnight federal funds are being offered in the national federal funds market at 9:00 a.m. (Charlotte, North Carolina time).

“Finance Charges”: With respect to any Asset, any interest or finance charges owing by an Obligor pursuant to or with respect to such Asset.

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“Financial Sponsor”: Any Person, including any Subsidiary of another Person, whose principal business activity is acquiring, holding, and selling investments (including controlling interests) in otherwise unrelated companies that each are distinct legal entities with separate management, books and records and bank accounts, whose operations are not integrated one with another and whose financial condition and creditworthiness are independent of the other companies so owned by such Person.

“Fitch”: Fitch, Inc. or any successor thereto.

“Fixed Rate Asset”: A Loan that is an Eligible Asset other than a Floating Rate Asset.

“Fixed Rate Asset Percentage”: As of any date of determination, the percentage equivalent of a fraction (a) the numerator of which is equal to the sum of the Outstanding Asset Balances of all Fixed Rate Assets and Banded Floating Rate Loans that are within 0.50% of the maximum interest rate allowable under their Required Asset Documents as of such date, and (b) the denominator of which is equal to the Aggregate Outstanding Asset Balance as of such date.

“Floating Rate Asset”: A Loan that is an Eligible Asset where the interest rate payable by the Obligor thereof is based on the CSE Prime Rate or CSE LIBOR Rate, plus some specified interest percentage in addition thereto, and the Loan provides that such interest rate will reset immediately upon any change in the related CSE Prime Rate or CSE LIBOR Rate.

“Funding Date”: The third Business Day following the Closing Date, and as to any incremental Advance, any Business Day that is one Business Day immediately following the receipt by the Administrative Agent and each Purchaser Agent of a Borrowing Notice (along with a Borrowing Base Certificate) in accordance with Section 2.3.

“GAAP”: Generally accepted accounting principles as in effect from time to time in the United States.

“Governmental Authority”: With respect to any Person, any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any body or entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over such Person.

“H.15”: Federal Reserve Statistical Release H.15.

“Healthcare Properties”: Includes hospitals, clinics, nursing homes, sports clubs, spas and other healthcare facilities and other similar Interests in Real Property used in one or more similar businesses (but excluding medical offices).

“Hedge Amount”: On any day, an amount equal to the product of (a) the product of (i) the Borrowing Base and (ii) the Fixed Rate Asset Percentage on such day and (b) one minus the Overcollateralization Percentage on such day.

“Hedge Collateral”: Defined in Section 5.3(b).

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“Hedge Breakage Costs”: For any Hedge Transaction, any amount payable by the Seller for the early termination of that Hedge Transaction or any portion thereof.

“Hedge Counterparty”: Means (a) Wachovia Bank, National Association and its successors and assigns, and (b) any entity that (i) on the date of entering into a Hedging Agreement (x) is an interest rate swap dealer that has been approved in writing by the Administrative Agent (which approval shall not be unreasonably withheld), and (y) has a long-term unsecured debt rating of not less than “A” by S&P, not less than “A2” by Moody’s and not less than “A” by Fitch (if such entity is rated by Fitch) (“Long-term Rating Requirement”) and a short-term unsecured debt rating of not less than “A-1” by S&P, not less than “P-1” by Moody’s and not less than “F-1” by Fitch (if such entity is rated by Fitch) (“Short-term Rating Requirement”), and (ii) in a Hedging Agreement (x) consents to the assignment of the Seller’s rights under each Hedging Agreement to the Administrative Agent for the benefit of the Secured Parties pursuant to Section 5.3(b) and (y) agrees that in the event that Moody’s, S&P or Fitch reduces its long-term unsecured debt rating below the Long-term Rating Requirement, or reduces its short-term unsecured debt rating below the Short-term Rating Requirement, it shall transfer its rights and obligations under each Hedge Transaction to another entity that meets the requirements of clause (i) and (ii) hereof and has entered into a Hedging Agreement with the Seller on or prior to the date of such transfer.

“Hedge Guaranty”: The Guaranty, dated as of December 28, 2005, by and between CSE Mortgage in favor of Wachovia, as Hedge Counterparty, as amended, modified, waived, supplemented, restated or replaced from time to time.

“Hedge Notional Amount”: For any Advance, the aggregate notional amount in effect on any day under all Hedge Transactions entered into pursuant to Section 5.3(a) for that Advance.

“Hedge Percentage”: With respect to:

     (a) Fixed Rate Assets is, on any day that (i) the Aggregate Outstanding Asset Balance exceeds $150,000,000, an amount equal to 100% if the sum of the Outstanding Asset Balances of all Fixed Rate Assets exceeds $50,000,000, (ii) the Aggregate Outstanding Asset Balance exceeds $150,000,000, an amount equal to 0% if the sum of the Outstanding Asset Balances of all Fixed Rate Assets is less than or equal to $50,000,000, (iii) the Aggregate Outstanding Asset Balance is less than or equal to $150,000,000, an amount equal to 100% if the sum of the Outstanding Asset Balances of all Fixed Rate Assets exceeds $20,000,000 or (iv) the Aggregate Outstanding Asset Balance is less than or equal to $150,000,000, an amount equal to 0% if the sum of the Outstanding Asset Balances of all Fixed Rate Assets is less than or equal to $20,000,000;

     (b) Floating Rate Assets is 0%;

     (c) Banded Floating Rate Loans that are within 0.50% of the maximum interest rate allowable under their Required Asset Documents, on any day, is an amount equal to 100%.

“Hedge Transaction”: Each interest rate or index rate swap transaction between the Seller and a Hedge Counterparty that is entered into pursuant to Section 5.3(a) and is governed by a Hedging Agreement.

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“Hedged Rate”: For any Advance, the interest rate payable to a Hedge Counterparty under the Hedge Transaction related to such Advance computed as of the Cut-Off Date under or with respect to the Asset to which that Advance relates.

“Hedging Agreement”: Each agreement between the Seller and a Hedge Counterparty that governs one or more Hedge Transactions entered into pursuant to Section 5.3(a), which agreement shall consist of a “Master Agreement” in a form published by the International Swaps and Derivatives Association, Inc., together with a “Schedule” thereto substantially in the form of Exhibit D hereto or such other form as the Administrative Agent shall approve in writing, and each “Confirmation” thereunder confirming the specific terms of each such Hedge Transaction.

“Highest Required Investment Category”: (i) With respect to ratings assigned by Moody’s, “Aa2” or “P-1” for one month instruments, “Aa2” and “P-1” for three month instruments, “Aa3” and “P-1” for six month instruments and “Aa2” and “P-1” for instruments with a term in excess of six months, (ii) with respect to rating assigned by S&P, “A-1” for short-term instruments and “A” for long-term instruments, and (iii) with respect to rating assigned by Fitch (if such investment is rated by Fitch), “F-1+” for short-term instruments and “AAA” for long-term instruments.

“Hospitality Properties”: Includes hotels, motels, resorts, youth hostels, bed and breakfasts and other similar Interests in Real Property used in one or more similar businesses.

“Increased Costs”: Any amounts required to be paid by the Seller to an Affected Party pursuant to Section 2.15.

“Indebtedness”: With respect to any Person at any date, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current liabilities incurred in the ordinary course of business and payable in accordance with customary trade practices) or that is evidenced by a note, bond, debenture or similar instrument or other evidence of indebtedness customary for indebtedness of that type, (b) all obligations of such Person under leases that shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, (c) all obligations of such Person in respect of acceptances issued or created for the account of such Person, (d) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof, (e) all indebtedness, obligations or liabilities of that Person in respect of Derivatives, and (f) obligations under direct or indirect guaranties in respect of obligations (contingent or otherwise) to purchase or otherwise acquire, or to otherwise assure a creditor against loss in respect of, indebtedness or obligations of others of the kind referred to in clauses (a) through (e) above.

“Indemnified Amounts”: Defined in Section 11.1.

“Indemnified Parties”: Defined in Section 11.1.

“Independent Director”: Defined in Section 4.1(u).

“Industrial Properties”: Includes factories, refinery plants, warehouses, breweries and other similar Interests in Real Property used in one or more similar businesses.

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“Industry”: The industry of an Obligor as determined by reference to the two digit standard industry classification or North American Industry Classification System codes.

“Initial Advance”: The first Advance.

“Insolvency Event”: With respect to a specified Person, (a) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable Insolvency Law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person’s affairs, and such decree or order shall remain unstayed and in effect for a period of sixty (60) consecutive days; or (b) the commencement by such Person of a voluntary case under any applicable Insolvency Law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due, or the taking of action by such Person in furtherance of any of the foregoing.

“Insolvency Laws”: The Bankruptcy Code and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments, or similar debtor relief laws from time to time in effect affecting the rights of creditors generally.

“Insolvency Proceeding”: Any case, action or proceeding before any court or other Governmental Authority relating to any Insolvency Event.

“Instrument”: Any “instrument” (as defined in Article 9 of the UCC), other than an instrument that constitutes part of chattel paper.

“Insurance Policy”: With respect to any Asset, an insurance policy covering liability and physical damage to or loss of the Related Property.

“Insurance Proceeds”: Any amounts payable or any payments made on or with respect to an Asset under any Insurance Policy.

“Intercreditor Agreement”: The Fourth Amended and Restated Intercreditor and Lockbox Administration Agreement, dated as of June 30, 2005, by and among each of the financing agents from time to time party thereto, Bank of America, N.A., as the lockbox bank, CapitalSource Finance LLC, as the originator, as the original servicer and as the lockbox servicer, and CapitalSource Funding LLC, as the owner of the account and as the owner of the lockbox, as amended, modified, waived, supplemented, restated or replaced from time to time.

“Interest”: For each Accrual Period and each Advance outstanding, the sum of the products of:

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IR x P x	1
	D

where:
IR	=	the Interest Rate applicable on such day;
P	=	the principal amount of such Advance on such day;and
D	=	360 or, to the extent the Interest Rate is based on the Base Rate, 365 or 366 days, as applicable.

provided that (i) no provision of this Agreement shall require the payment or permit the collection of Interest in excess of the maximum permitted by Applicable Law and (ii) Interest shall not be considered paid by any distribution if at any time such distribution is rescinded or must otherwise be returned for any reason.

“Interest Collections”: Any and all amounts received in respect of any interest, fees or other similar charges (including any Finance Charges) from or on behalf of any Obligor that are deposited into the Collection Account, or received by or on behalf of the Seller by the Servicer or Originator in respect of an Asset, in the form of cash, checks, wire transfers, electronic transfers or any other form of cash payment (net of any payment owed by the Seller to, and including any receipts from, any Hedge Counterparties).

“Interests in Real Property”: A fee simple interest, a financeable estate for years or a leasehold interest, in each case in real property.

“Interest Rate”: For any Accrual Period and for each Advance outstanding for each day during such Accrual Period:

          (i) to the extent the applicable Purchaser has funded the applicable Advance through the issuance of commercial paper, a rate equal to the applicable CP Rate; or

          (ii) to the extent the applicable Purchaser did not fund the applicable Advance through the issuance of commercial paper, a rate equal to the Alternative Rate;

provided that the Interest Rate shall be the Base Rate for any Accrual Period for any Advance as to which a Purchaser has funded the making or maintenance thereof through the Liquidity Bank under the applicable Liquidity Agreement on any day other than the first day of such Accrual Period without giving such Liquidity Bank(s) at least two Business Days’ prior notice of such assignment.

“ISDA Definitions”: The 2000 ISDA Definitions as published by the International Swaps and Derivatives Association, Inc.

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“Issuer”: VFCC and any other Purchaser whose principal business consists of issuing commercial paper or other securities to fund its acquisition or maintenance of receivables, accounts, instruments, chattel paper, general intangibles and other similar assets.

“Land Development”: Financing to an entity engaged in the business of purchasing land for the purposes of resale to a developer.

“Lease”: The underlying triple-net lease between SPE Obligor and any Underlying Lessee pursuant to which the Underlying Lessee is responsible for all expenses arising from the use or operation of the underlying property, including, without limitation, taxes, insurance premiums, alterations, and repairs and maintenance costs.

“Leased Property”: Defined in clause 3(f) of the definition of Eligible Asset.

“LIBOR Rate”: For any day during any Accrual Period and any Advance or portion thereof, an interest rate per annum equal to:

     (1) the posted rate for thirty (30) day deposits in Dollars appearing on Telerate page 3750 as of 11:00 a.m. (London time) on the Business Day which is the second (2nd) Business Day immediately preceding the applicable Funding Date (with respect to the initial Accrual Period for such Advance) and as of the second (2nd) Business Day immediately preceding the first (1st) day of the applicable Accrual Period (with respect to all subsequent Accrual Periods for such Advance); or

     (2) if no such rate appears on Telerate page 3750 at such time and day, then the LIBOR Rate shall be determined by Wachovia at its principal office in Charlotte, North Carolina as its rate (each such determination, absent manifest error, to be conclusive and binding on all parties hereto and their assignees) at which thirty (30) day deposits in Dollars are being, have been, or would be offered or quoted by Wachovia to major banks in the applicable interbank market for Eurodollar deposits at or about 11:00 a.m. (Charlotte, North Carolina time) on such day.

“Lien”: Any mortgage, lien, pledge, charge, right, claim, security interest or encumbrance of any kind of or on any Person’s assets or properties in favor of any other Person (including any UCC financing statement or any similar instrument filed against such Person’s assets or properties).

“Liquid Real Estate Assets”: (a) Residential mortgage-backed securities that (i) have a rating of not less than “AA” by S&P/Fitch and “Aa2” by Moody’s, (ii) are purchased by CapitalSource Inc. or its Consolidated Subsidiaries solely to meet REIT asset and income tests, and (iii) are leveraged through debt facilities utilizing leverage greater than 12 times the amount of equity investment in such Liquid Real Estate Assets and (b) residential mortgage whole loan purchases made by CapitalSource Inc. or its Consolidated Subsidiaries solely to meet REIT asset and income tests, all in accordance with the Residential Mortgage Policies and Procedures.

“Liquidation Expenses”: With respect to (a) any Asset, the aggregate amount of all out-of-pocket expenses reasonably incurred by the Servicer (including amounts paid to any subservicer) and any reasonably allocated costs of counsel (if any), in each case in accordance with the Servicer’s customary procedures in connection with the repossession, refurbishing and

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disposition of any related assets securing such Asset upon or after the expiration or earlier termination of such Asset and other out-of-pocket costs related to the liquidation of any such assets, including the attempted collection of any amount owing pursuant to such Asset if it is a Charged-Off Asset, and if requested by the Administrative Agent, the Servicer and Originator must provide to the Administrative Agent a breakdown of the Liquidation Expenses for any Asset along with any supporting documentation therefor, and (b) any Portfolio Asset, the aggregate amount of all out-of-pocket expenses reasonably incurred by the Servicer (including amounts paid to any subservicer) and any reasonably allocated costs of counsel (if any), in each case in accordance with the Servicer’s customary procedures in connection with the repossession, refurbishing and disposition of any related assets securing such Portfolio Asset upon or after the expiration or earlier termination of such Portfolio Asset and other out-of-pocket costs related to the liquidation of any such assets, including the attempted collection of any amount owing pursuant to such Portfolio Asset if it is a Charged-Off Portfolio Asset, and if requested by the Administrative Agent, the Servicer and Originator must provide to the Administrative Agent a breakdown of the Liquidation Expenses for any Portfolio Asset along with any supporting documentation therefor.

“Liquidity Agreement”: (a) with respect to each Purchaser, the Liquidity Purchase Agreement or liquidity loan agreement, by and among such Purchaser, the Liquidity Banks named therein, and the related Purchaser Agent, as such agreement may be amended, modified, waived, supplemented, restated or replaced from time to time, and (b) with respect to each Additional Purchaser, the liquidity purchase agreement or liquidity loan agreement by and among such Additional Purchaser, the Liquidity Banks named therein and the related Additional Agent, as such agreement may be amended, modified, waived, supplemented, restated or replaced from time to time.

“Liquidity Bank”: The Person or Persons who provide liquidity support to any Purchaser or Additional Purchaser pursuant to a Liquidity Agreement in connection with the issuance by such Purchaser of Commercial Paper Notes.

“Liquidity Factor Reduction Event”: With respect to each Asset included as part of the Collateral subject to the Retained Interest provisions of this Agreement, a “Liquidity Factor Reduction Event” under and as defined in any Permitted Securitization Transaction rated by the Rating Agencies.

“Loan”: Any loan originated by the Originator or, in the case of an Assigned Loan or an Acquired Loan, otherwise acquired by the Originator, that is identified on an Asset List and sold or contributed to the Seller hereunder and included as part of the Collateral, which loan includes, without limitation, (i) the Required Asset Documents and Asset File, and (ii) all right, title and interest of the Originator in and to the loan and any Related Property; provided that the foregoing shall include any “Loan” under and as defined in the Acquisition Facility.

“Loan Register”: Defined in Section 5.4(n).

“Loan-to-Liquidation Value” or “LLV”: With respect to any Loan, as of the date of origination, the percentage equivalent of a fraction (i) the numerator of which is equal to the maximum availability (as provided in the applicable Underlying Instruments) of such Loan as of the date of

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its origination and (ii) the denominator of which is equal to the liquidation value of the Related Property securing such Loan that is subject to a first priority lien in favor of the Originator (as determined by the Servicer in accordance with the Credit and Collection Policy and in a commercially reasonable manner).

“Loan-to-Value Ratio” or “LTV”: With respect to any Loan, as of any date of determination, the percentage equivalent of a fraction (a) the numerator of which is equal to the total commitment amount of such Loan as of the date of its origination (as provided in the related Underlying Instruments) (or the Outstanding Asset Balance with respect to Delayed-Draw Term Loans as determined on the last day of each calendar month) plus the total commitment amount or principal amount, as the case may be, as of the applicable date of origination or incurrence, of all loans and other indebtedness which is senior to or pari passu with such Loan in the “capital structure” of the related Obligor (as defined in, and as determined by the Servicer in accordance with, the Credit and Collection Policy and in a commercially reasonable manner), and (b) the denominator of which is equal to the lower of the Obligor’s cost to acquire the Related Property or the current value (determined by means of an Appraisal) of the Related Property.

“Lock-Box”: The post office box to which Collections are remitted for retrieval by a Lock-Box Bank and deposited by such Lock-Box Bank into a Lock-Box Account, the details of which are contained in Schedule II.

“Lock-Box Account”: The account maintained at the Lock-Box Bank for the purpose of receiving Collections, the details of which are contained in Schedule II, as such schedule may be amended from time to time.

“Lock-Box Agreement”: The Fifth Amended and Restated Three Party Agreement Relating to Lockbox Services and Control (with Activation Upon Notice), dated as of June 30, 2005, by and among certain financing agents party thereto, Bank of America, N.A., as the lockbox bank, CapitalSource Finance LLC, as the originator, as the original servicer and as the lockbox servicer, and CapitalSource Funding LLC, as the owner of the account and as the owner of the lockbox, as amended, modified, waived, supplemented, restated or replaced from time to time.

“Lock-Box Bank”: Bank of America, N.A., or any of the banks or other financial institutions holding one or more Lock-Box Accounts.

“Margin Stock”: Margin Stock as defined under Regulation U.

“Material Adverse Effect”: With respect to any event or circumstance, means a material adverse effect on (a) the business, condition (financial or otherwise), operations, performance, properties or prospects of the Originator, the Servicer or the Seller, (b) the validity, enforceability or collectibility of this Agreement or any other Transaction Document or the validity, enforceability or collectibility of the Assets generally or any material portion of the Assets, (c) the rights and remedies of the Administrative Agent, the Purchasers, the Purchaser Agents and the Secured Parties, (d) the ability of the Seller, the Servicer, the Backup Servicer or the Collateral Custodian to perform its obligations under this Agreement or any Transaction Document, or (e) the status, existence, perfection, priority or enforceability of the Administrative Agent’s, the Purchaser Agents’, or the Secured Parties’ interest in the Collateral.

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“Material Mortgage Loan”: Any Loan for which the underlying Related Property consisting of real property owned by the Obligor (i) represents 25% or more (measured by the book value of the three most valuable parcels of real property as of the date of such Loan) of (a) the original commitment for such Loan and (b) the fair value of the underlying Obligor and Related Property as a whole and (ii) is material to the operations of the related business; provided that a Material Mortgage Loan shall not include certain parcels of real property which the Obligor is in the process of disposing.

“Materials of Environmental Concern”: Any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Laws, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation.

“Maximum Availability”: An amount equal to the lesser of:

     (a) the Facility Amount;

     (b) the sum of (i) the product of the Borrowing Base and the Weighted Average Advance Rate plus (ii) the amount on deposit in the Principal Collections Account received in reduction of the Outstanding Asset Balance of any Asset that is an Eligible Asset; and

     (c) an amount equal to (i) the Borrowing Base minus (ii) the Minimum Overcollateralization Amount plus (iii) the amount on deposit in the Principal Collections Account received in reduction of the Outstanding Asset Balance of any Asset that is an Eligible Asset;

provided that in case of each of the foregoing clauses (a)-(c), during the Amortization Period, the Maximum Availability shall be equal to the Advances Outstanding.

“Mezzanine Loan”: Any Term Loan (i) that is subordinate to a B-Note Loan, if any, in terms of priority of payment obligations, (ii) the payment of which may contain a form of equity participation in the issuer or Obligor and is secured by a pledge from the parent of the Obligor of the equity in such Obligor or otherwise, and (iii) that does not share in the same collateral package as the Obligor’s senior loans.

“Minimum Overcollateralization Amount”: As of any date of determination, an amount equal to the product of 1.5 and the sum of the Outstanding Asset Balances of all Eligible Assets attributable to the Obligor having the largest aggregate Outstanding Asset Balance of Eligible Assets included as part of the Collateral (excluding the amount, calculated without duplication, by which such Eligible Assets exceed any applicable Pool Concentration Criteria)

“Minimum Pool Yield”: A Pool Yield equal to 2.75%.

“Mixed Use Properties”: Includes any property or pool of properties in which not more than 50% of the rentable area of such property can be classified into a single classification of Mortgaged Property.

“Monthly Report”: Defined in Section 6.10(b).

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“Moody’s”: Moody’s Investors Service, Inc., and any successor thereto.

“Mortgage”: The mortgage, deed of trust or other instrument creating a first or second Lien on an Interest in Real Property securing a Loan subject to this Agreement, including the Assignment of Leases and Rents related thereto.

“Mortgaged Property”: The underlying Interests in Real Property which are subject to the Lien of a Mortgage that secures a Loan, consisting of Interests in Real Property in a parcel or parcels of land, at least one of which parcels is improved by a commercial building or facility, together with Interests in Real Property in such commercial building or facility and any personal property, fixtures, leases and other property or rights pertaining to such land, commercial building or facility which are subject to the related Mortgage. For the avoidance of doubt, the applicable classification of Mortgaged Property includes Healthcare Properties, Hospitality Properties, Industrial Properties, Multifamily Properties, Office Properties, Retail Properties, Other Property and Land Development. Each Eligible Asset shall be classified into one of the applicable classifications of Mortgaged Property identified herein or as a Mixed Use Property, including Eligible Assets that are also classified as Development Properties.

“Multiemployer Plan”: A “multiemployer plan” as defined in Section 4001(a)(3) of ERISA that is or was at any time during the current year or the immediately preceding five years contributed to by the Seller or any ERISA Affiliate on behalf of its employees.

“Multifamily Properties”: Includes multifamily dwellings such as apartment blocks, condominiums and cooperative owned buildings.

“NAICS Code” means the North American Industry Classification System Codes by at least four digits.

“Net Proceeds of Capital Stock/Conversion of Debt”: Any and all proceeds (whether cash or non-cash) or other consideration received by CapitalSource Inc. and its Consolidated Subsidiaries, on a consolidated basis, in respect of the issuance of Capital Stock (including, without limitation, the aggregate amount of any and all Indebtedness converted into Capital Stock), after deducting therefrom all reasonable and customary costs and expenses incurred by CapitalSource Inc. and such Consolidated Subsidiary in connection with the issuance of such Capital Stock in each case to the extent classified as equity on the consolidated balance sheet of CapitalSource Inc. and its Consolidated Subsidiaries.

“NOI”: With respect to any Mortgaged Property, as of the last day of any fiscal quarter, the amount determined for the period consisting of such fiscal quarter and each of the three immediately preceding fiscal quarters of the sum of all rents and other revenues received in the ordinary course from such Mortgaged Property minus all expenses paid related to the ownership, operation and maintenance of such Mortgaged Property.

“Noteless Loan”: A Loan with respect to which the Underlying Instruments do not require the Obligor to execute and deliver a promissory note to evidence the indebtedness created under such Loan.

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“Obligor”: With respect to any Asset, any Person or Persons obligated to make payments pursuant to or with respect to such Asset, including any guarantor thereof. For purposes of calculating any of the Pool Concentration Criteria only, all Assets included as part of the Collateral or to be transferred to the Collateral the Obligor of which is an Affiliate of another Obligor (excluding any Financial Sponsor or Obligors that are Affiliates solely because of common ownership or control by a Financial Sponsor) shall be aggregated with all Assets of such other Obligor; for example, if Corporation A is an Affiliate (other than because of a common Financial Sponsor) of Corporation B, and the sum of the Outstanding Asset Balances of all of Corporation A’s Loans included as part of the Collateral constitutes 10% of the Aggregate Outstanding Asset Balance and the sum of the Outstanding Asset Balances all of Corporation B’s Loans included as part of the Collateral constitutes 10% of the Aggregate Outstanding Asset Balance, the combined Obligor concentration for Corporation A and Corporation B would be 20%.

“Office Properties”: Includes office buildings (including medical offices), conference facilities and other similar Interests in Real Property used in the commercial real estate business.

“Officer’s Certificate”: A certificate signed by a Responsible Officer of the Seller or the Servicer, as the case may be, and delivered to the Collateral Custodian.

“Opinion of Counsel”: A written opinion of counsel, which opinion and counsel are acceptable to the Administrative Agent in its sole discretion.

“Optional Sale”: Defined in Section 2.19(a).

“Optional Sale Date”: Any Business Day, provided forty-five (45) days written notice is given in accordance with Section 2.19(a).

“Original Sale and Servicing Agreement”: Defined in the Recitals of this Agreement.

“Originator”: Defined in the Preamble of this Agreement.

“Other Costs”: Defined in Section 13.09(c).

“Other Property”: Includes any property that is not Healthcare Property, Hospitality Property, Industrial Property, Multifamily Property, Office Property, Retail Property, Mixed Use Property or Land Development.

“Outstanding Asset Balance”: (i) With respect to any Loan (other than any other “Loan” under and as defined in the Acquisition Facility) at any time, the sum of (a) the portion of all future Scheduled Payments becoming due under or with respect to such Loan plus (b) any past due Scheduled Payments with respect to such Loan (other than with respect to those payments to the extent a Servicer Advance is outstanding with respect thereto), and (ii) with respect to any other “Loan” (under and as defined in the Acquisition Facility), the “Outstanding Asset Balance” as calculated in accordance with the terms and provisions of the Acquisition Facility (which terms and provisions are incorporated herein by reference mutatis mutandis as if set forth fully herein and notwithstanding any subsequent or contemporaneous termination of the Acquisition Facility); provided that notwithstanding anything to the contrary contained herein, for purposes

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of determining the Aggregate Outstanding Asset Balance, if any portion of an Asset is deemed to be “charged-off” in accordance with the provisions of the definition of Charged-Off Asset, then the entire Asset shall be deemed to have an Outstanding Asset Balance of zero, except for purposes of calculating the Average Pool Charged-Off Ratio.

“Overcollateralization Amount”: As of any date of determination, an amount equal to the product of (i) the Overcollateralization Percentage on such date and (ii) the Borrowing Base on such date.

“Overcollateralization Percentage”: As of any date of determination, the percentage equivalent of (a) one minus (b) a fraction (i) the numerator of which is equal to the Advances Outstanding on such date and (ii) the denominator of which is equal to the Aggregate Outstanding Asset Balance as of such date.

“Overcollateralization Shortfall”: As of any date of determination, the positive difference, if any, of (a) the Minimum Overcollateralization Amount on such date minus (b) the Overcollateralization Amount on such date.

“Park Avenue”: Defined in the Recitals of this Agreement.

“Park Avenue Agent”: Defined in the Recitals of this Agreement.

“Park Avenue Agent’s Account”: A special account (account number 645475302) in the name of the Park Avenue Agent maintained at JPMorgan Chase Bank, National Association.

“Participating Member State”: A member of the European Community that adopts or has adopted the Euro as its lawful currency in accordance with legislation of the European Economic Community relating to the Economic and Monetary Union.

“Participation Loan”: A Loan to an Obligor, originated by the Originator and serviced by the Servicer in the ordinary course of its business, in which a participation interest has been granted to another Person in accordance with the Credit and Collection Policy and (i) such transaction has been fully consummated, pursuant to a participation agreement, (ii) such Loan (other than in the case of a Noteless Loan) is represented by a separate promissory note, and (iii) the Originator has the right to receive and collect payments directly in its own name, and to enforce its rights directly against the Obligor thereof including the right to proceed against collateral; provided that any such Loan shall exclude any Retained Interest.

“Payment Date”: The fifteenth (15th) day of each calendar month or, if such day is not a Business Day, the next succeeding Business Day.

“Payment Duties”: Defined in Section 8.2(b).

“Permitted Investments”: With respect to any Payment Date means negotiable instruments or securities or other investments maturing on or before such Payment Date (a) which, except in the case of demand or time deposits, investments in money market funds and Eligible Repurchase Obligations, are represented by instruments in bearer or registered form or ownership of which is represented by book entries by a Clearing Agency or by a Federal Reserve Bank in favor of

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depository institutions eligible to have an account with such Federal Reserve Bank who hold such investments on behalf of their customers, (b) that, as of any date of determination, mature by their terms on or prior to the Business Day immediately preceding the next Payment Date immediately following such date of determination, and (c) that evidence:

     (1) direct obligations of, and obligations fully guaranteed as to full and timely payment by, the United States (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States);

     (2) demand deposits, time deposits or certificates of deposit of depository institutions or trust companies incorporated under the laws of the United States or any state thereof and subject to supervision and examination by federal or state banking or depository institution authorities; provided that at the time of the Seller’s investment or contractual commitment to invest therein, the commercial paper, if any, and short-term unsecured debt obligations (other than such obligation whose rating is based on the credit of a Person other than such institution or trust company) of such depository institution or trust company shall have a credit rating from Fitch and each Rating Agency in the Highest Required Investment Category granted by Fitch and such Rating Agency, which in the case of Fitch, shall be “F-1+”;

     (3) commercial paper, or other short term obligations, having, at the time of the Seller’s investment or contractual commitment to invest therein, a rating in the Highest Required Investment Category granted by each Rating Agency, which in the case of Fitch, shall be “F-1+”;

     (4) demand deposits, time deposits or certificates of deposit that are fully insured by the FDIC and either have a rating on their certificates of deposit or short-term deposits from Moody’s and S&P of “P-1” and “A-1”, respectively, and if rated by Fitch, from Fitch of “F-1+”;

     (5) notes that are payable on demand or bankers’ acceptances issued by any depository institution or trust company referred to in clause (ii) above;

     (6) investments in taxable money market funds or other regulated investment companies having, at the time of the Seller’s investment or contractual commitment to invest therein, a rating of the Highest Required Investment Category from Moody’s, S&P and Fitch (if rated by Fitch);

     (7) time deposits (having maturities of not more than ninety (90) days) by an entity the commercial paper of which has, at the time of the Seller’s investment or contractual commitment to invest therein, a rating of the Highest Required Investment Category granted by Fitch and each Rating Agency; or

     (8) Eligible Repurchase Obligations with a rating acceptable to the Rating Agencies, which in the case of Fitch, shall be “F-1+” and in the case of S&P shall be “A-1”.

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The Collateral Custodian may pursuant to the direction of the Servicer or Administrative Agent, as applicable, purchase or sell to itself or an Affiliate, as principal or agent, the Permitted Investments described above.

“Permitted Liens”: Any of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced (a) Liens for state, municipal or other local taxes if such taxes shall not at the time be due and payable, (b) Liens imposed by law, such as materialmen’s, mechanics’, carriers’, workmen’s and repairmen’s Liens and other similar Liens, arising in the ordinary course of business securing obligations that are not overdue for a period of more than thirty (30) days, and (c) Liens granted pursuant to or by the Transaction Documents.

“Permitted Securitization Transaction”: Any financing transaction undertaken by the Seller or an Affiliate of the Seller that is secured, directly or indirectly, by the Collateral or any portion thereof or any interest therein, including any sale, lease, whole loan sale, asset securitization, secured loan or other transfer.

“Person”: An individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, sole proprietorship, joint venture, government (or any agency or political subdivision thereof) or other entity.

“Pool Charged-Off Ratio”: As of any Determination Date, the product of (i) twelve (12) and (ii) the percentage equivalent of a fraction, (a) the numerator of which is equal to the sum of the Outstanding Asset Balances of all Eligible Assets that became Charged-Off Assets (net of Recoveries during such Collection Period) during the Collection Period related to such Determination Date, and (b) the denominator of which is equal to the Aggregate Outstanding Asset Balance as of the first (1st) day of the Collection Period related to such Determination Date.

“Pool Concentration Criteria”: With respect to item (8), (9) and (12) below, on any day, and with respect to all other items below, on any day on and after the Concentrations Effective Date, each of the concentration limitations as set forth below, which concentration limitations (unless otherwise indicated) shall be measured on the basis of a percentage of the Aggregate Outstanding Asset Balance:

     (1) the sum of the Outstanding Asset Balance of all Eligible Assets the Obligors of which are resident of the same state shall not exceed 20%, with the exception of Florida, California and New York, each of which shall not exceed 30%; provided that the state having the single highest concentration other than California, Florida and New York shall not exceed 30%;

     (2) the sum of the Outstanding Asset Balances of all Eligible Assets that are Loans secured by Development Properties shall not exceed 35% (including, for the avoidance of doubt, rediscount loans secured by Development Properties); provided that, Condominium Conversions shall not exceed 30%;;

     (3) the sum of the Outstanding Asset Balances of all Eligible Assets that are Senior Secured ABLs shall not exceed 50%;

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     (4) the sum of the Outstanding Asset Balances of all Eligible Assets that are B-Note Loans or Mezzanine Loans shall not exceed 20%;

     (5) the sum of the Outstanding Asset Balances of all Eligible Assets that are Loans secured by the same classification of Mortgaged Property shall not exceed the amounts set forth in the following table:

Property Classification	Concentration Limit
Office Properties, Healthcare Properties, Industrial Properties and Retail Properties		35	%
Multifamily Properties		35	%
Hospitality Properties		35	%
Land Development		30	%
Other Property		10	%

     (6) the sum of the Outstanding Asset Balances of all Eligible Assets that are Mixed Use Properties shall not exceed 30%;

     (7) the sum of the Outstanding Asset Balances of all Eligible Assets that are Sale/Leaseback Loans shall not exceed 20%;

     (8) the sum of the Outstanding Asset Balances of all Eligible Assets with a “Risk Rating 4”, a “Risk Rating 5” and a “Risk Rating 6” shall not exceed 20%, 10% and 0%, respectively;

     (9) the sum of the Outstanding Asset Balances of all Eligible Assets to a single Obligor shall not exceed $50,000,000;

     (10) the Aggregate Outstanding Asset Balances of all Eligible Assets divided by the number of Obligors (including Affiliates thereof) shall not exceed the greater of (a) 1.75% or (b) $15 million;

     (11) the sum of the Outstanding Asset Balances of all Eligible Assets that are Acquired Loans shall not exceed 25%;

     (12) the sum of the Outstanding Asset Balances of all Eligible Assets which have been included as part of the Collateral for eighteen (18) months or more shall not exceed 20%;

     (13) the sum of the Outstanding Asset Balances of all Eligible Assets where all or any portion of the Related Property is located outside of the United States and its territories and protectorates shall not exceed 15%;

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     (14) subject to the requirements of (1)(g) of the definition of Eligible Asset, the sum of the Outstanding Asset Balances of all Eligible Assets which provide for interest and principal payments in British Pounds Sterling, Euros or Canadian Dollars shall not exceed 10%; and

     (15) the sum of the Outstanding Asset Balances of all Loans which provide for payments of interest on a semi-annual basis shall not exceed the lesser of (a) 5% and (b) $20,000,000.

“Pool Rate”: As of any Determination Date, the annualized percentage equivalent of a fraction, (a) the numerator of which is equal to all Interest Collections on Assets included in the Aggregate Outstanding Asset Balance as of the first (1st) day of the Collection Period related to such Determination Date that are deposited into the Collection Account during such Collection Period, and (b) the denominator of which is equal to the Aggregate Outstanding Asset Balance as of the first (1st) day of such Collection Period.

“Pool Weighted Average Life”: At any point in time, the number obtained by (i) for each Asset included in the Borrowing Base as of such point in time, multiplying each Scheduled Payment by the number of months from such point in time until such Scheduled Payment is due; (ii) summing all of the products calculated pursuant to clause (i); (iii) dividing the sum calculated pursuant to clause (ii) by the sum of all successive Scheduled Payments due on all Assets included in the Borrowing Base as of such point in time; and (iv) dividing the amount calculated pursuant to clause (iii) by 12.

“Pool Yield”: On any day, the excess, if any, of (a) the Pool Rate on such day over (b) the sum of (i) the Interest Rate, (ii) the Program Fee Rate and (iii) the Servicing Fee Rate, in each case as of such day.

“Portfolio Aggregate Outstanding Asset Balance”: With respect to all Portfolio Assets, on any day, the sum of the Portfolio Outstanding Asset Balances of such Portfolio Assets on such date. Notwithstanding anything to the contrary contained herein, for purposes of determining the Portfolio Aggregate Outstanding Asset Balance, if any portion of a Portfolio Asset is deemed to be “charged-off” in accordance with the provisions of the definition of Charged-Off Portfolio Asset, then the entire Portfolio Asset shall have a zero (0) Outstanding Asset Balance, except for purposes of calculating the Average Portfolio Charged-Off Ratio.

“Portfolio Asset”: Any asset owned or serviced by the Originator (including each Asset). For the avoidance of doubt, the term Portfolio Asset shall not include any asset owned and/or serviced solely by one or more Affiliates of the Originator (but not by the Originator); provided that (i) such asset shall not have been originated or acquired by the Originator and (ii) such asset shall not be included in the consolidated financial statements of the Originator.

“Portfolio Charged-Off Ratio”: As of any Determination Date, the product of (i) twelve (12) and (ii) the percentage equivalent of a fraction, (a) the numerator of which is equal to the sum of the Portfolio Outstanding Asset Balances of all Portfolio Assets (excluding equity and preferred stock investments) that became Charged-Off Portfolio Asset (net of Recoveries during such Collection Period) during the Collection Period related to such Determination Date and (b) the

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denominator of which is equal to the Portfolio Aggregate Outstanding Asset Balance (excluding equity and preferred stock investments) as of the first (1st) day of the Collection Period related to such Determination Date; provided that, such calculation shall exclude the effects of any Liquid Real Estate Assets that are acquired and levered by the Originator solely to satisfy REIT asset and income tests.

“Portfolio Delinquency Ratio”: As of any Determination Date, the percentage equivalent of a fraction, (i) the numerator of which is equal to the sum of the Portfolio Outstanding Asset Balances of all Delinquent Portfolio Assets on such date and (ii) the denominator of which is equal to the Portfolio Aggregate Outstanding Asset Balance on such date; provided that, such calculation shall exclude the effects of any Liquid Real Estate Assets that are acquired and levered by the Originator solely to satisfy REIT asset and income tests.

“Portfolio Outstanding Asset Balance”: With respect to any Portfolio Asset, the sum of (i) the portion of all future Scheduled Payments becoming due under or with respect to such Portfolio Asset plus (ii) any past due Scheduled Payments with respect to such Portfolio Asset.

“Prepaid Asset”: Any Asset (other than a Charged-Off Asset) that was terminated or has been prepaid in full or in part prior to its scheduled expiration date.

“Prepayment Amount”: Defined in Section 6.4(b).

“Prepayments”: Any and all (i) partial or full prepayments on or with respect to an Asset (including, with respect to any Asset and any Collection Period, any Scheduled Payment, Finance Charge or portion thereof that is due in a subsequent Collection Period that the Servicer has received, and pursuant to the terms of Section 6.4(b) expressly permitted the related Obligor to make, in advance of its scheduled due date, and that will be applied to such Scheduled Payment on such due date), (ii) Recoveries, and (iii) Insurance Proceeds.

“Prime Rate”: (a) The rate announced by Wachovia from time to time as its prime rate in the United States, such rate to change as and when such designated rate changes, or (b) with respect to any Additional Purchaser, as otherwise specified by or on behalf of such Additional Purchaser in the applicable Additional Purchaser Agreement. The Prime Rate is not intended to be the lowest rate of interest charged by Wachovia or any other specified financial institution in connection with extensions of credit to debtors.

“Principal Collections”: Any and all amounts received in respect of any principal due and payable from or on behalf of Obligors that are deposited into the Principal Collections Account, or received by or on behalf of the Seller by the Servicer or Originator in respect of Assets, in the form of cash, checks, wire transfers, electronic transfers or any other form of cash payment.

“Principal Collections Account”: Defined in Section 6.4(f).

“Proceeds”: With respect to any Collateral, whatever is receivable or received when such Collateral is sold, liquidated, foreclosed, exchanged, or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes all rights to payment with respect to any insurance relating to such Collateral.

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“Program Fee”: (a) With respect to any Purchaser, as defined in the applicable Purchaser Fee Letter and (b) with respect to any Additional Purchaser, as defined in the applicable Additional Purchaser Fee Letter.

“Program Fee Rate”: (a) With respect to any Purchaser, the rate set forth in such Purchaser’s Purchaser Fee Letter and (b) with respect to any Additional Purchaser, the rate set forth in the applicable Additional Agent Fee Letter as the “Program Fee Rate.”

“Pro Rata Share”: (i) the percentage obtained by dividing each Purchaser’s, as applicable, Commitment (as determined under subsection (i)(a) of the definition of Commitment) by the aggregate Commitments of all the Purchasers (as determined under subsection (i)(a) of the definition of Commitment).

“Purchaser”: (i) VFCC, Park Avenue, Fairway and Three Pillars and (ii) any Additional Purchaser, as the context requires; and “Purchasers” means collectively (a) VFCC, Park Avenue, Fairway and Three Pillars and (b) the Additional Purchasers.

“Purchaser Agent”: The VFCC Agent, the Park Avenue Agent, the Fairway Agent and Three Pillars Agent or any Additional Agent, as the context requires; and “Purchaser Agents” means collectively the VFCC Agent, the Park Avenue Agent, the Fairway Agent and Three Pillars Agent and the Additional Agents.

“Purchaser Affiliate”: With respect to a Purchaser or Purchaser Agent, means any other Person that, directly or indirectly, controls, is controlled by or under common control with such Person. For purposes of this definition, “control” (including the terms “controlling,” “controlled by” and “under common control with”) when used with respect to any specified Person means the possession, direct or indirect, of the power to vote 50% or more of the voting securities of such Person or to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

“Purchaser Fee Letter”: Each Fee Letter Agreement, dated as of the date hereof, by and among the Seller, the Servicer, and the applicable Purchaser Agent, as amended, modified, waived, supplemented, restated or replaced from time to time.

“Qualified Institution”: Defined in Section 6.4(f).

“Qualified Transferee”:

     (a) The Seller, each Purchaser Agent and any Affiliate thereof, or the Administrative Agent or any Affiliate of the Administrative Agent; or

     (b) any other Person which:

     (i) has at least $50,000,000 in capital/statutory surplus or shareholders’ equity (except with respect to a pension advisory firm or similar fiduciary); and

     (ii) is regularly engaged in the business of making or owning commercial real estate loans or operating commercial real estate properties; and

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     (iii) is one of the following: (I) an insurance company, bank, savings and loan association, investment bank, trust company, commercial credit corporation, pension plan, pension fund, pension fund advisory firm, mutual fund, real estate investment trust, governmental entity or plan; (II) an investment company, money management firm or a “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act of 1933, as amended, or an “institutional accredited investor” within the meaning of Regulation D under the Securities Act of 1933, as amended; or (III) the trustee, collateral agent or administrative agent in connection with (x) a securitization of the subject Asset through the creation of collateralized debt or loan obligations or (y) an asset-backed commercial paper transaction funded by a commercial paper conduit whose commercial paper notes are rated at least “A-1” by S&P or at least “P-1” by Moody’s, or (z) a repurchase transaction funded by an entity which would otherwise be a Qualified Transferee so long as the “equity interest” (other than any nominal or de minimis equity interest) in the special purpose entity that issues notes or certificates in connection with any such collateralized debt or loan obligation, asset-backed commercial paper funded transaction or repurchase transaction is owned by one or more entities that are Qualified Transferees under subclauses (A) or (B) above; or (IV) any entity Controlled (as defined below) by any of the entities described in subclauses (i), (ii) or (iii) above.

For purposes of this definition only, “Control” means the ownership, directly or indirectly, in the aggregate of more than fifty percent (50%) of the beneficial ownership interests of an entity and the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of an entity, whether through the ability to exercise voting power, by contract or otherwise, and “Controlled” has the meaning correlative thereto.

“Quarterly Determination Date”: March 31, June 30, September 30 and December 31 of each calendar year.

“Rating Agency”: Each of S&P, Moody’s and any other rating agency that has been requested to issue a rating with respect to a Permitted Securitization Transaction.

“Records”: All documents relating to the Assets, including books, records and other information (including without limitation, computer programs, tapes, disks, punch cards, data processing software and related property and rights) executed in connection with the origination or acquisition of the Collateral or maintained with respect to the Collateral and the related Obligors that the Seller, the Originator or the Servicer have generated, in which the Seller, the Originator or the Servicer have acquired an interest pursuant to the Sale Agreement or in which the Seller, the Originator or the Servicer have otherwise obtained an interest.

“Recoveries”: As of the time any Related Property or any other related property is sold, discarded (after a determination by the Servicer that such Related Property or any other related property has little or no remaining value) or otherwise determined to be fully liquidated by the Servicer in accordance with the Credit and Collection Policy (or such similar policies and procedures utilized by the Servicer in servicing the Portfolio Assets) with respect to any Charged-Off Asset or Charged-Off Portfolio Asset, the proceeds from the sale of the Related Property or any other related property, the proceeds of any related Insurance Policy, any other recoveries with respect to such Charged-Off Asset or Charged-Off Portfolio Asset, the Related

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Property, any other related property, and amounts representing late fees and penalties, net of Liquidation Expenses and amounts, if any, received that are required under such Asset or Portfolio Asset, as applicable, to be refunded to the related Obligor.

“Register”: Defined in Section 13.16(d).

“Regulation U”: Regulation U of the Board of Governors of the Federal Reserve System, 12 C.F.R. §221, or any successor regulation.

“REIT”: A “real estate investment trust” as defined in Section 856(c)(5)(B) of the Code.

“Rejectable Offer”: Defined in clause 3(f) of the definition of Eligible Asset.

“Related Property”: With respect to an Asset, any property or other assets pledged as collateral to the Originator to secure repayment of such Asset, including all Proceeds from any sale or other disposition of such property or other assets.

“Related Security”: All of the Seller’s right, title and interest in and to:

     (a) any Related Property securing an Asset and all Recoveries related thereto;

     (b) all Required Asset Documents, Asset Files related to any Asset, Records, and the documents, agreements, and instruments included in the Asset File or Records, including without limitation, rights of recovery of the Seller against the Originator;

     (c) all Insurance Policies with respect to any Asset;

     (d) all security interests, liens, guaranties, warranties, letters of credit, accounts, bank accounts, mortgages or other encumbrances and property subject thereto from time to time purporting to secure or support payment of any Asset, together with all UCC financing statements or similar filings signed by an Obligor relating thereto;

     (e) the Collection Account, the Excess Spread Account, each Lock Box and all Lock Box Accounts, together with all cash and investments in each of the foregoing other than amounts earned on investments in the Lock Box Accounts;

     (f) any Hedging Agreement and any payment from time to time due thereunder;

     (g) the Sale Agreement and the assignment to the Administrative Agent of all UCC financing statements filed by the Seller against the Originator under or in connection with the Sale Agreement;

     (h) the “Assets” under and as defined in the Original Sale and Servicing Agreement; and

     (i) the proceeds of each of the foregoing.

“Replaced Asset”: Defined in Section 2.18(a).

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“Reporting Date”: The date that is two Business Days prior to each Payment Date.

“Required Advance Reduction Amount”: On any day, an amount equal to the positive difference, if any, of (a) Advances Outstanding on such day minus (b) the Maximum Availability on such day.

“Required Asset Documents”: With respect to (i) any Noteless Loan identified as a Noteless Loan on the Asset Checklist, a copy of the related Loan Register (together with a certificate of a Responsible Officer of the Servicer certifying to the accuracy of such Loan Register as of the date such Loan is included as a part of the Collateral), (ii) all Loans other than Noteless Loans, the duly executed original of the promissory note and an assignment (which may be by endorsement or allonge) of each such promissory note to the Seller and then the Administrative Agent, signed by an officer of the Originator and the Seller, respectively, (iii) any Loan, any related loan agreement and the Asset Checklist together with, to the extent set forth on the Asset Checklist, duly executed (if applicable) originals or copies of each of any related participation agreement, acquisition agreement, subordination agreement, intercreditor agreement, security agreements or similar instruments, UCC financing statements, guarantee, or Insurance Policy (iv) for each Loan secured by real property, an Assignment of Mortgage and (v) for any Loan identified as an Assigned Loan on the Asset Checklist, the duly executed original assignment agreement; provided that with respect to any Assigned Loan, any of the foregoing documents, other than any related promissory notes in the case of Assigned Loans only, may be copies.

“Required Equity Contribution”: On any day after the occurrence of a Termination Event or on the Termination Date and prior to the Collection Date when the Originator shall have received a Required Equity Contribution Notice, an amount equal to the excess, if any, of (a) the sum of the Outstanding Asset Balances of all Eligible Assets attributable to the three Obligors having the largest aggregate Outstanding Asset Balances of Eligible Assets included as part of the Collateral on such date (net of amounts in excess of applicable Pool Concentration Criteria calculated without duplication) over (b) the Minimum Overcollateralization Amount; provided that, in no event shall such amount exceed $75,000,000.

“Required Equity Contribution Notice”: A written demand by the Administrative Agent to the Originator specifying an amount equal to any payment obligation of the Seller then due and owing under this Agreement or any other Transaction Document, whether arising in respect of the Seller’s obligation to make payment of Advances Outstanding, Required Equity Shortfall, Interest, indemnification, fees, expenses or otherwise.

“Required Equity Shortfall”: On any day, the excess, if any, of the Required Equity Contribution over an amount equal to the excess, if any, of (a) the sum of (i) the Borrowing Base on such day plus (ii) all Principal Collections on deposit in the Principal Collections Account and all deposits in the Excess Spread Account on such day, over (b) the Advances Outstanding on such day.

“Required Reports”: Collectively, the Monthly Report, the Servicer’s Certificate required pursuant to Section 6.10(c), the financial statements of the Servicer required pursuant to Section 6.10(d), the annual statements as to compliance required pursuant to Section 6.11, and the annual independent public accountant’s report required pursuant to Section 6.12.

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“Residential Mortgage Policies and Procedures”: The written residential mortgage policies and procedures manual of CapitalSource Inc. attached hereto as Schedule V as it may be amended or supplemented from time to time.

“Responsible Officer”: With respect to any Person, any duly authorized officer of such Person with direct responsibility for the administration of this Agreement and also, with respect to a particular matter, any other duly authorized officer to whom such matter is referred because of such officer’s knowledge of and familiarity with the particular subject.

“Restricted Junior Payment”: (i) any dividend or other distribution, direct or indirect, on account of any class of membership interests of the Seller now or hereafter outstanding, except a dividend payment solely in interests of that class of membership interests or in any junior class of membership interests of the Seller; (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any class of membership interest of the Seller now or hereafter outstanding, (iii) any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire membership interests of Seller now or hereafter outstanding, and (iv) any payment of management fees by the Seller (except for reasonable management fees to the Originator or its Affiliates in reimbursement of actual management services performed).

“Retail Properties”: Includes retail stores, restaurants, bookstores, clothing stores and other similar Interests in Real Property used in one or more similar businesses.”

“Retained Interest”: (A) With respect to any Revolving Loan or any Loan with an unfunded commitment on the part of the Originator that does not provide by its terms that funding thereunder is in Originator’s sole and absolute discretion and that is transferred by the Originator to the Seller and/or by the Seller to the Purchasers, all of the obligations, if any, to provide additional funding with respect to such Revolving Loan, and (B) with respect to any Assigned Loan, any Participation Loan or any Agented Note that is transferred by the Originator to the Seller and/or by the Seller to the Purchasers, (i) all of the obligations, if any, of the agent(s) under the documentation evidencing such Assigned Loan, Participation Loan, or Agented Note and (ii) the applicable portion of the interests, rights and obligations under the documentation evidencing such Assigned Loan, Participation Loan, or Agented Note that relate to such portion(s) of the indebtedness that is owned by another lender or is being retained by the Originator pursuant to clause (A) of this definition.

“Retransfer Date”: Defined in Section 4.6.

“Replacement Notice”: Defined in Section 13.1(c).

“Replacement Purchaser”: Defined in Section 13.1(c).

“Revolving Loan”: A Loan that is a line of credit or contains an unfunded commitment arising from an extension of credit by the Originator to an Obligor, pursuant to the terms of which amounts borrowed may be repaid and subsequently reborrowed; provided that any such Loan shall exclude any Retained Interest.

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“Revolving Period”: The period commencing on the Closing Date and ending on the day immediately preceding the Termination Date.

“S&P”: Standard & Poor’s, a division of The McGraw Hill Companies, Inc., and any successor thereto.

“Sale Agreement”: The Amended and Restated Sale and Contribution Agreement, dated as of the date hereof, between the Originator and the Seller, as amended, modified, waived, supplemented, restated or replaced from time to time.

“Sale/Leaseback Loan”: Any Loan by the Originator to an SPE Obligor that is collateralized by real estate and the SPE Obligor’s rights under a Lease with an Underlying Lessee.

“Scheduled Payments”: With respect to any Loan, each monthly, quarterly, or annual payment of principal required to be made by the Obligor thereof under the terms of such Loan; in all cases, excluding any payment in the nature of, or constituting, interest.

“Secured Party”: (i) each Purchaser, (ii) the Administrative Agent and each Purchaser Agent, and (iii) each Hedge Counterparty that is either a Purchaser or an Affiliate of the VFCC Agent if that Affiliate is a Hedge Counterparty that executes a counterpart of this Agreement agreeing to be bound by the terms of this Agreement applicable to a Secured Party.

“Seller”: Defined in the Preamble of this Agreement.

“Senior Secured ABL Loan”: Any Revolving Loan that (i) is secured by a first priority Lien on all of the Obligor’s assets constituting Related Property for the Loan, (ii) provides the related Obligor with the option to receive additional borrowings thereunder based on the value of its eligible accounts receivable, residential mortgage receivables, inventory (other than real estate property or land) or equipment, (iii) has a Loan-to-Liquidation Value of less than or equal to (a) 85% with respect to the Related Property which constitutes accounts receivable, (b) 90% with respect to the Related Property which constitutes residential mortgage receivables, (c) 50% with respect to the Related Property which constitutes inventory (other than real estate property or land), and (d) 80% with respect to the Related Property which constitutes equipment, and (iii) provides that the payment obligation of the Obligor on such Loan is either senior to, or pari passu with, all other loans or financings to such Obligor.

“Senior Secured Loan”: Any Loan that (i) is secured by a first priority Lien on all of the Obligor’s assets constituting Related Property for the Loan, (ii) has a Loan-to-Value of not greater than 90%, and (iii) provides that the payment obligation of the Obligor on such Loan is either senior to, or pari passu with, all other loans or financings to such Obligor.

“Servicer”: CSE Mortgage, and each successor (in the same capacity) appointed as Successor Servicer pursuant to Section 6.16(a).

“Servicer Advance”: An advance of Scheduled Payments made by the Servicer pursuant to Section 6.5.

“Servicer Default”: Defined in Section 6.15.

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“Servicer Termination Notice”: Defined in Section 6.15.

“Servicer’s Certificate”: Defined in Section 6.10(c).

“Servicing Fee”: Defined in Section 2.14(b).

“Servicing Fee Rate”: 0.50% per annum for Eligible Assets which are not Workout Assets and 0.75% per annum for Workout Assets, without duplication.

“Solvent”: As to any Person at any time, having a state of affairs such that all of the following conditions are met: (a) the fair value of the property of such Person is greater than the amount of such Person’s liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated for purposes of Section 101(32) of the Bankruptcy Code; (b) the present fair salable value of the property of such Person in an orderly liquidation of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person is able to realize upon its property and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business; (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature; and (e) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person’s property would constitute unreasonably small capital.

“SPE Obligor”: An Obligor that (a) is organized as a bankruptcy remote, special purpose entity (as evidenced by an Opinion of Counsel in form and substance satisfactory to the Administrative Agent) and is not an operating company and (b) has as its primary assets real property and rights under a Lease.

“Subsidiary”: As to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly, through one or more intermediaries, or both, by such Person.

“Substitute Asset”: On any day, an Eligible Asset that meets each of the conditions for substitution set forth in Section 2.18.

“Successor Servicer”: Defined in Section 6.16(a).

“Tape”: Defined in Section 7.2(b)(ii).

“Taxes”: Any present or future taxes, levies, imposts, duties, charges, assessments or fees of any nature (including interest, penalties, and additions thereto) that are imposed by any Governmental Authority.

“Termination Date”: The earliest of (a) the date of the termination of the Facility Amount pursuant to Section 2.4, (b) the Business Day designated by the Seller to the Administrative

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Agent and each Purchaser Agent as the Termination Date at any time following two Business Days’ prior written notice thereof to the Administrative Agent and each Purchaser Agent, (c) April 25, 2008, (d) the date any Liquidity Agreement shall cease to be in full force and effect, (d) the date of the declaration of the Termination Date pursuant to Section 10.2(a) or the date of the automatic occurrence of the Termination Date pursuant to Section 10.2(b), and (e) the second Business Day prior to the Facility Termination Date.

“Termination Event”: Defined in Section 10.1.

“Term Loan”: A Loan that is a term loan that has been fully funded and does not contain any unfunded commitment on the part of the Originator arising from an extension of credit by the Originator to an Obligor.

“Three Pillars”: Three Pillars Funding LLC, a Delaware limited liability company, and its successors and assigns.

“Three Pillars Agent”: SunTrust Capital Markets, Inc., and its successors and assigns, or any other entity that has been appointed as the administrator of Three Pillars.

“Three Pillars Agent’s Account”: A special account (account number 8800171236) in the name of the Three Pillars Agent maintained at SunTrust Bank.

“Transaction”: Defined in Section 3.2.

“Transaction Documents”: The Agreement, the Sale Agreement, each Hedging Agreement, the Hedge Guaranty, the Lock-Box Agreement, the Intercreditor Agreement, each Variable Funding Certificate, each Purchaser Fee Letter, any Additional Agent Fee Letters, any Additional Purchaser Agreements, the Backup Servicer Fee Letter, the Collateral Custodian Fee Letter, any UCC financing statements filed pursuant to the terms of this Agreement, and any additional document the execution of which is necessary or incidental to carrying out the terms of the foregoing documents.

“Transferee Letter”: Defined in Section 13.16(a).

“Transition Expenses”: The reasonable costs (including reasonable attorneys’ fees) of the Backup Servicer incurred in connection with the transferring the servicing obligations under this Agreement and amending this Agreement to reflect such transfer in an amount not to exceed $100,000.

“UCC”: The Uniform Commercial Code as from time to time in effect in the applicable jurisdiction or jurisdictions.

“Underlying Instruments”: The indenture, loan agreement, credit agreement or other agreement pursuant to which a Loan has been issued or created and each other agreement that governs the terms of or secures the obligations represented by such Loan or of which the holders of such Loan are the beneficiaries.

“Underlying Lessee”: A lessee that is obligated on a Lease with an SPE Obligor.

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“United States”: The United States of America.

“Unmatured Termination Event”: Any event that, with the giving of notice or the lapse of time, or both, would become a Termination Event.

“US Bank Collection Account”: Account number 4346848296 maintained by the Originator at US Bank National Association.

“Variable Funding Certificate”: Defined in Section 2.1.

“VFCC”: Defined in the Recitals of this Agreement.

“VFCC Agent”: Defined in the Preamble of this Agreement.

“VFCC Agent’s Account”: A special account (account number 2000002391825) in the name of the VFCC Agent maintained at Wachovia.

“Voting Stock”: With respect to any Person, capital stock or membership interests (in the case of a limited liability company) issued by such Person the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such contingency.

“Wachovia”: Wachovia Bank, National Association, a national banking association in its individual capacity, and its successors and assigns.

“Warranty Asset”: Any Asset that fails to satisfy any criteria of the definition of Eligible Asset; provided that notwithstanding the foregoing, for purposes of determining what is a Warranty Asset, (i) the criteria set forth in clauses (1)(c), (1)(d), 1(m)(i), 1(t) (but solely to the extent the criteria in such clause 1(t) relates to any express representation and warranty that an Asset is an Eligible Asset), 1(w), 1(x), (1)(y) and clauses (2)(e) and 2(f) (but solely to the extent that the criteria in such clauses 2(e) and 2(f) would not be satisfied as a result of the operation of law or an effective court order in connection with an Insolvency Event) and clause (3)(i) of the definition of Eligible Asset and clauses (vii), (viii) and (ix) in the definition of Eligible Obligor shall apply only as of the applicable Cut-Off Date of such Asset, and (ii) with respect to any CS Funding III Asset, the criteria set forth in the definition of Eligible Asset and Eligible Obligor shall apply only as of the applicable CS Funding III Cut-Off Date (other than the criteria set forth in the definition of Eligible Asset clauses (1)(a), (b)(i), (d), (e), (f), (j), (k), (r), (cc), (ee) and (ff) which shall apply only as of the applicable Cut-Off Date).

“Warranty Event”: As to any Asset, the discovery that as of the related Cut-Off Date or Funding Date there had existed a breach of any representation or warranty relating to such Asset and the continuance of such breach through any applicable determination date or beyond any applicable cure period.

“WCM”: Defined in the Preamble of this Agreement.

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“Weighted Average Advance Rate”: For any Advances Outstanding on any day, the weighted average of the Advance Rates applicable to the Eligible Assets backing such Advances on such day, weighted according to the proportion of the Aggregate Outstanding Asset Balance each type of Asset represents.

“Workout Asset”: A Delinquent Asset or a Charged-Off Asset.

     Section 1.2 Other Terms.

     All accounting terms used but not specifically defined herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the State of New York, and used but not specifically defined herein, are used herein as defined in such Article 9.

     Section 1.3 Computation of Time Periods.

     Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding.”

     Section 1.4 Interpretation.

     In each Transaction Document, unless a contrary intention appears:

     (i) the singular number includes the plural number and vice versa;

     (ii) reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by the Transaction Documents;

     (iii) reference to any gender includes each other gender;

     (iv) reference to day or days without further qualification means calendar days;

     (v) reference to any time means Charlotte, North Carolina time;

     (vi) reference to any agreement (including any Transaction Document), document or instrument means such agreement, document or instrument as amended, modified, waived, supplemented, restated or replaced and in effect from time to time in accordance with the terms thereof and, if applicable, the terms of the other Transaction Documents, and reference to any promissory note includes any promissory note that is an extension or renewal thereof or a substitute or replacement therefor; and

     (vii) reference to any Applicable Law means such Applicable Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder and reference to any Section or other provision of any Applicable Law means that provision of such Applicable Law from time to time in effect and constituting the substantive amendment,

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modification, codification, replacement or reenactment of such Section or other provision.

     Section 1.5 Special Provisions Relating to Alternative Currency Loans.

     For purposes of (a) complying with any requirement of this Agreement stated in Dollars and (b) calculating any ratio or other test set forth in this Agreement, the amount of any Asset that is denominated in an Alternative Currency shall be deemed to be the Dollar Equivalent of such amount of Alternative Currency determined as of the date of such calculation including, without limitation, the following (together with any defined terms in which such defined terms are used): “Aggregate Outstanding Asset Balance”, “Borrowing Base”, “Pool Concentration Criteria”, “Hedge Percentage”, “Interest Collections”, “Outstanding Asset Balance”, “Permitted Investments”, “Portfolio Aggregate Outstanding Asset Balance”, “Portfolio Outstanding Asset Balance”, “Principal Collections”, “Scheduled Payment” and “Servicing Fee”.

ARTICLE II

PURCHASE OF THE VARIABLE FUNDING CERTIFICATES

     Section 2.1 The Variable Funding Certificates.

     (a) On the terms and conditions hereinafter set forth, Seller shall deliver a duly executed variable funding certificate (each such certificate, a “Variable Funding Certificate” or “VFC”), in substantially the form of Exhibit B-1 or B-2, as applicable, (i) on the Closing Date, to each Purchaser Agent at its address set forth on the signature pages of this Agreement, and (ii) on each date on which an Additional Purchaser purchases a Variable Funding Certificate, to the related Additional Agent at the address designated by such Additional Agent. Each Variable Funding Certificate shall evidence an undivided ownership interest (and the Seller does hereby sell, transfer, assign and convey such undivided ownership interest to the Purchasers) in the Collateral purchased by a Purchaser in an amount equal, at any time, to the percentage equivalent of a fraction (i) the numerator of which is the Advances outstanding under the applicable VFC on such day, and (ii) the denominator of which is the total aggregate Advances Outstanding on such day. Interest shall accrue, and each VFC shall be payable, as described herein. The VFC purchased by (1)(A) VFCC shall be in the name of “Wachovia Capital Markets, LLC, as the VFCC Agent” and shall be in the face amount equal to $400,000,000, (B) Fairway, shall be in the name of “Harris Nesbitt Corp., as the Fairway Agent” and shall be in the face amount equal to $200,000,000, (C) Park Avenue, shall be in the name of “JPMorgan Chase Bank, National Association, as the Park Avenue Agent” and shall be in the face amount equal to $200,000,000 and (D) Three Pillars, shall be in the name of “SunTrust Capital Markets, Inc., as the Three Pillars Agent” and shall be in the face amount equal to $200,000,000 and (2) an Additional Purchaser shall be in the name of such Additional Purchaser and shall be in a face amount to be determined; provided that the aggregate amount outstanding under all VFCs at any one time shall not exceed the Facility Amount.

     (b) On the terms and conditions hereinafter set forth, from the Closing Date to, but excluding the Termination Date, the Seller may, at its option, request the Purchasers to make advances of funds under the VFCs (each, an “Advance”) and the Purchasers shall make such

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Advance in an amount equal to their Pro Rata Share of such requested Advance; provided that, in no event shall the Purchasers make any Advance if, after giving effect to such Advance the aggregate Advances Outstanding hereunder would exceed the lesser of (i) the Facility Amount or (ii) the Maximum Availability. Notwithstanding anything contained in this Section 2.1 or elsewhere in this Agreement to the contrary, no Purchaser shall be obligated to provide its Purchaser Agent or the Seller with aggregate funds in connection with an Advance that would exceed such Purchaser’s unused Commitment then in effect. Each Advance made by the Purchasers hereunder is subject to the interests of the Hedge Counterparties under Section 2.9(a)(1) and Section 2.10(a)(2) of this Agreement.

     (c) [Reserved].

     (d) The Seller may, within sixty (60) days but not less than forty-five (45) days prior to the expiration of any Liquidity Agreement or this Agreement, by written notice to each Purchaser Agent, make a request (i) for each applicable Liquidity Bank to extend the term of such Liquidity Agreement for an additional period of 364 days and (ii) for each Purchaser Agent to extend the date set forth in clause (c) of the definition of Termination Date for an additional period of 364 days. Each Purchaser Agent will give prompt notice to the applicable Purchaser and each applicable Liquidity Bank of its receipt of such request, and each Purchaser and each Liquidity Bank shall make a determination, in their sole discretion, not less than fifteen (15) days prior to the expiration of the date set forth in clause (c) of the definition of Termination Date or the expiration of any Liquidity Agreement (as applicable) as to whether or not it will agree to the extension requested. The failure of a Purchaser Agent or a Liquidity Bank to provide timely notice of its decision to the Seller shall be deemed to constitute a refusal by such Purchaser or such Liquidity Bank (as applicable) to extend the date set forth in clause (c) of the definition of Termination Date or the term of the Liquidity Agreement, respectively. In the event the term of any Liquidity Agreement or the date set forth in clause (c) of the definition of Termination Date is not extended for a period of up to 364 days, the Termination Date shall be extended with the consent of each Purchaser Agent (such consent not to be unreasonably withheld) for a period of 90 days and notice of such termination shall be provided by the Administrative Agent to the Collateral Custodian, the Originator, the Seller and the Servicer. Only one such 90 day extension of the Termination Date, as described in this Section 2.1(d), may occur. The Seller confirms that each Liquidity Bank and each Purchaser, in their sole and absolute discretion, without regard to the value or performance of the Collateral or any other factor, may elect not to extend any Liquidity Agreement or the date set forth in clause (c) of the definition of Termination Date (as applicable).

     (e) The Seller may, with the written consent of the Administrative Agent, request that an existing Purchaser increase its Commitment in connection with a corresponding increase in the Facility Amount or, with the written consent of the Administrative Agent, add additional Persons as Purchasers; provided, that: (i) if the addition of any Purchaser or the increase of any Purchaser’s Commitment would cause the aggregate Commitments of the Purchasers to exceed $2,000,000,000, such addition or increase may be effected only with the consent of the Administrative Agent and each Purchaser Agent and (ii) the Commitment of any Purchaser may only be increased with the prior written consent of such Purchaser. Each new Purchaser and

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Purchaser Agent shall become a party hereto by executing and delivering to the Administrative Agent and the Seller an Additional Purchaser Agreement.

     (f) Notwithstanding anything to the contrary herein, each of the parties hereto hereby understands and agrees that:

     (i) any outstanding “Advances” (under and as defined in the Original Sale and Servicing Agreement) of any Purchaser that exist as of the Closing Date hereof shall, subject to the remainder of this Section 2.1(f), be deemed to be Advances outstanding for all purposes of this Agreement and the other Transaction Documents;

     (ii) any outstanding “Hedge Transactions” (under and as defined in the Original Sale and Servicing Agreement) of any Hedge Counterparty that exist as of the Closing Date hereof shall be deemed to be Hedge Transactions outstanding for all purposes of this Agreement and the other Transaction Documents; and

     (iii) until the date following the Closing Date when the outstanding Advances of each Purchaser (and on each subsequent date on which a Purchaser shall become a party to this Agreement) equal such Purchaser’s Pro Rata Share of all Advances Outstanding, the Seller shall request Advances, on a non-pro rata basis, from each Purchaser whose outstanding Advances do not yet equal their respective Pro Rata Share of all Advances Outstanding on the date so requested or that are becoming a party to this Agreement as of the Closing Date or such later date, as applicable, and shall use the proceeds of such Advances to reduce outstanding Advances of each other Purchaser until the respective outstanding Advances of each Purchaser equal such Purchaser’s Pro Rata Share of all Advances Outstanding.

     Section 2.2 [Reserved].

     Section 2.3 Procedures for Advances by Purchasers.

     (a) Each Advance from a Purchaser hereunder shall be effected by the Seller (or the Servicer on its behalf) delivering to the Administrative Agent and each Purchaser Agent (with a copy to the Collateral Custodian and the Backup Servicer) a duly completed Borrowing Notice (along with a Borrowing Base Certificate) no later than 2:00 p.m. (Charlotte, North Carolina time) at least one Business Day prior to the proposed Funding Date (provided however if the proposed Funding Date is not an Amsterdam Business Day, then the Funding Date shall be the next Business Day (which is also an Amsterdam Business Day) following such proposed Funding Date). Each Borrowing Notice (along with a Borrowing Base Certificate) shall (i) specify the desired amount of such Advance, which amount must be at least equal to $250,000 per Purchaser, (ii) specify the date of such Advance, (iii) specify the Assets to be financed on such Funding Date (including the appropriate file number, Outstanding Asset Balance for each Asset and identifying each Loan by type and whether such Loan is a Senior Secured ABL Loan, Senior Secured Loan, B-Note Loan, Mezzanine Loan, Acquired Loan, Assigned Loan, or

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Participation Loan) and (iv) include a representation that all conditions precedent for an Advance described in Article III hereof have been met. Each Borrowing Notice shall be irrevocable.

     (b) On the date of each Advance, each Purchaser shall, upon satisfaction of the applicable conditions set forth in Article III, make available to the Seller in same day funds, at such bank or other location reasonably designated by Seller in its Borrowing Notice given pursuant to this Section 2.3, an amount equal to its Pro Rata Share of the lesser of (i) the amount requested by the Seller for such Advance, (ii) an amount equal to the Availability on such Funding Date or (iii) the Facility Amount.

     (c) On each Funding Date, the obligation of each Purchaser to remit its Pro Rata Share of any such Advance shall be several from that of each other Purchaser and the failure of any Purchaser to so make such amount available to the Seller shall not relieve any other Purchaser of its obligation hereunder.

     Section 2.4 Reduction of the Facility Amount; Mandatory and Optional Repayments.

     (a) The Seller may, upon at least twenty (20) Business Days’ prior written notice (such notice to be received by the Administrative Agent and each Purchaser Agent no later than 5:00 p.m. (Charlotte, North Carolina time) on such day) to the Administrative Agent and each Purchaser Agent, terminate in whole or reduce in part the portion of the Facility Amount that exceeds the sum of the Advances Outstanding, accrued Interest, Breakage Costs and Hedge Breakage Costs; provided that each partial reduction of the Facility Amount shall be in an aggregate amount equal to at least $1,000,000. Each notice of reduction or termination pursuant to this Section 2.4(a) shall be irrevocable.

     (b) The Seller may, upon one Business Days’ prior written notice (such notice to be received by the Administrative Agent, each Hedge Counterparty and each Purchaser Agent no later than 2:00 p.m. (Charlotte, North Carolina time) on such day) to the Administrative Agent and each Purchaser Agent, reduce the Advances Outstanding by remitting, in accordance with their Pro Rata Share, to each Purchaser Agent, for payment to the respective Purchasers, (i) cash and (ii) instructions to reduce such Advances Outstanding, related accrued Interest, Breakage Costs and Hedge Breakage Costs; provided that no such reduction shall be given effect (1) unless the Seller has complied with the terms of any Hedging Agreement requiring that one or more Hedge Transactions be terminated in whole or in part as the result of any such reduction of the Advances Outstanding, and Seller has paid all Hedge Breakage Costs and any payments owing to the relevant Hedge Counterparty for any such termination (2) if a Termination Event or Unmatured Termination Event has occurred, is continuing or would result from such reduction. Any reduction of the Advances Outstanding shall be in a minimum amount of $500,000. Any such reduction will occur only if sufficient funds have been remitted to pay all such amounts in the succeeding sentence in full. Upon receipt of such amounts, the Purchaser Agents shall apply such amounts first to the pro rata reduction of the Advances Outstanding, second to the payment of related accrued Interest on the amount of the Advances Outstanding to be repaid by paying such amounts to the respective Purchasers, and third to the payment of any Breakage Costs and Hedge Breakage Costs and any other payments owing to the applicable Hedge Counterparty in

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respect of the termination of any Hedge Transaction. Any notice relating to any prepayment pursuant to this Section 2.4(b) shall be irrevocable.

     (c) If on any day (i) the Administrative Agent, as agent for the Secured Parties, does not own or have a valid and perfected first priority security interest in any of the Collateral or (ii) any Asset which has been represented by the Seller to be an Eligible Asset is later determined not to have been an Eligible Asset as of the related Cut-Off Date, upon the earlier of the Seller’s receipt of notice from the Administrative Agent or the Seller becoming aware thereof and the Seller’s failure to cure such breach within thirty (30) days, the Seller shall be deemed to have received on such day a collection (a “Deemed Collection”) of such Asset in full and shall on such day pay to the Administrative Agent, on behalf of the Purchasers and each Hedge Counterparty, an amount equal to (x) the Outstanding Asset Balance of the Asset to be applied to the pro rata reduction of the principal of each VFC plus (y) any Breakage Costs and Hedge Breakage Costs and any other payments owing to the applicable Hedge Counterparty in respect of the termination of any Hedge Transaction required as a result of the Deemed Collection and retransfer of the related Asset contemplated by this Section 2.4(c). In connection with any such Deemed Collection, the Administrative Agent, as agent for the Secured Parties, shall automatically and without further action, be deemed to transfer to the Seller, free and clear of any Lien created by the Administrative Agent, all of the right, title and interest of the Administrative Agent, as agent for the Secured Parties, in, to, and under the Asset with respect to which the Administrative Agent has received such Deemed Collection, but without any other representation and warranty of any kind, express or implied.

     Section 2.5 Determination of Interest.

     (a) Each Purchaser Agent shall determine such Purchaser’s CP Rate and the Interest (including unpaid Interest, if any, due and payable on a prior Payment Date) to be paid by the Seller with respect to each Advance on each Payment Date for the related Accrual Period and shall advise the Servicer thereof on or before the third (3rd) Business Day prior to such Payment Date.

     (b) Each Additional Agent shall determine such Additional Purchaser’s CP Rate and Interest (including unpaid Interest related to such CP Rate, if any, due and payable to a prior Payment Date) to be paid by the Seller with respect to each Advance on each Payment Date for the related Accrual Period and shall advise the Servicer thereof on or before the third (3rd) Business Day prior to such Payment Date.

     Section 2.6 Percentage Evidenced by each Variable Funding Certificate.

     The variable percentage ownership interest in the Collateral represented by each VFC shall be initially computed on its date of purchase. Thereafter, until the Termination Date, each VFC shall be automatically recomputed (or deemed to be recomputed) on each day prior to the Termination Date. The variable percentage ownership interest in the Collateral represented by each VFC as computed (or deemed recomputed) as of the close of business on the day immediately preceding the Termination Date shall remain constant at all times on and after the Termination Date. The variable percentage ownership interest in the Collateral represented by each VFC shall become zero when its Advances and Interest have been indefeasibly paid in full.

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     Section 2.7 [Reserved].

     Section 2.8 Notations on Variable Funding Certificates.

     Each Purchaser Agent is hereby authorized to enter on a schedule attached to the VFC a notation (which may be computer generated) with respect to each Advance under the VFC made by the related Purchaser of: (a) the date and principal amount thereof, and (b) each repayment of principal thereof, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. The failure of any Purchaser Agent to make any such notation on the schedule attached to the VFC shall not limit or otherwise affect the obligation of the Seller to repay the Advances in accordance with their respective terms as set forth herein.

     Section 2.9 Settlement Procedures During the Revolving Period.

     (a) On each Payment Date during the Revolving Period, the Servicer shall direct the Collateral Custodian to pay pursuant to the Monthly Report to the following Persons, from (1) the Collection Account, to the extent of Available Funds, and (2) Servicer Advances received with respect to the immediately preceding Collection Period that ended on the last day of the calendar month immediately preceding the calendar month in which such Payment Date occurs, the following amounts in the following order of priority:

     (1) pro rata to each Hedge Counterparty, any amounts, (other than any Hedge Breakage Costs and any payments due in respect of the termination of any Hedging Transaction), owing to that Hedge Counterparty under its respective Hedging Agreement in respect of any Hedge Transaction(s), for the payment thereof;

     (2) to the Servicer, in an amount equal to any unreimbursed Servicer Advances, for the payment thereof;

     (3) to the Servicer, in an amount equal to any accrued and unpaid Servicing Fees to the end of the preceding Collection Period, for the payment thereof;

     (4) to the extent not paid for by the Originator, pro rata to the Backup Servicer and the Collateral Custodian, in an amount equal to any accrued and unpaid Backup Servicing Fees, Collateral Custodian Fees and Transition Expenses, for the payment thereof;

     (5) to each Purchaser Agent, pro rata in accordance with the amount of Advances Outstanding hereunder for the account of the applicable Purchaser, in an amount equal to any accrued and unpaid Interest, Program Fee, Commitment Fee and Breakage Costs, for the payment thereof;

     (6) to each Purchaser Agent, if the Required Advance Reduction Amount is greater than zero, an amount necessary to reduce the Required Advance Reduction Amount to zero, pro rata in accordance with the amount of Advances Outstanding hereunder for the account of the applicable Purchaser, for the payment thereof;

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     (7) pro rata to each Hedge Counterparty, any Hedge Breakage Costs and payments due in termination of any Hedge Transaction, owing to that Hedge Counterparty under its respective Hedging Agreement, for the payment thereof;

     (8) to the Administrative Agent, each Purchaser Agent, the applicable Purchaser, the Backup Servicer, the Collateral Custodian, the Affected Parties, the Indemnified Parties or the Secured Parties, pro rata in accordance with the amount owed to such Person under this clause (8), all other amounts, including Increased Costs but other than Advances Outstanding, then due under this Agreement, for the payment thereof; and

     (9) any remaining amount shall be distributed to the Seller.

     (b) On the terms and conditions hereinafter set forth, from time to time during the Revolving Period, the Servicer may, to the extent of any Principal Collections on deposit in the Principal Collections Account, withdraw such funds for the purpose of reinvesting in additional Eligible Assets, provided the following conditions are satisfied:

     (i) all conditions precedent set forth in Section 3.2(b) have been satisfied;

     (ii) the Servicer provides same day written notice to the Administrative Agent and Collateral Custodian by facsimile (to be received no later than 2:00 p.m. (Charlotte, North Carolina time) on such day) of the request to withdraw Principal Collections and the amount thereof;

     (iii) the notice required in clause (ii) above shall be accompanied by a Borrowing Notice in the form of Exhibit A-2 and a Borrowing Base Certificate and the same are executed by the Seller and at least one Responsible Officer of the Servicer;

     (iv) the Collateral Custodian provides to the Administrative Agent by facsimile (to be received no later than 2:00 p.m. (Charlotte, North Carolina time) on that same date) a statement reflecting the total amount on deposit on such day in the Principal Collections Account; and

     (v) upon the satisfaction of the conditions set forth in clauses (i) through (iv) above, and the Administrative Agent’s confirmation of available funds, the Administrative Agent will instruct the Collateral Custodian by facsimile on such day to release funds from the Principal Collections Account to the Servicer in an amount not to exceed the lesser of (A) the amount requested by the Servicer and (B) the amount on deposit in the Principal Collections Account on such day.

     Section 2.10 Settlement Procedures During the Amortization Period.

          (a) On each Payment Date during the Amortization Period, the Servicer shall direct the Collateral Custodian to pay pursuant to the Monthly Report to the following Persons, (i) from the Collection Account, to the extent of Available Funds, (ii) in the case of payments solely for purposes of clause (6), from the Excess Spread Account to the extent of any amounts on deposit

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therein, and (iii) from Servicer Advances received with respect to the immediately preceding Collection Period, the following amounts in the following order of priority:

     (1) pro rata to each Hedge Counterparty, any amounts, (including any Hedge Breakage Costs and any payments due in respect of the termination of any Hedge Transaction in an amount not to exceed $250,000 in the aggregate for all Hedging Agreements), owing to that Hedge Counterparty under its respective Hedging Agreement in respect of any Hedge Transaction(s), for the payment thereof;

     (2) to the Servicer, in an amount equal to any unreimbursed Servicer Advances, for the payment thereof;

     (3) to the Servicer, in an amount equal to any accrued and unpaid Servicing Fees to the end of the preceding Collection Period, for the payment thereof;

     (4) to the extent not paid for by the Originator, pro rata to the Backup Servicer and the Collateral Custodian, in an amount equal to any accrued and unpaid Backup Servicing Fees, Collateral Custodian Fees and Transition Expenses, for the payment thereof;

     (5) to each Purchaser Agent, pro rata in accordance with the amount of Advances Outstanding hereunder for the account of the applicable Purchaser, in an amount equal to any accrued and unpaid Interest, Program Fee, Commitment Fee and Breakage Costs, for the payment thereof;

     (6) to each Purchaser Agent, pro rata in accordance with the amount of Advances Outstanding hereunder for the account of the applicable Purchaser, in an amount necessary to reduce the Advances Outstanding and Aggregate Unpaids to zero, for the payment thereof;

     (7) pro rata to each Hedge Counterparty, any Hedge Breakage Costs and payments due in termination of any Hedge Transaction, owing to that Hedge Counterparty under its respective Hedging Agreement to the extent not reimbursed pursuant to clause (1) above, for the payment thereof;

     (8) to the Administrative Agent, each Purchaser Agent, the applicable Purchaser, the Backup Servicer, the Collateral Custodian, the Affected Parties, the Indemnified Parties or the Secured Parties, pro rata in accordance with the amount owed to such Person under this clause (8), all other amounts, including Increased Costs but other than Advances Outstanding, then due under this Agreement, for the payment thereof; and

     (9) any remaining amount shall be distributed to the Seller.

     Section 2.11 Collections and Allocations.

     (a) Collections. The Servicer shall promptly identify any collections received as being on account of Interest Collections, Principal Collections or other Collections and shall

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transfer, or cause to be transferred, all Collections received directly by it or on deposit in the form of available funds in the Lock-Box Accounts to the Collection Account by the close of business on the second (2nd) Business Day after such Collections are received. In transferring Collections to the Collection Account, the Servicer shall segregate Principal Collections and transfer the same to the corresponding Principal Collections Account. The Servicer shall make such deposits or payments on the date indicated therein by wire transfer, in immediately available funds. The Servicer shall further include a statement as to the amount of Principal Collections and Interest Collections on deposit in the Collection Account on each Reporting Date in the Monthly Report delivered pursuant to Section 6.10(b).

     (b) Initial Deposits. On the Closing Date and on each Addition Date thereafter, the Servicer will deposit (in immediately available funds) into the Collection Account all Collections received after the applicable Cut-Off Date and through and including the Closing Date or Addition Date, as the case may be, in respect of Eligible Assets being transferred to and included as part of the Collateral on such date.

     (c) Excluded Amounts. With the prior written consent of the Administrative Agent and each Purchaser Agent, which consent shall not be unreasonably withheld (a copy of which will be provided by the Servicer to the Backup Servicer), the Servicer may withdraw from the Collection Account any deposits thereto constituting Excluded Amounts if the Servicer has, prior to such withdrawal and consent, delivered to the Administrative Agent and each Purchaser Agent a report setting forth the calculation of such Excluded Amounts in a format satisfactory to the Administrative Agent and each Purchaser Agent in their sole discretion.

     (d) Investment of Funds. Until the occurrence of a Termination Event, to the extent there are uninvested amounts deposited in the Collection Account, all amounts shall be invested in Permitted Investments selected by the Servicer that mature no later than the Business Day immediately preceding the next Payment Date; from and after the occurrence of a Termination Event, to the extent there are uninvested amounts in the Collection Account (net of losses and investment expenses), all amounts may be invested in Permitted Investments selected by the Administrative Agent that mature no later than the Business Day immediately preceding the next Payment Date. All earnings (net of losses and investment expenses) thereon shall be retained or deposited into the Collection Account and shall be applied pursuant to the provisions of Section 2.9 and Section 2.10.

     Section 2.12 Payments, Computations, Etc.

     (a) Unless otherwise expressly provided herein, all amounts to be paid or deposited by the Seller or the Servicer hereunder shall be paid or deposited in accordance with the terms hereof no later than 2:00 p.m. (Charlotte, North Carolina time) on the day when due in lawful money of the United States in immediately available funds to the applicable Purchaser Agent’s Account and if not received before such time shall be deemed received on the next Business Day. The Seller shall, to the extent permitted by law, pay to the Secured Parties interest on all amounts not paid or deposited when due hereunder at 2% per annum above the Base Rate, payable on demand; provided that such interest rate shall not at any time exceed the maximum rate permitted by Applicable Law. Such interest shall be for the account of, and distributed to, each applicable Purchaser. All computations of interest and all computations of Interest and

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other fees hereunder shall be made on the basis of a year consisting of 360 days (other than calculations with respect to the Base Rate which shall be based on a year consisting of 365 or 366 days, as applicable) for the actual number of days (including the first but excluding the last day) elapsed.

     (b) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of Interest or any fee payable hereunder, as the case may be. For avoidance of doubt, to the extent that Available Funds are insufficient on any Payment Date to satisfy the full amount of any Increased Costs pursuant to Section 2.9(a)(8) or Section 2.10(a)(8), such unpaid amounts shall remain due and owing and shall accrue Interest until repaid in full.

     (c) If any Advance requested by the Seller and approved by the applicable Purchaser and the Purchaser Agents, pursuant to Section 2.3 is not, for any reason made or effectuated, as the case may be, on the date specified therefor, the Seller shall indemnify the applicable Purchaser against any reasonable loss, cost or expense incurred by the applicable Purchaser including, without limitation, any loss (including loss of anticipated profits, net of anticipated profits in the reemployment of such funds in the manner determined by each Purchaser), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the applicable Purchaser to fund or maintain such Advance.

     Section 2.13 Optional Repurchase.

     At any time following the Termination Date when the Borrowing Base is less than fifteen (15%) percent of the Borrowing Base as of the Termination Date, the Seller may notify the Administrative Agent and each Purchaser Agent in writing of its intention to purchase all remaining Collateral; provided that all Hedge Transactions have been terminated in accordance with their terms. On the Payment Date next succeeding any such notice, the Seller shall purchase all such Collateral for a price equal to the Aggregate Unpaids and the proceeds of such purchase will be deposited into the Collection Account and paid in accordance with Section 2.10.

     Section 2.14 Fees.

     (a) The Servicer on behalf of the Seller shall pay in accordance with Section 2.9(a)(5) and Section 2.10(a)(5), as applicable, to the applicable Purchaser Agent from the Collection Account to the extent funds are available on each Payment Date, monthly in arrears, the applicable Program Fee and the applicable Commitment Fee agreed to between the Seller and such Purchaser Agent in the relevant Purchaser Fee Letter and the relevant Additional Agent Fee Letter, as applicable.

     (b) The Servicer shall be entitled to receive a fee (the “Servicing Fee”), monthly in arrears in accordance with Section 2.9(a)(3) and Section 2.10(a)(3), as applicable, which fee shall be equal to the sum of (a) the product of (i) the Servicing Fee Rate applicable to Eligible Assets which are not Workout Assets, (ii) the Aggregate Outstanding Asset Balance (excluding Workout Assets), as of the first day of the immediately preceding Collection Period and (iii) the actual number of days in such Collection Period divided by 360, and (b) the product of (i) the

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Servicing Fee Rate applicable to Workout Assets, (ii) the sum of the Outstanding Asset Balances of all Workout Assets, as of the first day of the immediately preceding Collection Period and (iii) the actual number of days in such Collection Period divided by 360.

     (c) The Backup Servicer shall be entitled to receive the Backup Servicing Fee in accordance with Section 2.9(a)(4) and Section 2.10(a)(4), as applicable.

     (d) The Collateral Custodian shall be entitled to receive the Collateral Custodian Fee in accordance with Section 2.9(a)(4) and Section 2.10(a)(4), as applicable.

     (e) The Seller shall pay to Dechert LLP as counsel to the Administrative Agent, on the Closing Date, its reasonable estimated fees and out-of-pocket expenses in immediately available funds and shall pay all additional reasonable fees and out-of-pocket expenses of Dechert LLP within thirty (30) Business Days after receiving an invoice for such amounts.

     Section 2.15 Increased Costs; Capital Adequacy; Illegality.

     (a) If either (i) the introduction of or any change (including, without limitation, any change by way of imposition or increase of reserve requirements) in or in the interpretation of any law or regulation or (ii) the compliance by an Affected Party with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), shall (a) subject an Affected Party to any Tax (except for Taxes on the overall net income of such Affected Party), duty or other charge with respect to any ownership interest in the Collateral, or any right to make Advances hereunder, or on any payment made hereunder, (b) impose, modify or deem applicable any reserve requirement (including, without limitation, any reserve requirement imposed by the Board of Governors of the Federal Reserve System, but excluding any reserve requirement, if any, included in the determination of Interest), special deposit or similar requirement against assets of, deposits with or for the amount of, or credit extended by, any Affected Party or (c) impose any other condition affecting the ownership interest in the Collateral conveyed to the Purchasers hereunder or the Purchasers’ rights hereunder, the result of which is to increase the cost to any Affected Party or to reduce the amount of any sum received or receivable by an Affected Party under this Agreement, then within ten days after demand by such Affected Party (which demand shall be accompanied by a statement setting forth the basis for such demand), the Servicer shall pay (and to the extent the Servicer does not make such payment the Seller shall pay) directly to such Affected Party such additional amount or amounts as will compensate such Affected Party for such additional or increased cost incurred or such reduction suffered.

     (b) If either (i) the introduction of or any change in or in the interpretation of any law, guideline, rule, regulation, directive or request or (ii) compliance by any Affected Party with any law, guideline, rule, regulation, directive or request from any central bank or other governmental authority or agency (whether or not having the force of law), including, without limitation, compliance by an Affected Party with any request or directive regarding capital adequacy, has or would have the effect of reducing the rate of return on the capital of any Affected Party as a consequence of its obligations hereunder or arising in connection herewith to a level below that which any such Affected Party could have achieved but for such introduction, change or compliance (taking into consideration the policies of such Affected Party with respect to capital

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adequacy) by an amount deemed by such Affected Party to be material, then from time to time, within ten days after demand by such Affected Party (which demand shall be accompanied by a statement setting forth the basis for such demand), the Servicer shall pay (and to the extent the Servicer does not make such payment the Seller shall pay) directly to such Affected Party such additional amount or amounts as will compensate such Affected Party for such reduction. For the avoidance of doubt, if the issuance of Interpretation No. 46 by the Financial Accounting Standards Board or any other change in accounting standards or the issuance of any other pronouncement, release or interpretation, causes or requires the consolidation of all or a portion of the assets and liabilities of the Originator or Seller with the assets and liabilities of the Administrative Agent, any Purchaser Agent, any Purchaser or any Liquidity Bank, such event shall constitute a circumstance on which such Affected Party may base a claim for reimbursement under this Section 2.15.

     (c) If as a result of any event or circumstance similar to those described in clause (a) or (b) of this Section 2.15, any Affected Party is required to compensate a bank or other financial institution providing liquidity support, credit enhancement or other similar support to such Affected Party in connection with this Agreement or the funding or maintenance of Advances hereunder, then within ten days after demand by such Affected Party, the Servicer shall pay (or to the extent the Servicer does not make such payment the Seller shall pay) to such Affected Party such additional amount or amounts as may be necessary to reimburse such Affected Party for any amounts payable or paid by it.

     (d) In determining any amount provided for in this Section 2.15, the Affected Party may use any reasonable averaging and attribution methods. Any Affected Party making a claim under this Section 2.15 shall submit to the Servicer a written description as to such additional or increased cost or reduction and the calculation thereof, which written description shall be conclusive absent demonstrable error.

     (e) If the applicable Purchaser shall notify their respective Purchaser Agent that a Eurodollar Disruption Event as described in clause (a) of the definition of “Eurodollar Disruption Event” has occurred, the applicable Purchaser Agent shall in turn so notify the Seller, whereupon all Advances Outstanding of the affected Purchaser in respect of which Interest accrues at the Adjusted Eurodollar Rate shall immediately be converted into Advances Outstanding in respect of which Interest accrues at the Base Rate.

     Section 2.16 Taxes.

     (a) All payments made by an Obligor in respect of an Asset and all payments made by the Seller or the Servicer under this Agreement will be made free and clear of and without deduction or withholding for or on account of any Taxes. If any Taxes are required to be withheld from any amounts payable to the Administrative Agent, the Purchaser Agents, any Affected Party or any Secured Party, then the amount payable to such Person will be increased (such increase, the “Additional Amount”) such that every net payment made under this Agreement after withholding for or on account of any Taxes (including, without limitation, any Taxes on such increase) is not less than the amount that would have been paid had no such deduction or withholding been deducted or withheld. The foregoing obligation to pay Additional Amounts, however, will not apply with respect to net income or franchise taxes imposed on the

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Purchasers, any Affected Party, the Administrative Agent or the Purchaser Agents, respectively, with respect to payments required to be made by the Seller or Servicer under this Agreement, by a taxing jurisdiction in which the Purchasers, any Affected Party, the Administrative Agent or the Purchaser Agents, are organized, conducts business or is paying taxes (as the case may be).

     (b) The Servicer will indemnify (and to the extent the indemnification provided by the Servicer is insufficient the Seller will indemnify) each Affected Party for the full amount of Taxes payable by such Person in respect of Additional Amounts and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. All payments in respect of this indemnification shall be made within ten days from the date a written invoice therefor is delivered to the Seller.

     (c) Within thirty (30) days after the date of any payment by the Seller and the Servicer of any Taxes, the Seller and the Servicer will furnish to the Administrative Agent and each of the Purchaser Agents at its address set forth under its name on the signature pages hereof, appropriate evidence of payment thereof.

     (d) If a Purchaser is not created or organized under the laws of the United States or a political subdivision thereof, such Purchaser shall deliver to the Seller, with a copy to the Administrative Agent, (i) within fifteen (15) days after the date hereof, two (or such other number as may from time to time be prescribed by Applicable Laws) duly completed copies of IRS Form W-8BEN or Form W-8ECI (or any successor forms or other certificates or statements that may be required from time to time by the relevant United States taxing authorities or Applicable Laws), as appropriate, to permit the Seller to make payments hereunder for the account of such Purchaser without deduction or withholding of United States federal income or similar Taxes and (ii) upon the obsolescence of or after the occurrence of any event requiring a change in, any form or certificate previously delivered pursuant to this Section 2.16(d), copies (in such numbers as may from time to time be prescribed by Applicable Laws or regulations) of such additional, amended or successor forms, certificates or statements as may be required under Applicable Laws or regulations to permit the Seller and the Servicer to make payments hereunder for the account of such Purchaser without deduction or withholding of United States federal income or similar Taxes.

     (e) If, in connection with an agreement or other document providing liquidity support, credit enhancement or other similar support to the Purchasers in connection with this Agreement or the funding or maintenance of Advances hereunder, the Purchasers are required to compensate a bank or other financial institution in respect of Taxes under circumstances similar to those described in this Section 2.16, then, within ten days after demand by the Purchasers, the Servicer shall pay (or to the extent the Servicer does not make such payment the Seller shall pay) to the Purchasers such additional amount or amounts as may be necessary to reimburse the Purchasers for any amounts paid by them.

     (f) Without prejudice to the survival of any other agreement of the Seller and the Servicer hereunder, the agreements and obligations of the Seller and the Servicer contained in this Section 2.16 shall survive the termination of this Agreement.

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     Section 2.17 Assignment of the Sale Agreement.

     The Seller hereby assigns to the Administrative Agent, for the ratable benefit of the Secured Parties hereunder, all of the Seller’s right, title and interest in and to, but none of its obligations under, the Sale Agreement and any UCC financing statements filed under or in connection therewith. In furtherance and not in limitation of the foregoing, the Seller hereby assigns to the Administrative Agent for the benefit of the Secured Parties its right to indemnification under Article VIII of the Sale Agreement. The Seller confirms that the Administrative Agent on behalf of the Secured Parties shall have the sole right to enforce the Seller’s rights and remedies under the Sale Agreement and any UCC financing statements filed under or in connection therewith for the benefit of the Secured Parties.

     Section 2.18 Substitution of Assets.

     On any day prior to the occurrence of a Termination Event (and after the Termination Date at the discretion of the Administrative Agent with the consent of the Purchaser Agents), the Seller may, subject to the conditions set forth in this Section 2.18 and subject to the other restrictions contained herein, replace any Asset with one or more Eligible Assets (each, a “Substitute Asset”); provided that no such replacement shall occur unless each of the following conditions is satisfied as of the date of such replacement and substitution:

     (a) the Seller has recommended to the Administrative Agent (with a copy to the Collateral Custodian) in writing that the Asset to be replaced should be replaced (each a “Replaced Asset”);

     (b) each Substitute Asset is an Eligible Asset on the date of substitution;

     (c) after giving effect to any such substitution, the Advances Outstanding do not exceed the lesser of (i) the Facility Amount and (ii) the Maximum Availability;

     (d) for purposes only of substitutions pursuant to Section 4.6 undertaken because an Asset has become a Warranty Asset, the aggregate Outstanding Asset Balance of such Substitute Assets shall be equal to or greater than the aggregate Outstanding Asset Balances of the Replaced Assets;

     (e) for purposes only of substitutions pursuant to Section 4.6 undertaken because an Asset has become a Warranty Asset, such Substitute Assets, at the time of substitution by the Seller, shall have no greater weighted average life than the Replaced Asset;

     (f) all representations and warranties of the Seller contained in Section 4.1 and Section 4.2 shall be true and correct as of the date of substitution of any such Substitute Asset;

     (g) the substitution of any Substitute Asset does not cause a Termination Event or Unmatured Termination Event to occur;

     (h) the sum of the Outstanding Asset Balance of all Assets that are Substitute Assets does not exceed 20% of the Facility Amount, calculated on an annualized basis commencing with the Closing Date;

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     (i) the sum of the Outstanding Asset Balance of all Substitute Assets substituted for Delinquent Assets, Charged-Off Assets and Warranty Assets shall not exceed 10% of the Facility Amount, calculated on an annualized basis commencing with the Closing Date;

     (j) the Seller shall deliver to the Administrative Agent on the date of such substitution a certificate of a Responsible Officer certifying that each of the foregoing is true and correct as of such date; and

     (k) each Asset that is replaced pursuant to the terms of this Section 2.18 shall be substituted only with another Asset that meets the foregoing conditions.

     In addition, the Seller shall in connection with such substitution deliver to the Collateral Custodian the related Required Asset Documents. In connection with any such substitution, the Administrative Agent, as agent for the Secured Parties, shall, automatically and without further action, be deemed to transfer to the Seller, free and clear of any Lien created pursuant to this Agreement, all of the right, title and interest of the Administrative Agent, as agent for the Secured Parties, in, to and under such Replaced Asset, but without any representation and warranty of any kind, express or implied.

     Section 2.19 Optional Sales.

     (a) On any Optional Sale Date, the Seller shall have the right to prepay all or a portion of the Advances Outstanding in connection with the sale and assignment to the Seller by the Administrative Agent, on behalf of the Secured Parties, of the Collateral (each, an “Optional Sale”), subject to the following terms and conditions:

     (i) The Seller shall have given the Administrative Agent at least ten (10) Business Days’ prior written notice of its intent to effect an Optional Sale, unless such notice is waived or reduced by the Administrative Agent;

     (ii) Any Optional Sale shall be in connection with a Permitted Securitization Transaction;

     (iii) Unless an Optional Sale is to be effected on a Payment Date (in which case the relevant calculations with respect to such Optional Sale shall be reflected on the applicable Monthly Report), the Servicer shall deliver to the Administrative Agent a certificate and evidence to the reasonable satisfaction of the Administrative Agent (which evidence may consist solely of a certificate from the Servicer) that the Seller shall have sufficient funds on the related Optional Sale Date to effect the contemplated Optional Sale in accordance with this Agreement. In effecting an Optional Sale, the Seller may use the Proceeds of sales of the Collateral;

     (iv) After giving effect to the Optional Sale and the assignment to the Seller of the Collateral on any Optional Sale Date, (a) the remaining Advances Outstanding shall not exceed the lesser of the Facility Amount and the Maximum Availability, (b) the representations and warranties contained in Section 4.1 hereof shall continue to be correct in all material respects, except to the extent relating to an earlier date, (c) the eligibility of any Asset remaining as part of the Collateral after the Optional Sale will be redetermined

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as of the Optional Sale Date, (d) the Pool Concentration Criteria will be redetermined as of the Optional Sale Date, and (e) neither an Unmatured Termination Event nor a Termination Event shall have resulted;

     (v) On the related Optional Sale Date, the Administrative Agent, each Purchaser Agent, on behalf of the applicable Purchaser and the Hedge Counterparties, shall have received, as applicable, in immediately available funds, an amount equal to the sum of (a) the portion of the Advances Outstanding to be prepaid plus (b) an amount equal to all unpaid Interest to the extent reasonably determined by the Administrative Agent and the Purchaser Agents to be attributable to that portion of the Advances Outstanding to be paid in connection with the Optional Sale plus (c) an aggregate amount equal to the sum of all other amounts due and owing to the Administrative Agent, the Collateral Custodian, the Backup Servicer, the Purchaser Agents, the applicable Purchaser, the Affected Parties and the Hedge Counterparties, as applicable, under this Agreement and the other Transaction Documents, to the extent accrued to such date and to accrue thereafter (including, without limitation, Breakage Costs, Hedge Breakage Costs and any other payments owing to the applicable Hedge Counterparty in respect of the termination of any Hedge Transaction); provided that the Administrative Agent and each Purchaser Agent shall have the right to determine whether the amount paid (or proposed to be paid) by the Seller on the Optional Sale Date is sufficient to satisfy the requirements of clauses (iii), (iv) and (v) and is sufficient to reduce the Advances Outstanding to the extent requested by the Seller in connection with the Optional Sale; and

     (vi) On or prior to each Optional Sale Date, the Seller shall have delivered to the Administrative Agent a list specifying all Assets to be sold and assigned pursuant to such Optional Sale.

     (b) In connection with any Optional Sale, following receipt by the Purchaser Agents of the amounts referred to in clause (v) above, there shall be sold and assigned to the Seller without recourse, representation or warranty all of the right, title and interest of the Administrative Agent, the Purchaser Agents, the Purchasers and the Secured Parties in, to and under the portion of the Collateral so retransferred and such portion of the Collateral so retransferred shall be released from the Lien of this Agreement (subject to the requirements of clause (iv) above).

     (c) The Seller hereby agrees to pay the reasonable legal fees and expenses of the Administrative Agent, each Purchaser Agent and the Secured Parties in connection with any Optional Sale (including, but not limited to, expenses incurred in connection with the release of the Lien of the Administrative Agent, the Secured Parties and any other party having an interest in the Collateral in connection with such Optional Sale).

     (d) In connection with any Optional Sale, on the related Optional Sale Date, the Administrative Agent, on behalf of the Secured Parties, shall, at the expense of the Seller (i) execute such instruments of release with respect to the portion of the Collateral to be retransferred to the Seller, in recordable form if necessary, in favor of the Seller as the Seller may reasonably request, (ii) deliver any portion of the Collateral to be retransferred to the Seller

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in its possession to the Seller and (iii) otherwise take such actions, and cause or permit the Collateral Custodian to take such actions, as are necessary and appropriate to release the Lien of the Administrative Agent and the Secured Parties on the portion of the Collateral to be retransferred to the Seller and release and deliver to the Seller such portion of the Collateral to be retransferred to the Seller.

     Section 2.20 Discretionary Sales.

     Prior to the occurrence of an Unmatured Termination Event or a Termination Event, on any Discretionary Sale Date, the Seller shall have the right to prepay all or a portion of the Advances Outstanding in connection with the transfer and assignment to the Seller by the Administrative Agent, on behalf of the Secured Parties, of the Collateral (each, a “Discretionary Sale”), subject to the following terms and conditions:

     (a) At least one Business Day prior to each Discretionary Sale Date, the Servicer, on behalf of the Seller, shall have given the Administrative Agent and each Hedge Counterparty written notice of its intent to effect a Discretionary Sale (each such notice a “Discretionary Sale Notice”), specifying the Discretionary Sale Date and including a list of all Assets to be sold and assigned pursuant to such Discretionary Sale, and a revised Borrowing Base Certificate;

     (b) Any Discretionary Sale shall be made by the Servicer, on behalf of the Seller, to an unaffiliated third party purchaser in a transaction (i) reflecting arms-length market terms and (ii) in which the Seller makes no representations, warranties or covenants for the benefit of any other party to the Discretionary Sale and provides no indemnification for the benefit of any other party to the Discretionary Sale;

     (c) After giving effect to the Discretionary Sale and the assignment to the Seller of the Collateral on any Discretionary Sale Date, (a) the Availability is greater than or equal to zero, (b) the representations and warranties contained in Section 4.1 hereof shall continue to be correct in all material respects, except to the extent relating to an earlier date and (c) neither an Unmatured Termination Event nor a Termination Event shall have resulted;

     (d) On the related Discretionary Sale Date, the Administrative Agent, each Purchaser Agent, on behalf of the applicable Purchaser, the Hedge Counterparties, the Collateral Custodian and the Backup Servicer, as applicable, shall have received, as applicable, in immediately available funds, an amount equal to the sum of (a) an amount sufficient to reduce the Advances Outstanding such that, after giving effect to the transfer of the Assets that are the subject of such Discretionary Sale, the Availability will be equal to or greater than $0 plus (b) an amount equal to all unpaid Interest to the extent reasonably determined by the Administrative Agent and the Purchaser Agents to be attributable to that portion of the Advances Outstanding to be repaid in connection with the Discretionary Sale plus (c) an aggregate amount equal to the sum of all other Aggregate Unpaids due and owing to the Administrative Agent, the Purchaser Agents, each applicable Purchaser, the Affected Parties, the Indemnified Parties and the Hedge Counterparties, as applicable, under this Agreement and the other Transaction Documents, to the extent accrued to such date; provided that, the Administrative Agent and each Purchaser Agent shall have the right to determine whether the amount paid (or proposed to be paid) by the Seller on the Discretionary Sale Date is sufficient to satisfy the requirements of clauses (a) through (c) and is

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sufficient to reduce the Advances Outstanding to the extent requested by the Seller in connection with the Discretionary Sale;

     (e) The Outstanding Asset Balance of the Asset(s) which are the subject of the proposed Discretionary Sale, together with the Outstanding Asset Balance of the Asset(s) sold in all other Discretionary Sales made in the preceding 12 month period, shall not exceed 20% of the Facility Amount; and

     (f) On the related Discretionary Sale Date, the proceeds from such Discretionary Sale have been sent directly into the Collection Account.

     Section 2.21 Required Equity Requirements.

     The Originator hereby agrees, upon receipt of a Required Equity Contribution Notice delivered pursuant to and in accordance with the terms of this Agreement, to deposit into the Excess Spread Account or to otherwise cure within two Business Days the related Required Equity Shortfall as provided in the Required Equity Contribution Notice after giving effect to any deposits to the Excess Spread Account made by the Seller pursuant to Section 6.4(g). The Originator further agrees to pay any and all reasonable expenses (including reasonable counsel fees and expenses) incurred by the Administrative Agent, the Purchaser Agents and the Secured Parties in enforcing any rights under this Section 2.21. In the event that the Originator shall fail to pay the Required Equity Shortfall when required to be paid pursuant to the terms hereof, the Originator shall indemnify and hold harmless the Administrative Agent, the Purchaser Agents and each Secured Party from and against any and all damages, losses, claims, liabilities and related costs and expenses, including attorney’s fees and disbursements awarded against or incurred by them or any of them as a result of such failure of the Originator. Notwithstanding anything herein to the contrary, the maximum amount of payments (other than indemnification ) made by the Originator pursuant to this Section 2.21 shall not exceed $75,000,000 in the aggregate regardless of the number of such payments made hereunder.

ARTICLE III

CONDITIONS TO ADVANCES

     Section 3.1 Conditions to Closing and Initial Advance.

     The Purchasers shall not be obligated to make any Advance hereunder on the occasion of the Initial Advance, nor shall any Purchaser, Administrative Agent, the Purchaser Agents, the Backup Servicer and the Collateral Custodian be obligated to take, fulfill or perform any other action hereunder, until the following conditions have been satisfied, in the sole discretion of, or waived in writing by, the Administrative Agent and each Purchaser Agent:

     (a) Each Transaction Document shall have been duly executed by, and delivered to, the parties thereto, and the Administrative Agent and each Purchaser Agent shall have received such other documents, instruments, agreements and legal opinions as the Administrative Agent and each Purchaser Agent shall reasonably request in connection with the transactions contemplated by this Agreement, including, without limitation, all those specified in the

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Schedule of Documents attached hereto as Schedule I, each in form and substance satisfactory to the Administrative Agent and each Purchaser Agent;

     (b) The Administrative Agent and each Purchaser Agent shall have received (i) satisfactory evidence that the Seller and the Servicer have obtained all required consents and approvals of all Persons, including all requisite Governmental Authorities, to the execution, delivery and performance of this Agreement and the other Transaction Documents to which each is a party and the consummation of the transactions contemplated hereby or thereby or (ii) an Officer’s Certificate from each of the Seller and the Servicer in form and substance reasonably satisfactory to the Administrative Agent and each Purchaser Agent affirming that no such consents or approvals are required; it being understood that the acceptance of such evidence or officer’s certificate shall in no way limit the recourse of the Administrative Agent, each Purchaser Agent or any Secured Party against the Originator or the Seller for a breach of the Originator’s and the Seller’s representation or warranty that all such consents and approvals have, in fact, been obtained;

     (c) The Seller, the Servicer and the Originator shall each be in compliance in all material respects with all Applicable Laws and shall have delivered to the Administrative Agent and each Purchaser Agent as to this and other closing matters certification in the form of Exhibits F-1 and F-2;

     (d) The Seller and the Servicer shall have delivered to the Administrative Agent and each Purchaser Agent duly executed Powers of Attorney in the form of Exhibits G-1 and G-2;

     (e) The Seller and the Servicer shall each have delivered to the Administrative Agent and each Purchaser Agent a certificate as to Solvency in the form of Exhibits E-1 and E-2 and a perfection certificate in form reasonably acceptable to the Administrative Agent; and

     (f) On or prior to the date of the Initial Advance, each Purchaser Agent (excluding Three Pillars Purchaser Agent) shall have received, in immediately available funds, an amount by or on behalf of Three Pillars representing its respective Pro Rata Share of previously funded Advances.

     Section 3.2 Conditions Precedent to All Advances.

     Each Advance to the Seller by the applicable Purchaser (each, a “Transaction”) shall be subject to the further conditions precedent that:

     (a) (i) With respect to any Advance (including the Initial Advance), the Servicer shall have delivered to the Administrative Agent and each Purchaser Agent (with a copy to the Collateral Custodian and the Backup Servicer), in the case of an Advance, no later than 2:00 p.m. (Charlotte, North Carolina time), one Business Day prior to the related Funding Date in a form and substance satisfactory to the Administrative Agent and each Purchaser Agent, (1) a Borrowing Notice (Exhibit A-1), Borrowing Base Certificate (Exhibit A-3), Asset List and Monthly Report, if applicable, and (2) a Certificate of Assignment (Exhibit A to the Sale Agreement including Schedule I, thereto) and containing such additional information as may be reasonably requested by the Administrative Agent and each Purchaser Agent, and (ii) with respect to any reduction in Advances Outstanding pursuant to Section 2.4(b) or any reinvestment

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of Principal Collections permitted by Section 2.9(b), the Servicer shall have delivered to the Administrative Agent and each Purchaser Agent (with a copy to the Backup Servicer) at least one Business Day prior to any reduction of Advances Outstanding or same day notice no later than 2:00 p.m. (Charlotte, North Carolina time) on such day for any reinvestment of Principal Collections a Borrowing Notice (Exhibit A-2) and a Borrowing Base Certificate (Exhibit A-3) executed by the Servicer and the Seller;

     (b) On the date of such Transaction the following statements shall be true, and the Seller shall be deemed to have certified that:

     (i) The representations and warranties contained in Section 4.1, Section 4.2 and Section 4.3 are true and correct on and as of such day as though made on and as of such day and shall be deemed to have been made on such day;

     (ii) No event has occurred and is continuing, or would result from such Transaction, that constitutes a Termination Event or Unmatured Termination Event;

     (iii) On and as of such day, after giving effect to such Transaction, the Advances Outstanding shall not exceed the lesser of (x) the Facility Amount and (y) the Maximum Availability;

     (iv) On and as of such day, the Seller and the Servicer each has performed all of the covenants and agreements contained in this Agreement to be performed by such person at or prior to such day;

     (v) No law or regulation shall prohibit, and no order, judgment or decree of any federal, state or local court or governmental body, agency or instrumentality shall prohibit or enjoin, the making of such Advance or incremental Advance by the Purchaser in accordance with the provisions hereof, the reduction of Advances Outstanding, the reinvestment of Principal Collections or any other transaction contemplated herein; and

     (vi) Such date is an Amsterdam Business Day;

     (c) The Seller shall have delivered to the Collateral Custodian (with a copy to the Backup Servicer and the Administrative Agent) in the case of an Advance, no later than 2:00 p.m. (Charlotte, North Carolina time) one Business Day prior to any Funding Date a faxed copy of the duly executed original promissory notes, master purchase agreement and purchase statements or a copy of the Loan Register, as applicable, for the Loans, and, if any Assets are closed in escrow, a certificate (in the form of Exhibit L) from the counsel to the Originator or the Obligor of such Assets certifying the possession of the Required Asset Documents, provided that notwithstanding the foregoing, the Required Asset Documents (including any UCCs included in the Required Asset Documents) shall be in the possession of the Collateral Custodian within two Business Days of any related Funding Date as to any Additional Assets;

     (d) The Seller shall not have requested the Termination Date to occur;

     (e) The Facility Termination Date shall not have occurred;

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     (f) On the date of such Transaction, the Administrative Agent and each Purchaser Agent shall have received such other approvals, opinions or documents as the Administrative Agent and each Purchaser Agent may reasonably require;

     (g) The Required Equity Contribution, if any, shall have been made to the Seller;

     (h) The Administrative Agent shall have received from the Seller all hedging confirms related to any Hedging Agreement required by this Agreement;

     (i) The Seller and Servicer shall have delivered to the Administrative Agent and each Purchaser Agent all reports required to be delivered as of the date of such Transaction including, without limitation, all deliveries required by Section 2.3;

     (j) With respect to any Acquired Loan intended to be included as a part of the Collateral, the Administrative Agent and each Purchaser Agent shall have received an opinion of counsel in accordance with Schedule I;

     (k) The Seller shall have paid all fees required to be paid, including all fees required hereunder and under the Purchaser Fee Letters and any Additional Agent Fee Letter and shall have reimbursed the Purchasers, the Administrative Agent and each Purchaser Agent for all fees, costs and expenses of closing the transactions contemplated hereunder and under the other Transaction Documents, including the reasonable attorney fees and any other legal and document preparation costs incurred by the Purchasers, the Administrative Agent and each Purchaser Agent; and

     (l) The Seller shall have delivered to the Administrative Agent and each Purchaser Agent an Officer’s Certificate (which may be part of the Borrowing Notice) in form and substance reasonably satisfactory to the Administrative Agent and each Purchaser Agent certifying that each of the foregoing conditions precedent has been satisfied.

     The failure of the Seller to satisfy any of the foregoing conditions precedent in respect of any Advance shall give rise to a right of the Administrative Agent and the applicable Purchaser Agent, which right may be exercised at any time on the demand of the applicable Purchaser Agent, to rescind the related Advance and direct the Seller to pay to the Administrative Agent for the benefit of the applicable Purchaser an amount equal to the Advances made during any such time that any of the foregoing conditions precedent were not satisfied.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

     Section 4.1 Representations and Warranties of the Seller.

     The Seller represents and warrants as follows:

     (a) Organization and Good Standing. The Seller has been duly organized, and is validly existing as a limited liability company in good standing, under the laws of the State of Delaware, with all requisite company power and authority to own or lease its properties and

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conduct its business as such business is presently conducted, and had at all relevant times, and now has all necessary power, authority and legal right to acquire, own and sell the Collateral.

     (b) Due Qualification. The Seller is duly qualified to do business and is in good standing as a limited liability company, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business requires such qualification, licenses or approvals.

     (c) Power and Authority; Due Authorization; Execution and Delivery. The Seller (i) has all necessary power, authority and legal right to (a) execute and deliver this Agreement and the other Transaction Documents to which it is a party, (b) carry out the terms of the Transaction Documents to which it is a party, (c) sell and assign an ownership interest in the Collateral, and (d) receive Advances and sell the Collateral on the terms and conditions provided herein and (ii) has duly authorized by all necessary company action the execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party and the sale and assignment of an ownership interest in the Collateral on the terms and conditions herein provided. This Agreement and each other Transaction Document to which the Seller is a party have been duly executed and delivered by the Seller.

     (d) Binding Obligation. This Agreement and each other Transaction Document to which the Seller is a party constitutes a legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with its respective terms, except as such enforceability may be limited by Insolvency Laws and by general principles of equity (whether considered in a suit at law or in equity).

     (e) No Violation. The consummation of the transactions contemplated by this Agreement and the other Transaction Documents to which it is a party and the fulfillment of the terms hereof and thereof will not (i) conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, the Seller’s operating agreement or any Contractual Obligation of the Seller, (ii) result in the creation or imposition of any Lien (other than Permitted Liens) upon any of the Seller’s properties pursuant to the terms of any such Contractual Obligation, other than this Agreement, or (iii) violate any Applicable Law.

     (f) No Proceedings. There is no litigation, proceeding or investigation pending or, to the best knowledge of the Seller, threatened against the Seller, before any Governmental Authority (i) asserting the invalidity of this Agreement or any other Transaction Document to which the Seller is a party, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Transaction Document to which the Seller is a party or (iii) seeking any determination or ruling that could reasonably be expected to have Material Adverse Effect.

     (g) All Consents Required. All approvals, authorizations, consents, orders or other actions of any Person or of any Governmental Authority (if any) required for the due execution, delivery and performance by the Seller of this Agreement and any other Transaction Document to which the Seller is a party have been obtained.

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     (h) Bulk Sales. The execution, delivery and performance of this Agreement and the transactions contemplated hereby do not require compliance with any “bulk sales” act or similar law by Seller.

     (i) Solvency. The Seller is not the subject of any Insolvency Proceedings or Insolvency Event. The transactions under this Agreement and any other Transaction Document to which the Seller is a party do not and will not render the Seller not Solvent and the Seller shall deliver to the Administrative Agent and each Purchaser Agent on the Closing Date a certification in the form of Exhibit E-1.

     (j) Selection Procedures. No procedures believed by the Seller to be adverse to the interests of the Purchaser were utilized by the Seller in identifying and/or selecting the Assets in the Collateral. In addition, each Asset shall have been underwritten in accordance with and satisfy the standards of any Credit and Collection Policy that has been established by the Seller or the Originator and is then in effect.

     (k) Taxes. The Seller has filed or caused to be filed all tax returns that are required to be filed by it. The Seller has paid or made adequate provisions for the payment of all Taxes and all assessments made against it or any of its property (other than any amount of Tax the validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Seller), and no tax lien has been filed and, to the Seller’s knowledge, no claim is being asserted, with respect to any such Tax, fee or other charge.

     (l) Exchange Act Compliance; Regulations T, U and X. None of the transactions contemplated herein (including, without limitation, the use of the proceeds from the sale of the Collateral) will violate or result in a violation of Section 7 of the Securities Exchange Act, or any regulations issued pursuant thereto, including, without limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. The Seller does not own or intend to carry or purchase, and no proceeds from the Advances will be used to carry or purchase, any “margin stock” within the meaning of Regulation U or to extend “purpose credit” within the meaning of Regulation U.

     (m) Security Interest.

     (i) This Agreement creates a valid and continuing security interest (as defined in the applicable UCC) in the Collateral in favor of the Administrative Agent, on behalf of the Secured Parties, which security interest is prior to all other Liens (except for Permitted Liens), and is enforceable as such against creditors of and purchasers from the Seller;

     (ii) the Asset, along with the related Asset Files, constitute a “general intangible,” an “instrument,” an “account,” or “chattel paper,” within the meaning of the applicable UCC;

     (iii) the Seller owns and has good and marketable title to the Collateral free and clear of any Lien (other than Permitted Liens), claim or encumbrance of any Person;

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     (iv) the Seller has received all consents and approvals required by the terms of any Asset to the sale and granting of a security interest in the Assets hereunder to the Administrative Agent, on behalf of the Secured Parties;

     (v) the Seller has caused the filing of all appropriate financing statements in the proper filing office in the appropriate jurisdictions under Applicable Law in order to perfect the security interest in the Collateral granted to the Administrative Agent, on behalf of the Secured Parties, under this Agreement;

     (vi) other than the security interest granted to the Administrative Agent, on behalf of the Secured Parties, pursuant to this Agreement, the Seller has not pledged, assigned, sold, granted a security interest in or otherwise conveyed any of the Collateral. The Seller has not authorized the filing of and is not aware of any financing statements against the Seller that include a description of collateral covering the Collateral other than any financing statement (A) relating to the security interest granted to the Seller under the Sale Agreement, or (B) that have been terminated. The Seller is not aware of the filing of any judgment or tax lien filings against the Seller;

     (vii) all original executed copies of each underlying promissory note or copies of each Loan Register, as applicable, that constitute or evidence each Loan has been, or subject to the delivery requirements contained herein, will be delivered to the Collateral Custodian;

     (viii) the Seller has received a written acknowledgment from the Collateral Custodian that the Collateral Custodian or its bailee is holding the underlying promissory notes (if any), the copies of the Loan Registers that constitute or evidence the Assets solely on behalf of and for the benefit of the Secured Parties;

     (ix) none of the underlying promissory notes or Loan Registers, as applicable, that constitute or evidence the Assets has any marks or notations indicating that they have been pledged, assigned or otherwise conveyed to any Person other than the Administrative Agent, on behalf of the Secured Parties; and

     (x) none of the Collateral has been pledged or otherwise made subject to a Lien.

     (n) Reports Accurate. All Monthly Reports (if prepared by the Seller, or to the extent that information contained therein is supplied by the Seller), information, exhibits, financial statements, documents, books, records or reports furnished or to be furnished by the Seller to the Administrative Agent, each Purchaser Agent or any Purchaser in connection with this Agreement are true, complete and correct.

     (o) Location of Offices. The Seller’s location (within the meaning of Article 9 of the UCC) is Delaware. The office where the Seller keeps all the Records is at the address of the Seller referred to in Section 13.2 hereof (or at such other locations as to which the notice and other requirements specified in Section 5.2(g) shall have been satisfied). The Seller’s Federal Employee Identification Number is 30-3991722. The Seller has not changed its name, whether

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by amendment of its certificate of formation, by reorganization or otherwise, and has not changed its location within the four months preceding the Closing Date.

     (p) Lock-Boxes. The names and addresses of all the Lock-Box Banks, together with the account numbers of the Lock-Box Accounts of the Seller at such Lock-Box Banks and the names, addresses and account numbers of all accounts to which Collections of the Collateral outstanding before the Initial Advance hereunder have been sent, are specified in Schedule II (which shall be deemed to be amended in respect of terminating or adding any Lock-Box Account or Lock-Box Bank upon satisfaction of the notice and other requirements specified in Section 5.2(k)). The Seller has not granted any Person other than the Administrative Agent and Collateral Custodian an interest in any Lock-Box Account at a future time or upon the occurrence of a future event.

     (q) Tradenames. The Seller has no trade names, fictitious names, assumed names or “doing business as” names or other names under which it has done or is doing business.

     (r) Sale Agreement. The Sale Agreement is the only agreement pursuant to which the Seller purchases Collateral.

     (s) Value Given. The Seller shall have given reasonably equivalent value to the Originator in consideration for the transfer to the Seller of the Collateral under the Sale Agreement, no such transfer shall have been made for or on account of an antecedent debt owed by the Originator to the Seller, and no such transfer is or may be voidable or subject to avoidance under any section of the Bankruptcy Code.

     (t) Accounting. The Seller accounts for the transfers to it from the Originator of interests in Collateral under the Sale Agreement as financings of such Collateral for tax and consolidated accounting purposes (with a notation that it is treating the transfers as a sale for legal and all other purposes on its books, records and financial statements, in each case consistent with GAAP and with the requirements set forth herein).

     (u) Special Purpose Entity. The Seller has not and shall not:

     (i) engage in any business or activity other than the purchase and receipt of Collateral and related assets from the Originator under the Sale Agreement, the sale of Collateral under the Transaction Documents, and such other activities as are incidental thereto;

     (ii) acquire or own any material assets other than (a) the Collateral and related assets from the Originator under the Sale Agreement and (b) incidental property as may be necessary for the operation of the Seller;

     (iii) merge into or consolidate with any Person or dissolve, terminate or liquidate in whole or in part, transfer or otherwise dispose of all or substantially all of its assets or change its legal structure, without in each case first obtaining the consent of the Administrative Agent and each Purchaser Agent;

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     (iv) fail to preserve its existence as an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization or formation, or without the prior written consent of the Administrative Agent and each Purchaser Agent, amend, modify, terminate or fail to comply with the provisions of its operating agreement, or fail to observe limited liability company formalities;

     (v) own any Subsidiary or make any investment in any Person without the consent of the Administrative Agent and each Purchaser Agent;

     (vi) except as permitted by this Agreement and the Lock-Box Agreement, commingle its assets with the assets of any of its Affiliates, or of any other Person;

     (vii) incur any debt, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than indebtedness to the Secured Parties hereunder or in conjunction with a repayment of all Advances owed to the Purchasers, except for trade payables in the ordinary course of its business; provided that such debt is not evidenced by a note and is paid when due;

     (viii) become insolvent or fail to pay its debts and liabilities from its assets as the same shall become due;

     (ix) fail to maintain its records, books of account and bank accounts separate and apart from those of any other Person;

     (x) enter into any contract or agreement with any Person, except upon terms and conditions that are commercially reasonable and intrinsically fair and substantially similar to those that would be available on an arms-length basis with third parties other than such Person;

     (xi) seek its dissolution or winding up in whole or in part;

     (xii) fail to correct any known misunderstandings regarding the separate identity of Seller and the Originator or any principal or Affiliate thereof or any other Person;

     (xiii) guarantee, become obligated for, or hold itself out to be responsible for the debt of another Person;

     (xiv) make any loan or advances to any third party, including any principal or Affiliate, or hold evidence of indebtedness issued by any other Person (other than cash and investment-grade securities);

     (xv) fail to file its own separate tax return, or file a consolidated federal income tax return with any other Person, except as may be required by the Internal Revenue Code and regulations;

     (xvi) fail either to hold itself out to the public as a legal entity separate and distinct from any other Person or to conduct its business solely in its own name in order

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not (a) to mislead others as to the identity with which such other party is transacting business, or (b) to suggest that it is responsible for the debts of any third party (including any of its principals or Affiliates);

     (xvii) fail to maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations;

     (xviii) file or consent to the filing of any petition, either voluntary or involuntary, to take advantage of any applicable insolvency, bankruptcy, liquidation or reorganization statute, or make an assignment for the benefit of creditors;

     (xix) except as may be required by the Internal Revenue Code and regulations, share any common logo with or hold itself out as or be considered as a department or division of (a) any of its principals or affiliates, (b) any Affiliate of a principal or (c) any other Person;

     (xx) permit any transfer (whether in one or more transactions) of any direct or indirect ownership interest in the Seller to the extent it has the ability to control the same, unless the Seller delivers to the Administrative Agent and each Purchaser Agent an acceptable non-consolidation opinion and the Administrative Agent consents to such transfer;

     (xxi) fail to maintain separate financial statements, showing its assets and liabilities separate and apart from those of any other Person;

     (xxii) fail to pay its own liabilities and expenses only out of its own funds;

     (xxiii) fail to pay the salaries of its own employees in light of its contemplated business operations;

     (xxiv) acquire the obligations or securities of its Affiliates or stockholders;

     (xxv) fail to allocate fairly and reasonably any overhead expenses that are shared with an Affiliate, including paying for office space and services performed by any employee of an Affiliate;

     (xxvi) fail to use separate invoices and checks bearing its own name;

     (xxvii) pledge its assets for the benefit of any other Person, other than with respect to payment of the indebtedness to the Secured Parties hereunder;

     (xxviii) fail at any time to have at least one independent director who is not and has not been for at least five years a director, officer, employee, trade credit or shareholder (or spouse, parent, sibling or child of the foregoing) of (a) the Servicer, (b) the Seller, (c) any principal of the Servicer, (d) any Affiliate of the Servicer, or (e) any Affiliate of any principal of the Servicer (an “Independent Director”); provided that such Independent Director may be an independent director of another special purpose entity

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affiliated with the Servicer or fail to ensure that all limited liability company action relating to the selection, maintenance or replacement of the Independent Director are duly authorized by the unanimous vote of the board of directors (including the Independent Director);

     (xxix) to provide that the unanimous consent of all directors (including the consent of the Independent Director) is required for the Seller to (a) dissolve or liquidate, in whole or part, or institute proceedings to be adjudicated bankrupt or insolvent, (b) institute or consent to the institution of bankruptcy or insolvency proceedings against it, (c) file a petition seeking or consent to reorganization or relief under any applicable federal or state law relating to bankruptcy or insolvency, (d) seek or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, custodian or any similar official for the Seller, (e) make any assignment for the benefit of the Seller’s creditors, (f) admit in writing its inability to pay its debts generally as they become due, or (g) take any action in furtherance of any of the foregoing; and

     (xxx) take or refrain from taking, as applicable, each of the activities specified in the non-consolidation opinion of Patton Boggs LLP, dated as of the date hereof.

     (v) Confirmation from the Originator. The Seller has received in writing from the Originator confirmation that the Originator will not cause the Seller to file a voluntary petition under the Bankruptcy Code or Insolvency Laws. Each of the Seller and the Originator is aware that in light of the circumstances described in the preceding sentence and other relevant facts, the filing of a voluntary petition under the Bankruptcy Code for the purpose of making any Collateral or any other assets of the Seller available to satisfy claims of the creditors of the Originator would not result in making such assets available to satisfy such creditors under the Bankruptcy Code.

     (w) Investment Company Act. The Seller is not, and is not controlled by, an “investment company” within the meaning of the 1940 Act, as amended, or is exempt from the provisions of the 1940 Act.

     (x) ERISA. The present value of all benefits vested under all “employee pension benefit plans,” as such term is defined in Section 3 of ERISA, maintained by the Seller, or in which employees of the Seller are entitled to participate, as from time to time in effect (herein called the “Pension Plans”), does not exceed the value of the assets of the Pension Plan allocable to such vested benefits (based on the value of such assets as of the last annual valuation date). No prohibited transactions, accumulated funding deficiencies, withdrawals or reportable events have occurred with respect to any Pension Plans that, in the aggregate, could subject the Seller to any material tax, penalty or other liability. No notice of intent to terminate a Pension Plan has been billed, nor has any Pension Plan been terminated under Section 4041(f) of ERISA, nor has the Pension Benefit Guaranty Corporation instituted proceedings to terminate, or appoint a trustee to administer a Pension Plan and no event has occurred or condition exists that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan.

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     (y) PUHCA. The Seller is not a “holding company” or a “subsidiary holding company” of a “holding company” within the meaning of the Public Utility Holding Company Act of 1935, as amended, or any successor statute.

     (z) Compliance with Law. The Seller has complied in all respects with all Applicable Laws to which it may be subject, and no item of Collateral contravenes any Applicable Laws (including, without limitation, all applicable predatory and abusive lending laws and all laws, rules and regulations relating to licensing, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices, and privacy).

     (aa) Credit and Collection Policy. The Seller has complied in all material respects with the Credit and Collection Policy with respect to all of the Collateral.

     (bb) Collections. The Seller acknowledges that all Collections received by it or its Affiliates with respect to the Collateral sold hereunder are held and shall be held in trust for the benefit of the Secured Parties until deposited into the Collection Account within two Business Days from receipt as required herein.

     (cc) Set-Off, etc. Other than B-Note Loans or Mezzanine Loans, no Collateral has been compromised, adjusted, extended, satisfied, subordinated, rescinded, set-off or modified by the Seller, the Originator or the Obligor thereof, and no Collateral is subject to compromise, adjustment, extension, satisfaction, subordination, rescission, set-off, counterclaim, defense, abatement, suspension, deferment, deduction, reduction, termination or modification, whether arising out of transactions concerning the Collateral or otherwise, by the Seller, the Originator or the Obligor with respect thereto, except for amendments to such Collateral otherwise permitted under Section 6.4(a) of this Agreement and in accordance with the Credit and Collection Policy.

     (dd) Full Payment. The Seller has no knowledge of any fact which should lead it to expect that any Collateral will not be paid in full.

     (ee) Accuracy of Representations and Warranties. Each representation or warranty by the Seller contained herein or in any certificate or other document furnished by the Seller pursuant hereto or in connection herewith is true and correct in all material respects.

     (ff) Representations and Warranties in Sale Agreement. The representations and warranties made by the Originator to the Seller in the Sale Agreement are hereby remade by the Seller on each date to which they speak in the Sale Agreement as if such representations and warranties were set forth herein. For purposes of this Section 4.1(ff), such representations and warranties are incorporated herein by reference as if made by the Seller to the Administrative Agent, each Purchaser Agent and each of the Secured Parties under the terms hereof mutatis mutandis.

     (gg) Reaffirmation of Representations and Warranties by the Seller. On each day that any Advance is made hereunder, the Seller shall be deemed to have certified that all representations and warranties described in Section 4.1 hereof are correct on and as of such day as though made on and as of such day.

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     (hh) Participation, Acquired and Assigned Loans. The participations created with respect to the Participation Loans and the sale to the Originator with respect to the Acquired and Assigned Loans do not violate any provisions of the underlying Required Asset Documents and such documents do not contain any express or implied prohibitions on participations or sales of such Loans.

     (ii) Environmental.

     (i) Each item of the Related Property is in compliance with all applicable Environmental Laws, and there is no violation of any Environmental Law with respect to such Related Property and there are no conditions relating to such Related Property that could give rise to liability under any applicable Environmental Laws.

     (ii) None of the Related Property contains, or has previously contained, any Materials of Environmental Concern at, on or under the Related Property in amounts or concentrations that constitute or constituted a violation of, or could give rise to liability under, Environmental Laws.

     (iii) None of the Seller, the Originator nor the Servicer has received any written or verbal notice of, or inquiry from any Governmental Authority regarding, any violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Related Property, nor does any such Person have knowledge or reason to believe that any such notice will be received or is being threatened.

     (iv) Materials of Environmental Concern have not been transported or disposed of from the Related Property, or generated, treated, stored or disposed of at, on or under any of the Related Property or any other location, in each case by or on behalf of the Seller, the Originator and/or the Servicer in violation of, or in a manner that would be reasonably likely to give rise to liability under, any applicable Environmental Law.

     (v) No judicial proceeding or governmental or administrative action is pending or, to the best knowledge of the Seller, the Originator and/or the Servicer, threatened, under any Environmental Law to which any of the Seller, the Originator and/or the Servicer is or will be named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements, outstanding under any Environmental Law with respect to any of the Seller, the Originator, the Servicer or the Related Property.

     (vi) There has been no release or threat of release of Materials of Environmental Concern at or from any of the Related Property, or arising from or related to the operations (including, without limitation, disposal) of any of the Seller, the Originator and/or the Servicer in connection with the Related Property in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws.

     (jj) USA PATRIOT Act. Neither the Seller nor any Affiliate of the Seller is (i) a country, territory, organization, person or entity named on an Office of Foreign Asset Control (OFAC) list, (ii) a Person that resides or has a place of business in a country or territory named

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on such lists or which is designated as a “Non-Cooperative Jurisdiction” by the Financial Action Task Force on Money Laundering, or whose subscription funds are transferred from or through such a jurisdiction; (iii) a “Foreign Shell Bank” within the meaning of the USA PATRIOT Act, i.e., a foreign bank that does not have a physical presence in any country and that is not affiliated with a bank that has a physical presence and an acceptable level of regulation and supervision; or (iv) a person or entity that resides in or is organized under the laws of a jurisdiction designated by the United States Secretary of the Treasury under Sections 311 or 312 of the USA PATRIOT Act as warranting special measures due to money laundering concerns.

     The representations and warranties in Section 4.1(m) shall survive the termination of this Agreement and such representations and warranties may not be waived by any party hereto.

     Section 4.2 Representations and Warranties of the Seller Relating to the Agreement and the Collateral.

     The Seller hereby represents and warrants, as of the Closing Date and as of each Addition Date:

     (a) Binding Obligation, Valid Transfer and Security Interest.

     (i) This Agreement and each other Transaction Document to which the Seller is a party each constitute a legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its respective terms, except as such enforceability may be limited by Insolvency Laws and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity).

     (ii) This Agreement constitutes a valid transfer to the Administrative Agent, as agent for the Secured Parties, of all right, title and interest of the Seller in, to and under all of the Collateral, free and clear of any Lien of any Person claiming through or under the Seller or its Affiliates, except for Permitted Liens. If the conveyances contemplated by this Agreement are determined to be transfer for security, then this Agreement constitutes a grant of a security interest in all of the Collateral to the Administrative Agent, as agent for the Secured Parties, which upon the delivery of the Required Asset Documents to the Collateral Custodian and the filing of the financing statements described in Section 4.1(m) and, in the case of Additional Assets on the applicable Addition Date, shall be a first priority perfected security interest in all Collateral, subject only to Permitted Liens. Neither the Seller nor any Person claiming through or under Seller shall have any claim to or interest in the Collection Account and, if this Agreement constitutes the grant of a security interest in such property, except for the interest of Seller in such property as a debtor for purposes of the UCC.

     (b) Eligibility of Collateral. As of the Closing Date and each Addition Date, (i) the Asset List and the information contained in the Borrowing Notice delivered pursuant to Section 2.3 is an accurate and complete listing in all material respects of all Collateral as of the Cut-Off Date and the information contained therein with respect to the identity of such Collateral and the amounts owing thereunder is true and correct in all material respects as of the related Cut-Off

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Date, (ii) each such Asset that is part of the Borrowing Base is an Eligible Asset as of such date, (iii) each such item of Collateral is free and clear of any Lien of any Person (other than Permitted Liens) and in compliance with all Applicable Laws, (iv) with respect to each such item of Collateral, all consents, licenses, approvals or authorizations of or registrations or declarations of any Governmental Authority required to be obtained, effected or given by the Seller in connection with the transfer of an ownership interest in such Collateral to the Administrative Agent as agent for the Secured Parties have been duly obtained, effected or given and are in full force and effect, and (v) the representations and warranties set forth in Section 4.2(a) are true and correct with respect to each item of Collateral.

     (c) No Fraud. Each Asset was originated without any fraud or material misrepresentation by the Originator or, to the best of the Seller’s knowledge, on the part of the Obligor.

     Section 4.3 Representations and Warranties of the Servicer.

     The Servicer represents and warrants as follows:

     (a) Organization and Good Standing. The Servicer has been duly organized and is validly existing as a limited liability company in good standing under the laws of the State of Delaware, with all requisite company power and authority to own or lease its properties and to conduct its business as such business is presently conducted and to enter into and perform its obligations pursuant to this Agreement.

     (b) Due Qualification. The Servicer is duly qualified to do business as a limited liability company and is in good standing as a limited liability company, and has obtained all necessary licenses and approvals in all jurisdictions in which the ownership or lease of its property and or the conduct of its business requires such qualification, licenses or approvals.

     (c) Power and Authority; Due Authorization; Execution and Delivery. The Servicer (i) has all necessary power, authority and legal right to (a) execute and deliver this Agreement and the other Transaction Documents to which it is a party, (b) carry out the terms of the Transaction Documents to which it is a party, and (ii) has duly authorized by all necessary company action the execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party. This Agreement and each other Transaction Document to which the Servicer is a party have been duly executed and delivered by the Servicer.

     (d) Binding Obligation. This Agreement and each other Transaction Document to which the Servicer is a party constitutes a legal, valid and binding obligation of the Servicer enforceable against the Servicer in accordance with its respective terms, except as such enforceability may be limited by Insolvency Laws and general principles of equity (whether considered in a suit at law or in equity).

     (e) No Violation. The consummation of the transactions contemplated by this Agreement and the other Transaction Documents to which it is a party and the fulfillment of the terms hereof and thereof will not (i) conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, the

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Servicer’s operating agreement or any Contractual Obligation of the Servicer, (ii) result in the creation or imposition of any Lien upon any of the Servicer’s properties pursuant to the terms of any such Contractual Obligation, other than this Agreement, or (iii) violate any Applicable Law.

     (f) No Proceedings. There is no litigation, proceedings or investigations pending or, to the best knowledge of the Servicer, threatened against the Servicer, before any Governmental Authority (i) asserting the invalidity of this Agreement or any other Transaction Document to which the Servicer is a party, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Transaction Document to which the Servicer is a party or (iii) seeking any determination or ruling that could reasonably be expected to have Material Adverse Effect.

     (g) All Consents Required. All approvals, authorizations, consents, orders, licenses or other actions of any Person or of any Governmental Authority (if any) required for the due execution, delivery and performance by the Servicer of this Agreement and any other Transaction Document to which the Servicer is a party have been obtained.

     (h) Reports Accurate. All Servicer Certificates and other written and electronic information, exhibits, financial statements, documents, books, records or reports furnished by the Servicer to the Administrative Agent, each Purchaser Agent or any Purchaser in connection with this Agreement are accurate, true and correct.

     (i) Credit and Collection Policy. The Servicer has complied in all material respects with the Credit and Collection Policy with regard to the origination, underwriting and servicing of the Assets.

     (j) Collections. The Servicer acknowledges that all Collections received by it or its Affiliates with respect to the Collateral sold hereunder are held and shall be held in trust for the benefit of the Secured Parties until deposited into the Collection Account within two Business Days from receipt as required herein.

     (k) Bulk Sales. The execution, delivery and performance of this Agreement do not require compliance with any “bulk sales” act or similar law by the Servicer.

     (l) Solvency. The Servicer is not the subject of any Insolvency Proceedings or Insolvency Event. The transactions under this Agreement and any other Transaction Document to which the Servicer is a party do not and will not render the Servicer not Solvent and the Servicer shall deliver to the Administrative Agent and each Purchaser Agent on the Closing Date a certification in the form of Exhibit E-2.

     (m) Taxes. The Servicer has filed or caused to be filed all tax returns that are required to be filed by it. The Servicer has paid or made adequate provisions for the payment of all Taxes and all assessments made against it or any of its property (other than any amount of Tax the validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Servicer), and no tax lien has been filed and, to the Servicer’s knowledge, no claim is being asserted, with respect to any such Tax, fee or other charge.

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     (n) Exchange Act Compliance; Regulations T, U and X. None of the transactions contemplated herein (including, without limitation, the use of the Proceeds from the sale of the Collateral) will violate or result in a violation of Section 7 of the Securities Exchange Act, or any regulations issued pursuant thereto, including, without limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. The Servicer does not own or intend to carry or purchase, and no proceeds from the Advances will be used to carry or purchase, any “margin stock” within the meaning of Regulation U or to extend “purpose credit” within the meaning of Regulation U.

     (o) Security Interest. The Servicer will take all steps necessary to ensure that the Seller has granted a security interest (as defined in the UCC) to the Administrative Agent, as agent for the Secured Parties, in the Collateral, which is enforceable in accordance with Applicable Law upon execution and delivery of this Agreement. Upon the filing of UCC-1 financing statements naming the Administrative Agent as secured party and the Seller as debtor, the Administrative Agent, as agent for the Secured Parties, shall have a first priority perfected security interest in the Collateral (except for any Permitted Liens). All filings (including, without limitation, such UCC filings) as are necessary for the perfection of the Secured Parties’ security interest in the Collateral have been (or prior to the date of the applicable will be) made.

     (p) ERISA. The present value of all benefits vested under all “employee pension benefit plans,” as such term is defined in Section 3 of ERISA, maintained by the Servicer, or in which employees of the Servicer are entitled to participate, as from time to time in effect (herein called the “Pension Plans”), does not exceed the value of the assets of the Pension Plan allocable to such vested benefits (based on the value of such assets as of the last annual valuation date). No prohibited transactions, accumulated funding deficiencies, withdrawals or reportable events have occurred with respect to any Pension Plans that, in the aggregate, could subject the Servicer to any material tax, penalty or other liability. No notice of intent to terminate a Pension Plan has been billed, nor has any Pension Plan been terminated under Section 4041(f) of ERISA, nor has the Pension Benefit Guaranty Corporation instituted proceedings to terminate, or appoint a trustee to administer, a Pension Plan and no event has occurred or condition exists that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan.

     (q) Investment Company Act. The Servicer is not, and is not controlled by, an “investment company” within the meaning of the 1940 Act, as amended, or is exempt from the provisions of the 1940 Act.

     (r) USA PATRIOT Act. Neither the Servicer nor any Affiliate of the Servicer is (i) a country, territory, organization, person or entity named on an OFAC list, (ii) a Person that resides or has a place of business in a country or territory named on such lists or which is designated as a “Non-Cooperative Jurisdiction” by the Financial Action Task Force on Money Laundering, or whose subscription funds are transferred from or through such a jurisdiction; (iii) a “Foreign Shell Bank” within the meaning of the USA PATRIOT Act, i.e., a foreign bank that does not have a physical presence in any country and that is not affiliated with a bank that has a physical presence and an acceptable level of regulation and supervision; or (iv) a person or entity that resides in or is organized under the laws of a jurisdiction designated by the United

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States Secretary of the Treasury under Sections 311 or 312 of the USA PATRIOT Act as warranting special measures due to money laundering concerns.

     Section 4.4 Representations and Warranties of the Backup Servicer.

     The Backup Servicer in its individual capacity and as Backup Servicer represents and warrants as follows:

     (a) Organization and Corporate Power. It is a duly organized and validly existing national banking association in good standing under the laws of the United States. It has full corporate power, authority and legal right to execute, deliver and perform its obligations as Backup Servicer under this Agreement.

     (b) Due Authorization. The execution and delivery of this Agreement and the consummation of the transactions provided for herein have been duly authorized by all necessary association action on its part, either in its individual capacity or as Backup Servicer, as the case may be.

     (c) No Conflict. The execution and delivery of this Agreement, the performance of the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with, result in any breach of any of the material terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under any indenture, contract, agreement, mortgage, deed of trust, or other instrument to which the Backup Servicer is a party or by which it or any of its property is bound.

     (d) No Violation. The execution and delivery of this Agreement, the performance of the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with or violate, in any material respect, any Applicable Law.

     (e) All Consents Required. All approvals, authorizations, consents, orders or other actions of any Person or Governmental Authority applicable to the Backup Servicer, required in connection with the execution and delivery of this Agreement, the performance by the Backup Servicer of the transactions contemplated hereby and the fulfillment by the Backup Servicer of the terms hereof have been obtained.

     (f) Validity, Etc. This Agreement constitutes the legal, valid and binding obligation of the Backup Servicer, enforceable against the Backup Servicer in accordance with its terms, except as such enforceability may be limited by applicable Insolvency Laws or general principles of equity (whether considered in a suit at law or in equity).

     Section 4.5 Representations and Warranties of the Collateral Custodian.

     The Collateral Custodian in its individual capacity and as Collateral Custodian represents and warrants as follows:

     (a) Organization and Corporate Power. It is a duly organized and validly existing national banking association in good standing under the laws of the United States. It has full

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corporate power, authority and legal right to execute, deliver and perform its obligations as Collateral Custodian under this Agreement.

     (b) Due Authorization. The execution and delivery of this Agreement and the consummation of the transactions provided for herein have been duly authorized by all necessary association action on its part, either in its individual capacity or as Collateral Custodian, as the case may be.

     (c) No Conflict. The execution and delivery of this Agreement, the performance of the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with, result in any breach of any of the material terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under any indenture, contract, agreement, mortgage, deed of trust, or other instrument to which the Collateral Custodian is a party or by which it or any of its property is bound.

     (d) No Violation. The execution and delivery of this Agreement, the performance of the Transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with or violate, in any material respect, any Applicable Law.

     (e) All Consents Required. All approvals, authorizations, consents, orders or other actions of any Person or Governmental Authority applicable to the Collateral Custodian, required in connection with the execution and delivery of this Agreement, the performance by the Collateral Custodian of the transactions contemplated hereby and the fulfillment by the Collateral Custodian of the terms hereof have been obtained.

     (f) Validity, Etc. The Agreement constitutes the legal, valid and binding obligation of the Collateral Custodian, enforceable against the Collateral Custodian in accordance with its terms, except as such enforceability may be limited by applicable Insolvency Laws and general principles of equity (whether considered in a suit at law or in equity).

     Section 4.6 Breach of Certain Representations and Warranties.

     If on any day an Asset is (or becomes) a Warranty Asset, no later than two Business Days following the earlier of knowledge by the Seller of such Asset becoming a Warranty Asset or receipt by the Seller from the Administrative Agent or the Servicer of written notice thereof, the Seller shall either: (a) make a deposit to the Collection Account (for allocation pursuant to Section 2.9 or Section 2.10, as applicable) in immediately available funds in an amount equal to the sum of (i) the amount which, if deposited to the Collection Account on such date, would cause the Availability as of such date (after giving effect to such Warranty Asset) to be greater than or equal to zero, (ii) any outstanding Servicer Advances thereon, (iii) any accrued and unpaid interest, (iv) all Hedge Breakage Costs owed to the relevant Hedge Counterparty for any termination of one or more Hedge Transactions, in whole or in part, as required by the terms of any Hedging Agreement and (v) in the case of a Loan, any costs and damages incurred in connection with any violation by such Loan of any predatory- or abusive-lending law; or (b) subject to the satisfaction of the conditions in Section 2.18, substitute for such Warranty Asset a Substitute Asset. In either of the foregoing instances, the Seller may (in its discretion) accept retransfer of each such Warranty Asset and any Related Security and the Borrowing Base shall

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be reduced by the Outstanding Asset Balance of each such Warranty Asset and, if applicable, increased by the Outstanding Asset Balance of each Substitute Asset. Upon confirmation of the deposit of such Retransfer Price into the Collection Account or the delivery by the Seller of a Substitute Asset for each Warranty Asset (the “Retransfer Date”), such Warranty Asset shall not be included in the Borrowing Base (and, if and when the Seller elects to accept the retransfer of such Warranty Asset, the Collateral) and, as applicable, the Substitute Asset shall be included in the Collateral. Upon the Retransfer Date of each Warranty Asset, the Administrative Agent, as agent for the Secured Parties, shall (if and when the Seller elects to accept the retransfer of such Warranty Asset) automatically and without further action be deemed to transfer, assign and set-over to the Seller, without recourse, representation or warranty, all the right, title and interest of the Administrative Agent, as agent for the Secured Parties in, to and under such Warranty Asset and all future monies due or to become due with respect thereto, the Related Security, all Proceeds of such Warranty Asset, Recoveries and Insurance Proceeds relating thereto, all rights to security for any such Warranty Asset, and all Proceeds and products of the foregoing. The Administrative Agent, as agent for the Secured Parties, shall (if and when the Seller elects to accept the retransfer of such Warranty Asset), at the sole expense of the Servicer, execute such documents and instruments of transfer as may be prepared by the Servicer on behalf of the Seller and take other such actions as shall reasonably be requested by the Seller to effect the transfer of such Warranty Asset pursuant to this Section 4.6.

ARTICLE V

GENERAL COVENANTS

     Section 5.1 Affirmative Covenants of the Seller.

     From the date hereof until the Collection Date:

     (a) Compliance with Laws. The Seller will comply in all material respects with all Applicable Laws, including those with respect to the Collateral or any part thereof.

     (b) Preservation of Company Existence. The Seller will preserve and maintain its company existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified in good standing as a limited liability company in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification has had, or could reasonably be expected to have, a Material Adverse Effect.

     (c) Performance and Compliance with Collateral. The Seller will, at its expense, timely and fully perform and comply (or cause the Originator to perform and comply pursuant to the Sale Agreement) with all provisions, covenants and other promises required to be observed by it under the Collateral and all other agreements related to such Collateral.

     (d) Keeping of Records and Books of Account. The Seller will maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing the Collateral in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all or any portion of the Collateral.

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     (e) Originator’s Collateral. With respect to the Collateral acquired by the Seller, the Seller will (i) acquire such Collateral pursuant to and in accordance with the terms of the Sale Agreement, (ii) (at the Servicer’s expense) take all action necessary to perfect, protect and more fully evidence the Seller’s ownership of such Collateral free and clear of any Lien other than the Lien created hereunder and Permitted Liens, including, without limitation, (a) filing and maintaining (at the Servicer’s expense), effective financing statements against the Originator in all necessary or appropriate filing offices, and filing continuation statements, amendments or assignments with respect thereto in such filing offices, and (b) executing or causing to be executed such other instruments or notices as may be necessary or appropriate, (iii) permit the Administrative Agent, each Purchaser Agent or their respective agents or representatives to visit the offices of the Seller during normal office hours and upon reasonable notice examine and make copies of all documents, books, records and other information concerning the Collateral and discuss matters related thereto with any of the officers or employees of the Seller having knowledge of such matters, and (iv) take all additional action that the Administrative Agent or any Purchaser Agent may reasonably request to perfect, protect and more fully evidence the respective interests of the parties to this Agreement in the Collateral.

     (f) Delivery of Collections. The Seller will pay to the Servicer promptly (but in no event later than two Business Days after receipt) all Collections received by Seller in respect of the Collateral and cause the same to be promptly deposited into the Collection Account by the Servicer in accordance with Section 5.4(l).

     (g) Separate Limited Liability Company Existence. The Seller shall be in compliance with the Special Purpose Entity requirements set forth in Section 4.1(u).

     (h) Credit and Collection Policy. The Seller will (a) comply in all material respects with the Credit and Collection Policy in regard to the Collateral, and (b) furnish to the Administrative Agent and each Purchaser Agent, prior to its effective date, prompt notice of any material changes in the Credit and Collection Policy. The Seller will not agree to or otherwise permit to occur any material change in the Credit and Collection Policy, which change would impair the collectibility of any of the Collateral or otherwise adversely affect the interests or remedies of the Administrative Agent, each Purchaser Agent or the Secured Parties under this Agreement or any other Transaction Document, without the prior consent of the Administrative Agent and each Purchaser Agent (which consent shall not be unreasonably withheld).

     (i) Termination Events. The Seller will provide the Administrative Agent and each Purchaser Agent with immediate written notice of the occurrence of each Termination Event and each Unmatured Termination Event of which the Seller has knowledge or has received notice. In addition, no later than two Business Days following the Seller’s knowledge or notice of the occurrence of any Termination Event or Unmatured Termination Event, the Seller will provide to the Administrative Agent and each Purchaser Agent a written statement of the chief financial officer or chief accounting officer of Seller setting forth the details of such event and the action that the Seller proposes to take with respect thereto.

     (j) Taxes. The Seller will file and pay any and all Taxes required to meet the obligations of the Transaction Documents.

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     (k) Use of Proceeds. The Seller will use the proceeds of the Advances only to acquire Collateral or to make distributions to its members in accordance with the terms hereof.

     (l) Obligor Notification Forms. The Seller shall furnish the Administrative Agent with an appropriate power of attorney to send (at the Administrative Agent’s discretion after the occurrence of a Termination Event or an Unmatured Termination Event) Obligor notification forms to give notice to the Obligors of the Secured Parties’ interest in the Collateral and the obligation to make payments as directed by the Administrative Agent.

     (m) Adverse Claims. The Seller will not create, or participate in the creation of, or permit to exist, any Liens in relation to each Lock-Box Account other than as disclosed to the Administrative Agent and each Purchaser Agent.

     (n) Seller’s Collateral. With respect to each item of Collateral acquired by the Secured Parties, the Seller will (i) take all action necessary to perfect, protect and more fully evidence the Secured Parties’ ownership of such Collateral, including, without limitation, (a) filing and maintaining (at the Servicer’s expense), effective financing statements against the Seller in all necessary or appropriate filing offices, and filing continuation statements, amendments or assignments with respect thereto in such filing offices, and (b) executing or causing to be executed such other instruments or notices as may be necessary or appropriate and (ii) take all additional action that the Administrative Agent may reasonably request to perfect, protect and more fully evidence the respective interests of the parties to this Agreement in such Collateral.

     (o) Notices. The Seller will furnish to the Administrative Agent and each Purchaser Agent:

     (i) Income Tax Liability. Within ten Business Days after the receipt of revenue agent reports or other written proposals, determinations or assessments of the Internal Revenue Service or any other taxing authority which propose, determine or otherwise set forth positive adjustments to the Tax liability of any Affiliated group (within the meaning of Section 1504(a)(l) of the Internal Revenue Code of 1986 (as amended from time to time)) which equal or exceed $1,000,000 in the aggregate, telephonic, telex or telecopy notice (confirmed in writing within five Business Days) specifying the nature of the items giving rise to such adjustments and the amounts thereof;

     (ii) Auditors’ Management Letters. Promptly after the receipt thereof, any auditors’ management letters are received by the Seller or by its accountants;

     (iii) Representations. Forthwith upon receiving knowledge of same, the Seller shall notify the Administrative Agent and each Purchaser Agent if any representation or warranty set forth in Section 4.1 was incorrect at the time it was given or deemed to have been given and at the same time deliver to the Administrative Agent and each Purchaser Agent a written notice setting forth in reasonable detail the nature of such facts and circumstances. In particular, but without limiting the foregoing, the Seller shall notify the Administrative Agent and each Purchaser Agent in the manner set forth in

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the preceding sentence before any Funding Date of any facts or circumstances within the knowledge of the Seller which would render any of the said representations and warranties untrue at the date when such representations and warranties were made or deemed to have been made;

     (iv) ERISA. Promptly after receiving notice of any “reportable event” (as defined in Title IV of ERISA) with respect to the Seller (or any Affiliate thereof), a copy of such notice;

     (v) Proceedings. As soon as possible and in any event within three Business Days after any executive officer of the Seller receives notice or obtains knowledge thereof, of any settlement of, material judgment (including a material judgment with respect to the liability phase of a bifurcated trial) in or commencement of any material labor controversy, material litigation, material action, material suit or material proceeding before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Collateral, the Transaction Documents, the Secured Parties’ interest in the Collateral, or the Seller, the Servicer or the Originator or any of their Affiliates; provided that, notwithstanding the foregoing, any settlement, judgment, labor controversy, litigation, action, suit or proceeding affecting the Collateral, the Transaction Documents, the Secured Parties’ interest in the Collateral, or the Seller, the Servicer or the Originator or any of their Affiliates in excess of $2,500,000 or more shall be deemed to be material for purposes of this Section 5.1(o); and

     (vi) Notice of Material Events. Promptly upon becoming aware thereof, notice of any other event or circumstances that, in the reasonable judgment of the Seller, is likely to have a Material Adverse Effect.

     (p) Other. The Seller will furnish to the Administrative Agent and each Purchaser Agent promptly, from time to time, such other information, documents, records or reports respecting the Collateral or the condition or operations, financial or otherwise, of Seller or Originator as the Administrative Agent and each Purchaser Agent may from time to time reasonably request in order to protect the interests of the Administrative Agent, each Purchaser Agent or the Secured Parties under or as contemplated by this Agreement.

     Section 5.2 Negative Covenants of the Seller.

     From the date hereof until the Collection Date:

     (a) Other Business. Seller will not (i) engage in any business other than the transactions contemplated by the Transaction Documents, (ii) incur any Indebtedness, obligation, liability or contingent obligation of any kind other than pursuant to this Agreement or under any Hedging Agreement required by Section 5.3(a), or (iii) form any Subsidiary or make any Investments in any other Person.

     (b) Collateral Not to be Evidenced by Instruments. The Seller will take no action to cause any Collateral that is not, as of the Closing Date or the related Addition Date, as the case may be, evidenced by an Instrument, to be so evidenced except in connection with the enforcement or collection of such Collateral.

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     (c) Security Interests. Except as otherwise permitted herein and in respect of any Optional Sale and Permitted Securitization, the Seller will not sell, pledge, assign or transfer to any other Person, or grant, create, incur, assume or suffer to exist any Lien on any Collateral, whether now existing or hereafter transferred hereunder, or any interest therein, and the Seller will not sell, pledge, assign or suffer to exist any Lien on its interest, if any, hereunder. The Seller will promptly notify the Administrative Agent and each Purchaser Agent of the existence of any Lien on any Collateral and the Seller shall defend the right, title and interest of the Administrative Agent as agent for the Secured Parties in, to and under the Collateral against all claims of third parties; provided that nothing in this Section 5.2(c) shall prevent or be deemed to prohibit the Seller from suffering to exist Permitted Liens upon any of the Collateral.

     (d) Mergers, Acquisitions, Sales, etc. The Seller will not be a party to any merger or consolidation, or purchase or otherwise acquire any of the assets or any stock of any class of, or any partnership or joint venture interest in, any other Person, or sell, transfer, convey or lease any of its assets, or sell or assign with or without recourse any Collateral or any interest therein (other than pursuant hereto or to the Sale Agreement).

     (e) Deposits to Special Accounts. Except as otherwise provided in the Lock-Box Agreement, the Seller will not deposit or otherwise credit, or cause or permit to be so deposited or credited, to any Lock-Box Account cash or cash proceeds other than Collections in respect of the Collateral.

     (f) Restricted Payments. The Seller shall not make any Restricted Junior Payment, except that, so long as no Termination Event or Unmatured Termination Event has occurred and is continuing or would result therefrom, the Seller may declare and make distributions to its members on their membership interests.

     (g) Change of Name or Location of Loan Files. The Seller shall not (x) change its name, move the location of its principal place of business and chief executive office, change the offices where it keeps the records from the location referred to in Section 13.2, or change the jurisdiction of its formation, or (y) move, or consent to the Collateral Custodian or Servicer moving, the Required Asset Documents and the Asset Files from the location thereof on the Closing Date, unless the Seller has given at least thirty (30) days’ written notice to the Administrative Agent and has taken all actions required under the UCC of each relevant jurisdiction in order to continue the first priority perfected security interest of the Administrative Agent, as agent for the Secured Parties, in the Collateral.

     (h) Accounting of Purchases. Other than for tax and consolidated accounting purposes, the Seller will not account for or treat (whether in financial statements or otherwise) the transactions contemplated hereby in any manner other than as a sale of the Collateral by the Seller to the Secured Parties. Other than for tax and consolidated accounting purposes, the Seller will not account for or treat (whether in financial statements or otherwise) the transactions contemplated by the Sale Agreement in any manner other than as a sale of the Collateral by the Originator to the Seller.

     (i) ERISA Matters. The Seller will not (a) engage or permit any ERISA Affiliate to engage in any prohibited transaction for which an exemption is not available or has not

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previously been obtained from the United States Department of Labor, (b) permit to exist any accumulated funding deficiency, as defined in Section 302(a) of ERISA and Section 412(a) of the Code, or funding deficiency with respect to any Benefit Plan other than a Multiemployer Plan, (c) fail to make any payments to a Multiemployer Plan that the Seller or any ERISA Affiliate may be required to make under the agreement relating to such Multiemployer Plan or any law pertaining thereto, (d) terminate any Benefit Plan so as to result in any liability, or (e) permit to exist any occurrence of any reportable event described in Title IV of ERISA.

     (j) Operating Agreement; Sale Agreement. The Seller will not amend, modify, waive or terminate any provision of its operating agreement or the Sale Agreement without the prior written consent of the Administrative Agent and each Purchaser Agent.

     (k) Changes in Payment Instructions to Obligors. The Seller will not add or terminate any bank as a Lock-Box Bank or any Lock-Box Account from those listed in Schedule II or make any change, or permit Servicer to make any change, in its instructions to Obligors regarding payments to be made to Seller or Servicer or payments to be made to any Lock-Box Bank, unless the Administrative Agent has consented to such addition, termination or change (which consent shall not be unreasonably withheld) and has received duly executed copies of Lock-Box Agreements with each new Lock-Box Bank or with respect to each new Lock-Box Account, as the case may be.

     (l) Extension or Amendment of Collateral. The Seller will not, except as otherwise permitted in Section 6.4(a), waive, extend, amend or otherwise modify, or permit the Servicer to extend, amend or otherwise modify, the terms of any Collateral (including the Related Security) provided that no waiver, extension, modification or alteration otherwise permitted under Section 6.4(a) shall (i) alter the status of any Asset as a Delinquent Asset or Charged-Off Asset, (ii) in the reasonable judgment of the Administrative Agent, prevent or delay any Asset from becoming a Delinquent Asset or Charged-Off Asset, or (iii) limit and/or impair the rights of the Administrative Agent or the Secured Parties under this Agreement.

     (m) Credit and Collection Policy. The Seller will not materially amend, modify, restate or replace, in whole or in part, the Credit and Collection Policy, which amendment, modification, restatement or replacement would impair the collectibility of any of the Collateral or otherwise adversely affect the interests or remedies of the Administrative Agent, each Purchaser Agent or the Secured Parties under this Agreement or any other Transaction Document, without the prior written consent of the Administrative Agent and each Purchaser Agent (which consent will not be unreasonably withheld).

     (n) Other Indebtedness. The Seller will not issue or extend any class or type of Indebtedness whether senior, pari passu or subordinated to the Indebtedness arising under this Agreement, unless an opinion of special tax counsel is first rendered to the effect that such issuance of additional Indebtedness will not cause the Seller to be treated as a taxable mortgage pool.

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     Section 5.3 Covenants of the Seller Relating to the Hedging of Assets.

     (a) On or prior to each Funding Date, the Seller shall enter into one or more Hedge Transactions for that Advance; provided that each such Hedge Transaction shall:

     (i) be entered into with a Hedge Counterparty and governed by a Hedging Agreement;

     (ii) have a schedule of monthly calculation periods the first of which commences on the Funding Date of that Advance and the last of which ends on the last Scheduled Payment due to occur under or with respect to the Assets included in the Aggregate Outstanding Asset Balance to which that Advance relates;

     (iii) have an amortizing notional amount such that the Hedge Notional Amount shall be at least equal to the product of the Hedge Percentage and the portion of the Hedge Amount represented by such Advance; and

     (iv) provide for two series of monthly payments to be netted against each other, one such series being payments to be made by the Seller to a Hedge Counterparty (solely on a net basis) by reference to a fixed rate for that Advance, and the other such series being payments to be made by such Hedge Counterparty to the Administrative Agent (solely on a net basis) at a floating rate equal to “USD-LIBOR-BBA” (as defined in the ISDA Definitions), the net amount of which shall be paid into the Collection Account (if payable by such Hedge Counterparty) or from the Collection Account to the extent funds are available under Section 2.9(a)(1) and Section 2.10(a)(1) (if payable by the Seller).

     (b) As additional security hereunder, Seller hereby assigns to the Administrative Agent, as agent for the Secured Parties, all right, title and interest but none of the obligations of the Seller in each Hedging Agreement, each Hedge Transaction, and all present and future amounts payable by a Hedge Counterparty to Seller under or in connection with the respective Hedging Agreement and Hedge Transaction(s) with that Hedge Counterparty (“Hedge Collateral”), and grants a security interest to the Administrative Agent, as agent for the Secured Parties, in the Hedge Collateral. Seller acknowledges that, as a result of that assignment, Seller may not, without the prior written consent of the Administrative Agent, exercise any rights under any Hedging Agreement or Hedge Transaction, except for Seller’s right under any Hedging Agreement to enter into Hedge Transactions in order to meet the Seller’s obligations under Section 5.3(a) hereof. Nothing herein shall have the effect of releasing the Seller from any of its obligations under any Hedging Agreement or any Hedge Transaction, nor be construed as requiring the consent of the Administrative Agent or any Secured Party for the performance by Seller of any such obligations.

     Section 5.4 Affirmative Covenants of the Servicer.

     From the date hereof until the Collection Date:

     (a) Compliance with Law. The Servicer will comply in all material respects with all Applicable Laws, including those with respect to the Collateral or any part thereof.

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     (b) Preservation of Company Existence. The Servicer will preserve and maintain its company existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified in good standing as a limited liability company in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification has had, or could reasonably be expected to have, a Material Adverse Effect.

     (c) Obligations and Compliance with Collateral. The Servicer will duly fulfill and comply with all obligations on the part of the Seller to be fulfilled or complied with under or in connection with each Collateral and will do nothing to impair the rights of the Administrative Agent, as agent for the Secured Parties, or of the Secured Parties in, to and under the Collateral.

     (d) Keeping of Records and Books of Account.

     (i) The Servicer will maintain and implement administrative and operating procedures (including without limitation, an ability to recreate records evidencing Collateral in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all Collateral and the identification of the Collateral.

     (ii) The Servicer shall permit the Administrative Agent, each Purchaser Agent or their respective agents or representatives, to visit the offices of the Servicer during normal office hours and upon reasonable notice and examine and make copies of all documents, books, records and other information concerning the Collateral and discuss matters related thereto with any of the officers or employees of the Servicer having knowledge of such matters.

     (iii) The Servicer will on or prior to the date hereof, mark its master data processing records and other books and records relating to the Collateral with a legend, acceptable to the Administrative Agent and each Purchaser Agent, describing the sale of the Collateral (A) from the Originator to the Seller, and (B) from the Seller to the Purchaser.

     (e) Preservation of Security Interest. The Servicer (at its own expense) will execute and file such financing and continuation statements and any other documents that may be required by any law or regulation of any Governmental Authority to preserve and protect fully the security interest of the Administrative Agent as agent for the Secured Parties in, to and under the Collateral.

     (f) Credit and Collection Policy. The Servicer will (i) comply in all material respects with the Credit and Collection Policy in regard to the Collateral, and (ii) furnish to the Administrative Agent and each Purchaser Agent, prior to its effective date, prompt notice of any proposed material change in the Credit and Collection Policy. Without the prior written consent of the Administrative Agent and each Purchaser Agent (which consent will not be unreasonably withheld), the Servicer will not agree to or otherwise permit to occur any material change in the Credit and Collection Policy, which change would impair the collectibility of any of the Collateral or otherwise adversely affect the interests or remedies of the Administrative Agent,

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each Purchaser Agent or the Secured Parties under this Agreement or any other Transaction Document.

     (g) Termination Events. The Servicer will provide the Administrative Agent and each Purchaser Agent with immediate written notice of the occurrence of each Termination Event and each Unmatured Termination Event of which the Servicer has knowledge or has received notice. In addition, no later than two Business Days following the Servicer’s knowledge or notice of the occurrence of any Termination Event or Unmatured Termination Event, the Servicer will provide to the Administrative Agent and each Purchaser Agent a written statement of the chief financial officer or chief accounting officer of the Servicer setting forth the details of such event and the action that the Servicer proposes to take with respect thereto.

     (h) Taxes. The Servicer will file and pay any and all Taxes required to meet the obligations of the Seller and the Servicer under the Transaction Documents.

     (i) Other. The Servicer will promptly furnish to the Administrative Agent and each Purchaser Agent such other information, documents, records or reports respecting the Collateral or the condition or operations, financial or otherwise, of the Seller or the Servicer as the Administrative Agent and each Purchaser Agent may from time to time reasonably request in order to protect the interests of the Administrative Agent, each Purchaser Agent or Secured Parties under or as contemplated by this Agreement.

     (j) Proceedings. As soon as possible and in any event within three Business Days after any executive officer of the Servicer receives notice or obtains knowledge thereof, of any settlement of, material judgment (including a material judgment with respect to the liability phase of a bifurcated trial) in or commencement of any material labor controversy material litigation, material action, material suit or material proceeding before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Collateral, the Transaction Documents, the Secured Parties’ interest in the Collateral, or the Seller, the Servicer or the Originator or any of their Affiliates; provided that, notwithstanding the foregoing, any settlement, judgment, labor controversy, litigation, action, suit or proceeding affecting the Collateral, the Transaction Documents, the Secured Parties’ interest in the Collateral, or the Seller, the Servicer or the Originator or any of their Affiliates in excess of $2,500,000 or more shall be deemed to be material for purposes of this Section 5.4(j).

     (k) Deposit of Collections. The Servicer shall promptly (but in no event later than two Business Days after receipt) deposit into the Collection Account any and all Collections received by the Seller, the Servicer or any of their Affiliates.

     (l) Servicing of Participation, Acquired and Assigned Loans. With respect to Participation Loans, Acquired Loans and Assigned Loans, the Servicer shall: (i) segregate all Loan Files with respect to such Loans; (ii) keep separate records with respect to such Loans; and (iii) identify each such Type of Loan on the Servicing Reports required hereunder with respect to such Loans.

     (m) Change-in-Control. Upon the occurrence of a Change-in-Control (including any merger or consolidation of the Originator or transfer of substantially all of its assets and its

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business), the Servicer shall provide the Administrative Agent, each Purchaser Agent and the Hedge Counterparties with notice of such Change-in-Control within thirty (30) days after completion of the same.

     (n) Loan Register.

     (i) The Servicer shall maintain with respect to each Noteless Loan a register (each, a “Loan Register”) in which it will record (v) the amount of such Loan, (w) the amount of any principal or interest due and payable or to become due and payable from the Obligor thereunder, (x) the amount of any sum in respect of such Loan received from the Obligor and each Purchaser’s share thereof, (y) the date of origination of such Loan and (z) the maturity date of such Loan. The entries made in each Loan Register maintained pursuant to this Section 5.04(n) shall be prima facie evidence of the existence and amounts of the obligations therein recorded; provided that the failure of the Servicer to maintain any such Loan Register or any error therein shall not in any manner affect the obligations of the Obligor to repay the related Loans in accordance with their terms or any Purchaser’s interest therein.

     (ii) At any time a Noteless Loan is included as part of the Collateral pursuant to this Agreement, the Servicer shall deliver to the Collateral Custodian a copy of the related Loan Register, together with a certificate of a Responsible Officer of the Servicer certifying to the accuracy of such Loan Register as of the date such Loan is included as part of the Collateral.

     Section 5.5 Negative Covenants of the Servicer.

     From the date hereof until the Collection Date.

     (a) Deposits to Special Accounts. Except as otherwise provided in the Lock-Box Agreement, the Servicer will not deposit or otherwise credit, or cause or permit to be so deposited or credited, to any Lock-Box Account cash or cash proceeds other than Collections in respect of the Collateral.

     (b) Mergers, Acquisition, Sales, etc. The Servicer will not consolidate with or merge into any other Person or convey or transfer its properties and assets substantially as an entirety to any Person, unless the Servicer is the surviving entity and unless:

     (i) the Servicer has delivered to the Administrative Agent and each Purchaser Agent an Officer’s Certificate and an Opinion of Counsel each stating that any consolidation, merger, conveyance or transfer and such supplemental agreement comply with this Section 5.5 and that all conditions precedent herein provided for relating to such transaction have been complied with and, in the case of the Opinion of Counsel, that such supplemental agreement is legal, valid and binding with respect to the Servicer and such other matters as the Administrative Agent may reasonably request;

     (ii) the Servicer shall have delivered notice of such consolidation, merger, conveyance or transfer to the Administrative Agent and each Purchaser Agent;

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     (iii) after giving effect thereto, no Termination Event or Servicer Default or event that with notice or lapse of time would constitute either a Termination Event or a Servicer Default shall have occurred; and

     (iv) the Administrative Agent and each Purchaser Agent have consented in writing to such consolidation, merger, conveyance or transfer.

     (c) Change of Name or Location of Loan Files. The Servicer shall not (x) change its name, move the location of its principal place of business and chief executive office, change the offices where it keeps records concerning the Collateral from the location referred to in Section 13.2, or change the jurisdiction of its formation, or (y) move, or consent to the Collateral Custodian moving, the Required Asset Documents and Asset Files from the location thereof on the Closing Date, unless the Servicer has given at least thirty (30) days’ written notice to the Administrative Agent and has taken all actions required under the UCC of each relevant jurisdiction in order to continue the first priority perfected security interest of the Administrative Agent as agent for the Secured Parties in the Collateral.

     (d) Change in Payment Instructions to Obligors. The Servicer will not add or terminate any bank as a Lock-Box Bank or any Lock-Box Account from those listed in Schedule II or make any change in its instructions to Obligors regarding payments to be made to the Seller or the Servicer or payments to be made to any Lock-Box Bank, unless the Administrative Agent has consented to such addition, termination or change (which consent shall not be unreasonably withheld) and has received duly executed copies of Lock-Box Agreements with each new Lock-Box Bank or with respect to each new Lock-Box Account, as the case may be.

     (e) Extension or Amendment of Assets. The Servicer will not, except as otherwise permitted in Section 6.4(a), extend, amend or otherwise modify the terms of any Assets; provided that no waiver, extension, modification or alteration otherwise permitted under Section 6.4(a) shall (i) alter the status of any Asset as a Delinquent Asset or Charged-Off Asset, (ii) in the reasonable judgment of the Administrative Agent, prevent or delay any Asset from becoming a Delinquent Asset or Charged-Off Asset, or (iii) limit and/or impair the rights of the Administrative Agent or the Secured Parties under this Agreement.

     Section 5.6 Affirmative Covenants of the Backup Servicer.

     From the date hereof until the Collection Date:

     (a) Compliance with Law. The Backup Servicer will comply in all material respects with all Applicable Laws.

     (b) Preservation of Existence. The Backup Servicer will preserve and maintain its existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified in good standing in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification has had, or could reasonably be expected to have, a Material Adverse Effect.

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     Section 5.7 Negative Covenants of the Backup Servicer.

     From the date hereof until the Collection Date:

     No Changes in Backup Servicer Fee. The Backup Servicer will not make any changes to the Backup Servicer Fee set forth in the Backup Servicer Fee Letter without the prior written approval of the Administrative Agent and each Purchaser Agent.

     Section 5.8 Affirmative Covenants of the Collateral Custodian.

     From the date hereof until the Collection Date:

     (a) Compliance with Law. The Collateral Custodian will comply in all material respects with all Applicable Laws.

     (b) Preservation of Existence. The Collateral Custodian will preserve and maintain its existence, rights, franchises and privileges in the jurisdiction of its formation and qualify and remain qualified in good standing in each jurisdiction where failure to preserve and maintain such existence, rights, franchises, privileges and qualification has had, or could reasonably be expected to have, a Material Adverse Effect.

     (c) Location of Required Asset Documents. The Required Asset Documents shall remain at all times in the possession of the Collateral Custodian at the address set forth herein unless notice of a different address is given in accordance with the terms hereof or unless the Administrative Agent agrees to allow certain Required Asset Documents to be released to the Servicer on a temporary basis in accordance with the terms hereof.

     Section 5.9 Negative Covenants of the Collateral Custodian.

     From the date hereof until the Collection Date:

     (a) Required Asset Documents. The Collateral Custodian will not dispose of any documents constituting the Required Asset Documents in any manner that is inconsistent with the performance of its obligations as the Collateral Custodian pursuant to this Agreement and will not dispose of any Collateral except as contemplated by this Agreement.

     (b) No Changes in Collateral Custodian Fee. The Collateral Custodian will not make any changes to the Collateral Custodian Fee set forth in the Collateral Custodian Fee Letter without the prior written approval of the Administrative Agent and each Purchaser Agent.

ARTICLE VI

ADMINISTRATION AND SERVICING OF CONTRACTS

     Section 6.1 Designation of the Servicer.

     (a) Initial Servicer. The servicing, administering and collection of the Collateral shall be conducted by the Person designated as the Servicer hereunder from time to time in accordance

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with this Section 6.1. Until the Administrative Agent gives to the Originator a Servicer Termination Notice, the Originator is hereby designated as, and hereby agrees to perform the duties and responsibilities of, the Servicer pursuant to the terms hereof.

     (b) Successor Servicer. Upon the Servicer’s receipt of a Servicer Termination Notice (with a copy to the Backup Servicer) from the Administrative Agent pursuant to the terms of Section 6.15, the Servicer agrees that it will terminate its activities as Servicer hereunder in a manner that the Administrative Agent reasonably believes will facilitate the transition of the performance of such activities to a successor Servicer, and the successor Servicer shall assume each and all of the Servicer’s obligations to service and administer the Collateral, on the terms and subject to the conditions herein set forth, and the Servicer shall use its best reasonable efforts to assist the successor Servicer in assuming such obligations.

     (c) Subcontracts. The Servicer may, with the prior consent of the Administrative Agent, subcontract with any other Person for servicing, administering or collecting the Collateral; provided that the Servicer shall remain liable for the performance of the duties and obligations of the Servicer pursuant to the terms hereof and that any such subcontract may be terminated upon the occurrence of a Servicer Default.

     (d) Servicing Programs. In the event that the Servicer uses any software program in servicing the Collateral that it licenses from a third party, the Servicer shall use its best reasonable efforts to obtain, either before the Closing Date or as soon as possible thereafter, whatever licenses or approvals are necessary to allow the Administrative Agent or the Servicer to use such program.

     Section 6.2 Duties of the Servicer.

     (a) Appointment. The Seller hereby appoints the Servicer as its agent, as from time to time designated pursuant to Section 6.1, to service the Collateral and enforce its respective rights in and under such Collateral. The Servicer hereby accepts such appointment and agrees to perform the duties and obligations with respect thereto as set forth herein. The Servicer and the Seller hereby acknowledge that the Administrative Agent, each Purchaser Agent and the Secured Parties are third party beneficiaries of the obligations undertaken by the Servicer hereunder.

     (b) Duties. The Servicer shall take or cause to be taken all such actions as may be necessary or advisable to collect on the Collateral from time to time, all in accordance with Applicable Laws, with reasonable care and diligence, and in accordance with the Credit and Collection Policy. Without limiting the foregoing, the duties of the Servicer shall include the following:

     (i) preparing and submitting of claims to, and post-billing liaison with, Obligors on each Asset;

     (ii) maintaining all necessary servicing records with respect to the Collateral and providing such reports to the Administrative Agent and each Purchaser Agent in respect of the servicing of the Collateral (including information relating to its performance under this Agreement) as may be required hereunder or as the Administrative Agent and each Purchaser Agent may reasonably request;

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     (iii) maintaining and implementing administrative and operating procedures (including, without limitation, an ability to recreate servicing records evidencing the Collateral in the event of the destruction of the originals thereof) and keeping and maintaining all documents, books, records and other information reasonably necessary or advisable for the collection of the Collateral;

     (iv) promptly delivering to the Administrative Agent, each Purchaser Agent or the Collateral Custodian, from time to time, such information and servicing records (including information relating to its performance under this Agreement) as the Administrative Agent, each Purchaser Agent or the Collateral Custodian may from time to time reasonably request;

     (v) identifying each Asset clearly and unambiguously in its servicing records to reflect that such Asset is owned by the Seller and that the Seller is selling an undivided ownership interest therein to the Secured Parties pursuant to this Agreement;

     (vi) notifying the Administrative Agent and each Purchaser Agent of any material action, suit, proceeding, dispute, offset, deduction, defense or counterclaim (1) that is or is threatened to be asserted by an Obligor with respect to any Asset (or portion thereof) of which it has knowledge or has received notice; or (2) that is reasonably expected to have a Material Adverse Effect;

     (vii) notifying the Administrative Agent and each Purchaser Agent of any proposed change in the Credit and Collection Policy that could have an adverse effect on the collectibility of the Collateral, on the Seller or on the interests of the Administrative Agent, each Purchaser Agent or any Secured Party;

     (viii) using its reasonable best efforts to maintain the perfected security interest of the Administrative Agent, as agent for the Secured Parties, in the Collateral;

     (ix) maintaining in the same manner as the Collateral Custodian holds the Required Asset Documents, the Asset File (other than Required Asset Documents) with respect to each Asset included as part of the Collateral; and

     (x) the Servicer shall make payments pursuant to the terms of the Monthly Report in accordance with Section 2.9 and Section 2.10.

     (c) Notwithstanding anything to the contrary contained herein, the exercise by the Administrative Agent, each Purchaser Agent and the Secured Parties of their rights hereunder shall not release the Servicer, the Originator or the Seller from any of their duties or responsibilities with respect to the Collateral. The Secured Parties, the Administrative Agent, each Purchaser Agent and the Collateral Custodian (except in the role of Backup Servicer) shall not have any obligation or liability with respect to any Collateral, nor shall any of them be obligated to perform any of the obligations of the Servicer hereunder.

     (d) Any payment by an Obligor in respect of any Indebtedness owed by it to the Originator or the Seller shall, except as otherwise specified by such Obligor or otherwise required by contract or law and unless otherwise instructed by the Administrative Agent, be

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applied as a Collection of an item of Collateral of such Obligor (starting with the oldest such Collateral) to the extent of any amounts then due and payable thereunder before being applied to any other receivable or other obligation of such Obligor.

     Section 6.3 Authorization of the Servicer.

     (a) Each of the Seller, the Administrative Agent, each Purchaser Agent, each Purchaser and each Hedge Counterparty hereby authorizes the Servicer (including any successor thereto) to take any and all reasonable steps in its name and on its behalf necessary or desirable and not inconsistent with the sale of the Collateral to the Purchasers and each Hedge Counterparty, in the determination of the Servicer, to collect all amounts due under any and all Collateral, including, without limitation, endorsing any of their names on checks and other instruments representing Collections, executing and delivering any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Collateral and, after the delinquency of any Collateral and to the extent permitted under and in compliance with Applicable Law, to commence proceedings with respect to enforcing payment thereof, to the same extent as the Originator could have done if it had continued to own such Collateral. The Originator, the Seller and the Administrative Agent on behalf of the Secured Parties and each Hedge Counterparty shall furnish the Servicer (and any successors thereto) with any powers of attorney and other documents necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties hereunder, and shall cooperate with the Servicer to the fullest extent in order to ensure the collectibility of the Collateral. In no event shall the Servicer be entitled to make the Secured Parties, any Hedge Counterparty, the Collateral Custodian, the Administrative Agent or the Purchaser Agents a party to any litigation without such party’s express prior written consent, or to make the Seller a party to any litigation (other than any routine foreclosure or similar collection procedure) without the Administrative Agent’s and each Purchaser Agent’s consent.

     (b) After a Termination Event has occurred and is continuing, at the direction the Administrative Agent, the Servicer shall take such action as the Administrative Agent may deem necessary or advisable to enforce collection of the Collateral; provided that the Administrative Agent may, at any time that a Termination Event or Unmatured Termination Event has occurred and is continuing, notify any Obligor with respect to any Collateral of the assignment of such Collateral to the Administrative Agent and direct that payments of all amounts due or to become due be made directly to the Administrative Agent and each Purchaser Agent or any servicer, collection agent or lock-box or other account designated by the Administrative Agent and each Purchaser Agent and, upon such notification and at the expense of the Seller, the Administrative Agent may enforce collection of any such Collateral, and adjust, settle or compromise the amount or payment thereof.

     Section 6.4 Collection of Payments.

     (a) Collection Efforts, Modification of Collateral. The Servicer will use its reasonable best efforts to collect all payments called for under the terms and provisions of the Assets included in the Collateral as and when the same become due in accordance with the Credit and Collection Policy, and will follow those collection procedures that it follows with respect to all comparable Collateral that it services for itself or others. The Servicer may not

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waive, modify or otherwise vary any provision of an item of Collateral in a manner that, in its reasonable judgment, would impair the collectibility of the Collateral or in any manner contrary to the Credit and Collection Policy.

     (b) Prepaid Asset. Prior to a Termination Event, upon any Asset becoming a Prepaid Asset, the Servicer shall either (x) provide a Substitute Asset in accordance with Section 2.18 or (y) deposit to the Collection Account (in addition to all amounts received from the related Obligor upon the prepayment of such Asset) an amount equal to the excess, if any, of the sum of (a) the Outstanding Asset Balance on the date of such payment, (b) any outstanding Servicer Advances thereon, (c) any accrued and unpaid interest, and (d) all Hedge Breakage Costs owing to the relevant Hedge Counterparty for any termination of one or more Hedge Transactions, in whole or in part, as required by the terms of any Hedging Agreement as the result of any such Asset becoming a Prepaid Asset, over the amount received from the related Obligor upon such prepayment (such excess, the “Prepayment Amount”), in each case, only to the extent necessary to cause the Availability as of such date (after giving effect to such substitution or deposit, as applicable) to be greater than or equal to zero. After a Termination Event has occurred, upon any Asset becoming a Prepaid Asset, the Servicer shall deposit to the Collection Account all amounts received from the related Obligor upon the prepayment of such Asset plus the Prepayment Amount, if any.

     (c) Acceleration. If required by the Credit and Collection Policy, the Servicer shall accelerate the maturity of all or any Scheduled Payments and other amounts due under any Asset in which a default under the terms thereof has occurred and is continuing (after the lapse of any applicable grace period) promptly after such Asset becomes a Charged-Off Asset.

     (d) Taxes and other Amounts. To the extent provided for in any Asset, the Servicer will use its reasonable best efforts to collect all payments with respect to amounts due for taxes, assessments and insurance premiums relating to such Asset and remit such amounts to the appropriate Governmental Authority or insurer on or prior to the date such payments are due.

     (e) Payments to Lock-Box Account. Subject to Section 5.1(p), on or before the applicable Cut-Off Date, the Servicer shall have instructed all Obligors to make all payments in respect of the Collateral to the Lock-Box or directly to the Lock-Box Account.

     (f) Establishment of the Collection Account. The Servicer shall cause to be established, on or before the Closing Date, with the Collateral Custodian, and maintained in the name of the Administrative Agent as agent for the Secured Parties, with an office or branch of a depository institution or trust company a segregated corporate trust account entitled Collection Account for Wachovia Capital Markets, LLC, as Administrative Agent for the Secured Parties (the “Collection Account”), and the Servicer shall further maintain a subaccount within the Collection Account for the purpose of segregating, within two Business Days of the receipt of any Collections, Principal Collections (the “Principal Collections Account”), over which the Collateral Custodian as agent for the Secured Parties shall have control and from which neither the Originator, Servicer nor the Seller shall have any right of withdrawal except in accordance with Section 2.9(b); provided that at all times such depository institution or trust company shall be acceptable to the Administrative Agent and a depository institution organized under the laws of the United States of America or any one of the States thereof or the District of Columbia (or

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any domestic branch of a foreign bank), (i) (a) that has either (1) a long-term unsecured debt rating of “A” or better by S&P and “A2” or better by Moody’s or (2) a short-term unsecured debt rating or certificate of deposit rating of “A-1” or better by S&P or “P-1” or better by Moody’s, (b) the parent corporation of which has either (1) a long-term unsecured debt rating of “A” or better by S&P and “A2” or better by Moody’s or (2) a short-term unsecured debt rating or certificate of deposit rating of “A-1” or better by S&P and “P-1” or better by Moody’s or (c) is otherwise acceptable to the Administrative Agent and (ii) whose deposits are insured by the Federal Deposit Insurance Corporation (any such depository institution or trust company, a “Qualified Institution”).

     (g) Establishment of the Excess Spread Account. The Seller or the Servicer on its behalf shall establish, on or before the Closing Date, with the Collateral Custodian, and cause to be maintained in the name of the Seller and assigned to the Administrative Agent, with a Qualified Institution an account into which all amounts paid by the Originator pursuant to Section 2.21 of this Agreement shall be deposited (the “Excess Spread Account”). Upon receipt of the Required Equity Contribution Notice the Seller shall deposit within the timeframe set forth in Section 2.21 an amount of cash into the Excess Spread Account equal to the Required Equity Shortfall. To the extent that, on any Payment Date during the Amortization Period, there are funds on deposit in the Excess Spread Account, such funds shall be applied on such Payment Date in accordance with Section 2.10.

     (h) Adjustments. If (i) the Servicer makes a deposit into the Collection Account in respect of a Collection of an item of Collateral and such Collection was received by the Servicer in the form of a check that is not honored for any reason or (ii) the Servicer makes a mistake with respect to the amount of any Collection and deposits an amount that is less than or more than the actual amount of such Collection, the Servicer shall appropriately adjust the amount subsequently deposited into the Collection Account to reflect such dishonored check or mistake. Any Scheduled Payment in respect of which a dishonored check is received shall be deemed not to have been paid.

     Section 6.5 Servicer Advances.

     For each Collection Period, if the Servicer determines that any Scheduled Payment (or portion thereof) that was due and payable pursuant to an Asset during such Collection Period was not received prior to the last day of such Collection Period, the Servicer may (in its sole and absolute discretion) make an advance in an amount up to the amount of such delinquent Scheduled Payment. The Servicer will deposit any Servicer Advances into the Collection Account on or prior to 9:00 a.m. (Charlotte, North Carolina time) on the Business Day prior to the related Payment Date, in immediately available funds. Notwithstanding anything to the contrary contained herein, no Successor Servicer shall have any responsibility to make Servicer Advances.

     Section 6.6 Realization Upon Charged-Off Assets.

     The Servicer will use reasonable efforts to repossess or otherwise comparably convert the ownership of any Related Property relating to a Charged-Off Asset and will act as sales and processing agent for Related Property that it repossesses. The Servicer will follow such other

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practices and procedures as it deems necessary or advisable and as are customary and usual in its servicing of contracts and other actions by the Servicer in order to realize upon such Related Property, which practices and procedures may include reasonable efforts to enforce all obligations of Obligors and repossessing and selling such Related Property at public or private sale in circumstances other than those described in the preceding sentence. Without limiting the generality of the foregoing, unless the Administrative Agent has specifically given instruction to the contrary, the Servicer may sell any such Related Property to the Servicer or its Affiliates for a purchase price equal to the then fair market value thereof, any such sale to be evidenced by a certificate of a Responsible Officer of the Servicer delivered to the Administrative Agent setting forth the Asset, the Related Property, the sale price of the Related Property and certifying that such sale price is the fair market value of such Related Property. In any case in which any such Related Property has suffered damage, the Servicer will not expend funds in connection with any repair or toward the repossession of such Related Property unless it reasonably determines that such repair and/or repossession will increase the Recoveries by an amount greater than the amount of such expenses. The Servicer will remit to the Collection Account the Recoveries received in connection with the sale or disposition of Related Property relating to a Charged-Off Asset.

     Section 6.7 Maintenance of Insurance Policies.

     The Servicer will use its reasonable best efforts to ensure that each Obligor maintains an Insurance Policy with respect to any Related Property (other than accounts receivable) in an amount at least equal to the Servicer’s good faith and commercially reasonable estimate of the value of the real property, inventory, and/or equipment constituting such Related Property and shall ensure that each such Insurance Policy names the Servicer as loss payee and as an insured thereunder and all of the Seller’s right, title and interest therein is fully assigned to the Administrative Agent, as agent for the Secured Parties. Additionally, the Servicer will require that each Obligor maintain property damage liability insurance during the term of each Asset in amounts and against risks customarily insured against by the Obligor on property owned by it. If an Obligor fails to maintain property damage insurance, the Servicer may in its discretion purchase and maintain such insurance on behalf of, and at the expense of, the Obligor. In connection with its activities as Servicer, the Servicer agrees to present, on behalf of the Administrative Agent, claims to the insurer under each Insurance Policy and any such liability policy, and to settle, adjust and compromise such claims, in each case, consistent with the terms of each Asset. The Servicer’s Insurance Policies with respect to the Related Property will insure against liability for physical damage relating to such Related Property in accordance with the requirements of the Credit and Collection Policy. The Servicer hereby disclaims any and all right, title and interest in and to any Insurance Policy and Insurance Proceeds with respect to any Related Property, including any Insurance Policy with respect to which it is named as loss payee and as an insured, and agrees that it has no equitable, beneficial or other interest in the Insurance Polices and Insurance Proceeds other than being named as loss payee and as an insured. The Servicer acknowledges that with respect to the Insurance Policies and Insurance Proceeds thereof that it is acting solely in the capacity as agent for the Administrative Agent, as agent for the Secured Parties.

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     Section 6.8 Servicing Compensation.

     As compensation for its servicing activities hereunder and reimbursement for its expenses, the Servicer shall be entitled to receive the Servicing Fee to the extent of funds available therefor pursuant to the provisions of Section 2.9(a)(3) or Section 2.10(a)(3), as applicable.

     Section 6.9 Payment of Certain Expenses by Servicer.

     The Servicer will be required to pay all expenses incurred by it in connection with its activities under this Agreement, including fees and disbursements of independent accountants, Taxes imposed on the Servicer, expenses incurred in connection with payments and reports pursuant to this Agreement, and all other fees and expenses not expressly stated under this Agreement for the account of the Seller, but excluding Liquidation Expenses incurred as a result of activities contemplated by Section 6.6; provided that for avoidance of doubt, to the extent Liquidation Expenses relate to a Loan and a Retained Interest such Liquidation Expenses shall be allocated pro rata. The Servicer will be required to pay all reasonable fees and expenses owing to any bank or trust company in connection with the maintenance of the Collection Account and the Lock-Box Account. The Servicer shall be required to pay such expenses for its own account and shall not be entitled to any payment therefor other than the Servicing Fee.

     Section 6.10 Reports.

     (a) Borrowing Notice. On each Funding Date, on each reduction of Advances Outstanding pursuant to Section 2.4(b) and on each reinvestment of Principal Collections pursuant to Section 2.9(b), the Seller (and the Servicer on its behalf) will provide a Borrowing Notice, updated as of such date, to the Administrative Agent and each Purchaser Agent (with a copy to the Collateral Custodian).

     (b) Monthly Report. On each Reporting Date, the Servicer will provide to the Seller, the Administrative Agent, each Purchaser Agent, the Backup Servicer and any Liquidity Bank, a monthly statement including a Borrowing Base calculated as of the most recent Determination Date, with respect to the related Collection Period signed by a Responsible Officer of the Servicer and the Seller and substantially in the form of Exhibit C (a “Monthly Report”).

     (c) Servicer’s Certificate. Together with each Monthly Report, the Servicer shall submit to the Administrative Agent, each Purchaser Agent and any Liquidity Bank a certificate (a “Servicer’s Certificate”), signed by a Responsible Officer of the Servicer and substantially in the form of Exhibit J.

     (d) Financial Statements. The Servicer will submit to the Administrative Agent, each Purchaser Agent, each Purchaser, the Backup Servicer and any Liquidity Bank, (i) within forty-five (45) days after the end of each of its first three fiscal quarters, commencing with the fiscal quarter ending March 31, 2006, a copy of the quarterly report on Form 10-Q of CapitalSource Inc. for the most recent fiscal quarter and unaudited consolidating statements, and (ii) within ninety (90) days after the end of each fiscal year, commencing with the fiscal year ending December 31, 2006, a copy of the annual report on Form 10-K of CapitalSource Inc., in each

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case in the form as filed with the Securities and Exchange Commission and unaudited consolidating statements.

     (e) Tax Returns. Upon demand by the Administrative Agent, each Purchaser Agent and any Liquidity Bank, copies of all federal, state and local Tax returns and reports filed by the Seller and Servicer, or in which the Seller or Servicer was included on a consolidated or combined basis (excluding sales, use and like taxes).

     (f) Financial Statements of Obligors. Upon demand by the Administrative Agent, each Purchaser Agent and any Liquidity Bank, the Servicer will provide to such party the financial statements of any Obligor.

     (g) Other Reports. The Servicer will provide any other reports requested by the Administrative Agent and reasonably acceptable to the Originator.

     Section 6.11 Annual Statement as to Compliance.

     The Servicer will provide to the Administrative Agent and each Purchaser Agent, within ninety (90) days following the end of each fiscal year of the Servicer, commencing with the fiscal year ending on December 31, 2006, a fiscal report signed by a Responsible Officer of the Servicer certifying that (a) a review of the activities of the Servicer, and the Servicer’s performance pursuant to this Agreement, for the fiscal period ending on the last day of such fiscal year has been made under such Person’s supervision and (b) the Servicer has performed or has caused to be performed in all material respects all of its obligations under this Agreement throughout such year and no Servicer Default has occurred and is continuing.

     Section 6.12 Annual Independent Public Accountant’s Servicing Reports.

     The Servicer will cause a firm of nationally recognized independent public accountants (who may also render other services to the Servicer) to furnish to the Administrative Agent, each Purchaser Agent, the Collateral Custodian and the Backup Servicer, within ninety (90) days following the end of each fiscal year of the Servicer, commencing with the fiscal year ending on December 31, 2006: (i) a report relating to such fiscal year to the effect that (a) such firm has reviewed certain documents and records relating to the servicing of the Collateral, and (b) based on such examination, such firm is of the opinion that the Monthly Reports for such year were prepared in compliance with this Agreement, except for such exceptions as it believes to be immaterial and such other exceptions as will be set forth in such firm’s report and (ii) a report covering such fiscal year to the effect that such accountants have applied certain agreed-upon procedures (which procedures shall have been approved by the Administrative Agent and each Purchaser Agent) to certain documents and records relating to the Collateral under any Transaction Document, compared the information contained in the Monthly Reports and the Servicer’s Certificates delivered during the period covered by such report with such documents and records and that no matters came to the attention of such accountants that caused them to believe that such servicing was not conducted in compliance with this Article VI, except for such exceptions as such accountants shall believe to be immaterial and such other exception as shall be set forth in such statement.

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     Section 6.13 Limitation on Liability of the Servicer and Others

     Except as provided herein, the Servicer shall not be under any liability to the Administrative Agent, each Purchaser Agent, the Secured Parties or any other Person for any action taken or for refraining from the taking of any action pursuant to this Agreement whether arising from express or implied duties under this Agreement; provided that notwithstanding anything to the contrary contained herein nothing shall protect the Servicer against any liability that would otherwise be imposed by reason of its willful misfeasance, bad faith or negligence in the performance of duties or by reason of its willful misconduct hereunder.

     Section 6.14 The Servicer Not to Resign.

     The Servicer shall not resign from the obligations and duties hereby imposed on it except upon the Servicer’s determination that (i) the performance of its duties hereunder is or becomes impermissible under Applicable Law and (ii) there is no reasonable action that the Servicer could take to make the performance of its duties hereunder permissible under Applicable Law. Any such determination permitting the resignation of the Servicer shall be evidenced as to clause (i) above by an Opinion of Counsel to such effect delivered to the Administrative Agent, each Purchaser Agent and the Backup Servicer. No such resignation shall become effective until a Successor Servicer shall have assumed the responsibilities and obligations of the Servicer in accordance with Section 6.2.

     Section 6.15 Servicer Defaults.

     If any one of the following events (a “Servicer Default”) shall occur and be continuing:

     (a) any failure by the Servicer to make any payment, transfer or deposit (including without limitation with respect to Collections) as required by this Agreement which continues unremedied for a period of one Business Day;

     (b) any failure by the Servicer to give instructions or notice to the Administrative Agent and each Purchaser Agent as required by this Agreement, or to deliver any required Monthly Report or other Required Reports hereunder on or before the date occurring two Business Days after the date such instruction, notice or report is required to be made or given, as the case may be, under the terms of this Agreement;

     (c) any failure on the part of the Servicer duly to observe or perform in any material respect any other covenants or agreements of the Servicer set forth in this Agreement or the other Transaction Documents to which the Servicer is a party and the same continues unremedied for a period of thirty (30) days after the earlier to occur of (i) the date on which written notice of such failure requiring the same to be remedied shall have been given to the Servicer by the Administrative Agent and each Purchaser Agent and (ii) the date on which the Servicer becomes aware thereof;

     (d) any representation, warranty or certification made by the Servicer in any Transaction Document or in any certificate delivered pursuant to any Transaction Document shall prove to have been incorrect when made, which has a Material Adverse Effect on the Administrative Agent, any Purchaser Agent or the Secured Parties and which continues to be

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unremedied for a period of thirty (30) days after the earlier to occur of (i) the date on which written notice of such incorrectness requiring the same to be remedied shall have been given to the Servicer by the Administrative Agent or any Purchaser Agent and (ii) the date on which the Servicer becomes aware thereof;

     (e) an Insolvency Event shall occur with respect to the Servicer;

     (f) any material delegation of the Servicer’s duties that is not permitted by Section 6.1;

     (g) any financial or other information reasonably requested by the Administrative Agent, any Purchaser Agent or any Purchaser is not provided as requested within a reasonable amount of time following such request;

     (h) the rendering against the Servicer of one or more final judgments, decrees or orders for the payment of money in excess of $10,000,000, individually or in the aggregate, and the continuance of such judgment, decree or order unsatisfied and in effect for any period of more than sixty (60) consecutive days without a stay of execution;

     (i) the failure of the Servicer to make any payment due with respect to any recourse debt or other obligations, which debt or other obligations are in excess of $10,000,000, individually or in the aggregate, or the occurrence of any event or condition that would permit acceleration of such recourse debt or other obligations whether or not waived;

     (j) CapitalSource Inc.’s Consolidated Tangible Net Worth is less than (i) $1,015,000,000 plus (ii) 70% of the cumulative Net Proceeds of Capital Stock/Conversion of Debt received at any time after December 31, 2005;

     (k) [Reserved];

     (l) the Servicer fails in any material respect to comply with the Credit and Collection Policy regarding the servicing of the Collateral;

     (m) the Servicer consents or agrees to, or otherwise permits to occur, any amendment, modification, change, supplement or rescission of or to the Credit and Collection Policy (after the adoption of same) in whole or in part that could be reasonably expected to have a Material Adverse Effect upon the Collateral, the Administrative Agent, any Purchaser Agent or the Secured Parties, without the prior written consent of the Administrative Agent and each Purchaser Agent; or

     (n) CSE Mortgage ceases to be the Servicer.

     then notwithstanding anything herein to the contrary, so long as any such Servicer Default shall not have been remedied within any applicable cure period prior to the date of the Servicer Termination Notice (defined below), the Administrative Agent, by written notice to the Servicer (with a copy to the Backup Servicer) (a “Servicer Termination Notice”), may terminate all of the rights and obligations of the Servicer as Servicer under this Agreement.

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     Section 6.16 Appointment of Successor Servicer.

     (a) On and after the receipt by the Servicer of a Servicer Termination Notice pursuant to Section 6.15, the Servicer shall continue to perform all servicing functions under this Agreement until the date specified in the Servicer Termination Notice or otherwise specified by the Administrative Agent in writing or, if no such date is specified in such Servicer Termination Notice or otherwise specified by the Administrative Agent, until a date mutually agreed upon by the Servicer and the Administrative Agent. The Administrative Agent may at the time described in the immediately preceding sentence in its sole discretion, appoint the Backup Servicer as the Servicer hereunder, and the Backup Servicer shall on such date assume all obligations of the Servicer hereunder, and all authority and power of the Servicer under this Agreement shall pass to and be vested in the Backup Servicer. As compensation therefor, the Backup Servicer shall be entitled to the Servicing Fee, together with other servicing compensation in the form of assumption fees, late payment charges or otherwise as provided herein; including, without limitation, Transition Expenses. In the event that the Administrative Agent does not so appoint the Backup Servicer, there is no Backup Servicer or the Backup Servicer is unable to assume such obligations on such date, the Administrative Agent shall as promptly as possible appoint a successor servicer (the “Successor Servicer”), and such Successor Servicer shall accept its appointment by a written assumption in a form acceptable to the Administrative Agent and each Purchaser Agent. In the event that a Successor Servicer has not accepted its appointment at the time when the Servicer ceases to act as Servicer, the Administrative Agent shall petition a court of competent jurisdiction to appoint any established financial institution, having a net worth of not less than $50,000,000 and whose regular business includes the servicing of Collateral, as the Successor Servicer hereunder.

     (b) Upon its appointment, the Backup Servicer (subject to Section 6.16(a)) or the Successor Servicer, as applicable, shall be the successor in all respects to the Servicer with respect to servicing functions under this Agreement and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer by the terms and provisions hereof, and all references in this Agreement to the Servicer shall be deemed to refer to the Backup Servicer or the Successor Servicer, as applicable; provided that the Backup Servicer or Successor Servicer, as applicable, shall have (i) no liability with respect to any action performed by the terminated Servicer prior to the date that the Backup Servicer or Successor Servicer, as applicable, becomes the successor to the Servicer or any claim of a third party based on any alleged action or inaction of the terminated Servicer, (ii) no obligation to perform any advancing obligations, if any, of the Servicer unless it elects to in its sole discretion, (iii) no obligation to pay any taxes required to be paid by the Servicer (provided that the Backup Servicer or Successor Servicer, as applicable, shall pay any income taxes for which it is liable), (iv) no obligation to pay any of the fees and expenses of any other party to the transactions contemplated hereby, and (v) no liability or obligation with respect to any Servicer indemnification obligations of any prior Servicer, including the original Servicer. The indemnification obligations of the Backup Servicer or the Successor Servicer, as applicable, upon becoming a Successor Servicer, are expressly limited to those arising on account of its failure to act in good faith and with reasonable care under the circumstances. In addition, the Backup Servicer or Successor Servicer, as applicable, shall have no liability relating to the representations and warranties of the Servicer contained in Article IV. Further, for so long as the

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Backup Servicer shall be the Successor Servicer, the provisions of Section 2.15, Section 2.16(b) and Section 2.16(e) of this Agreement shall not apply to it in its capacity as Servicer.

     (c) All authority and power granted to the Servicer under this Agreement shall automatically cease and terminate upon termination of this Agreement and shall pass to and be vested in the Seller and, without limitation, the Seller is hereby authorized and empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, all documents and other instruments, and to do and accomplish all other acts or things necessary or appropriate to effect the purposes of such transfer of servicing rights. The Servicer agrees to cooperate with the Seller in effecting the termination of the responsibilities and rights of the Servicer to conduct servicing of the Collateral.

     (d) Upon the Backup Servicer receiving notice that it is required to serve as the Servicer hereunder pursuant to the foregoing provisions of this Section 6.16, the Backup Servicer will promptly begin the transition to its role as Servicer. Notwithstanding the foregoing, the Backup Servicer may, in its discretion, appoint, or petition a court of competent jurisdiction to appoint, any established servicing institution as the successor to the Servicer hereunder in the assumption of all or any part of the responsibilities, duties or liabilities of the Servicer hereunder. As compensation, any Successor Servicer (including, without limitation, the Administrative Agent) so appointed shall be entitled to receive the Servicing Fee, together with any other servicing compensation in the form of assumption fees, late payment charges or otherwise as provided herein that accrued prior thereto, including, without limitation, Transition Expenses. In the event the Backup Servicer is required to solicit bids as provided herein, the Backup Servicer shall solicit, by public announcement, bids from banks and mortgage servicing institutions meeting the qualifications set forth in Section 6.16(a). Such public announcement shall specify that the Successor Servicer shall be entitled to the full amount of the Servicing Fee as servicing compensation, together with the other servicing compensation in the form of assumption fees, late payment charges or otherwise that accrued prior thereto. Within thirty (30) days after any such public announcement, the Backup Servicer shall negotiate and effect the sale, transfer and assignment of the servicing rights and responsibilities hereunder to the qualified party submitting the highest qualifying bid. The Backup Servicer shall deduct from any sum received by the Backup Servicer from the successor to the Servicer in respect of such sale, transfer and assignment all costs and expenses of any public announcement and of any sale, transfer and assignment of the servicing rights and responsibilities hereunder and the amount of any unreimbursed Servicing Advances. After such deductions, the remainder of such sum shall be paid by the Backup Servicer to the Servicer at the time of such sale, transfer and assignment to the Servicer’s successor. The Backup Servicer and such successor shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. No appointment of a successor to the Servicer hereunder shall be effective until written notice of such proposed appointment shall have been provided by the Backup Servicer to the Administrative Agent and each Purchaser Agent and the Backup Servicer shall have consented thereto. The Backup Servicer shall not resign as servicer until a Successor Servicer has been appointed and accepted such appointment. Notwithstanding anything to the contrary contained herein, in no event shall Wells Fargo, in any capacity, be liable for any Servicing Fee or for any differential in the amount of the Servicing Fee paid hereunder and the amount necessary to induce any Successor Servicer under this Agreement and the transactions set forth or provided for by this Agreement.

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ARTICLE VII

THE BACKUP SERVICER

     Section 7.1 Designation of the Backup Servicer.

     (a) Initial Backup Servicer. The backup servicing role with respect to the Collateral shall be conducted by the Person designated as Backup Servicer hereunder from time to time in accordance with this Section 7.1. Until the Administrative Agent shall give to Wells Fargo a Backup Servicer Termination Notice, Wells Fargo is hereby designated as, and hereby agrees to perform the duties and obligations of, a Backup Servicer pursuant to the terms hereof.

     (b) Successor Backup Servicer. Upon the Backup Servicer’s receipt of Backup Servicer Termination Notice from the Administrative Agent of the designation of a replacement Backup Servicer pursuant to the provisions of Section 7.5, the Backup Servicer agrees that it will terminate its activities as Backup Servicer hereunder.

     Section 7.2 Duties of the Backup Servicer.

     (a) Appointment. The Seller and the Administrative Agent, as agent for the Secured Parties, each hereby appoints Wells Fargo to act as Backup Servicer, for the benefit of the Administrative Agent, each Purchaser Agent and the Secured Parties, as from time to time designated pursuant to Section 7.1. The Backup Servicer hereby accepts such appointment and agrees to perform the duties and obligations with respect thereto set forth herein.

     (b) Duties. On or before the initial Funding Date, and until its removal pursuant to Section 7.5, the Backup Servicer shall perform, on behalf of the Administrative Agent and the Secured Parties, the following duties and obligations:

     (i) On or before the Closing Date, the Backup Servicer shall accept from the Servicer delivery of the information required to be set forth in the Monthly Reports (if any) in hard copy and on computer tape; provided that the computer tape is in an MS DOS, PC readable ASCII format or other format to be agreed upon by the Backup Servicer and the Servicer on or prior to closing.

     (ii) Not later than 12:00 noon Charlotte, North Carolina time on each Reporting Date, the Servicer shall deliver to the Backup Servicer the asset tape, which shall include but not be limited to the following information: (x) for each Asset, the name and number of the related Obligor, the collection status, the loan status, the date of each Scheduled Payment and the Outstanding Asset Balance, (y) the Borrowing Base and (z) the Aggregate Outstanding Asset Balance (the “Tape”). The Backup Servicer shall accept delivery of the Tape.

     (iii) Prior to the related Payment Date, the Backup Servicer shall review the Monthly Report to ensure that it is complete on its face and that the following items in such Monthly Report have been accurately calculated, if applicable, and reported: (A) the Borrowing Base, (B) the Backup Servicing Fee, (C) the Assets that are current and not past due, (D) the Assets that are 1 - 30 days past due, (E) the Assets that are 31 - 60

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days past due, (F) the Assets that are 61 — 90 days past due, (G) the Assets that are 90+ days past due, (H) the Pool Charged-Off Ratio, and (I) the Aggregate Outstanding Asset Balance. The Backup Servicer by a separate written report shall notify the Administrative Agent and the Servicer of any disagreements with the Monthly Report based on such review not later than the Business Day preceding such Payment Date to such Persons.

     (iv) If the Servicer disagrees with the report provided under paragraph (iii) above by the Backup Servicer or if the Servicer or any subservicer has not reconciled such discrepancy, the Backup Servicer agrees to confer with the Servicer to resolve such disagreement on or prior to the next succeeding Determination Date and shall settle such discrepancy with the Servicer if possible, and notify the Administrative Agent of the resolution thereof. The Servicer hereby agrees to cooperate at its own expense with the Backup Servicer in reconciling any discrepancies herein. If within twenty (20) days after the delivery of the report provided under paragraph (iii) above by the Backup Servicer, such discrepancy is not resolved, the Backup Servicer shall promptly notify the Administrative Agent of the continued existence of such discrepancy. Following receipt of such notice by the Administrative Agent, the Servicer shall deliver to the Administrative Agent, the Secured Parties and the Backup Servicer no later than the related Payment Date a certificate describing the nature and amount of such discrepancies and the actions the Servicer proposes to take with respect thereto.

     (c) Reliance on Tape. With respect to the duties described in Section 7.2(b), the Backup Servicer, is entitled to rely conclusively, and shall be fully protected in so relying, on the contents of each Tape, including, but not limited to, the completeness and accuracy thereof, provided by the Servicer.

     Section 7.3 Merger or Consolidation.

     Any Person (i) into which the Backup Servicer may be merged or consolidated, (ii) that may result from any merger or consolidation to which the Backup Servicer shall be a party, or (iii) that may succeed to the properties and assets of the Backup Servicer substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Backup Servicer hereunder, shall be the successor to the Backup Servicer under this Agreement without further act on the part of any of the parties to this Agreement provided such Person is organized under the laws of the United States of America or any one of the States thereof or the District of Columbia (or any domestic branch of a foreign bank), (i) (a) that has either (1) a long-term unsecured debt rating of “A” or better by S&P and “A2” or better by Moody’s or (2) a short-term unsecured debt rating or certificate of deposit rating of “A-1” or better by S&P or “P-1” or better by Moody’s, (b) the parent corporation which has either (1) a long-term unsecured debt rating of “A” or better by S&P and “A2” or better by Moody’s or (2) a short-term unsecured debt rating or certificate of deposit rating of “A-1” or better by S&P and “P-1” or better by Moody’s or (c) is otherwise acceptable to the Administrative Agent.

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     Section 7.4 Backup Servicing Compensation.

     As compensation for its back-up servicing activities hereunder, the Backup Servicer shall be entitled to receive the Backup Servicing Fee from the Servicer. To the extent that such Backup Servicing Fee is not paid by the Servicer, the Backup Servicer shall be entitled to receive the unpaid balance of its Backup Servicing Fee to the extent of funds available therefor pursuant to Section 2.9(a)(4) and Section 2.10(a)(4), as applicable. The Backup Servicer’s entitlement to receive the Backup Servicing Fee shall cease (excluding any unpaid outstanding amounts as of that date) on the earliest to occur of: (i) it becoming the Successor Servicer, (ii) its removal as Backup Servicer pursuant to Section 7.5, or (iii) the termination of this Agreement. Upon becoming Successor Servicer pursuant to Section 6.16, the Backup Servicer shall be entitled to the Servicing Fee.

     Section 7.5 Backup Servicer Removal.

     The Backup Servicer may be removed, with or without cause, by the Administrative Agent by notice given in writing to the Backup Servicer (the “Backup Servicer Termination Notice”). In the event of any such removal, a replacement Backup Servicer may be appointed by the Administrative Agent.

     Section 7.6 Limitation on Liability.

     (a) The Backup Servicer undertakes to perform only such duties and obligations as are specifically set forth in this Agreement, it being expressly understood by all parties hereto that there are no implied duties or obligations of the Backup Servicer hereunder. Without limiting the generality of the foregoing, the Backup Servicer, except as expressly set forth herein, shall have no obligation to supervise, verify, monitor or administer the performance of the Servicer. The Backup Servicer may act through its agents, nominees, attorneys and custodians in performing any of its duties and obligations under this Agreement, it being understood by the parties hereto that the Backup Servicer will be responsible for any misconduct or negligence on the part of such agents, attorneys or custodians acting on the routine and ordinary day-to-day operations for and on behalf of the Backup Servicer. Neither the Backup Servicer nor any of its officers, directors, employees or agents shall be liable, directly or indirectly, for any damages or expenses arising out of the services performed under this Agreement other than damages or expenses that result from the gross negligence or willful misconduct of it or them or the failure to perform materially in accordance with this Agreement.

     (b) The Backup Servicer shall not be liable for any obligation of the Servicer contained in this Agreement or for any errors of the Servicer contained in any computer tape, certificate or other data or document delivered to the Backup Servicer hereunder or on which the Backup Servicer must rely in order to perform its obligations hereunder, and the Secured Parties, the Administrative Agent and the Collateral Custodian each agree to look only to the Servicer to perform such obligations. The Backup Servicer shall have no responsibility and shall not be in default hereunder or incur any liability for any failure, error, malfunction or any delay in carrying out any of its duties under this Agreement if such failure or delay results from the Backup Servicer acting in accordance with information prepared or supplied by a Person other than the Backup Servicer or the failure of any such other Person to prepare or provide such

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information. The Backup Servicer shall have no responsibility, shall not be in default and shall incur no liability for (i) any act or failure to act of any third party, including the Servicer, (ii) any inaccuracy or omission in a notice or communication received by the Backup Servicer from any third party, (iii) the invalidity or unenforceability of any Collateral under Applicable Law, (iv) the breach or inaccuracy of any representation or warranty made with respect to any Collateral, or (v) the acts or omissions of any successor Backup Servicer.

     Section 7.7 The Backup Servicer Not to Resign.

     The Backup Servicer shall not resign (except with prior consent of the Administrative Agent which consent shall not be unreasonably withheld) from the obligations and duties hereby imposed on it except upon the Backup Servicer’s determination that (i) the performance of its duties hereunder is or becomes impermissible under Applicable Law and (ii) there is no reasonable action that the Backup Servicer could take to make the performance of its duties hereunder permissible under Applicable Law. Any such determination permitting the resignation of the Backup Servicer shall be evidenced as to clause (i) above by an Opinion of Counsel to such effect delivered to the Administrative Agent and each Purchaser Agent. No such resignation shall become effective until a successor Backup Servicer shall have assumed the responsibilities and obligations of the Backup Servicer hereunder.

ARTICLE VIII

THE COLLATERAL CUSTODIAN

     Section 8.1 Designation of Collateral Custodian.

     (a) Initial Collateral Custodian. The role of collateral custodian with respect to the Required Asset Documents shall be conducted by the Person designated as Collateral Custodian hereunder from time to time in accordance with this Section 8.1. Until the Administrative Agent shall give to Wells Fargo a Collateral Custodian Termination Notice, Wells Fargo is hereby designated as, and hereby agrees to perform the duties and obligations of, Collateral Custodian pursuant to the terms hereof.

     (b) Successor Collateral Custodian. Upon the Collateral Custodian’s receipt of a Collateral Custodian Termination Notice from the Administrative Agent of the designation of a successor Collateral Custodian pursuant to the provisions of Section 8.5, the Collateral Custodian agrees that it will terminate its activities as Collateral Custodian hereunder.

     Section 8.2 Duties of Collateral Custodian.

     (a) Appointment. The Seller and the Administrative Agent each hereby appoints Wells Fargo to act as Collateral Custodian, for the benefit of the Administrative Agent, as agent for the Secured Parties. The Collateral Custodian hereby accepts such appointment and agrees to perform the duties and obligation with respect thereto set forth herein.

     (b) Duties. On or before the initial Funding Date, and until its removal pursuant to Section 8.5, the Collateral Custodian shall perform on behalf of the Administrative Agent and the Secured Parties, the following duties and obligations:

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     (i) The Collateral Custodian shall take and retain custody of the Required Asset Documents delivered by the Seller pursuant to Section 3.2 in accordance with the terms and conditions of this Agreement, all for the benefit of the Secured Parties and subject to the Lien thereon in favor of the Administrative Agent as agent for the Secured Parties. Within five Business Days of its receipt of any Required Asset Documents, the Collateral Custodian shall review the related Collateral and Required Asset Documents to confirm that (A) such Collateral has been properly executed and has no missing or mutilated pages, (B) any UCC and other filings (as set forth on the Asset Checklists) have been made, (C) an Insurance Policy exists with respect to any real or personal property constituting the Related Property, and (D) confirming the related Outstanding Asset Balance, Asset number and Obligor name with respect to such Asset is referenced on the related Asset List and is not a duplicate Asset (collectively, the “Review Criteria”). In order to facilitate the foregoing review by the Collateral Custodian, in connection with each delivery of Required Asset Documents hereunder to the Collateral Custodian, the Servicer shall provide to the Collateral Custodian an electronic file (in EXCEL or a comparable format) that contains the related Asset List or that otherwise contains the Asset identification number and the name of the Obligor with respect to each related Asset. If, at the conclusion of such review, the Collateral Custodian shall determine that (i) the Outstanding Asset Balances of the Collateral it has received Required Asset Documents with respect to is less than as set forth on the electronic file, the Collateral Custodian shall immediately notify the Administrative Agent of such discrepancy, and (ii) any Review Criteria is not satisfied, the Collateral Custodian shall within one Business Day notify the Servicer of such determination and provide the Servicer with a list of the non-complying Assets and the applicable Review Criteria that they fail to satisfy. The Servicer shall have five Business Days to correct any non-compliance with a Review Criteria. If after the conclusion of such time period the Servicer has still not cured any non-compliance by an Asset with a Review Criteria, the Collateral Custodian shall promptly notify the Seller and the Administrative Agent of such determination by providing a written report to such persons identifying, with particularity, each Asset and each of the applicable Review Criteria that such Asset fails to satisfy. In addition, if requested in writing by the Servicer and approved by the Administrative Agent within ten Business Days of the Collateral Custodian’s delivery of such report, the Collateral Custodian shall return any Asset which fails to satisfy a Review Criteria to the Seller. Other than the foregoing, the Collateral Custodian shall not have any responsibility for reviewing any Required Asset Documents.

     (ii) In taking and retaining custody of the Required Asset Documents, the Collateral Custodian shall be deemed to be acting as the agent of the Administrative Agent and the Secured Parties; provided that the Collateral Custodian makes no representations as to the existence, perfection or priority of any Lien on the Required Asset Documents or the instruments therein; and provided further that, the Collateral Custodian’s duties as agent shall be limited to those expressly contemplated herein.

     (iii) All Required Asset Document shall be kept in fire resistant vaults, rooms or cabinets at the locations specified on Schedule III attached hereto, or at such other office as shall be specified to the Administrative Agent by the Collateral Custodian in a written notice delivered at least forty-five (45) days prior to such change. All Required

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Asset Documents shall be placed together with an appropriate identifying label and maintained in such a manner so as to permit retrieval and access. All Required Asset Documents shall be clearly segregated from any other documents or instruments maintained by the Collateral Custodian.

     (iv) The Collateral Custodian shall make payments pursuant to the terms of the Monthly Report in accordance with Section 2.9 and Section 2.10 (the “Payment Duties”).

     (v) On each Reporting Date, the Collateral Custodian shall provide a written report to the Administrative Agent and the Servicer (in a form acceptable to the Administrative Agent) identifying each Asset for which it holds Required Asset Documents, the non-complying Assets and the applicable Review Criteria that any non-complying Asset fails to satisfy.

     (vi) In performing its duties, the Collateral Custodian shall use the same degree of care and attention as it employs with respect to similar Collateral that it holds as Collateral Custodian.

     Section 8.3 Merger or Consolidation.

     Any Person (i) into which the Collateral Custodian may be merged or consolidated, (ii) that may result from any merger or consolidation to which the Collateral Custodian shall be a party, or (iii) that may succeed to the properties and assets of the Collateral Custodian substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Collateral Custodian hereunder, shall be the successor to the Collateral Custodian under this Agreement without further act of any of the parties to this Agreement.

     Section 8.4 Collateral Custodian Compensation.

     As compensation for its collateral custodian activities hereunder, the Collateral Custodian shall be entitled to a Collateral Custodian Fee (the “Collateral Custodian Fee”) from the Servicer. To the extent that such Collateral Custodian Fee is not paid by the Servicer, the Collateral Custodian shall be entitled to receive the unpaid balance of its Collateral Custodian Fee to the extent of funds available therefor pursuant to the provision of Section 2.9(a)(4) or Section 2.10(a)(4), as applicable. The Collateral Custodian’s entitlement to receive the Collateral Custodian Fee shall cease on the earlier to occur of: (i) its removal as Collateral Custodian pursuant to Section 8.5 or (ii) the termination of this Agreement.

     Section 8.5 Collateral Custodian Removal.

     The Collateral Custodian may be removed, with or without cause, by the Administrative Agent by notice given in writing to the Collateral Custodian (the “Collateral Custodian Termination Notice”); provided that, notwithstanding its receipt of a Collateral Custodian Termination Notice, the Collateral Custodian shall continue to act in such capacity until a successor Collateral Custodian has been appointed, has agreed to act as Collateral Custodian

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hereunder, and has received all Required Asset Documents held by the previous Collateral Custodian.

     Section 8.6 Limitation on Liability.

     (i) The Collateral Custodian may conclusively rely on and shall be fully protected in acting upon any certificate, instrument, opinion, notice, letter, telegram or other document delivered to it and that in good faith it reasonably believes to be genuine and that has been signed by the proper party or parties. The Collateral Custodian may rely conclusively on and shall be fully protected in acting upon (a) the written instructions of any designated officer of the Administrative Agent or (b) the verbal instructions of the Administrative Agent.

     (ii) The Collateral Custodian may consult counsel satisfactory to it and the advice or opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the advice or opinion of such counsel.

     (iii) The Collateral Custodian shall not be liable for any error of judgment, or for any act done or step taken or omitted by it, in good faith, or for any mistakes of fact or law, or for anything that it may do or refrain from doing in connection herewith except in the case of its willful misconduct or grossly negligent performance or omission of its duties and in the case of the negligent performance of its Payment Duties and in the case of its negligent performance of its duties in taking and retaining custody of the Required Asset Documents.

     (iv) The Collateral Custodian makes no warranty or representation and shall have no responsibility (except as expressly set forth in this Agreement) as to the content, enforceability, completeness, validity, sufficiency, value, genuineness, ownership or transferability of the Collateral, and will not be required to and will not make any representations as to the validity or value (except as expressly set forth in this Agreement) of any of the Collateral. The Collateral Custodian shall not be obligated to take any legal action hereunder that might in its judgment involve any expense or liability unless it has been furnished with an indemnity reasonably satisfactory to it.

     (v) The Collateral Custodian shall have no duties or responsibilities except such duties and responsibilities as are specifically set forth in this Agreement and no covenants or obligations shall be implied in this Agreement against the Collateral Custodian.

     (vi) The Collateral Custodian shall not be required to expend or risk its own funds in the performance of its duties hereunder.

     (vii) It is expressly agreed and acknowledged that the Collateral Custodian is not guaranteeing performance of or assuming any liability for the obligations of the other parties hereto or any parties to the Collateral.

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     Section 8.7 The Collateral Custodian Not to Resign.

     The Collateral Custodian shall not resign from the obligations and duties hereby imposed on it except upon the Collateral Custodian’s determination that (i) the performance of its duties hereunder is or becomes impermissible under Applicable Law and (ii) there is no reasonable action that the Collateral Custodian could take to make the performance of its duties hereunder permissible under Applicable Law. Any such determination permitting the resignation of the Collateral Custodian shall be evidenced as to clause (i) above by an Opinion of Counsel to such effect delivered to the Administrative Agent and each Purchaser Agent. No such resignation shall become effective until a successor Collateral Custodian shall have assumed the responsibilities and obligations of the Collateral Custodian hereunder.

     Section 8.8 Release of Documents.

     (a) Release for Servicing. From time to time and as appropriate for the enforcement or servicing any of the Collateral, the Collateral Custodian is hereby authorized (unless and until such authorization is revoked by the Administrative Agent), upon written receipt from the Servicer of a request for release of documents and receipt in the form annexed hereto as Exhibit H to release to the Servicer the related Required Asset Documents or the documents set forth in such request and receipt to the Servicer. All documents so released to the Servicer shall be held by the Servicer in trust for the benefit of the Administrative Agent in accordance with the terms of this Agreement. The Servicer shall return to the Collateral Custodian the Required Asset Documents or other such documents (i) immediately upon the request of the Administrative Agent, or (ii) when the Servicer’s need therefor in connection with such foreclosure or servicing no longer exists, unless the Asset shall be liquidated, in which case, upon receipt of an additional request for release of documents and receipt certifying such liquidation from the Servicer to the Collateral Custodian in the form annexed hereto as Exhibit H, the Servicer’s request and receipt submitted pursuant to the first sentence of this subsection shall be released by the Collateral Custodian to the Servicer.

     (b) Limitation on Release. The foregoing provision respecting release to the Servicer of the Required Asset Documents and documents by the Collateral Custodian upon request by the Servicer shall be operative only to the extent that at any time the Collateral Custodian shall not have released to the Servicer active Required Asset Documents (including those requested) pertaining to more than fifteen (15) Assets at the time being serviced by the Servicer under this Agreement. Any additional Required Asset Documents or documents requested to be released by the Servicer may be released only upon written authorization of the Administrative Agent. The limitations of this paragraph shall not apply to the release of Required Asset Documents to the Servicer pursuant to the immediately succeeding subsection.

     (c) Release for Payment. Upon receipt by the Collateral Custodian of the Servicer’s request for release of documents and receipt in the form annexed hereto as Exhibit H(which certification shall include a statement to the effect that all amounts received in connection with such payment or repurchase have been credited to the Collection Account as provided in this Agreement), the Collateral Custodian shall promptly release the related Required Asset Documents to the Servicer.

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     Section 8.9 Return of Required Asset Documents.

     The Seller may, with the prior written consent of the Administrative Agent (such consent not to be unreasonably withheld), require that the Collateral Custodian return each Required Asset Document (a) delivered to the Collateral Custodian in error, (b) for which a Substitute Asset has been substituted in accordance with Section 2.18, (c) as to which the lien on the Related Property has been so released pursuant to Section 9.2, (d) that has been repaid by the Seller pursuant to Section 4.6 or (e) that is required to be redelivered to the Seller in connection with the termination of this Agreement, in each case by submitting to the Collateral Custodian and the Administrative Agent a written request in the form of Exhibit H hereto (signed by both the Seller and the Administrative Agent) specifying the Collateral to be so returned and reciting that the conditions to such release have been met (and specifying the Section or Sections of this Agreement being relied upon for such release). The Collateral Custodian shall upon its receipt of each such request for return executed by the Seller and the Administrative Agent promptly, but in any event within five Business Days, return the Required Asset Documents so requested to the Seller.

     Section 8.10 Access to Certain Documentation and Information Regarding the Collateral; Audits.

     The Collateral Custodian shall provide to the Administrative Agent and each Purchaser Agent access to the Required Asset Documents and all other documentation regarding the Collateral including in such cases where the Administrative Agent and each Purchaser Agent is required in connection with the enforcement of the rights or interests of the Secured Parties, or by applicable statutes or regulations, to review such documentation, such access being afforded without charge but only (i) upon two Business Days prior written request, (ii) during normal business hours and (iii) subject to the Servicer’s and Collateral Custodian’s normal security and confidentiality procedures. Prior to the Closing Date and periodically thereafter at the discretion of the Administrative Agent and each Purchaser Agent, the Administrative Agent and each Purchaser Agent may review the Servicer’s collection and administration of the Collateral in order to assess compliance by the Servicer with the Credit and Collection Policy, as well as with this Agreement and may conduct an audit of the Collateral, Required Asset Documents in conjunction with such a review. Such review shall be reasonable in scope and shall be completed in a reasonable period of time. Without limiting the foregoing provisions of this Section 8.10, from time to time on request of the Administrative Agent, the Collateral Custodian shall permit certified public accountants or other auditors acceptable to the Administrative Agent to conduct, at the Servicer’s expense, a review of the Required Asset Documents and all other documentation regarding the Collateral.

ARTICLE IX

SECURITY INTEREST

     Section 9.1 Grant of Security Interest.

     The parties to this Agreement intend that the conveyance of the Collateral by the Seller to the applicable Purchasers be treated as sales for all purposes (other than for the purposes

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described in Section 13.19). If, despite such intention, a determination is made that such transactions not be treated as sales, then the parties hereto intend that this Agreement constitute a security agreement and the transactions effected hereby constitute secured loans by the applicable Purchasers to the Seller under Applicable Law. For such purpose, the Seller hereby transfers, conveys, assigns and grants as of the Closing Date to the Administrative Agent, as agent for the Secured Parties, a lien and continuing security interest in all of the Seller’s right, title and interest in, to and under (but none of the obligations under) all Collateral (including any Hedging Agreements), whether now existing or hereafter arising or acquired by the Seller, and wherever the same may be located, to secure the prompt, complete and indefeasible payment and performance in full when due, whether by lapse of time, acceleration or otherwise, of the Aggregate Unpaids of the Seller arising in connection with this Agreement and each other Transaction Document, whether now or hereafter existing, due or to become due, direct or indirect, or absolute or contingent, including, without limitation, all Aggregate Unpaids. The assignment under this Section 9.1 does not constitute and is not intended to result in a creation or an assumption by the Administrative Agent, the Purchaser Agents, any Hedge Counterparty, the Liquidity Banks or any of the Secured Parties of any obligation of the Seller or any other Person in connection with any or all of the Collateral or under any agreement or instrument relating thereto. Anything herein to the contrary notwithstanding, (a) the Seller shall remain liable under the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Administrative Agent, as agent for the Secured Parties, of any of its rights in the Collateral shall not release the Seller from any of its duties or obligations under the Collateral, and (c) none of the Administrative Agent, the Purchaser Agents, any Hedge Counterparty, the Liquidity Banks or any Secured Party shall have any obligations or liability under the Collateral by reason of this Agreement, nor shall the Administrative Agent, the Purchaser Agents, any Hedge Counterparty, the Liquidity Banks or any Secured Party be obligated to perform any of the obligations or duties of the Seller thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.

     Section 9.2 Release of Lien on Collateral.

     At the same time as (i) any Collateral expires by its terms and all amounts in respect thereof have been paid in full by the related Obligor and deposited in the Collection Account, (ii) any Asset becomes a Prepaid Asset and all amounts in respect thereof have been paid in full by the related Obligor and deposited in the Collection Account, (iii) such Asset is replaced in accordance with Section 2.18, or (iv) this agreement terminates in accordance with Section 13.6, the Administrative Agent as agent for the Secured Parties will, to the extent requested by the Servicer, release its interest in such Collateral. In connection with any sale of such Related Property, the Administrative Agent as agent for the Secured Parties will after the deposit by the Servicer of the Proceeds of such sale into the Collection Account, at the sole expense of the Servicer, execute and deliver to the Servicer any assignments, bills of sale, termination statements and any other releases and instruments as the Servicer may reasonably request in order to effect the release and transfer of such Related Property; provided that the Administrative Agent as agent for the Secured Parties will make no representation or warranty, express or implied, with respect to any such Related Property in connection with such sale or transfer and assignment. Nothing in this section shall diminish the Servicer’s obligations pursuant to Section 6.6 with respect to the Proceeds of any such sale.

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     Section 9.3 Further Assurances.

     The provisions of Section 13.12 shall apply to the security interest granted under Section 9.1 as well as to the Advances hereunder.

     Section 9.4 Remedies.

     Upon the occurrence of a Termination Event, the Administrative Agent and Secured Parties shall have, with respect to the Collateral granted pursuant to Section 9.1, and in addition to all other rights and remedies available to the Administrative Agent and Secured Parties under this Agreement or other Applicable Law, all rights and remedies of a secured party upon default under the UCC.

     Section 9.5 Waiver of Certain Laws.

     Each of the Seller and the Servicer agrees, to the full extent that it may lawfully so agree, that neither it nor anyone claiming through or under it will set up, claim or seek to take advantage of any appraisement, valuation, stay, extension or redemption law now or hereafter in force in any locality where any Collateral may be situated in order to prevent, hinder or delay the enforcement or foreclosure of this Agreement, or the absolute sale of any of the Collateral or any part thereof, or the final and absolute putting into possession thereof, immediately after such sale, of the purchasers thereof, and each of the Seller and the Servicer, for itself and all who may at any time claim through or under it, hereby waives, to the full extent that it may be lawful so to do, the benefit of all such laws, and any and all right to have any of the properties or assets constituting the Collateral marshaled upon any such sale, and agrees that the Administrative Agent or any court having jurisdiction to foreclose the security interests granted in this Agreement may sell the Collateral as an entirety or in such parcels as the Administrative Agent or such court may determine.

     Section 9.6 Power of Attorney.

     Each of the Seller and the Servicer hereby irrevocably appoints the Administrative Agent its true and lawful attorney (with full power of substitution) in its name, place and stead and at is expense, in connection with the enforcement of the rights and remedies provided for in this Agreement, including without limitation the following powers: (a) to give any necessary receipts or acquittance for amounts collected or received hereunder, (b) to make all necessary transfers of the Collateral in connection with any such sale or other disposition made pursuant hereto, (c) to execute and deliver for value all necessary or appropriate bills of sale, assignments and other instruments in connection with any such sale or other disposition, the Seller and the Servicer hereby ratifying and confirming all that such attorney (or any substitute) shall lawfully do hereunder and pursuant hereto, and (d) to sign any agreements, orders or other documents in connection with or pursuant to any Transaction Document or Hedging Agreement. Nevertheless, if so requested by the Administrative Agent or a Purchaser Agent, the Seller shall ratify and confirm any such sale or other disposition by executing and delivering to the Administrative Agent or such purchaser all proper bills of sale, assignments, releases and other instruments as may be designated in any such request.

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ARTICLE X

TERMINATION EVENTS

     Section 10.1 Termination Events.

     The following events shall be Termination Events (“Termination Events”) hereunder:

     (a) as of any Determination Date, the Average Portfolio Delinquency Ratio exceeds 6.5%; or

     (b) as of any Determination Date, the Average Pool Charged-Off Ratio exceeds 3.0%; or

     (c) as of any Determination Date, the Average Portfolio Charged-Off Ratio exceeds 4.0%; or

     (d) the Advances Outstanding on any day exceeds the lesser of the Facility Amount and Maximum Availability and the same continues unremedied for two Business Days; provided that during the period of time that such event remains unremedied, no additional Advances will be made under this Agreement and any payments required to be made by the Servicer on a Payment Date shall be made under Section 2.10; or

     (e) a Servicer Default occurs and is continuing; or

     (f) the Facility Termination Date shall have occurred; or

     (g) failure on the part of the Seller or Originator to make any payment or deposit (including without limitation with respect to Collections) required by the terms of any Transaction Document on the day such payment or deposit is required to be made and the same continues unremedied for two Business Days; or

     (h) the occurrence of an Insolvency Event relating to the Originator, the Seller, the Servicer or any Affiliate of the Originator which is a party to a Permitted Securitization Transaction; or

     (i) the Seller shall become required to register as an “investment company” within the meaning of the Investment Company Act of 1940, as amended or the arrangements contemplated by the Transaction Documents shall require registration as an “investment company” within the meaning of the 1940 Act; or

     (j) a regulatory, tax or accounting body has ordered that the activities of the Seller or any Affiliate of the Seller contemplated hereby be terminated or, as a result of any other event or circumstance, the activities of the Seller contemplated hereby may reasonably be expected to cause the Seller or any of its respective Affiliates to suffer materially adverse regulatory, accounting or tax consequences; or

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     (k) there shall exist any event or occurrence that has caused a Material Adverse Effect; or

     (l) the Internal Revenue Service shall file notice of a lien pursuant to Section 6323 of the Code with regard to any assets of the Seller or the Originator and such lien shall not have been released within five Business Days, or the Pension Benefit Guaranty Corporation shall file notice of a lien pursuant to Section 4068 of ERISA with regard to any of the assets of the Seller or the Originator and such lien shall not have been released within five Business Days; or

     (m) any Change-in-Control shall occur; or

     (n) (i) any Transaction Document, or any lien or security interest granted thereunder, shall (except in accordance with its terms), in whole or in part, terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligation of the Seller, the Originator, or the Servicer,

     (ii) the Seller, the Originator, the Servicer or any other party shall, directly or indirectly, contest in any manner the effectiveness, validity, binding nature or enforceability of any Transaction Document or any lien or security interest thereunder, or

     (iii) any security interest securing any obligation under any Transaction Document shall, in whole or in part, cease to be a perfected first priority security interest; or

     (o) on any date of determination, the aggregate Hedge Notional Amount in effect for that day under all Hedge Transactions is less than the product of the Hedge Percentage on such day and the Hedge Amount on that day, and the same continues unremedied for a period of two Business Days; or

     (p) any failure on the part of the Seller or the Originator duly to observe or perform in any material respect any other covenants or agreements of the Seller or the Originator set forth in this Agreement or the other Transaction Documents to which the Seller or the Originator is a party and the same continues unremedied for a period of thirty (30) days after the earlier to occur of (i) the date on which written notice of such failure requiring the same to be remedied shall have been given to the Seller or the Originator by the Administrative Agent and (ii) the date on which the Seller or the Originator becomes aware thereof; or

     (q) any representation, warranty or certification made by the Seller or the Originator in any Transaction Document or in any certificate delivered pursuant to any Transaction Document shall prove to have been incorrect when made, which has a Material Adverse Effect on the Secured Parties and which continues to be unremedied for a period of thirty (30) days after the earlier to occur of (i) the date on which written notice of such incorrectness requiring the same to be remedied shall have been given to the Seller or the Originator by the Administrative Agent and (ii) the date on which the Seller or the Originator becomes aware thereof; or

     (r) any failure by the Seller to give instructions or notice to the Administrative Agent as required by this Agreement, or to deliver any required Monthly Report or other Required

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Reports hereunder on or before the date occurring two Business Days after the date such instruction, notice or report is required to be made or given, as the case may be, under the terms of this Agreement; or

     (s) the failure of the Seller, the Servicer or the Originator to make any payment due with respect to recourse debt or other obligations, in the case of the Servicer or the Originator, in excess of $10,000,000, or the occurrence of any event or condition that would permit acceleration of such recourse debt or other obligations whether or not such event or condition has been waived; or

     (t) (1) the rendering of one or more final judgments, decrees or orders by a court or arbitrator of competent jurisdiction for the payment of money in excess of $10,000,000, individually or in the aggregate, against the Originator, or $2,000,000 against the Seller, individually or in the aggregate, and the Originator shall not have either (i) discharged or provided for the discharge of any such judgment, decree or order in accordance with its terms or (ii) perfected a timely appeal of such judgment, decree or order and caused the execution of same to be stayed during the pendency of the appeal or (2) the failure of the Originator or the Seller to make any payments due of amounts in excess of $7,500,000 by the Originator, or $2,000,000 by the Seller, in the settlement of any litigation, claim or dispute (excluding payments made from insurance proceeds); or

     (u) as of any Determination Date, the Pool Yield does not equal or exceed the Minimum Pool Yield and the same continues unremedied by the following Determination Date; or

     (v) on any day an Overcollateralization Shortfall exists and continues unremedied for two Business Days; or

     (w) as of any Quarterly Determination Date, the Originator’s ratio of Consolidated Funded Indebtedness to Consolidated Tangible Net Worth is more than 6 to 1; provided that such calculation shall exclude the effects of any Liquid Real Estate Assets that are acquired and levered by the Originator solely to satisfy REIT asset and income tests.

     Section 10.2 Remedies.

     (a) Upon the occurrence of a Termination Event (other than a Termination Event described in Section 10.1(h)), the Administrative Agent shall, at the request of, or may, with the consent of, any of the Purchasers, by notice to the Seller, declare the Termination Date to have occurred and the Amortization Period to have commenced.

     (b) Upon the occurrence of a Termination Event described in Section 10.1(h), the Termination Date shall occur immediately and the Amortization Period shall commence automatically.

     (c) Upon the occurrence of any Termination Event described in Section 10.1, no Advances will thereafter be made, and the Administrative Agent and the Secured Parties shall have, in addition to all other rights and remedies under this Agreement or otherwise, all other rights and remedies provided under the UCC of each applicable jurisdiction and other Applicable

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Laws, which rights shall be cumulative, and also may require the Seller and Servicer to, and the Seller and Servicer hereby agree that they will at the Servicer’s expense and upon request of the Administrative Agent forthwith, (i) assemble all or any part of the Collateral as directed by the Administrative Agent and make the same available to the Administrative Agent at a place to be designated by the Administrative Agent and (ii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at a public or private sale, at any of the Administrative Agent’s offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Administrative Agent may deem commercially reasonable. The Seller agrees that, to the extent notice of sale shall be required by law, at least ten days’ notice to the Seller of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. All cash Proceeds received by the Administrative Agent in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral (after payment of any amounts incurred in connection with such sale) shall be deposited into the Collection Account and to be applied against all or any part of the Aggregate Unpaids pursuant to Section 2.10 or otherwise in such order as the Administrative Agent shall elect in its discretion.

ARTICLE XI

INDEMNIFICATION

     Section 11.1 Indemnities by the Seller.

     (a) Without limiting any other rights that any such Person may have hereunder or under Applicable Law, the Seller hereby agrees to indemnify the Administrative Agent, the Purchaser Agents, the Backup Servicer, the Collateral Custodian, the Secured Parties, the Affected Parties and each of their respective assigns and officers, directors, employees and agents thereof (collectively, the “Indemnified Parties”), forthwith on demand, from and against any and all damages, losses, claims, liabilities and related costs and expenses, including attorneys’ fees and disbursements (all of the foregoing being collectively referred to as the “Indemnified Amounts”) awarded against or incurred by such Indemnified Party and other non-monetary damages of any such Indemnified Party or any of them arising out of or as a result of this Agreement or the ownership of an interest in the Collateral or in respect of any Asset included in the Collateral, excluding, however, (a) Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of such Indemnified Party or (b) Indemnified Amounts that have the effect of recourse for non-payment of the Assets included in the Collateral due to credit problems of the Obligors (except as otherwise specifically provided in this Agreement). If the Seller has made any indemnity payment pursuant to this Section 11.1 and such payment fully indemnified the recipient thereof and the recipient thereafter collects any payments from others in respect of such Indemnified Amounts then, the recipient shall repay to the Seller an amount equal to the amount it has collected from others in respect of such indemnified amounts. Without limiting the foregoing, the Seller shall indemnify each Indemnified Party for Indemnified Amounts relating to or resulting from:

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     (i) any representation or warranty made or deemed made by the Seller, the Servicer (if the Originator or one of its Affiliates is the Servicer) or any of their respective officers under or in connection with this Agreement or any other Transaction Document, which shall have been false or incorrect in any material respect when made or deemed made or delivered;

     (ii) the failure by the Seller or the Servicer (if the Originator or one of its Affiliates is the Servicer) to comply with any term, provision or covenant contained in this Agreement or any agreement executed in connection with this Agreement, or with any Applicable Law, with respect to any Collateral or the nonconformity of any Collateral with any such Applicable Law;

     (iii) the failure to vest and maintain vested in the Administrative Agent, as agent for the Secured Parties, an undivided ownership interest in the Collateral, together with all Collections, free and clear of any Lien (other than Permitted Liens) whether existing at the time of any Advance or at any time thereafter;

     (iv) the failure to maintain, as of the close of business on each Business Day prior to the Termination Date, an amount of Advances Outstanding that is less than or equal to the lesser of (x) the Facility Amount and (y) the Maximum Availability on such Business Day;

     (v) the failure to file, or any delay in filing, financing statements, continuation statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other Applicable Laws with respect to any Collateral, whether at the time of any Advance or at any subsequent time;

     (vi) any dispute, claim, offset or defense (other than the discharge in bankruptcy of the Obligor) of the Obligor to the payment with respect to any Collateral (including, without limitation, a defense based on the Collateral not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or services related to such Collateral or the furnishing or failure to furnish such merchandise or services;

     (vii) any failure of the Seller or the Servicer (if the Originator or one of its Affiliates is the Servicer) to perform its duties or obligations in accordance with the provisions of this Agreement or any of the other Transaction Documents to which it is a party or any failure by the Originator, the Seller or any Affiliate thereof to perform its respective duties under any Collateral;

     (viii) the failure of any Lock-Box Bank to remit any amounts held in a Lock-Box Account pursuant to the instructions of the Servicer or the Administrative Agent (to the extent such Person is entitled to give such instructions in accordance with the terms hereof and of any applicable Lock-Box Agreement) whether by reason of the exercise of set-off rights or otherwise;

     (ix) any inability to obtain any judgment in, or utilize the court or other adjudication system of, any state in which an Obligor may be located as a result of the

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failure of the Seller or the Originator to qualify to do business or file any notice or business activity report or any similar report;

     (x) any action taken by the Seller or the Originator (in its capacity as Servicer) in the enforcement or collection of any Collateral;

     (xi) any products liability claim or personal injury or property damage suit or other similar or related claim or action of whatever sort arising out of or in connection with the Related Property or services that are the subject of any Collateral;

     (xii) any claim, suit or action of any kind arising out of or in connection with Environmental Laws including any vicarious liability;

     (xiii) the failure by Seller to pay when due any Taxes for which the Seller is liable, including without limitation, sales, excise or personal property taxes payable in connection with the Collateral;

     (xiv) any repayment by the Administrative Agent, the Purchaser Agents or a Secured Party of any amount previously distributed in reduction of Advances Outstanding or payment of Interest or any other amount due hereunder or under any Hedging Agreement, in each case which amount the Administrative Agent, the Purchaser Agents or a Secured Party believes in good faith is required to be repaid;

     (xv) the commingling of Collections on the Collateral at any time with other funds;

     (xvi) any investigation, litigation or proceeding related to this Agreement or the use of proceeds of Advances or the security interest in the Collateral;

     (xvii) any failure by the Seller to give reasonably equivalent value to the Originator in consideration for the transfer by the Originator to the Seller of any item of Collateral or any attempt by any Person to void or otherwise avoid any such transfer under any statutory provision or common law or equitable action, including, without limitation, any provision of the Bankruptcy Code;

     (xviii) the use of the proceeds of any Advance in a manner other than as provided in this Agreement and the Sale Agreement;

     (xix) the failure of the Seller, the Originator or any of their respective agents or representatives to remit to the Servicer or the Administrative Agent or the Purchaser Agents, Collections on the Collateral remitted to the Seller, the Originator, the Servicer or any such agent or representative;

     (xx) the failure by the Seller to comply with any of the covenants relating to any Hedging Agreement in accordance with the Transaction Documents; or

     (xxi) the failure of the Seller to comply with any of the covenants relating to the Required Equity Contribution in accordance with the Transaction Documents.

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     (b) Any amounts subject to the indemnification provisions of this Section 11.1 shall be paid by the Seller to the Indemnified Party within five Business Days following such Person’s demand therefor.

     (c) If for any reason the indemnification provided above in this Section 11.1 is unavailable to the Indemnified Party or is insufficient to hold an Indemnified Party harmless, then the Seller or the Servicer, as the case may be, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by such Indemnified Party on the one hand and the Seller or the Servicer, as the case may be, on the other hand but also the relative fault of such Indemnified Party as well as any other relevant equitable considerations.

     (d) The obligations of the Seller under this Section 11.1 shall survive the resignation or removal of the Administrative Agent, the Purchaser Agents, the Servicer, the Backup Servicer or the Collateral Custodian and the termination of this Agreement.

     Section 11.2 Indemnities by the Servicer.

     (a) Without limiting any other rights that any such Person may have hereunder or under Applicable Law, the Servicer hereby agrees to indemnify each Indemnified Party, forthwith on demand, from and against any and all Indemnified Amounts awarded against or incurred by any such Indemnified Party by reason of any acts, omissions or alleged acts or omissions of the Servicer, including, but not limited to (i) any representation or warranty made by the Servicer under or in connection with any Transaction Document, any Monthly Report, Servicer’s Certificate or any other information or report delivered by or on behalf of the Servicer pursuant hereto, which shall have been false, incorrect or misleading in any material respect when made or deemed made, (ii) the failure by the Servicer to comply with any Applicable Law, (iii) the failure of the Servicer to comply with its duties or obligations in accordance with the Agreement, (iv) the failure by the Servicer to comply with any of the covenants relating to any Hedging Agreement in accordance with the Transaction Documents, or (v) any litigation, proceedings or investigation against the Servicer. The provisions of this indemnity shall run directly to and be enforceable by an injured party subject to the limitations hereof.

     (b) Any amounts subject to the indemnification provisions of this Section 11.2 shall be paid by the Servicer to the Indemnified Party within five Business Days following such Person’s demand therefor.

     (c) The Servicer shall have no liability for making indemnification hereunder to the extent any such indemnification constitutes recourse for uncollectible or uncollected Assets.

     (d) The obligations of the Servicer under this Section 11.2 shall survive the resignation or removal of the Administrative Agent, the Purchaser Agents, the Backup Servicer or the Collateral Custodian and the termination of this Agreement.

     (e) Any indemnification pursuant to this Section 11.2 shall not be payable from the Collateral.

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     Section 11.3 After-Tax Basis.

     Indemnification under Section 11.1 and Section 11.2 shall be in an amount necessary to make the Indemnified Party whole after taking into account any tax consequences to the Indemnified Party of the receipt of the indemnity provided hereunder, including the effect of such tax or refund on the amount of tax measured by net income or profits that is or was payable by the Indemnified Party.

ARTICLE XII

THE ADMINISTRATIVE AGENT
AND PURCHASER AGENTS

     Section 12.1 The Administrative Agent.

     (a) Each Purchaser Agent and each Secured Party hereby appoints and authorizes the Administrative Agent as its agent and bailee for purposes of perfection pursuant to the applicable UCC or other Applicable Law and hereby further authorizes the Administrative Agent to appoint additional agents and bailees to act on its behalf and for the benefit of each of the Purchaser Agents and each Secured Party. Each of the Purchaser Agents and each Secured Party further authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Transaction Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. In furtherance, and without limiting the generality, of the foregoing, each Secured Party hereby appoints the Administrative Agent as its agent to execute and deliver all further instruments and documents, and take all further action that the Administrative Agent may deem necessary or appropriate or that a Secured Party may reasonably request in order to perfect, protect or more fully evidence the security interests granted by the Seller hereunder, or to enable any of them to exercise or enforce any of their respective rights hereunder, including, without limitation, the execution by the Administrative Agent as secured party/assignee of such financing or continuation statements, or amendments thereto or assignments thereof, relative to all or any of the Collateral now existing or hereafter arising, and such other instruments or notices, as may be necessary or appropriate for the purposes stated hereinabove. The Purchaser Agents and the Purchasers may direct the Administrative Agent to take any such incidental action hereunder. With respect to other actions which are incidental to the actions specifically delegated to the Administrative Agent hereunder, the Administrative Agent shall not be required to take any such incidental action hereunder, but shall be required to act or to refrain from acting (and shall be fully protected in acting or refraining from acting) upon the direction of the Purchaser Agents and the Purchasers; provided that that the Administrative Agent shall not be required to take any action hereunder if the taking of such action, in the reasonable determination of the Administrative Agent, shall be in violation of any Applicable Law or contrary to any provision of this Agreement or shall expose the Administrative Agent to liability hereunder or otherwise. In the event the Administrative Agent requests the consent of a Purchaser Agent or a Purchaser pursuant to the foregoing provisions and the Administrative Agent does not receive a consent (either positive or negative) from such Person within ten Business Days of such Person’s receipt of such request, then such Purchaser Agent or Purchaser shall be deemed to have declined to consent to the relevant amendments.

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     (b) The Administrative Agent shall exercise such rights and powers vested in it by this Agreement and the other Transaction Documents, and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs.

     (c) Administrative Agent’s Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them as Administrative Agent under or in connection with this Agreement or any of the other Transaction Documents, except for its or their own gross negligence or willful misconduct. Without limiting the foregoing, the Administrative Agent: (i) may consult with legal counsel (including counsel for the Seller or the Originator), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation and shall not be responsible for any statements, warranties or representations made in or in connection with this Agreement; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any of the other Transaction Documents on the part of the Seller, the Originator, or the Servicer or to inspect the property (including the books and records) of the Seller, the Originator, or the Servicer; (iv) shall not be responsible for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any of the other Transaction Documents or any other instrument or document furnished pursuant hereto or thereto; and (v) shall incur no liability under or in respect of this Agreement or any of the other Transaction Documents by acting upon any notice (including notice by telephone), consent, certificate or other instrument or writing (which may be by telex) believed by it to be genuine and signed or sent by the proper party or parties.

     (d) Credit Decision with Respect to the Administrative Agent. Each Purchaser Agent and Secured Party acknowledges that it has, independently and without reliance upon the Administrative Agent, or any of the Administrative Agent’s Affiliates, and based upon such documents and information as it has deemed appropriate, made its own evaluation and decision to enter into this Agreement and the other Transaction Documents to which it is a party. Each Purchaser Agent and Secured Party also acknowledges that it will, independently and without reliance upon the Administrative Agent, or any of the Administrative Agent’s Affiliates, and based on such documents and information as it shall deem appropriate at the time, continue to make its own decisions in taking or not taking action under this Agreement and the other Transaction Documents to which it is a party.

     (e) Indemnification of the Administrative Agent. Each Purchaser Agent and Purchaser agrees to indemnify the Administrative Agent (to the extent not reimbursed by the Seller or the Servicer), ratably in accordance with its Pro Rata Share from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Administrative Agent in any way relating to or arising out of this Agreement or any of the other Transaction Documents, or any action taken or omitted by the Administrative Agent hereunder or thereunder; provided that none of the Purchaser Agents or Purchasers shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent’s

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gross negligence or willful misconduct. Without limitation of the foregoing, each Purchaser Agent and Purchaser agrees to reimburse the Administrative Agent, ratably in accordance with its Pro Rata Share promptly upon demand for any out-of-pocket expenses (including counsel fees) incurred by the Administrative Agent in connection with the administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement and the other Transaction Documents, to the extent that such expenses are incurred in the interests of or otherwise in respect of the Purchaser Agents, or the Purchasers hereunder and/or thereunder and to the extent that the Administrative Agent is not reimbursed for such expenses by the Seller or the Servicer.

     (f) Successor Administrative Agent. The Administrative Agent may resign at any time, effective upon the appointment and acceptance of a successor Administrative Agent as provided below, by giving at least five days’ written notice thereof to each Purchaser Agent and the Seller and may be removed at any time with cause by the Purchaser Agents acting jointly. Upon any such resignation or removal, the Purchaser Agents acting jointly shall appoint a successor Administrative Agent. Each of the Purchaser Agents agrees that it shall not unreasonably withhold or delay its approval of the appointment of a successor Administrative Agent. If no such successor Administrative Agent shall have been so appointed, and shall have accepted such appointment, within thirty (30) days after the retiring Administrative Agent’s giving of notice of resignation or the removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Secured Parties, appoint a successor Administrative Agent which successor Administrative Agent shall be either (i) a commercial bank organized under the laws of the United States or of any state thereof and have a combined capital and surplus of at least $50,000,000 or (ii) an Affiliate of such a bank. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent’s resignation or removal hereunder as Administrative Agent, the provisions of this Article XII shall continue to inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement.

     (g) Payments by the Administrative Agent. Unless specifically allocated to a specific Purchaser Agent pursuant to the terms of this Agreement, all amounts received by the Administrative Agent on behalf of the Purchaser Agents shall be paid by the Administrative Agent to the Purchaser Agents in accordance with their respective Pro Rata Shares in the applicable Advances Outstanding, or if there are no Advances Outstanding then to the Purchaser Agents in accordance with the most recent applicable Commitment, on the Business Day received by the Administrative Agent, unless such amounts are received after 12:00 noon on such Business Day, in which case the Administrative Agent shall use its reasonable efforts to pay such amounts to each Purchaser Agent on such Business Day, but, in any event, shall pay such amounts to such Purchaser Agent not later than the following Business Day.

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     Section 12.2 The Purchaser Agents.

     (a) Authorization and Action. Each Purchaser hereby designates and appoints its applicable Purchaser Agent to act as its agent hereunder and under each other Transaction Document, and authorizes such Purchaser Agent to take such actions as agent on its behalf and to exercise such powers as are delegated to such Purchaser Agent by the terms of this Agreement together and the other Transaction Documents with such powers as are reasonably incidental thereto. Such Purchaser Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with its related Purchaser, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on the part of such Purchaser Agent shall be read into this Agreement or any other Transaction Document or otherwise exist for such Purchaser Agent. In performing its functions and duties hereunder and under the other Transaction Documents, such Purchaser Agent shall act solely as agent for its related Purchaser and does not assume nor shall be deemed to have assumed any obligation or relationship of trust or agency with or for the Seller or any of its successors or assigns. Such Purchaser Agent shall not be required to take any action that exposes such Purchaser Agent to personal liability or that is contrary to this Agreement, or any other Transaction Document or Applicable Law. The appointment and authority of such Purchaser Agent hereunder shall terminate at the indefeasible payment in full of the Aggregate Unpaids. Each Purchaser Agent, respectively, hereby authorizes the Administrative Agent to execute each of the UCC Financing Statements on behalf of such Purchaser (the terms of which shall be binding on such Purchaser).

     (b) Delegation of Duties. Each applicable Purchaser Agent may execute any of its duties under this Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Such Purchaser Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care.

     (c) Exculpatory Provisions. Neither any applicable Purchaser Agent nor any of its directors, officers, agents or employees shall be (i) liable for any action lawfully taken or omitted to be taken by it or them under or in connection with this Agreement or any other Transaction Document (except for its, their or such Person’s own gross negligence or willful misconduct or, in the case of such Purchaser Agent, the breach of its obligations expressly set forth in this Agreement or any other Transaction Document), or (ii) responsible in any manner to its related Purchaser for any recitals, statements, representations or warranties made by the Seller contained in this Agreement or any other Transaction Document, for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any other Transaction Document or any other document furnished in connection herewith, for any failure of the Seller to perform its obligations hereunder, or for the satisfaction of any condition specified in Article III. Such Purchaser Agent shall not be under any obligation to its related Purchaser to ascertain or to inquire as to the observance or performance of any of the agreements or covenants contained in, or conditions of, this Agreement or any other Transaction Document, or to inspect the properties, books or records of the Seller. Such Purchaser Agent shall not be deemed to have knowledge of any Unmatured Termination Event, Termination Event or Servicer Default unless such Purchaser Agent has received notice from the Seller or a Secured Party.

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     (d) Reliance. Such Purchaser Agent shall in all cases be entitled to rely, and shall be fully protected in relying, upon any document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Seller), independent accountants and other experts selected by such Purchaser Agent. Such Purchaser Agent shall in all cases be fully justified in failing or refusing to take any action under this Agreement, any other Transaction Document or any other document furnished in connection herewith unless it shall first receive such advice or concurrence of its related Purchaser, as it deems appropriate, or it shall first be indemnified to its satisfaction by its related Purchaser; provided that unless and until such Purchaser Agent shall have received such advice, such Purchaser Agent may take or refrain from taking any action as such Purchaser Agent shall deem advisable and in the best interests of its related Purchaser. Such Purchaser Agent shall in all cases be fully protected in acting, or in refraining from acting, in accordance with a request of its related Purchaser, and such request and any action taken or failure to act pursuant thereto shall be binding upon its related Purchaser.

     (e) Non-Reliance on the Purchaser Agent and Other Purchasers. Each applicable Purchaser, respectively, expressly acknowledges that neither its related Purchaser Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by such Purchaser Agent hereafter taken, including, without limitation, any review of the affairs of the Seller, shall be deemed to constitute any representation or warranty by the such Purchaser Agent. Each applicable Purchaser, respectively, represents and warrants to its related Purchaser Agent that it has and will, independently and without reliance upon such Purchaser Agent, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, prospects, financial and other conditions and creditworthiness of the Seller and made its own decision to enter into this Agreement, the other Transaction Documents or any Hedging Agreement, as the case may be.

     (f) Purchaser Agents in their Respective Capacities. Each applicable Purchaser Agent, respectively, and any of its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Seller or any Affiliate of the Seller as though such Purchaser Agent were not a Purchaser Agent hereunder. With respect to the Advances made pursuant to this Agreement, such Purchaser Agent and each of its Affiliates shall have the same rights and powers under this Agreement as any Purchaser and may exercise the same as though it were not a Purchaser Agent and the terms “Purchaser” and “Purchasers” shall include such Purchaser Agent in its individual capacity.

     (g) Successor Purchaser Agent. Each applicable Purchaser Agent, respectively, may, upon five days’ notice to the Seller and its related Purchaser, and such Purchaser Agent will, upon the direction of its related Purchaser, resign as Purchaser Agent for such Purchaser. If such Purchaser Agent shall resign, then its related Purchaser, during such five day period, shall appoint a successor agent. If for any reason no successor Agent is appointed by such Purchaser during such five day period, then effective upon the expiration of such five day period, the Seller shall make all payments in respect of the Aggregate Unpaids directly to such Purchaser and for all purposes shall deal directly with such Purchaser. After any retiring Purchaser Agent’s resignation hereunder as Purchaser Agent, the provisions of Articles XI and XII shall inure to its

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benefit as to any actions taken or omitted to be taken by it while it was a Purchaser Agent under this Agreement. Notwithstanding the resignation or removal of the Purchaser Agent for VFCC, Wachovia, as Hedge Counterparty, shall continue to be a Secured Party hereunder.

     Section 12.3 Additional Agent.

     (a) Authorization and Action. Each Additional Purchaser hereby designates and appoints the relevant Additional Agent designated in the related Additional Purchaser Agreement to act as its agent hereunder and under each other Transaction Document, and authorizes such Additional Agent to take such actions as agent on its behalf and to exercise such powers as are delegated to the Additional Agent by the terms of this Agreement and the other Transaction Documents together with such powers as are reasonably incidental thereto. No Additional Agent shall have any duties or responsibilities, except those expressly set forth herein or in any other Transaction Document, or any fiduciary relationship with such related Additional Purchaser, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on the part of such Additional Agent shall be read into this Agreement or any other Transaction Document or otherwise exist for such Additional Agent. In performing its functions and duties hereunder and under the other Transaction Documents, each Additional Agent shall act solely as agent for the related Additional Purchaser and does not assume nor shall be deemed to have assumed any obligation or relationship of trust or agency with or for the Seller or the Servicer or any of the Seller’s or the Servicer’s successors or assigns. No Additional Agent shall be required to take any action that exposes the Additional Agent to personal liability or that is contrary to this Agreement, any other Transaction Document or Applicable Law. The appointment and authority of each Additional Agent hereunder shall terminate upon the indefeasible payment in full of all Aggregate Unpaids. Each Additional Agent hereby authorizes the Administrative Agent to execute each of the UCC financing statements on behalf of such Additional Agent (the terms of which shall be binding on such Additional Agent).

     (b) Delegation of Duties. Any of the Additional Agents may execute any of its duties under this Agreement and each other Transaction Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. No Additional Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care.

     (c) Exculpatory Provisions. Neither any Additional Agent nor any of its directors, officers, agents or employees shall be (i) liable for any action lawfully taken or omitted to be taken by it or them under or in connection with this Agreement or any other Transaction Document (except for its, their or such Person’s own gross negligence or willful misconduct), or (ii) responsible in any manner to any Additional Purchaser for any recitals, statements, representations or warranties made by the Seller or the Servicer contained in Article IV, any other Transaction Document or any certificate, report, statement or other document referred to or provided for in, or received under or in connection with, this Agreement or any other Transaction Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any other Transaction Document or any other document furnished in connection herewith or therewith, or for any failure of the Seller or the Servicer to perform its obligations hereunder or thereunder, or for the satisfaction of any condition specified in this Agreement, or for the perfection, priority, condition, value or sufficiency of any collateral pledged in connection

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herewith. No Additional Agent shall be under any obligation to any Additional Purchaser to ascertain or to inquire as to the observance or performance of any of the agreements or covenants contained in, or conditions of, this Agreement or any other Transaction Document, or to inspect the properties, books or records of the Seller or the Servicer. No Additional Agent shall be deemed to have knowledge of any Termination Event or Unmatured Termination Event unless such Additional Agent has received notice from the Seller or the related Additional Purchaser.

     (d) Reliance by Additional Agent. Each Additional Agent shall in all cases be entitled to rely, and shall be fully protected in relying, upon any document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Seller), independent accountants and other experts selected by such Additional Agent. Each Additional Agent shall in all cases be fully justified in failing or refusing to take any action under this Agreement or any other Transaction Document unless it shall first receive such advice or concurrence of the related Additional Purchaser as it deems appropriate and it shall first be indemnified to its satisfaction by such Additional Purchaser; provided that unless and until such Additional Agent shall have received such advice, the Additional Agent may take or refrain from taking any action, as the Additional Agent shall deem advisable and in the best interests of the Related Additional Purchaser. Each Additional Agent shall in all cases be fully protected in acting, or in refraining from acting, in accordance with a request of the related Additional Purchaser, and such request and any action taken or failure to act pursuant thereto shall be binding upon such Additional Purchaser.

     (e) Non-Reliance on Additional Agent. Each Additional Purchaser expressly acknowledges that neither any Additional Agent, nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by such Additional Agent hereafter taken, including, without limitation, any review of the affairs of the Seller or the Servicer, shall be deemed to constitute any representation or warranty by such Additional Agent. Each Additional Purchaser represents and warrants to the related Additional Agent that it has and will, independently and without reliance upon such Additional Agent, such Additional Purchaser and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, prospects, financial and other conditions and creditworthiness of the Seller and made its own decision to enter into this Agreement, the other Transaction Documents and all other documents related hereto or thereto.

     (f) Additional Agent in its Individual Capacity. Each Additional Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Seller or any Affiliate of the Seller as though such Additional Agent were not an Additional Agent hereunder. With respect to Advances pursuant to this Agreement, each Additional Agent shall have the same rights and powers under this Agreement in its individual capacity as any Purchaser and may exercise the same as though it were not an Additional Agent, and the terms “Purchaser,” and “Purchasers,” shall include the Additional Agent in its individual capacity.

     (g) Successor Additional Agent. Each Additional Agent may, upon five days’ notice to the Seller, and the related Additional Purchaser, and such Additional Agent will, upon the

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direction of such Additional Purchaser (other than such Additional Agent, in its individual capacity) resign as Additional Agent. If any Additional Agent shall resign, then the related Additional Purchaser during such five day period shall appoint a successor agent. If for any reason no successor Additional Agent is appointed by the related Additional Purchaser during such five day period, then effective upon the termination of such five day period, and the Seller shall make all payments in respect of the Aggregate Unpaids directly to such Additional Purchaser, and for all purposes shall deal directly with such Additional Purchaser. After any retiring Additional Agent’s resignation hereunder as an Additional Agent, the provisions of Articles XI and XII shall inure to its benefit with respect to any actions taken or omitted to be taken by it while it was an Additional Agent under this Agreement.

ARTICLE XIII

MISCELLANEOUS

     Section 13.1 Amendments and Waivers.

     (a) Except as provided in this Section 13.1, no amendment, waiver or other modification of any provision of this Agreement shall be effective without the written agreement of the Seller, the Servicer, the Backup Servicer, the Collateral Custodian, the Administrative Agent and the Secured Parties; provided that no such amendment, waiver or modification adversely affecting the rights or obligations of any Hedge Counterparty shall be effective without the written agreement of such Person.

     (b) The parties hereto acknowledge and agree that after the Closing Date the Agreement may need to be amended to correct certain ambiguities or errors as well as to correct inconsistencies with the terms of the other Transaction Documents and each such party agrees to cooperate in good faith to effectuate, and not to unreasonably withhold, delay or condition its consent to, any such amendments; provided that, notwithstanding the foregoing, to the extent any such amendment would have a adverse effect on any Secured Party, such Secured Party shall have the right to consent or withhold consent in its sole discretion.

     (c) The parties hereby acknowledge and agree that if any Purchaser (the “Affected Purchaser”) fails to consent to an amendment, waiver or other modification of any provision of this Agreement that requires the consent of such Purchaser and such amendment, waiver or other modification is otherwise consented to by Purchasers holding more than 50% of the Advances Outstanding, the Seller may, at its sole cost and expense, within 15 days of receipt by the Seller of notice of such failure to consent, give notice in writing (a “Replacement Notice”) to the Administrative Agent and such Affected Purchaser of its intention to cause such Affected Purchaser to sell all or any portion of its Commitment and its Pro Rata Share of the Advances Outstanding to another financial institution or other Person (a “Replacement Purchaser”) designated in such Replacement Notice; provided that no Replacement Notice may be given by the Seller if (i) such replacement conflicts with any applicable law or regulation or (ii) any Termination Event shall have occurred and be continuing at the time of such replacement. If the Administrative Agent shall, in the exercise of its reasonable discretion and within 15 days of its receipt of such Replacement Notice, notify the Seller and such Affected Purchaser in writing that the Replacement Purchaser is satisfactory to the Administrative Agent (such consent not being

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required where the Replacement Purchaser is already a Purchaser), then such Affected Purchaser shall assign the portion of its Commitment and its Pro Rata Share of the Advances Outstanding and other rights and obligations under this Agreement and all other Transaction Documents designated in the Replacement Notice to such Replacement Purchaser; provided that (i) in the case of an assignment of the Purchaser Variable Funding Certificate or Additional Purchaser Variable Funding Certificate, the Replacement Purchaser shall execute and deliver to the Servicer and the Administrative Agent a Transferee Letter, (ii) such assignment shall be without recourse, representation or warranty and shall be on terms and conditions reasonably satisfactory to such Affected Purchaser and such Replacement Purchaser, (iii) the purchase price paid by such Replacement Purchaser shall be in the amount of such Affected Purchaser’s Pro Rata Share of Advances Outstanding designated in the Replacement Notice, together with all accrued and unpaid interest and fees in respect thereof, plus all other amounts then owing to such Affected Purchaser hereunder and (iv) the Seller shall pay to the Affected Purchaser and the Administrative Agent all reasonable out-of-pocket expenses incurred by the Affected Purchaser and the Administrative Agent in connection with such assignment and assumption. Upon the effective date of the assignment described above, the Replacement Purchaser shall become a “Purchaser” for all purposes under the Transaction Documents. Each Purchaser hereby grants to the Administrative Agent an irrevocable power of attorney (which power is coupled with an interest) to execute and deliver, on behalf of such Purchaser as assignor, any assignment agreement necessary to effectuate any assignment of such Purchaser’s interests hereunder in the circumstances contemplated by this Section 13.1(c).

     Section 13.2 Notices, Etc.

     All notices, reports and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including telex communication and communication by facsimile copy) and mailed, telexed, transmitted or delivered, as to each party hereto, at its address set forth under its name on the signature pages hereof or at such other address as shall be designated by such party in a written notice to the other parties hereto (provided that, for avoidance of doubt, Lord Securities Corp. shall not receive notices, reports and other communications provided pursuant to Article II, and Section 6.10, Section 6.11 and Section 6.12 hereof). All such notices and communications shall be effective, upon receipt, or in the case of (a) notice by mail, five days after being deposited in the United States mail, first class postage prepaid, (b) notice by telex, when telexed against receipt of answer back, or (c) notice by facsimile copy, when verbal communication of receipt is obtained.

     Section 13.3 Ratable Payments.

     If any Secured Party, whether by setoff or otherwise, has payment made to it with respect to any portion of the Aggregate Unpaids owing to such Secured Party (other than payments received pursuant to Section 11.1) in a greater proportion than that received by any other Secured Party, such Secured Party agrees, promptly upon demand, to purchase for cash without recourse or warranty a portion of the Aggregate Unpaids held by the other Secured Parties so that after such purchase each Secured Party will hold its ratable proportion of the Aggregate Unpaids; provided that if all or any portion of such excess amount is thereafter recovered from such Secured Party, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest.

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     Section 13.4 No Waiver; Remedies.

     No failure on the part of the Administrative Agent, the Purchaser Agents, the Collateral Custodian, the Backup Servicer or a Secured Party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right. The rights and remedies herein provided are cumulative and not exclusive of any rights and remedies provided by law.

     Section 13.5 Binding Effect; Benefit of Agreement.

     This Agreement shall be binding upon and inure to the benefit of the Seller, the Servicer, the Administrative Agent, the Purchaser Agents, the Backup Servicer, the Collateral Custodian, the Secured Parties and their respective successors and permitted assigns and, in addition, the provisions of Section 2.9(a)(1) and Section 2.10(a)(1) shall inure to the benefit of each Hedge Counterparty, whether or not that Hedge Counterparty is a Secured Party.

     Section 13.6 Term of this Agreement.

     This Agreement, including, without limitation, the Seller’s representations and covenants set forth in Articles IV and V, and the Servicer’s representations, covenants and duties set forth in Articles VI, VII and VIII, create and constitute the continuing obligation of the parties hereto in accordance with its terms, and shall remain in full force and effect until the Collection Date; provided that the rights and remedies with respect to any breach of any representation and warranty made or deemed made by the Seller pursuant to Articles III and IV the indemnification and payment provisions of Article XI and the provisions of Section 13.9, Section 13.10 and Section 13.11, shall be continuing and shall survive any termination of this Agreement.

     Section 13.7 Governing Law; Consent to Jurisdiction; Waiver of Objection to Venue.

     THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. EACH OF THE PARTIES HERETO AND EACH HEDGE COUNTERPARTY HEREBY AGREES TO THE NON-EXCLUSIVE JURISDICTION OF ANY FEDERAL COURT LOCATED WITHIN THE STATE OF NEW YORK. EACH OF THE PARTIES HERETO AND EACH SECURED PARTY HEREBY WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER IN ANY OF THE AFOREMENTIONED COURTS AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT.

     Section 13.8 Waiver of Jury Trial.

     TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO AND EACH HEDGE COUNTERPARTY HEREBY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE PARTIES HERETO ARISING

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OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN ANY OF THEM IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. INSTEAD, ANY SUCH DISPUTE RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL WITHOUT A JURY.

     Section 13.9 Costs, Expenses and Taxes.

     (a) In addition to the rights of indemnification granted to the Administrative Agent, the Purchaser Agents, the Backup Servicer, the Collateral Custodian, the Secured Parties and its or their Affiliates and officers, directors, employees and agents thereof under Article XI hereof, the Seller and Originator agrees to pay on demand all reasonable costs and expenses of the Administrative Agent, the Purchaser Agents, the Backup Servicer, the Collateral Custodian and the Secured Parties incurred in connection with the preparation, execution, delivery, administration (including periodic auditing, which shall be limited to two audits per year prior to the occurrence of a Termination Event), renewal, amendment or modification of, or any waiver or consent issued in connection with, this Agreement and the other documents to be delivered hereunder or in connection herewith (including any Hedging Agreement), including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent, the Purchaser Agents, the Backup Servicer, the Collateral Custodian and the Secured Parties with respect thereto and with respect to advising the Administrative Agent, the Purchaser Agents, the Backup Servicer, the Collateral Custodian and the Secured Parties as to their respective rights and remedies under this Agreement and the other documents to be delivered hereunder or in connection herewith (including any Hedging Agreement), and all costs and expenses, if any (including reasonable counsel fees and expenses), incurred by the Administrative Agent, the Purchaser Agents, the Backup Servicer, the Collateral Custodian or the Secured Parties in connection with the enforcement of this Agreement and the other documents to be delivered hereunder or in connection herewith (including any Hedging Agreement).

     (b) The Seller and Originator shall pay on demand any and all stamp, sales, excise and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement, the other documents to be delivered hereunder or any agreement or other document providing liquidity support, credit enhancement or other similar support to the Purchasers in connection with this Agreement or the funding or maintenance of Advances hereunder.

     (c) The Seller and Originator shall pay on demand all other reasonable costs, expenses and Taxes (excluding income taxes) incurred by the Administrative Agent, the Purchaser Agents, the Secured Parties (“Other Costs”), including, without limitation, all costs and expenses incurred by the Administrative Agent and the Purchaser Agents in connection with periodic audits of the Seller’s or the Servicer’s books and records.

     Section 13.10 No Proceedings.

     (a) Each of the parties hereto (other than a particular Purchaser) and each Hedge Counterparty (by accepting the benefits of this Agreement) hereby agrees that it will not institute

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against, or join any other Person in instituting against, such Purchaser, the Administrative Agent, the related Purchaser Agent or any Liquidity Banks any Insolvency Proceeding so long as any commercial paper issued by such Purchaser shall be outstanding and there shall not have elapsed one year and one day since the last day on which any such commercial paper shall have been outstanding.

     (b) Each of the parties hereto (other than a particular Additional Purchaser) hereby agrees that it will not institute against, or join any other Person in instituting against such Additional Purchaser, the related Additional Agent or any of its Liquidity Banks any Insolvency Proceeding so long as any commercial paper issued by such Additional Purchaser shall be outstanding and there shall not have elapsed one year and one day since the last day on which any such commercial paper shall have been outstanding.

     (c) Each of the parties hereto (other than the Administrative Agent without the consent of the Purchaser Agents) hereby agrees that it will not institute against, or join any other Person in instituting against, the Seller any Insolvency Proceeding so long as there shall not have elapsed one year and one day since the Collection Date; provided that nothing in this Section 13.10 shall limit any party’s right to file any claim in or otherwise take any action with respect to any insolvency proceeding that was instituted by any other Person.

     Section 13.11 Recourse Against Certain Parties.

     (a) No recourse under or with respect to any obligation, covenant or agreement (including, without limitation, the payment of any fees or any other obligations) of the Administrative Agent, the Purchaser Agents, or any Secured Party as contained in this Agreement or any other agreement, instrument or document entered into by it pursuant hereto or in connection herewith shall be had against any administrator of the Administrative Agent, the Purchaser Agents, or any Secured Party, or any incorporator, affiliate, stockholder, officer, employee or director of the Administrative Agent, the Purchaser Agents, or any Secured Party, or of any such administrator, as such, by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any statute or otherwise; it being expressly agreed and understood that the agreements of the Administrative Agent, the Purchaser Agents, or any Secured Party contained in this Agreement and all of the other agreements, instruments and documents entered into by it pursuant hereto or in connection herewith are, in each case, solely the corporate obligations of the Administrative Agent, the Purchaser Agents, or any Secured Party, and that no personal liability whatsoever shall attach to or be incurred by any administrator of the Administrative Agent, the Purchaser Agents, or any Secured Party or any incorporator, stockholder, affiliate, officer, employee or director of the Administrative Agent, the Purchaser Agents, or any Secured Party or of any such administrator, as such, or any other of them, under or by reason of any of the obligations, covenants or agreements of the Administrative Agent, the Purchaser Agents, or any Secured Party contained in this Agreement or in any other such instruments, documents or agreements, or that are implied therefrom, and that any and all personal liability of every such administrator of the Administrative Agent, the Purchaser Agents, or any Secured Party and each incorporator, stockholder, affiliate, officer, employee or director of the Administrative Agent, the Purchaser Agents, or any Secured Party or of any such administrator, or any of them, for breaches by the Administrative Agent, the Purchaser Agents, or any Secured Party of any such obligations, covenants or agreements, which

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liability may arise either at common law or at equity, by statute or constitution, or otherwise, is hereby expressly waived as a condition of and in consideration for the execution of this Agreement. The provisions of this Section 13.11 shall survive the termination of this Agreement.

     (b) Notwithstanding anything in this Agreement to the contrary, no Purchaser or Additional Purchaser shall have any obligation to pay any amount required to be paid by it hereunder in excess of any amount available to such Purchaser or such Additional Purchaser, as applicable, after paying or making provision for the payment of its Commercial Paper Notes. All payment obligations of each Purchaser and each Additional Purchaser, as applicable, hereunder are contingent on the availability of funds in excess of the amounts necessary to pay its Commercial Paper Notes; and each of the other parties hereto agrees that it will not have a claim under Section 101(5) of the Bankruptcy Code if and to the extent that any such payment obligation owed to it by a Purchaser or an Additional Purchaser, as applicable, exceeds the amount available to such Purchaser or such Additional Purchaser, as applicable, to pay such amount after paying or making provision for the payment of its Commercial Paper Notes.

     (c) Notwithstanding any contrary provision set forth herein, no claim may be made by the Seller, the Originator or the Servicer or any other Person against the Administrative Agent and the Secured Parties or their respective Affiliates, directors, officers, employees, attorneys or agents for any special, indirect, consequential or punitive damages in respect to any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement, or any act, omission or event occurring in connection therewith; and the Seller, the Originator and the Servicer each hereby waives, releases, and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected.

     (d) No obligation or liability to any Obligor under any of the Assets is intended to be assumed by the Administrative Agent and the Secured Parties under or as a result of this Agreement and the transactions contemplated hereby

Section 13.12 Protection of Right, Title and Interest in the Collateral; Further Action Evidencing Advances .

     (a) The Servicer shall cause this Agreement, all amendments hereto and/or all financing statements and continuation statements and any other necessary documents covering the right, title and interest of the Administrative Agent as agent for the Secured Parties and of the Secured Parties to the Collateral to be promptly recorded, registered and filed, and at all times to be kept recorded, registered and filed, all in such manner and in such places as may be required by law fully to preserve and protect the right, title and interest of the Administrative Agent as agent for the Secured Parties hereunder to all property comprising the Collateral. The Servicer shall deliver to the Administrative Agent file-stamped copies of, or filing receipts for, any document recorded, registered or filed as provided above, as soon as available following such recording, registration or filing. The Seller shall cooperate fully with the Servicer in connection with the obligations set forth above and will execute any and all documents reasonably required to fulfill the intent of this Section 13.12(a).

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     (b) The Seller agrees that from time to time, at its expense, it will promptly execute and deliver all instruments and documents, and take all actions, that the Administrative Agent may reasonably request in order to perfect, protect or more fully evidence the Advances hereunder and the security interest granted in the Collateral, or to enable the Administrative Agent or the Secured Parties to exercise and enforce their rights and remedies hereunder or under any Transaction Document.

     (c) If the Seller or the Servicer fails to perform any of its obligations hereunder, the Administrative Agent or any Secured Party may (but shall not be required to) perform, or cause performance of, such obligation; and the Administrative Agent’s or such Secured Party’s costs and expenses incurred in connection therewith shall be payable by the Seller as provided in Article XI. The Seller irrevocably authorizes the Administrative Agent and appoints the Administrative Agent as its attorney-in-fact to act on behalf of the Seller (i) to execute on behalf of the Seller as debtor and to file financing statements necessary or desirable in the Administrative Agent’s sole discretion to perfect and to maintain the perfection and priority of the interest of the Secured Parties in the Collateral and (ii) to file a carbon, photographic or other reproduction of this Agreement or any financing statement with respect to the Collateral as a financing statement in such offices as the Administrative Agent in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of the interests of the Secured Parties in the Collateral. This appointment is coupled with an interest and is irrevocable.

     (d) Without limiting the generality of the foregoing, Seller will, not earlier than six months and not later than three months prior to the fifth anniversary of the date of filing of the financing statement referred to in Section 3.1 or any other financing statement filed pursuant to this Agreement or in connection with any Advance hereunder, unless the Collection Date shall have occurred:

     (i) execute and deliver and file or cause to be filed an appropriate continuation statement with respect to such financing statement; and

     (ii) deliver or cause to be delivered to the Administrative Agent an opinion of the counsel for Seller, in form and substance reasonably satisfactory to the Administrative Agent, confirming and updating the opinion delivered pursuant to Section 3.1 with respect to perfection and otherwise to the effect that the security interest hereunder continues to be an enforceable and perfected security interest, subject to no other Liens of record except as provided herein or otherwise permitted hereunder, which opinion may contain usual and customary assumptions, limitations and exceptions.

     Section 13.13 Confidentiality

     (a) Each of the Administrative Agent, the Purchaser Agents, the Secured Parties, the Servicer, the Collateral Custodian, the Backup Servicer and the Seller shall maintain and shall cause each of its employees and officers to maintain the confidentiality of the Agreement and all information with respect to the other parties, including all information regarding the business of the Seller and the Servicer hereto and their respective businesses obtained by it or them in connection with the structuring, negotiating and execution of the transactions contemplated

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herein or related to any of the underlying Obligors, except that each such party and its officers and employees may (i) disclose such information to its external accountants, attorneys, rating agencies, investors, potential investors parties that provide or may in the future provide first loss or credit enhancement to such Person and the agents of such Persons (“Excepted Persons”); (ii) disclose the existence of the Agreement, but not the financial terms thereof, (iii) disclose such information as is required by Applicable Law and (iv) disclose the Agreement and such information in any suit, action, proceeding or investigation (whether in law or in equity or pursuant to arbitration) involving any of the Transaction Documents or any Hedging Agreement for the purpose of defending itself, reducing its liability, or protecting or exercising any of its claims, rights, remedies, or interests under or in connection with any of the Transaction Documents or any Hedging Agreement. It is understood that the financial terms that may not be disclosed except in compliance with this Section 13.13(a) include, without limitation, all fees and other pricing terms, and all Termination Events, Servicer Defaults, and priority of payment provisions. Each of the Administrative Agent, the Purchaser Agents, the Secured Parties, the Collateral Custodian and the Backup Servicer will not use any such information referenced in this clause (a) regarding the business of the Seller and the Servicer hereto and their respective businesses related to any of the underlying Obligors for the purpose of their own (or their Affiliates) business development with such underlying Obligor without the prior written consent of the Seller and the Servicer (provided that such consent shall not be unreasonably withheld).

     (b) Anything herein to the contrary notwithstanding, the Seller and the Servicer each hereby consents to the disclosure of any nonpublic information with respect to it (i) to the Administrative Agent, the Purchaser Agents, the Collateral Custodian, the Backup Servicer or the Secured Parties by each other, (ii) by the Administrative Agent, the Purchaser Agents, the Collateral Custodian, the Backup Servicer and the Secured Parties to any prospective or actual assignee or participant of any of them provided such Person agrees to hold such information confidential, or (iii) by the Administrative Agent, the Purchaser Agents, and the Secured Parties to any commercial paper dealer or provider of a surety, guaranty or credit or liquidity enhancement to any Purchaser, as applicable, and to any officers, directors, employees, outside accountants and attorneys of any of the foregoing, provided each such Person is informed of the confidential nature of such information. In addition, the Secured Parties, the Administrative Agent and the Purchaser Agents, may disclose any such nonpublic information as required pursuant to any law, rule, regulation, direction, request or order of any judicial, administrative or regulatory authority or proceedings (whether or not having the force or effect of law).

     (c) Notwithstanding anything herein to the contrary, the foregoing shall not be construed to prohibit (i) disclosure of any and all information that is or becomes publicly known; (ii) disclosure of any and all information (a) if required to do so by any applicable statute, law, rule or regulation, (b) to any government agency or regulatory body having or claiming authority to regulate or oversee any respects of the Administrative Agents’, the Purchaser Agents’, the Secured Parties’, the Collateral Custodian’s or the Backup Servicer’s business or that of their affiliates, (c) pursuant to any subpoena, civil investigative demand or similar demand or request of any court, regulatory authority, arbitrator or arbitration to which the Administrative Agent, the Purchaser Agents, the Secured Parties, the Collateral Custodian or the Backup Servicer or an officer, director, employer, shareholder or affiliate of any of the foregoing is a party, (d) in any preliminary or final offering circular, registration statement or contract or other document approved in advance by the Seller, the Servicer or the Originator or (e) to any affiliate,

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independent or internal auditor, agent, employee or attorney of the Collateral Custodian or Backup Servicer having a need to know the same, provided that the Collateral Custodian or Backup Servicer advises such recipient of the confidential nature of the information being disclosed; or (iii) any other disclosure authorized by the Seller, Servicer or Originator.

     Section 13.14 Execution in Counterparts; Severability; Integration.

     This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts (including by facsimile), each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. This Agreement and any agreements or letters (including fee letters) executed in connection herewith contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, superseding all prior oral or written understandings other than any fee letter delivered by the Originator to the Administrative Agent, the Purchaser Agents, and the Secured Parties.

     Section 13.15 Waiver of Setoff.

     (a) Each of the parties hereto (other than any one of the Purchasers) hereby waives any right of setoff it may have or to which it may be entitled under this Agreement from time to time against such Purchaser or its assets.

     (b) Each of the parties hereto (other than any one of the Additional Purchasers) hereby waives any right of setoff it may have or to which it may be entitled under this Agreement from time to time against such Additional Purchaser or its assets.

     Section 13.16 Assignments.

     (a) The Purchasers may at any time assign, or grant a security interest or sell a participation interest in, with the prior written consent of the Seller and Administrative Agent provided that no Termination Event has occurred and is continuing (provided that such consent shall not be required after a Termination Event or in connection with any assignment, grant of a security interest or sale of a participation interest in an Advance or Commitment to any other Purchaser, any Purchaser Agent, any Purchaser Affiliate, any Liquidity Bank or Affiliate of such Liquidity Bank providing liquidity to a purchaser that is a commercial paper conduit, or any other purchaser that is a commercial paper conduit sponsored by any Purchaser or Purchaser Affiliate), in any Advance or Commitment (or portion thereof) to any Person (such Person other than any Liquidity Bank, pledgee or Participant (as defined below), an “Additional Purchaser”); provided that in the case of an assignment of a Variable Funding Certificate, the assignee (other than any assignee that is a Liquidity Bank) shall execute and deliver to the Servicer, the Administrative Agent and each Purchaser Agent a Transferee Letter substantially in the form of Exhibit K hereto (the “Transferee Letter”). The parties to any such assignment, grant or sale of

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participation interest shall execute and deliver to the applicable Purchaser Agent, for its acceptance and recording in its books and records, such agreement or document as may be satisfactory to such parties and such Purchaser Agent. Any assignment of a Variable Funding Certificate shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Additional Purchaser and the resulting adjustment of Commitments arising from the purchase by such Additional Purchaser of all or a portion of the rights and obligations of such transferor Purchaser under this Agreement its Variable Funding Certificate. The Seller shall not assign or delegate, or grant any interest in, or permit any Lien (other than any Permitted Lien) to exist upon, any of the Seller’s rights, obligations or duties under this Agreement without the prior written consent of the Administrative Agent, each Purchaser Agent and each Hedge Counterparty.

     (b) The Originator may, with the written consent of the Administrative Agent, add additional Persons as Additional Purchasers and Additional Agents or cause an existing Purchaser to increase its Commitment; provided however that the Commitment of any Purchaser may only be increased with the prior written consent of such Purchaser and the Administrative Agent. Each new Additional Purchaser and Additional Agent (other than any Liquidity Bank, pledgee, or Participant (as defined below)) shall become a party hereto by executing and delivering to the Administrative Agent and the Originator an Assumption Agreement substantially in the form of Exhibit M hereto (the “Assumption Agreement”).

     (c) Any Person to whom a participation has been sold by a Purchaser pursuant to Section 13.16(a) (each a “Participant”) shall not be entitled to receive any greater payment under Sections 2.14 through 2.16 or Article XI than the applicable Purchaser would have been entitled to receive with respect to the participation interest sold to such Participant.

     (d) The Administrative Agent, on behalf of the Seller, shall maintain a copy of each Additional Purchaser Agreement delivered to it and a register (the “Register”) for the recordation of the names and addresses of the Purchasers and the principal amount of the Variable Funding Certificates owned by each Purchaser from time to time. The entries in the Register shall be prima facie evidence of the accuracy thereof, and the Seller, the Purchaser Agents and the Purchasers shall treat each Person whose name is recorded in the Register as the owner of a Variable Funding Certificate hereunder as the owner thereof for all purposes of the Sale and Servicing Agreement, notwithstanding any notice to the contrary. Any assignment of a Variable Funding Certificate hereunder shall be effective only upon appropriate entries with respect thereto being made in the Register. Any assignment or transfer of all or part of any Variable Funding Certificate shall be registered on the Register only upon surrender for registration of assignment or transfer of the related Variable Funding Certificate, duly endorsed by (or accompanied by a written instrument of assignment or transfer duly executed by) the holder thereof, and thereupon one or more new Variable Funding Certificate(s) in the same aggregate principal amount shall be issued to the designated Additional Purchaser(s) and the old Variable Funding Certificate shall be returned to the Seller marked “cancelled”. The Register shall be available for inspection by the Seller or any Purchaser at any reasonable time and from time to time upon reasonable prior notice.

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     Section 13.17 Heading and Exhibits.

     The headings herein are for purposes of references only and shall not otherwise affect the meaning or interpretation of any provision hereof. The schedules and exhibits attached hereto and referred to herein shall constitute a part of this Agreement and are incorporated into this Agreement for all purposes.

     Section 13.18 Loans Subject to Retained Interest Provisions.

     (a) With respect to any Loan included in the Collateral subject to the Retained Interest provisions of this Agreement, the Seller will own only the principal portion of such Loans outstanding as of the applicable Cut-Off Date. Principal Collections received by the Seller or the Servicer on any Revolving Loans will be allocated first to the portion of such Revolving Loan owned by the Seller, until the principal amount of such portion is reduced to zero, and then to the portion not owned by the Seller; provided that if (i) a payment default occurs with respect to any of the related Loans, (ii) a Liquidity Factor Reduction Event occurs and continues, (iii) the Originator has determined in its sole discretion that an Obligor’s credit has deteriorated or the Originator has determined in its sole discretion to reduce its commitment to an Obligor, or (iv) an Allocation Adjustment Event occurs, then Principal Collections received on (x) the applicable Loan (in the case of clause (i) or (iii) above or during the time that a Liquidity Factor Reduction Event exists and continues in the case of clause (ii) above) or (y) all the Revolving Loans (in the case of clauses (iv) above) will be allocated between the portion owned by the Seller and the portion not owned by the Seller, pro rata based upon the outstanding principal amount of each such portion.

     (b) With respect to any Term Loans included in the Collateral subject to the Retained Interest provisions of this Agreement, Principal Collections and Interest Collections received by the Servicer will be allocated between the portion owned by the Seller and to the portion not owned by the Seller (if any) on a pro rata basis according to the outstanding principal amount of such portion.

     Section 13.19 Tax Treatment of Advances.

     It is the intention of the Seller and the Purchasers that, for U.S. federal, state and local income and franchise tax purposes only, the Advances made hereunder will be treated as indebtedness secured by the Collateral. The Seller, by entering into this Agreement, and the Purchasers, by making the Advances described herein, agree to treat the Advances for U.S. federal, state and local income and franchise tax purposes as indebtedness. The provisions of this Agreement and all related Transaction Documents shall be construed to further these intentions of the parties.

     Section 13.20 Original Sale and Servicing Agreement.

     This Agreement shall become effective, and shall amend and restate the Original Sale and Servicing Agreement, upon the execution of this Agreement by Seller, the Originator, the Servicer, the Purchasers, the Purchaser Agents, the Administrative Agent, the Backup Servicer and the Collateral Custodian and upon the satisfaction of the conditions contained in Article III hereof; and from and after such effective time, (i) all references made to the Original Sale and

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Servicing Agreement in the Transaction Documents or in any other instrument or document executed and/or delivered pursuant thereto shall, without anything further, be deemed to refer to this Agreement and (ii) the Original Sale and Servicing Agreement shall be deemed amended and restated in its entirety hereby.

     This Agreement is entered into and delivered to Purchaser Agents and the Purchasers in replacement of and substitution for, and not in termination of or satisfaction for the Original Sale and Servicing Agreement. All Transaction Documents, including, the other instruments, documents and agreements executed and delivered in connection with the Original Sale and Servicing Agreement, are hereby reaffirmed and shall continue in full force and effect, as may be amended, restated or otherwise modified in connection herewith. Seller acknowledges that the Assets and other Collateral evidenced by the Original Sale and Servicing Agreement have not been satisfied but instead have become part of the Assets and the Collateral under this Agreement.

[Remainder of Page Intentionally Left Blank.]

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     IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

CSE QRS FUNDING I LLC, as Seller
By:	/s/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Vice President and Treasurer

CSE MORTGAGE LLC, as Originator and as Server
By:	/s/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Vice President and Treasurer

[Signatures Continued on the Following Page]

VARIABLE FUNDING CAPITAL COMPANY LLC
By:	Wachovia Capital Markets, LLC,
	as attorney-in-fact
By:	/s/ DOUGLAS R. WILSON, SR.
	Name:	Douglas R. Wilson, Sr.
	Title:	Director

WACHOVIA CAPITAL MARKETS, LLC, as the Administrative Agent and as the VFCC Agent
By:	/s/ BRIAN SMITH
	Name:	Brian Smith
	Title:	Vice President

[Signatures Continued on the Following Page]

PARK AVENUE RECEIVABLES COMPANY, LLC
By:	JPMorgan Chase Bank, N.A., its attorney-in-fact
By:	/s/ GEORGE S. WILKINS
	Name:	George S. Wilkins
	Title:	Vice President
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, as the Park Avenue Agent
By:	/s/ GEORGE S. WILKINS
	Name:	George S. Wilkins
	Title:	Vice President

[Signatures Continued on the Following Page]

FAIRWAY FINANCE COMPANY, LLC
By:	/s/ PHILIP A. MARTONE
	Name:	Philip A. Martone
	Title:	Vice President

BMO CAPITAL MARKETS CORP. (f/k/a Harris Nesbitt Corp.), as the Fairway Agent
By:	/s/ MATTHEW PETERS
	Name:	Matthew Peters
	Title:	Managing Director

THREE PILLARS FUNDING LLC
By:	/s/ DORIS J. HEARN
	Name:	Doris J. Hearn
	Title:	Vice President

SUNTRUST CAPITAL MARKETS, INC., as the Three Pillars Agent
By:	/s/ MICHAEL G. MAZA
	Name:	Michael G. Maza
	Title:	Managing Director

[Signatures Continued on the Following Page]

SCALDIS CAPITAL LIMITED
By:	/s/ NICHOLAS JOHN WARD
	Name:	Nicholas John Ward
	Title:	Alternate Director

FORTIS BANK S.A./N.V. as the Scaldis Agent
By:	/s/ KRISTOF MOENS
	Name:	Kristof Moens
	Title:	Executive Director Co-Head Securitisation
By:	/s/ RALPH BAUER
	Name:	Ralph Bauer
	Title:	Global Head of Capital Markets Group
		Global Markets

[Signatures Continued on the Following Page]

SYMPHONY NO. 4, LLC
By:	/s/ DAVID V. DEANGELIS
	Name:	David V. DeAngelis
	Title:	Vice President

DRESDNER BANK AG, NEW YORK BRANCH as the Symphony Agent
By:	/s/ BRAD ELLIS
	Name:	Brad Ellis
	Title:	Vice President
By:	/s/ ROMAN MAZO
	Name:	Roman Mazo
	Title:	Vice President

[Signatures Continued on the Following Page]

WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its individual capacity but solely as Backup Servicer and as the Collateral Custodian
By:	/s/ JENNIFER C. DAVIS
	Name:	Jennifer C. Davis
	Title:	Assistant Vice President

[Signatures Continued on the Following Page]

Acknowledged and Agreed to as of the date first written above. WACHOVIA BANK, NATIONAL ASSOCIATION, as the Hedge Counterparty
By:	/s/        KIM FARR
	Name:	Kim Farr
	Title:	Director

EX-10.13.2

Exhibit 10.13.2

EXECUTION VERSION

SECOND AMENDMENT TO THE SALE AND SERVICING AGREEMENT

     This Second Amendment (this “Amendment”) to the Sale and Servicing Agreement referenced below is entered into as of October 15, 2007, among CapitalSource Funding VII Trust, a Delaware statutory trust (the “Issuer”), CS Funding VII Depositor LLC, a Delaware limited liability company, as Depositor (in such capacity, the “Depositor”), CapitalSource Finance LLC, a Delaware limited liability company (“CapitalSource”), as Loan Originator (in such capacity, the “Loan Originator”) and as Servicer (in such capacity, the “Servicer”) and Wells Fargo Bank, National Association, a national banking association, as Indenture Trustee on behalf of the Noteholders and as Paying Agent (in such capacities, the “Indenture Trustee”), as Collateral Custodian (the “Collateral Custodian”) and as Backup Servicer (the “Backup Servicer”).

RECITALS:

     WHEREAS, the Issuer, the Depositor, CapitalSource, the Loan Originator, the Servicer, the Indenture Trustee, the Paying Agent, the Collateral Custodian and the Backup Servicer are parties to the Sale and Servicing Agreement, dated as of April 19, 2007 (as amended, supplemented and otherwise modified form time to time including by this Amendment, the “Sale and Servicing Agreement”);

     WHEREAS, the parties hereto desire to amend the Sale and Servicing Agreement pursuant to Section 13.02(b) thereof as more specifically set forth below;

     NOW, THEREFORE, in consideration of the mutual covenants and undertakings herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

     Section 1. Amendments to the Sale and Servicing Agreement. Upon the execution and delivery of this Amendment by all parties hereto, the Sale and Servicing Agreement is hereby amended as follows:

          (a) Section 1.01 of the Sale and Servicing Agreement is hereby amended by amending and restating the following definitions contained therein in their entirety:

          “Breakage Cost: All costs, fees, expenses and liabilities of the Paying Agent, each Hedge Counterparty and the Noteholders resulting from (i) the termination of this Agreement pursuant to Section 12.02, (ii) the non-transfer of any Loans by the Issuer after the Issuer has given notice of a proposed upcoming Transfer Date for such Loans and/or (iii) any prepayment in part of the Notes on a date other than a Payment Date.”

          “Concentration Limitation: On any date of determination:

(i) the aggregate Principal Balance of all Eligible Loans made to a single Obligor shall not exceed the greater of (i) 3% of the

aggregate Principal Balance of all Eligible Loans, or (ii) $30,000,000; provided however that in no event shall the aggregate Principal Balance of all Eligible Loans made to a single Obligor exceed $50,000,000;

(ii)	no more than 25% of the aggregate Principal Balance of all Eligible Loans shall have a Principal Balance in excess of $25,000,000;
(iii)	(A) the aggregate Principal Balance of all Eligible Loans the Obligors of which are domiciled within a single state (other than Florida and California) shall not exceed the greater of (x) $20,000,000 and (y) 20% of the aggregate Principal Balance of all Eligible Loans and (B) the aggregate Principal Balance of all Eligible Loans in either the state of Florida or the state of California shall not exceed the greater of (x) $20,000,000 and (y) 30% of the aggregate Principal Balance of all Eligible Loans;
(iv)	the aggregate Principal Balance of Eligible Loans for which the Obligor is domiciled outside of the United States or Canada shall not exceed the greater of (x) $20,000,000 and (y) 10% of the aggregate Principal Balance of all Eligible Loans;
(v)	the aggregate Principal Balance of Eligible Loans within a single industry (which shall be determined by the Loan Originator based on the four digit NAIC code and included on the Loan Schedule) shall not exceed the greater of (x) $20,000,000 and (y) 30% of the aggregate Principal Balance of all Eligible Loans;
(vi)	the aggregate Principal Balance of Subordinated Loans shall not exceed the greater of (x) $20,000,000 and (y) 20% of the aggregate Principal Balance of all Eligible Loans;
(vii)	the aggregate Principal Balance of Eligible Loans assigned Loan Rating 4 shall not exceed 20% of the aggregate Principal Balance of all Eligible Loans and the aggregate Principal Balance of all Eligible Loans and the aggregate Principal Balance of Eligible Loans assigned Loan Rating 5 shall not exceed 10% of the aggregate Principal Balance of all Eligible Loans;
(viii)	the aggregate Principal Balance of DIP Loans shall not exceed the greater of (x) $20,000,000 or (y) 20% of the aggregate Principal Balance of all Eligible Loans;
(ix)	the aggregate Principal Balance of Eligible Loans subject to Scheduled Payments of interest on a basis other than monthly shall not exceed the greater of (x) $20,000,000 and (y) 25% of the aggregate Principal Balance of all Eligible Loans;

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(x)	the aggregate Principal Balance of all Senior B-Note Loans shall not exceed the greater of (x) $20,000,000 and (y) 20% of the aggregate Principal Balance of all Eligible Loans; provided, however that any Senior B-Note Loan or portion thereof in excess of this limitation shall be considered a Subordinated Loan for purposes of determining eligibility;
(xi)	the aggregate Principal Balance of Eligible Loans to Obligors principally engaged in the origination of mortgage loans to borrowers who have less than perfect (i.e., less than “A”) credit histories, higher debt to income ratios or whose loans otherwise were underwritten with exceptions to customary “A” quality underwriting guidelines or who present other risks shall not exceed $0;
(xii)	the aggregate Principal Balance of Assigned Loans shall not exceed the greater of (x) $20,000,000 and (y) 20% of the aggregate Principal Balance of all Eligible Loans;
(xiii)	the aggregate Principal Balance of Acquired Loans shall not exceed 50% of the aggregate Principal Balance of all Eligible Loans;
(xiv)	the aggregate Principal Balance of any single bulk purchase of Acquired Loans shall not exceed the greater of (x) $20,000,000 and (y) 20% of the aggregate Principal Balance of all Eligible Loans without the approval of the Initial Noteholder;
(xv)	the sum of (a) the aggregate Principal Balance of Senior Loans and Senior B-Note Loans with an original term to maturity of 7 years or greater and (b) the aggregate Principal Balance of Subordinated Loans with an original term to maturity of 10 years or greater shall not exceed $100,000,000;
(xvi)	the aggregate outstanding principal balance of the Rated Retained Securities shall not exceed 2.5% of the aggregate Principal Balance;
(xvii)	the weighted average life of the Loan Pool shall not exceed 4.0 years; and
(xviii)	the Loan Margin shall not be less than 3.00%.”

          “Excess Spread: For any date of determination, a percentage equal to the excess, if any, of (x) the weighted average Loan Interest Rate of the Loan Pool (determined based on the unpaid principal balance of the Loans in the Loan Pool) and (y) the sum of (i) the Note Interest Rate multiplied by the weighted average Purchase Price

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Percentage of the Eligible Loans and (ii) the rate at which the Trust Fees and Expenses accrue.”

          “Loan Originator: CapitalSource and its permitted successors and assigns; all Loans originated by CapitalSource CF LLC and acquired by CapitalSource (or its permitted successors and assigns) from CapitalSource CF LLC shall be deemed to have been originated by CapitalSource (or its permitted successors and assigns) provided such acquisition is reflected on the Borrowing Base Certificate.”

          “Payment Date: The 15th day of each calendar month commencing on the first such 15th day to occur after the first Transfer Date, or if any such day is not a Business Day, the first Business Day immediately following such day, provided that if the Maturity Date would otherwise fall on a date that is not a Payment Date, such Maturity Date shall occur on the next succeeding Payment Date.”

          “Purchase Price Percentage: On any Business Day, with respect to each Loan, a percentage determined as follows:

     (a) with respect to all Senior Secured Loans assigned Loan Rating 1, Loan Rating 2, Loan Rating 3 or Loan Rating 4, 85%;

     (b) with respect to all Subordinated Loans assigned Loan Rating 1, Loan Rating 2, Loan Rating 3 or Loan Rating 4, 65%;

     (c) with respect to all Senior Secured Loans assigned Loan Rating 5, 50%;

     (d) with respect to all Subordinated Loans assigned Loan Rating 5, 25%;

     (e) with respect to all Loans assigned Loan Rating 6, 0%;

     (f) with respect to any securities in clause (i) or (ii) of the definition of “Rated Retained Securities,” 75%; and

     (g) with respect to any securities in clause (iii) of the definition of “Rated Retained Securities,” a percentage to be agreed upon by mutual consent of the Majority Noteholders and the Issuer.”

          “Required Overcollateralization Amount: With respect to any Business Day, an amount equal to the greatest of (a) the excess, if any, of (i) the Pool Principal Balance on such Business Day and (ii) the Pool Purchase Price (reduced by the amount, without duplication, of any Loan in excess of the Concentration Limitations, as determined in the definition of “Borrowing Base”); (b) an amount equal to 15% of the aggregate Principal Balance of the Eligible Loans; and (c) the Required Equity Contribution.”

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          “Revolving Period: With respect to the Notes, the period commencing on the Closing Date and ending on the earlier of (i) the Maturity Date unless extended by the mutual agreement of CapitalSource and the Initial Noteholder within thirty (30) days prior to the expiration date and (ii) the date on which the Revolving Period is terminated pursuant to Section 2.08.”

          (b) The definition of “Borrowing Base” in Section 1.01 of the Sale and Servicing Agreement is hereby amended to add the following after the phrase “minus the amount (calculated without duplication) by which such Eligible Loans exceed the Concentration Limitation”: “(with respect to clause (xvii) of the definition of “Concentration Limitation,” Eligible Loans with the longest weighted average life shall be excluded first and, with respect to clause (xviii) of the definition of “Concentration Limitation,” Eligible Loans with the lowest Loan Margin shall be excluded first)”.

          (c) The definition of “Required Loan Documents” in Section 1.01 of the Sale and Servicing Agreement is hereby amended by adding at the end of clause (a) of such definition: “all operative documents effectuating the sale or transfer of such Eligible Loan from CapitalSource CF LLC to the Loan Originator (if set forth on the Loan Schedule)”.

          (d) The definition of “Trigger Event” in Section 1.01 of the Sale and Servicing Agreement is hereby amended by deleting the reference therein to “2.00%” and replacing it with “2.15%”.

          (e) Section 2.06 of the Sale and Servicing Agreement is hereby amended by adding the following language at the end of the section:

          On or before the date of the initial sale or transfer of any Loan originated by CapitalSource CF LLC and acquired by CapitalSource from CapitalSource CF LLC, the Servicer shall have delivered to the Initial Noteholder (1) a form of assignment approved in writing by the Initial Noteholder and (2) a single satisfactory legal opinion concerning Loans originated by CapitalSource CF LLC and acquired from time to time by CapitalSource from CapitalSource CF LLC pursuant to an assignment in such form.

          (f) Section 3.04 of the Sale and Servicing Agreement is hereby amended by adding the following new provision Section 3.04(uu):

     “(uu) after giving effect to such transfer of any Loan, the weighted average life of the Loan Pool shall not exceed 4.0 years; and”

          (g) Section 3.04 of the Sale and Servicing Agreement is hereby amended by adding the following new provision Section 3.04(vv):

     “(vv) after giving effect to such transfer of any Loan, the Loan Margin shall not be less than 3.00%.”

          (h) Section 3.06(b)(i)(A) of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:

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     “(A) After giving effect to the Disposition on any Optional Disposition Date, (i) the remaining Note Principal Balance shall not exceed the lesser of the Maximum Note Principal Balance and the Borrowing Base, (ii) the weighted average life of the Loan Pool shall not exceed 4.0 years and (iii) the Loan Margin shall not be less than 3.00%;”

          (i) Section 3.06 of the Sale and Servicing Agreement is hereby amended by amending and restating in its entirety the last paragraph of subsection (b) thereof as follows:

          “The Initial Noteholder shall have the right, in its sole discretion, upon and following the termination of the Revolving Period, to direct the Loan Originator, the Issuer and the Depositor to effect a Disposition. Any such Disposition shall be effected by the Loan Originator, the Issuer and the Depositor in a commercially reasonable manner. The Issuer may effect a Disposition directly to any special purpose entity provided that (1) the Issuer shall not make any representations and warranties regarding such Disposition or any of the Loans or other property subject thereto and (2) such special purpose entity agrees in writing to the Issuer not to, prior to the date which is two years and one day after the payment in full of the all of the Notes, acquiesce, petition or otherwise, directly or indirectly, invoke or cause the Issuer or Depositor to invoke the process of any governmental authority for the purpose of commencing or sustaining a case against the Issuer or the Depositor under any Federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or the Depositor any substantial part of their respective property or ordering the winding up or liquidation of the affairs of the Issuer or the Depositor.”

          (j) Section 5.01(c)(5)(ii) of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:

          “(ii) to distribute on such Payment Date the following amounts in the following order: (a) to the Indenture Trustee, an amount equal to one-twelfth of the annual Indenture Trustee Fee and all unpaid Indenture Trustee Fees from prior Payment Dates and all amounts owing to the Indenture Trustee pursuant to Section 6.07 of the Indenture, (b) to the Servicer, an amount equal to the Servicing Compensation (only if CapitalSource is not the Servicer and such amounts were not previously retained by the Servicer) and any Servicing Advance Reimbursement Amounts, (c) to the reimbursement or payment of any expenses incurred by the Indenture Trustee in connection with the appointment of a successor Servicer pursuant to Section 9.02 hereof, (d) to the Back-up Servicer, an amount equal to one-twelfth of the annual Backup Servicer Fee and (e) on each anniversary of the Closing Date, to the Owner Trustee, an amount equal to the Owner Trustee Fee;”

          (k) Section 5.01(c)(5)(v) of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:

          “(v) to the holders of the Notes pro rata, the amount required to maintain the Required Overcollateralization Amount for such Payment Date; provided,

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however, that if (a) a Trigger Event shall have occurred and be continuing, (b) an Event of Default under the Indenture or Default shall have occurred and be continuing or (c) the Revolving Period shall have terminated, the holders of the Notes shall receive, in respect of principal of the Notes, all remaining amounts on deposit in the Distribution Account;”

          (l) Section 10.03 of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:

          “All Custodial Loan Files shall be kept in fire resistant vaults, rooms or cabinets at the office of the Collateral Custodian set forth in Section 13.06 hereof, or at such other office as shall be specified to the Indenture Trustee by the Collateral Custodian in a written notice delivered at least forty-five (45) days prior to such change. All Custodial Loan Files shall be placed together with an appropriate identifying label and maintained in such a manner so as to permit retrieval and access upon delivery of the request for release of, in the form of Exhibit H attached hereto. All Custodial Loan Files shall be clearly segregated from any other documents or instruments maintained by the Collateral Custodian.”

          (m) The first paragraph of Section 12.02 of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:

          “The Servicer may, at its option, effect an early termination of this Agreement and the Collateral on any Business Day. The Servicer shall effect such early termination by providing notice thereof to the Indenture Trustee and Owner Trustee and paying all amounts due the Indenture Trustee, the Owner Trustee and the Noteholders hereunder, including any Breakage Costs (the “Termination Price”).”

          (n) The Sale and Servicing Agreement is hereby amended by inserting EXHIBIT H thereto in the form attached hereto as EXHIBIT 1.

     Section 2. Representations and Warranties. Each of the Issuer, the Depositor, the Loan Originator and the Servicer hereby represents and warrants that (i) it has the power and is duly authorized to execute and deliver this Amendment, (ii) this Amendment has been duly authorized, executed and delivered, (iii) it is and will continue to be duly authorized to perform its respective obligations under the Basic Documents and this Amendment, (iv) the execution, delivery and performance by it of this Amendment shall not (1) result in the breach of, or constitute (alone or with notice or with the lapse of time or both) a default under, any material agreement or instrument to which it is a party in each case that is likely to affect materially and adversely its ability to carry out the transactions contemplated hereby, (2) violate (A) any provision of law, statute, rule or regulation, or organizational documents or other constitutive documents, (B) any order of any Governmental Authority or (C) any provision of any material indenture, agreement or other instrument to which it is a party or by which it or any of its property is or may be bound in each case that is likely to affect materially and adversely its ability to carry out the transactions contemplated hereby, or (3) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by the Issuer other than pursuant to the Basic Documents, (v) this Amendment and each of the Basic Documents to which it is a party or by which it or its assets may be or is bound

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constitutes its legal, valid and binding obligations, enforceable against it (subject, as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting creditors’ rights generally and to general principles of equity), (vi) except as publicly disclosed, there are no actions, suits, investigations (civil or criminal) or proceedings at law or in equity or by or before any Governmental Authority pending or, to its knowledge, threatened against or affecting it or any of its business, property or rights (1) which involve any Basic Document or (2) which would be materially likely to result in a material adverse effect on its business, assets, operations or financial condition, (vii) it is not in default or violation with respect to any law, rule or regulation, judgment, writ, injunction or decree order of any court, governmental authority, regulatory agency or arbitration board or tribunal, the effect of which would have a material adverse effect on its business, assets, operations or financial condition and (viii) no Default or Event of Default has occurred or is continuing. Except as expressly amended by the terms of this Amendment, all terms and conditions of the Sale and Servicing Agreement shall remain in full force and effect and are hereby ratified in all respects. Neither the Initial Noteholder nor the Certificateholder object to the execution of this Amendment by Wilmington Trust Company or the Issuer.

     Section 3. No Reliance. Each of the Issuer, the Depositor, the Loan Originator and the Servicer hereby acknowledges that it has not relied on the Initial Noteholder, the Hedge Counterparty or the Certificateholder or any of their respective officers, directors, employees, agents and “control persons” as such term is used under the Act and under the Securities Exchange Act of 1934, as amended, for any tax, accounting, legal or other professional advice in connection with the transactions contemplated by this Amendment or the Basic Documents, that each of the Issuer, the Depositor, the Loan Originator and the Servicer has retained and been advised by such tax, accounting, legal and other professionals as it has deemed necessary in connection with the transactions contemplated by this Amendment and the Basic Documents and that each of the Initial Noteholder, the Hedge Counterparty and the Certificateholder makes no representation or warranty, and shall have no liability with respect to, the tax, accounting or legal treatment or implications relating to the transactions contemplated by this Amendment and the Basic Documents.

     Section 4. Defined Terms; Headings. All capitalized terms used herein, unless otherwise defined herein, have the same meanings provided herein or in the Sale and Servicing Agreement. The headings of the various Sections of this Amendment have been inserted for convenience of reference only and shall not be deemed to be part of this Amendment.

     Section 5. Limited Amendment. This Amendment is limited precisely as written and shall not be deemed to (a) be a consent to a waiver or any other term or condition of the Sale and Servicing Agreement, the other Basic Documents or any of the documents referred to therein or executed in connection therewith or (b) prejudice any right or rights the Initial Noteholder or the Hedge Counterparty may now have or may have in the future under or in connection with the Sale and Servicing Agreement, the other Basic Documents or any documents referred to therein or executed in connection therewith. Whenever the Sale and Servicing Agreement is referred to in the Sale and Servicing Agreement or any of the instruments, agreements or other documents or papers executed and delivered in connection therewith, it shall be deemed to mean the Sale and Servicing Agreement, as the case may be, as modified by this Amendment. Except as

8

hereby amended, no other term, condition or provision of the Sale and Servicing Agreement shall be deemed modified or amended, and this Amendment shall not be considered a novation.

     Section 6. Construction; Severability. This Amendment is a document executed pursuant to the Sale and Servicing Agreement and shall (unless otherwise expressly indicated therein) be construed, administered or applied in accordance with the terms and provisions thereof. If any one or more of the covenants, agreements, provisions or terms of this Amendment shall be held invalid in a jurisdiction for any reason whatsoever, then, in such jurisdiction, such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Amendment and shall in no way affect the validity or enforceability of the other covenants, agreements, provisions or terms of this Amendment.

     Section 7. Counterparts; Facsimile Signature. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. The parties may execute facsimile copies of this Amendment and the facsimile signature of any such party shall be deemed an original and fully binding on said party.

     Section 8. Governing Law. This Amendment shall be governed and construed in accordance with the applicable terms and provisions of Section 13.05 (Governing Law) of the Sale and Servicing Agreement, which terms and provisions are incorporated herein by reference.

     Section 9. Instructions to Owner Trustee; Limitation on Liability. The Depositor, as sole Certificateholder, hereby instructs the Owner Trustee, pursuant to Section 6.3 of the Trust Agreement, to execute and deliver this Amendment. It is expressly understood and agreed by the parties hereto that (a) this Amendment is executed and delivered by Wilmington Trust Company, not individually or personally, but solely as Owner Trustee of CapitalSource Funding VII Trust, in the exercise of the powers and authority conferred and vested in it, (b) each of the representations, undertakings and agreements herein made on the part of the Issuer is made and intended not as personal representations, undertakings and agreements by Wilmington Trust Company but is made and intended for the purpose for binding only the Issuer, (c) nothing herein contained shall be construed as creating any liability on Wilmington Trust Company, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties hereto and by any Person claiming by, through or under the parties hereto and (d) under no circumstances shall Wilmington Trust Company be personally liable for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Issuer under this Amendment or any other related documents.

     Section 10. Recordation of Amendment. To the extent permitted by applicable law, this Amendment, or a memorandum thereof if permitted under applicable law, is subject to recordation in all appropriate public offices for real property records in all of the counties or other comparable jurisdictions and in any other appropriate public recording office or elsewhere, such recordation to be effected by the Servicer at the Securityholders’ expense on direction of the Initial Noteholder but only when accompanied by an Opinion of Counsel to the effect that

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such recordation materially and beneficially affects the interests of the Securityholders or is necessary for the administration or servicing of the Loans.

     Section 11. Successor and Assigns. This Amendment shall be governed by, subject to and construed in accordance with the applicable terms and provisions of Section 13.10 (Successor and Assigns) of the Sale and Servicing Agreement, which terms and provisions are incorporated herein by reference.

     Section 12. Acknowledgement as to Restructuring of the CS Funding VII Financing Facility. The parties hereto acknowledge that (i) this Amendment satisfies for all purposes the condition contemplated by Section 3 of that certain First Amendment to the Note Purchase Agreement, dated as of August 2, 2007, by and among the Issuer, the Depositor, CapitalSource and Citigroup Global Markets Realty Corp., as Purchaser, that the parties to the Basic Documents enter into an amendment in form and substance satisfactory to the Initial Noteholder on or before October 15, 2007 to substantially conform the concentration limitations, covenants, representations and warranties set forth in the CSII Financing Facility referenced therein and (ii) a Termination Date shall not have occurred as a result of such Section 3.

[Remainder of Page Intentionally Left Blank; Signature Page Follows]

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     IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to the Sale and Servicing Agreement to be duly executed by their respective authorized officers as of the day and year first written above.

CAPITALSOURCE FUNDING VII TRUST,
By:	Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee
By:	/s/ Rachel L. Simpson
	Name:	Rachel L. Simpson
	Title:	Sr. Financial Services Officer
CS FUNDING VII DEPOSITOR LLC, as Depositor
By:	/s/ Jeffrey A. Lipson
	Name:	Jeffrey A. Lipson
	Title:	Vice President and Treasurer
CAPITALSOURCE FINANCE LLC, as Loan Originator and Servicer
By:	/s/ Jeffrey A. Lipson
	Name:	Jeffrey A. Lipson
	Title:	Vice President and Treasurer
WELLS FARGO BANK, NATIONAL ASSOCIATION, as Indenture Trustee, Collateral Custodian and Backup Servicer
By:	/s/ Jeanine C. Casey
	Name:	Jeanine C. Casey
	Title:	Assistant Vice President

[Signature Pages to Second Amendment to Sale and Servicing Agreement]

ACKNOWLEDGED AND AGREED: CITIGROUP GLOBAL MARKETS REALTY CORP.
By:	/s/ Gerald F. Keefe
	Name:	Gerald F. Keefe
	Title:	Authorized Signatory
CAPITALSOURCE FINANCE LLC, as sole Certificateholder
By:	/s/ Jeffrey A. Lipson
	Name:	Jeffrey A. Lipson
	Title:	Vice President and Treasurer

EX-10.14

Exhibit 10.14

AMENDED AND RESTATED
SALE AND SERVICING AGREEMENT

by and among

CAPITALSOURCE REAL ESTATE LOAN LLC, 2007-A,
as the Seller

CSE MORTGAGE LLC,
as the Originator and as the Servicer

EACH OF THE ISSUERS
FROM TIME TO TIME PARTY HERETO,

EACH OF THE LIQUIDITY BANKS
FROM TIME TO TIME PARTY HERETO

CITICORP NORTH AMERICA, INC.,
as the Administrative Agent

and

WELLS FARGO BANK, NATIONAL ASSOCIATION,
as the Backup Servicer and as the Collateral Custodian

Dated as of September 10, 2007

and
AMENDED AND RESTATED
As of October 30, 2007

TABLE OF CONTENTS

		Page
ARTICLE I DEFINITION		2
Section 1.1	Certain Defined Terms	2
Section 1.2	Other Terms	52
Section 1.3	Computation of Time Periods	52
Section 1.4	Interpretation	52
Section 1.5	Special Provisions Relating to Alternative Currency Loans	53
ARTICLE II PURCHASE OF THE VARIABLE FUNDING CERTIFICATES		53
Section 2.1	The Variable Funding Certificates	53
Section 2.2	[Intentionally Omitted]	55
Section 2.3	Procedures for Advances	55
Section 2.4	Reduction of the Facility Amount; Mandatory and Optional
	Repayments; Increase of Commitment	56
Section 2.5	Determination of Interest	58
Section 2.6	Percentage Evidenced by each Variable Funding Certificate	58
Section 2.7	[Reserved]	58
Section 2.8	Notations on Variable Funding Certificates	58
Section 2.9	Settlement Procedures During the Revolving Period and the
	Amortization Period	58
Section 2.10	Settlement Procedures During the Turbo Period	60
Section 2.11	Collections and Allocations	61
Section 2.12	Payments, Computations, Etc.	62
Section 2.13	Optional and Mandatory Repurchase	63
Section 2.14	Fees	63
Section 2.15	Increased Costs; Capital Adequacy; Illegality	64
Section 2.16	Taxes	65
Section 2.17	Assignment of the Sale Agreement	66
Section 2.18	Substitution of Assets	67
Section 2.19	Optional Sales	68
Section 2.20	Discretionary Sales	70
ARTICLE III CONDITIONS TO ADVANCES		71
Section 3.1	Conditions to Closing and Initial Advance	71
Section 3.2	Conditions Precedent to All Advances	72
Section 3.3	Conditions to Closing and Initial Advance under the Class B VFC	74
ARTICLE IV REPRESENTATIONS AND WARRANTIES		75
Section 4.1	Representations and Warranties of the Seller	75
Section 4.2	Representations and Warranties of the Seller Relating to
	the Agreement and the Collateral	84
Section 4.3	Representations and Warranties of the Servicer	86

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TABLE OF CONTENTS
(continued)

		Page
Section 4.4	Representations and Warranties of the Backup Servicer	88
Section 4.5	Representations and Warranties of the Collateral Custodian	89
Section 4.6	Breach of Certain Representations and Warranties	90
ARTICLE V GENERAL COVENANTS		91
Section 5.1	Affirmative Covenants of the Seller	91
Section 5.2	Negative Covenants of the Seller	95
Section 5.3	Covenants of the Seller Relating to the Hedging of Assets	97
Section 5.4	Affirmative Covenants of the Servicer	98
Section 5.5	Negative Covenants of the Servicer	100
Section 5.6	Affirmative Covenants of the Backup Servicer	102
Section 5.7	Negative Covenants of the Backup Servicer	102
Section 5.8	Affirmative Covenants of the Collateral Custodian	102
Section 5.9	Negative Covenants of the Collateral Custodian	103
Section 5.10	Covenant of the Seller, the Servicer and the Originator	103
ARTICLE VI ADMINISTRATION AND SERVICING OF ASSETS		103
Section 6.1	Designation of the Servicer	103
Section 6.2	Duties of the Servicer	104
Section 6.3	Authorization of the Servicer	106
Section 6.4	Collection of Payments	107
Section 6.5	Servicer Advances	109
Section 6.6	Realization Upon Charged-Off Assets	109
Section 6.7	Maintenance of Insurance Policies	110
Section 6.8	Servicing Compensation	110
Section 6.9	Payment of Certain Expenses by Servicer	110
Section 6.10	Reports	111
Section 6.11	Annual Statement as to Compliance	112
Section 6.12	Annual Independent Public Accountant’s Servicing Reports	112
Section 6.13	Limitation on Liability of the Servicer and Others	112
Section 6.14	The Servicer Not to Resign	112
Section 6.15	Servicer Defaults	113
Section 6.16	Appointment of Successor Servicer	114
ARTICLE VII THE BACKUP SERVICER		116
Section 7.1	Designation of the Backup Servicer	116
Section 7.2	Duties of the Backup Servicer	116
Section 7.3	Merger or Consolidation	118
Section 7.4	Backup Servicing Compensation	118
Section 7.5	Backup Servicer Removal	118
Section 7.6	Limitation on Liability	118
Section 7.7	The Backup Servicer Not to Resign	119
ARTICLE VIII THE COLLATERAL CUSTODIAN		120
Section 8.1	Designation of Collateral Custodian	120

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TABLE OF CONTENTS
(continued)

		Page
Section 8.2	Duties of Collateral Custodian	120
Section 8.3	Merger or Consolidation	122
Section 8.4	Collateral Custodian Compensation	122
Section 8.5	Collateral Custodian Removal	122
Section 8.6	Limitation on Liability	122
Section 8.7	The Collateral Custodian Not to Resign	123
Section 8.8	Release of Documents	123
Section 8.9	Return of Required Asset Documents	124
Section 8.10	Access to Certain Documentation and Information Regarding
	the Collateral; Audits	125
Section 8.11	Intentionally Omitted	125
ARTICLE IX SECURITY INTEREST		125
Section 9.1	Grant of Security Interest	125
Section 9.2	Release of Lien on Collateral	126
Section 9.3	Further Assurances	126
Section 9.4	Remedies	126
Section 9.5	Waiver of Certain Laws	127
Section 9.6	Power of Attorney	127
ARTICLE X TERMINATION EVENTS		127
Section 10.1	Termination Events	127
Section 10.2	Remedies	130
ARTICLE XI INDEMNIFICATION		131
Section 11.1	Indemnities by the Seller	131
Section 11.2	Indemnities by the Servicer	134
Section 11.3	After-Tax Basis	135
ARTICLE XII THE ADMINISTRATIVE AGENT		135
Section 12.1	The Administrative Agent	135
ARTICLE XIII MISCELLANEOUS		139
Section 13.1	Amendments and Waivers	139
Section 13.2	Notices, Etc.	139
Section 13.3	Ratable Payments	139
Section 13.4	No Waiver; Remedies	140
Section 13.5	Binding Effect; Benefit of Agreement	140
Section 13.6	Term of this Agreement	140
Section 13.7	Governing Law; Consent to Jurisdiction; Waiver of
	Objection to Venue	140
Section 13.8	Waiver of Jury Trial	141
Section 13.9	Costs, Expenses and Taxes	141
Section 13.10	No Proceedings	142
Section 13.11	Recourse Against Certain Parties	142

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TABLE OF CONTENTS
(continued)

		Page
Section 13.12	Protection of Right, Title and Interest in the
	Collateral; Further Action Evidencing Advances	143
Section 13.13	Confidentiality	144
Section 13.14	Execution in Counterparts; Severability; Integration	145
Section 13.15	Waiver of Set-off	146
Section 13.16	Assignments	146
Section 13.17	Heading and Exhibits	149
Section 13.18	Loans Subject to Retained Interest Provisions	149
Section 13.19	Tax Treatment of Advances	149
Section 13.20	Acknowledgement	150

EXHIBITS
EXHIBIT A-1	Form of Borrowing Notice (Advances)
EXHIBIT A-2	Form of Borrowing Notice (Reduction of Facility Amount)
EXHIBIT A-3	Form of Borrowing Base Certificate
EXHIBIT B-1	Form of Class A Variable Funding Certificate
EXHIBIT B-2	Form of Class B Variable Funding Certificate
EXHIBIT C	Form of Monthly Report
EXHIBIT D	Form of Hedging Agreement (including Schedule and Confirmation)
EXHIBIT E-1	Form of Officer’s Certificate to Solvency (CapitalSource Real
	Estate Loan LLC, 2007-A)
EXHIBIT E-2	Form of Officer’s Certificate to Solvency (CSE Mortgage LLC)
EXHIBIT F-1	Form of Officer’s Closing Certificate (CapitalSource Real
	Estate Loan LLC, 2007-A)
EXHIBIT F-2	Form of Officer’s Closing Certificate (CSE Mortgage LLC)
EXHIBIT G-1	Form of Power of Attorney (CapitalSource Real Estate Loan LLC,
	2007-A)
EXHIBIT G-2	Form of Power of Attorney (CSE Mortgage LLC)
EXHIBIT H	Form of Release of Required Asset Documents
EXHIBIT I	Form of Assignment of Mortgage
EXHIBIT J	Form of Servicer’s Certificate
EXHIBIT K	[Intentionally omitted]
EXHIBIT L	Form of Certificate of Outside Counsel
EXHIBIT M	Form of Assignment and Acceptance Agreement
EXHIBIT N	Form of Parent Undertaking — Originator
EXHIBIT O	Form of Parent Undertaking — Servicer
SCHEDULES
SCHEDULE I	Condition Precedent Documents
SCHEDULE I-A	Condition Precedent Documents To Restatement Date
SCHEDULE II	List of Lock-Box Banks and Lock-Box Accounts
SCHEDULE III	Location of Required Asset Documents and Asset Files
SCHEDULE IV	Asset List

iv

TABLE OF CONTENTS
(continued)

		Page
SCHEDULE V	Residential Mortgage Policies and Procedures
SCHEDULE VI	Investors
SCHEDULE VII	Intentionally Omitted
SCHEDULE VIII	Excess Concentration Loans

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AMENDED AND RESTATED
SALE AND SERVICING AGREEMENT

     THIS SALE AND SERVICING AGREEMENT (such agreement as amended, modified, waived, supplemented, restated or replaced from time to time, the “Agreement”) dated as of September 10, 2007, and AMENDED AND RESTATED as of October ___, 2007, by and among:

     (1) CAPITALSOURCE REAL ESTATE LOAN LLC, 2007-A, a Delaware limited liability company, as the seller (together with its successors and assigns in such capacity, the “Seller”);

     (2) CSE MORTGAGE LLC, a Delaware limited liability company (“CSE Mortgage”), as the originator (together with its successors and assigns in such capacity, the “Originator”), and as the servicer (together with its successors and assigns in such capacity, the “Servicer”);

     (3) EACH OF THE ISSUERS FROM TIME TO TIME PARTY HERETO (together with their respective successors and assigns in such capacities, each an “Issuer”);

     (4) EACH OF THE LIQUIDITY BANKS FROM TIME TO TIME PARTY HERETO (together with their respective successors and assigns in such capacities, each a “Liquidity Bank”);

     (5) CITICORP NORTH AMERICA, INC., a Delaware corporation (“CNAI”), as the administrative agent for the Issuers and Liquidity Banks hereunder (together with its successors and assigns in such capacity, including any successor appointed pursuant to ARTICLE XII, the “Administrative Agent”); and

     (6) WELLS FARGO BANK, NATIONAL ASSOCIATION (“Wells Fargo”), not in its individual capacity but as the backup servicer (together with its successors and assigns in such capacity, the “Backup Servicer”), and not in its individual capacity but as the collateral custodian (together with its successors and assigns in such capacity, the “Collateral Custodian”).

RECITALS

     WHEREAS, the Seller has acquired, and may from time to time continue to acquire, certain Assets (as defined below) from the Originator pursuant to the Sale Agreement (as defined below);

     WHEREAS, the Seller is prepared to transfer and assign, and grant security interests in, certain Assets and other proceeds with respect thereto to the Purchasers (as defined below) from time to time;

     WHEREAS, the Purchasers may, in accordance with the terms of this Agreement, purchase such Assets;

     WHEREAS, all other conditions precedent to the execution of this Agreement have been complied with; and

     WHEREAS, the parties hereto wish to AMEND AND RESTATE this Agreement in order to create and issue two Classes of Variable Funding Certificates;

     NOW, THEREFORE, based upon the foregoing Recitals, the mutual premises and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

ARTICLE I

DEFINITION

      Section 1.1 Certain Defined Terms.

     Certain capitalized terms used throughout this Agreement are defined above or in this Section 1.1. As used in this Agreement and its schedules, exhibits and other attachments, unless the context requires a different meaning, the following terms shall have the following meanings:

“1940 Act”: Defined in Section 10.1(i).

“Accrual Period”: (a) with respect to each Advance (or portion thereof) funded at an Interest Rate other than the CP Rate, (i) with respect to the first Payment Date, the period from and including the Closing Date to but excluding such first Payment Date and (ii) with respect to any subsequent Payment Date, the period from and including the previous Payment Date to but excluding such subsequent Payment Date, and (b) with respect to each Class A Advance (or portion thereof) funded at an Interest Rate equal to the CP Rate, (i) with respect to the first Payment Date, the period from and including the Closing Date to and including the last day of the calendar month in which the Closing Date occurs and (ii) with respect to any subsequent Payment Date, the period ending on the last day of the calendar month immediately preceding the month in which the Payment Date occurs and commencing on the first day of such immediately preceding calendar month.

“Acquired Loan”: A Loan that is originated by a Person other than the Originator, CapitalSource Finance LLC or any of their respective Subsidiaries and acquired by the Originator in a “true sale” transaction pursuant to an acquisition agreement, provided that the foregoing shall exclude any Retained Interest.

“Addition Date”: With respect to any Additional Assets, the date on which such Additional Assets become part of the Collateral.

“Additional Assets”: All Assets that become part of the Collateral after the initial Funding Date.

“Adjusted Eurodollar Rate”: For any Accrual Period, an interest rate per annum equal to a fraction, expressed as a percentage and rounded upwards (if necessary) to the nearest 1/100 of 1%, (i) the numerator of which is equal to the offered quotation to first-class banks in the New

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York interbank Eurodollar market by the Administrative Agent for Dollar deposits of amounts in same day funds comparable to the outstanding principal amount of the Advance for which an interest rate is then being determined with maturities comparable to the Accrual Period to be applicable to such Advance, determined as of 10:00 a.m. (New York City, New York time) on the date which is two Business Days prior to the commencement of such Accrual Period (and rounded upward to the next whole multiple of 1/16 of 1%) to a fraction, expressed as a percentage and rounded upwards (if necessary) to the nearest 1/100 of 1%, and (ii) the denominator of which is equal to 100% minus the Eurodollar Reserve Percentage for such Accrual Period.

“Administrative Agent”: Defined in the Preamble of this Agreement.

“Advance”: A Class A Advance or Class B Advance.

“Advance Rate”: For any Advance, (i) with respect to the Class A Variable Funding Certificates, the Class A Advance Rate, and (ii) with respect to the Class B Variable Funding Certificates, the Class B Advance Rate.

“Advances Outstanding”: On any day, the aggregate principal amount of all Class A Advances Outstanding and Class B Advances Outstanding.

“Affected Party”: The Administrative Agent, the Purchasers, each Liquidity Bank, all assignees, participants and Affiliates of the Purchasers and each Liquidity Bank, any successor to CNAI as Administrative Agent and any sub-agent of the Administrative Agent.

“Affiliate”: With respect to a Person, means any other Person that, directly or indirectly, controls, is controlled by or under common control with such Person, or is a director or officer of such Person. For purposes of this definition, “control” (including the terms “controlling,” “controlled by” and “under common control with”) when used with respect to any specified Person means the possession, direct or indirect, of the power to vote 20% or more of the voting securities of such Person or to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

“Agent’s Account”: A special account (account number 40517805) in the name of the Administrative Agent maintained at Citibank, N.A.

“Agented Loans”: With respect to any Loan, one or more loans to an Eligible Obligor wherein (a) the loan(s) are originated by the Originator in accordance with the Credit and Collection Policy as a part of a syndicated loan transaction that has been fully consummated between the Originator and the related Obligor (without regard to any subsequent syndication of such Loan) prior to such Agented Loans becoming part of the Collateral hereunder, (b) upon an assignment of the note under the Sale Agreement to the Seller, any original note related thereto will be endorsed to the Administrative Agent and held by the Collateral Custodian, on behalf of the Secured Parties, (c) the Seller, as assignee of the loan, will have all of the rights but none of the obligations of the Originator with respect to such loan and the Originator’s right, title and interest in and to the Related Property including the right to receive and collect payments directly in its own name and to enforce its rights directly against the Obligor thereof, (d) the loan, if secured, is secured by an undivided interest in the Related Property that also secures and is shared by, on a

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pro rata basis, all other holders of such Obligor’s loan of equal priority and (e) CapitalSource Finance LLC or the Originator (or a wholly owned subsidiary of the Originator) is the collateral agent and payment agent for loans to such Obligor.

“Aggregate Notional Amount”: On any date of determination, the aggregate notional amount in respect of the payment obligations of the relevant Hedge Counterparty that is outstanding on that date under all Hedge Transactions or any group thereof, as the context requires.

“Aggregate Outstanding Asset Balance”: On any date of determination, the sum of the Outstanding Asset Balances of all Eligible Assets included as part of the Collateral on such date.

“Aggregate Outstanding Principal Balance”: As of any date of determination, the sum of Advances Outstanding, plus the amount of the Seller Investment.

“Aggregate Unpaids”: At any time, an amount equal to the sum of all unpaid Advances Outstanding, Interest, Breakage Costs, Hedge Breakage Costs and all other amounts owed by the Seller to the Purchasers, the Administrative Agent, the Backup Servicer, each Hedge Counterparty and the Collateral Custodian hereunder (including, without limitation, all Indemnified Amounts, other amounts payable under Article XI and amounts required under Section 2.9, Section 2.10, Section 2.14, Section 2.15 and Section 2.16 to the Affected Parties or Indemnified Parties) or under any Hedging Agreement (including, without limitation, payments in respect of the termination of any such Hedging Agreement) or by the Seller or any other Person under any fee letter (including, without limitation, the Purchaser Fee Letter, the Backup Servicer and Collateral Custodian Fee Letter) delivered in connection with the transactions contemplated by this Agreement (whether due or accrued).

“Alternative Currency”: At any time, any of Canadian Dollars, British Pounds Sterling or Euros.

“Alternative Rate”: An interest rate per annum equal to the Adjusted Eurodollar Rate calculated on a daily basis; provided that the Alternative Rate shall be the Base Rate (i) for all Advances of any Class B Purchaser or Liquidity Bank which has provided a notice pursuant to clause (a), (b), (c) or (d) of the definition of Eurodollar Disruption Event and (ii) for the relevant Advances of any Class B Purchaser or Liquidity Bank which has provided a notice pursuant to clause (e) of the definition of Eurodollar Disruption Event.

“Amortization Period”: The period beginning on the occurrence of the Termination Date pursuant to clause (a), (b), (c) or (d) of the definition thereof and ending on the earlier of (i) the commencement of the Turbo Period and (ii) the Collection Date.

“Applicable Law”: For any Person or property of such Person, all existing and future applicable laws, rules, regulations (including proposed, temporary and final income tax regulations), statutes, treaties, codes, ordinances, permits, certificates, orders and licenses of and interpretations by any Governmental Authority (including, without limitation, usury laws, the Federal Truth in Lending Act, and Regulation Z and Regulation B of the Board of Governors of the Federal Reserve System), and applicable judgments, decrees, injunctions, writs, awards or orders of any court, arbitrator or other administrative, judicial, or quasi-judicial tribunal or agency of competent jurisdiction.

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“Appraisal”: With respect to any Mortgaged Property as to which an appraisal is required or permitted to be performed pursuant to the terms of this Agreement, an appraisal performed in conformance with the guidelines of the Appraisal Institute.

“Appraisal Institute”: The international membership association of professional real estate appraisers.

“Asset Checklist”: The list of loan documents attached as Schedule 5 to the Sale Agreement or an electronic list delivered by or on behalf of the Seller to the Collateral Custodian that identifies each of the items contained in the related Asset File, as amended from time to time.

“Asset Files”: With respect to any Asset, as applicable, and Related Security, copies of each of the Required Asset Documents and duly executed originals (to the extent required by the Credit and Collection Policy) and copies of any other Records relating to such Asset and Related Security.

“Asset List”: The Asset List provided by or on behalf of the Seller to the Administrative Agent and the Collateral Custodian, in the form of Schedule IV hereto, as such list may be amended, supplemented or modified from time to time in accordance with this Agreement.

“Assets”: Loans, individually or collectively, as the context requires.

“Assigned Loan”: A Loan (other than an Agented Loan) originated by a Person other than the Originator in which a constant percentage interest has been assigned to the Originator by such Person in accordance with the Credit and Collection Policy and (i) the transaction has been fully consummated prior to such Loan becoming part of the Collateral hereunder, (ii) the Originator is a party to a credit agreement and/or an assignment agreement with the Obligor with respect to such Loan, and (iii) the agent receives payment directly from the Obligor thereof on behalf of each lender that has been assigned a percentage interest in such Loan; provided that any such Loan shall exclude any Retained Interest.

“Assignment and Acceptance”: An assignment and acceptance agreement entered into by a Purchaser, an Eligible Assignee and the Agent, pursuant to which such Eligible Assignee may become a party to this Agreement, in substantially the form of Exhibit M hereto.

“Assignment of Leases and Rents”: With respect to any Mortgaged Property, any assignment of leases, rents and profits or similar instrument executed by the Obligor, assigning to the mortgagee all of the income, rents and profits derived from the ownership, operation, leasing or disposition of all or a portion of such Mortgaged Property, whether contained in the Mortgage or in a document separate from the Mortgage, in the form that was duly executed, acknowledged and delivered, as amended, modified, renewed or extended through the date hereof and from time to time hereafter in accordance with the Credit and Collection Policy.

“Assignment of Mortgage”: As to each Loan, other than Agented Loans or Assigned Loans (or other Loans for which an Assignment of Mortgage has been delivered to Wells Fargo in its capacity as trustee or custodian pursuant to a prior term transaction or warehouse facility involving the Originator or one of its Affiliates) secured by an Interest in Real Property, one or more assignments, notices of transfer or equivalent instruments, each in recordable form and

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sufficient under the laws of the relevant jurisdiction to reflect the transfer of the related Mortgage or similar security instrument and all other documents related to such Loan and to the Seller and to grant a perfected lien thereon by the Seller in favor of the Administrative Agent, on behalf of the Secured Parties, each such Assignment of Mortgage to be substantially in the form of Exhibit I hereto.

“Available Collections Amount”: As of any Payment Date, the amount of funds remaining after making the distributions required by clauses (1) through (5) of Section 2.9(a).

“Available Collections Shortfall”: As of any Payment Date, the Total Principal Payable exceeds the Available Collections Amount.

“Availability”: At any time, an amount equal to the sum of the Class A Availability plus the Class B Availability.

“Available Funds”: With respect to any Payment Date, all amounts received in the Collection Account (including, without limitation, any Collections on the Assets included in the Collateral and earnings from Permitted Investments in the Collection Account) during the Collection Period immediately preceding such Payment Date.

“Average Pool Charged-Off Ratio”: As of any Determination Date, the percentage equivalent of a fraction (i) the numerator of which is equal to the sum of the Outstanding Asset Balance of all Assets that became Charged-Off Assets (net of Recoveries during such Collection Period) during the Collection Period related to such Determination Date and each of the 11 preceding Determination Dates (or such lesser number as shall have elapsed as of such Determination Date), and (ii) the denominator of which is equal to a fraction the numerator of which is the sum of the Aggregate Outstanding Asset Balance as of the first day of the Collection Period related to such Determination Date and each of the 11 preceding Determination Dates (or such lesser number as shall have elapsed as of such Determination Date) and the denominator of which is 12 (or the corresponding lesser number of Determination Dates included in the calculations described herein).

“Average Portfolio Charged-Off Ratio”: As of any Determination Date, the percentage equivalent of a fraction (i) the numerator of which is equal to the sum of the Portfolio Outstanding Asset Balance of all Portfolio Assets (excluding equity investments) that became Charged-Off Portfolio Assets (net of Recoveries during such Collection Period) during the Collection Period related to such Determination Date and each of the 11 preceding Determination Dates (or such lesser number as shall have elapsed as of such Determination Date), and (ii) the denominator of which is equal to a fraction the numerator of which is the sum of the Portfolio Outstanding Asset Balance (excluding equity investments) as of the first day of the Collection Period related to such Determination Date and each of the 11 preceding Determination Dates (or such lesser number as shall have elapsed as of such Determination Date) and the denominator of which is 12 (or the corresponding lesser number of Determination Dates included in the calculations described herein); provided that such calculation shall exclude the effects of any Liquid Real Estate Assets that are acquired and levered by the Originator solely to satisfy REIT asset and income tests.

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“Average Portfolio Delinquency Ratio”: As of any Determination Date, the percentage equivalent of a fraction the numerator of which is equal to the sum of the Portfolio Delinquency Ratio on such Determination Date and each of the two preceding Determination Dates (or such lesser number as shall have elapsed as of such Determination Date) and the denominator of which is equal to three (or the corresponding lesser number of Determination Dates included in the calculations described herein); provided that such calculation shall exclude the effects of any Liquid Real Estate Assets that are acquired and levered by the Originator solely to satisfy REIT asset and income tests.

“Backup Servicer”: Wells Fargo Bank, National Association, not in its individual capacity, but solely as Backup Servicer, its successor in interest pursuant to Section 7.3 or such Person as shall have been appointed as Backup Servicer pursuant to Section 7.5.

“Backup Servicer and Collateral Custodian Fee Letter”: The Backup Servicer Fee Letter and Collateral Custodian Fee Letter, dated as of the date hereof, by and among the Servicer, the Administrative Agent, the Backup Servicer and the Collateral Custodian, as such letter may be amended, modified, supplemented, restated or replaced from time to time.

“Backup Servicer Fee Rate”: The rate per annum set forth in the Backup Servicer and Collateral Custodian Fee Letter as the “Backup Servicer Fee Rate.”

“Backup Servicer Termination Notice”: Defined in Section 7.5.

“Backup Servicing Fee”: Defined in the Backup Servicer and Collateral Custodian Fee Letter.

“Banded Floating Rate Loan”: A Loan where the interest rate payable by the Obligor thereof fluctuates between a minimum interest rate and a maximum interest rate allowable under its Underlying Instruments.

“Bankruptcy Code”: The United States Bankruptcy Reform Act of 1978 (11 U.S.C. § 101, et seq.), as amended from time to time.

“Base Rate”: On any date, a fluctuating interest rate per annum equal to the highest of (a) the Prime Rate, (b) the CD Rate and (c) the Federal Funds Rate plus 1.5%.

“Benefit Plan”: Any employee benefit plan as defined in Section 3(3) of ERISA in respect of which the Seller or any ERISA Affiliate of the Seller is, or at any time during the immediately preceding six years was, an “employer” as defined in Section 3(5) of ERISA.

“B-Note Loan”: Any Term Loan that (i) is a multilender loan, (ii) is secured by a first or second priority Lien on all of the Obligor’s assets constituting Related Property for the Loan, (iii) has a “first dollar” at risk not to exceed 65% of the Loan to Value Ratio and a “last dollar” at risk not to exceed 90% of the Loan to Value Ratio, and (iv) contains terms which, upon the occurrence of an event of default under the Underlying Instruments or in the case of any liquidation or foreclosure on the Related Property, provide that the principal of the Seller’s portion of such Loan would be paid only after the other lenders parties on the senior tranche related to such Loan are paid in full.

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“Borrowing Base”: On any date of determination, the sum of (i) the Aggregate Outstanding Asset Balance and (ii) (a) the Outstanding Asset Balances of all Additional Assets that are Eligible Assets to be included as part of the Collateral on such date minus (b) the amount (calculated without duplication) by which such Eligible Assets exceed any applicable Pool Concentration Criteria.

“Borrowing Base Certificate”: Each certificate, in the form of Exhibit A-3, required to be delivered by the Seller along with each Borrowing Notice.

“Borrowing Notice”: Each notice, in the form of Exhibit A-1 or A-2 (as applicable), required to be delivered by the Seller (i) in respect of (a) each Initial Advance and each incremental Advance (as applicable) or (b) any reduction of the Facility Amount or repayment of the Advances Outstanding; and (ii) on each Determination Date.

“Breakage Costs”: Any amount or amounts as shall compensate a Purchaser for any loss, cost or expense incurred by such Purchaser (as determined by the Administrative Agent in its sole discretion) as a result of a prepayment by the Seller of Advances Outstanding or Interest. All Breakage Costs shall be due and payable hereunder upon demand.

“British Pound Sterling”: The lawful currency of the United Kingdom.

“Business Day”: Any day other than a Saturday or a Sunday on which (a) banks are not required or authorized to be closed in Minneapolis, Minnesota or New York City, New York, and (b) if the term “Business Day” is used in connection with the determination of the LIBOR Rate, dealings in United States dollar deposits are carried on in the London interbank market.

“CAFCO”: CAFCO, LLC, together with its successors and assigns, each as permitted pursuant to this Agreement.

“Canadian Dollars”: The lawful currency of Canada.

“Capital Stock”: Any capital stock or membership interests (in the case of a limited liability company) or equivalent equity interests of CapitalSource Inc. or any Consolidated Subsidiary (to the extent issued to a Person other than CapitalSource Inc.), whether common or preferred.

“CD Rate”: A fluctuating interest rate per annum equal to 1/2 of one percent above the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average being determined weekly on each Monday (or, if such day is not a Business Day, on the next succeeding Business Day) for the three-week period ending on the previous Friday by Citibank on the basis of such rates reported by certificate of deposit dealers to and published by the Federal Reserve Bank of New York or, if such publication shall be suspended or terminated, on the basis of quotations for such rates received by Citibank from three New York certificate of deposit dealers of recognized standing selected by Citibank, in either case adjusted to the nearest 1/4 of one percent or, if there is no nearest 1/4 of one percent, to the next higher 1/4 of one percent.

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“Change-in-Control”: Any of the following:

     (a) Any “Person” or “group”(as such terms are used in Sections 13(d) and 14(d) of the Securities and Exchange Act of 1934, as amended), other than the Investors, shall become the “beneficial owner” (as defined in Section 13(d)-3 and 13(d)-5 under such Act), directly or indirectly, of shares representing more than the greater of (i) 20% of the shares outstanding of CapitalSource Inc. and (ii) the percentage of the aggregate then outstanding voting stock of CapitalSource Inc. owned beneficially, directly or indirectly, by the Investors;

     (b) the board of directors of CapitalSource Inc. shall not consist of at least a majority of Continuing Directors;

     (c) the failure of CapitalSource Inc. to own (directly or through wholly owned subsidiaries), free and clear of all Liens, the greater of (x) 51% of the outstanding Voting Stock of the Originator and (y) the aggregate amount of the outstanding Voting Stock of the Originator necessary to require the consolidation of the Originator’s financial statements with those of CapitalSource Inc. in accordance with GAAP; or

     (d) the failure by the Originator to own all of the limited liability company membership interests in the Seller.

“Charged-Off Asset”: An Asset with respect to which either of the following occurs: (a) the Servicer has deemed such Asset to be “charged-off” pursuant to the criteria set forth in the Credit and Collection Policy, excluding the balance of any Asset for which a loss was specifically provided as of August 31, 2007 or (b) all or any portion of one or more principal or interest payments (other than in respect of default rate interest) remain unpaid for at least 120 days from the original due date for such payment (without giving effect to any Servicer Advance thereon).

“Charged-Off Portfolio Asset”: A Portfolio Asset the Servicer has deemed to be “charged-off” pursuant to the criteria set forth in the Credit and Collection Policy, excluding the balance of any Portfolio Asset for which a loss was specifically provided as of August 31, 2007.

“CIESCO”: CIESCO, LLC, together with its successors and assigns, each as permitted pursuant to this Agreement.

“Citibank”: Citibank, N.A.

“Class”: Either the Class A Variable Funding Certificates or the Class B Variable Funding Certificates.

“Class A Advance”: Defined in Section 2.1(b).

“Class A Advance Rate”: 80% with respect to any Senior Secured ABLs on any date of determination, and for all other Eligible Assets the corresponding percentage set forth below:

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Senior Secured Loan

Classification	LTV <=65%	LTV <=70%	LTV<=75%	LTV <=80%	LTV <=85%	LTV <=90%
Multifamily	80%	80%	80%	75%	65%	55%
Retail, Office, Industrial, Healthcare, Land Development, Construction Properties and other	80%	80%	80%	75%	65%	60%
Hotel	80%	75%	70%	65%	N/A	N/A

Sale/Leaseback Loan

Classification	LTV <=65%	LTV <=70%	LTV<=75%	LTV <=80%	LTV <=85%	LTV <=90%
Multifamily	80%	80%	80%	75%	65%	55%
Retail, Office, Industrial, Healthcare, Land Development and other	80%	80%	80%	75%	60%	50%
Hotel	80%	75%	70%	65%	N/A	N/A

B-Note Loans

Classification	LTV<=75%	LTV <=80%	LTV <=85%	LTV <=90%
Multifamily	60%	60%	60%	50%
Retail, Office, Industrial, Healthcare, Land Development and other	55%	55%	55%	50%
Hotel	60%	55%	N/A	N/A

Mezzanine Loan

Classification	LTV <=80%	LTV <=85%	LTV <=90%
Multifamily	40%	40%	40%
Retail, Office, Industrial, Healthcare and other	40%	40%	40%
Hotel	50%	N/A	N/A

For purposes of calculating the Class A Advance Rate with respect to any Acquired Loans, Assigned Loans, Agented Loans and Participation Loans, the applicable Class A Advance Rate will be determined by reference to the type of underlying Loan being acquired, assigned, agented or participated in, as the case may be.

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“Class A Advances Outstanding”: On any day, the aggregate principal amount of all Class A Advances outstanding on such day, after giving effect to all repayments of Class A Advances and the making of new Class A Advances on such day.

“Class A Availability”: At any time, an amount equal to the difference (positive or negative) of (i) the lesser of (a) the Class A Facility Amount and (b) the Maximum Availability minus (ii) the Class A Advances Outstanding on such day.

“Class A Collection Date”: The later of the Termination Date and the date on which the Aggregate Unpaids with respect to the Class A VFC have been reduced to zero and indefeasibly paid in full.

“Class A Commitment”: With respect to each Liquidity Bank the commitment of such Liquidity Bank to make Class A Advances under the Class A Variable Funding Certificate in accordance herewith in an amount not to exceed (a) with respect to Citibank, prior to the Termination Date, an amount equal to $1,250,000,000 (provided that such amount may be increased pursuant to Section 2.4(d) to an amount not exceeding $1,500,000,000) or such amount as reduced or increased by any Assignment and Acceptance Agreement or (b) on or after the Termination Date, such Liquidity Bank’s pro rata share of the aggregate Class A Advances Outstanding. Any reduction (or termination) of the Class A Facility Amount pursuant to the terms of this Agreement shall reduce ratably (or terminate) each Liquidity Bank’s Class A Commitment.

“Class A Facility Amount”: The aggregate Class A Commitments then in effect; provided that such amount may not at any time exceed $1,500,000,000 without the written agreement of the parties hereto; provided further that, on or after the Termination Date, the Class A Facility Amount shall mean the Class A Advances Outstanding.

“Class A Interest Rate”: For any Accrual Period and for each Class A Advance outstanding for each day during such Accrual Period:

     (i) to the extent the applicable Purchaser is an Issuer that has funded the applicable Class A Advance through the issuance of commercial paper or other senior notes, a rate equal to the applicable CP Rate; or

     (ii) to the extent the applicable Purchaser is (x) an Issuer that did not fund the applicable Class A Advance through the issuance of commercial paper or other senior notes, or (y) is a Liquidity Bank, a rate equal to the Alternative Rate;

provided that the Class A Interest Rate shall be the Base Rate for any Accrual Period for any Class A Advance as to which a Purchaser has funded the making or maintenance thereof without having received at least two Business Days’ prior written notice thereof (including, without limitation, by reason of a sale of an interest therein to any Liquidity Bank under the applicable Liquidity Agreement).

“Class A Purchaser”: (i) any Issuer and (ii) any Liquidity Bank, as the context requires; and "Class A Purchasers” means collectively (a) the Issuers and (b) the Liquidity Banks.

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“Class A Total Principal Payable": As of any date of determination, the product of (i) Total Principal Payable multiplied by (ii) Class A Advances Outstanding divided by Advances Outstanding.

“Class A Variable Funding Certificate” or “Class A VFC”: Defined in Section 2.1(a).

“Class B Advance”: Defined in Section 2.1(d).

“Class B Advance Rate”: With respect to any Class B Advance, a percentage equal to the product of (x) 5/75, multiplied by (y) the Class A Advance Rate for the related Advance on the Class A Variable Funding Certificates.

“Class B Advances Outstanding”: On any day, the aggregate principal amount of all Class B Advances outstanding on such day, after giving effect to all repayments of Class B Advances and the making of new Class B Advances on such day.

“Class B Availability”: At any time, an amount equal to the difference (positive or negative) of (i) the lesser of (a) the Class B Facility Amount and (b) the product of 5/75 and the Maximum Availability minus (ii) the Class B Advances Outstanding on such day.

“Class B Commitment”: With respect to each Purchaser of Class B Variable Funding Certificates, (a) the commitment of such Purchaser to make Class B Advances under the Class B Variable Funding Certificate in accordance herewith in an amount not to exceed $83,333,333; provided, that such amount may be increased pursuant to Section 2.4(d) to an amount not to exceed $100,000,000, or (b) on or after the Termination Date, such Purchaser’s pro rata share of the aggregate Class B Advances Outstanding. Any reduction (or termination) of the Class B Facility Amount pursuant to the terms of this Agreement shall reduce ratably (or terminate) each such Purchaser’s Commitment.

“Class B Facility Amount”: The aggregate Class B Commitments then in effect; provided that such amount may not at any time exceed $100,000,000 without the written agreement of the parties hereto; provided further that, on or after the Termination Date, the Class B Facility Amount shall mean the Class B Advances Outstanding.

“Class B Interest Rate”: For any Accrual Period and for each Class B Advance outstanding for each day during such Accrual Period, a rate equal to the Alternative Rate plus 4.00%.

“Class B Purchaser”: CSE Mortgage LLC and any Eligible Assignee of the Class B Variable Funding Certificates.

“Class B Variable Funding Certificate” or “Class B VFC”: Defined in Section 2.1(a).

“Clearing Agency”: An organization registered as a “clearing agency” pursuant to Section 17A of the Exchange Act.

“Closing Date”: September 10, 2007.

“Code”: The Internal Revenue Code of 1986, as amended from time to time.

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“Collateral”: All right, title, and interest (whether now owned or hereafter acquired or arising, and wherever located) of the Seller in all accounts, cash and currency, chattel paper, tangible chattel paper, electronic chattel paper, copyrights, copyright licenses, equipment, fixtures, general intangibles, instruments, commercial tort claims, deposit accounts, securities accounts, inventory, investment property, letter-of-credit rights, software, supporting obligations, accessions, and other property consisting of, arising out of, or related to any of the following (in each case excluding the Retained Interest and the Excluded Amounts): (i) the Existing Assets and the Additional Assets, and all monies due or to become due in payment under such Existing Assets and the Additional Assets on and after the related Cut-Off Date, including but not limited to all Collections, but excluding any Excluded Amounts; and (ii) all Related Security with respect to the Existing Assets and the Additional Assets, and (iii) all income and Proceeds of the foregoing.

“Collateral Custodian”: Wells Fargo Bank, National Association, not in its individual capacity, but solely as Collateral Custodian, its successor in interest pursuant to Section 8.3 or such Person as shall have been appointed Collateral Custodian pursuant to Section 8.5.

“Collateral Custodian Fee”: Defined in the Backup Servicer and Collateral Custodian Fee Letter.

“Collateral Custodian Termination Notice”: Defined in Section 8.5.

“Collection Account”: Defined in Section 6.4(f).

“Collection Date”: The date following the Termination Date on which the Aggregate Unpaids have been reduced to zero and indefeasibly paid in full.

“Collection Period”: With respect to the first Payment Date, the period from and including the Closing Date to but excluding the 11th day of the calendar month immediately preceding the first Payment Date; and with respect to each Payment Date thereafter, the period from and including the 11th day of the previous calendar month to but excluding the 11th day of the month in which such Payment Date occurs.

“Collections”: (a) All cash collections and other cash proceeds of any Asset, including, without limitation, Scheduled Payments, Finance Charges, Prepayments, Insurance Proceeds, all Recoveries or other amounts received in respect thereof but excluding any Excluded Amounts, (b) any cash proceeds or other funds received by the Seller or the Servicer with respect to any Related Security, (c) all payments received pursuant to any Hedging Agreement or Hedge Transaction and (d) all Deemed Collections.

“Commercial Paper Notes”: On any day, any short-term promissory notes of any Issuer issued by such Issuer in the commercial paper market.

“Commitments”: The Class A Commitment and the Class B Commitment.

“Commitment Fee”: With respect to Class A Purchasers, as defined in the Purchaser Fee Letter.

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“Confirmation and Undertaking Letter”: The Intercreditor and Lockbox Confirmation and Undertaking Letter, dated the date hereof, among the Administrative Agent, the Seller, the Servicer and Originator, CapitalSource Inc., CapitalSource Funding Inc. and CapitalSource Finance LLC, regarding certain agreements between the parties with respect to the Lock-Box Agreement and the Intercreditor Agreement, as the Confirmation and Undertaking Letter may be amended, restated, modified or supplemented from time to time.

“Consolidated Funded Indebtedness”: As of any date of determination, all outstanding Indebtedness of the Originator and its Subsidiaries determined on a consolidated basis in accordance with GAAP.

“Consolidated Subsidiary”: At any date any Subsidiary the accounts of which, in accordance with GAAP, would be consolidated with those of CapitalSource Inc. in its consolidated and consolidating financial statements as of such date.

“Consolidated Tangible Net Worth”: As of any date of determination, the assets less the liabilities of any Person and its Subsidiaries on a consolidated basis, less intangible assets (including goodwill), all determined in accordance with GAAP.

“Construction Loan”: A Senior Secured Loan (which may be a Revolving Loan or a Loan with an unfunded commitment) that is secured by Construction Properties and has a shadow rating of at least Caa1/CCC+ from Moody’s or S&P.

“Construction Properties”: Properties that (a) are subject to ground up construction of new improvements, involving, without limitation, new foundations, new structural steel or wood frame, and new mechanical, electrical and plumbing systems and (b) secure a future advance loan or Revolving Loan, and which either (x) the related future funding obligation represented more than 30% of the total committed amount of the underlying loan as of the date the Seller acquired such future advance loan or Revolving Loan or (y) the related future funding obligation represented more than 40% of the total committed amount of the underlying loan as of the date of origination of such future advance loan or Revolving Loan.

“Continuing Directors”: The directors of CapitalSource Inc. on the Closing Date, and each other director if, in each case, such other director’s nomination for election to the board of directors is recommended by majority of the then Continuing Directors or such other director receives the vote of the Investors in his or her election by the stockholders of CapitalSource Inc.

“Contractual Obligation”: With respect to any Person, any provision of any securities issued by such Person or any indenture, mortgage, deed of trust, contract, undertaking, agreement, instrument or other document to which such Person is a party or by which it or any of its property is bound or is subject.

“Corporate Trust Office”: With respect to Wells Fargo, the office at which any particular time its corporate trust business shall be principally administered, which office at the date of the execution of this Agreement is located at the address set forth under the signature of Wells Fargo on the applicable signature page hereto.

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“CP Rate”: For any day during any Accrual Period, the per annum rate equivalent to the weighted average of the per annum rates paid or payable by an Issuer from time to time as interest on or otherwise (by means of interest rate hedges or otherwise) in respect of the promissory notes issued by such Issuer that are allocated, in whole or in part, by the Administrative Agent on behalf of such Issuer to fund or maintain the Class A Advances Outstanding funded by such Issuer during such period, as determined by the Administrative Agent (on such Issuer’s behalf) and reported to the Seller and the Servicer, which rates shall reflect and give effect to (i) the commissions of placement agents and dealers in respect of such promissory notes, to the extent such commissions are allocated, in whole or in part, to such promissory notes by the Administrative Agent (on such Issuer’s behalf) and (ii) other borrowings by such Issuer, including, without limitation, borrowings to fund small or odd dollar amounts that are not easily accommodated in the commercial paper market; provided that if any component of such rate is a discount rate, in calculating the CP Rate, the Administrative Agent shall for such component use the rate resulting from converting such discount rate to an interest bearing equivalent rate per annum.

“CRC Funding”: CRC Funding, LLC, together with its successors and assigns, each as permitted pursuant to this Agreement.

“Credit and Collection Policy”: The written credit policies and procedures manual of the Originator and the Servicer (which policies shall include without limitation policies on a risk rating system, due diligence format, underwriting parameters and credit approval procedures) in the form provided to the Administrative Agent prior to the Closing Date, as it may be amended or supplemented from time to time in accordance with Section 5.1(h) and Section 5.4(f).

“CSE Management Agreement”: The management agreement, dated as of January 1, 2006, by and among CapitalSource Inc., CSE Mortgage and CapitalSource Finance LLC, as the same may be amended, restated, modified or supplemented from time to time.

“CSE Prime Rate”: The rate designated by CSE Mortgage (or the originator of an Assigned Loan) from time to time and/or pursuant to the related Underlying Instruments as its prime rate in the United States, such rate to change as and when the designated rate changes; provided that the CSE Prime Rate is not intended to be the lowest rate of interest charged by CSE Mortgage (or such originator) in connection with extensions of credit to debtors.

“CSE LIBOR Rate”: The Eurodollar or LIBO rate for 30, 60, 90 or 180 day, as applicable, deposits in Dollars, as and when determined in accordance with the applicable Required Asset Documents.

“Cut-Off Date”: With respect to each Asset and Additional Asset, the related Funding Date therefor.

“Currency”: Dollars or any Alternative Currency.

“Deemed Collection”: Defined in Section 2.4(c).

“Delayed-Draw Term Loan”: A Loan that is fully committed on the closing date thereof and is required by its terms to be fully funded in one or more installments on draw dates to occur within

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three years after the closing date thereof but which, once fully funded, has the characteristics of a Term Loan.

“Delinquent Asset”: An Asset (that is not a Charged-Off Asset) as to which either of the following first occurs: (a) all or any portion of one or more principal or interest payments (other than in respect of default rate interest) remain unpaid for at least 60 days from the original due date for such payment (without giving effect to any Servicer Advance thereon) or (b) consistent with the Credit and Collection Policy such Asset would be classified as delinquent by the Servicer.

“Delinquent Portfolio Asset”: A Portfolio Asset (that is not a Charged-Off Portfolio Asset) (excluding equity investments) as to which either of the following first occurs: (a) all or any portion of one or more principal or interest payments (other than in respect of default rate interest) remain unpaid for at least 60 days from the original due date for such payment (without giving effect to any Servicer Advance thereon) or (b) consistent with the Credit and Collection Policy (or such similar policies and procedures utilized by the Servicer in servicing such Portfolio Asset) such Portfolio Asset would be classified as delinquent by the Servicer.

“Derivatives”: Any exchange-traded or over-the-counter (i) forward, future, option, swap, cap, collar, floor or foreign exchange contract or any combination thereof, whether for physical delivery or cash settlement, relating to any interest rate, interest rate index, currency, currency exchange rate, currency exchange rate index, debt instrument, debt price, debt index, depository instrument, depository price, depository index, equity instrument, equity price, equity index, commodity, commodity price or commodity index, (ii) any similar transaction, contract, instrument, undertaking or security, or (iii) any transaction, contract, instrument, undertaking or security containing any of the foregoing.

“Determination Date”: The last day of each Collection Period.

“Development Properties”: An existing property that is undergoing renovation or redevelopment that either (i) disrupts at least 30% of the occupancy of the property, or (ii) temporarily reduces the NOI of the property by more than 30%; provided that a property will not be considered a Development Property after it has an occupancy rate of at least 80%.

“DIP Loan”: A loan to an Obligor that is a “debtor-in-possession” as defined under the Bankruptcy Code.

“Discretionary Sale”: Defined in Section 2.20.

“Discretionary Sale Date”: The Business Day identified by the Seller to the Administrative Agent in a Discretionary Sale Notice as the proposed date of a Discretionary Sale.

“Discretionary Sale Notice”: Defined in Section 2.20(a).

“Dollar Equivalent”: On any day, with respect to the amount of any Alternative Currency, the amount of Dollars that would be required to purchase such amount of Alternative Currency on such day, based on the spot selling rate from the prior Business Day as determined by the

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Servicer reported on Wall Street Journal to sell such Alternative Currency for Dollars in the London foreign exchange market.

“Dollars”: Means, and the conventional “$” signifies, the lawful currency of the United States.

“Eligible Asset”: On any date of determination, each Asset (A) for which the Administrative Agent, Collateral Custodian and Backup Servicer have received the following no later than 2:00 p.m. (New York City, New York time) on the day prior to the related Funding Date: (1) a faxed copy of the duly executed original promissory note, master purchase agreement and purchase statements, Loan Register and Asset Checklist, as applicable, in a form and substance satisfactory to the Administrative Agent and, with respect to any Loans closed in escrow, a certificate (in the form of Exhibit L) from the counsel to the Originator or the Obligor of such Loans certifying the possession of the Required Asset Documents; provided that notwithstanding the foregoing, the Required Asset Documents (including any UCCs included in the Required Asset Documents) shall be in the possession of the Collateral Custodian within two Business Days of any related Funding Date as to any Additional Assets; (2) a Borrowing Notice delivered by the Seller to the Collateral Custodian and the Administrative Agent as part of the Borrowing Notice or Monthly Report delivered by the Servicer, (3) a Borrowing Base Certificate, and (4) a Certificate of Assignment (Exhibit A to the Sale Agreement, including Schedule I thereto); provided that if such Asset is part of a capital contribution to the Seller the Collateral Custodian shall have received the Required Asset Documents within three Business Days of receipt of the Certificate of Assignment and (B) that satisfies each of the following eligibility requirements, as applicable:

(1) With respect to any Asset:

     (a) the Asset, together with the Related Security, has been originated or acquired by the Originator, sold to the Seller pursuant to (and in accordance with) the Sale Agreement and the Seller has good title, free and clear of all Liens (other than Permitted Liens), on such Asset and Related Security;

     (b) the Asset, (i) (together with the Collections and Related Security related thereto) has been the subject of a grant by the Seller in favor of the Administrative Agent on behalf of the Secured Parties, of a first priority perfected security interest, and (ii) with respect to which, at the time of the sale of such Asset to the Seller, the Originator had a first priority (other than in the case of B-Note Loans or Mezzanine Loans) perfected security interest in the Related Property (other than additional or “boot” collateral) relating to such Loan;

     (c) at the time such Asset is included in the Collateral, the Asset (i) is not (and since its origination by the Originator or, in the case of Acquired Loans, acquisition by the Originator has never been) a Charged-Off Asset (either in whole or in part), (ii) is not past due in the case of a Loan, with respect to payments of principal or interest (provided that if such Asset is past due at the time it is included in the Collateral but not more than ten days past due, the Originator and the Servicer must reasonably believe that such Asset will promptly and in no event later than the date of the next Scheduled Payment due on such Asset, be brought current with respect to all payments due thereunder), and (iii) has never been more than 60 days past due, with respect to payments of principal or interest, or, in the case of Acquired Loans, to the best of the

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Originator’s knowledge after due inquiry, has never been more than 60 days past due in the 12 months prior to acquisition;

     (d) the Asset is an “eligible asset” as defined in Rule 3a-7 under the 1940 Act;

     (e) the Asset is an “account”, “chattel paper”, “instrument” or a “general intangible” within the meaning of Article 9 of the UCC of all applicable jurisdictions;

     (f) the Obligor with respect to such Asset is an Eligible Obligor and such Asset is payable only in Dollars and does not permit the currency in which or the country in which such Asset is payable to be changed; provided that notwithstanding the foregoing, any such Asset denominated in an Alternative Currency shall be deemed to satisfy the requirements in this clause that it be payable in Dollars if such Asset is subject to appropriate currency hedging as determined by the Administrative Agent in its sole discretion;

     (g) the Asset is evidenced by a promissory note, Loan Register, security agreement, loan or note purchase agreement or other Underlying Instruments that have been duly authorized and executed, are in full force and effect and constitute the legal, valid, binding and absolute and unconditional payment obligation of the related Obligor, enforceable against such Obligor in accordance with their terms (subject to applicable bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally and to general principles of equity, whether considered in a suit at law or in equity), and there are no conditions precedent to the enforceability or validity of the Asset that have not been satisfied or validly waived;

     (h) the Asset does not contravene in any material respect any Applicable Laws (including, without limitation all applicable predatory and abusive lending laws and all laws, rules and regulations relating to usury, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices, licensing and privacy) and with respect to which no part thereof is in violation of any Applicable Law in any material respect;

     (i) neither the assignment of the Asset under the Sale Agreement by the Originator, the sale of the Asset hereunder or the granting of a security interest hereunder by the Seller violates, conflicts with or contravenes any Applicable Laws or any contractual or other restriction, limitation or encumbrance;

     (j) on or before the applicable Cut-Off Date, the Obligor of such Asset shall have been directed to make all payments to the Lock-Box or directly to the Lock-Box Account;

     (k) the Asset requires the Obligor thereof to maintain reasonable and customary property damage and loss insurance with respect to the real or personal property constituting the Related Property (if any) if such Related Property is of a type customarily so insured;

     (l) the Related Property (if any) (i) has not been foreclosed on or repossessed from the current Obligor by the Servicer, and (ii) has not suffered any material loss or damage that has not been repaired or restored or for which insurance proceeds are not available;

     (m) the Asset provides by its terms that the Obligor’s payment obligations are absolute and unconditional without any right of rescission, setoff, counterclaim or defense for

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any reason against the Originator and the Asset contains a clause that has the effect of unconditionally and irrevocably obligating the Obligor to make periodic payments (including taxes) notwithstanding any damage to, defects in, or destruction of the Related Property (if any) or any other event, including obsolescence of any property or improvements;

     (n) the Asset is not subject to any litigation, dispute, refund, claims of rescission, setoff, netting, counterclaim or defense whatsoever, including but not limited to, claims by or against the Obligor thereof or a payor to or account debtor of such Obligor;

     (o) the Asset requires the Obligor to maintain the Related Property in good condition and to bear all the costs of operating and maintaining same, including taxes and insurance relating thereto;

     (p) the Asset shall not have been originated in, nor shall it be subject to the laws of, any jurisdiction under which the sale, transfer and assignment of such Asset under the Transaction Documents would be unlawful, void or voidable;

     (q) the Asset, together with the Required Asset Documents and Asset File related thereto, is assignable and does not require the consent of or notice to the Obligor to consummate the transactions contemplated by the Transaction Documents or contain any other restriction on the transfer or the assignment of the Asset for the purpose of consummating the transactions contemplated by the Transaction Documents other than a consent or waiver of such restriction that has been obtained prior to the date on which the Asset was sold to the Seller; provided that with respect to Loans which are secured by an interest in commercial real estate, the Required Asset Documents may restrict the transfer or the assignment of the related Loan so long as such Loan is freely assignable or transferable to a Qualified Transferee;

     (r) the Obligor of such Asset is legally responsible for all taxes relating to the Related Security or other security relating to such Asset, and all payments in respect of the Asset are required to be made free and clear of, and without deduction or withholding for or on account of, any taxes, unless such withholding or deduction is required by Applicable Law in which case the Obligor thereof is required to make “gross-up” payments that cover the full amount of any such withholding taxes on an after-tax basis;

     (s) the Asset complies with the representations and warranties made by the Seller and Servicer hereunder and all information provided by the Seller or the Servicer with respect to the Asset is true and correct in all material respects;

     (t) the Asset and the Related Security have not been sold, transferred, assigned or pledged by the Seller to any Person;

     (u) no selection procedure adverse to the interests of the Administrative Agent or the Secured Parties was utilized by the Seller or Originator in the selection of Assets for inclusion in the Collateral;

     (v) the Asset has not been compromised, adjusted, extended, satisfied, rescinded, set-off or modified by the Seller, the Originator or the Obligor with respect thereto, and no Asset is subject to compromise, adjustment, extension, satisfaction, rescission, set-off, counterclaim,

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defense, abatement, suspension, deferment, deductible, reduction, termination or modification, whether arising out of transactions concerning the Asset, or otherwise, by the Seller, the Originator or the Obligor with respect thereto except as otherwise permitted under Section 6.4(a) of this Agreement and in accordance with the Credit and Collection Policy;

     (w) the particular Asset is not one as to which the Seller or the Servicer has knowledge which should lead it to expect such Asset will not be paid in full;

     (x) the Obligor of such Asset is not the subject of an Insolvency Event or Insolvency Proceedings;

     (y) the Asset is secured by a valid, perfected, first priority (other than with respect to B-Note Loans and Mezzanine Loans) security interest in all assets that constitute the collateral for the Asset (subject to Liens expressly permitted by the Underlying Instruments);

     (z) all material consents, licenses, approvals or authorizations of, or registrations or declarations with, any Governmental Authority required to be obtained, effected or given in connection with the making or performance of the Asset have been duly obtained, effected or given and are in full force and effect;

     (aa) the Asset satisfies all applicable requirements of and was originated or acquired, underwritten and closed in accordance with the Credit and Collection Policy (including without limitation the execution by the Obligor of all documentation required by the Credit and Collection Policy);

     (bb) the Asset was originated or acquired in the ordinary course of the Originator’s business;

     (cc) the Asset arises pursuant to documentation with respect to which the Originator has performed all obligations required to be performed by it thereunder;

     (dd) the Asset is not Margin Stock;

     (ee) the acquisition of the Asset by the Seller will not cause the Seller or the pool of Collateral to be required to be registered as an investment company under the 1940 Act;

     (ff) the Asset is not subject to a guaranty by the Originator or any Affiliate thereof; and

     (gg) the proceeds of the Asset will not be used to finance “ground-up” construction activities; provided that financing for purposes of Land Development shall not be considered a “ground-up” construction activity.

(2) With respect to any Loan:

     (a) the Loan provides (i) for periodic payments of interest and/or principal in cash, which are due and payable on a monthly, quarterly or semi-annual basis unless otherwise consented to in writing by the Administrative Agent, and (ii) that the Servicer (or, with respect to

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Assigned Loans or Agented Loans, that the agent or a majority of the related lenders) may accelerate all payments if the Obligor is in default under the Loan and any applicable grace period has expired (in the case of any B-Note Loan or Mezzanine Loan, subject to any applicable intercreditor or subordination agreement); provided that Sale/Leaseback Loans shall provide for payments of interest and/or principal in cash, no less frequently than on a quarterly basis;

     (b) the Loan is underwritten as (i) a rediscount loan, (ii) a commercial real estate loan, or (iii) a Sale/Leaseback Loan, in each case pursuant to and in accordance with the Credit and Collection Policy;

     (c) the Loan is a Sale/Leaseback Loan, Senior Secured ABL Loan, Senior Secured Loan, B-Note Loan or Mezzanine Loan;

     (d) the Loan has an original term to maturity of not more than 25 years;

     (e) the Loan provides for cash payments that fully amortize the Outstanding Asset Balance of such Loan on or by its maturity and does not provide for such Outstanding Asset Balance to be discounted pursuant to a prepayment in full;

     (f) the Loan does not permit the Obligor to defer all or any portion of the current cash interest due thereunder;

     (g) the Loan does not permit the payment obligation of the Obligor thereunder to be converted or exchanged for equity capital of such Obligor;

     (h) other than Participation Loans, Agented Loans and Assigned Loans, with respect to the Originator’s obligation to fund and the actual funding of the Loan by the Originator, the Originator has not assigned or granted participations to, in whole or in part;

     (i) except with respect to B-Note Loans, Mezzanine Loans and certain Loans that, in the Originator’s reasonable judgment cannot be cross-collateralized or cross-defaulted because of REIT eligibility criteria, if the Obligor of such Loan is the Obligor of more than one Loan, all such Loans are cross-collateralized and cross-defaulted;

     (j) the Loan does not represent capitalized interest or payment obligations relating to “put” rights;

     (k) the Loan is not a Loan or extension of credit by the Originator to the Obligor for the purpose of making any past due principal, interest or other payments due on such Loan;

     (l) the Originator (i) has completed to its satisfaction, in accordance with the Credit and Collection Policy, a due diligence audit and collateral assessment with respect to such Loan and (ii) has done nothing to impair the rights of the Administrative Agent or the Secured Parties with respect to the Loan, the Related Security, the Scheduled Payments or any income or Proceeds therefrom;

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     (m) except with respect to B-Note Loans and Mezzanine Loans and, to the extent set forth in the definition thereof, the Loan is not subordinated to any other loan or financing to the related Obligor;

     (n) if the Loan is a Revolving Loan, either it provides by its terms that any future funding thereunder is in the Originator’s sole and absolute discretion or it is subject to the Retained Interest provision of this Agreement;

     (o) the Face Amount of the Loan is the dollar amount thereof shown on the books and records of the Originator and Seller;

     (p) with respect to B-Note Loans or Mezzanine Loans, the Originator has entered into an intercreditor agreement or subordination agreement (or such provisions are contained in the principal Underlying Instruments) with, or provisions for the benefit of, the senior lender, which agreement or provisions are assignable to and have been assigned to the Seller, and which provide that any standstill of remedies by the Originator or its assignee is limited (A) such that no standstill of remedies may be imposed unless (x) a default with respect to the senior obligation has occurred and is continuing and (y) in the case of such a default, other than a payment default, the Originator’s or assignee’s receipt from the senior lender or Obligor of a notice of default by the Obligor under the senior debt, and (B) to no longer than 180 days in duration in the aggregate in any given year;

     (q) with respect to any Acquired Loan or Assigned Loan, such Loan has been re-underwritten by the Originator and satisfies all of the Originator’s underwriting criteria;

     (r) with respect to any Acquired Loan acquired from an Affiliate of the Originator, the Administrative Agent has received a satisfactory legal opinion concerning the acquisition of such Loan by the Originator in a true sale transaction;

     (s) with respect to any Acquired Loan that was acquired in a pool by the Originator along with one or more other Acquired Loans, the Administrative Agent has approved in writing such Loan for inclusion in the Collateral and has completed its own due diligence with respect to such Loan;

     (t) with respect to Agented Loans, the related Underlying Instruments (a) shall include a note purchase or similar agreement containing provisions relating to the appointment and duties of a payment agent and a collateral agent and intercreditor and (if applicable) subordination provisions, and (b) are duly authorized, fully and properly executed and are the valid, binding and unconditional payment obligation of the Obligor thereof;

     (u) with respect to Agented Loans, CapitalSource Finance LLC or the Originator (or a wholly owned subsidiary of CapitalSource Inc.) has been appointed the collateral agent of the security and the payment agent for all such notes prior to such Agented Loan becoming a part of the Collateral;

     (v) with respect to Agented Loans, if the entity serving as the collateral agent of the security for all syndicated notes of the Obligor has or will change from the time of the origination of the notes, all appropriate assignments of the collateral agent’s rights in and to the

22

collateral on behalf of the noteholders have been or will be executed and filed or recorded as appropriate prior to such Agented Loan becoming a part of the Collateral;

     (w) with respect to any Agented Loan, all required notifications, if any, have been given to the collateral agent, the payment agent and any other parties required by the Required Asset Documents of, and all required consents, if any, have been obtained with respect to, the Originator’s assignment of such Agented Loan and the Originator’s right, title and interest in the Related Property to the Seller and the Administrative Agent’s security interest therein on behalf of the Secured Parties;

     (x) with respect to Agented Loans, the right to control the actions of and replace the collateral agent and/or the paying agent of the syndicated notes is to be exercised by at least a majority in interest of all holders of such Agented Loans;

     (y) with respect to Agented Loans, all syndicated notes of the Obligor of the same priority are cross-defaulted, the Related Property securing such notes is held by the collateral agent for the benefit of all holders of the syndicated notes and all holders of such notes (a) have an undivided interest in the collateral securing such notes and (b) share in the proceeds of the sale or other disposition of such collateral on a pro rata basis;

     (z) no portion of the proceeds used to make payments of principal or interest on such Loan have come from a new loan by the Originator;

     (aa) does not contain a confidentiality provision that restricts or purports to restrict the ability of the Administrative Agent or any Secured Party to exercise their rights under this Agreement, including, without limitation, their rights to review the Loan, the Required Asset Documents and Asset File;

     (bb) is not a consumer loan;

     (cc) is not a DIP loan; and

     (dd) none of the Loans secured by a Mortgage are high-cost loans as defined by applicable predatory and abusive-lending laws.

(3) In addition to the criteria set forth in clauses (1) and (2) above, with respect to any Sale/Leaseback Loan, the following additional criteria:

     (a) the Originator or CapitalSource Finance LLC shall be the owner and lender of record for such Loan; provided that with respect to any Sale/Leaseback Loan for which CapitalSource Finance LLC is the lender and owner of record prior to such Sale/Leaseback Loan becoming part of the Collateral the Seller shall deliver either (i) a true sale opinion in form and substance acceptable to the Administrative Agent or (ii) an executed copy of an omnibus assignment and assumption agreement for such Sale/Leaseback Loan in a form satisfactory to the Administrative Agent;

     (b) (i) other than with respect to Agented Loans or Assigned Loans (or other Loans for which an Assignment of Mortgage has been delivered to Wells Fargo in its capacity as trustee

23

or custodian pursuant to a prior term transaction or warehouse facility involving the Originator or one of its Affiliates), the Collateral Custodian or an escrow agent (pursuant to an escrow agreement in form and substance acceptable to the Administrative Agent in its sole discretion) shall hold all instruments and other documents in blank for the benefit of each Purchaser with respect to all documentation evidencing, securing, insuring or otherwise benefiting the Originator or CapitalSource Finance LLC’s interest in such Sale/Leaseback Loan, together with (promptly upon written request) such affidavits, forms, tax returns and statements and other documents as shall be necessary to accomplish such assignment and (ii) the Administrative Agent shall have the right to cause the Collateral Custodian (at the expense of the Originator) to effectuate the foregoing assignment upon (A) the occurrence of a Termination Event or an Unmatured Termination Event or (B) a default, event of default, or any event that, with the giving of notice or the lapse of time, or both, would become a default or event of default (however defined or described) in the Underlying Instruments for such Sale/Leaseback Loan;

     (c) the Originator shall provide an indemnity to the Purchasers to cover any losses suffered by the Purchasers as a result of any Lien against any of the SPE Obligor’s assets that is pari passu or takes priority over the Liens granted pursuant to the Transaction Documents;

     (d) the Underlying Lessee is not an Affiliate of CapitalSource Inc. or its Subsidiaries;

     (e) the SPE Obligor owns the fee simple or ground lease interest in the underlying property and shall not grant a Lien on such underlying property to any Person other than the Originator;

     (f) in no event shall the payments on the Lease abate or diminish, except:

     (I) [Reserved],

     (II) [Reserved],

     (III) upon the termination of the Underlying Lease following a casualty or condemnation with respect to the underlying property (the “Leased Property”) which renders the Leased Property unsuitable for its primary intended use, such termination to be conditioned upon (i) the prepayment by SPE Obligor of the Sale/Leaseback Loan at par plus any accrued interest or (ii) SPE Obligor providing assurances of such prepayment which are acceptable to the Administrative Agent, or

     (IV) in the event a condemnation or casualty described in clause (III) above, respectively, occurs in the final 12 months of the term of the Underlying Lease, the Underlying Lessee shall have the right to terminate the Underlying Lease with no further obligations thereunder other than the satisfaction of all accrued and unpaid obligations to the date of termination.

     (g) the terms of the Lease shall provide periodic payments (which shall not be subject to defense, set-off or counterclaim) from Underlying Lessee to SPE Obligor no less frequently than on a quarterly basis to at least equal the interest and principal payments on the related Loan;

     (h) the term of the Lease shall be at least equal to the term of the related Loan;

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     (i) the Underlying Lessee shall not be in default under the Lease at the time of contribution and thereafter shall not be in payment default;

     (j) any extraordinary payments by Underlying Lessee to SPE Obligor, including, but not limited to, default, bankruptcy and early lease termination payments (but excluding late payment fees) shall be applied to effectuate a reduction in the principal to the related Loan;

     (k) (i) the Underlying Lessee or SPE Obligor shall maintain risk property insurance in an amount at least equal to the full replacement cost of the underlying property, (ii) shall maintain general liability, business interruption and any other insurance agreed upon in the Lease and (iii) all such insurance policies shall name the Originator and the Administrative Agent on behalf of each Purchaser as additional insureds;

     (l) either the rights of the SPE Obligor under the Lease are freely assignable by the SPE Obligor or the Underlying Lessee has consented to the assignment of such rights to the Originator and its assignees;

     (m) the Loan shall contain customary representations, warranties, indemnities, events of default and remedies (including liquidated damages) similar to other transactions that Originator would make to a third party in an arms-length transaction; and

     (n) the Seller shall have a pledge of the SPE Obligor’s equity interest.

“Eligible Assignee”: (A) with respect to the Class A Variable Funding Certificate, (i) CNAI or any of its Affiliates, (ii) any Person managed by Citibank, CNAI or any of their Affiliates, or (iii) any financial or other institution acceptable to the Administrative Agent and approved by the Seller (which approval by the Seller shall not be unreasonably withheld, delayed or conditioned and shall not be required if a Termination, Event or an Unmatured Termination Event has occurred and is continuing), and (B) with respect to the Class B Variable Funding Certificate, (i) CSE Mortgage LLC or any entity wholly-owned by CSE Mortgage LLC that is disregarded for income tax purposes or (ii) any financial or other institution acceptable to the Administrative Agent and approved by the Seller (which approval by the Seller shall not be unreasonably withheld, delayed or conditioned and shall not be required (x) if a Termination, Event or an Unmatured Termination Event has occurred and is continuing, or (y) to the extent that such Person becomes a Class B Purchaser pursuant to the exercise of its rights under a Lien granted by a Class B Purchaser in a Class B Variable Funding Certificate).

“Eligible Obligor”: On any date of determination, any Obligor that:

     (i) is a business organization (and not a natural person) duly organized and validly existing under the laws of its jurisdiction of organization,

     (ii) [intentionally omitted];

     (iii) has not entered into the Loan primarily for personal, family or household purposes,

     (iv) is not a Governmental Authority,

25

     (v) except with respect to Sale/Leaseback Loans to SPE Obligors, the Obligor is not an Affiliate of the Originator or Seller,

     (vi) is not in the gaming (other than Obligors in the business of providing services to the gaming industry), nuclear waste or natural resource exploration/production and oil field service industries,

     (vii) is not engaged in the business of conducting proprietary research on new drug development,

     (viii) is not the subject of an Insolvency Proceeding,

     (ix) as of the applicable Cut-Off Date, has an Eligible Risk Rating, and

     (x) is not an Obligor of a Charged-Off Asset or Delinquent Asset.

“Eligible Repurchase Obligations”: Repurchase obligations with respect to any security that is a direct obligation of, or fully guaranteed by, the United States or any agency or instrumentality thereof the obligations of which are backed by the full faith and credit of the United States, in either case entered into with a depository institution or trust company (acting as principal) described in clauses (c)(ii) and (c)(iv) of the definition of Permitted Investments.

“Eligible Risk Rating”: With respect to a designated Obligor, a “Rating 1,” “Rating 2,” “Rating 3,” or “Rating 4” each as determined in accordance with the Credit and Collection Policy.

“Environmental Laws”: Any and all foreign, federal, state and local laws, statutes, ordinances, rules, regulations, permits, licenses, approvals, interpretations and orders of courts or Governmental Authorities, relating to the protection of human health or the environment, including, but not limited to, requirements pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of hazardous materials. Environmental Laws include, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. § 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. § 331 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. § 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. § 1251 et seq.), the Clean Air Act (42 U.S.C. § 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. § 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. § 300, et seq.), the Environmental Protection Agency’s regulations relating to underground storage tanks (40 C.F.R. Parts 280 and 281), and the Occupational Safety and Health Act (29 U.S.C. § 651 et seq.), and the rules and regulations thereunder, each as amended or supplemented from time to time.

“ERISA”: The United States Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder.

“ERISA Affiliate”: (a) Any corporation that is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Seller, (b) a trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with the Seller, or (c) a member of the same affiliated service group

26

(within the meaning of Section 414(m) of the Code) as the Seller, any corporation described in clause (a) above or any trade or business described in clause (b) above.

“Euro”: The lawful currency of the Participating Member States.

“Eurocurrency Liabilities”: Defined in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time.

“Eurodollar Disruption Event”: The occurrence of any of the following: (a) any Liquidity Bank or Class B Purchaser shall have notified the Administrative Agent of a determination by such Liquidity Bank or Class B Purchaser or any of its assignees or participants that it would be contrary to law or to the directive of any central bank or other governmental authority (whether or not having the force of law) to obtain Dollars in the London interbank market to fund any Advance, (b) any Liquidity Bank or Class B Purchaser shall have notified the Administrative Agent of the inability, for any reason, of such Liquidity Bank or Class B Purchaser or any of its assignees or participants to determine the Adjusted Eurodollar Rate, (c) any Liquidity Bank or Class B Purchaser shall have notified the Administrative Agent of a determination by such Liquidity Bank or Class B Purchaser or any of its assignees or participants that the rate at which deposits of Dollars are being offered to such Liquidity Bank or Class B Purchaser or any of its assignees or participants in the London interbank market does not accurately reflect the cost to such Liquidity Bank or Class B Purchaser, such assignee or such participant of making, funding or maintaining any Advance, (d) any Liquidity Bank or Class B Purchaser shall have notified the Administrative Agent of the inability of such Liquidity Bank or Class B Purchaser or any of its assignees or participants to obtain Dollars in the London interbank market to make, fund or maintain any Advance or (e) any Liquidity Bank or Class B Purchaser shall have notified the Administrative Agent that the principal amount of Advances to be funded by it is less than $500,000.

“Eurodollar Reserve Percentage”: For any period means the percentage, if any, applicable during such period (or, if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any basic, emergency, supplemental, marginal or other reserve requirements) with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term of one month.

“Excepted Person”: Defined in Section 13.13(a).

“Excess Concentration Loan”: Each Loan listed on Schedule VIII attached hereto.

“Exchange Act”: The United States Securities Exchange Act of 1934, as amended.

“Excluded Amounts”: (a) Any amount received in the Lock-Box by, on or with respect to any Asset included as part of the Collateral, which amount is attributable to the payment of any tax, fee or other charge imposed by any Governmental Authority on such Asset, (b) any amount representing a reimbursement of insurance premiums and (c) any amount with respect to any Asset retransferred or substituted for upon the occurrence of a Warranty Event (if the Seller has

27

decided that such Asset is no longer to be included in the Collateral) or that is otherwise replaced by a Substitute Asset (if the Seller has decided that such Asset is no longer to be included in the Collateral), to the extent such amount is attributable to a time after the effective date of such replacement.

“Existing Assets”: Each Asset purchased by the Seller under the Sale Agreement and owned by the Seller on the initial Funding Date.

“Face Amount”: With respect to any Asset, the Outstanding Asset Balance thereof, in each case as shown on the applicable Asset List.

“Facility Amount”: The aggregate amount of the Class A Facility Amount and Class B Facility Amount.

“FDIC”: The Federal Deposit Insurance Corporation, and any successor thereto.

“Federal Funds Rate”: For any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the overnight federal funds rates as in Federal Reserve Board Statistical Release H.15(519) or any successor or substitute publication selected by the Administrative Agent (or, if such day is not a Business Day, for the next preceding Business Day), or, if, for any reason, such rate is not available on any day, the rate determined, in the sole opinion of the Administrative Agent, to be the rate at which overnight federal funds are being offered in the national federal funds market at 9:00 a.m. (New York City, New York time).

“Finance Charges”: With respect to any Asset, any interest or finance charges owing by an Obligor pursuant to or with respect to such Asset.

“Financial Sponsor”: Any Person, including any Subsidiary of another Person, whose principal business activity is acquiring, holding, and selling investments (including controlling interests) in otherwise unrelated companies that each are distinct legal entities with separate management, books and records and bank accounts, whose operations are not integrated one with another and whose financial condition and creditworthiness are independent of the other companies so owned by such Person.

“Fitch”: Fitch, Inc. or any successor thereto.

“Fixed Rate Asset”: A Loan that is an Eligible Asset other than a Floating Rate Asset.

“Fixed Rate Asset Percentage”: As of any date of determination, the percentage equivalent of a fraction (a) the numerator of which is equal to the sum of the Outstanding Asset Balances of all Fixed Rate Assets and Banded Floating Rate Loans that are within 0.50% of the maximum interest rate allowable under their Required Asset Documents as of such date, and (b) the denominator of which is equal to the Aggregate Outstanding Asset Balance as of such date.

“Floating Rate Asset”: A Loan that is an Eligible Asset where the interest rate payable by the Obligor thereof is based on the CSE Prime Rate or CSE LIBOR Rate, plus some specified interest percentage in addition thereto, and the Loan provides that such interest rate will reset immediately upon any change in the related CSE Prime Rate or CSE LIBOR Rate.

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“Floating Prime Rate Permitted Excess Amount”: $25,000,000 in the aggregate.

“Funding Date”: With respect to the initial Funding Date for Class A Advances, the second Business Day following the Closing Date, with respect to the initial Funding Date for Class B Advances, the Restatement Date, and as to any incremental Advance, any Business Day that is two Business Days immediately following the receipt by the Administrative Agent of a Borrowing Notice (along with a Borrowing Base Certificate) in accordance with Section 2.3.

“GAAP”: Generally accepted accounting principles as in effect from time to time in the United States.

“Governmental Authority”: With respect to any Person, any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any body or entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over such Person.

“H.15”: Federal Reserve Statistical Release H.15.

“Hedge Collateral”: Defined in Section 5.3(b).

“Hedge Breakage Costs”: For any Hedge Transaction, any amount payable by the Seller for the early termination of that Hedge Transaction or any portion thereof.

“Hedge Counterparty”: Means (a) Citibank, N.A. and its successors and assigns, and (b) any entity that (i) on the date of entering into a Hedging Agreement (x) is an interest rate swap dealer that has been approved in writing by the Administrative Agent (which approval shall not be unreasonably withheld), and (y) has a long-term unsecured debt rating of not less than “A” by S&P, not less than “A2” by Moody’s and not less than “A” by Fitch (if such entity is rated by Fitch) (“Long-term Rating Requirement”) and a short-term unsecured debt rating of not less than “A-1” by S&P, not less than “P-1” by Moody’s and not less than “F-1” by Fitch (if such entity is rated by Fitch) (“Short-term Rating Requirement”), and (ii) in a Hedging Agreement (x) consents to the assignment of the Seller’s rights under each Hedging Agreement to the Administrative Agent for the benefit of the Secured Parties pursuant to Section 5.3(b) and (y) agrees that in the event that Moody’s, S&P or Fitch reduces its long-term unsecured debt rating below the Long-term Rating Requirement, or reduces its short-term unsecured debt rating below the Short-term Rating Requirement, it shall transfer its rights and obligations under each Hedge Transaction to another entity that meets the requirements of clause (i) and (ii) hereof and has entered into a Hedging Agreement with the Seller on or prior to the date of such transfer.

“Hedge Guaranty”: The Guarantee Agreement, dated as of September 10, 2007, by and between CSE Mortgage in favor of the applicable Hedge Counterparty, as amended, modified, waived, supplemented, restated or replaced from time to time.

“Hedge Transaction”: Each interest rate or index rate swap transaction between the Seller and a Hedge Counterparty that is entered into pursuant to Section 5.3(a) and is governed by a Hedging Agreement.

29

“Hedging Agreement”: Each agreement between the Seller and a Hedge Counterparty that governs one or more Hedge Transactions entered into pursuant to Section 5.3(a), which agreement shall consist of a “Master Agreement” in a form published by the International Swaps and Derivatives Association, Inc., together with a “Schedule” thereto substantially in the form of Exhibit D hereto or such other form as the Administrative Agent shall approve in writing, detailing the specific terms of each such Hedge Transaction.

“Highest Required Investment Category”: (i) With respect to ratings assigned by Moody’s, “Aa2” or “P-1” for one month instruments, “Aa2” and “P-1” for three month instruments, “Aa3” and “P-1” for six month instruments and “Aa2” and “P-1” for instruments with a term in excess of six months, (ii) with respect to rating assigned by S&P, “A-1” for short-term instruments and “A” for long-term instruments, and (iii) with respect to rating assigned by Fitch (if such investment is rated by Fitch), “F-1+” for short-term instruments and “AAA” for long-term instruments.

“Increased Costs”: Any amounts required to be paid by the Seller to an Affected Party pursuant to Section 2.15.

“Indebtedness”: With respect to any Person at any date, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current liabilities incurred in the ordinary course of business and payable in accordance with customary trade practices) or that is evidenced by a note, bond, debenture or similar instrument or other evidence of indebtedness customary for indebtedness of that type, (b) all obligations of such Person under leases that shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, (c) all obligations of such Person in respect of acceptances issued or created for the account of such Person, (d) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof, (e) all indebtedness, obligations or liabilities of that Person in respect of Derivatives, and (f) obligations under direct or indirect guaranties in respect of obligations (contingent or otherwise) to purchase or otherwise acquire, or to otherwise assure a creditor against loss in respect of, indebtedness or obligations of others of the kind referred to in clauses (a) through (e) above.

“Indemnified Amounts”: Defined in Section 11.1.

“Indemnified Parties”: Defined in Section 11.1.

“Independent Director”: Defined in Section 4.1(u).

“Industry”: The industry of an Obligor as determined by reference to the two digit standard industry classification or North American Industry Classification System codes.

“Initial Advance”: The first Advance under the Class A VFC and the Class B VFC, respectively.

“Insolvency Event”: With respect to a specified Person, (a) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable Insolvency Law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar

30

official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person’s affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (b) the commencement by such Person of a voluntary case under any applicable Insolvency Law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due, or the taking of action by such Person in furtherance of any of the foregoing.

“Insolvency Laws”: The Bankruptcy Code and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments, or similar debtor relief laws from time to time in effect affecting the rights of creditors generally.

“Insolvency Proceeding”: Any case, action or proceeding before any court or other Governmental Authority relating to any Insolvency Event.

“Instrument”: Any “instrument” (as defined in Article 9 of the UCC), other than an instrument that constitutes part of chattel paper.

“Insurance Policy”: With respect to any Asset an insurance policy covering liability and physical damage to or loss of the Related Property.

“Insurance Proceeds”: Any amounts payable or any payments made on or with respect to an Asset under any Insurance Policy.

“Intercreditor Agreement”: The Fourth Amended and Restated Intercreditor and Lockbox Administration Agreement, dated as of June 30, 2005, by and among each of the financing agents from time to time party thereto, Bank of America, N.A., as the lockbox bank, CapitalSource Finance LLC, as the originator, as the original servicer and as the lockbox servicer, and CapitalSource Funding LLC, as the owner of the account and as the owner of the lockbox, as amended, modified, waived, supplemented, restated or replaced from time to time.

“Interest”: For each Accrual Period and each Advance outstanding, the sum of the products of:

IR x P x	1
	360

     where:

     IR       =       the Interest Rate applicable on such day; and

     P        =       the principal amount of such Advance on such day.

provided that (i) no provision of this Agreement shall require the payment or permit the collection of Interest in excess of the maximum permitted by Applicable Law and (ii) Interest

31

shall not be considered paid by any distribution if at any time such distribution is rescinded or must otherwise be returned for any reason.

“Interest Collections”: Any and all amounts received in respect of any interest, fees or other similar charges (including any Finance Charges) from or on behalf of any Obligor that are deposited into the Collection Account, or received by or on behalf of the Seller by the Servicer or Originator in respect of an Asset, in the form of cash, checks, wire transfers, electronic transfers or any other form of cash payment (net of any payment owed by the Seller to, and including any receipts from, any Hedge Counterparties).

“Interest Rate”: The Class A Interest Rate or the Class B Interest Rate, as applicable.

“Interests in Real Property”: A fee simple interest, a financeable estate for years or a leasehold interest, in each case in real property.

“Investors”: The Persons listed on Schedule VI attached hereto.

“ISDA Definitions”: The 2000 ISDA Definitions as published by the International Swaps and Derivatives Association, Inc.

“Issuer”: CAFCO, CIESCO, CRC Funding and any other any Person that becomes an owner of Class A Advances, by assignment or otherwise, and whose principal business consists of issuing commercial paper or other securities to fund its acquisition or maintenance of receivables, accounts, instruments, chattel paper, general intangibles and other similar assets.

“Issuer Purchase Limit”: With respect to each Issuer, the lesser of $600,000,000 and the Class A Facility Amount in effect from time to time.

“Land Development”: Financing to an entity engaged in the business of purchasing land for the purposes of resale to a developer.

“Lease”: The underlying triple-net lease between SPE Obligor and any Underlying Lessee pursuant to which the Underlying Lessee is responsible for all expenses arising from the use or operation of the underlying property, including, without limitation, taxes, insurance premiums, alterations, and repairs and maintenance costs.

“Leased Property”: Defined in clause 3(f) of the definition of Eligible Asset.

“LIBOR Rate”: For any day during any Accrual Period and any Advance or portion thereof, an interest rate per annum equal to:

     (1) the posted rate for 30 day deposits in Dollars appearing on the Reuters Screen LIBO Page as of 11:00 a.m. (London time) on the Business Day which is the second Business Day immediately preceding the applicable Funding Date (with respect to the initial Accrual Period for such Advance) and as of the second Business Day immediately preceding the first day of the applicable Accrual Period (with respect to all subsequent Accrual Periods for such Advance); or

32

     (2) if no such rate appears on the Reuters Screen LIBO Page at such time and day, then the LIBOR Rate shall be determined by Citibank at its principal office in New York, New York as its rate (each such determination, absent manifest error, to be conclusive and binding on all parties hereto and their assignees) at which 30 day deposits in Dollars are being, have been, or would be offered or quoted by Citibank to major banks in the applicable interbank market for Eurodollar deposits at or about 11:00 a.m. (New York, New York time) on such day.

“Lien”: Any mortgage, lien, pledge, charge, right, claim, security interest or encumbrance of any kind of or on any Person’s assets or properties in favor of any other Person (including any UCC financing statement or any similar instrument filed against such Person’s assets or properties).

“Liquid Real Estate Assets”: (a) Residential mortgage-backed securities that (i) have a rating of not less than “AA” by S&P/Fitch and “Aa2” by Moody’s, (ii) are purchased by CapitalSource Inc. or its Consolidated Subsidiaries solely to meet REIT asset and income tests, and (iii) are leveraged through debt facilities utilizing leverage greater than 12 times the amount of equity investment in such Liquid Real Estate Assets and (b) residential mortgage whole loan purchases made by CapitalSource Inc. or its Consolidated Subsidiaries solely to meet REIT asset and income tests, all in accordance with the Residential Mortgage Policies and Procedures.

“Liquidation Expenses”: With respect to (a) any Asset, the aggregate amount of all out-of-pocket expenses reasonably incurred by the Servicer (including amounts paid to any subservicer) and any reasonably allocated costs of counsel (if any), in each case in accordance with the Servicer’s customary procedures in connection with the repossession, refurbishing and disposition of any related assets securing such Asset upon or after the expiration or earlier termination of such Asset and other out-of-pocket costs related to the liquidation of any such assets, including the attempted collection of any amount owing pursuant to such Asset if it is a Charged-Off Asset, and if requested by the Administrative Agent, the Servicer and Originator must provide to the Administrative Agent a breakdown of the Liquidation Expenses for any Asset along with any supporting documentation therefor, and (b) any Portfolio Asset, the aggregate amount of all out-of-pocket expenses reasonably incurred by the Servicer (including amounts paid to any subservicer) and any reasonably allocated costs of counsel (if any), in each case in accordance with the Servicer’s customary procedures in connection with the repossession, refurbishing and disposition of any related assets securing such Portfolio Asset upon or after the expiration or earlier termination of such Portfolio Asset and other out-of-pocket costs related to the liquidation of any such assets, including the attempted collection of any amount owing pursuant to such Portfolio Asset if it is a Charged-Off Portfolio Asset, and if requested by the Administrative Agent, the Servicer and Originator must provide to the Administrative Agent a breakdown of the Liquidation Expenses for any Portfolio Asset along with any supporting documentation therefor.

“Liquidity Agreement”: With respect to each Purchaser which is an Issuer, the asset purchase agreement, secondary market agreement or other liquidity agreement, by and among such Purchaser, the Liquidity Banks named therein, and the Administrative Agent, as such agreement may be amended, modified, waived, supplemented, restated or replaced from time to time.

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“Liquidity Bank”: Citibank and each other Person or Persons who provide liquidity support to any Purchaser which is an Issuer pursuant to a Liquidity Agreement in connection with the issuance by such Issuer of Commercial Paper Notes.

“Loan”: Any loan originated by the Originator or, in the case of an Assigned Loan or an Acquired Loan, otherwise acquired by the Originator, that is identified on an Asset List and sold or contributed to the Seller hereunder and included as part of the Collateral, which loan includes, without limitation, (i) the Required Asset Documents and Asset File, and (ii) all right, title and interest of the Originator in and to the loan and any Related Property.

“Loan Register”: Defined in Section 5.4(n).

“Loan-to-Liquidation Value” or “LLV”: With respect to any Loan, as of the date of its origination, the percentage equivalent of a fraction (i) the numerator of which is equal to the maximum availability (as provided in the applicable Underlying Instruments) of such Loan as of the date of its origination and (ii) the denominator of which is equal to the liquidation value of the Related Property securing such Loan that is subject to a first priority lien in favor of the Originator (as determined by the Servicer in accordance with the Credit and Collection Policy and in a commercially reasonable manner).

“Loan-to-Value Ratio” or “LTV”: With respect to any Loan, as of the date of its origination, the percentage equivalent of a fraction (a) the numerator of which is equal to the total commitment amount of such Loan as of the date of its origination (as provided in the related Underlying Instruments) (or the Outstanding Asset Balance with respect to Delayed-Draw Term Loans as determined on the last day of each calendar month) plus the total commitment amount or principal amount, as the case may be, as of the applicable date of origination or incurrence, of all loans and other indebtedness which is senior to or pari passu with such Loan in the “capital structure” of the related Obligor (as defined in, and as determined by the Servicer in accordance with, the Credit and Collection Policy and in a commercially reasonable manner), and (b) the denominator of which is equal to the lower of the Obligor’s cost to acquire the Related Property or the current value (determined by means of an Appraisal) of the Related Property.

“Lock-Box”: The post office box to which Collections are remitted for retrieval by a Lock-Box Bank and deposited by such Lock-Box Bank into a Lock-Box Account, the details of which are contained in Schedule II.

“Lock-Box Account”: The account maintained at the Lock-Box Bank for the purpose of receiving Collections, the details of which are contained in Schedule II, as such schedule may be amended from time to time.

“Lock-Box Agreement”: The Fifth Amended and Restated Three Party Agreement Relating to Lockbox Services and Control (with Activation Upon Notice), dated as of June 30, 2005, by and among certain financing agents party thereto, Bank of America, N.A., as the lockbox bank, CapitalSource Finance LLC, as the originator, as the original servicer and as the lockbox servicer, and CapitalSource Funding LLC, as the owner of the account and as the owner of the lockbox, as amended, modified, waived, supplemented, restated or replaced from time to time.

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“Lock-Box Bank”: Bank of America, N.A., or any of the banks or other financial institutions holding one or more Lock-Box Accounts.

“Margin Stock”: Margin Stock as defined under Regulation U.

“Material Adverse Effect”: With respect to any event or circumstance, means a material adverse effect on (a) the business, financial condition, operations, performance or properties of the Servicer or the Seller, (b) the validity, enforceability or collectibility of this Agreement or any other Transaction Document or the validity, enforceability or collectibility of the Assets generally or any material portion of the Assets, (c) the rights and remedies of the Administrative Agent, the Purchasers and the Secured Parties under the Transaction Documents, (d) the ability of the Seller, the Servicer, the Backup Servicer or the Collateral Custodian to perform its obligations under this Agreement or any Transaction Document, or (e) the status, existence, perfection, priority or enforceability of the Administrative Agent’s or the Secured Parties’ interest in the Collateral.

“Material Mortgage Loan”: Any Loan for which the underlying Related Property consisting of real property owned by the Obligor (i) represents 25% or more (measured by the book value of the three most valuable parcels of real property as of the date of such Loan) of (a) the original commitment for such Loan and (b) the fair value of the underlying Obligor and Related Property as a whole and (ii) is material to the operations of the related business of such Obligor; provided that a Material Mortgage Loan shall not include certain parcels of real property which the Obligor is in the process of disposing.

“Materials of Environmental Concern”: Any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Laws, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation.

“Maximum Availability”: On any date of determination an amount equal to the least of:

     (a) the Class A Facility Amount;

     (b) an amount equal to (i) the product of the Borrowing Base and the Weighted Average Advance Rate on such date plus (ii) the amount on deposit in the Principal Collections Account; and

     (c) an amount equal to (i) the Borrowing Base minus (ii) the Minimum Overcollateralization Amount plus (iii) the amount on deposit in the Principal Collections Account.

“Mezzanine Loan”: Any Term Loan (i) that is subordinate to a B-Note Loan, if any, in terms of priority of payment obligations, (ii) the payment of which may contain a form of equity participation in the issuer or Obligor and is secured by a pledge from the parent of the Obligor of the equity in such Obligor, and (iii) that does not share in the same collateral package as the Obligor’s senior loans.

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“Minimum Overcollateralization Amount”: As of any date of determination, an amount equal to the product of 3.0 and the sum of the Outstanding Asset Balances of all Eligible Assets attributable to the Obligor having the largest aggregate Outstanding Asset Balance of Eligible Assets included as part of the Collateral (excluding the amount, calculated without duplication, by which such Eligible Assets exceed any applicable Pool Concentration Criteria).

“Minimum Pool Yield”: A Pool Yield equal to 2.70%.

“Monthly Report”: Defined in Section 6.10(b).

“Moody’s”: Moody’s Investors Service, Inc., and any successor thereto.

“Mortgage”: The mortgage, deed of trust or other instrument creating a first or second Lien on an Interest in Real Property securing a Loan subject to this Agreement, including the Assignment of Leases and Rents related thereto.

“Mortgaged Property”: The underlying Interests in Real Property which are subject to the Lien of a Mortgage that secures a Loan, consisting of Interests in Real Property in a parcel or parcels of land, at least one of which parcels is improved by a commercial building or facility, together with Interests in Real Property in such commercial building or facility and any personal property, fixtures, leases and other property or rights pertaining to such land, commercial building or facility which are subject to the related Mortgage.

“Multiemployer Plan”: A “multiemployer plan” as defined in Section 4001(a)(3) of ERISA that is or was at any time during the current year or the immediately preceding five years contributed to by the Seller or any ERISA Affiliate on behalf of its employees.

“NAICS Code”: the North American Industry Classification System Codes by at least four digits.

“Net Proceeds of Capital Stock/Conversion of Debt”: Any and all proceeds (whether cash or non-cash) or other consideration received by CapitalSource Inc. and its Consolidated Subsidiaries, on a consolidated basis, in respect of the issuance of Capital Stock (including, without limitation, the aggregate amount of any and all Indebtedness converted into Capital Stock), after deducting therefrom all reasonable and customary costs and expenses incurred by CapitalSource Inc. and such Consolidated Subsidiary in connection with the issuance of such Capital Stock in each case to the extent classified as equity on the consolidated balance sheet of CapitalSource Inc. and its Consolidated Subsidiaries.

“NOI”: With respect to any Mortgaged Property, as of the last day of any fiscal quarter, the amount determined for the period consisting of such fiscal quarter and each of the three immediately preceding fiscal quarters of the sum of all rents and other revenues received in the ordinary course from such Mortgaged Property minus all expenses paid related to the ownership, operation and maintenance of such Mortgaged Property.

“Noteless Loan”: A Loan with respect to which the Underlying Instruments do not require the Obligor to execute and deliver a promissory note to evidence the indebtedness created under such Loan.

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“Obligor”: With respect to any Asset, as applicable, any Person or Persons obligated to make payments pursuant to or with respect to such Asset, including any guarantor thereof. For purposes of calculating any of the Pool Concentration Criteria only, all Assets included as part of the Collateral or to be transferred to the Collateral the Obligor of which is an Affiliate of another Obligor (excluding any Financial Sponsor or Obligors that are Affiliates solely because of common ownership or control by a Financial Sponsor) shall be aggregated with all Assets of such other Obligor; for example, if Corporation A is an Affiliate (other than because of a common Financial Sponsor) of Corporation B, and the sum of the Outstanding Asset Balances of all of Corporation A’s Loans included as part of the Collateral constitutes 10% of the Aggregate Outstanding Asset Balance and the sum of the Outstanding Asset Balances all of Corporation B’s Loans included as part of the Collateral constitutes 10% of the Aggregate Outstanding Asset Balance, the combined Obligor concentration for Corporation A and Corporation B would be 20%.

“Officer’s Certificate”: A certificate signed by a Responsible Officer of the Seller or the Servicer, as the case may be, and delivered to the Collateral Custodian.

“Opinion of Counsel”: A written opinion of counsel, which opinion and counsel are acceptable to the Administrative Agent in its sole discretion.

“Optional Sale”: Defined in Section 2.19(a).

“Optional Sale Date”: Any Business Day, provided 10 Business Days written notice is given in accordance with Section 2.19(a).

“Original Agreement”: This Agreement prior to the amendment and restatement thereof on the Restatement Date.

“Originator”: Defined in the Preamble of this Agreement and the Originator shall be deemed to be the originator of the Loans listed on the Asset List on the first two Funding Dates, all of which Loans have either been originated by the Originator or acquired by the Originator from CapitalSource Finance LLC.

“Other Costs”: Defined in Section 13.09(c).

“Outstanding Asset Balance”: With respect to any Asset at any time, the sum of (a) all future Scheduled Payments becoming due under or with respect to such Asset plus (b) any past due Scheduled Payments with respect to such Asset (other than with respect to those payments to the extent a Servicer Advance is outstanding with respect thereto); provided that notwithstanding anything to the contrary contained herein, for purposes of determining the Outstanding Asset Balance, if any Asset is a Charged-Off Asset or if any portion of an Asset is deemed to be “charged-off” in accordance with the provisions of the definition of Charged-Off Asset, then the entire Asset shall be deemed to have an Outstanding Asset Balance of zero, except for purposes of calculating the Average Pool Charged-Off Ratio.

“Overcollateralization Amount”: As of any date of determination, an amount equal to the product of (i) the Overcollateralization Percentage on such date and (ii) the Borrowing Base on such date.

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“Overcollateralization Percentage”: As of any date of determination, the percentage equivalent of (a) one minus (b) a fraction (i) the numerator of which is equal to the Class A Advances Outstanding on such date and (ii) the denominator of which is equal to the Aggregate Outstanding Asset Balance as of such date.

“Overcollateralization Shortfall”: As of any date of determination, the positive difference, if any, of (a) the Minimum Overcollateralization Amount on such date minus (b) the Overcollateralization Amount on such date.

“Parent Undertaking — Originator”: The Parent Undertaking Agreement, in substantially the form of Exhibit N hereto, dated as of the date hereof, relating to the obligations of the Originator, made by CapitalSource Inc. in favor of the Seller, and assigned to the Administrative Agent, as such Parent Undertaking Agreement may be amended, modified, supplemented, restated or replaced from time to time.

“Parent Undertaking — Servicer”: The Parent Undertaking Agreement, in substantially the form of Exhibit O hereto, dated as of the date hereof, relating to the obligations of the Servicer, made by CapitalSource Inc. in favor of the Administrative Agent, as such Parent Undertaking Agreement may be amended, modified, supplemented, restated or replaced from time to time.

“Participating Member State”: A member of the European Community that adopts or has adopted the Euro as its lawful currency in accordance with legislation of the European Economic Community relating to the Economic and Monetary Union.

“Participation Loan”: A Loan to an Obligor, originated by the Originator and serviced by the Servicer in the ordinary course of its business, in which a participation interest has been granted to another Person in accordance with the Credit and Collection Policy and (i) such transaction has been fully consummated, pursuant to a participation agreement, (ii) such Loan (other than in the case of a Noteless Loan) is represented by a separate promissory note, and (iii) the Originator has the right to receive and collect payments directly in its own name, and to enforce its rights directly against the Obligor thereof including the right to proceed against collateral; provided that any such Loan shall exclude any Retained Interest.

“Payment Date”: The 20th day of each calendar month or, if such day is not a Business Day, the next succeeding Business Day, commencing October 22, 2007.

“Payment Duties”: Defined in Section 8.2(b).

“Permitted Investments”: With respect to any Payment Date means negotiable instruments or securities or other investments maturing on or before such Payment Date (a) which, except in the case of demand or time deposits, investments in money market funds and Eligible Repurchase Obligations, are represented by instruments in bearer or registered form or ownership of which is represented by book entries by a Clearing Agency or by a Federal Reserve Bank in favor of depository institutions eligible to have an account with such Federal Reserve Bank who hold such investments on behalf of their customers, (b) that, as of any date of determination, mature by their terms on or prior to the Business Day immediately preceding the next Payment Date immediately following such date of determination, and (c) that evidence:

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     (1) direct obligations of, and obligations fully guaranteed as to full and timely payment by, the United States (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States);

     (2) demand deposits, time deposits or certificates of deposit of depository institutions or trust companies incorporated under the laws of the United States or any state thereof and subject to supervision and examination by federal or state banking or depository institution authorities; provided that at the time of the Seller’s investment or contractual commitment to invest therein, the commercial paper, if any, and short-term unsecured debt obligations (other than such obligation whose rating is based on the credit of a Person other than such institution or trust company) of such depository institution or trust company shall have a credit rating from Fitch and each Rating Agency in the Highest Required Investment Category granted by Fitch and such Rating Agency, which in the case of Fitch, shall be “F-1+”;

     (3) commercial paper, or other short term obligations, having, at the time of the Seller’s investment or contractual commitment to invest therein, a rating in the Highest Required Investment Category granted by each Rating Agency, which in the case of Fitch, shall be “F-1+”;

     (4) demand deposits, time deposits or certificates of deposit that are fully insured by the FDIC and either have a rating on their certificates of deposit or short-term deposits from Moody’s and S&P of “P-1” and “A-1”, respectively, and if rated by Fitch, from Fitch of “F-1+”;

     (5) notes that are payable on demand or bankers’ acceptances issued by any depository institution or trust company referred to in clause (ii) above;

     (6) investments in taxable money market funds or other regulated investment companies having, at the time of the Seller’s investment or contractual commitment to invest therein, a rating of the Highest Required Investment Category from Moody’s, S&P and Fitch (if rated by Fitch);

     (7) time deposits (having maturities of not more than 90 days) by an entity the commercial paper of which has, at the time of the Seller’s investment or contractual commitment to invest therein, a rating of the Highest Required Investment Category granted by Fitch and each Rating Agency; or

     (8) Eligible Repurchase Obligations with a rating acceptable to the Rating Agencies, which in the case of Fitch, shall be “F-1+” and in the case of S&P shall be “A-1”.

The Collateral Custodian may pursuant to the direction of the Servicer or Administrative Agent, as applicable, purchase or sell to itself or an Affiliate, as principal or agent, the Permitted Investments described above.

“Permitted Liens”: With respect to the Collateral (i) Liens for state, municipal or other local taxes (other than payroll taxes) if such taxes shall not at the time be due and payable or are being

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contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP so long as there exists no material risk of sale, forfeiture, loss, or loss of or interference with use or possession of, or diminution of value, utility or useful life of, the related Collateral, (ii) Liens imposed by operation of law, such as materialmen’s, mechanics’, carriers’, workmen’s and repairmen’s liens and other similar liens arising in the ordinary course of business securing obligations that are not overdue for a period of more than thirty (30) days or are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP so long as there exists no material risk of sale, forfeiture, loss, or loss of or interference with use or possession of, or diminution of value, utility or useful life of, the related Collateral, (iii) Liens (other than any Lien imposed by ERISA) on or in respect of deposits or pledges of cash or letters of credit posted in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers’ compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations, provided that any such Lien attaches only to the cash collateral or letter of credit posted to secure such obligation, and (iv) Liens pursuant to indebtedness incurred by an Obligor that is subordinated, pursuant to a customary and appropriate subordination agreement, to all present and future obligations, indebtedness and liabilities of Obligor or any related guarantor under or in respect of the related Asset at any time and from time to time of every kind, nature and description, direct or indirect, secured or unsecured, joint and several, absolute or contingent, due or to become due, matured or unmatured, now existing or hereafter arising, contractual or tortious, liquidated or unliquidated, such that the Lien in favor of the Originator is senior in priority and the subordinated lien holder is subject to restrictions for a customary and reasonable period of time with respect to its right to take foreclosure actions or exercise other remedies with respect to the related collateral (other than the subordinated lien holder’s customary purchase option of the senior indebtedness at par) in accordance with its credit and collection policies. With respect to the Assets, Liens in favor of the Administrative Agent.

“Person”: An individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, sole proprietorship, joint venture, government (or any agency or political subdivision thereof) or other entity.

“Pool Charged-Off Ratio”: As of any Determination Date, the product of (i) 12 and (ii) the percentage equivalent of a fraction, (a) the numerator of which is equal to the sum of the Outstanding Asset Balances of all Eligible Assets that became Charged-Off Assets (net of Recoveries during such Collection Period) during the Collection Period related to such Determination Date, and (b) the denominator of which is equal to the Aggregate Outstanding Asset Balance as of the first day of the Collection Period related to such Determination Date.

“Pool Concentration Criteria”: On any day, each of the concentration limitations as set forth below, which concentration limitations (unless otherwise indicated) shall be measured on the basis of a percentage of the Aggregate Outstanding Asset Balance:

     (1) the sum of the Outstanding Asset Balance of all Eligible Assets the Obligors of which are resident of the same state shall not exceed 20%, with the

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exception of the State of Florida, the State of California and the State of New York, which shall not exceed 30%;

     (2) the sum of the Outstanding Asset Balances of all Eligible Assets that are Loans secured by Development Properties shall not exceed 20%; provided that condominium conversions shall not exceed 15%;

     (3) the sum of the Outstanding Asset Balances of all Eligible Assets that are Senior Secured ABLs shall not exceed 35%;

     (4) the sum of the Outstanding Asset Balances of all Eligible Assets that are B-Note Loans or Mezzanine Loans shall not exceed 10%;

     (5) the sum of the Outstanding Asset Balances comprised of all Eligible Assets that are Construction Loans shall not exceed 5%;

     (6) the sum of the Outstanding Asset Balances of all Eligible Assets that are Loans secured by the same classification of Mortgaged Property shall not exceed 30% with the exception of Loans secured by Mortgaged Property classified as hotel property, which shall not exceed 20%;

     (7) the sum of the Outstanding Asset Balances of all Eligible Assets that are Loans used to finance Land Development activities shall not exceed 10%;

     (8) the sum of the Outstanding Asset Balances of all Eligible Assets that are Sale/Leaseback Loans shall not exceed 20%;

     (9) the sum of the Outstanding Asset Balances of all Eligible Assets with a “Risk Rating 4”, a “Risk Rating 5” and a “Risk Rating 6” shall not exceed 20%, 10% and 0%, respectively;

     (10) the sum of the Outstanding Asset Balances of all Eligible Assets to a single Obligor shall not exceed 3%, except that with respect to the Excess Concentration Loans, the sum of the Outstanding Asset Balances of all Excess Concentration Loans to a single Obligor shall not exceed the lesser of (a) 3.5% (measured on the initial Funding Date) and (b) the amount set forth for such Obligor on Schedule VIII hereto;

     (11) the Aggregate Outstanding Asset Balances of all Eligible Assets divided by the number of Obligors (including Affiliates thereof) shall not exceed the greater of (a) 1.75% or (b) $15 million;

     (12) the sum of the Outstanding Asset Balances of all Eligible Assets that are Acquired Loans shall not exceed 15%;

     (13) the sum of the Outstanding Asset Balances of all Eligible Assets that are Fixed Rate Assets shall not exceed 5%;

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     (14) the sum of the Outstanding Asset Balances of all Eligible Assets where all or any portion of the Related Property is located outside of the United States and its territories and protectorates shall not exceed 15%;

     (15) subject to the requirements of clause (1)(f) of the definition of Eligible Asset, the sum of the Outstanding Asset Balances of all Eligible Assets which provide for interest and principal payments in British Pounds Sterling, Euros or Canadian Dollars shall not exceed 10%; and

     (16) the sum of the Outstanding Asset Balances of all Loans which provide for payments of interest on a semi-annual basis shall not exceed the lesser of (a) 5% and (b) $20,000,000.

“Pool Rate”: As of any Determination Date, the annualized percentage equivalent of a fraction, (a) the numerator of which is equal to all Interest Collections on Assets included in the Aggregate Outstanding Asset Balance as of the first day of the Collection Period related to such Determination Date that are deposited into the Collection Account during such Collection Period, and (b) the denominator of which is equal to the Aggregate Outstanding Asset Balance as of the first day of such Collection Period.

“Pool Yield”: On any day, the excess, if any, of (a) the Pool Rate on such day over (b) the sum of (i) the weighted average Class A Interest Rate multiplied by the Weighted Average Advance Rate, (ii) the weighted average Program Fee Rate applicable to the Class A Advances multiplied by the Weighted Average Advance Rate and (iii) the Servicing Fee Rate, in each case as of such day.

“Portfolio Aggregate Outstanding Asset Balance”: With respect to all Portfolio Assets, on any day, the sum of the Portfolio Outstanding Asset Balances of such Portfolio Assets on such date. Notwithstanding anything to the contrary contained herein, for purposes of determining the Portfolio Aggregate Outstanding Asset Balance, if any portion of a Portfolio Asset is deemed to be “charged-off” in accordance with the provisions of the definition of Charged-Off Portfolio Asset, then the entire Portfolio Asset shall have a zero Outstanding Asset Balance, except for purposes of calculating the Average Portfolio Charged-Off Ratio.

“Portfolio Asset”: Any asset owned or serviced by the Originator (including each Asset). For the avoidance of doubt, the term Portfolio Asset shall not include any asset owned and/or serviced solely by one or more Affiliates of the Originator (but not by the Originator); provided that (i) such asset shall not have been originated or acquired by the Originator and (ii) such asset shall not be included in the consolidated financial statements of the Originator.

“Portfolio Charged-Off Ratio”: As of any Determination Date, the product of (i) 12 and (ii) the percentage equivalent of a fraction, (a) the numerator of which is equal to the sum of the Portfolio Outstanding Asset Balances of all Portfolio Assets (excluding equity and preferred stock investments) that became Charged-Off Portfolio Asset (net of Recoveries during such Collection Period) during the Collection Period related to such Determination Date and (b) the denominator of which is equal to the Portfolio Aggregate Outstanding Asset Balance (excluding equity and preferred stock investments) as of the first day of the Collection Period related to such

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Determination Date; provided that such calculation shall exclude the effects of any Liquid Real Estate Assets that are acquired and levered by the Originator solely to satisfy REIT asset and income tests.

“Portfolio Delinquency Ratio”: As of any Determination Date, the percentage equivalent of a fraction, (i) the numerator of which is equal to the sum of the Portfolio Outstanding Asset Balances of all Delinquent Portfolio Assets on such date and (ii) the denominator of which is equal to the Portfolio Aggregate Outstanding Asset Balance on such date; provided that, such calculation shall exclude the effects of any Liquid Real Estate Assets that are acquired and levered by the Originator solely to satisfy REIT asset and income tests.

“Portfolio Outstanding Asset Balance”: With respect to any Portfolio Asset, the sum of (i) the portion of all future Scheduled Payments becoming due under or with respect to such Portfolio Asset plus (ii) any past due Scheduled Payments with respect to such Portfolio Asset.

“Prepaid Asset”: Any Asset (other than a Charged-Off Asset) that was terminated or has been prepaid in full or in part prior to its scheduled expiration date.

“Prepayment Amount”: Defined in Section 6.4(b).

“Prepayments”: Any and all (i) partial or full prepayments on or with respect to an Asset (including, with respect to any Asset and any Collection Period, any Scheduled Payment, Finance Charge or portion thereof that is due in a subsequent Collection Period that the Servicer has received, and pursuant to the terms of Section 6.4(b) expressly permitted the related Obligor to make, in advance of its scheduled due date, and that will be applied to such Scheduled Payment on such due date), (ii) Recoveries, and (iii) Insurance Proceeds.

“Prime Rate”: The rate announced publicly by Citibank from time to time as its base rate in the United States, such rate to change as and when such designated rate changes. The Prime Rate is not intended to be the lowest rate of interest charged by Citibank or any other specified financial institution in connection with extensions of credit to debtors.

“Prime Rate Asset”: A Floating Rate Asset where the interest rate payable by the Obligor thereof is based on the CSE Prime Rate.

“Principal Collections”: Any and all amounts received in respect of any principal due and payable from or on behalf of Obligors that are deposited into the Principal Collections Account, or received by or on behalf of the Seller by the Servicer or Originator in respect of Assets, in the form of cash, checks, wire transfers, electronic transfers or any other form of cash payment.

“Principal Collections Account”: Defined in Section 6.4(f).

“Proceeds”: With respect to any Collateral, whatever is receivable or received when such Collateral is sold, liquidated, foreclosed, exchanged, or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes all rights to payment with respect to any insurance relating to such Collateral.

“Program Fee”: With respect to any Purchaser, as defined in the Purchaser Fee Letter.

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“Program Fee Rate”: With respect to any Purchaser and any Class A Advance, the rate set forth in the Purchaser Fee Letter.

“Purchaser”: any Class A Purchaser or Class B Purchaser; and “Purchasers” means collectively the Class A Purchasers and Class B Purchasers.

“Purchaser Affiliate”: With respect to a Purchaser, means any other Person that, directly or indirectly, controls, is controlled by or under common control with such Person. For purposes of this definition, “control” (including the terms “controlling,” “controlled by” and “under common control with”) when used with respect to any specified Person means the possession, direct or indirect, of the power to vote 50% or more of the voting securities of such Person or to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by contract or otherwise

“Purchaser Fee Letter”: Each Fee Letter Agreement, dated as of September 10, 2007, by and among the Seller, the Servicer, and the Administrative Agent, as amended, modified, waived, supplemented, restated or replaced from time to time.

“Qualified Institution”: Defined in Section 6.4(f).

“Qualified Transferee”:

(a)	The Seller, the Administrative Agent or any of their Affiliates; or
(b)	any other Person which:

     (i) has at least $50,000,000 in capital/statutory surplus or shareholders’ equity (except with respect to a pension advisory firm or similar fiduciary); and

     (ii) is regularly engaged in the business of making or owning commercial real estate loans or operating commercial real estate properties; and

     (iii) is one of the following: (I) an insurance company, bank, savings and loan association, investment bank, trust company, commercial credit corporation, pension plan, pension fund, pension fund advisory firm, mutual fund, real estate investment trust, governmental entity or plan; (II) an investment company, money management firm or a “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act of 1933, as amended, or an “institutional accredited investor” within the meaning of Regulation D under the Securities Act of 1933, as amended; or (III) the trustee, collateral agent or administrative agent in connection with (x) a securitization of the subject Asset through the creation of collateralized debt or loan obligations or (y) an asset-backed commercial paper transaction funded by a commercial paper conduit whose commercial paper notes are rated at least “A-1” by S&P or at least “P-1” by Moody’s, or (z) a repurchase transaction funded by an entity which would otherwise be a Qualified Transferee so long as the “equity interest” (other than any nominal or de minimis equity interest) in the special purpose entity that issues notes or certificates in connection with any such collateralized debt or loan obligation, asset-backed commercial paper funded transaction or repurchase transaction is owned by one or more entities that are Qualified

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Transferees under subclauses (A) or (B) above; or (IV) any entity Controlled (as defined below) by any of the entities described in subclauses (i), (ii) or (iii) above.

For purposes of this definition only, “Control” means the ownership, directly or indirectly, in the aggregate of more than 50% of the beneficial ownership interests of an entity and the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of an entity, whether through the ability to exercise voting power, by contract or otherwise, and “Controlled” has the meaning correlative thereto.

“Quarterly Determination Date”: March 31, June 30, September 30 and December 31 of each calendar year.

“Rating Agency”: Each of S&P and Moody’s.

“Records”: All documents relating to the Assets, including books, records and other information (including without limitation, computer programs, tapes, disks, punch cards, data processing software and related property and rights) executed in connection with the origination or acquisition of the Collateral or maintained with respect to the Collateral and the related Obligors that the Seller, the Originator or the Servicer have generated, in which the Seller, the Originator or the Servicer have acquired an interest pursuant to the Sale Agreement or in which the Seller, the Originator or the Servicer have otherwise obtained an interest.

“Recoveries”: As of the time any Related Property or any other related property is sold, discarded (after a determination by the Servicer that such Related Property or any other related property has little or no remaining value) or otherwise determined to be fully liquidated by the Servicer in accordance with the Credit and Collection Policy (or such similar policies and procedures utilized by the Servicer in servicing the Portfolio Assets) with respect to any Charged-Off Asset or Charged-Off Portfolio Asset, the proceeds from the sale of the Related Property or any other related property, the proceeds of any related Insurance Policy, any other recoveries with respect to such Charged-Off Asset or Charged-Off Portfolio Asset, the Related Property, any other related property, and amounts representing late fees and penalties, net of Liquidation Expenses and amounts, if any, received that are required under such Asset or Portfolio Asset, as applicable, to be refunded to the related Obligor.

“Register”: Defined in Section 13.16(c).

“Regulation U”: Regulation U of the Board of Governors of the Federal Reserve System, 12 C.F.R. §221, or any successor regulation.

“REIT”: A “real estate investment trust” as defined in Section 856(c)(5)(B) of the Code.

“Rejectable Offer”: Defined in clause 3(f) of the definition of Eligible Asset.

“Related Property”: With respect to an Asset, any property or other assets pledged as collateral to the Originator to secure repayment of such Asset including all Proceeds from any sale or other disposition of such property or other assets.

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“Related Security”: All of the Seller’s right, title and interest in and to:

     (a) any Related Property securing an Asset and all Recoveries related thereto;

     (b) all Required Asset Documents, Asset Files related to any Asset, Records, and the documents, agreements, and instruments included in the Asset File or Records, including without limitation, rights of recovery of the Seller against the Originator;

     (c) all Insurance Policies with respect to any Asset;

     (d) all security interests, liens, guaranties, warranties, letters of credit, accounts, bank accounts, mortgages or other encumbrances and property subject thereto from time to time purporting to secure or support payment of any Asset, together with all UCC financing statements or similar filings signed by an Obligor relating thereto;

     (e) the Collection Account, the Reserve Account, Lock Box and all Lock Box Accounts together with all cash and investments in each of the foregoing other than amounts earned on investments therein;

     (f) any Hedging Agreement and any payment from time to time due thereunder;

     (g) the Sale Agreement and the assignment to the Administrative Agent of all UCC financing statements filed by the Seller against the Originator under or in connection with the Sale Agreement; and

     (h) the proceeds of each of the foregoing.

“Replaced Asset”: Defined in Section 2.18(a).

“Reporting Date”: The date that is two Business Days prior to each Payment Date.

“Required Asset Documents”: With respect to (i) any Noteless Loan identified as a Noteless Loan on the Asset Checklist, a copy of the related Loan Register (together with a certificate of a Responsible Officer of the Servicer certifying to the accuracy of such Loan Register as of the date such Loan is included as a part of the Collateral), (ii) all Loans other than Noteless Loans, the duly executed original of the promissory note and an assignment (which may be by endorsement or allonge) of each such promissory note to the Seller and then the Administrative Agent, signed by an officer of the Originator and the Seller, respectively, (iii) any Loan, any related loan agreement and the Asset Checklist together with, to the extent set forth on the Asset Checklist, duly executed (if applicable) originals or copies of each of any related participation agreement, acquisition agreement, subordination agreement, intercreditor agreement, security agreements or similar instruments, UCC financing statements, guarantee, or Insurance Policy (iv) for each Loan, other than Agented Loans or Assigned Loans (or other Loans for which an Assignment of Mortgage has been delivered to Wells Fargo in its capacity as trustee or custodian pursuant to a prior term transaction or warehouse facility involving the Originator or one of its Affiliates), secured by real property, an Assignment of Mortgage and (v) for any Loan identified as an Assigned Loan on the Asset Checklist, the duly executed original assignment agreement;

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provided that with respect to any Assigned Loan, any of the foregoing documents, other than any related promissory notes in the case of Assigned Loans only, may be copies.

“Required Reports”: Collectively, the Monthly Report, the Servicer’s Certificate required pursuant to Section 6.10(c), the financial statements of the Servicer required pursuant to Section 6.10(d), the annual statements as to compliance required pursuant to Section 6.11, and the annual independent public accountant’s report required pursuant to Section 6.12.

“Required Reserve Amount” means, with respect to each Payment Date, an amount equal to the Outstanding Asset Balance of each Delinquent Asset as of the related Determination Date.

“Reserve Account”: Defined in Section 6.4(g).

“Residential Mortgage Policies and Procedures”: The written residential mortgage policies and procedures manual of CapitalSource Inc. attached hereto as Schedule V as it may be amended or supplemented from time to time.

“Responsible Officer”: With respect to any Person, any duly authorized officer of such Person with direct responsibility for the administration of this Agreement and also, with respect to a particular matter, any other duly authorized officer to whom such matter is referred because of such officer’s knowledge of and familiarity with the particular subject.

“Restatement Date”: October ___, 2007.

“Restricted Junior Payment”: (i) any dividend or other distribution, direct or indirect, on account of any class of membership interests of the Seller now or hereafter outstanding, except a dividend payment solely in interests of that class of membership interests or in any junior class of membership interests of the Seller; (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any class of membership interest of the Seller now or hereafter outstanding, (iii) any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire membership interests of Seller now or hereafter outstanding, and (iv) any payment of management fees by the Seller (except for reasonable management fees to the Originator or its Affiliates in reimbursement of actual management services performed).

“Retained Interest”: (A) With respect to any Revolving Loan or any Loan with an unfunded commitment on the part of the Originator that does not provide by its terms that funding thereunder is in Originator’s sole and absolute discretion and that is transferred by the Originator to the Seller and/or by the Seller to the Purchasers, all of the obligations, if any, to provide additional funding with respect to such Revolving Loan, and (B) with respect to any Assigned Loan, any Participation Loan or any Agented Loan that is transferred by the Originator to the Seller and/or by the Seller to the Purchasers, (i) all of the obligations, if any, of the agent(s) under the documentation evidencing such Assigned Loan, Participation Loan, or Agented Loan and (ii) the applicable portion of the interests, rights and obligations under the documentation evidencing such Assigned Loan, Participation Loan, or Agented Loan that relate to such portion(s) of the indebtedness that is owned by another lender or is being retained by the Originator pursuant to clause (A) of this definition.

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“Retransfer Date”: Defined in Section 4.6.

“Revolving Loan”: A Loan that is a line of credit or contains an unfunded commitment arising from an extension of credit by the Originator to an Obligor, pursuant to the terms of which amounts borrowed may be repaid and subsequently reborrowed; provided that any such Loan shall exclude any Retained Interest.

“Revolving Period”: The period commencing on the Closing Date and ending on the day immediately preceding the Termination Date.

“S&P”: Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., and any successor thereto.

“Sale Agreement”: The Sale and Contribution Agreement, dated as of the date hereof, between the Originator and the Seller, as amended, modified, waived, supplemented, restated or replaced from time to time.

“Sale/Leaseback Loan”: Any Loan by the Originator to an SPE Obligor that is collateralized by real estate and the SPE Obligor’s rights under a Lease with an Underlying Lessee.

“Scheduled Payments”: With respect to any Asset, each monthly, quarterly, or annual payment of principal required to be made by the Obligor thereof under the terms of such Asset; in all cases, excluding any payment in the nature of, or constituting, interest.

“Secured Party”: (i) each Purchaser, (ii) the Administrative Agent and (iii) each Hedge Counterparty that is either a Purchaser or an Affiliate of the Administrative Agent if that Affiliate is a Hedge Counterparty that executes a counterpart of this Agreement agreeing to be bound by the terms of this Agreement applicable to a Secured Party.

“Seller”: Defined in the Preamble of this Agreement.

“Seller Investment”: As of any date of determination, the sum, with respect to each Funding Date that has occurred on or prior to such determination date, of the excess of (x) the Outstanding Asset Balance (as of such Funding Date) of all Eligible Assets which became part of the Collateral on such Funding Date, over (y) the Advances made on such Funding Date; provided, however, that on the Restatement Date, the Seller Investment shall be reduced by the principal amount of the Class B Advance made on the Restatement Date.

“Senior Secured ABL Loan”: Any Revolving Loan that (i) is secured by a first priority Lien on all of the Obligor’s assets constituting Related Property for the Loan, (ii) provides the related Obligor with the option to receive additional borrowings thereunder based on the value of its eligible accounts receivable, residential mortgage receivables, inventory (other than real estate property or land) or equipment, (iii) has a Loan-to-Liquidation Value of less than or equal to (a) 85% with respect to the Related Property which constitutes accounts receivable, (b) 90% with respect to the Related Property which constitutes residential mortgage receivables, (c) 50% with respect to the Related Property which constitutes inventory (other than real estate property or land), and (d) 80% with respect to the Related Property which constitutes equipment, and

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(iii) provides that the payment obligation of the Obligor on such Loan is either senior to, or pari passu with, all other loans or financings to such Obligor.

“Senior Secured Loan”: Any Loan that (i) is secured by a first priority Lien on all of the Obligor’s assets constituting Related Property for the Loan, (ii) has a Loan-to-Value of not greater than 90%, and (iii) provides that the payment obligation of the Obligor on such Loan is either senior to, or pari passu with, all other loans or financings to such Obligor.

“Servicer”: CSE Mortgage, and each successor (in the same capacity) appointed as Successor Servicer pursuant to Section 6.16(a).

“Servicer Advance”: An advance of Scheduled Payments made by the Servicer pursuant to Section 6.5.

“Servicer Default”: Defined in Section 6.15.

“Servicer Termination Notice”: Defined in Section 6.15.

“Servicer’s Certificate”: Defined in Section 6.10(c).

“Servicing Fee”: Defined in Section 2.14(b).

“Servicing Fee Rate”: 0.50% per annum for Eligible Assets which are not Workout Assets and 0.75% per annum for Workout Assets, without duplication.

“Solvent”: As to any Person at any time, having a state of affairs such that all of the following conditions are met: (a) the fair value of the property of such Person is greater than the amount of such Person’s liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated for purposes of Section 101(32) of the Bankruptcy Code; (b) the present fair salable value of the property of such Person in an orderly liquidation of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person is able to realize upon its property and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business; (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature; and (e) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person’s property would constitute unreasonably small capital.

“SPE Obligor”: An Obligor that (a) is organized as a bankruptcy remote, special purpose entity (as evidenced by an Opinion of Counsel in form and substance satisfactory to the Administrative Agent) and is not an operating company and (b) has as its primary assets real property and rights under a Lease.

“Subsidiary”: As to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or

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other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly, through one or more intermediaries, or both, by such Person; provided that any joint ventures in which each party to the joint venture possesses 50% of the voting stock of such entity shall be expressly excluded from this definition.

“Substitute Asset”: On any day, an Eligible Asset that meets each of the conditions for substitution set forth in Section 2.18.

“Successor Servicer”: Defined in Section 6.16(a).

“Tape”: Defined in Section 7.2(b)(ii).

“Taxes”: Any present or future taxes, levies, imposts, duties, charges, assessments or fees of any nature (including interest, penalties, and additions thereto) that are imposed by any Governmental Authority.

“Termination Date”: The earliest of (a) the date of the termination of the Facility Amount pursuant to Section 2.4, (b) the Business Day designated by the Seller to the Administrative Agent as the Termination Date at any time following two Business Days’ prior written notice thereof to the Administrative Agent, (c) November 30, 2007, (d) with respect to any Purchaser who is an Issuer the date any Liquidity Agreement shall cease to be in full force and effect, or (e) the date of the declaration of the Termination Date pursuant to Section 10.2(a) or 10.2(c) or the date of the automatic occurrence of the Termination Date pursuant to Section 10.2(b).

“Termination Event”: Defined in Section 10.1.

“Term Loan”: A Loan that is a term loan that has been fully funded and does not contain any unfunded commitment on the part of the Originator arising from an extension of credit by the Originator to an Obligor.

“Total Principal Payable”: As of any date of determination, the excess, if any, of the Aggregate Outstanding Principal Balance over the Aggregate Outstanding Asset Balance.

“Transaction”: Defined in Section 3.2.

“Transaction Documents”: The Agreement, the Sale Agreement, each Hedging Agreement, the Hedge Guaranty, the Lock-Box Agreement, the Intercreditor Agreement, the Confirmation and Undertaking Letter, the Parent Undertaking-Originator, the Parent Undertaking-Servicer, each Variable Funding Certificate, the Purchaser Fee Letter, the Backup Servicer and Collateral Custodian Fee Letter, any UCC financing statements filed pursuant to the terms of this Agreement, and any additional document the execution of which is necessary or incidental to carrying out the terms of the foregoing documents.

“Transition Expenses”: The reasonable costs (including reasonable attorneys’ fees) of the Backup Servicer incurred in connection with the transferring the servicing obligations under this Agreement and amending this Agreement to reflect such transfer in an amount not to exceed $100,000.

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“Turbo Period”: The period beginning on the date of the declaration of the Turbo Period pursuant to Section 10.2(a) or 10.2(c) or the date of the automatic occurrence of the Turbo Period pursuant to Section 10.2(b) and ending on the Collection Date.

“UCC”: The Uniform Commercial Code as from time to time in effect in the applicable jurisdiction or jurisdictions.

“Underlying Instruments”: The indenture, loan agreement, credit agreement or other agreement pursuant to which a Loan has been issued or created and each other agreement that governs the terms of or secures the obligations represented by such Loan or of which the holders of such Loan are the beneficiaries related thereto.

“Underlying Lessee”: A lessee that is obligated on a Lease with an SPE Obligor.

“United States”: The United States of America.

“Unmatured Termination Event”: Any event that, with the giving of notice or the lapse of time, or both, would become a Termination Event.

“Variable Funding Certificate” or “VFC”: Defined in Section 2.1(a).

“Voting Stock”: With respect to any Person, capital stock or membership interests (in the case of a limited liability company) issued by such Person the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such contingency.

“Warranty Asset”: Any Asset that fails to satisfy any criteria of the definition of Eligible Asset; provided that notwithstanding the foregoing, for purposes of determining what is a Warranty Asset, the criteria set forth in clauses (1)(c), (1)(d), 1(l)(i), 1(s) (but solely to the extent the criteria in such clause 1(s) relates to any express representation and warranty that an Asset is an Eligible Asset), 1(w), 1(x), (1)(y) and clauses (2)(e) and 2(f) (but solely to the extent that the criteria in such clauses 2(e) and 2(f) would not be satisfied as a result of the operation of law or an effective court order in connection with an Insolvency Event) and clause (3)(i) of the definition of Eligible Asset and clauses (viii) and (x) in the definition of Eligible Obligor shall apply only as of the applicable Cut-Off Date of such Asset.

“Warranty Event”: As to any Asset, the discovery that as of the related Cut-Off Date or Funding Date there had existed a breach of any representation or warranty relating to such Asset and the continuance of such breach through any applicable determination date or beyond any applicable cure period.

“Weighted Average Advance Rate”: For any day on which Class A Advances are outstanding, the weighted average of the Class A Advance Rates applicable to the Eligible Assets included in the Collateral on such day, weighted according to the proportion of the Aggregate Outstanding Asset Balance each type of Asset represents; provided that the Weighted Average Advance Rate shall in no event exceed 75%.

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“Workout Asset”: A Delinquent Asset or a Charged-Off Asset.

“Zero-Coupon Bond”: A bond that, at the time of determination, does not make periodic payments of interest.

     Section 1.2 Other Terms.

     All accounting terms used but not specifically defined herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the State of New York, and used but not specifically defined herein, are used herein as defined in such Article 9.

     Section 1.3 Computation of Time Periods.

     Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding.”

     Section 1.4 Interpretation.

     In each Transaction Document, unless a contrary intention appears:

     (i) the singular number includes the plural number and vice versa;

     (ii) reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by the Transaction Documents;

     (iii) reference to any gender includes each other gender;

     (iv) reference to day or days without further qualification means calendar days;

     (v) reference to any time means New York, New York time;

     (vi) reference to any agreement (including any Transaction Document), document or instrument means such agreement, document or instrument as amended, modified, waived, supplemented, restated or replaced and in effect from time to time in accordance with the terms thereof and, if applicable, the terms of the other Transaction Documents, and reference to any promissory note includes any promissory note that is an extension or renewal thereof or a substitute or replacement therefor; and

     (vii) reference to any Applicable Law means such Applicable Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder and reference to any Section or other provision of any Applicable Law means that provision of such Applicable Law from time to time in effect and constituting the substantive amendment,

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modification, codification, replacement or reenactment of such Section or other provision.

      Section 1.5 Special Provisions Relating to Alternative Currency Loans.

     For purposes of (a) complying with any requirement of this Agreement stated in Dollars and (b) calculating any ratio or other test set forth in this Agreement, the amount of any Asset that is denominated in an Alternative Currency shall be deemed to be the Dollar Equivalent of such amount of Alternative Currency determined as of the date of such calculation including, without limitation, the following (together with any defined terms in which such defined terms are used): “Aggregate Outstanding Asset Balance”, “Borrowing Base”, “Pool Concentration Criteria”, “Interest Collections”, “Outstanding Asset Balance”, “Permitted Investments”, “Portfolio Aggregate Outstanding Asset Balance”, “Portfolio Outstanding Asset Balance”, “Principal Collections”, “Scheduled Payment” and “Servicing Fee”.

ARTICLE II

PURCHASE OF THE VARIABLE FUNDING CERTIFICATES

      Section 2.1 The Variable Funding Certificates.

     (a) On the terms and conditions hereinafter set forth, Seller shall deliver to the Administrative Agent at its address set forth on the signature pages of this Agreement (for the benefit of the applicable Purchaser thereof) (i) on the Closing Date, a duly executed variable funding certificate — Class A (each such certificate, a “Class A Variable Funding Certificate” or “Class A VFC”), in substantially the form of Exhibit B-1, and (ii) on the Restatement Date, a duly executed variable funding certificate — Class B (each such certificate, a “Class B Variable Funding Certificate” or “Class B VFC”; and together with the Class A VFCs, each, a “Variable Funding Certificate” or “VFC”, and collectively, the “Variable Funding Certificates” or “VFCs”). Each Variable Funding Certificate shall evidence an undivided ownership interest (and the Seller does hereby sell, transfer, assign and convey such undivided ownership interest to the Administrative Agent for the benefit of the Purchasers) in the Collateral purchased by a Purchaser in an amount equal, at any time, to the percentage equivalent of a fraction (i) the numerator of which is the Advances outstanding under the applicable VFC on such day, and (ii) the denominator of which is the total aggregate Advances Outstanding on such day. Interest shall accrue, and each VFC shall be payable, as described herein; provided that the aggregate amount outstanding under (i) all Class A VFCs at any one time shall not exceed the Class A Facility Amount, and (ii) all Class B VFCs at any one time shall not exceed the Class B Facility Amount.

     (b) On the terms and conditions hereinafter set forth, from the Closing Date to, but excluding the Termination Date, the Seller may, at its option, request advances of funds under the Class A VFCs (each, a “Class A Advance”) and the Issuers may, in their sole discretion, fund such Class A Advance ratably in accordance with their Issuer Purchase Limits (or in such other proportion as the Issuers may mutually agree), and if the Issuers do not fund the entire amount of such Class A Advance, the Liquidity Banks shall fund, ratably in accordance with their Class A Commitments, any portion of such Class A Advance not funded by the Issuers; provided that in

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no event shall the Class A Purchasers make any Class A Advance if, after giving effect to such Class A Advance, the aggregate Class A Advances Outstanding hereunder would exceed the lesser of (x) the Class A Facility Amount, or (y) the Maximum Availability. Notwithstanding anything contained in this Section 2.1 or elsewhere in this Agreement to the contrary, (i) no Issuer shall fund any Class A Advance at any time if, after giving effect thereto, the outstanding principal amount of Class A Advances funded by such Issuer would exceed such Issuer’s Issuer Purchase Limit, and (ii) no Liquidity Bank shall be obligated to provide the Administrative Agent or the Seller with aggregate funds in connection with a Class A Advance that would exceed such Liquidity Bank’s Class A Commitment then in effect. Each Class A Advance made by the Class A Purchasers hereunder is subject to the interests of the Hedge Counterparties under Section 2.9(a)(1) and Section 2.10(a)(2) of this Agreement.

     (c) Notwithstanding the foregoing or anything in this Agreement or any other Transaction Document to the contrary, (i) nothing contained in this Agreement or any other Transaction Document shall constitute a commitment by any Issuer to fund any Advance and (ii) the Issuers shall not be liable to make any payments under this Agreement or any other Transaction Document (all liability with respect to which shall be an obligation of the Liquidity Banks or the Administrative Agent).

     (d) On the terms and conditions hereinafter set forth, from the Restatement Date to, but excluding the Termination Date, the Seller may, at its option, request advances of funds under the Class B VFCs (each, a “Class B Advance”) and the Class B Purchasers shall fund, ratably in accordance with their Class B Commitments, such Class B Advance; provided that in no event shall the Class B Purchasers make any Class B Advance if, after giving effect to such Class B Advance, the aggregate Class B Advances Outstanding hereunder would exceed the lesser of (x) the Class B Facility Amount and (y) an amount equal to the product of 5/75 multiplied by the Class A Advances Outstanding as of the proposed Funding Date, after giving effect to any Class A Advances to be funded on such date. Notwithstanding anything contained in this Section 2.1 or elsewhere in this Agreement to the contrary, no Class B Purchaser shall fund any Class B Advance at any time if, after giving effect thereto, the outstanding principal amount of Class B Advances funded by such Class B Purchaser would exceed its Class B Commitment then in effect.

     (e) [Intentionally Omitted.]

     (f) Notwithstanding anything to the contrary contained herein, this Agreement and the Class A VFCs to be issued thereunder shall constitute a single revolving debt facility with a single maturity and Seller shall not take any action under the Agreement that would cause Seller to have outstanding one or more debt obligations with two or more maturities hereunder, provided that if an Eligible Assignee other than CSE Mortgage LLC or any entity wholly-owned by CSE Mortgage LLC that is disregarded for income tax purposes becomes a Class B Purchaser, the Class B VFCs shall be treated as issued and outstanding without, and not due to any action by, Seller, including a pledge by Seller of the Class B VFCs.

For purposes of this section, debt obligations have “two or more maturities” if they have different stated maturities or if the holders of the debt obligations possess different rights concerning the acceleration of or delay in the maturities of the obligations.

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      Section 2.2 [Intentionally Omitted].

      Section 2.3 Procedures for Advances.

     (a) Each Advance from a Purchaser hereunder shall be effected by the Seller (or the Servicer on its behalf) delivering to the Administrative Agent and Class B Purchaser (with a copy to the Collateral Custodian and the Backup Servicer) a duly completed Borrowing Notice (along with a Borrowing Base Certificate) no later than 11:00 a.m. (New York City, New York time) at least two Business Days prior to the proposed Funding Date; provided that no more than four Class A Advances shall be made in any one calendar month without the Administrative Agent’s prior consent. Each Borrowing Notice (along with a Borrowing Base Certificate) shall (i) specify the desired amount of such Class A Advance (which amount must be at least equal to $250,000) and Class B Advance, (ii) specify the date of such Advances, (iii) specify the Assets to be financed on such Funding Date (including the appropriate file number and Outstanding Asset Balance for each Asset, and identifying each Loan by type and whether such Loan is a Senior Secured ABL Loan, Senior Secured Loan, B-Note Loan, Mezzanine Loan, Acquired Loan, Assigned Loan, or Participation Loan) and (iv) include a representation that all conditions precedent for an Advance described in Article III hereof have been met. Each Borrowing Notice shall be irrevocable.

     Each Borrowing Notice shall set forth, and each Advance shall be comprised of (i) a proposed Class A Advance and (ii) a proposed Class B Advance, which shall be calculated at the Class B Advance Rate based on the proposed Class A Advance.

     Each Issuer shall promptly thereafter notify the Administrative Agent whether such Issuer has determined to make the requested Class A Advance on the terms specified by the Seller, and the Issuers shall notify the Administrative Agent of the funding allocation as between them (if other than proportional to their Issuer Purchase Limits). The Administrative Agent shall promptly thereafter notify the Seller whether the Issuers have determined to make the requested purchase and, if so, whether all of the terms specified by the Seller are acceptable to the Issuers. If the Issuers have determined not to make the entire amount of a Class A Advance requested to be made, the Administrative Agent shall promptly send notice of the proposed Class A Advance to all of the Liquidity Banks concurrently specifying the date of such Class A Advance, the aggregate amount of such Class A Advance to be funded by the Liquidity Banks (which amount shall be equal to the portion of the Class A Advance not funded by the Issuers), and each such Liquidity Bank’s portion thereof (determined ratably in accordance with its respective Class A Commitment).

     (b) On the date of each Advance, the applicable Purchasers shall upon satisfaction of the applicable conditions set forth in Article III, make available to the Seller in same day funds, at such bank or other location reasonably designated by Seller in its Borrowing Notice given pursuant to this Section 2.3, an aggregate amount equal to: (X) with respect to the Class A VFC, the least of (i) the amount requested by the Seller for such Class A Advance, (ii) an amount equal to the Class A Availability on such Funding Date, and (iii) the Class A Facility Amount, and (Y) with respect to the Class B VFC, the least of (i) the amount requested by the Seller for such Class B Advance, (ii) 5/75 multiplied by Class A Advances Outstanding after giving effect to the

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proposed Class A Advance, subject to the limitation set forth in the proviso to Section 2.1(b), and (iii) the undrawn portion of the Class B Facility Amount.

     (c) Effective on the date of each Advance pursuant to this Section 2.3, the Seller hereby sells and assigns to the Administrative Agent, for the benefit of the Purchasers making such Advance, all Assets listed on the attachment to the Borrowing Notice delivered in connection with such Advance, and the Related Security and Collections with respect thereto.

     (d) On each Funding Date, the obligation of each Liquidity Bank to remit its pro rata share of each Class A Advance shall be several from that of each other Liquidity Bank and the failure of any Liquidity Bank to so make such amount available to the Seller shall not relieve any other Liquidity Bank of its obligation hereunder. No Liquidity Bank shall be responsible for the failure of any other Liquidity Bank to make funds available in connection with any Class A Advance.

     (e) Notwithstanding the foregoing, an Additional Asset may not be included in the Assets being financed unless (x) if all Pool Concentration Criteria were satisfied immediately prior to giving effect to such inclusion, all Pool Concentration Criteria continue to be satisfied after giving effect to the inclusion of such Additional Asset or (y) if any Pool Concentration Criteria was not satisfied immediately prior to giving effect to such inclusion, the degree of non-satisfaction of each Pool Concentration Criteria will be maintained or improved after giving effect to the inclusion of such Additional Asset.

     (f) Notwithstanding the foregoing, (x) no Construction Loan may become an Additional Asset, if after giving effect thereto, the Outstanding Asset Balance of all Construction Loans that are included in the Collateral (expressed as a percentage of Aggregate Outstanding Asset Balance) would exceed the Outstanding Asset Balance (as of the initial Funding Date) of all Construction Loans included in the Collateral on the initial Funding Date (expressed as a percentage of Aggregate Outstanding Asset Balance as of the initial Funding Date), and (y) no Loan due from the Obligor of an Excess Concentration Loan may become an Additional Asset.

Section 2.4 Reduction of the Facility Amount; Mandatory and Optional Repayments; Increase of Commitment.

     (a) The Seller may, upon at least 10 days’ prior written notice (such notice to be received by the Administrative Agent no later than 5:00 p.m. (New York City, New York time) on such day) to the Administrative Agent and Class B Purchaser, terminate in whole or reduce in part the portion of the Facility Amount that exceeds the sum of the Advances Outstanding, accrued Interest, Breakage Costs and Hedge Breakage Costs; provided that each partial reduction of the Facility Amount shall be in an aggregate amount equal to at least $1,000,000; and provided, further that, the reduction in the Facility Amount shall be allocated pro rata between the Class A Facility Amount and the Class B Facility Amount. Each notice of reduction or termination pursuant to this Section 2.4(a) shall be irrevocable.

     (b) The Seller may, upon two Business Days’ prior written notice (such notice to be received by the Administrative Agent and each Hedge Counterparty no later than 11:00 a.m. (New York City, New York time) on such day) to the Administrative Agent, reduce the

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Advances Outstanding by remitting, to the Administrative Agent, for payment to the applicable Purchasers, (i) cash and (ii) instructions to reduce such Advances Outstanding, related accrued Interest, Breakage Costs and Hedge Breakage Costs; provided that no such reduction shall be given effect unless the Seller has complied with the terms of any Hedging Agreement requiring that one or more Hedge Transactions be terminated in whole or in part as the result of any such reduction of the Advances Outstanding, and Seller has paid all Hedge Breakage Costs and any payments owing to the relevant Hedge Counterparty for any such termination. Any reduction of the Advances Outstanding shall be in a minimum amount of $250,000. Any such reduction will occur only if sufficient funds have been remitted to pay all such amounts in the succeeding sentence in full. Upon receipt of such amounts, the Administrative Agent shall apply such amounts first to the pro rata reduction of the Advances Outstanding by paying such amounts to the applicable Purchasers, second to the payment of related accrued Interest on the amount of the Advances Outstanding to be repaid by paying such amounts to the applicable Purchasers, and third to the payment of any Breakage Costs and Hedge Breakage Costs and any other payments owing to the applicable Hedge Counterparty in respect of the termination of any Hedge Transaction; provided, however, (x) if such amounts are received during the Amortization Period or the Turbo Period, such amounts shall be applied in the order of priority set forth in Section 2.10, and (y) if such amounts are received during the Revolving Period, such amounts shall be applied first to Class A Advances Outstanding and related Interest, Breakage Costs and Hedge Breakage Costs and then to Class B Advances Outstanding and related Interest and Breakage Costs. Any notice relating to any prepayment pursuant to this Section 2.4(b) shall be irrevocable.

     (c) If on any day (i) the Administrative Agent, as agent for the Secured Parties, does not own or have a valid and perfected first priority security interest in any of the Collateral or (ii) any Asset which has been represented by the Seller to be an Eligible Asset is later determined not to have been an Eligible Asset as of the related Cut-Off Date, upon the earlier of the Seller’s receipt of notice from the Administrative Agent or the Seller becoming aware thereof and the Seller’s failure to cure such breach within 30 days, the Seller shall be deemed to have received on such day a collection (a “Deemed Collection”) of such Asset in full and shall on such day pay to the Administrative Agent, on behalf of the Purchasers and each Hedge Counterparty, an amount equal to (x) the Outstanding Asset Balance of the Asset to be applied towards the reduction of the principal of the Class A VFCs until paid in full and then towards the reduction of the principal of the Class B VFCs until paid in full, plus (y) any Breakage Costs and Hedge Breakage Costs and any other payments owing to the applicable Hedge Counterparty in respect of the termination of any Hedge Transaction required as a result of the Deemed Collection and retransfer of the related Asset contemplated by this Section 2.4(c). In connection with any such Deemed Collection, the Administrative Agent, as agent for the Secured Parties, shall automatically and without further action, be deemed to transfer to the Seller, free and clear of any Lien created by the Administrative Agent, all of the right, title and interest of the Administrative Agent, as agent for the Secured Parties, in, to, and under the Asset with respect to which the Administrative Agent has received such Deemed Collection, but without any other representation and warranty of any kind, express or implied.

     (d) At any time prior to the Termination Date, the Seller may, upon at least two (2) Business Days’ prior written notice to the Administrative Agent, request that the aggregate Class A Commitments be increased in increments of $125,000,000 up to a maximum incremental

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amount of $250,000,000, with a commensurate increase in the Class A Commitment of each Liquidity Bank and the pro rata increase in the Class B Commitments in increments of $8,333,334 (or $8,333,333, as applicable) up to a maximum incremental amount of $16,666,667, any such increase to be subject to the written consent of the Administrative Agent, the Class B Purchaser and each Liquidity Bank.

      Section 2.5 Determination of Interest.

     To the extent any Purchaser’s Class A Interest Rate is determined by reference to the CP Rate, the Administrative Agent shall determine such Purchaser’s CP Rate and the Interest (including unpaid Interest, if any, due and payable on a prior Payment Date) to be paid by the Seller with respect to each Advance, as applicable, on each Payment Date for the related Accrual Period and shall advise the Servicer thereof on or before the third Business Day prior to such Payment Date.

      Section 2.6 Percentage Evidenced by each Variable Funding Certificate.

     The variable percentage ownership interest in the Collateral represented by each VFC shall be initially computed on its date of purchase as set forth in Section 2.1(a). Thereafter, until the Termination Date, each VFC shall be automatically recomputed (or deemed to be recomputed) on each day prior to the Termination Date as set forth in Section 2.1(a). The variable percentage ownership interest in the Collateral represented by each VFC as computed (or deemed to be recomputed) as of the close of business on the day immediately preceding the Termination Date shall remain constant at all times on and after the Termination Date. The variable percentage ownership interest in the Collateral represented by each VFC shall become zero when its Advances and Interest have been indefeasibly paid in full.

      Section 2.7 [Reserved].

      Section 2.8 Notations on Variable Funding Certificates.

     The Administrative Agent is hereby authorized to enter on a schedule attached to the VFC a notation (which may be computer generated) with respect to each Advance under a VFC made by the applicable Purchaser of: (a) the date and principal amount thereof, and (b) each repayment of principal thereof, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. The failure of the Administrative Agent to make any such notation on the schedule attached to the VFC shall not limit or otherwise affect the obligation of the Seller to repay the Advances in accordance with their respective terms as set forth herein.

Section 2.9 Settlement Procedures During the Revolving Period and the Amortization Period.

     (a) On each Payment Date during the Revolving Period and the Amortization Period, the Servicer shall direct the Collateral Custodian to pay pursuant to the Monthly Report to the following Persons, from (1) the Collection Account, to the extent of Available Funds, (2) Servicer Advances received with respect to the immediately preceding Collection Period, and

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(3) from the Reserve Account (to the extent of all funds therein), the following amounts in the following order of priority:

     (1) pro rata to each Hedge Counterparty, any amounts, (other than any Hedge Breakage Costs and any payments due in respect of the termination of any Hedging Transaction), owing to that Hedge Counterparty under its respective Hedging Agreement in respect of any Hedge Transaction(s), for the payment thereof;

     (2) to the Servicer, in an amount equal to any unreimbursed Servicer Advances, for the payment thereof;

     (3) to the Servicer, in an amount equal to any accrued and unpaid Servicing Fees to the end of the preceding Collection Period, for the payment thereof;

     (4) to the extent not paid for by the Originator, pro rata to the Backup Servicer and the Collateral Custodian, in an amount equal to any accrued and unpaid Backup Servicing Fees, Collateral Custodian Fees and Transition Expenses, for the payment thereof;

     (5) to the Administrative Agent, for the account of the applicable Class A Purchasers pro rata in accordance with the amount of Class A Advances Outstanding hereunder (or portions thereof) held by each Class A Purchaser, an amount equal to any accrued and unpaid Interest (including Interest payable on any prior Payment Date and related interest thereon), Program Fee, Commitment Fee and Breakage Costs with respect to the Class A Variable Funding Certificates, for the payment thereof;

     (6) to the Administrative Agent, the Class A Total Principal Payable for the account of the applicable Class A Purchasers pro rata in accordance with the amount of Class A Advances Outstanding hereunder (or portions thereof) held by each Class A Purchaser, for the payment thereof;

     (7) to the Reserve Account, until the amount on deposit therein equals the Required Reserve Amount;

     (8) to the Administrative Agent, for the account of the applicable Class B Purchasers pro rata in accordance with the amount of Class B Advances Outstanding hereunder (or portions thereof) held by each Class B Purchaser, in an amount equal to any accrued and unpaid Interest (including Interest payable on any prior Payment Date and related interest thereon) and Breakage Costs with respect to the Class B Variable Funding Certificates, for the payment thereof;

     (9) to the Administrative Agent, any remaining Total Principal Payable for the account of the applicable Class B Purchasers pro rata in accordance with the amount of Class B Advances Outstanding hereunder (or portions thereof) held by each Class B Purchaser, for the payment thereof;

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     (10) pro rata to each Hedge Counterparty, any Hedge Breakage Costs and payments due in termination of any Hedge Transaction, owing to that Hedge Counterparty under its respective Hedging Agreement, for the payment thereof;

     (11) to the Administrative Agent, the applicable Purchasers, the Backup Servicer, the Collateral Custodian, the Affected Parties, the Indemnified Parties or the Secured Parties, pro rata in accordance with the amount owed to such Person under this clause (11), all other amounts, including Increased Costs but other than Advances Outstanding, then due under this Agreement, for the payment thereof; and

     (12) any remaining amount shall be distributed to the Seller.

(b) Intentionally Omitted.

     Section 2.10 Settlement Procedures During the Turbo Period.

     (a) On each Payment Date during the Turbo Period or during any period in which the Class A Advances Outstanding exceeds the lesser of the Class A Facility Amount and Maximum Availability, the Servicer shall direct the Collateral Custodian to pay pursuant to the Monthly Report to the following Persons, (i) from the Collection Account, to the extent of Available Funds, (ii) from Servicer Advances received with respect to the immediately preceding Collection Period, and (iii) from the Reserve Account (to the extent of all funds therein), the following amounts in the following order of priority:

     (1) pro rata to each Hedge Counterparty, any amounts, (including any Hedge Breakage Costs and any payments due in respect of the termination of any Hedge Transaction in an amount not to exceed $250,000 in the aggregate for all Hedging Agreements), owing to that Hedge Counterparty under its respective Hedging Agreement in respect of any Hedge Transaction(s), for the payment thereof;

     (2) to the Servicer, in an amount equal to any unreimbursed Servicer Advances, for the payment thereof;

     (3) to the Servicer, in an amount equal to any accrued and unpaid Servicing Fees to the end of the preceding Collection Period, for the payment thereof;

     (4) to the extent not paid for by the Originator, pro rata to the Backup Servicer and the Collateral Custodian, in an amount equal to any accrued and unpaid Backup Servicing Fees, Collateral Custodian Fees and Transition Expenses, for the payment thereof;

     (5) to the Administrative Agent, for the account of the applicable Class A Purchasers pro rata in accordance with the amount of Class A Advances Outstanding hereunder (or portions thereof) held by each Class A Purchaser, in an amount equal to any accrued and unpaid Interest (including Interest payable on any prior Payment Date and related interest thereon), Program Fee, Commitment Fee and Breakage Costs with respect to the Class A Variable Funding Certificates, for the payment thereof;

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     (6) to the Administrative Agent, for the account of the applicable Class A Purchasers, pro rata in accordance with the amount of Class A Advances Outstanding hereunder (or portions thereof) held by each Class A Purchaser, in an amount necessary to reduce the Class A Advances Outstanding to zero, for the payment thereof;

     (7) to the Administrative Agent, for the account of the applicable Class B Purchasers pro rata in accordance with the amount of Class B Advances Outstanding hereunder (or portions thereof) held by each Class B Purchaser, in an amount equal to any accrued and unpaid Interest (including Interest payable on any prior Payment Date and related interest thereon) and Breakage Costs with respect to the Class B Variable Funding Certificates, for the payment thereof;

     (8) to the Administrative Agent, for the account of the applicable Class B Purchasers, pro rata in accordance with the amount of Class B Advances Outstanding hereunder (or portions thereof) held by each Class B Purchaser, in an amount necessary to reduce the Class B Advances Outstanding to zero, for the payment thereof;

     (9) to the Administrative Agent, for the account of the applicable Purchasers pro rata in accordance with the amount of Advances Outstanding hereunder (or portions thereof) held by each Purchaser, in an amount necessary to reduce the all other Aggregate Unpaids to zero, for the payment thereof;

     (10) pro rata to each Hedge Counterparty, any Hedge Breakage Costs and payments due in termination of any Hedge Transaction, owing to that Hedge Counterparty under its respective Hedging Agreement to the extent not reimbursed pursuant to clause (1) above, for the payment thereof;

     (11) to the Administrative Agent, the applicable Purchasers, the Backup Servicer, the Collateral Custodian, the Affected Parties, the Indemnified Parties or the Secured Parties, pro rata in accordance with the amount owed to such Person under this clause (11), all other amounts, including Increased Costs but other than Advances Outstanding, then due under this Agreement, for the payment thereof; and

     (12) any remaining amount shall be distributed to the Seller.

      Section 2.11 Collections and Allocations.

     (a) Collections. The Servicer shall promptly identify any collections received as being on account of Interest Collections, Principal Collections or other Collections and shall transfer, or cause to be transferred, all Collections received directly by it or on deposit in the form of available funds in the Lock-Box Accounts to the Collection Account by the close of business on the second Business Day after such Collections are received. In transferring Collections to the Collection Account, the Servicer shall segregate Principal Collections and transfer the same to the corresponding Principal Collections Account. The Servicer shall make such deposits or payments on the date indicated therein by wire transfer, in immediately available funds. The Servicer shall further include a statement as to the amount of Principal Collections and Interest Collections on deposit in the Collection Account on each Reporting Date in the Monthly Report delivered pursuant to Section 6.10(b).

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     (b) Initial Deposits. On the initial Funding Date and on each Addition Date thereafter, the Servicer will deposit (in immediately available funds) into the Collection Account all Collections received after the applicable Cut-Off Date and through and including the initial Funding Date or Addition Date, as the case may be, in respect of Eligible Assets being transferred to and included as part of the Collateral on such date.

     (c) Excluded Amounts. With the prior written consent of the Administrative Agent, which consent shall not be unreasonably withheld (a copy of which will be provided by the Servicer to the Backup Servicer), the Servicer may withdraw from the Collection Account any deposits thereto constituting Excluded Amounts if the Servicer has, prior to such withdrawal and consent, delivered to the Administrative Agent a report setting forth the calculation of such Excluded Amounts in a format satisfactory to the Administrative Agent in its sole discretion.

     (d) Investment of Funds. Until the occurrence of a Termination Event, to the extent there are uninvested amounts deposited in the Collection Account or the Reserve Account, all amounts shall be invested in Permitted Investments selected by the Servicer that mature no later than the Business Day immediately preceding the next Payment Date; from and after the occurrence of a Termination Event, to the extent there are uninvested amounts in the Collection Account or the Reserve Account (net of losses and investment expenses), all amounts may be invested in Permitted Investments selected by the Administrative Agent that mature no later than the Business Day immediately preceding the next Payment Date. All earnings (net of losses and investment expenses) thereon shall be retained or deposited into the Collection Account or the Reserve Account, as the case may be, and shall be applied pursuant to the provisions of Section 2.9 and Section 2.10.

      Section 2.12 Payments, Computations, Etc.

     (a) Unless otherwise expressly provided herein, all amounts to be paid or deposited by the Seller or the Servicer hereunder shall be paid or deposited in accordance with the terms hereof no later than 11:00 a.m. (New York City, New York time) on the day when due in lawful money of the United States in immediately available funds to the Agent’s Account and if not received before such time shall be deemed received on the next Business Day. The Seller shall, to the extent permitted by law, pay to the Secured Parties interest on all amounts not paid or deposited when due hereunder at 2.0% per annum above the Base Rate, payable on demand; provided that such interest rate shall not at any time exceed the maximum rate permitted by Applicable Law. Such interest shall be for the account of, and distributed to, each applicable Purchaser. All computations of interest and all computations of Interest and other fees hereunder shall be made on the basis of a year consisting of 360 days for the actual number of days (including the first but excluding the last day) elapsed.

     (b) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of Interest or any fee payable hereunder, as the case may be. For avoidance of doubt, to the extent that Available Funds are insufficient on any Payment Date to satisfy the full amount of any Increased Costs pursuant to Section 2.9(a)(11) or Section 2.10(a)(9), such unpaid amounts shall remain due and owing and shall accrue Interest until repaid in full.

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     (c) If any Advance requested by the Seller and approved by the Purchasers and the Administrative Agent, pursuant to Section 2.3 is not, for any reason made or effectuated, as the case may be, on the date specified therefor, the Seller shall indemnify the applicable Purchasers against any reasonable loss, cost or expense incurred by the applicable Purchasers including, without limitation, any loss (including loss of anticipated profits, net of anticipated profits in the reemployment of such funds in the manner determined by each applicable Purchaser), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the applicable Purchaser to fund or maintain such Advance.

     Section 2.13 Optional and Mandatory Repurchase.

     (a) At any time following the Termination Date when the Borrowing Base is less than 15% percent of the Borrowing Base as of the Termination Date, the Seller may notify the Administrative Agent in writing of its intention to purchase all remaining Collateral; provided that all Hedge Transactions have been terminated in accordance with their terms. On the Payment Date next succeeding any such notice, the Seller shall purchase all such Collateral for a price equal to the Aggregate Unpaids and the proceeds of such purchase will be deposited into the Collection Account and paid in accordance with Section 2.10.

     (b) On the first Payment Date following the Termination Date when the Borrowing Base is less than 10% of the Borrowing Base as of the Termination Date, the Seller shall notify the Administrative Agent in writing of its intention to purchase all remaining Collateral. On the Payment Date next succeeding any such notice, the Seller shall (i) terminate all Hedge Transactions in accordance with their terms and (ii) purchase all remaining Collateral for a price equal to the Aggregate Unpaids and the proceeds of such purchase will be deposited into the Collection Account and paid in accordance with Section 2.10.

     Section 2.14 Fees.

     (a) The Servicer on behalf of the Seller shall pay in accordance with Section 2.9(a)(5) and Section 2.10(a)(5), as applicable, to the Administrative Agent from the Collection Account to the extent funds are available on each Payment Date, monthly in arrears, the applicable Program Fee and the applicable Commitment Fee agreed to between the Seller and the Administrative Agent in the Purchaser Fee Letter.

     (b) The Servicer shall be entitled to receive a fee (the “Servicing Fee”), monthly in arrears in accordance with Section 2.9(a)(3) and Section 2.10(a)(3), as applicable, which fee shall be equal to the sum of (a) the product of (i) the Servicing Fee Rate applicable to Eligible Assets which are not Workout Assets, (ii) the Aggregate Outstanding Asset Balance (excluding Workout Assets), as of the first day of the immediately preceding Collection Period and (iii) the actual number of days in such Collection Period divided by 360, and (b) the product of (i) the Servicing Fee Rate applicable to Workout Assets, (ii) the sum of the Outstanding Asset Balances of all Workout Assets, as of the first day of the immediately preceding Collection Period and (iii) the actual number of days in such Collection Period divided by 360.

     (c) The Backup Servicer shall be entitled to receive the Backup Servicing Fee in accordance with Section 2.9(a)(4) and Section 2.10(a)(4), as applicable.

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     (d) The Collateral Custodian shall be entitled to receive the Collateral Custodian Fee in accordance with Section 2.9(a)(4) and Section 2.10(a)(4), as applicable.

     (e) The Seller shall pay to Kaye Scholer LLP as counsel to the Administrative Agent, on the initial Funding Date, its reasonable estimated fees and out-of-pocket expenses in immediately available funds and shall pay all additional reasonable fees and out-of-pocket expenses of Kaye Scholer LLP within 30 Business Days after receiving an invoice for such amounts.

     Section 2.15 Increased Costs; Capital Adequacy; Illegality.

     (a) If either (i) the introduction of or any change (including, without limitation, any change by way of imposition or increase of reserve requirements) in or in the interpretation of any law or regulation or (ii) the compliance by an Affected Party with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), shall (a) subject an Affected Party to any Tax (except for Taxes on the overall net income of such Affected Party), duty or other charge with respect to any ownership interest in the Collateral, or any right to make Advances hereunder, or on any payment made hereunder, (b) impose, modify or deem applicable any reserve requirement (including, without limitation, any reserve requirement imposed by the Board of Governors of the Federal Reserve System, but excluding any reserve requirement, if any, included in the determination of Interest), special deposit or similar requirement against assets of, deposits with or for the amount of, or credit extended by, any Affected Party or (c) impose any other condition affecting the ownership interest in the Collateral conveyed to the Purchasers hereunder or the Purchasers’ rights or obligations hereunder, the result of which is to increase the cost to any Affected Party or to reduce the amount of any sum received or receivable by an Affected Party under this Agreement, then within ten days after demand by such Affected Party (which demand shall be accompanied by a statement setting forth the basis for such demand), the Servicer shall pay (and to the extent the Servicer does not make such payment the Seller shall pay) directly to such Affected Party such additional amount or amounts as will compensate such Affected Party for such additional or increased cost incurred or such reduction suffered.

     (b) If either (i) the introduction of or any change in or in the interpretation of any law, guideline, rule, regulation, directive or request or (ii) compliance by any Affected Party with any law, guideline, rule, regulation, directive or request from any central bank or other governmental authority or agency (whether or not having the force of law), including, without limitation, compliance by an Affected Party with any request or directive regarding capital adequacy, has or would have the effect of reducing the rate of return on the capital of any Affected Party as a consequence of its obligations hereunder or arising in connection herewith to a level below that which any such Affected Party could have achieved but for such introduction, change or compliance (taking into consideration the policies of such Affected Party with respect to capital adequacy) by an amount deemed by such Affected Party to be material, then from time to time, within ten days after demand by such Affected Party (which demand shall be accompanied by a statement setting forth the basis for such demand), the Servicer shall pay (and to the extent the Servicer does not make such payment the Seller shall pay) directly to such Affected Party such additional amount or amounts as will compensate such Affected Party for such reduction. For the avoidance of doubt, if the issuance of Interpretation No. 46 by the Financial Accounting

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Standards Board or any other change in accounting standards or the issuance of any other pronouncement, release or interpretation, causes or requires the consolidation of all or a portion of the assets and liabilities of the Originator or Seller with the assets and liabilities of the Administrative Agent, any Purchaser or any Liquidity Bank, such event shall constitute a circumstance on which such Affected Party may base a claim for reimbursement under this Section 2.15.

     (c) If as a result of any event or circumstance similar to those described in clause (a) or (b) of this Section 2.15, any Affected Party is required to compensate a bank or other financial institution providing liquidity support, credit enhancement or other similar support to such Affected Party in connection with this Agreement or the funding or maintenance of Advances hereunder, then within ten days after demand by such Affected Party, the Servicer shall pay (or to the extent the Servicer does not make such payment the Seller shall pay) to such Affected Party such additional amount or amounts as may be necessary to reimburse such Affected Party for any amounts payable or paid by it.

     (d) In determining any amount provided for in this Section 2.15, the Affected Party may use any reasonable averaging and attribution methods. Any Affected Party making a claim under this Section 2.15 shall submit to the Servicer a written description as to such additional or increased cost or reduction and the calculation thereof, which written description shall be conclusive absent demonstrable error.

     (e) If any Purchaser shall notify the Administrative Agent that a Eurodollar Disruption Event as described in clause (a) of the definition of “Eurodollar Disruption Event” has occurred, the Administrative Agent shall in turn so notify the Seller, whereupon all Advances Outstanding of the affected Purchaser in respect of which Interest accrues at the Adjusted Eurodollar Rate shall immediately be converted into Advances Outstanding in respect of which Interest accrues at the Base Rate.

     Section 2.16 Taxes.

     (a) All payments made by an Obligor in respect of an Asset and all payments made by the Seller or the Servicer under this Agreement will be made free and clear of and without deduction or withholding for or on account of any Taxes. If any Taxes are required to be withheld from any amounts payable to the Administrative Agent, any Affected Party or any Secured Party, then the amount payable to such Person will be increased (such increase, the “Additional Amount”) such that every net payment made under this Agreement after withholding for or on account of any Taxes (including, without limitation, any Taxes on such increase) is not less than the amount that would have been paid had no such deduction or withholding been deducted or withheld. The foregoing obligation to pay Additional Amounts, however, will not apply with respect to net income or franchise taxes imposed on the Purchasers, any Affected Party or the Administrative Agent, respectively, with respect to payments required to be made by the Seller or Servicer under this Agreement, by a taxing jurisdiction in which the Purchasers, any Affected Party or the Administrative Agent, are organized, conducts business or is paying taxes (as the case may be).

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     (b) The Servicer will indemnify (and to the extent the indemnification provided by the Servicer is insufficient the Seller will indemnify) each Affected Party for the full amount of Taxes payable by such Person in respect of Additional Amounts and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. All payments in respect of this indemnification shall be made within ten days from the date a written invoice therefor is delivered to the Seller.

     (c) Within 30 days after the date of any payment by the Seller and the Servicer of any Taxes, the Seller and the Servicer will furnish to the Administrative Agent at its address set forth under its name on the signature pages hereof, appropriate evidence of payment thereof.

     (d) If a Purchaser is not created or organized under the laws of the United States or a political subdivision thereof, such Purchaser shall deliver to the Seller, with a copy to the Administrative Agent, (i) within 15 days after the date hereof, two (or such other number as may from time to time be prescribed by Applicable Laws) duly completed copies of IRS Form W-8BEN or Form W-8ECI (or any successor forms or other certificates or statements that may be required from time to time by the relevant United States taxing authorities or Applicable Laws), as appropriate, to permit the Seller to make payments hereunder for the account of such Purchaser without deduction or withholding of United States federal income or similar Taxes and (ii) upon the obsolescence of or after the occurrence of any event requiring a change in, any form or certificate previously delivered pursuant to this Section 2.16(d), copies (in such numbers as may from time to time be prescribed by Applicable Laws or regulations) of such additional, amended or successor forms, certificates or statements as may be required under Applicable Laws or regulations to permit the Seller and the Servicer to make payments hereunder for the account of such Purchaser without deduction or withholding of United States federal income or similar Taxes.

     (e) If, in connection with an agreement or other document providing liquidity support, credit enhancement or other similar support to the Purchasers in connection with this Agreement or the funding or maintenance of Advances hereunder, the Purchasers are required to compensate a bank or other financial institution in respect of Taxes under circumstances similar to those described in this Section 2.16, then, within ten days after demand by the Purchasers, the Servicer shall pay (or to the extent the Servicer does not make such payment the Seller shall pay) to the Purchasers such additional amount or amounts as may be necessary to reimburse the Purchasers for any amounts paid by them.

     (f) Without prejudice to the survival of any other agreement of the Seller and the Servicer hereunder, the agreements and obligations of the Seller and the Servicer contained in this Section 2.16 shall survive the termination of this Agreement.

     Section 2.17 Assignment of the Sale Agreement.

     The Seller hereby assigns to the Administrative Agent, for the ratable benefit of the Secured Parties hereunder, all of the Seller’s right, title and interest in and to, but none of its obligations under, the Sale Agreement and any UCC financing statements filed under or in connection therewith. In furtherance and not in limitation of the foregoing, the Seller hereby assigns to the Administrative Agent for the benefit of the Secured Parties its right to

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indemnification under Article VIII of the Sale Agreement. The Seller confirms that the Administrative Agent on behalf of the Secured Parties shall have the sole right to enforce the Seller’s rights and remedies under the Sale Agreement and any UCC financing statements filed under or in connection therewith for the benefit of the Secured Parties.

     Section 2.18 Substitution of Assets.

     On any day prior to the occurrence of a Termination Event (and after the occurrence of a Termination Event at the discretion of the Administrative Agent), the Seller may, subject to the conditions set forth in this Section 2.18 and subject to the other restrictions contained herein, replace any Asset with one or more Eligible Assets (each, a “Substitute Asset”); provided that no such replacement shall occur unless each of the following conditions is satisfied as of the date of such replacement and substitution:

     (a) the Seller has recommended to the Administrative Agent (with a copy to the Collateral Custodian) in writing that the Asset to be replaced should be replaced (each a “Replaced Asset”);

     (b) each Substitute Asset is an Eligible Asset on the date of substitution;

     (c) (x) if all Pool Concentration Criteria were satisfied immediately prior to giving effect to the inclusion of the Substitute Asset, all Pool Concentration Criteria continue to be satisfied after giving effect to such inclusion or (y) if any Pool Concentration Criteria was not satisfied immediately prior to giving effect to such inclusion, the degree of non-satisfaction of each Pool Concentration Criteria will be maintained or improved after giving effect to the inclusion of such Substitute Asset;

     (d) for purposes only of substitutions pursuant to Section 4.6 undertaken because an Asset has become a Warranty Asset, the aggregate Outstanding Asset Balance of such Substitute Assets shall be equal to or greater than the aggregate Outstanding Asset Balances of the Replaced Assets;

     (e) for purposes only of substitutions pursuant to Section 4.6 undertaken because an Asset has become a Warranty Asset, such Substitute Assets, at the time of substitution by the Seller, shall have no greater weighted average life than the Replaced Asset;

     (f) all representations and warranties of the Seller contained in Section 4.1 and Section 4.2 shall be true and correct as of the date of substitution of any such Substitute Asset;

     (g) the substitution of any Substitute Asset does not cause a Termination Event or Unmatured Termination Event to occur;

     (h) the sum of the Outstanding Asset Balance of all Assets that are Substitute Assets (other than in the case of substitutions pursuant to Section 4.6 undertaken because an Asset has become a Warranty Asset) does not exceed 20% of the Facility Amount;

     (i) the sum of the Outstanding Asset Balance of all Substitute Assets (other than in the case of substitutions pursuant to Section 4.6 undertaken because an Asset has become a

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Warranty Asset) substituted for Delinquent Assets and Charged-Off Assets shall not exceed 10% of the Facility Amount; and

     (j) the Seller shall deliver to the Administrative Agent on the date of such substitution a certificate of a Responsible Officer certifying that each of the foregoing is true and correct as of such date.

     In addition, the Seller shall in connection with such substitution deliver to the Collateral Custodian the related Required Asset Documents. In connection with any such substitution, the Administrative Agent, as agent for the Secured Parties, shall, automatically and without further action, be deemed to transfer to the Seller, free and clear of any Lien created pursuant to this Agreement, all of the right, title and interest of the Administrative Agent, as agent for the Secured Parties, in, to and under such Replaced Asset, but without any representation and warranty of any kind, express or implied.

     Section 2.19 Optional Sales.

     (a) On any Optional Sale Date, the Seller shall have the right to prepay all or a portion of the Advances Outstanding in connection with the sale and assignment to the Seller by the Administrative Agent, on behalf of the Secured Parties, of the Collateral (each, an “Optional Sale”), subject to the following terms and conditions:

     (i) The Seller shall have given the Administrative Agent at least ten Business Days’ prior written notice of its intent to effect an Optional Sale, unless such notice is waived or reduced by the Administrative Agent;

     (ii) Intentionally Omitted;

     (iii) Unless an Optional Sale is to be effected on a Payment Date (in which case the relevant calculations with respect to such Optional Sale shall be reflected on the applicable Monthly Report), the Servicer shall deliver to the Administrative Agent a certificate and evidence to the reasonable satisfaction of the Administrative Agent (which evidence may consist solely of a certificate from the Servicer) that the Seller shall have sufficient funds on the related Optional Sale Date to effect the contemplated Optional Sale in accordance with this Agreement. In effecting an Optional Sale, the Seller may use the Proceeds of sales of the Collateral;

     (iv) After giving effect to the Optional Sale and the assignment to the Seller of the Collateral on any Optional Sale Date, (a) the remaining Class A Advances Outstanding shall not exceed the lesser of the Class A Facility Amount and the Maximum Availability, (b) [intentionally omitted], (c) the representations and warranties contained in Section 4.1 hereof shall continue to be correct in all material respects, except to the extent relating to an earlier date, (d) the eligibility of any Asset remaining as part of the Collateral after the Optional Sale will be redetermined as of the Optional Sale Date, (e) the Pool Concentration Criteria will be redetermined as of the Optional Sale Date, and (f) neither an Unmatured Termination Event nor a Termination Event shall have resulted;

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     (v) On the related Optional Sale Date, the Administrative Agent, on behalf of the Purchasers and Hedge Counterparties, shall have received, as applicable, in immediately available funds, an amount equal to the sum of (a) (x) the portion of the Class A Advances Outstanding to be prepaid , plus (y) an amount equal to all unpaid Interest to the extent reasonably determined by the Administrative Agent to be attributable to that portion of the Class A Advances Outstanding, to be paid in connection with the Optional Sale, plus (b) following the Termination Date and the date on which the Aggregate Unpaids with respect to the Class A VFC have been reduced to zero and indefeasibly paid in full, (x) the portion of the Class B Advances Outstanding to be prepaid, plus (y) an amount equal to all unpaid Interest to the extent reasonably determined by the Administrative Agent to be attributable to that portion of the Class B Advances Outstanding, to be paid in connection with the Optional Sale plus (c) an aggregate amount equal to the sum of all other amounts due and owing to the Administrative Agent, the Collateral Custodian, the Backup Servicer, the Purchasers, the Affected Parties and the Hedge Counterparties, as applicable, under this Agreement and the other Transaction Documents, to the extent accrued to such date and to accrue thereafter (including, without limitation, Breakage Costs, Hedge Breakage Costs and any other payments owing to the applicable Hedge Counterparty in respect of the termination of any Hedge Transaction); provided that the Administrative Agent shall have the right to determine whether the amount paid (or proposed to be paid) by the Seller on the Optional Sale Date is sufficient to satisfy the requirements of clauses (iii), (iv) and (v) and is sufficient to reduce the Advances Outstanding, to the extent requested by the Seller in connection with the Optional Sale; and

     (vi) On or prior to each Optional Sale Date, the Seller shall have delivered to the Administrative Agent a list specifying all Assets to be sold and assigned pursuant to such Optional Sale.

     (b) In connection with any Optional Sale, following receipt by the Administrative Agent of the amounts referred to in clause (v) above, there shall be sold and assigned to the Seller without recourse, representation or warranty all of the right, title and interest of the Administrative Agent, the Purchasers and the Secured Parties in, to and under the portion of the Collateral so retransferred and such portion of the Collateral so retransferred shall be released from the Lien of this Agreement (subject to the requirements of clause (iv) above).

     (c) The Seller hereby agrees to pay the reasonable legal fees and expenses of the Administrative Agent and the Secured Parties in connection with any Optional Sale (including, but not limited to, expenses incurred in connection with the release of the Lien of the Administrative Agent, the Secured Parties and any other party having an interest in the Collateral in connection with such Optional Sale).

     (d) In connection with any Optional Sale, on the related Optional Sale Date, the Administrative Agent, on behalf of the Secured Parties, shall, at the expense of the Seller (i) execute such instruments of release with respect to the portion of the Collateral to be retransferred to the Seller, in recordable form if necessary, in favor of the Seller as the Seller may reasonably request, (ii) deliver any portion of the Collateral to be retransferred to the Seller in its possession to the Seller and (iii) otherwise take such actions, and cause or permit the

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Collateral Custodian to take such actions, as are necessary and appropriate to release the Lien of the Administrative Agent and the Secured Parties on the portion of the Collateral to be retransferred to the Seller and release and deliver to the Seller such portion of the Collateral to be retransferred to the Seller.

     Section 2.20 Discretionary Sales.

     Prior to the occurrence of an Unmatured Termination Event or a Termination Event, on any Discretionary Sale Date, the Seller shall have the right to prepay all or a portion of the Advances Outstanding, in connection with the transfer and assignment to the Seller by the Administrative Agent, on behalf of the Secured Parties, of the Collateral (each, a “Discretionary Sale”), subject to the following terms and conditions:

     (a) At least one Business Day prior to each Discretionary Sale Date, the Servicer, on behalf of the Seller, shall have given the Administrative Agent and each Hedge Counterparty written notice of its intent to effect a Discretionary Sale (each such notice a “Discretionary Sale Notice”), specifying the Discretionary Sale Date and including a list of all Assets to be sold and assigned pursuant to such Discretionary Sale, and a revised Borrowing Base Certificate;

     (b) Any Discretionary Sale shall be made by the Servicer, on behalf of the Seller, to an unaffiliated third party purchaser in a transaction (i) reflecting arms-length market terms and (ii) in which the Seller makes no representations, warranties or covenants for the benefit of any other party to the Discretionary Sale and provides no indemnification for the benefit of any other party to the Discretionary Sale;

     (c) After giving effect to the Discretionary Sale and the assignment to the Seller of the Collateral on any Discretionary Sale Date, (a) the Availability is greater than or equal to zero, (b) the representations and warranties contained in Section 4.1 hereof shall continue to be correct in all material respects, except to the extent relating to an earlier date and (c) neither an Unmatured Termination Event nor a Termination Event shall have resulted;

     (d) On the related Discretionary Sale Date, the Administrative Agent, on behalf of the Purchasers, the Hedge Counterparties, the Collateral Custodian and the Backup Servicer, as applicable, shall have received, as applicable, in immediately available funds, an amount equal to the sum of (a) an amount sufficient to reduce the Advances Outstanding such that, after giving effect to the transfer of the Assets that are the subject of such Discretionary Sale, the Availability will be equal to or greater than $0 plus (b) an amount equal to all unpaid Interest to the extent reasonably determined by the Administrative Agent to be attributable to that portion of the Advances Outstanding to be repaid in connection with the Discretionary Sale plus (c) an aggregate amount equal to the sum of all other Aggregate Unpaids due and owing to the Administrative Agent, the Purchasers, the Affected Parties, the Indemnified Parties and the Hedge Counterparties, as applicable, under this Agreement and the other Transaction Documents, to the extent accrued to such date; provided that the Administrative Agent shall have the right to determine whether the amount paid (or proposed to be paid) by the Seller on the Discretionary Sale Date is sufficient to satisfy the requirements of clauses (a) through (c) and is sufficient to reduce the Advances Outstanding to the extent requested by the Seller in connection with the Discretionary Sale;

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     (e) The Outstanding Asset Balance of the Asset(s) which are the subject of the proposed Discretionary Sale, together with the Outstanding Asset Balance of the Asset(s) sold in all other Discretionary Sales made in the preceding 12 month period, shall not exceed 20% of the Facility Amount;

     (f) On the related Discretionary Sale Date, the proceeds from such Discretionary Sale have been sent directly into the Collection Account for distribution in accordance with the provisions of Section 2.9 or 2.10, as applicable;

     (g) The Seller hereby agrees to pay the reasonable legal fees and expenses of the Administrative Agent and the Secured Parties in connection with any Discretionary Sale (including, but not limited to, expenses incurred in connection with the release of the Lien of the Administrative Agent, the Secured Parties and any other party having an interest in the Collateral in connection with such Discretionary Sale); and

     (h) In connection with any Discretionary Sale, on the related Discretionary Sale Date, the Administrative Agent, on behalf of the Secured Parties, shall, at the expense of the Seller (i) execute such instruments of release with respect to the portion of the Collateral to be retransferred to the Seller, in recordable form if necessary, in favor of the Seller as the Seller may reasonably request, (ii) deliver any portion of the Collateral to be retransferred to the Seller in its possession to the Seller and (iii) otherwise take such actions, and cause or permit the Collateral Custodian to take such actions, as are necessary and appropriate to release the Lien of the Administrative Agent and the Secured Parties on the portion of the Collateral to be retransferred to the Seller and release and deliver to the Seller such portion of the Collateral to be retransferred to the Seller.

ARTICLE III

CONDITIONS TO ADVANCES

     Section 3.1 Conditions to Closing and Initial Advance.

     The Purchasers shall not be obligated to make any Advance hereunder on the occasion of the Initial Advance, nor shall any Purchaser, Administrative Agent, the Backup Servicer and the Collateral Custodian be obligated to take, fulfill or perform any other action hereunder, until the following conditions have been satisfied, in the sole discretion of, or waived in writing by, the Administrative Agent:

     (a) Each Transaction Document (excluding any Hedge Agreement) shall have been duly executed by, and delivered to, the parties thereto, and the Administrative Agent shall have received such other documents, instruments, agreements and legal opinions as the Administrative Agent shall reasonably request in connection with the transactions contemplated by this Agreement, including, without limitation, all those specified in the Schedule of Documents attached hereto as Schedule I, each in form and substance satisfactory to the Administrative Agent;

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     (b) The Administrative Agent shall have received (i) satisfactory evidence that the Seller and the Servicer have obtained all required consents and approvals of all Persons, including all requisite Governmental Authorities, to the execution, delivery and performance of this Agreement and the other Transaction Documents to which each is a party and the consummation of the transactions contemplated hereby or thereby or (ii) an Officer’s Certificate from each of the Seller and the Servicer in form and substance reasonably satisfactory to the Administrative Agent affirming that no such consents or approvals are required; it being understood that the acceptance of such evidence or officer’s certificate shall in no way limit the recourse of the Administrative Agent or any Secured Party against the Originator or the Seller for a breach of the Originator’s and the Seller’s representation or warranty that all such consents and approvals have, in fact, been obtained;

     (c) The Seller, the Servicer and the Originator shall each be in compliance in all material respects with all Applicable Laws and shall have delivered to the Administrative Agent as to this and other closing matters certification in the form of Exhibits F-1 and F-2;

     (d) The Seller and the Servicer shall have delivered to the Administrative Agent duly executed Powers of Attorney in the form of Exhibits G-1 and G-2; and

     (e) The Seller and the Servicer shall each have delivered to the Administrative Agent a certificate as to Solvency in the form of Exhibits E-1 and E-2.

     Section 3.2 Conditions Precedent to All Advances.

     Each Advance to the Seller by the applicable Purchaser (each, a “Transaction”) shall be subject to the further conditions precedent that:

     (a) (i) With respect to any Advance (including the Initial Advance), the Servicer shall have delivered to the Administrative Agent (with a copy to the Collateral Custodian and the Backup Servicer), in the case of an Advance, no later than 11:00 a.m. (New York City, New York time), two Business Days prior to the related Funding Date in a form and substance satisfactory to the Administrative Agent, (1) a Borrowing Notice (Exhibit A-1), Borrowing Base Certificate (Exhibit A-3), Asset List and Monthly Report, if applicable, and (2) a Certificate of Assignment (Exhibit A to the Sale Agreement including Schedule I, thereto) and containing such additional information as may be reasonably requested by the Administrative Agent, and (ii) with respect to any reduction in Advances Outstanding pursuant to Section 2.4(b), the Servicer shall have delivered to the Administrative Agent (with a copy to the Backup Servicer) at least two Business Days prior to any reduction of Advances Outstanding a Borrowing Notice (Exhibit A-2) and a Borrowing Base Certificate (Exhibit A-3) executed by the Servicer and the Seller;

     (b) On the date of such Transaction the following statements shall be true, and the Seller shall be deemed to have certified that:

     (i) The representations and warranties contained in Section 4.1, Section 4.2 and Section 4.3 are true and correct on and as of such day as though made on and as of such day and shall be deemed to have been made on such day;

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     (ii) No event has occurred and is continuing, or would result from such Transaction, that constitutes a Termination Event or Unmatured Termination Event;

     (iii) On and as of such day, after giving effect to such Transaction, (X) the Class A Advances Outstanding shall not exceed the lesser of (x) the Class A Facility Amount and (y) the Maximum Availability, and (Y) the Class B Advances Outstanding hereunder shall not exceed the Class B Facility Amount;

     (iv) On and as of such day, the Seller and the Servicer each has performed all of the covenants and agreements contained in this Agreement to be performed by such person at or prior to such day; and

     (v) No law or regulation shall prohibit, and no order, judgment or decree of any federal, state or local court or governmental body, agency or instrumentality shall prohibit or enjoin, the making of such Advance or incremental Advance by the Purchasers in accordance with the provisions hereof, the reduction of Advances Outstanding, or any other transaction contemplated herein;

     (c) The Seller shall have delivered to the Collateral Custodian (with a copy to the Backup Servicer and the Administrative Agent) in the case of an Advance, no later than 2:00 p.m. (New York City, New York time) one Business Day prior to any Funding Date a faxed copy of the duly executed original promissory notes, master purchase agreement and purchase statements or a copy of the Loan Register, as applicable, for the Loans, and, if any Assets are closed in escrow, a certificate (in the form of Exhibit L) from the counsel to the Originator or the Obligor of such Assets certifying the possession of the Required Asset Documents, provided that notwithstanding the foregoing, the Required Asset Documents (including any UCCs included in the Required Asset Documents) shall be in the possession of the Collateral Custodian within two Business Days of any related Funding Date as to any Additional Assets;

     (d) If such Transaction occurs on or after the Restatement Date, the Administrative Agent shall have received evidence satisfactory to it that the Class B Purchaser has funded the Class B Advance to be made on such Funding Date;

     (e) Intentionally Omitted;

     (f) Intentionally Omitted;

     (g) The Termination Date shall not have occurred;

     (h) On the date of such Transaction, the Administrative Agent shall have received such other approvals, opinions or documents as the Administrative Agent may reasonably require;

     (i) Intentionally Omitted;

     (j) The Administrative Agent shall have received from the Seller any required Hedging Agreement and related hedging confirms required in connection with the Transaction;

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     (k) The Seller and Servicer shall have delivered to the Administrative Agent all reports required to be delivered as of the date of such Transaction including, without limitation, all deliveries required by Section 2.3;

     (l) With respect to any Acquired Loan acquired from an Affiliate of the Originator, the Administrative Agent has received a satisfactory legal opinion concerning the acquisition of such Loan by the Originator in a true sale transaction;

     (m) The Seller shall have paid all fees required to be paid, including all fees required hereunder and under the Purchaser Fee Letter and shall have reimbursed the Purchasers and the Administrative Agent for all fees, costs and expenses of closing the transactions contemplated hereunder and under the other Transaction Documents, including the reasonable attorney fees and any other legal and document preparation costs incurred by the Purchasers and the Administrative Agent; and

     (n) The Seller shall have delivered to the Administrative Agent an Officer’s Certificate (which may be part of the Borrowing Notice) in form and substance reasonably satisfactory to the Administrative Agent certifying that each of the foregoing conditions precedent has been satisfied.

     The failure of the Seller to satisfy any of the foregoing conditions precedent in respect of any Advance shall give rise to a right of the Administrative Agent, which right may be exercised at any time by the Administrative Agent, to refuse to fund the requested Advance or Advances or if any Advances were funded during any such time that any of the foregoing conditions precedent were not satisfied, the Administrative Agent may direct the Seller to pay to the Administrative Agent for the benefit of the applicable Purchasers an amount equal to all such Advances.

     Section 3.3 Conditions to Closing and Initial Advance under the Class B VFC.

     In addition to the conditions set forth in Section 3.2, the Class B Purchasers shall not be obligated to make any Class B Advance hereunder on the occasion of the Initial Advance under the Class B VFC, nor shall any Purchaser, Administrative Agent, the Backup Servicer and the Collateral Custodian be obligated to take, fulfill or perform any other action hereunder with respect to the Class B VFC, until the following conditions have been satisfied, in the sole discretion of, or waived in writing by, the Administrative Agent:

     (a) Each of the Class B Variable Funding Certificate and all related Transaction Documents shall have been duly executed by, and delivered to, the parties thereto, and the Administrative Agent shall have received such other documents, instruments, agreements and legal opinions as the Administrative Agent shall reasonably request in connection with the transactions contemplated by this Agreement, including, without limitation, all those specified in the Schedule of Documents attached hereto as Schedule I-A, each in form and substance satisfactory to the Administrative Agent and the Class B Purchaser;

     (b) The Administrative Agent shall have received (i) satisfactory evidence that the Seller and the Servicer have obtained all required consents and approvals of all Persons, including all requisite Governmental Authorities, to the execution, delivery and performance of

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this Agreement and the other Transaction Documents to which each is a party and the consummation of the transactions contemplated hereby or thereby or (ii) an Officer’s Certificate from each of the Seller and the Servicer in form and substance reasonably satisfactory to the Administrative Agent affirming that no such consents or approvals are required; it being understood that the acceptance of such evidence or officer’s certificate shall in no way limit the recourse of the Administrative Agent or any Secured Party against the Originator or the Seller for a breach of the Originator’s and the Seller’s representation or warranty that all such consents and approvals have, in fact, been obtained; and

     (c) The Seller, the Servicer and the Originator shall each be in compliance in all material respects with all Applicable Laws and shall have delivered to the Administrative Agent as to this and other closing matters certification in the form of Exhibits F-1 and F-2;

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

     Section 4.1 Representations and Warranties of the Seller.

     The Seller represents and warrants as follows:

     (a) Organization and Good Standing. The Seller has been duly organized, and is validly existing as a limited liability company in good standing, under the laws of the State of Delaware, with all requisite company power and authority to own or lease its properties and conduct its business as such business is presently conducted, and had at all relevant times, and now has all necessary power, authority and legal right to acquire, own and sell the Collateral.

     (b) Due Qualification. The Seller is duly qualified to do business and is in good standing as a limited liability company, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business requires such qualification, licenses or approvals.

     (c) Power and Authority; Due Authorization; Execution and Delivery. The Seller (i) has all necessary power, authority and legal right to (a) execute and deliver this Agreement and the other Transaction Documents to which it is a party, (b) carry out the terms of the Transaction Documents to which it is a party, (c) sell and assign an ownership interest in the Collateral, and (d) receive Advances and sell the Collateral on the terms and conditions provided herein and (ii) has duly authorized by all necessary company action the execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party and the sale and assignment of an ownership interest in the Collateral on the terms and conditions herein provided. This Agreement and each other Transaction Document to which the Seller is a party have been duly executed and delivered by the Seller.

     (d) Binding Obligation. This Agreement and each other Transaction Document to which the Seller is a party constitutes a legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with its respective terms, except as such

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enforceability may be limited by Insolvency Laws and by general principles of equity (whether considered in a suit at law or in equity).

     (e) No Violation. The consummation of the transactions contemplated by this Agreement and the other Transaction Documents to which it is a party and the fulfillment of the terms hereof and thereof will not (i) conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, the Seller’s operating agreement or any Contractual Obligation of the Seller, (ii) result in the creation or imposition of any Lien (other than Permitted Liens) upon any of the Seller’s properties pursuant to the terms of any such Contractual Obligation, other than this Agreement, or (iii) violate any Applicable Law.

     (f) No Proceedings. There is no litigation, proceeding or investigation pending or, to the best knowledge of the Seller, threatened against the Seller, before any Governmental Authority (i) asserting the legality, invalidity or enforceability of this Agreement or any other Transaction Document to which the Seller is a party, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Transaction Document to which the Seller is a party or (iii) seeking any determination or ruling that could reasonably be expected to have Material Adverse Effect.

     (g) All Consents Required. All approvals, authorizations, consents, orders or other actions of any Person or of any Governmental Authority (if any) required for the due execution, delivery and performance by the Seller of this Agreement and any other Transaction Document to which the Seller is a party have been obtained.

     (h) Bulk Sales. The execution, delivery and performance of this Agreement and the transactions contemplated hereby do not require compliance with any “bulk sales” act or similar law by Seller.

     (i) Solvency. The Seller is not the subject of any Insolvency Proceedings or Insolvency Event. The transactions under this Agreement and any other Transaction Document to which the Seller is a party do not and will not render the Seller not Solvent and the Seller shall deliver to the Administrative Agent on the Closing Date a certification in the form of Exhibit E-1.

     (j) Selection Procedures. No procedures believed by the Seller to be adverse to the interests of any Purchaser were utilized by the Seller in identifying and/or selecting the Assets in the Collateral. In addition, each Asset shall have been underwritten in accordance with and satisfy the standards of any Credit and Collection Policy that has been established by the Seller or the Originator and is then in effect.

     (k) Taxes. The Seller has filed or caused to be filed all tax returns that are required to be filed by it. The Seller has paid or made adequate provisions for the payment of all Taxes and all assessments made against it or any of its property (other than any amount of Tax the validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Seller), and

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no tax lien has been filed and, to the Seller’s knowledge, no claim is being asserted, with respect to any such Tax, fee or other charge.

     (l) Exchange Act Compliance; Regulations T, U and X. None of the transactions contemplated herein (including, without limitation, the use of the proceeds from the sale of the Collateral) will violate or result in a violation of Section 7 of the Securities Exchange Act, or any regulations issued pursuant thereto, including, without limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. The Seller does not own or intend to carry or purchase, and no proceeds from the Advances will be used to carry or purchase, any “margin stock” within the meaning of Regulation U or to extend “purpose credit” within the meaning of Regulation U.

     (m) Security Interest.

     (i) This Agreement creates a valid and continuing security interest (as defined in the applicable UCC) in the Collateral in favor of the Administrative Agent, on behalf of the Secured Parties, which security interest is prior to all other Liens (except for Permitted Liens), and is enforceable as such against creditors of and purchasers from the Seller;

     (ii) each of the Assets, along with the related Asset Files, constitutes a “general intangible,” an “instrument,” an “account,” or “chattel paper,” within the meaning of the applicable UCC;

     (iii) the Seller owns and has good and marketable title to the Collateral free and clear of any Lien (other than Permitted Liens), claim or encumbrance of any Person;

     (iv) the Seller has received all consents and approvals required by the terms of any Asset to the sale and granting of a security interest in the Assets hereunder to the Administrative Agent, on behalf of the Secured Parties;

     (v) the Seller has caused the filing of all appropriate financing statements in the proper filing office in the appropriate jurisdictions under Applicable Law in order to perfect the security interest in the Collateral granted to the Administrative Agent, on behalf of the Secured Parties, under this Agreement;

     (vi) other than the security interest granted to the Administrative Agent, on behalf of the Secured Parties, pursuant to this Agreement, the Seller has not pledged, assigned, sold, granted a security interest in or otherwise conveyed any of the Collateral. The Seller has not authorized the filing of and is not aware of any financing statements against the Seller that include a description of collateral covering the Collateral other than any financing statement (A) relating to the security interest granted to the Seller under the Sale Agreement, or (B) that have been terminated. The Seller is not aware of the filing of any judgment or tax lien filings against the Seller;

     (vii) all original executed copies of each underlying promissory note or copies of each Loan Register, as applicable, that constitute or evidence each Loan has been, or

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subject to the delivery requirements contained herein, will be delivered to the Collateral Custodian;

     (viii) the Seller has received a written acknowledgment from the Collateral Custodian that the Collateral Custodian or its bailee is holding the underlying promissory notes (if any), the copies of the Loan Registers that constitute or evidence the Assets solely on behalf of and for the benefit of the Secured Parties;

     (ix) none of the underlying promissory notes or Loan Registers, as applicable, that constitute or evidence the Assets has any marks or notations indicating that they have been pledged, assigned or otherwise conveyed to any Person other than the Administrative Agent, on behalf of the Secured Parties;

     (x) none of the Collateral has been pledged or otherwise made subject to a Lien; and

     (xi) with respect to (1) any Asset comprising “financial assets” within the meaning of the UCC, such Assets have been delivered to and are being held in a “securities account” within the meaning of the UCC that is maintained in the name of, and under the control and direction of the Collateral Custodian or another institution that for the purposes of the UCC is a “securities intermediary” whose “jurisdiction” with respect to the Collateral is the State of New York, the terms of which account treat the Collateral Custodian as entitled to exercise the rights that comprise any financial assets credited to such account solely on behalf of and for the benefit of the Secured Parties and (2) any Asset comprising certificated securities within the meaning of the UCC, such Assets have been delivered to the Collateral Custodian and indorsed in blank to the Collateral Custodian solely on behalf of and for the benefit of the Secured Parties.

     (n) Reports Accurate. All Monthly Reports (if prepared by the Seller, or to the extent that information contained therein is supplied by the Seller), information, exhibits, financial statements, documents, books, records or reports furnished or to be furnished by the Seller to the Administrative Agent or any Purchaser in connection with this Agreement are true, complete and correct, and no Monthly Report contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading.

     (o) Location of Offices. The Seller’s location (within the meaning of Article 9 of the UCC) is Delaware. The office where the Seller keeps all the Records is at the address of the Seller referred to in Section 13.2 hereof (or at such other locations as to which the notice and other requirements specified in Section 5.2(g) shall have been satisfied). The Seller’s Federal Employee Identification Number is 26-0821696. The Seller has not changed its name, whether by amendment of its certificate of formation, by reorganization or otherwise, and has not changed its location within the four months preceding the Closing Date.

     (p) Lock-Boxes. The names and addresses of all the Lock-Box Banks, together with the account numbers of the Lock-Box Accounts of the Seller at such Lock-Box Banks and the names, addresses and account numbers of all accounts to which Collections of the Collateral outstanding before the Initial Advance under the Class A Notes hereunder have been sent, are

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specified in Schedule II (which shall be deemed to be amended in respect of terminating or adding any Lock-Box Account or Lock-Box Bank upon satisfaction of the notice and other requirements specified in Section 5.2(k)). The Seller has not granted or agreed to grant to any Person other than the Administrative Agent and Collateral Custodian an interest in any Lock-Box Account except as disclosed to the Administrative Agent and in a manner consistent with the Intercreditor Agreement.

     (q) Tradenames. The Seller has no trade names, fictitious names, assumed names or “doing business as” names or other names under which it has done or is doing business.

     (r) Sale Agreement. The Sale Agreement is the only agreement pursuant to which the Seller purchases Collateral.

     (s) Value Given. The Seller shall have given reasonably equivalent value to the Originator in consideration for the transfer to the Seller of the Collateral under the Sale Agreement, no such transfer shall have been made for or on account of an antecedent debt owed by the Originator to the Seller, and no such transfer is or may be voidable or subject to avoidance under any section of the Bankruptcy Code.

     (t) Accounting. The Seller accounts for the transfers to it from the Originator of interests in Collateral under the Sale Agreement as financings of such Collateral for consolidated accounting purposes (with a notation that it is treating the transfers as a sale for legal and all other purposes on its books, records and financial statements, in each case consistent with GAAP and with the requirements set forth herein).

     (u) Special Purpose Entity. The Seller has not and shall not:

     (i) engage in any business or activity other than the purchase and receipt of Collateral and related assets from the Originator under the Sale Agreement, the sale of Collateral under the Transaction Documents, and such other activities as are incidental thereto;

     (ii) acquire or own any material assets other than (a) the Collateral and related assets from the Originator under the Sale Agreement and (b) incidental property as may be necessary for the operation of the Seller;

     (iii) merge into or consolidate with any Person or dissolve, terminate or liquidate in whole or in part, transfer or otherwise dispose of all or substantially all of its assets or change its legal structure, without in each case first obtaining the consent of the Administrative Agent;

     (iv) fail to preserve its existence as an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization or formation, or without the prior written consent of the Administrative Agent, amend, modify, terminate or fail to comply with the provisions of its operating agreement, or fail to observe limited liability company formalities;

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     (v) own any Subsidiary or make any investment in any Person without the consent of the Administrative Agent;

     (vi) except as permitted by this Agreement and the Lock-Box Agreement, commingle its assets with the assets of any of its Affiliates, or of any other Person;

     (vii) incur any debt, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than indebtedness to the Secured Parties hereunder or in conjunction with a repayment of all Advances owed to the Purchasers, except for trade payables in the ordinary course of its business; provided that such debt is not evidenced by a note and is paid when due;

     (viii) become insolvent or fail to pay its debts and liabilities from its assets as the same shall become due;

     (ix) fail to maintain its records, books of account and bank accounts separate and apart from those of any other Person;

     (x) enter into any contract or agreement with any Person, except upon terms and conditions that are commercially reasonable and intrinsically fair and substantially similar to those that would be available on an arms-length basis with third parties other than such Person;

     (xi) seek its dissolution or winding up in whole or in part;

     (xii) fail to correct any known misunderstandings regarding the separate identity of Seller and the Originator or any principal or Affiliate thereof or any other Person;

     (xiii) guarantee, become obligated for, or hold itself out to be responsible for the indebtedness of another Person;

     (xiv) make any loan or advances to any third party, including any principal or Affiliate, or hold evidence of indebtedness issued by any other Person (other than cash and investment-grade securities);

     (xv) fail to file its own separate tax return, or file a consolidated federal income tax return with any other Person, except as may be required by the Internal Revenue Code and regulations;

     (xvi) fail either to hold itself out to the public as a legal entity separate and distinct from any other Person or to conduct its business solely in its own name in order not (a) to mislead others as to the identity with which such other party is transacting business, or (b) to suggest that it is responsible for the indebtedness of any third party (including any of its principals or Affiliates);

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     (xvii) fail to maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations;

     (xviii) file or consent to the filing of any petition, either voluntary or involuntary, to take advantage of any applicable insolvency, bankruptcy, liquidation or reorganization statute, or make an assignment for the benefit of creditors;

     (xix) except as may be required by the Internal Revenue Code and regulations, share any common logo with or hold itself out as or be considered as a department or division of (a) any of its principals or affiliates, (b) any Affiliate of a principal or (c) any other Person;

     (xx) permit any transfer (whether in one or more transactions) of any direct or indirect ownership interest in the Seller to the extent it has the ability to control the same, unless the Seller delivers to the Administrative Agent an acceptable non-consolidation opinion and the Administrative Agent consents to such transfer;

     (xxi) fail to maintain separate financial statements, showing its assets and liabilities separate and apart from those of any other Person;

     (xxii) fail to pay its own liabilities and expenses only out of its own funds;

     (xxiii) fail to pay the salaries of its own employees in light of its contemplated business operations;

     (xxiv) acquire the obligations or securities of its Affiliates or stockholders;

     (xxv) fail to allocate fairly and reasonably any overhead expenses that are shared with an Affiliate, including paying for office space and services performed by any employee of an Affiliate;

     (xxvi) fail to use separate invoices and checks bearing its own name;

     (xxvii) pledge its assets for the benefit of any other Person, other than with respect to payment of the indebtedness to the Secured Parties hereunder;

     (xxviii) fail at any time to have at least one independent director who is not and has not been for at least five years a director, officer, employee, trade credit or shareholder (or spouse, parent, sibling or child of the foregoing) of (a) the Servicer, (b) the Seller, (c) any principal of the Servicer, (d) any Affiliate of the Servicer, or (e) any Affiliate of any principal of the Servicer (an “Independent Director”); provided that such Independent Director may be an independent director of another special purpose entity affiliated with the Servicer or its Affiliates or fail to ensure that all limited liability company action relating to the selection, maintenance or replacement of the Independent Director are duly authorized by the unanimous vote of the board of directors (including the Independent Director);

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     (xxix) take any of the following actions without obtaining the prior unanimous consent of all directors (including the consent of the Independent Director): (a) dissolve or liquidate, in whole or part, or institute proceedings to be adjudicated bankrupt or insolvent, (b) institute or consent to the institution of bankruptcy or insolvency proceedings against it, (c) file a petition seeking or consent to reorganization or relief under any applicable federal or state law relating to bankruptcy or insolvency, (d) seek or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, custodian or any similar official for the Seller, (e) make any assignment for the benefit of the Seller’s creditors, (f) admit in writing its inability to pay its debts generally as they become due, or (g) take any action in furtherance of any of the foregoing; and

     (xxx) take or refrain from taking, as applicable, each of the activities specified in the non-consolidation opinion of Patton Boggs LLP, dated as of the date hereof.

     (v) [Intentionally Omitted].

     (w) Investment Company Act. The Seller is not, and is not controlled by, an “investment company” within the meaning of, or is exempt from the registration requirement of, the 1940 Act.

     (x) ERISA. The present value of all benefits vested under all “employee pension benefit plans,” as such term is defined in Section 3 of ERISA, maintained by the Seller, or in which employees of the Seller are entitled to participate, as from time to time in effect (herein called the “Pension Plans”), does not exceed the value of the assets of the Pension Plan allocable to such vested benefits (based on the value of such assets as of the last annual valuation date). No prohibited transactions, accumulated funding deficiencies, withdrawals or reportable events have occurred with respect to any Pension Plans that, in the aggregate, could subject the Seller to any material tax, penalty or other liability. No notice of intent to terminate a Pension Plan has been billed, nor has any Pension Plan been terminated under Section 4041(f) of ERISA, nor has the Pension Benefit Guaranty Corporation instituted proceedings to terminate, or appoint a trustee to administer a Pension Plan and no event has occurred or condition exists that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan.

     (y) Compliance with Law. The Seller has complied in all respects with all Applicable Laws to which it may be subject, and no item of Collateral contravenes any Applicable Laws (including, without limitation, all applicable predatory and abusive lending laws and all laws, rules and regulations relating to licensing, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices, and privacy).

     (z) Credit and Collection Policy. The Seller has complied in all material respects with the Credit and Collection Policy with respect to all of the Collateral.

     (aa) Collections. The Seller acknowledges that all Collections received by it or its Affiliates with respect to the Collateral sold hereunder are held and shall be held in trust for the benefit of the Secured Parties until deposited into the Collection Account within two Business Days from receipt as required herein.

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     (bb) Set-Off, etc. Other than B-Note Loans or Mezzanine Loans, no Collateral has been compromised, adjusted, extended, satisfied, subordinated, rescinded, set-off or modified by the Seller, the Originator or the Obligor thereof, and no Collateral is subject to compromise, adjustment, extension, satisfaction, subordination, rescission, set-off, counterclaim, defense, abatement, suspension, deferment, deduction, reduction, termination or modification, whether arising out of transactions concerning the Collateral or otherwise, by the Seller, the Originator or the Obligor with respect thereto, except as otherwise permitted under Section 6.4(a) of this Agreement and in accordance with the Credit and Collection Policy.

     (cc) Full Payment. The Seller has no knowledge of any fact which should lead it to expect that any Collateral will not be paid in full.

     (dd) Accuracy of Representations and Warranties. Each representation or warranty by the Seller contained herein or in any certificate or other document furnished by the Seller pursuant hereto or in connection herewith is true and correct in all material respects.

     (ee) Representations and Warranties in Sale Agreement. The representations and warranties made by the Originator to the Seller in the Sale Agreement are hereby remade by the Seller on each date to which they speak in the Sale Agreement as if such representations and warranties were set forth herein. For purposes of this Section 4.1(ee), such representations and warranties are incorporated herein by reference as if made by the Seller to the Administrative Agent and each of the Secured Parties under the terms hereof mutatis mutandis.

     (ff) Reaffirmation of Representations and Warranties by the Seller. On each day that any Advance is made hereunder, the Seller shall be deemed to have certified that all representations and warranties described in Section 4.1 hereof are correct on and as of such day as though made on and as of such day.

     (gg) Participation, Acquired and Assigned Loans. The participations created with respect to the Participation Loans and the sale to the Originator with respect to the Acquired Loans and Assigned Loans do not violate any provisions of the underlying Required Asset Documents and such documents do not contain any express or implied prohibitions on participations or sales of such Loans other than those that have been complied with.

     (hh) Environmental.

     (i) Each item of the Related Property is in compliance with all applicable Environmental Laws, and there is no violation of any Environmental Law with respect to such Related Property and there are no conditions relating to such Related Property that could give rise to liability under any applicable Environmental Laws.

     (ii) None of the Related Property contains, or has previously contained, any Materials of Environmental Concern at, on or under the Related Property in amounts or concentrations that constitute or constituted a violation of, or could give rise to liability under, Environmental Laws.

     (iii) None of the Seller, the Originator nor the Servicer has received any written or verbal notice of, or inquiry from any Governmental Authority regarding, any

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violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Related Property, nor does any such Person have knowledge or reason to believe that any such notice will be received or is being threatened.

     (iv) Materials of Environmental Concern have not been transported or disposed of from the Related Property, or generated, treated, stored or disposed of at, on or under any of the Related Property or any other location, in each case by or on behalf of the Seller, the Originator and/or the Servicer in violation of, or in a manner that would be reasonably likely to give rise to liability under, any applicable Environmental Law.

     (v) No judicial proceeding or governmental or administrative action is pending or, to the best knowledge of the Seller, the Originator and/or the Servicer, threatened, under any Environmental Law to which any of the Seller, the Originator and/or the Servicer is or will be named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements, outstanding under any Environmental Law with respect to any of the Seller, the Originator, the Servicer or the Related Property.

     (vi) There has been no release or threat of release of Materials of Environmental Concern at or from any of the Related Property, or arising from or related to the operations (including, without limitation, disposal) of any of the Seller, the Originator and/or the Servicer in connection with the Related Property in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws.

     (ii) USA PATRIOT Act. Neither the Seller nor any Affiliate of the Seller is (i) a country, territory, organization, person or entity named on an Office of Foreign Asset Control (OFAC) list, (ii) a Person that resides or has a place of business in a country or territory named on such lists or which is designated as a “Non-Cooperative Jurisdiction” by the Financial Action Task Force on Money Laundering, or whose subscription funds are transferred from or through such a jurisdiction; (iii) a “Foreign Shell Bank” within the meaning of the USA PATRIOT Act, i.e., a foreign bank that does not have a physical presence in any country and that is not affiliated with a bank that has a physical presence and an acceptable level of regulation and supervision; or (iv) a person or entity that resides in or is organized under the laws of a jurisdiction designated by the United States Secretary of the Treasury under Sections 311 or 312 of the USA PATRIOT Act as warranting special measures due to money laundering concerns.

     (jj) Material Adverse Effect. The Seller represents and warrants that (i) since June 30, 2007 and (ii) as of the most recent Addition Date there has been no Material Adverse Effect.

     The representations and warranties in Section 4.1(m) shall survive the termination of this Agreement.

Section 4.2 Representations and Warranties of the Seller Relating to the Agreement and the Collateral.

     The Seller hereby represents and warrants, (i) with respect to clauses (a) through (c) below, as of the Closing Date, as of the initial Funding Date, as of the Restatement Date and as

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of each Addition Date and (ii) with respect to clause (d) below, since June 30, 2007 and as of the most recent Addition Date:

     (a) Binding Obligation, Valid Transfer and Security Interest.

     (i) This Agreement and each other Transaction Document to which the Seller is a party each constitute a legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its respective terms, except as such enforceability may be limited by Insolvency Laws and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity).

     (ii) This Agreement constitutes a valid transfer to the Administrative Agent, as agent for the Secured Parties, of all right, title and interest of the Seller in, to and under all of the Collateral, free and clear of any Lien of any Person claiming through or under the Seller or its Affiliates, except for Permitted Liens. If the conveyances contemplated by this Agreement are determined to be transfer for security, then this Agreement constitutes a grant of a security interest in all of the Collateral to the Administrative Agent, as agent for the Secured Parties, which upon the delivery of the Required Asset Documents to the Collateral Custodian and the filing of the financing statements described in Section 4.1(m) and, in the case of Additional Assets on the applicable Addition Date, shall be a first priority perfected security interest in all Collateral, subject only to Permitted Liens. Neither the Seller nor any Person claiming through or under Seller shall have any claim to or interest in the Collection Account and, if this Agreement constitutes the grant of a security interest in such property, except for the interest of Seller in such property as a debtor for purposes of the UCC.

     (b) Eligibility of Collateral. As of the initial Funding Date and each Addition Date, (i) the Asset List and the information contained in the Borrowing Notice delivered pursuant to Section 2.3 is an accurate and complete listing in all respects of all Collateral as of the Cut-Off Date and the information contained therein with respect to the identity of such Collateral and the amounts owing thereunder is true and correct in all respects as of the related Cut-Off Date, (ii) each such Asset that is part of the Borrowing Base is an Eligible Asset as of such date, (iii) each such item of Collateral is free and clear of any Lien of any Person (other than Permitted Liens) and in compliance with all Applicable Laws, (iv) with respect to each such item of Collateral, all consents, licenses, approvals or authorizations of or registrations or declarations of any Governmental Authority required to be obtained, effected or given by the Seller in connection with the transfer of an ownership interest in such Collateral to the Administrative Agent as agent for the Secured Parties have been duly obtained, effected or given and are in full force and effect, and (v) the representations and warranties set forth in Section 4.2(a) are true and correct with respect to each item of Collateral.

     (c) No Fraud. Each Asset was originated without any fraud or material misrepresentation by the Originator or, to the best of the Seller’s knowledge, on the part of the Obligor.

     (d) Material Adverse Effect. There has been no Material Adverse Effect.

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     Section 4.3 Representations and Warranties of the Servicer.

     The Servicer represents and warrants as follows:

     (a) Organization and Good Standing. The Servicer has been duly organized and is validly existing as a limited liability company in good standing under the laws of the State of Delaware, with all requisite company power and authority to own or lease its properties and to conduct its business as such business is presently conducted and to enter into and perform its obligations pursuant to this Agreement.

     (b) Due Qualification. The Servicer is duly qualified to do business as a limited liability company and is in good standing as a limited liability company, and has obtained all necessary licenses and approvals in all jurisdictions in which the ownership or lease of its property and or the conduct of its business requires such qualification, licenses or approvals.

     (c) Power and Authority; Due Authorization; Execution and Delivery. The Servicer (i) has all necessary power, authority and legal right to (a) execute and deliver this Agreement and the other Transaction Documents to which it is a party, (b) carry out the terms of the Transaction Documents to which it is a party, and (ii) has duly authorized by all necessary company action the execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party. This Agreement and each other Transaction Document to which the Servicer is a party have been duly executed and delivered by the Servicer.

     (d) Binding Obligation. This Agreement and each other Transaction Document to which the Servicer is a party constitutes a legal, valid and binding obligation of the Servicer enforceable against the Servicer in accordance with its respective terms, except as such enforceability may be limited by Insolvency Laws and general principles of equity (whether considered in a suit at law or in equity).

     (e) No Violation. The consummation of the transactions contemplated by this Agreement and the other Transaction Documents to which it is a party and the fulfillment of the terms hereof and thereof will not (i) conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, the Servicer’s operating agreement or any Contractual Obligation of the Servicer, (ii) result in the creation or imposition of any Lien upon any of the Servicer’s properties pursuant to the terms of any such Contractual Obligation, other than this Agreement, or (iii) violate any Applicable Law.

     (f) No Proceedings. There is no litigation, proceedings or investigations pending or, to the best knowledge of the Servicer, threatened against the Servicer, before any Governmental Authority (i) asserting the legality, invalidity or enforceability of this Agreement or any other Transaction Document to which the Servicer is a party, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Transaction Document to which the Servicer is a party or (iii) seeking any determination or ruling that could reasonably be expected to have Material Adverse Effect.

     (g) All Consents Required. All approvals, authorizations, consents, orders, licenses or other actions of any Person or of any Governmental Authority (if any) required for the due

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execution, delivery and performance by the Servicer of this Agreement and any other Transaction Document to which the Servicer is a party have been obtained.

     (h) Reports Accurate. All Servicer’s Certificates and other written and electronic information, exhibits, financial statements, documents, books, records or reports furnished by the Servicer to the Administrative Agent or any Purchaser in connection with this Agreement are accurate, true and correct, and no Servicer’s Certificate contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading.

     (i) Credit and Collection Policy. The Servicer has complied in all material respects with the Credit and Collection Policy with regard to the origination, underwriting and servicing of the Assets.

     (j) Collections. The Servicer acknowledges that all Collections received by it or its Affiliates with respect to the Collateral sold hereunder are held and shall be held in trust for the benefit of the Secured Parties until deposited into the Collection Account within two Business Days from receipt as required herein.

     (k) Bulk Sales. The execution, delivery and performance of this Agreement do not require compliance with any “bulk sales” act or similar law by the Servicer.

     (l) Solvency. The Servicer is not the subject of any Insolvency Proceedings or Insolvency Event. The transactions under this Agreement and any other Transaction Document to which the Servicer is a party do not and will not render the Servicer not Solvent and the Servicer shall deliver to the Administrative Agent on the Closing Date a certification in the form of Exhibit E-2.

     (m) Taxes. The Servicer has filed or caused to be filed all tax returns that are required to be filed by it. The Servicer has paid or made adequate provisions for the payment of all Taxes and all assessments made against it or any of its property (other than any amount of Tax the validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Servicer), and no tax lien has been filed and, to the Servicer’s knowledge, no claim is being asserted, with respect to any such Tax, fee or other charge.

     (n) Exchange Act Compliance; Regulations T, U and X. None of the transactions contemplated herein (including, without limitation, the use of the Proceeds from the sale of the Collateral) will violate or result in a violation of Section 7 of the Securities Exchange Act, or any regulations issued pursuant thereto, including, without limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. The Servicer does not own or intend to carry or purchase, and no proceeds from the Advances will be used to carry or purchase, any “margin stock” within the meaning of Regulation U or to extend “purpose credit” within the meaning of Regulation U.

     (o) Security Interest. The Servicer will take all steps necessary to ensure that the Seller has granted a security interest (as defined in the UCC) to the Administrative Agent, as agent for the Secured Parties, in the Collateral, which is enforceable in accordance with

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Applicable Law upon execution and delivery of this Agreement. Upon the filing of UCC-1 financing statements naming the Administrative Agent as secured party and the Seller as debtor, the Administrative Agent, as agent for the Secured Parties, shall have a first priority perfected security interest in the Collateral (except for any Permitted Liens). All filings (including, without limitation, such UCC filings) as are necessary for the perfection of the Secured Parties’ security interest in the Collateral have been (or prior to the date of the applicable will be) made.

     (p) ERISA. The present value of all benefits vested under all “employee pension benefit plans,” as such term is defined in Section 3 of ERISA, maintained by the Servicer, or in which employees of the Servicer are entitled to participate, as from time to time in effect (herein called the “Pension Plans”), does not exceed the value of the assets of the Pension Plan allocable to such vested benefits (based on the value of such assets as of the last annual valuation date). No prohibited transactions, accumulated funding deficiencies, withdrawals or reportable events have occurred with respect to any Pension Plans that, in the aggregate, could subject the Servicer to any material tax, penalty or other liability. No notice of intent to terminate a Pension Plan has been billed, nor has any Pension Plan been terminated under Section 4041(f) of ERISA, nor has the Pension Benefit Guaranty Corporation instituted proceedings to terminate, or appoint a trustee to administer, a Pension Plan and no event has occurred or condition exists that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan.

     (q) Investment Company Act. The Servicer is not, and is not controlled by, an “investment company” within the meaning of, or is exempt from the registration requirement of, the 1940 Act.

     (r) USA PATRIOT Act. Neither the Servicer nor any Affiliate of the Servicer is (i) a country, territory, organization, person or entity named on an OFAC list, (ii) a Person that resides or has a place of business in a country or territory named on such lists or which is designated as a “Non-Cooperative Jurisdiction” by the Financial Action Task Force on Money Laundering, or whose subscription funds are transferred from or through such a jurisdiction; (iii) a “Foreign Shell Bank” within the meaning of the USA PATRIOT Act, i.e., a foreign bank that does not have a physical presence in any country and that is not affiliated with a bank that has a physical presence and an acceptable level of regulation and supervision; or (iv) a person or entity that resides in or is organized under the laws of a jurisdiction designated by the United States Secretary of the Treasury under Sections 311 or 312 of the USA PATRIOT Act as warranting special measures due to money laundering concerns.

     (s) Material Adverse Effect. The Servicer represents and warrants that (i) since June 30, 2007 there has been no Material Adverse Effect.

     Section 4.4 Representations and Warranties of the Backup Servicer.

     The Backup Servicer in its individual capacity and as Backup Servicer represents and warrants as follows:

     (a) Organization and Corporate Power. It is a duly organized and validly existing national banking association in good standing under the laws of the United States. It has full

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corporate power, authority and legal right to execute, deliver and perform its obligations as Backup Servicer under this Agreement.

     (b) Due Authorization. The execution and delivery of this Agreement and the consummation of the transactions provided for herein have been duly authorized by all necessary association action on its part, either in its individual capacity or as Backup Servicer, as the case may be.

     (c) No Conflict. The execution and delivery of this Agreement, the performance of the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with, result in any breach of any of the material terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under any indenture, contract, agreement, mortgage, deed of trust, or other instrument to which the Backup Servicer is a party or by which it or any of its property is bound.

     (d) No Violation. The execution and delivery of this Agreement, the performance of the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with or violate, in any material respect, any Applicable Law.

     (e) All Consents Required. All approvals, authorizations, consents, orders or other actions of any Person or Governmental Authority applicable to the Backup Servicer, required in connection with the execution and delivery of this Agreement, the performance by the Backup Servicer of the transactions contemplated hereby and the fulfillment by the Backup Servicer of the terms hereof have been obtained.

     (f) Validity, Etc. This Agreement constitutes the legal, valid and binding obligation of the Backup Servicer, enforceable against the Backup Servicer in accordance with its terms, except as such enforceability may be limited by applicable Insolvency Laws or general principles of equity (whether considered in a suit at law or in equity).

     Section 4.5 Representations and Warranties of the Collateral Custodian.

     The Collateral Custodian in its individual capacity and as Collateral Custodian represents and warrants as follows:

     (a) Organization and Corporate Power. It is a duly organized and validly existing national banking association in good standing under the laws of the United States. It has full corporate power, authority and legal right to execute, deliver and perform its obligations as Collateral Custodian under this Agreement.

     (b) Due Authorization. The execution and delivery of this Agreement and the consummation of the transactions provided for herein have been duly authorized by all necessary association action on its part, either in its individual capacity or as Collateral Custodian, as the case may be.

     (c) No Conflict. The execution and delivery of this Agreement, the performance of the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with, result in any breach of any of the material terms and provisions of, or constitute (with or

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without notice or lapse of time or both) a default under any indenture, contract, agreement, mortgage, deed of trust, or other instrument to which the Collateral Custodian is a party or by which it or any of its property is bound.

     (d) No Violation. The execution and delivery of this Agreement, the performance of the Transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with or violate, in any material respect, any Applicable Law.

     (e) All Consents Required. All approvals, authorizations, consents, orders or other actions of any Person or Governmental Authority applicable to the Collateral Custodian, required in connection with the execution and delivery of this Agreement, the performance by the Collateral Custodian of the transactions contemplated hereby and the fulfillment by the Collateral Custodian of the terms hereof have been obtained.

     (f) Validity, Etc. The Agreement constitutes the legal, valid and binding obligation of the Collateral Custodian, enforceable against the Collateral Custodian in accordance with its terms, except as such enforceability may be limited by applicable Insolvency Laws and general principles of equity (whether considered in a suit at law or in equity).

     Section 4.6 Breach of Certain Representations and Warranties.

     If on any day an Asset is (or becomes) a Warranty Asset, no later than two Business Days following the earlier of knowledge by the Seller of such Asset becoming a Warranty Asset or receipt by the Seller from the Administrative Agent or the Servicer of written notice thereof, the Seller shall either: (a) make a deposit to the Collection Account (for allocation pursuant to Section 2.9 or Section 2.10, as applicable) in immediately available funds in an amount equal to the sum (the “Retransfer Price”) of (i) if such deposit is made during the Revolving Period, the amount which, if deposited to the Collection Account on such date, would cause the Availability as of such date (after giving effect to such Warranty Asset ceasing to be an Eligible Asset) to be greater than or equal to zero, (ii) if such deposit is made during the Amortization Period or the Turbo Period, an amount equal to the product of the Outstanding Asset Balance of such Warranty Asset (without giving effect to the proviso in the definition of Outstanding Asset Balance) multiplied by the Advance Rate applicable to such Warranty Asset on the Funding Date thereof, (iii) any outstanding Servicer Advances thereon, (iv) any accrued and unpaid interest on such Warranty Asset, (v) all Hedge Breakage Costs owed to the relevant Hedge Counterparty for any termination of one or more Hedge Transactions, in whole or in part, as required by the terms of any Hedging Agreement and (vi in the case of a Loan, any costs and damages incurred in connection with any violation by such Loan of any predatory- or abusive-lending law; or (b) subject to the satisfaction of the conditions in Section 2.18, substitute for such Warranty Asset a Substitute Asset. In either of the foregoing instances, the Seller may (in its discretion) accept retransfer of each such Warranty Asset and any Related Security and the Borrowing Base shall be reduced by the Outstanding Asset Balance of each such Warranty Asset and, if applicable, increased by the Outstanding Asset Balance of each Substitute Asset. Upon confirmation of the deposit of such Retransfer Price into the Collection Account or the delivery by the Seller of a Substitute Asset for each Warranty Asset (the “Retransfer Date”), such Warranty Asset shall not be included in the Borrowing Base (and, if and when the Seller elects to accept the retransfer of such Warranty Asset, the Collateral) and, as applicable, the Substitute Asset shall be included in

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the Collateral. Upon the Retransfer Date of each Warranty Asset, the Administrative Agent, as agent for the Secured Parties, shall (if and when the Seller elects to accept the retransfer of such Warranty Asset) automatically and without further action be deemed to transfer, assign and set-over to the Seller, without recourse, representation or warranty, all the right, title and interest of the Administrative Agent, as agent for the Secured Parties in, to and under such Warranty Asset and all future monies due or to become due with respect thereto, the Related Security, all Proceeds of such Warranty Asset, Recoveries and Insurance Proceeds relating thereto, all rights to security for any such Warranty Asset, and all Proceeds and products of the foregoing. The Administrative Agent, as agent for the Secured Parties, shall (if and when the Seller elects to accept the retransfer of such Warranty Asset), at the sole expense of the Servicer, execute such documents and instruments of transfer as may be prepared by the Servicer on behalf of the Seller and take other such actions as shall reasonably be requested by the Seller to effect the transfer of such Warranty Asset pursuant to this Section 4.6.

ARTICLE V

GENERAL COVENANTS

     Section 5.1 Affirmative Covenants of the Seller.

     From the date hereof until the Collection Date:

     (a) Compliance with Laws. The Seller will comply in all material respects with all Applicable Laws, including those with respect to the Collateral or any part thereof.

     (b) Preservation of Company Existence. The Seller will preserve and maintain its company existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified in good standing as a limited liability company in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification has had, or could reasonably be expected to have, a Material Adverse Effect.

     (c) Performance and Compliance with Collateral. The Seller will, at its expense, timely and fully perform and comply (or direct the Originator to perform and comply pursuant to the Sale Agreement) with all provisions, covenants and other promises required to be observed by it under the Collateral and all other agreements related to such Collateral.

     (d) Keeping of Records and Books of Account. The Seller will maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing the Collateral in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all or any portion of the Collateral.

     (e) Originator’s Collateral. With respect to the Collateral acquired by the Seller, the Seller will (i) acquire such Collateral pursuant to and in accordance with the terms of the Sale Agreement, (ii) (at the Servicer’s expense) take all action necessary to perfect, protect and more fully evidence the Seller’s ownership of such Collateral free and clear of any Lien other than the Lien created hereunder and Permitted Liens, including, without limitation, (a) filing and maintaining (at the Servicer’s expense), effective financing statements against the Originator in

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all necessary or appropriate filing offices, and filing continuation statements, amendments or assignments with respect thereto in such filing offices, and (b) executing or causing to be executed such other instruments or notices as may be necessary or appropriate, (iii) permit the Administrative Agent or its agents or representatives to visit the offices of the Seller during normal office hours and upon reasonable notice examine and make copies of all documents, books, records and other information concerning the Collateral and discuss matters related thereto with any of the officers or employees of the Seller having knowledge of such matters, and (iv) take all additional action that the Administrative Agent may reasonably request to perfect, protect and more fully evidence the respective interests of the parties to this Agreement in the Collateral.

     (f) Delivery of Collections. The Seller will pay to the Servicer promptly (but in no event later than two Business Days after receipt) all Collections received by Seller in respect of the Collateral and cause the same to be promptly deposited into the Collection Account by the Servicer in accordance with Section 5.4(l).

     (g) Separate Limited Liability Company Existence. The Seller shall be in compliance with the Special Purpose Entity requirements set forth in Section 4.1(u).

     (h) Credit and Collection Policy. The Seller will (a) comply in all material respects with the Credit and Collection Policy in regard to the Collateral, and (b) furnish to the Administrative Agent, prior to its effective date, prompt notice of any material changes in the Credit and Collection Policy. The Seller may agree to or otherwise permit to occur changes in Credit and Collection Policy which would not impair the collectibility of any of the Collateral or otherwise adversely affect the interests or remedies of the Administrative Agent or the Secured Parties under this Agreement or any other Transaction Document. The Seller may not agree to or otherwise permit to occur changes in the Credit and Collection Policy which would impair the collectibility of any of the Collateral or otherwise adversely affect the interests or remedies of the Administrative Agent or the Secured Parties under this Agreement or any other Transaction Document, without the prior written consent of the Administrative Agent.

     (i) Termination Events. The Seller will provide the Administrative Agent with immediate written notice of the occurrence of each Termination Event and each Unmatured Termination Event of which the Seller has knowledge or has received notice. In addition, no later than two Business Days following the Seller’s knowledge or notice of the occurrence of any Termination Event or Unmatured Termination Event, the Seller will provide to the Administrative Agent a written statement of the chief financial officer or chief accounting officer of Seller setting forth the details of such event and the action that the Seller proposes to take with respect thereto.

     (j) Taxes. The Seller will file and pay any and all Taxes required to meet the obligations of the Transaction Documents.

     (k) Use of Proceeds. The Seller will use the proceeds of the Advances only to acquire Collateral or to make distributions to its members in accordance with the terms hereof.

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     (l) Obligor Notification Forms. The Seller shall furnish the Administrative Agent with an appropriate power of attorney to send (at the Administrative Agent’s discretion after the occurrence of a Termination Event or an Unmatured Termination Event) Obligor notification forms to give notice to the Obligors of the Secured Parties’ interest in the Collateral and the obligation to make payments as directed by the Administrative Agent.

     (m) Adverse Claims. The Seller will not create, or participate in the creation of, or permit to exist, any Liens in relation to each Lock-Box Account other than as disclosed to the Administrative Agent and in a manner consistent with the Intercreditor Agreement.

     (n) Seller’s Collateral. With respect to each item of Collateral acquired by the Secured Parties, the Seller will (i) take all action necessary to perfect, protect and more fully evidence the Secured Parties’ ownership of such Collateral, including, without limitation, (a) filing and maintaining (at the Servicer’s expense), effective financing statements against the Seller in all necessary or appropriate filing offices, and filing continuation statements, amendments or assignments with respect thereto in such filing offices, and (b) executing or causing to be executed such other instruments or notices as may be necessary or appropriate and (ii) take all additional action that the Administrative Agent may reasonably request to perfect, protect and more fully evidence the respective interests of the parties to this Agreement in such Collateral. The Seller authorizes the Administrative Agent to file financing or continuation statements, and amendments thereto and assignments thereof, relating to the Collateral, which financing statements may (x) describe the collateral covered thereby as “all assets of the Seller,” “all personal property of the Seller” or words of similar effect and (y) be filed by the Administrative Agent if the Seller fails to file such financing statements in a timely manner and in any event promptly after the Administrative Agent’s request.

     (o) Notices. The Seller will furnish to the Administrative Agent:

     (i) Income Tax Liability. Within ten Business Days after the receipt of revenue agent reports or other written proposals, determinations or assessments of the Internal Revenue Service or any other taxing authority which propose, determine or otherwise set forth positive adjustments to the Tax liability of any Affiliated group (within the meaning of Section 1504(a)(l) of the Internal Revenue Code of 1986 (as amended from time to time)) which equal or exceed $1,000,000 in the aggregate, telephonic, telex or telecopy notice (confirmed in writing within five Business Days) specifying the nature of the items giving rise to such adjustments and the amounts thereof;

     (ii) Auditors’ Management Letters. Promptly after the receipt thereof, any auditors’ management letters that are received by the Seller or by its accountants;

     (iii) Representations. Forthwith upon receiving knowledge of same, the Seller shall notify the Administrative Agent if any representation or warranty set forth in Section 4.1 was incorrect at the time it was given or deemed to have been given and at the same time deliver to the Administrative Agent a written notice setting forth in reasonable detail the nature of such facts and circumstances. In particular, but without limiting the foregoing, the Seller shall notify the Administrative Agent in the manner set

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forth in the preceding sentence before any Funding Date of any facts or circumstances within the knowledge of the Seller which would render any of the said representations and warranties untrue at the date when such representations and warranties were made or deemed to have been made;

     (iv) ERISA. Promptly after receiving notice of any “reportable event” (as defined in Title IV of ERISA) with respect to the Seller (or any ERISA Affiliate thereof), a copy of such notice;

     (v) Proceedings. As soon as possible and in any event within three Business Days after any executive officer of the Seller receives notice or obtains knowledge thereof, of any settlement of, material judgment (including a material judgment with respect to the liability phase of a bifurcated trial) in or commencement of any material labor controversy, material litigation, material action, material suit or material proceeding before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Collateral, the Transaction Documents, the Secured Parties’ interest in the Collateral, or the Seller, the Servicer or the Originator or any other Subsidiary of CapitalSource Inc.; provided that notwithstanding the foregoing, any settlement, judgment, labor controversy, litigation, action, suit or proceeding affecting the Collateral, the Transaction Documents, the Secured Parties’ interest in the Collateral, or the Seller, the Servicer or the Originator or any other Subsidiary of CapitalSource Inc. in excess of $2,500,000 or more shall be deemed to be material for purposes of this Section 5.1(o); and

     (vi) Notice of Material Events. Promptly upon becoming aware thereof, notice of any other event or circumstances that, in the reasonable judgment of the Seller, is likely to have a Material Adverse Effect.

     (p) Reporting Requirements. The Seller will provide to the Administrative Agent and each Liquidity Bank the following:

     (i) as soon as available and in any event within 45 days after the end of each of the first three quarters and within 90 days after the end of the fourth fiscal quarter of each fiscal year of CapitalSource Inc., consolidated and consolidating balance sheets of CapitalSource Inc. and its Subsidiaries as of the end of such quarter and consolidated and consolidating statements of income and retained earnings of CapitalSource Inc. and its Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, certified by the chief financial officer of CapitalSource Inc. (which consolidating financial statements shall separately break out the financial information of the Originator as a Subsidiary of CapitalSource Inc.); and

     (ii) as soon as available and in any event within 45 days after the end of each of the first three quarters and within 90 days after the end of the fourth fiscal quarter of each fiscal year of the Seller, an unaudited balance sheet of the Seller as of the end of such quarter and an unaudited statement of income and retained earnings of the Seller for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, certified by the chief financial officer of the Seller.

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     (q) Other. The Seller will furnish to the Administrative Agent promptly, from time to time, such other information, documents, records or reports respecting the Collateral or the condition or operations, financial or otherwise, of Seller or Originator as the Administrative Agent may from time to time reasonably request in order to protect the interests of the Administrative Agent or the Secured Parties under or as contemplated by this Agreement.

     Section 5.2 Negative Covenants of the Seller.

     From the date hereof until the Collection Date:

     (a) Other Business. Seller will not (i) engage in any business other than the transactions contemplated by the Transaction Documents, (ii) incur any Indebtedness, obligation, liability or contingent obligation of any kind other than pursuant to this Agreement or under any Hedging Agreement required by Section 5.3(a), or (iii) form any Subsidiary or make any Investments in any other Person.

     (b) Collateral Not to be Evidenced by Instruments. The Seller will take no action to cause any Collateral that is not, as of the Closing Date, as of the initial Funding Date or the related Addition Date, as the case may be, evidenced by an Instrument, to be so evidenced except in connection with the enforcement or collection of such Collateral.

     (c) Security Interests. Except as otherwise permitted herein and in respect of any Optional Sale and Discretionary Sale, the Seller will not sell, pledge, assign or transfer to any other Person, or grant, create, incur, assume or suffer to exist any Lien on any Collateral, whether now existing or hereafter transferred hereunder, or any interest therein, and the Seller will not sell, pledge, assign or suffer to exist any Lien on its interest, if any, hereunder. The Seller will promptly notify the Administrative Agent of the existence of any Lien on any Collateral and the Seller shall defend the right, title and interest of the Administrative Agent as agent for the Secured Parties in, to and under the Collateral against all claims of third parties; provided that nothing in this Section 5.2(c) shall prevent or be deemed to prohibit the Seller from suffering to exist Permitted Liens upon any of the Collateral.

     (d) Mergers, Acquisitions, Sales, etc. The Seller will not be a party to any merger or consolidation, or purchase or otherwise acquire any of the assets or any stock of any class of, or any partnership or joint venture interest in, any other Person, or sell, transfer, convey or lease any of its assets, or sell or assign with or without recourse any Collateral or any interest therein (other than pursuant hereto or to the Sale Agreement).

     (e) Deposits to Special Accounts. Except as otherwise provided in the Lock-Box Agreement, the Seller will not deposit or otherwise credit, or cause or permit to be so deposited or credited, to any Lock-Box Account cash or cash proceeds other than Collections in respect of the Collateral.

     (f) Restricted Payments. The Seller shall not make any Restricted Junior Payment, except that, so long as no Termination Event or Unmatured Termination Event has occurred and is continuing or would result therefrom, the Seller may declare and make distributions to its members on their membership interests.

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     (g) Change of Name or Location of Loan Files. The Seller shall not (x) change its name, move the location of its principal place of business and chief executive office, change the offices where it keeps the records from the location referred to in Section 13.2, or change the jurisdiction of its formation, or (y) move, or consent to the Collateral Custodian or Servicer moving, the Required Asset Documents and the Asset Files from the location thereof on the Closing Date, unless the Seller has given at least 30 days’ written notice to the Administrative Agent and has taken all actions required under the UCC of each relevant jurisdiction in order to continue the first priority perfected security interest of the Administrative Agent, as agent for the Secured Parties, in the Collateral.

     (h) Accounting of Purchases. Other than for tax and consolidated accounting purposes, the Seller will not account for or treat (whether in financial statements or otherwise) the transactions contemplated hereby in any manner other than as a sale of the Collateral by the Seller to the Secured Parties. Other than for consolidated tax and accounting purposes, the Seller will not account for or treat (whether in financial statements or otherwise) the transactions contemplated by the Sale Agreement in any manner other than as a sale of the Collateral by the Originator to the Seller.

     (i) ERISA Matters. The Seller will not (a) engage or permit any ERISA Affiliate to engage in any prohibited transaction for which an exemption is not available or has not previously been obtained from the United States Department of Labor, (b) permit to exist any accumulated funding deficiency, as defined in Section 302(a) of ERISA and Section 412(a) of the Code, or funding deficiency with respect to any Benefit Plan other than a Multiemployer Plan, (c) fail to make any payments to a Multiemployer Plan that the Seller or any ERISA Affiliate may be required to make under the agreement relating to such Multiemployer Plan or any law pertaining thereto, (d) terminate any Benefit Plan so as to result in any liability, or (e) permit to exist any occurrence of any reportable event described in Title IV of ERISA.

     (j) Operating Agreement; Sale Agreement. The Seller will not amend, modify, waive or terminate any provision of its operating agreement or the Sale Agreement without the prior written consent of the Administrative Agent.

     (k) Changes in Payment Instructions to Obligors. The Seller will not add or terminate any bank as a Lock-Box Bank or any Lock-Box Account from those listed in Schedule II or make any change, or permit Servicer to make any change, in its instructions to Obligors regarding payments to be made to Seller or Servicer or payments to be made to any Lock-Box Bank, unless the Administrative Agent has consented to such addition, termination or change (which consent shall not be unreasonably withheld) and has received duly executed copies of Lock-Box Agreements with each new Lock-Box Bank or with respect to each new Lock-Box Account, as the case may be.

     (l) Extension or Amendment of Collateral. The Seller will not, except as otherwise permitted in Section 6.4(a), waive, extend, amend or otherwise modify, or permit the Servicer to extend, amend or otherwise modify, the terms of any Collateral (including the Related Security); provided that no waiver, extension, modification or alteration otherwise permitted under Section 6.4(a) shall (i) alter the status of any Asset as a Delinquent Asset or Charged-Off Asset, (ii) in the reasonable judgment of the Administrative Agent, prevent or delay any Asset from becoming

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a Delinquent Asset or Charged-Off Asset, or (iii) limit and/or impair the rights of the Administrative Agent or the Secured Parties under this Agreement.

     (m) Credit and Collection Policy. The Seller may amend, modify, restate or replace, in whole or in part, the Credit and Collection Policy, if such amendment, modification, restatement or replacement would not impair the collectibility of any of the Collateral or otherwise adversely affect the interests or remedies of the Administrative Agent or the Secured Parties under this Agreement or any other Transaction Document. The Seller may not amend, modify, restate or replace, in whole or in part, the Credit and Collection Policy, if such amendment, modification, restatement or replacement would impair the collectibility of any of the Collateral or otherwise adversely affect the interests or remedies of the Administrative Agent or the Secured Parties under this Agreement or any other Transaction Document, without the prior written consent of the Administrative Agent.

     (n) Other Indebtedness. The Seller will not issue or extend any class or type of Indebtedness whether senior, pari passu or subordinated to the Indebtedness arising under this Agreement, unless an opinion of special tax counsel is first rendered to the effect that such issuance of additional Indebtedness will not cause the Seller to be treated as a taxable mortgage pool.

     Section 5.3 Covenants of the Seller Relating to the Hedging of Assets.

     (a) On or prior to the initial Payment Date, and thereafter, the Seller shall enter into one or more Hedge Transactions with respect to Prime Rate Assets; provided that each such Hedge Transaction shall:

     (i) be entered into with a Hedge Counterparty and governed by a Hedging Agreement;

     (ii) have a schedule of monthly calculation periods the first of which commences on the initial Payment Date and the last of which ends on the last Scheduled Payment due to occur under or with respect to the Prime Rate Assets then included in the Aggregate Outstanding Asset Balance;

     (iii) have an amortizing notional amount that satisfies the requirements of Section 6.2(c); and

     (iv) provide for two series of monthly payments to be netted against each other, one such series being payments to be made by the Seller to a Hedge Counterparty (solely on a net basis) by reference to a floating rate equal to “USD-Prime-H.15” (as defined in the ISDA Definitions) , and the other such series being payments to be made by such Hedge Counterparty to the Administrative Agent (solely on a net basis) at a floating rate equal to “USD-LIBOR-BBA” (as defined in the ISDA Definitions), the net amount of which shall be paid into the Collection Account (if payable by such Hedge Counterparty) or from the Collection Account to the extent funds are available under Section 2.9(a)(1) and Section 2.10(a)(1) (if payable by the Seller);

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     (b) As additional security hereunder, Seller hereby assigns to the Administrative Agent, as agent for the Secured Parties, all right, title and interest but none of the obligations of the Seller in each Hedging Agreement, each Hedge Transaction, and all present and future amounts payable by a Hedge Counterparty to Seller under or in connection with the respective Hedging Agreement and Hedge Transaction(s) with that Hedge Counterparty (“Hedge Collateral”), and grants a security interest to the Administrative Agent, as agent for the Secured Parties, in the Hedge Collateral. Seller acknowledges that, as a result of that assignment, Seller may not, without the prior written consent of the Administrative Agent, exercise any rights under any Hedging Agreement or Hedge Transaction, except for Seller’s right under any Hedging Agreement to enter into Hedge Transactions in order to meet the Seller’s obligations under Section 5.3(a) hereof. Nothing herein shall have the effect of releasing the Seller from any of its obligations under any Hedging Agreement or any Hedge Transaction, nor be construed as requiring the consent of the Administrative Agent or any Secured Party for the performance by Seller of any such obligations.

     Section 5.4 Affirmative Covenants of the Servicer.

     From the date hereof until the Collection Date:

     (a) Compliance with Law. The Servicer will comply in all material respects with all Applicable Laws, including those with respect to the Collateral or any part thereof.

     (b) Preservation of Company Existence. The Servicer will preserve and maintain its company existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified in good standing as a limited liability company in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification has had, or could reasonably be expected to have, a Material Adverse Effect.

     (c) Obligations and Compliance with Collateral. The Servicer will duly fulfill and comply with all obligations on the part of the Seller to be fulfilled or complied with under or in connection with each Collateral and will do nothing to impair the rights of the Administrative Agent, as agent for the Secured Parties, or of the Secured Parties in, to and under the Collateral.

     (d) Keeping of Records and Books of Account.

     (i) The Servicer will maintain and implement administrative and operating procedures (including without limitation, an ability to recreate records evidencing Collateral in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all Collateral and the identification of the Collateral.

     (ii) The Servicer shall permit the Administrative Agent or its agents or representatives, to visit the offices of the Servicer during normal office hours and upon reasonable notice and examine and make copies of all documents, books, records and other information concerning the Collateral and discuss matters related thereto with any of the officers or employees of the Servicer having knowledge of such matters.

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     (iii) The Servicer will on or prior to the date hereof, mark its master data processing records and other books and records relating to the Collateral with a legend, acceptable to the Administrative Agent, describing the sale of the Collateral (A) from the Originator to the Seller, and (B) from the Seller to the Purchasers.

     (e) Preservation of Security Interest. The Servicer (at its own expense) will execute and file such financing and continuation statements and any other documents that may be required by any law or regulation of any Governmental Authority to preserve and protect fully the security interest of the Administrative Agent as agent for the Secured Parties in, to and under the Collateral.

     (f) Credit and Collection Policy. The Servicer will (i) comply in all material respects with the Credit and Collection Policy in regard to the Collateral, and (ii) furnish to the Administrative Agent, prior to its effective date, prompt notice of any proposed material change in the Credit and Collection Policy. The Servicer may agree to or otherwise permit to occur changes in Credit and Collection Policy which would not impair the collectibility of any of the Collateral or otherwise adversely affect the interests or remedies of the Administrative Agent or the Secured Parties under this Agreement or any other Transaction Document. The Servicer may not agree to or otherwise permit to occur changes in the Credit and Collection Policy which would impair the collectibility of any of the Collateral or otherwise adversely affect the interests or remedies of the Administrative Agent or the Secured Parties under this Agreement or any other Transaction Document, without the prior written consent of the Administrative Agent.

     (g) Termination Events. The Servicer will provide the Administrative Agent with immediate written notice of the occurrence of each Termination Event and each Unmatured Termination Event of which the Servicer has knowledge or has received notice. In addition, no later than two Business Days following the Servicer’s knowledge or notice of the occurrence of any Termination Event or Unmatured Termination Event, the Servicer will provide to the Administrative Agent a written statement of the chief financial officer or chief accounting officer of the Servicer setting forth the details of such event and the action that the Servicer proposes to take with respect thereto.

     (h) Taxes. The Servicer will file and pay any and all Taxes required to meet the obligations of the Seller and the Servicer under the Transaction Documents.

     (i) Other. The Servicer will promptly furnish to the Administrative Agent such other information, documents, records or reports respecting the Collateral or the condition or operations, financial or otherwise, of the Seller or the Servicer as the Administrative Agent may from time to time reasonably request in order to protect the interests of the Administrative Agent or Secured Parties under or as contemplated by this Agreement.

     (j) Proceedings. As soon as possible and in any event within three Business Days after any executive officer of the Servicer receives notice or obtains knowledge thereof, of any settlement of, material judgment (including a material judgment with respect to the liability phase of a bifurcated trial) in or commencement of any material labor controversy, material litigation, material action, material suit or material proceeding before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting

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the Collateral, the Transaction Documents, the Secured Parties’ interest in the Collateral, or the Seller, the Servicer or the Originator or any other Subsidiary of CapitalSource Inc.; provided that notwithstanding the foregoing, any settlement, judgment, labor controversy, litigation, action, suit or proceeding affecting the Collateral, the Transaction Documents, the Secured Parties’ interest in the Collateral, or the Seller, the Servicer or the Originator or any other Subsidiary of CapitalSource Inc. in excess of $2,500,000 or more shall be deemed to be material for purposes of this Section 5.4(j).

     (k) Deposit of Collections. The Servicer shall promptly (but in no event later than two Business Days after receipt) deposit into the Collection Account any and all Collections received by the Seller, the Servicer or any of their Affiliates.

     (l) Servicing of Participation, Acquired and Assigned Loans. With respect to Participation Loans, Acquired Loans and Assigned Loans, the Servicer shall: (i) segregate all Loan Files with respect to such Loans; (ii) keep separate records with respect to such Loans; and (iii) identify each such Type of Loan on the Servicing Reports required hereunder with respect to such Loans.

     (m) Change-in-Control. Upon the occurrence of a Change-in-Control, the Servicer shall provide the Administrative Agent and the Hedge Counterparties with notice of such Change-in-Control within 30 days after completion of the same.

     (n) Loan Register.

     (i) The Servicer shall maintain with respect to each Noteless Loan a register (each, a “Loan Register”) in which it will record (v) the amount of such Loan, (w) the amount of any principal or interest due and payable or to become due and payable from the Obligor thereunder, (x) the amount of any sum in respect of such Loan received from the Obligor and each Purchaser’s share thereof, (y) the date of origination of such Loan and (z) the maturity date of such Loan. The entries made in each Loan Register maintained pursuant to this Section 5.04(n) shall be prima facie evidence of the existence and amounts of the obligations therein recorded; provided that the failure of the Servicer to maintain any such Loan Register or any error therein shall not in any manner affect the obligations of the Obligor to repay the related Loans in accordance with their terms or any Purchaser’s interest therein.

     (ii) At any time a Noteless Loan is included as part of the Collateral pursuant to this Agreement, the Servicer shall deliver to the Collateral Custodian a copy of the related Loan Register, together with a certificate of a Responsible Officer of the Servicer certifying to the accuracy of such Loan Register as of the date such Loan is included as part of the Collateral.

     Section 5.5 Negative Covenants of the Servicer.

     From the date hereof until the Collection Date.

     (a) Deposits to Special Accounts. Except as otherwise provided in the Lock-Box Agreement, the Servicer will not deposit or otherwise credit, or cause or permit to be so

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deposited or credited, to any Lock-Box Account cash or cash proceeds other than Collections in respect of the Collateral.

     (b) Mergers, Acquisition, Sales, etc. The Servicer will not consolidate with or merge into any other Person or convey or transfer its properties and assets substantially as an entirety to any Person, unless the Servicer is the surviving entity and unless:

     (i) the Servicer has delivered to the Administrative Agent an Officer’s Certificate and an Opinion of Counsel each stating that any consolidation, merger, conveyance or transfer complies with this Section 5.5 and that all conditions precedent herein provided for relating to such transaction have been complied with and, in the case of the Opinion of Counsel, is legal, valid and binding with respect to the Servicer and such other matters as the Administrative Agent may reasonably request;

     (ii) the Servicer shall have delivered notice of such consolidation, merger, conveyance or transfer to the Administrative Agent;

     (iii) after giving effect thereto, no Termination Event or Servicer Default or event that with notice or lapse of time would constitute either a Termination Event or a Servicer Default shall have occurred; and

     (iv) the Administrative Agent has consented in writing to such consolidation, merger, conveyance or transfer.

     (c) Change of Name or Location of Loan Files. The Servicer shall not (x) change its name, move the location of its principal place of business and chief executive office, change the offices where it keeps records concerning the Collateral from the location referred to in Section 13.2, or change the jurisdiction of its formation, or (y) move, or consent to the Collateral Custodian moving, the Required Asset Documents and Asset Files from the location thereof on the Closing Date, unless the Servicer has given at least 30 days’ written notice to the Administrative Agent and has taken all actions required under the UCC of each relevant jurisdiction in order to continue the first priority perfected security interest of the Administrative Agent as agent for the Secured Parties in the Collateral.

     (d) Change in Payment Instructions to Obligors. The Servicer will not add or terminate any bank as a Lock-Box Bank or any Lock-Box Account from those listed in Schedule II or make any change in its instructions to Obligors regarding payments to be made to the Seller or the Servicer or payments to be made to any Lock-Box Bank, unless the Administrative Agent has consented to such addition, termination or change (which consent shall not be unreasonably withheld) and has received duly executed copies of Lock-Box Agreements with each new Lock-Box Bank or with respect to each new Lock-Box Account, as the case may be.

     (e) Extension or Amendment of Assets. The Servicer will not, except as otherwise permitted in Section 6.4(a), extend, amend or otherwise modify the terms of any Assets; provided that no waiver, extension, modification or alteration otherwise permitted under Section 6.4(a) shall (i) alter the status of any Asset as a Delinquent Asset or Charged-Off Asset, (ii) in the reasonable judgment of the Administrative Agent, prevent or delay any Asset from

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becoming a Delinquent Asset or Charged-Off Asset, or (iii) limit and/or impair the rights of the Administrative Agent or the Secured Parties under this Agreement.

     Section 5.6 Affirmative Covenants of the Backup Servicer.

     From the date hereof until the Collection Date:

     (a) Compliance with Law. The Backup Servicer will comply in all material respects with all Applicable Laws.

     (b) Preservation of Existence. The Backup Servicer will preserve and maintain its existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified in good standing in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification has had, or could reasonably be expected to have, a Material Adverse Effect.

     Section 5.7 Negative Covenants of the Backup Servicer.

     From the date hereof until the Collection Date:

     No Changes in Backup Servicer Fee. The Backup Servicer will not make any changes to the Backup Servicer Fee set forth in the Backup Servicer and Collateral Custodian Fee Letter without the prior written approval of the Administrative Agent.

     Section 5.8 Affirmative Covenants of the Collateral Custodian.

     From the date hereof until the Collection Date:

     (a) Compliance with Law. The Collateral Custodian will comply in all material respects with all Applicable Laws.

     (b) Preservation of Existence. The Collateral Custodian will preserve and maintain its existence, rights, franchises and privileges in the jurisdiction of its formation and qualify and remain qualified in good standing in each jurisdiction where failure to preserve and maintain such existence, rights, franchises, privileges and qualification has had, or could reasonably be expected to have, a Material Adverse Effect.

     (c) Location of Required Asset Documents. The Required Asset Documents shall remain at all times in the possession of the Collateral Custodian at the address set forth herein unless notice of a different address is given in accordance with the terms hereof or unless the Administrative Agent agrees to allow certain Required Asset Documents to be released to the Servicer on a temporary basis in accordance with the terms hereof.

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     Section 5.9 Negative Covenants of the Collateral Custodian.

     From the date hereof until the Collection Date:

     (a) Required Asset Documents. The Collateral Custodian will not dispose of any documents constituting the Required Asset Documents in any manner that is inconsistent with the performance of its obligations as the Collateral Custodian pursuant to this Agreement and will not dispose of any Collateral except as contemplated by this Agreement.

     (b) No Changes in Collateral Custodian Fee. The Collateral Custodian will not make any changes to the Collateral Custodian Fee set forth in the Backup Servicer and Collateral Custodian Fee Letter without the prior written approval of the Administrative Agent.

     Section 5.10 Covenant of the Seller, the Servicer and the Originator.

     Until the Collection Date, each of the Seller, the Servicer and the Originator will, at their respective expense, during regular business hours upon reasonable prior notice as requested by the Administrative Agent (provided that such requests will be limited to two times per year absent an Event of Default), permit the Administrative Agent or its agents or representatives (such as independent audit and consulting firms specializing in securitization transactions) two times per year (provided that if a Termination Event shall have occurred there shall be no such limitation), (i) to conduct periodic audits of the Assets and the related books and records and collections systems of the Seller, the Servicer or the Originator, as the case may be, (ii) to examine and make copies of and abstracts from all books, records and documents (including, without limitation, computer tapes and disks) in the possession or under the control of the Seller, the Servicer or the Originator, as the case may be, relating to Assets, and (iii) to visit the offices and properties of the Seller, the Servicer or the Originator, as the case may be, for the purpose of examining such materials described in clause (ii) above, and to discuss matters relating to Assets or the Seller’s, the Servicer’s or the Originator’s performance under the Transaction Documents with any of the officers or employees of the Seller, the Servicer or the Originator, as the case may be, having knowledge of such matters.

ARTICLE VI

ADMINISTRATION AND SERVICING OF ASSETS

     Section 6.1 Designation of the Servicer.

     (a) Initial Servicer. The servicing, administering and collection of the Collateral shall be conducted by the Person designated as the Servicer hereunder from time to time in accordance with this Section 6.1. Until the Administrative Agent gives to the Originator a Servicer Termination Notice, the Originator is hereby designated as, and hereby agrees to perform the duties and responsibilities of, the Servicer pursuant to the terms hereof.

     (b) Successor Servicer. Upon the Servicer’s receipt of a Servicer Termination Notice (with a copy to the Backup Servicer) from the Administrative Agent pursuant to the terms of Section 6.15, the Servicer agrees that it will terminate its activities as Servicer hereunder in a manner that the Administrative Agent reasonably believes will facilitate the transition of the

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performance of such activities to a successor Servicer, and the successor Servicer shall assume each and all of the Servicer’s obligations to service and administer the Collateral, on the terms and subject to the conditions herein set forth, and the Servicer shall use its best reasonable efforts to assist the successor Servicer in assuming such obligations.

     (c) Subcontracts. The Servicer may, with the prior consent of the Administrative Agent, subcontract with any other Person for servicing, administering or collecting the Collateral; provided that the Servicer shall remain liable for the performance of the duties and obligations of the Servicer pursuant to the terms hereof and that any such subcontract may be terminated upon the occurrence of a Servicer Default.

     (d) Servicing Programs. In the event that the Servicer uses any software program in servicing the Collateral that it licenses from a third party, the Servicer shall use its best reasonable efforts to obtain, either before the Closing Date or as soon as possible thereafter, whatever licenses or approvals are necessary to allow the Administrative Agent or the Backup Servicer to use such program.

     Section 6.2 Duties of the Servicer.

     (a) Appointment. The Seller hereby appoints the Servicer as its agent, as from time to time designated pursuant to Section 6.1, to service the Collateral and enforce its respective rights in and under such Collateral. The Servicer hereby accepts such appointment and agrees to perform the duties and obligations with respect thereto as set forth herein. The Servicer and the Seller hereby acknowledge that the Administrative Agent and the Secured Parties are third party beneficiaries of the obligations undertaken by the Servicer hereunder.

     (b) Duties. The Servicer shall take or cause to be taken all such actions as may be necessary or advisable to collect on the Collateral from time to time, all in accordance with Applicable Laws, with reasonable care and diligence, and in accordance with the Credit and Collection Policy. Without limiting the foregoing, the duties of the Servicer shall include the following:

     (i) preparing and submitting of claims to, and post-billing liaison with, Obligors on each Asset;

     (ii) maintaining all necessary servicing records with respect to the Collateral and providing such reports to the Administrative Agent in respect of the servicing of the Collateral (including information relating to its performance under this Agreement) as may be required hereunder or as the Administrative Agent may reasonably request;

     (iii) maintaining and implementing administrative and operating procedures (including, without limitation, an ability to recreate servicing records evidencing the Collateral in the event of the destruction of the originals thereof) and keeping and maintaining all documents, books, records and other information reasonably necessary or advisable for the collection of the Collateral;

     (iv) promptly delivering to the Administrative Agent or the Collateral Custodian, from time to time, such information and servicing records (including

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information relating to its performance under this Agreement) as the Administrative Agent or the Collateral Custodian may from time to time reasonably request;

     (v) identifying each Asset clearly and unambiguously in its servicing records to reflect that such Asset is owned by the Seller and that the Seller is selling an undivided ownership interest therein to the Secured Parties pursuant to this Agreement;

     (vi) notifying the Administrative Agent of any material action, suit, proceeding, dispute, offset, deduction, defense or counterclaim (1) that is or is threatened to be asserted by an Obligor with respect to any Asset (or portion thereof) of which it has knowledge or has received notice; or (2) that is reasonably expected to have a Material Adverse Effect;

     (vii) notifying the Administrative Agent of any proposed change in the Credit and Collection Policy that could have an adverse effect on the collectibility of the Collateral, on the Seller or on the interests of the Administrative Agent or any Secured Party;

     (viii) using its reasonable best efforts to maintain the perfected security interest of the Administrative Agent, as agent for the Secured Parties, in the Collateral;

     (ix) maintaining in the same manner as the Collateral Custodian holds the Required Asset Documents, the Asset File (other than Required Asset Documents) with respect to each Asset included as part of the Collateral; and

     (x) the Servicer shall make payments pursuant to the terms of the Monthly Report in accordance with Section 2.9 and Section 2.10.

     (c) Hedge Covenants.

     (i) As of the initial Payment Date and thereafter, so long as any of the Class A VFCs are outstanding, if on any date either:

     (1) the then current Aggregate Notional Amount of all Hedge Transactions (excluding any interest rate cap transactions) hedging the Prime Rate Assets (i) is less than the aggregate amount of the Class A Advances Outstanding of such Prime Rate Assets or (ii) is greater than the amount specified in clause (i) above by more than the Floating Prime Rate Permitted Excess Amount; or

     (2) the Aggregate Notional Amount for any future calculation period of all Hedge Transactions (excluding any interest rate cap transactions) hedging the Prime Rate Assets (i) is less than the projected aggregate amount of the Class A Advances Outstanding of the Prime Rate Assets for the corresponding Collection Period or (ii) is greater than the amount specified in clause (i) above by more than the Floating Prime Rate Permitted Excess Amount;

then, not later than 1:00 p.m. (New York City time) on the Determination Date preceding the next Payment Date, the Servicer will notify the Administrative Agent, the Hedge Counterparties

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and the Rating Agencies of such event and, with effect on such next Payment Date, one or more of the Hedge Transactions hedging the Prime Rate Assets will be reduced or amended, or the Seller will enter into one or more additional Hedge Transactions, as the case may be, in accordance with the terms of the applicable Hedge Agreements so that, as applicable, the Aggregate Notional Amount for each calculation period of the Hedge Transactions hedging the Prime Rate Assets will be equal to the aggregate amount of the Class A Advances Outstanding of the Prime Rate Assets at the end of the corresponding Collection Period or as projected to be outstanding at the end of the corresponding Collection Period,

     (ii) So long as any of the Class A VFCs are outstanding, if on any date either:

     (1) the then current Aggregate Notional Amount of all Hedge Transactions under all Hedge Agreements then in effect (excluding any interest rate cap transactions) exceeds the then Aggregate Outstanding Asset Balance; or

     (2) the Aggregate Notional Amount of all Hedge Transactions (excluding any interest rate cap transactions) for any future calculation period under all Hedge Agreements then in effect exceeds the projected Aggregate Outstanding Asset Balance for the corresponding Collection Period;

then, not later than 1:00 p.m. (New York City time) on the Determination Date preceding the next Payment Date, the Servicer will notify the Administrative Agent, the Hedge Counterparties and the Rating Agencies of such event and, with effect on such next Payment Date, one or more of the Hedge Transactions will be reduced or amended in accordance with the terms of the applicable Hedge Agreements so that the Aggregate Notional Amount of the Hedge Transactions for any future calculation period will not exceed the Aggregate Outstanding Asset Balance for the corresponding Collection Period.

     (d) Notwithstanding anything to the contrary contained herein, the exercise by the Administrative Agent and the Secured Parties of their rights hereunder shall not release the Servicer, the Originator or the Seller from any of their duties or responsibilities with respect to the Collateral. The Secured Parties, the Administrative Agent and the Collateral Custodian (except in the role of Backup Servicer) shall not have any obligation or liability with respect to any Collateral, nor shall any of them be obligated to perform any of the obligations of the Servicer hereunder.

     (e) Any payment by an Obligor in respect of any Indebtedness owed by it to the Originator or the Seller shall, except as otherwise specified by such Obligor or otherwise required by contract or Applicable Law and unless otherwise instructed by the Administrative Agent, be applied as a Collection of an item of Collateral of such Obligor (starting with the oldest such Collateral) to the extent of any amounts then due and payable thereunder before being applied to any other receivable or other obligation of such Obligor.

     Section 6.3 Authorization of the Servicer.

     (a) Each of the Seller, the Administrative Agent, each Purchaser and each Hedge Counterparty hereby authorizes the Servicer (including any successor thereto) to take any and all

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reasonable steps in its name and on its behalf necessary or desirable and not inconsistent with the sale of the Collateral to the Purchasers and each Hedge Counterparty, in the determination of the Servicer, to collect all amounts due under any and all Collateral, including, without limitation, endorsing any of their names on checks and other instruments representing Collections, executing and delivering any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Collateral and, after the delinquency of any Collateral and to the extent permitted under and in compliance with Applicable Law, to commence proceedings with respect to enforcing payment thereof, to the same extent as the Originator could have done if it had continued to own such Collateral. The Originator, the Seller and the Administrative Agent on behalf of the Secured Parties and each Hedge Counterparty shall furnish the Servicer (and any successors thereto) with any powers of attorney and other documents necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties hereunder, and shall cooperate with the Servicer to the fullest extent in order to ensure the collectibility of the Collateral. In no event shall the Servicer be entitled to make the Secured Parties, any Hedge Counterparty, the Collateral Custodian, the Administrative Agent a party to any litigation without such party’s express prior written consent, or to make the Seller a party to any litigation (other than any routine foreclosure or similar collection procedure) without the Administrative Agent’s consent.

     (b) After a Termination Event has occurred and is continuing, at the direction of the Administrative Agent, the Servicer shall take such action as the Administrative Agent may deem necessary or advisable to enforce collection of the Collateral; provided that the Administrative Agent may, at any time that a Termination Event or Unmatured Termination Event has occurred and is continuing, notify any Obligor with respect to any Collateral of the assignment of such Collateral to the Administrative Agent and direct that payments of all amounts due or to become due be made directly to the Administrative Agent or any servicer, collection agent or lock-box or other account designated by the Administrative Agent and, upon such notification and at the expense of the Seller, the Administrative Agent may enforce collection of any such Collateral, and adjust, settle or compromise the amount or payment thereof.

     Section 6.4 Collection of Payments.

     (a) Collection Efforts, Modification of Collateral. The Servicer will use its reasonable best efforts to collect all payments called for under the terms and provisions of the Assets included in the Collateral as and when the same become due in accordance with the Credit and Collection Policy, and will follow those collection procedures that it follows with respect to all comparable Collateral that it services for itself or others. The Servicer may not waive, modify or otherwise vary any provision of an item of Collateral in a manner that, in its reasonable judgment, would impair the collectibility of the Collateral or in any manner contrary to the Credit and Collection Policy. The Servicer may otherwise amend or modify the underlying documents related to any item of Collateral in compliance with the Credit and Collection Policy.

     (b) Prepaid Asset. Prior to a Termination Event, upon any Asset becoming a Prepaid Asset, the Servicer shall either (x) provide a Substitute Asset in accordance with Section 2.18 or (y) deposit to the Collection Account (in addition to all amounts received from the related Obligor upon the prepayment of such Asset) an amount equal to the excess, if any, of the sum of

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(a) the Outstanding Asset Balance on the date of such payment, (b) any outstanding Servicer Advances thereon, (c) any accrued and unpaid interest, and (d) all Hedge Breakage Costs owing to the relevant Hedge Counterparty for any termination of one or more Hedge Transactions, in whole or in part, as required by the terms of any Hedging Agreement as the result of any such Asset becoming a Prepaid Asset, over the amount received from the related Obligor upon such prepayment (such excess, the “Prepayment Amount”), in each case, only to the extent necessary to cause the Availability as of such date (after giving effect to such substitution or deposit, as applicable) to be greater than or equal to zero. After a Termination Event has occurred, upon any Asset becoming a Prepaid Asset, the Servicer shall deposit to the Collection Account all amounts received from the related Obligor upon the prepayment of such Asset plus the Prepayment Amount, if any.

     (c) Acceleration. If required by the Credit and Collection Policy, the Servicer shall accelerate the maturity of all or any Scheduled Payments and other amounts due under any Asset in which a default under the terms thereof has occurred and is continuing (after the lapse of any applicable grace period) promptly after such Asset becomes a Charged-Off Asset.

     (d) Taxes and other Amounts. To the extent provided for in any Asset, the Servicer will use its reasonable best efforts to collect all payments with respect to amounts due for taxes, assessments and insurance premiums relating to such Asset and remit such amounts to the appropriate Governmental Authority or insurer on or prior to the date such payments are due.

     (e) Payments to Lock-Box Account. Subject to Section 5.1(p), on or before the applicable Cut-Off Date, the Servicer shall have instructed all Obligors to make all payments in respect of the Collateral to the Lock-Box or directly to the Lock-Box Account.

     (f) Establishment of the Collection Account. The Servicer shall cause to be established, on or before the Closing Date, with the Collateral Custodian, and maintained in the name of the Administrative Agent as agent for the Secured Parties, with an office or branch of a depository institution or trust company a segregated corporate trust account entitled Collection Account for Citicorp North America, Inc., as Administrative Agent for the Secured Parties (the “Collection Account”), and the Servicer shall further maintain a subaccount within the Collection Account for the purpose of segregating, within two Business Days of the receipt of any Collections, Principal Collections (the “Principal Collections Account”), over which the Collateral Custodian as agent for the Secured Parties shall have control and from which neither the Originator, Servicer nor the Seller shall have any right of withdrawal except in accordance with Section 2.9(b); provided that at all times such depository institution or trust company shall be acceptable to the Administrative Agent and a depository institution organized under the laws of the United States of America or any one of the States thereof or the District of Columbia (or any domestic branch of a foreign bank), (i) (a) that has either (1) a long-term unsecured debt rating of “A” or better by S&P and “A2” or better by Moody’s or (2) a short-term unsecured debt rating or certificate of deposit rating of “A-1” or better by S&P or “P-1” or better by Moody’s, (b) the parent corporation of which has either (1) a long-term unsecured debt rating of “A” or better by S&P and “A2” or better by Moody’s or (2) a short-term unsecured debt rating or certificate of deposit rating of “A-1” or better by S&P and “P-1” or better by Moody’s or (c) is otherwise acceptable to the Administrative Agent and (ii) whose deposits are insured by the

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Federal Deposit Insurance Corporation (any such depository institution or trust company, a “Qualified Institution”).

     (g) Establishment of the Reserve Account. The Seller or the Servicer on its behalf shall establish, on or before the Closing Date, with the Collateral Custodian, and cause to be maintained in the name of the Seller and assigned to the Administrative Agent, with a Qualified Institution an account into which all amounts payable pursuant to Section 2.9(a)(7) of this Agreement shall be deposited (the “Reserve Account”).

     (h) Intentionally Omitted.

     (i) Adjustments. If (i) the Servicer makes a deposit into the Collection Account in respect of a Collection of an item of Collateral and such Collection was received by the Servicer in the form of a check that is not honored for any reason or (ii) the Servicer makes a mistake with respect to the amount of any Collection and deposits an amount that is less than or more than the actual amount of such Collection, the Servicer shall appropriately adjust the amount subsequently deposited into the Collection Account to reflect such dishonored check or mistake. Any Scheduled Payment in respect of which a dishonored check is received shall be deemed not to have been paid.

     Section 6.5 Servicer Advances.

     For each Collection Period, if the Servicer determines that any Scheduled Payment (or portion thereof) that was due and payable pursuant to an Asset during such Collection Period was not received prior to the last day of such Collection Period, the Servicer may (in its sole and absolute discretion) make an advance in an amount up to the amount of such delinquent Scheduled Payment. The Servicer will deposit any Servicer Advances into the Collection Account on or prior to 9:00 a.m. (New York City, New York time) on the Business Day prior to the related Payment Date, in immediately available funds. Notwithstanding anything to the contrary contained herein, no Successor Servicer shall have any responsibility to make Servicer Advances.

     Section 6.6 Realization Upon Charged-Off Assets.

     The Servicer will use reasonable efforts to repossess or otherwise comparably convert the ownership of any Related Property relating to a Charged-Off Asset and will act as sales and processing agent for Related Property that it repossesses. The Servicer will follow such other practices and procedures as it deems necessary or advisable and as are customary and usual in its servicing of contracts and other actions by the Servicer in order to realize upon such Related Property, which practices and procedures may include reasonable efforts to enforce all obligations of Obligors and repossessing and selling such Related Property at public or private sale in circumstances other than those described in the preceding sentence. Without limiting the generality of the foregoing, unless the Administrative Agent has specifically given instruction to the contrary, the Servicer may sell any such Related Property to the Servicer or its Affiliates for a purchase price equal to the then fair market value thereof, any such sale to be evidenced by a certificate of a Responsible Officer of the Servicer delivered to the Administrative Agent setting forth the Asset, the Related Property, the sale price of the Related Property and certifying that

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such sale price is the fair market value of such Related Property. In any case in which any such Related Property has suffered damage, the Servicer will not expend funds in connection with any repair or toward the repossession of such Related Property unless it reasonably determines that such repair and/or repossession will increase the Recoveries by an amount greater than the amount of such expenses. The Servicer will remit to the Collection Account the Recoveries received in connection with the sale or disposition of Related Property relating to a Charged-Off Asset.

     Section 6.7 Maintenance of Insurance Policies.

     The Servicer will use its reasonable best efforts to ensure that each Obligor maintains an Insurance Policy with respect to any Related Property (other than accounts receivable) in an amount at least equal to the Servicer’s good faith and commercially reasonable estimate of the value of the real property, inventory, and/or equipment constituting such Related Property and shall ensure that each such Insurance Policy names the Servicer as loss payee and as an insured thereunder and all of the Seller’s right, title and interest therein is fully assigned to the Administrative Agent, as agent for the Secured Parties. Additionally, the Servicer will require that each Obligor maintain property damage liability insurance during the term of each Asset in amounts and against risks customarily insured against by the Obligor on property owned by it. If an Obligor fails to maintain property damage insurance, the Servicer may in its discretion purchase and maintain such insurance on behalf of, and at the expense of, the Obligor. In connection with its activities as Servicer, the Servicer agrees to present, on behalf of the Administrative Agent, claims to the insurer under each Insurance Policy and any such liability policy, and to settle, adjust and compromise such claims, in each case, consistent with the terms of each Asset. The Servicer’s Insurance Policies with respect to the Related Property will insure against liability for physical damage relating to such Related Property in accordance with the requirements of the Credit and Collection Policy. The Servicer hereby disclaims any and all right, title and interest in and to any Insurance Policy and Insurance Proceeds with respect to any Related Property, including any Insurance Policy with respect to which it is named as loss payee and as an insured, and agrees that it has no equitable, beneficial or other interest in the Insurance Polices and Insurance Proceeds other than being named as loss payee and as an insured. The Servicer acknowledges that with respect to the Insurance Policies and Insurance Proceeds thereof that it is acting solely in the capacity as agent for the Administrative Agent, as agent for the Secured Parties.

     Section 6.8 Servicing Compensation.

     As compensation for its servicing activities hereunder and reimbursement for its expenses, the Servicer shall be entitled to receive the Servicing Fee to the extent of funds available therefor pursuant to the provisions of Section 2.9(a)(3) or Section 2.10(a)(3), as applicable.

     Section 6.9 Payment of Certain Expenses by Servicer.

     The Servicer will be required to pay all expenses incurred by it in connection with its activities under this Agreement, including fees and disbursements of independent accountants, Taxes imposed on the Servicer, expenses incurred in connection with payments and reports

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pursuant to this Agreement, and all other fees and expenses not expressly stated under this Agreement for the account of the Seller, but excluding Liquidation Expenses incurred as a result of activities contemplated by Section 6.6; provided that for avoidance of doubt, to the extent Liquidation Expenses relate to a Loan and a Retained Interest such Liquidation Expenses shall be allocated pro rata. The Servicer will be required to pay all reasonable fees and expenses owing to any bank or trust company in connection with the maintenance of the Collection Account and the Lock-Box Account. The Servicer shall be required to pay such expenses for its own account and shall not be entitled to any payment therefor other than the Servicing Fee.

     Section 6.10 Reports.

     (a) Borrowing Notice. On each Funding Date and on each reduction of Advances Outstanding pursuant to Section 2.4(b), the Seller (and the Servicer on its behalf) will provide a Borrowing Notice, updated as of such date, to the Administrative Agent (with a copy to the Collateral Custodian).

     (b) Monthly Report. On each Reporting Date, the Servicer will provide to the Seller, the Administrative Agent, the Backup Servicer and the Liquidity Banks, a monthly statement including a Borrowing Base calculated as of the most recent Determination Date, with respect to the related Collection Period signed by a Responsible Officer of the Servicer and the Seller and substantially in the form of Exhibit C (a “Monthly Report”).

     (c) Servicer’s Certificate. Together with each Monthly Report, the Servicer shall submit to the Administrative Agent and the Liquidity Banks a certificate (a “Servicer’s Certificate”), signed by a Responsible Officer of the Servicer and substantially in the form of Exhibit J.

     (d) Financial Statements. The Servicer will submit to the Administrative Agent, each Purchaser, the Backup Servicer and each Liquidity Bank, (i) within 45 days after the end of each of its first three fiscal quarters, commencing with the fiscal quarter ending September 30, 2007, a copy of the quarterly report on Form 10-Q of CapitalSource Inc. for the most recent fiscal quarter and unaudited consolidating statements, and (ii) within 90 days after the end of each fiscal year, commencing with the fiscal year ending December 31, 2007, a copy of the annual report on Form 10-K of CapitalSource Inc., in each case in the form as filed with the Securities and Exchange Commission and unaudited consolidating statements.

     (e) Tax Returns. Upon demand by the Administrative Agent or any Liquidity Bank, copies of all federal, state and local Tax returns and reports filed by the Seller and Servicer, or in which the Seller or Servicer was included on a consolidated or combined basis (excluding sales, use and like taxes).

     (f) Financial Statements of Obligors. Upon demand by the Administrative Agent or any Liquidity Bank, the Servicer will provide to such party the financial statements of any Obligor.

     (g) Other Reports. The Servicer will provide any other reports requested by the Administrative Agent and reasonably acceptable to the Originator.

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     Section 6.11 Annual Statement as to Compliance.

     The Servicer will provide to the Administrative Agent, within 90 days following the end of each fiscal year of the Servicer, commencing with the fiscal year ending on December 31, 2007, a fiscal report signed by a Responsible Officer of the Servicer certifying that (a) a review of the activities of the Servicer, and the Servicer’s performance pursuant to this Agreement, for the fiscal period ending on the last day of such fiscal year has been made under such Person’s supervision and (b) the Servicer has performed or has caused to be performed in all material respects all of its obligations under this Agreement throughout such year and no Servicer Default has occurred and is continuing.

     Section 6.12 Annual Independent Public Accountant’s Servicing Reports.

     The Servicer will cause a firm of nationally recognized independent public accountants (who may also render other services to the Servicer) to furnish to the Administrative Agent, the Collateral Custodian and the Backup Servicer, within 90 days following the end of each fiscal year of the Servicer, commencing with the fiscal year ending on December 31, 2007: (i) a report relating to such fiscal year to the effect that (a) such firm has reviewed certain documents and records relating to the servicing of the Collateral, and (b) based on such examination, such firm is of the opinion that the Monthly Reports for such year were prepared in compliance with this Agreement, except for such exceptions as it believes to be immaterial and such other exceptions as will be set forth in such firm’s report and (ii) a report covering such fiscal year to the effect that such accountants have applied certain agreed-upon procedures (which procedures shall have been approved by the Administrative Agent) to certain documents and records relating to the Collateral under any Transaction Document, compared the information contained in the Monthly Reports and the Servicer’s Certificates delivered during the period covered by such report with such documents and records and that no matters came to the attention of such accountants that caused them to believe that such servicing was not conducted in compliance with this Article VI, except for such exceptions as such accountants shall believe to be immaterial and such other exception as shall be set forth in such statement.

     Section 6.13 Limitation on Liability of the Servicer and Others

     Except as provided herein, the Servicer shall not be under any liability to the Administrative Agent, the Secured Parties or any other Person for any action taken or for refraining from the taking of any action pursuant to this Agreement whether arising from express or implied duties under this Agreement; provided that notwithstanding anything to the contrary contained herein nothing shall protect the Servicer against any liability that would otherwise be imposed by reason of its willful misfeasance, bad faith or negligence in the performance of duties or by reason of its willful misconduct hereunder.

     Section 6.14 The Servicer Not to Resign.

     The Servicer shall not resign from the obligations and duties hereby imposed on it except upon the Servicer’s determination that (i) the performance of its duties hereunder is or becomes impermissible under Applicable Law and (ii) there is no reasonable action that the Servicer could take to make the performance of its duties hereunder permissible under Applicable Law. Any

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such determination permitting the resignation of the Servicer shall be evidenced as to clause (i) above by an Opinion of Counsel to such effect delivered to the Administrative Agent and the Backup Servicer. No such resignation shall become effective until a Successor Servicer shall have assumed the responsibilities and obligations of the Servicer in accordance with Section 6.2.

     Section 6.15 Servicer Defaults.

     If any one of the following events (a “Servicer Default”) shall occur and be continuing:

     (a) any failure by the Servicer to make any payment, transfer or deposit (including without limitation with respect to Collections) as required by this Agreement on the date such payment, transfer or deposit is required to be made;

     (b) any failure by the Servicer to give instructions or notice to the Administrative Agent as required by this Agreement, or to deliver any required Monthly Report or other Required Reports hereunder on or before the date occurring two Business Days after the date such instruction, notice or report is required to be made or given, as the case may be, under the terms of this Agreement;

     (c) any failure on the part of the Servicer duly to observe or perform in any material respect any other covenants or agreements of the Servicer set forth in this Agreement or the other Transaction Documents to which the Servicer is a party and the same continues unremedied for a period of 10 days after the earlier to occur of (i) the date on which written notice of such failure requiring the same to be remedied shall have been given to the Servicer by the Administrative Agent and (ii) the date on which the Servicer becomes aware thereof;

     (d) any representation, warranty or certification made by the Servicer in any Transaction Document or in any certificate delivered pursuant to any Transaction Document shall prove to have been incorrect in any material respect when made, and which (if capable of being cured without any adverse impact on the Purchasers or the collectibility of the Assets) continues to be unremedied for a period of 10 days after the earlier to occur of (i) the date on which written notice of such incorrectness requiring the same to be remedied shall have been given to the Servicer by the Administrative Agent and (ii) the date on which the Servicer becomes aware thereof;

     (e) an Insolvency Event shall occur with respect to the Servicer;

     (f) any material delegation of the Servicer’s duties that is not permitted by Section 6.1;

     (g) any financial or other information reasonably requested by the Administrative Agent or any Purchaser is not provided as requested within a reasonable amount of time following such request;

     (h) the rendering against the Servicer of one or more final judgments, decrees or orders for the payment of money in excess of $10,000,000, individually or in the aggregate, and the continuance of such judgment, decree or order unsatisfied and in effect for any period of more than 60 consecutive days without a stay of execution;

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     (i) the failure of the Servicer to make any payment due with respect to any recourse debt or other obligations, which debt or other obligations are in excess of $10,000,000, individually or in the aggregate, or the occurrence of any event or condition that would at such time permit acceleration of such recourse debt or other obligations;

     (j) CapitalSource Inc.’s Consolidated Tangible Net Worth is less than (i) $2,000,000,000 plus (ii) 70% of the cumulative Net Proceeds of Capital Stock/Conversion of Debt received at any time after December 31, 2006;

     (k) [Reserved];

     (l) the Servicer fails in any material respect to comply with the Credit and Collection Policy regarding the servicing of the Collateral; or

     (m) the Servicer consents or agrees to, or otherwise permits to occur, any amendment, modification, change, supplement or rescission of or to the Credit and Collection Policy (after the adoption of same) in whole or in part that could be reasonably expected to have a Material Adverse Effect upon the Collateral, the Administrative Agent or the Secured Parties, without the prior written consent of the Administrative Agent.

then notwithstanding anything herein to the contrary, so long as any such Servicer Default shall not have been remedied within any applicable cure period prior to the date of the Servicer Termination Notice (defined below), the Administrative Agent, by written notice to the Servicer (with a copy to the Backup Servicer) (a “Servicer Termination Notice”), may terminate all of the rights and obligations of the Servicer as Servicer under this Agreement.

     Section 6.16 Appointment of Successor Servicer.

     (a) On and after the receipt by the Servicer of a Servicer Termination Notice pursuant to Section 6.15, the Servicer shall continue to perform all servicing functions under this Agreement until the date specified in the Servicer Termination Notice or otherwise specified by the Administrative Agent in writing or, if no such date is specified in such Servicer Termination Notice or otherwise specified by the Administrative Agent, until a date mutually agreed upon by the Servicer and the Administrative Agent. The Administrative Agent may at the time described in the immediately preceding sentence, appoint the Backup Servicer as the Servicer hereunder, and the Backup Servicer shall on such date assume all obligations of the Servicer hereunder, and all authority and power of the Servicer under this Agreement shall pass to and be vested in the Backup Servicer. As compensation therefor, the Backup Servicer shall be entitled to the Servicing Fee, together with other servicing compensation in the form of assumption fees, late payment charges or otherwise as provided herein; including, without limitation, Transition Expenses. In the event that the Administrative Agent does not so appoint the Backup Servicer, there is no Backup Servicer or the Backup Servicer is unable to assume such obligations on such date, the Administrative Agent shall as promptly as possible appoint a successor servicer (the “Successor Servicer”), and such Successor Servicer shall accept its appointment by a written assumption in a form acceptable to the Administrative Agent. In the event that a Successor Servicer has not accepted its appointment at the time when the Servicer ceases to act as Servicer, the Administrative Agent shall petition a court of competent jurisdiction to appoint any

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established financial institution, having a net worth of not less than $50,000,000 and whose regular business includes the servicing of Collateral, as the Successor Servicer hereunder.

     (b) Upon its appointment, the Backup Servicer (subject to Section 6.16(a)) or the Successor Servicer, as applicable, shall be the successor in all respects to the Servicer with respect to servicing functions under this Agreement and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer by the terms and provisions hereof, and all references in this Agreement to the Servicer shall be deemed to refer to the Backup Servicer or the Successor Servicer, as applicable; provided that the Backup Servicer or Successor Servicer, as applicable, shall have (i) no liability with respect to any action performed by the terminated Servicer prior to the date that the Backup Servicer or Successor Servicer, as applicable, becomes the successor to the Servicer or any claim of a third party based on any alleged action or inaction of the terminated Servicer, (ii) no obligation to perform any advancing obligations, if any, of the Servicer unless it elects to in its sole discretion, (iii) no obligation to pay any taxes required to be paid by the Servicer (provided that the Backup Servicer or Successor Servicer, as applicable, shall pay any income taxes for which it is liable), (iv) no obligation to pay any of the fees and expenses of any other party to the transactions contemplated hereby, and (v) no liability or obligation with respect to any Servicer indemnification obligations of any prior Servicer, including the original Servicer. The indemnification obligations of the Backup Servicer or the Successor Servicer, as applicable, upon becoming a Successor Servicer, are expressly limited to those arising on account of its failure to act in good faith and with reasonable care under the circumstances. In addition, the Backup Servicer or Successor Servicer, as applicable, shall have no liability relating to the representations and warranties of the Servicer contained in Article IV. Further, for so long as the Backup Servicer shall be the Successor Servicer, the provisions of Section 2.15, Section 2.16(b) and Section 2.16(e) of this Agreement shall not apply to it in its capacity as Servicer.

     (c) All authority and power granted to the Servicer under this Agreement shall automatically cease and terminate upon termination of this Agreement and shall pass to and be vested in the Seller and, without limitation, the Seller is hereby authorized and empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, all documents and other instruments, and to do and accomplish all other acts or things necessary or appropriate to effect the purposes of such transfer of servicing rights. The Servicer agrees to cooperate with the Seller in effecting the termination of the responsibilities and rights of the Servicer to conduct servicing of the Collateral.

     (d) Upon the Backup Servicer receiving notice that it is required to serve as the Servicer hereunder pursuant to the foregoing provisions of this Section 6.16, the Backup Servicer will promptly begin the transition to its role as Servicer. Notwithstanding the foregoing, the Backup Servicer may, in its discretion, appoint, or petition a court of competent jurisdiction to appoint, any established servicing institution as the successor to the Servicer hereunder in the assumption of all or any part of the responsibilities, duties or liabilities of the Servicer hereunder. As compensation, any Successor Servicer (including, without limitation, the Administrative Agent) so appointed shall be entitled to receive the Servicing Fee, together with any other servicing compensation in the form of assumption fees, late payment charges or otherwise as provided herein that accrued prior thereto, including, without limitation, Transition Expenses. In the event the Backup Servicer is required to solicit bids as provided herein, the Backup Servicer

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shall solicit, by public announcement, bids from banks and mortgage servicing institutions meeting the qualifications set forth in Section 6.16(a). Such public announcement shall specify that the Successor Servicer shall be entitled to the full amount of the Servicing Fee as servicing compensation, together with the other servicing compensation in the form of assumption fees, late payment charges or otherwise that accrued prior thereto. Within 30 days after any such public announcement, the Backup Servicer shall negotiate and effect the sale, transfer and assignment of the servicing rights and responsibilities hereunder to the qualified party submitting the highest qualifying bid. The Backup Servicer shall deduct from any sum received by the Backup Servicer from the successor to the Servicer in respect of such sale, transfer and assignment all costs and expenses of any public announcement and of any sale, transfer and assignment of the servicing rights and responsibilities hereunder and the amount of any unreimbursed Servicing Advances. After such deductions, the remainder of such sum shall be paid by the Backup Servicer to the Servicer at the time of such sale, transfer and assignment to the Servicer’s successor. The Backup Servicer and such successor shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. No appointment of a successor to the Servicer hereunder shall be effective until written notice of such proposed appointment shall have been provided by the Backup Servicer to the Administrative Agent and the Backup Servicer shall have consented thereto. The Backup Servicer shall not resign as servicer until a Successor Servicer has been appointed and accepted such appointment. Notwithstanding anything to the contrary contained herein, in no event shall Wells Fargo, in any capacity, be liable for any Servicing Fee or for any differential in the amount of the Servicing Fee paid hereunder and the amount necessary to induce any Successor Servicer under this Agreement and the transactions set forth or provided for by this Agreement.

ARTICLE VII

THE BACKUP SERVICER

     Section 7.1 Designation of the Backup Servicer.

     (a) Initial Backup Servicer. The backup servicing role with respect to the Collateral shall be conducted by the Person designated as Backup Servicer hereunder from time to time in accordance with this Section 7.1. Until the Administrative Agent shall give to Wells Fargo a Backup Servicer Termination Notice, Wells Fargo is hereby designated as, and hereby agrees to perform the duties and obligations of, a Backup Servicer pursuant to the terms hereof.

     (b) Successor Backup Servicer. Upon the Backup Servicer’s receipt of Backup Servicer Termination Notice from the Administrative Agent of the designation of a replacement Backup Servicer pursuant to the provisions of Section 7.5, the Backup Servicer agrees that it will terminate its activities as Backup Servicer hereunder.

     Section 7.2 Duties of the Backup Servicer.

     (a) Appointment. The Seller and the Administrative Agent, as agent for the Secured Parties, each hereby appoints Wells Fargo to act as Backup Servicer, for the benefit of the Administrative Agent and the Secured Parties, as from time to time designated pursuant to

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Section 7.1. The Backup Servicer hereby accepts such appointment and agrees to perform the duties and obligations with respect thereto set forth herein.

     (b) Duties. On or before the initial Funding Date, and until its removal pursuant to Section 7.5, the Backup Servicer shall perform, on behalf of the Administrative Agent and the Secured Parties, the following duties and obligations:

     (i) On or before the Closing Date, the Backup Servicer shall accept from the Servicer delivery of the information required to be set forth in the Monthly Reports (if any) in hard copy and on computer tape; provided that the computer tape is in an MS DOS, PC readable ASCII format or other format to be agreed upon by the Backup Servicer and the Servicer on or prior to closing.

     (ii) Not later than 12:00 noon (New York City, New York time) on each Reporting Date, the Servicer shall deliver to the Backup Servicer the asset tape, which shall include but not be limited to the following information: (x) for each Asset, the name and number of the related Obligor, the collection status, the loan status, the date of each Scheduled Payment and the Outstanding Asset Balance, (y) the Borrowing Base and (z) the Aggregate Outstanding Asset Balance (the “Tape”). The Backup Servicer shall accept delivery of the Tape.

     (iii) Prior to the related Payment Date, the Backup Servicer shall review the Monthly Report to ensure that it is complete on its face and that the following items in such Monthly Report have been accurately calculated, if applicable, and reported: (A) the Borrowing Base, (B) the Backup Servicing Fee, (C) the Assets that are current and not past due, (D) the Assets that are 1 — 30 days past due, (E) the Assets that are 31 — 60 days past due, (F) the Assets that are 61 — 90 days past due, (G) the Assets that are 90+ days past due, (H) the Pool Charged-Off Ratio, and (I) the Aggregate Outstanding Asset Balance. The Backup Servicer by a separate written report shall notify the Administrative Agent and the Servicer of any disagreements with the Monthly Report based on such review not later than the Business Day preceding such Payment Date to such Persons.

     (iv) If the Servicer disagrees with the report provided under paragraph (iii) above by the Backup Servicer or if the Servicer or any subservicer has not reconciled such discrepancy, the Backup Servicer agrees to confer with the Servicer to resolve such disagreement on or prior to the next succeeding Determination Date and shall settle such discrepancy with the Servicer if possible, and notify the Administrative Agent of the resolution thereof. The Servicer hereby agrees to cooperate at its own expense with the Backup Servicer in reconciling any discrepancies herein. If within 20 days after the delivery of the report provided under paragraph (iii) above by the Backup Servicer, such discrepancy is not resolved, the Backup Servicer shall promptly notify the Administrative Agent of the continued existence of such discrepancy. Following receipt of such notice by the Administrative Agent, the Servicer shall deliver to the Administrative Agent, the Secured Parties and the Backup Servicer no later than the related Payment Date a certificate describing the nature and amount of such discrepancies and the actions the Servicer proposes to take with respect thereto.

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     (c) Reliance on Tape. With respect to the duties described in Section 7.2(b), the Backup Servicer, is entitled to rely conclusively, and shall be fully protected in so relying, on the contents of each Tape, including, but not limited to, the completeness and accuracy thereof, provided by the Servicer.

     Section 7.3 Merger or Consolidation.

     Any Person (i) into which the Backup Servicer may be merged or consolidated, (ii) that may result from any merger or consolidation to which the Backup Servicer shall be a party, or (iii) that may succeed to the properties and assets of the Backup Servicer substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Backup Servicer hereunder, shall be the successor to the Backup Servicer under this Agreement without further act on the part of any of the parties to this Agreement provided such Person is organized under the laws of the United States of America or any one of the States thereof or the District of Columbia (or any domestic branch of a foreign bank), (i) (a) that has either (1) a long-term unsecured debt rating of “A” or better by S&P and “A2” or better by Moody’s or (2) a short-term unsecured debt rating or certificate of deposit rating of “A-1” or better by S&P or “P-1” or better by Moody’s, (b) the parent corporation which has either (1) a long-term unsecured debt rating of “A” or better by S&P and “A2” or better by Moody’s or (2) a short-term unsecured debt rating or certificate of deposit rating of “A-1” or better by S&P and “P-1” or better by Moody’s or (c) is otherwise acceptable to the Administrative Agent.

     Section 7.4 Backup Servicing Compensation.

     As compensation for its back-up servicing activities hereunder, the Backup Servicer shall be entitled to receive the Backup Servicing Fee from the Servicer. To the extent that such Backup Servicing Fee is not paid by the Servicer, the Backup Servicer shall be entitled to receive the unpaid balance of its Backup Servicing Fee to the extent of funds available therefor pursuant to Section 2.9(a)(4) and Section 2.10(a)(4), as applicable. The Backup Servicer’s entitlement to receive the Backup Servicing Fee shall cease (excluding any unpaid outstanding amounts as of that date) on the earliest to occur of: (i) it becoming the Successor Servicer, (ii) its removal as Backup Servicer pursuant to Section 7.5, or (iii) the termination of this Agreement. Upon becoming Successor Servicer pursuant to Section 6.16, the Backup Servicer shall be entitled to the Servicing Fee.

     Section 7.5 Backup Servicer Removal.

     The Backup Servicer may be removed, with or without cause, by the Administrative Agent by notice given in writing to the Backup Servicer (the “Backup Servicer Termination Notice”). In the event of any such removal, a replacement Backup Servicer may be appointed by the Administrative Agent.

     Section 7.6 Limitation on Liability.

     (a) The Backup Servicer undertakes to perform only such duties and obligations as are specifically set forth in this Agreement, it being expressly understood by all parties hereto that there are no implied duties or obligations of the Backup Servicer hereunder. Without

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limiting the generality of the foregoing, the Backup Servicer, except as expressly set forth herein, shall have no obligation to supervise, verify, monitor or administer the performance of the Servicer. The Backup Servicer may act through its agents, nominees, attorneys and custodians in performing any of its duties and obligations under this Agreement, it being understood by the parties hereto that the Backup Servicer will be responsible for any misconduct or negligence on the part of such agents, attorneys or custodians acting on the routine and ordinary day-to-day operations for and on behalf of the Backup Servicer. Neither the Backup Servicer nor any of its officers, directors, employees or agents shall be liable, directly or indirectly, for any damages or expenses arising out of the services performed under this Agreement other than damages or expenses that result from the gross negligence or willful misconduct of it or them or the failure to perform materially in accordance with this Agreement.

     (b) The Backup Servicer shall not be liable for any obligation of the Servicer contained in this Agreement or for any errors of the Servicer contained in any computer tape, certificate or other data or document delivered to the Backup Servicer hereunder or on which the Backup Servicer must rely in order to perform its obligations hereunder, and the Secured Parties, the Administrative Agent and the Collateral Custodian each agree to look only to the Servicer to perform such obligations. The Backup Servicer shall have no responsibility and shall not be in default hereunder or incur any liability for any failure, error, malfunction or any delay in carrying out any of its duties under this Agreement if such failure or delay results from the Backup Servicer acting in accordance with information prepared or supplied by a Person other than the Backup Servicer or the failure of any such other Person to prepare or provide such information. The Backup Servicer shall have no responsibility, shall not be in default and shall incur no liability for (i) any act or failure to act of any third party, including the Servicer, (ii) any inaccuracy or omission in a notice or communication received by the Backup Servicer from any third party, (iii) the invalidity or unenforceability of any Collateral under Applicable Law, (iv) the breach or inaccuracy of any representation or warranty made with respect to any Collateral, or (v) the acts or omissions of any successor Backup Servicer.

     Section 7.7 The Backup Servicer Not to Resign.

     The Backup Servicer shall not resign (except with prior consent of the Administrative Agent which consent shall not be unreasonably withheld) from the obligations and duties hereby imposed on it except upon the Backup Servicer’s determination that (i) the performance of its duties hereunder is or becomes impermissible under Applicable Law and (ii) there is no reasonable action that the Backup Servicer could take to make the performance of its duties hereunder permissible under Applicable Law. Any such determination permitting the resignation of the Backup Servicer shall be evidenced as to clause (i) above by an Opinion of Counsel to such effect delivered to the Administrative Agent. No such resignation shall become effective until a successor Backup Servicer shall have assumed the responsibilities and obligations of the Backup Servicer hereunder.

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ARTICLE VIII

THE COLLATERAL CUSTODIAN

     Section 8.1 Designation of Collateral Custodian.

     (a) Initial Collateral Custodian. The role of collateral custodian with respect to the Required Asset Documents shall be conducted by the Person designated as Collateral Custodian hereunder from time to time in accordance with this Section 8.1. Until the Administrative Agent shall give to Wells Fargo a Collateral Custodian Termination Notice, Wells Fargo is hereby designated as, and hereby agrees to perform the duties and obligations of, Collateral Custodian pursuant to the terms hereof.

     (b) Successor Collateral Custodian. Upon the Collateral Custodian’s receipt of a Collateral Custodian Termination Notice from the Administrative Agent of the designation of a successor Collateral Custodian pursuant to the provisions of Section 8.5, the Collateral Custodian agrees that it will terminate its activities as Collateral Custodian hereunder.

     Section 8.2 Duties of Collateral Custodian.

     (a) Appointment. The Seller and the Administrative Agent each hereby appoints Wells Fargo to act as Collateral Custodian, for the benefit of the Administrative Agent, as agent for the Secured Parties. The Collateral Custodian hereby accepts such appointment and agrees to perform the duties and obligation with respect thereto set forth herein.

     (b) Duties. On or before the initial Funding Date, and until its removal pursuant to Section 8.5, the Collateral Custodian shall perform on behalf of the Administrative Agent and the Secured Parties, the following duties and obligations:

     (i) The Collateral Custodian shall take and retain custody of the Required Asset Documents delivered by the Seller pursuant to Section 3.2 in accordance with the terms and conditions of this Agreement, all for the benefit of the Secured Parties and subject to the Lien thereon in favor of the Administrative Agent as agent for the Secured Parties. Within five Business Days of its receipt of any Required Asset Documents, the Collateral Custodian shall review the related Collateral and Required Asset Documents to confirm that (A) such Collateral has been properly executed and has no missing or mutilated pages, (B) any UCC and other filings (as set forth on the Asset Checklists) have been made, (C) an Insurance Policy exists with respect to any real or personal property constituting the Related Property, and (D) confirming the related Outstanding Asset Balance, Asset number and Obligor name with respect to such Asset is referenced on the related Asset List and is not a duplicate Asset (collectively, the “Review Criteria”). In order to facilitate the foregoing review by the Collateral Custodian, in connection with each delivery of Required Asset Documents hereunder to the Collateral Custodian, the Servicer shall provide to the Collateral Custodian an electronic file (in EXCEL or a comparable format) that contains the related Asset List or that otherwise contains the Asset identification number and the name of the Obligor with respect to each related Asset. If, at the conclusion of such review, the Collateral Custodian shall determine that

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(i) the Outstanding Asset Balances of the Collateral it has received Required Asset Documents with respect to is less than as set forth on the electronic file, the Collateral Custodian shall immediately notify the Administrative Agent of such discrepancy, and (ii) any Review Criteria is not satisfied, the Collateral Custodian shall within one Business Day notify the Servicer of such determination and provide the Servicer with a list of the non-complying Assets and the applicable Review Criteria that they fail to satisfy. The Servicer shall have five Business Days to correct any non-compliance with a Review Criteria. If after the conclusion of such time period the Servicer has still not cured any non-compliance by an Asset with a Review Criteria, the Collateral Custodian shall promptly notify the Seller and the Administrative Agent of such determination by providing a written report to such persons identifying, with particularity, each Asset and each of the applicable Review Criteria that such Asset fails to satisfy. In addition, if requested in writing by the Servicer and approved by the Administrative Agent within ten Business Days of the Collateral Custodian’s delivery of such report, the Collateral Custodian shall return any Asset which fails to satisfy a Review Criteria to the Seller. Other than the foregoing, the Collateral Custodian shall not have any responsibility for reviewing any Required Asset Documents.

     (ii) In taking and retaining custody of the Required Asset Documents, the Collateral Custodian shall be deemed to be acting as the agent of the Administrative Agent and the Secured Parties; provided that the Collateral Custodian makes no representations as to the existence, perfection or priority of any Lien on the Required Asset Documents or the instruments therein; and provided further that, the Collateral Custodian’s duties as agent shall be limited to those expressly contemplated herein.

     (iii) All Required Asset Document shall be kept in fire resistant vaults, rooms or cabinets at the locations specified on Schedule III attached hereto, or at such other office as shall be specified to the Administrative Agent by the Collateral Custodian in a written notice delivered at least 45 days prior to such change. All Required Asset Documents shall be placed together with an appropriate identifying label and maintained in such a manner so as to permit retrieval and access. All Required Asset Documents shall be clearly segregated from any other documents or instruments maintained by the Collateral Custodian.

     (iv) The Collateral Custodian shall make payments pursuant to the terms of the Monthly Report in accordance with Section 2.9 and Section 2.10 (the “Payment Duties”).

     (v) On each Reporting Date, the Collateral Custodian shall provide a written report to the Administrative Agent and the Servicer (in a form acceptable to the Administrative Agent) identifying each Asset for which it holds Required Asset Documents, the non-complying Assets and the applicable Review Criteria that any non-complying Asset fails to satisfy.

     (vi) In performing its duties, the Collateral Custodian shall use the same degree of care and attention as it employs with respect to similar Collateral that it holds as Collateral Custodian.

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     Section 8.3 Merger or Consolidation.

     Any Person (i) into which the Collateral Custodian may be merged or consolidated, (ii) that may result from any merger or consolidation to which the Collateral Custodian shall be a party, or (iii) that may succeed to the properties and assets of the Collateral Custodian substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Collateral Custodian hereunder, shall be the successor to the Collateral Custodian under this Agreement without further act of any of the parties to this Agreement.

     Section 8.4 Collateral Custodian Compensation.

     As compensation for its collateral custodian activities hereunder, the Collateral Custodian shall be entitled to a Collateral Custodian Fee (the “Collateral Custodian Fee”) from the Servicer. To the extent that such Collateral Custodian Fee is not paid by the Servicer, the Collateral Custodian shall be entitled to receive the unpaid balance of its Collateral Custodian Fee to the extent of funds available therefor pursuant to the provision of Section 2.9(a)(4) or Section 2.10(a)(4), as applicable. The Collateral Custodian’s entitlement to receive the Collateral Custodian Fee shall cease on the earlier to occur of: (i) its removal as Collateral Custodian pursuant to Section 8.5 or (ii) the termination of this Agreement.

     Section 8.5 Collateral Custodian Removal.

     The Collateral Custodian may be removed, with or without cause, by the Administrative Agent by notice given in writing to the Collateral Custodian (the “Collateral Custodian Termination Notice”); provided that notwithstanding its receipt of a Collateral Custodian Termination Notice, the Collateral Custodian shall continue to act in such capacity until a successor Collateral Custodian has been appointed, has agreed to act as Collateral Custodian hereunder, and has received all Required Asset Documents held by the previous Collateral Custodian.

     Section 8.6 Limitation on Liability.

     (i) The Collateral Custodian may conclusively rely on and shall be fully protected in acting upon any certificate, instrument, opinion, notice, letter, telegram or other document delivered to it and that in good faith it reasonably believes to be genuine and that has been signed by the proper party or parties. The Collateral Custodian may rely conclusively on and shall be fully protected in acting upon (a) the written instructions of any designated officer of the Administrative Agent or (b) the verbal instructions of the Administrative Agent.

     (ii) The Collateral Custodian may consult counsel satisfactory to it and the advice or opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the advice or opinion of such counsel.

     (iii) The Collateral Custodian shall not be liable for any error of judgment, or for any act done or step taken or omitted by it, in good faith, or for any mistakes of fact or

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law, or for anything that it may do or refrain from doing in connection herewith except in the case of its willful misconduct or grossly negligent performance or omission of its duties and in the case of the negligent performance of its Payment Duties and in the case of its negligent performance of its duties in taking and retaining custody of the Required Asset Documents.

     (iv) The Collateral Custodian makes no warranty or representation and shall have no responsibility (except as expressly set forth in this Agreement) as to the content, enforceability, completeness, validity, sufficiency, value, genuineness, ownership or transferability of the Collateral, and will not be required to and will not make any representations as to the validity or value (except as expressly set forth in this Agreement) of any of the Collateral. The Collateral Custodian shall not be obligated to take any legal action hereunder that might in its judgment involve any expense or liability unless it has been furnished with an indemnity reasonably satisfactory to it.

     (v) The Collateral Custodian shall have no duties or responsibilities except such duties and responsibilities as are specifically set forth in this Agreement and no covenants or obligations shall be implied in this Agreement against the Collateral Custodian.

     (vi) The Collateral Custodian shall not be required to expend or risk its own funds in the performance of its duties hereunder.

     (vii) It is expressly agreed and acknowledged that the Collateral Custodian is not guaranteeing performance of or assuming any liability for the obligations of the other parties hereto or any parties to the Collateral.

     Section 8.7 The Collateral Custodian Not to Resign.

     The Collateral Custodian shall not resign from the obligations and duties hereby imposed on it except upon the Collateral Custodian’s determination that (i) the performance of its duties hereunder is or becomes impermissible under Applicable Law and (ii) there is no reasonable action that the Collateral Custodian could take to make the performance of its duties hereunder permissible under Applicable Law. Any such determination permitting the resignation of the Collateral Custodian shall be evidenced as to clause (i) above by an Opinion of Counsel to such effect delivered to the Administrative Agent. No such resignation shall become effective until a successor Collateral Custodian shall have assumed the responsibilities and obligations of the Collateral Custodian hereunder.

     Section 8.8 Release of Documents.

     (a) Release for Servicing. From time to time and as appropriate for the enforcement or servicing any of the Collateral, the Collateral Custodian is hereby authorized (unless and until such authorization is revoked by the Administrative Agent), upon written receipt from the Servicer of a request for release of documents and receipt in the form annexed hereto as Exhibit H to release to the Servicer the related Required Asset Documents or the documents set forth in such request and receipt to the Servicer. All documents so released to the Servicer shall be held by the Servicer in trust for the benefit of the Administrative Agent in accordance with the

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terms of this Agreement. The Servicer shall return to the Collateral Custodian the Required Asset Documents or other such documents (i) immediately upon the request of the Administrative Agent, or (ii) when the Servicer’s need therefor in connection with such foreclosure or servicing no longer exists, unless the Asset shall be liquidated, in which case, upon receipt of an additional request for release of documents and receipt certifying such liquidation from the Servicer to the Collateral Custodian in the form annexed hereto as Exhibit H, the Servicer’s request and receipt submitted pursuant to the first sentence of this subsection shall be released by the Collateral Custodian to the Servicer.

     (b) Limitation on Release. The foregoing provision respecting release to the Servicer of the Required Asset Documents and documents by the Collateral Custodian upon request by the Servicer shall be operative only to the extent that at any time the Collateral Custodian shall not have released to the Servicer active Required Asset Documents (including those requested) pertaining to more than 15 Assets at the time being serviced by the Servicer under this Agreement. Any additional Required Asset Documents or documents requested to be released by the Servicer may be released only upon written authorization of the Administrative Agent. The limitations of this paragraph shall not apply to the release of Required Asset Documents to the Servicer pursuant to the immediately succeeding subsection.

     (c) Release for Payment. Upon receipt by the Collateral Custodian of the Servicer’s request for release of documents and receipt in the form annexed hereto as Exhibit H(which certification shall include a statement to the effect that all amounts received in connection with such payment or repurchase have been credited to the Collection Account as provided in this Agreement), the Collateral Custodian shall promptly release the related Required Asset Documents to the Servicer.

     Section 8.9 Return of Required Asset Documents.

     The Seller may, with the prior written consent of the Administrative Agent (such consent not to be unreasonably withheld), require that the Collateral Custodian return each Required Asset Document (a) delivered to the Collateral Custodian in error, (b) for which a Substitute Asset has been substituted in accordance with Section 2.18, (c) as to which the lien on the Related Property has been so released pursuant to Section 9.2, (d) that has been repaid by the Seller pursuant to Section 4.6 or (e) that is required to be redelivered to the Seller in connection with the termination of this Agreement, in each case by submitting to the Collateral Custodian and the Administrative Agent a written request in the form of Exhibit H hereto (signed by both the Seller and the Administrative Agent) specifying the Collateral to be so returned and reciting that the conditions to such release have been met (and specifying the Section or Sections of this Agreement being relied upon for such release). The Collateral Custodian shall upon its receipt of each such request for return executed by the Seller and the Administrative Agent promptly, but in any event within five Business Days, return the Required Asset Documents so requested to the Seller.

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Section 8.10 Access to Certain Documentation and Information Regarding the Collateral; Audits.

     The Collateral Custodian shall provide to the Administrative Agent access to the Required Asset Documents and all other documentation regarding the Collateral including in such cases where the Administrative Agent is required in connection with the enforcement of the rights or interests of the Secured Parties, or by applicable statutes or regulations, to review such documentation, such access being afforded without charge but only (i) upon two Business Days prior written request, (ii) during normal business hours and (iii) subject to the Servicer’s and Collateral Custodian’s normal security and confidentiality procedures. Prior to the Closing Date and periodically thereafter at the discretion of the Administrative Agent, the Administrative Agent may review the Servicer’s collection and administration of the Collateral in order to assess compliance by the Servicer with the Credit and Collection Policy, as well as with this Agreement and may conduct an audit of the Collateral, Required Asset Documents in conjunction with such a review. Such review shall be reasonable in scope and shall be completed in a reasonable period of time. Without limiting the foregoing provisions of this Section 8.10, from time to time on request of the Administrative Agent, the Collateral Custodian shall permit certified public accountants or other auditors acceptable to the Administrative Agent to conduct, at the Servicer’s expense, a review of the Required Asset Documents and all other documentation regarding the Collateral.

     Section 8.11 Intentionally Omitted

ARTICLE IX

SECURITY INTEREST

     Section 9.1 Grant of Security Interest.

     The parties to this Agreement intend that the conveyance of the Collateral by the Seller to the applicable Purchasers be treated as sales for all purposes (other than for the purposes described in Section 13.19 and for accounting purposes). If, despite such intention, a determination is made that such transactions not be treated as sales, then the parties hereto intend that this Agreement constitute a security agreement and the transactions effected hereby constitute secured loans by the applicable Purchasers to the Seller under Applicable Law. For such purpose, the Seller hereby transfers, conveys, assigns and grants as of the Closing Date to the Administrative Agent, as agent for the Secured Parties, a lien and continuing security interest in all of the Seller’s right, title and interest in, to and under (but none of the obligations under) all Collateral (including any Hedging Agreements), whether now existing or hereafter arising or acquired by the Seller, and wherever the same may be located, to secure the prompt, complete and indefeasible payment and performance in full when due, whether by lapse of time, acceleration or otherwise, of the Aggregate Unpaids of the Seller arising in connection with this Agreement and each other Transaction Document, whether now or hereafter existing, due or to become due, direct or indirect, or absolute or contingent, including, without limitation, all Aggregate Unpaids. The assignment under this Section 9.1 does not constitute and is not

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intended to result in a creation or an assumption by the Administrative Agent, any Hedge Counterparty, the Purchasers or any of the Secured Parties of any obligation of the Seller or any other Person in connection with any or all of the Collateral or under any agreement or instrument relating thereto. Anything herein to the contrary notwithstanding, (a) the Seller shall remain liable under the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Administrative Agent, as agent for the Secured Parties, of any of its rights in the Collateral shall not release the Seller from any of its duties or obligations under the Collateral, and (c) none of the Administrative Agent, any Hedge Counterparty, the Purchasers or any Secured Party shall have any obligations or liability under the Collateral by reason of this Agreement, nor shall the Administrative Agent, any Hedge Counterparty, the Purchasers or any Secured Party be obligated to perform any of the obligations or duties of the Seller thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.

     Section 9.2 Release of Lien on Collateral.

     At the same time as (i) any Collateral expires by its terms and all amounts in respect thereof have been paid in full by the related Obligor and deposited in the Collection Account, (ii) any Asset becomes a Prepaid Asset and all amounts in respect thereof have been paid in full by the related Obligor and deposited in the Collection Account, (iii) such Asset is replaced in accordance with Section 2.18, or (iv) this agreement terminates in accordance with Section 13.6, the Administrative Agent as agent for the Secured Parties will, to the extent requested by the Servicer, release its interest in such Collateral. In connection with any sale of such Related Property, the Administrative Agent as agent for the Secured Parties will after the deposit by the Servicer of the Proceeds of such sale into the Collection Account, at the sole expense of the Servicer, execute and deliver to the Servicer any assignments, bills of sale, termination statements and any other releases and instruments as the Servicer may reasonably request in order to effect the release and transfer of such Related Property; provided that the Administrative Agent as agent for the Secured Parties will make no representation or warranty, express or implied, with respect to any such Related Property in connection with such sale or transfer and assignment. Nothing in this section shall diminish the Servicer’s obligations pursuant to Section 6.6 with respect to the Proceeds of any such sale.

     Section 9.3 Further Assurances.

     The provisions of Section 13.12 shall apply to the security interest granted under Section 9.1 as well as to the Advances hereunder.

     Section 9.4 Remedies.

     Upon the occurrence of a Termination Event, the Administrative Agent and Secured Parties shall have, with respect to the Collateral granted pursuant to Section 9.1, and in addition to all other rights and remedies available to the Administrative Agent and Secured Parties under this Agreement or other Applicable Law, all rights and remedies of a secured party upon default under the UCC. Prior to the Class A Collection Date, the Class B Purchaser shall not exercise any rights and remedies available to it under this Agreement or other Applicable Law.

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     Section 9.5 Waiver of Certain Laws.

     Each of the Seller and the Servicer agrees, to the full extent that it may lawfully so agree, that neither it nor anyone claiming through or under it will set up, claim or seek to take advantage of any appraisement, valuation, stay, extension or redemption law now or hereafter in force in any locality where any Collateral may be situated in order to prevent, hinder or delay the enforcement or foreclosure of this Agreement, or the absolute sale of any of the Collateral or any part thereof, or the final and absolute putting into possession thereof, immediately after such sale, of the purchasers thereof, and each of the Seller and the Servicer, for itself and all who may at any time claim through or under it, hereby waives, to the full extent that it may be lawful so to do, the benefit of all such laws, and any and all right to have any of the properties or assets constituting the Collateral marshaled upon any such sale, and agrees that the Administrative Agent or any court having jurisdiction to foreclose the security interests granted in this Agreement may sell the Collateral as an entirety or in such parcels as the Administrative Agent or such court may determine.

     Section 9.6 Power of Attorney.

     Each of the Seller and the Servicer hereby irrevocably appoints the Administrative Agent its true and lawful attorney (with full power of substitution) in its name, place and stead and at is expense, in connection with the enforcement of the rights and remedies provided for in this Agreement, including without limitation the following powers: (a) to give any necessary receipts or acquittance for amounts collected or received hereunder, (b) to make all necessary transfers of the Collateral in connection with any such sale or other disposition made pursuant hereto, (c) to execute and deliver for value all necessary or appropriate bills of sale, assignments and other instruments in connection with any such sale or other disposition, the Seller and the Servicer hereby ratifying and confirming all that such attorney (or any substitute) shall lawfully do hereunder and pursuant hereto, and (d) to sign any agreements, orders or other documents in connection with or pursuant to any Transaction Document or Hedging Agreement. Nevertheless, if so requested by the Administrative Agent, the Seller shall ratify and confirm any such sale or other disposition by executing and delivering to the Administrative Agent or such purchaser all proper bills of sale, assignments, releases and other instruments as may be designated in any such request.

ARTICLE X

TERMINATION EVENTS

     Section 10.1 Termination Events.

     The following events shall be Termination Events (“Termination Events”) hereunder:

     (a) as of any Determination Date, the Average Portfolio Delinquency Ratio exceeds 6.5%; or

     (b) as of any Determination Date, the Average Pool Charged-Off Ratio exceeds 3.0%; or

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     (c) as of any Determination Date, the Average Portfolio Charged-Off Ratio exceeds 4.0%; or

     (d) the Class A Advances Outstanding on any day exceeds the lesser of the Class A Facility Amount and Maximum Availability, and the same continues unremedied for two Business Days; provided that during the period of time that such event remains unremedied, no additional Advances will be made under this Agreement and any payments required to be made by the Servicer on a Payment Date shall be made under Section 2.10; or

     (e) a Servicer Default occurs and is continuing; or

     (f) failure on the part of the Seller or Originator to make any payment or deposit (including without limitation with respect to Collections) of principal by the terms of any Transaction Document on the day such payment or deposit is required to be made; or;

     (g) (i) failure on the part of the Seller or Originator to make any payment or deposit with respect to any Aggregate Unpaids related to the Class A VFC (including without limitation with respect to Collections) other than principal required by the terms of any Transaction Document on the day such payment or deposit is required to be made and such failure continues unremedied for a period of 2 Business Days or (ii) following the Class A Collection Date, failure on the part of the Seller or Originator to make any payment or deposit (including without limitation with respect to Collections) other than principal required by the terms of any Transaction Document on the day such payment or deposit is required to be made and such failure continues unremedied for a period of 2 Business Days; or

     (h) the occurrence of an Insolvency Event relating to the Seller or the Originator; or

     (i) the Seller shall become required to register as an “investment company” within the meaning of the 1940 Act or the arrangements contemplated by the Transaction Documents shall require registration as an “investment company” within the meaning of the 1940 Act; or

     (j) a regulatory, tax or accounting body has ordered that the activities of the Seller or any other Subsidiary of CapitalSource Inc. contemplated hereby be terminated or, as a result of any other event or circumstance, the activities of the Seller contemplated hereby may reasonably be expected to cause the Seller or any other Subsidiary of CapitalSource Inc. to suffer materially adverse regulatory, accounting or tax consequences; or

     (k) there shall exist any Material Adverse Effect; or

     (l) the Internal Revenue Service shall file notice of a lien pursuant to Section 6323 of the Code with regard to any assets of the Seller or the Originator and such lien shall not have been released within five Business Days, or the Pension Benefit Guaranty Corporation shall file notice of a lien pursuant to Section 4068 of ERISA with regard to any of the assets of the Seller or the Originator and such lien shall not have been released within five Business Days; or

     (m) any Change-in-Control shall occur; or

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     (n) (i) any Transaction Document, or any lien or security interest granted thereunder, shall (except in accordance with its terms), in whole or in part, terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligation of the Seller, the Originator, or the Servicer,

     (ii) the Seller, the Originator, the Servicer or any other party shall, directly or indirectly, contest in any manner the effectiveness, validity, binding nature or enforceability of any Transaction Document or any lien or security interest thereunder, or

     (iii) any security interest securing any obligation under any Transaction Document shall, in whole or in part, cease to be a perfected first priority security interest; or

     (o) on any Payment Date, the Seller has not entered into any additional Hedge Transactions or reduced or amended any Hedge Transactions, in each case as then required pursuant to Section 6.2(c); or

     (p) any failure on the part of the Seller or the Originator duly to observe or perform (i) any covenants or agreements of the Seller or the Originator set forth in this Agreement (other than as referred to in Section 10.1(f), 10.1(g), 10.1(o) or 10.1(r) or clause (ii) of this Section 10.1(p)) or the other Transaction Documents to which the Seller or the Originator is a party and the same continues unremedied for a period of 10 days after the earlier to occur of (x) the date on which written notice of such failure requiring the same to be remedied shall have been given to the Seller or the Originator by the Administrative Agent and (y) the date on which the Seller or the Originator becomes aware thereof or (ii) any covenant applicable to it contained in Section 5.2; or

     (q) any representation, warranty or certification made by the Seller or the Originator in any Transaction Document or in any certificate delivered pursuant to any Transaction Document shall prove to have been incorrect in any material respect when made, and which (if capable of being cured without any adverse impact on the Purchasers or the collectibility of the Assets) continues to be unremedied for a period of 10 days after the earlier to occur of (i) the date on which written notice of such incorrectness requiring the same to be remedied shall have been given to the Seller or the Originator by the Administrative Agent and (ii) the date on which the Seller or the Originator becomes aware thereof; or

     (r) any failure by the Seller to give instructions or notice to the Administrative Agent as required by this Agreement, or to deliver any required Monthly Report or other Required Reports hereunder on or before the date occurring two Business Days after the date such instruction, notice or report is required to be made or given, as the case may be, under the terms of this Agreement; or

     (s) the failure of the Seller, the Servicer or the Originator to make any payment due with respect to recourse debt or other obligations, in the case of the Servicer or the Originator, in excess of $10,000,000, or the occurrence of any event or condition that would at such time permit acceleration of such recourse debt or other obligations; or

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     (t) (1) the rendering of one or more final judgments, decrees or orders by a court or arbitrator of competent jurisdiction for the payment of money in excess of $10,000,000, individually or in the aggregate, against the Originator, or $2,000,000 against the Seller, individually or in the aggregate, and the Originator shall not have either (i) discharged or provided for the discharge of any such judgment, decree or order in accordance with its terms or (ii) perfected a timely appeal of such judgment, decree or order and caused the execution of same to be stayed during the pendency of the appeal or (2) the failure of the Originator or the Seller to make any payments due of amounts in excess of $7,500,000 by the Originator, or $2,000,000 by the Seller, in the settlement of any litigation, claim or dispute (excluding payments made from insurance proceeds); or

     (u) as of any Determination Date, the Pool Yield does not equal or exceed the Minimum Pool Yield and the same continues unremedied by the following Determination Date; or

     (v) on any day an Overcollateralization Shortfall exists and continues unremedied for two Business Days; or

     (w) as of any Quarterly Determination Date, the Originator’s ratio of Consolidated Funded Indebtedness to Consolidated Tangible Net Worth is more than 6 to 1; provided that such calculation shall exclude the effects of any Liquid Real Estate Assets that are acquired and levered by the Originator solely to satisfy REIT asset and income tests; or

     (x) the occurrence of a “Purchase Termination Event” under the Sale Agreement, or

     (y) on any Payment Date an Available Collections Shortfall exists.

     Section 10.2 Remedies.

     (a) Upon the occurrence of a Termination Event described in Sections 10.1(a), 10.1(b), 10.1(c), 10.1(d), 10.1(k) (if such Termination Event arose under clause (a) of the definition of Material Adverse Effect), 10.1(u), 10.1(w) or 10.1(y), no Advances will thereafter be made and (i) the Administrative Agent may, and at the request of Liquidity Banks holding at least 66 2/3% of the Class A Commitments then in effect shall, by notice to the Seller, declare the Termination Date to have occurred and the Amortization Period and Turbo Period to have commenced or (ii) following the Class A Collection Date, the Class B Purchaser may, by notice to the Seller, declare the Termination Date to have occurred and the Amortization Period and Turbo Period to have commenced.

     (b) Upon the occurrence of a Termination Event described in Section 10.1(h), no Advances will thereafter be made and the Termination Date shall occur immediately and the Amortization Period and Turbo Period shall commence automatically.

     (c) Upon the occurrence of any Termination Event described in Sections 10.1(e), 10.1(f), 10.1(g), 10.1(h), 10.1(i), 10.1(j), 10.1(k) (if such Termination Event arose under any of clauses (b) through (e) of the definition of Material Adverse Effect), 10.1(l) through and including 10.1(t), 10.1(v) or 10.1(x), no Advances will thereafter be made, and (i) the Administrative Agent may, and at the request of Liquidity Banks holding at least 66 2/3% of the

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Class A Commitments then in effect shall, by notice to the Seller, declare the Termination Date to have occurred and the Amortization Period and Turbo Period to have commenced or (ii) following the Class A Collection Date, the Class B Purchaser may, by notice to the Seller, declare the Termination Date to have occurred and the Amortization Period and Turbo Period to have commenced, and the Administrative Agent and the Secured Parties or the Class B Purchaser, as applicable, shall have, in addition to all other rights and remedies under this Agreement or otherwise, all other rights and remedies provided under the UCC of each applicable jurisdiction and other Applicable Laws, which rights shall be cumulative, and also may require the Seller and Servicer to, and the Seller and Servicer hereby agree that they will at the Servicer’s expense and upon request of the Administrative Agent or the Class B Purchaser, as applicable, forthwith, (x) assemble all or any part of the Collateral as directed by the Administrative Agent or the Class B Purchaser, as applicable, and make the same available to the Administrative Agent or the Class B Purchaser, as applicable, at a place to be designated by the Administrative Agent or the Class B Purchaser, as applicable, and (y) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at a public or private sale, at any of the Administrative Agent’s offices or the Class B Purchaser’s offices, as applicable, or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Administrative Agent or the Class B Purchaser, as applicable, may deem commercially reasonable. The Seller agrees that, to the extent notice of sale shall be required by law, at least ten days’ notice to the Seller of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Administrative Agent or the Class B Purchaser, as applicable, shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Administrative Agent or the Class B Purchaser, as applicable, may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. All cash Proceeds received by the Administrative Agent or the Class B Purchaser, as applicable, in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral (after payment of any amounts incurred in connection with such sale) shall be deposited into the Collection Account and to be applied against all or any part of the Aggregate Unpaids pursuant to Section 2.10 or otherwise in such order as the Administrative Agent or the Class B Purchaser, as applicable, shall elect in its discretion. Prior to the Class A Collection Date, the Class B Purchaser shall not exercise any rights and remedies that might otherwise be available to such Class B Purchaser under this Agreement or other Applicable Law.

ARTICLE XI

INDEMNIFICATION

     Section 11.1 Indemnities by the Seller.

     (a) Without limiting any other rights that any such Person may have hereunder or under Applicable Law, the Seller hereby agrees to indemnify the Administrative Agent, the Backup Servicer, the Collateral Custodian, the Secured Parties, the Affected Parties and each of their respective assigns, Affiliates, officers, directors, employees, advisors and agents thereof (collectively, the “Indemnified Parties”), forthwith on demand, from and against any and all damages, losses, claims, liabilities and related reasonable out of pocket costs and expenses,

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including reasonable attorneys’ fees and disbursements (all of the foregoing being collectively referred to as the “Indemnified Amounts”) awarded against or incurred by such Indemnified Party and other non-monetary damages of any such Indemnified Party or any of them arising out of or as a result of this Agreement or the ownership of an interest in the Collateral or in respect of any Asset included in the Collateral, excluding, however, (a) Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of such Indemnified Party or (b) Indemnified Amounts that have the effect of recourse for non-payment of the Assets included in the Collateral due to credit problems of the Obligors (except as otherwise specifically provided in this Agreement). If the Seller has made any indemnity payment pursuant to this Section 11.1 and such payment fully indemnified the recipient thereof and the recipient thereafter collects any payments from others in respect of such Indemnified Amounts then, the recipient shall repay to the Seller an amount equal to the amount it has collected from others in respect of such indemnified amounts. Without limiting the foregoing, the Seller shall indemnify each Indemnified Party for Indemnified Amounts relating to or resulting from:

     (i) any representation or warranty made or deemed made by the Seller, the Servicer (if the Originator or one of its Affiliates is the Servicer) or any of their respective officers relating to the eligibility or qualification of any Asset, which shall have been false or incorrect in any respect when made or deemed made or delivered;

     (ii) any other representation or warranty made or deemed made by the Seller, the Servicer (if the Originator or one of its Affiliates is the Servicer) or any of their respective officers under or in connection with this Agreement or any other Transaction Document, which shall have been false or incorrect in any material respect when made or deemed made or delivered;

     (iii) the failure by the Seller or the Servicer (if the Originator or one of its Affiliates is the Servicer) to comply with any term, provision or covenant contained in this Agreement or any agreement executed in connection with this Agreement, or with any Applicable Law, with respect to any Collateral or the nonconformity of any Collateral with any such Applicable Law;

     (iv) the failure to vest and maintain vested in the Administrative Agent, as agent for the Secured Parties, an undivided ownership interest in the Collateral, together with all Collections, free and clear of any Lien (other than Permitted Liens) whether existing at the time of any Advance or at any time thereafter;

     (v) the failure to maintain, as of the close of business on each Business Day prior to the Termination Date, an amount of Class A Advances Outstanding that is less than or equal to the lesser of (I) the Class A Facility Amount and (II) the Maximum Availability on such Business Day;

     (vi) the failure to file, or any delay in filing, financing statements, continuation statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other Applicable Laws with respect to any Collateral, whether at the time of any Advance or at any subsequent time;

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     (vii) any dispute, claim, offset or defense (other than the discharge in bankruptcy of the Obligor) of the Obligor to the payment with respect to any Collateral (including, without limitation, a defense based on the Collateral not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or services related to such Collateral or the furnishing or failure to furnish such merchandise or services;

     (viii) any failure of the Seller or the Servicer (if the Originator or one of its Affiliates is the Servicer) to perform its duties or obligations in accordance with the provisions of this Agreement or any of the other Transaction Documents to which it is a party or any failure by the Originator, the Seller or any Affiliate thereof to perform its respective duties under any Collateral;

     (ix) the failure of any Lock-Box Bank to remit any amounts held in a Lock-Box Account pursuant to the instructions of the Servicer or the Administrative Agent (to the extent such Person is entitled to give such instructions in accordance with the terms hereof and of any applicable Lock-Box Agreement) whether by reason of the exercise of set-off rights or otherwise;

     (x) any inability to obtain any judgment in, or utilize the court or other adjudication system of, any state in which an Obligor may be located as a result of the failure of the Seller or the Originator to qualify to do business or file any notice or business activity report or any similar report;

     (xi) any action taken by the Seller or the Servicer in the enforcement or collection of any Collateral;

     (xii) any products liability claim or personal injury or property damage suit or other similar or related claim or action of whatever sort arising out of or in connection with the Related Property or services that are the subject of any Collateral;

     (xiii) any claim, suit or action of any kind arising out of or in connection with Environmental Laws including any vicarious liability;

     (xiv) the failure by Seller to pay when due any Taxes for which the Seller is liable, including without limitation, sales, excise or personal property taxes payable in connection with the Collateral;

     (xv) any repayment by the Administrative Agent or a Secured Party of any amount previously distributed in reduction of Advances Outstanding, or payment of Interest or any other amount due hereunder or under any Hedging Agreement, in each case which amount the Administrative Agent or a Secured Party believes in good faith is required to be repaid;

     (xvi) the commingling of Collections on the Collateral at any time with other funds, unless permitted hereunder;

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     (xvii) any investigation, litigation or proceeding related to this Agreement or the use of proceeds of Advances or the security interest in the Collateral;

     (xviii) any failure by the Seller to give reasonably equivalent value to the Originator in consideration for the transfer by the Originator to the Seller of any item of Collateral or any attempt by any Person to void or otherwise avoid any such transfer under any statutory provision or common law or equitable action, including, without limitation, any provision of the Bankruptcy Code;

     (xix) the use of the proceeds of any Advance in a manner other than as provided in this Agreement and the Sale Agreement;

     (xx) the failure of the Seller, the Originator or any of their respective agents or representatives to remit to the Servicer or the Administrative Agent, Collections on the Collateral remitted to the Seller, the Originator, the Servicer or any such agent or representative; or

     (xxi) the failure by the Seller to comply with any of the covenants relating to any Hedging Agreement in accordance with the Transaction Documents.

     (b) Any amounts subject to the indemnification provisions of this Section 11.1 shall be paid by the Seller to the Indemnified Party within five Business Days following such Person’s demand therefor.

     (c) If for any reason the indemnification provided above in this Section 11.1 is unavailable to the Indemnified Party or is insufficient to hold an Indemnified Party harmless, then the Seller or the Servicer, as the case may be, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by such Indemnified Party on the one hand and the Seller or the Servicer, as the case may be, on the other hand but also the relative fault of such Indemnified Party as well as any other relevant equitable considerations.

     (d) The obligations of the Seller under this Section 11.1 shall survive the resignation or removal of the Administrative Agent, the Servicer, the Backup Servicer or the Collateral Custodian and the termination of this Agreement.

     Section 11.2 Indemnities by the Servicer.

     (a) Without limiting any other rights that any such Person may have hereunder or under Applicable Law, the Servicer hereby agrees to indemnify each Indemnified Party, forthwith on demand, from and against any and all Indemnified Amounts awarded against or incurred by any such Indemnified Party by reason of any acts, omissions or alleged acts or omissions of the Servicer, including, but not limited to (i) any representation or warranty made by the Servicer under or in connection with any Transaction Document, any Monthly Report, Servicer’s Certificate or any other information or report delivered by or on behalf of the Servicer pursuant hereto, which shall have been false, incorrect or misleading in any material respect when made or deemed made, (ii) the failure by the Servicer to comply with any Applicable Law, (iii) the failure of the Servicer to comply with its duties or obligations in accordance with the

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Agreement, (iv) the failure by the Servicer to comply with any of the covenants relating to any Hedging Agreement in accordance with the Transaction Documents, or (v) any litigation, proceedings or investigation against the Servicer. The provisions of this indemnity shall run directly to and be enforceable by an injured party subject to the limitations hereof.

     (b) Any amounts subject to the indemnification provisions of this Section 11.2 shall be paid by the Servicer to the Indemnified Party within five Business Days following such Person’s demand therefor.

     (c) The Servicer shall have no liability for making indemnification hereunder to the extent any such indemnification constitutes recourse for uncollectible or uncollected Assets.

     (d) The obligations of the Servicer under this Section 11.2 shall survive the resignation or removal of the Administrative Agent, the Backup Servicer or the Collateral Custodian and the termination of this Agreement.

     (e) Any indemnification pursuant to this Section 11.2 shall not be payable from the Collateral.

     Section 11.3 After-Tax Basis.

     Indemnification under Section 11.1 and Section 11.2 shall be in an amount necessary to make the Indemnified Party whole after taking into account any tax consequences to the Indemnified Party of the receipt of the indemnity provided hereunder, including the effect of such tax or refund on the amount of tax measured by net income or profits that is or was payable by the Indemnified Party.

ARTICLE XII

THE ADMINISTRATIVE AGENT

     Section 12.1 The Administrative Agent.

     (a) Each Secured Party hereby appoints and authorizes the Administrative Agent as its agent and bailee for purposes of perfection pursuant to the applicable UCC or other Applicable Law and hereby further authorizes the Administrative Agent to appoint additional agents and bailees to act on its behalf and for the benefit of each Secured Party. Each Secured Party further authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Transaction Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. In furtherance, and without limiting the generality, of the foregoing, each Secured Party hereby appoints the Administrative Agent as its agent to execute and deliver all further instruments and documents, and take all further action that the Administrative Agent may deem necessary or appropriate or that a Secured Party may reasonably request in order to perfect, protect or more fully evidence the security interests granted by the Seller hereunder, or to enable any of them to exercise or enforce any of their respective rights hereunder, including, without limitation, the execution by the Administrative Agent as secured party/assignee of such financing or continuation statements, or amendments

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thereto or assignments thereof, relative to all or any of the Collateral now existing or hereafter arising, and such other instruments or notices, as may be necessary or appropriate for the purposes stated hereinabove. The Purchasers may direct the Administrative Agent to take any such incidental action hereunder. With respect to other actions which are incidental to the actions specifically delegated to the Administrative Agent hereunder, the Administrative Agent shall not be required to take any such incidental action hereunder, but shall be required to act or to refrain from acting (and shall be fully protected in acting or refraining from acting) upon the direction of the Liquidity Banks; provided that the Administrative Agent shall not be required to take any action hereunder if the taking of such action, in the reasonable determination of the Administrative Agent, shall be in violation of any Applicable Law or contrary to any provision of this Agreement or shall expose the Administrative Agent to liability hereunder or otherwise. In the event the Administrative Agent requests the consent of a Purchaser or a Liquidity Bank pursuant to the foregoing provisions and the Administrative Agent does not receive a consent (either positive or negative) from such Person within ten Business Days of such Person’s receipt of such request, then such Purchaser or Liquidity Bank shall be deemed to have declined to consent to the relevant actions.

     (b) The Administrative Agent shall exercise such rights and powers vested in it by this Agreement and the other Transaction Documents, and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs. The Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with the Purchasers or Liquidity Banks, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on the part of the Administrative Agent shall be read into this Agreement or any other Transaction Document or otherwise exist for the Administrative Agent. In performing its functions and duties hereunder and under the other Transaction Documents, the Administrative Agent shall act solely as agent for the Purchasers and Liquidity Banks and does not assume nor shall be deemed to have assumed any obligation or relationship of trust or agency with or for the Seller or any of its successors or assigns.

     (c) Administrative Agent’s Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them as Administrative Agent under or in connection with this Agreement or any of the other Transaction Documents, except for its or their own gross negligence or willful misconduct. Without limiting the foregoing, the Administrative Agent: (i) may consult with legal counsel (including counsel for the Seller or the Originator), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation and shall not be responsible for any statements, warranties or representations made in or in connection with this Agreement; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any of the other Transaction Documents on the part of the Seller, the Originator, or the Servicer or to inspect the property (including the books and records) of the Seller, the Originator, or the Servicer; (iv) shall not be responsible for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any of the other Transaction Documents or any other instrument or document furnished pursuant hereto or thereto; and (v) shall incur no liability under or in respect of this Agreement or any of the other

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Transaction Documents by acting upon any notice (including notice by telephone), consent, certificate or other instrument or writing (which may be by telex) believed by it to be genuine and signed or sent by the proper party or parties.

     (d) Credit Decision with Respect to the Administrative Agent. Each Secured Party acknowledges that it has, independently and without reliance upon the Administrative Agent, or any of the Administrative Agent’s Affiliates, and based upon such documents and information as it has deemed appropriate, made its own evaluation and decision to enter into this Agreement and the other Transaction Documents to which it is a party. Each Secured Party also acknowledges that it will, independently and without reliance upon the Administrative Agent, or any of the Administrative Agent’s Affiliates, and based on such documents and information as it shall deem appropriate at the time, continue to make its own decisions in taking or not taking action under this Agreement and the other Transaction Documents to which it is a party.

     (e) Indemnification of the Administrative Agent. Each Liquidity Bank and Class B Purchaser agrees to indemnify the Administrative Agent (to the extent not reimbursed by the Seller or the Servicer), ratably in accordance with its Commitment (or, if the Commitments have been terminated, then ratably according to the respective amounts of the sum of (x) the aggregate Advances Outstanding funded by it plus (y) the additional Advances it may be required to fund under the applicable Liquidity Agreement) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Administrative Agent in any way relating to or arising out of this Agreement or any of the other Transaction Documents, or any action taken or omitted by the Administrative Agent hereunder or thereunder; provided that none of the Liquidity Banks or Class B Purchasers shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent’s gross negligence or willful misconduct. Without limitation of the foregoing, each Liquidity Bank and Class B Purchaser agrees to reimburse the Administrative Agent, ratably in accordance with its Commitment (or, if the Commitments have been terminated, then ratably according to the respective amounts of the sum of (x) the aggregate Advances Outstanding funded by it plus (y) the additional Advances it may be required to fund under the applicable Liquidity Agreement) promptly upon demand for any out-of-pocket expenses (including counsel fees) incurred by the Administrative Agent in connection with the administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement and the other Transaction Documents, to the extent that the Administrative Agent is not reimbursed for such expenses by the Seller or the Servicer.

     (f) Successor Administrative Agent. The Administrative Agent may resign at any time, effective upon the appointment and acceptance of a successor Administrative Agent as provided below, by giving at least five days’ written notice thereof to each Purchaser and the Seller and may be removed at any time with cause by the Purchasers acting jointly. Upon any such resignation or removal, the Class A Purchasers, the Class B Purchasers (other than, if a Termination Event then exists, any Class B Purchaser which is the Seller or an Affiliate of the Seller) and (unless a Termination Event then exists) the Seller acting jointly shall appoint a successor Administrative Agent. Each of the Purchasers and the Seller agrees that it shall not

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unreasonably withhold or delay its approval of the appointment of a successor Administrative Agent. If no such successor Administrative Agent shall have been so appointed, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent’s giving of notice of resignation or the removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Secured Parties, appoint a successor Administrative Agent which successor Administrative Agent shall be either (i) a commercial bank organized under the laws of the United States or of any state thereof and have a combined capital and surplus of at least $50,000,000 or (ii) an Affiliate of such a bank. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent’s resignation or removal hereunder as Administrative Agent, the provisions of this Article XII shall continue to inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement.

     (g) Payments by the Administrative Agent. All amounts received by the Administrative Agent on behalf of the Purchasers shall be paid by the Administrative Agent to the applicable Purchasers in accordance with the terms of this Agreement, on the Business Day received by the Administrative Agent, unless such amounts are received after 12:00 noon on such Business Day, in which case the Administrative Agent shall use its reasonable efforts to pay such amounts to the applicable Purchasers on such Business Day, but, in any event, shall pay such amounts to such Purchasers not later than the following Business Day.

     (h) Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care.

     (i) Non-Reliance on the Administrative Agent. Each Purchaser expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereafter taken, including, without limitation, any review of the affairs of the Seller, shall be deemed to constitute any representation or warranty by the Administrative Agent. Each Purchaser represents and warrants to the Administrative Agent that it has and will, independently and without reliance upon the Administrative Agent, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, prospects, financial and other conditions and creditworthiness of the Seller and made its own decision to enter into this Agreement, the other Transaction Documents or any Hedging Agreement, as the case may be.

     (j) Administrative Agent and its Affiliates. The Administrative Agent and any of its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Seller, Originator or Servicer or any Affiliate of the foregoing as though the Administrative Agent was not the Administrative Agent. With respect to the Advances made pursuant to this Agreement, the Administrative Agent and each of its Affiliates shall have the

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same rights and powers under this Agreement as any Liquidity Bank and may exercise the same as though it were not the Administrative Agent.

ARTICLE XIII

MISCELLANEOUS

     Section 13.1 Amendments and Waivers.

     (a) Except as provided in this Section 13.1, no amendment, waiver or other modification of any provision of this Agreement shall be effective without the written agreement of the Seller, the Servicer, the Backup Servicer, the Collateral Custodian, the Administrative Agent and the Secured Parties; provided that, prior to the Class A Collection Date, no consent from the Class B Purchaser shall be required for any such amendment, waiver or other modification of any provision of this Agreement, so long as such amendment, waiver or modification does not in any way affect the payment obligations hereunder or materially increase the obligations of the Class B Purchaser hereunder; provided further that no such amendment, waiver or modification adversely affecting the rights or obligations of any Hedge Counterparty shall be effective without the written agreement of such Person.

     (b) The parties hereto acknowledge and agree that after the Closing Date the Agreement may need to be amended to correct certain ambiguities or errors as well as to correct inconsistencies with the terms of the other Transaction Documents and each such party agrees to cooperate in good faith to effectuate, and not to unreasonably withhold, delay or condition its consent to, any such amendments; provided that notwithstanding the foregoing, to the extent any such amendment would have an adverse effect on any Secured Party, such Secured Party shall have the right to consent or withhold consent in its sole discretion.

     Section 13.2 Notices, Etc.

     All notices, reports and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including telex communication and communication by facsimile copy) and mailed, telexed, transmitted or delivered, as to each party hereto, at its address set forth under its name on the signature pages hereof or at such other address as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective, upon receipt, or in the case of (a) notice by mail, five days after being deposited in the United States mail, first class postage prepaid or (b) notice by facsimile copy, when communication of receipt is obtained.

     Section 13.3 Ratable Payments.

     If any Class A Purchaser, whether by setoff or otherwise, has payment made to it with respect to any portion of the Aggregate Unpaids owing to such Class A Purchaser (other than payments received pursuant to Section 11.1) in a greater proportion than that received by any other Class A Purchaser, such Class A Purchaser agrees, promptly upon demand, to purchase for cash without recourse or warranty a portion of the Aggregate Unpaids held by the other Class A Purchasers so that after such purchase each Class A Purchaser will hold its ratable proportion of the Aggregate Unpaids; provided that if all or any portion of such excess amount is thereafter

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recovered from such Class A Purchaser, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest.

     Section 13.4 No Waiver; Remedies.

     No failure on the part of the Administrative Agent, the Collateral Custodian, the Backup Servicer or a Secured Party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right. The rights and remedies herein provided are cumulative and not exclusive of any rights and remedies provided by law.

     Section 13.5 Binding Effect; Benefit of Agreement.

     This Agreement shall be binding upon and inure to the benefit of the Seller, the Servicer, the Administrative Agent, the Backup Servicer, the Collateral Custodian, the Secured Parties and their respective successors and permitted assigns and, in addition, the provisions of Section 2.9(a)(1) and Section 2.10(a)(1) shall inure to the benefit of each Hedge Counterparty, whether or not that Hedge Counterparty is a Secured Party.

     Section 13.6 Term of this Agreement.

     This Agreement, including, without limitation, the Seller’s representations and covenants set forth in Articles IV and V, and the Servicer’s representations, covenants and duties set forth in Articles VI, VII and VIII, create and constitute the continuing obligation of the parties hereto in accordance with its terms, and shall remain in full force and effect until the Collection Date. Upon the occurrence of the Collection Date and the written request of the Seller, the Administrative Agent shall release its interest in the Collateral pursuant to Section 9.2; provided however that the rights and remedies with respect to any breach of any representation and warranty made or deemed made by the Seller pursuant to Articles III and IV the indemnification and payment provisions of Article XI and the provisions of Section 13.9, Section 13.10 and Section 13.11, shall be continuing and shall survive any termination of this Agreement.

     Section 13.7 Governing Law; Consent to Jurisdiction; Waiver of Objection to Venue.

     THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW PROVISIONS THEREOF (OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK). EACH OF THE PARTIES HERETO AND EACH HEDGE COUNTERPARTY HEREBY AGREES TO THE NON-EXCLUSIVE JURISDICTION OF ANY NEW YORK STATE OR FEDERAL COURT LOCATED IN NEW YORK CITY. EACH OF THE PARTIES HERETO AND EACH SECURED PARTY HEREBY WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER IN ANY OF THE AFOREMENTIONED COURTS AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT.

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     Section 13.8 Waiver of Jury Trial.

     TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO AND EACH HEDGE COUNTERPARTY HEREBY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE PARTIES HERETO ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN ANY OF THEM IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. INSTEAD, ANY SUCH DISPUTE RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL WITHOUT A JURY.

     Section 13.9 Costs, Expenses and Taxes.

     (a) In addition to the rights of indemnification granted under Article XI hereof, the Seller and Originator agrees to pay on demand all reasonable out of pocket costs and expenses of the Administrative Agent, the Backup Servicer, the Collateral Custodian and the Secured Parties incurred in connection with the preparation, execution, delivery, administration (including periodic auditing, which shall be limited to two audits per year prior to the occurrence of a Termination Event), renewal, amendment or modification of, or any waiver or consent issued in connection with, this Agreement and the other documents to be delivered hereunder or in connection herewith (including any Hedging Agreement), including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent, the Backup Servicer, the Collateral Custodian and the Secured Parties with respect thereto and with respect to advising the Administrative Agent, the Backup Servicer, the Collateral Custodian and the Secured Parties as to their respective rights and remedies under this Agreement and the other documents to be delivered hereunder or in connection herewith (including any Hedging Agreement), and all reasonable out of pocket costs and expenses, if any (including reasonable counsel fees and expenses), incurred by the Administrative Agent, the Backup Servicer, the Collateral Custodian or the Secured Parties in connection with the enforcement of this Agreement and the other documents to be delivered hereunder or in connection herewith (including any Hedging Agreement).

     (b) The Seller and Originator shall pay on demand any and all stamp, sales, excise and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement, the other documents to be delivered hereunder or any agreement or other document providing liquidity support, credit enhancement or other similar support to the Purchasers in connection with this Agreement or the funding or maintenance of Advances hereunder.

     (c) The Seller and Originator shall pay on demand all other reasonable out of pocket costs, expenses and Taxes (excluding income taxes) incurred by the Administrative Agent and the Secured Parties (“Other Costs”), including, without limitation, all costs and expenses incurred by the Administrative Agent in connection with periodic audits of the Seller’s or the Servicer’s books and records.

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     Section 13.10 No Proceedings.

     (a) Each of the parties hereto and each Hedge Counterparty (by accepting the benefits of this Agreement) hereby agrees that it will not institute against, or join any other Person in instituting against, any Issuer, any Insolvency Proceeding so long as any commercial paper or other senior indebtedness issued by such Issuer shall be outstanding and there shall not have elapsed one year and one day since the last day on which any such commercial paper or other senior indebtedness shall have been outstanding.

     (b) Each of the parties hereto (other than the Administrative Agent acting with the consent of the Purchasers) hereby agrees that it will not institute against, or join any other Person in instituting against, the Seller any Insolvency Proceeding so long as there shall not have elapsed one year and one day since the Collection Date; provided that nothing in this Section 13.10 shall limit any party’s right to file any claim in or otherwise take any action with respect to any Insolvency Proceeding that was instituted by any other Person.

     Section 13.11 Recourse Against Certain Parties.

     (a) No recourse under or with respect to any obligation, covenant or agreement (including, without limitation, the payment of any fees or any other obligations) of the Administrative Agent, the Seller, the Servicer, the Originator or any Secured Party as contained in this Agreement or any other agreement, instrument or document entered into by it pursuant hereto or in connection herewith shall be had against any administrator of the Administrative Agent, the Seller, the Servicer, the Originator or any Secured Party, or any incorporator, affiliate, stockholder, officer, employee or director of the Administrative Agent, the Seller, the Servicer, the Originator or any Secured Party, or of any such administrator, as such, by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any statute or otherwise; it being expressly agreed and understood that the agreements of the Administrative Agent, the Seller, the Servicer, the Originator or any Secured Party contained in this Agreement and all of the other agreements, instruments and documents entered into by it pursuant hereto or in connection herewith are, in each case, solely the corporate or limited liability company obligations of the Administrative Agent, the Seller, the Servicer, the Originator or any Secured Party, and that no personal liability whatsoever shall attach to or be incurred by any administrator of the Administrative Agent, the Seller, the Servicer, the Originator or any Secured Party or any incorporator, stockholder, affiliate, officer, employee or director of the Administrative Agent, the Seller, the Servicer, the Originator or any Secured Party or of any such administrator, as such, or any other of them, under or by reason of any of the obligations, covenants or agreements of the Administrative Agent, the Seller, the Servicer, the Originator or any Secured Party contained in this Agreement or in any other such instruments, documents or agreements, or that are implied therefrom, and that any and all personal liability of every such administrator of the Administrative Agent, the Seller, the Servicer, the Originator or any Secured Party and each incorporator, stockholder, affiliate, officer, employee or director of the Administrative Agent, the Seller, the Servicer, the Originator or any Secured Party or of any such administrator, or any of them, for breaches by the Administrative Agent, the Seller, the Servicer, the Originator or any Secured Party of any such obligations, covenants or agreements, which liability may arise either at common law or at equity, by statute or constitution, or otherwise, is hereby expressly waived as a condition of and in consideration for the execution of this

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Agreement. The provisions of this Section 13.11(a) shall survive the termination of this Agreement.

     (b) [Intentionally omitted.]

     (c) Notwithstanding any contrary provision set forth herein, no claim may be made by the Seller, the Originator or the Servicer or any other Person against the Administrative Agent and the Secured Parties or their respective Affiliates, directors, officers, employees, attorneys or agents for any special, indirect, consequential or punitive damages in respect to any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement, or any act, omission or event occurring in connection therewith; and the Seller, the Originator and the Servicer each hereby waives, releases, and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected.

     (d) No obligation or liability to any Obligor under any of the Assets is intended to be assumed by the Administrative Agent and the Secured Parties under or as a result of this Agreement and the transactions contemplated hereby

Section 13.12 Protection of Right, Title and Interest in the Collateral; Further Action Evidencing Advances .

     (a) The Servicer shall cause this Agreement, all amendments hereto and/or all financing statements and continuation statements and any other necessary documents covering the right, title and interest of the Administrative Agent as agent for the Secured Parties and of the Secured Parties to the Collateral to be promptly recorded, registered and filed, and at all times to be kept recorded, registered and filed, all in such manner and in such places as may be required by law fully to preserve and protect the right, title and interest of the Administrative Agent as agent for the Secured Parties hereunder to all property comprising the Collateral. The Servicer shall deliver to the Administrative Agent file-stamped copies of, or filing receipts for, any document recorded, registered or filed as provided above, as soon as available following such recording, registration or filing. The Seller shall cooperate fully with the Servicer in connection with the obligations set forth above and will execute any and all documents reasonably required to fulfill the intent of this Section 13.12(a).

     (b) The Seller agrees that from time to time, at its expense, it will promptly execute and deliver all instruments and documents, and take all actions, that the Administrative Agent may reasonably request in order to perfect, protect or more fully evidence the Advances hereunder and the security interest granted in the Collateral, or to enable the Administrative Agent or the Secured Parties to exercise and enforce their rights and remedies hereunder or under any Transaction Document.

     (c) If the Seller or the Servicer fails to perform any of its obligations hereunder, the Administrative Agent or any Secured Party may (but shall not be required to) perform, or cause performance of, such obligation; and the Administrative Agent’s or such Secured Party’s costs and expenses incurred in connection therewith shall be payable by the Seller as provided in Article XI. The Seller irrevocably authorizes the Administrative Agent and appoints the

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Administrative Agent as its attorney-in-fact to act on behalf of the Seller (i) to execute on behalf of the Seller as debtor and to file financing statements necessary or desirable in the Administrative Agent’s sole discretion to perfect and to maintain the perfection and priority of the interest of the Secured Parties in the Collateral and (ii) to file a carbon, photographic or other reproduction of this Agreement or any financing statement with respect to the Collateral as a financing statement in such offices as the Administrative Agent in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of the interests of the Secured Parties in the Collateral. This appointment is coupled with an interest and is irrevocable.

     (d) Without limiting the generality of the foregoing, Seller will, not earlier than six months and not later than three months prior to the fifth anniversary of the date of filing of the financing statement referred to in Section 3.1 or any other financing statement filed pursuant to this Agreement or in connection with any Advance hereunder, unless the Collection Date shall have occurred:

     (i) deliver and file or cause to be filed an appropriate continuation statement with respect to such financing statement; and

     (ii) deliver or cause to be delivered to the Administrative Agent an opinion of the counsel for Seller, in form and substance reasonably satisfactory to the Administrative Agent confirming and updating the opinion delivered pursuant to Section 3.1 with respect to perfection and otherwise to the effect that the security interest hereunder continues to be an enforceable and perfected security interest, subject to no other Liens of record except as provided herein or otherwise permitted hereunder, which opinion may contain usual and customary assumptions, limitations and exceptions.

     Section 13.13 Confidentiality

     (a) Each of the Administrative Agent, the Secured Parties, the Servicer, the Collateral Custodian, the Backup Servicer and the Seller shall maintain and shall cause each of its employees and officers to maintain the confidentiality of the Agreement and all information with respect to the other parties, including all information regarding the business of CapitalSource Inc. and its Affiliates, the Seller and the Servicer hereto, and their respective businesses obtained by it or them in connection with the structuring, negotiating and execution of the transactions contemplated herein or related to any of the underlying Obligors, except that each such party and its officers and employees may (i) disclose such information to its external accountants, attorneys, investors, potential investors parties that provide or may in the future provide first loss or credit enhancement to such Person and the agents of such Persons (“Excepted Persons”); (ii) disclose the existence of the Agreement, but not the financial terms thereof, (iii) disclose such information as is required by Applicable Law and (iv) disclose the Agreement and such information in any suit, action, proceeding or investigation (whether in law or in equity or pursuant to arbitration) involving any of the Transaction Documents or any Hedging Agreement for the purpose of defending itself, reducing its liability, or protecting or exercising any of its claims, rights, remedies, or interests under or in connection with any of the Transaction Documents or any Hedging Agreement. It is understood that the financial terms that may not be disclosed except in compliance with this Section 13.13(a) include, without limitation, all fees and

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other pricing terms, and all Termination Events, Servicer Defaults, and priority of payment provisions.

     (b) Anything herein to the contrary notwithstanding, the Seller and the Servicer each hereby consents to the disclosure of any nonpublic information with respect to it (i) to the Administrative Agent, the Collateral Custodian, the Backup Servicer or the Secured Parties by each other, (ii) by the Administrative Agent, the Collateral Custodian, the Backup Servicer and the Secured Parties to any prospective or actual assignee or participant of any of them provided such Person agrees to hold such information confidential, (iii) by the Administrative Agent and the Secured Parties to any commercial paper dealer or provider of a surety, guaranty or credit or liquidity enhancement to any Issuer, or to any subordinated investor in any Issuer, and to any officers, directors, employees, outside accountants and attorneys of any of the foregoing, provided each such Person is informed of the confidential nature of such information or (iv) to any Rating Agency. In addition, the Secured Parties and the Administrative Agent, may disclose any such nonpublic information as required pursuant to any law, rule, regulation, direction, request or order of any judicial, administrative or regulatory authority or proceedings (whether or not having the force or effect of law).

     (c) Notwithstanding anything herein to the contrary, the foregoing shall not be construed to prohibit (i) disclosure of any and all information that is or becomes publicly known; (ii) disclosure of any and all information (a) if required to do so by any applicable statute, law, rule or regulation, (b) to any government agency or regulatory body having or claiming authority to regulate or oversee any respects of the Administrative Agents’, the Secured Parties’, the Collateral Custodian’s, the Backup Servicer’s, the Seller, the Servicer or the Originator business or that of their affiliates, (c) pursuant to any subpoena, civil investigative demand or similar demand or request of any court, regulatory authority, arbitrator or arbitration to which the Administrative Agent, the Secured Parties, the Collateral Custodian, the Backup Servicer, the Seller, the Servicer or the Originator or an officer, director, employer, shareholder or affiliate of any of the foregoing is a party, (d) in any preliminary or final offering circular, registration statement or contract or other document approved in advance by the Seller, the Servicer or the Originator or (e) to any affiliate, independent or internal auditor, agent, employee or attorney of the Collateral Custodian or Backup Servicer having a need to know the same, provided that the Collateral Custodian or Backup Servicer advises such recipient of the confidential nature of the information being disclosed; or (iii) any other disclosure authorized in writing by the Seller, Servicer or Originator.

     (d) Notwithstanding any other provision herein or in any other Transaction Document, each Purchaser and the Administrative Agent hereby confirms that the Seller, the Originator and the Servicer (and each employee, representative or other agent of each such party) may disclose to any and all Persons, without limitation of any kind, the U.S. tax treatment and U.S. tax structure of the transaction contemplated by this Agreement and the other Transaction Documents.

     Section 13.14 Execution in Counterparts; Severability; Integration.

     This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts (including by facsimile or by electronic mail in portable

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document format (pdf)), each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. This Agreement and the Transaction Documents contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, superseding all prior oral or written understandings delivered by the Originator to the Administrative Agent and the Secured Parties.

     Section 13.15 Waiver of Set-off.

     (a) The Seller, the Servicer and the Originator each hereby waives any right of setoff it may have or to which it may be entitled under this Agreement from time to time against the Administrative Agent, each Purchaser, its Affiliates or its respective assets.

     (b) Without in any way limiting the provisions of Section 13.3, the Administrative Agent and each Purchaser is hereby authorized (in addition to any other rights it may have) at any time after the occurrence and during the continuance of a Termination Event to set-off, appropriate and apply (without presentment, demand, protest or other notice which are hereby expressly waived) any deposits and any other indebtedness held or owing by the Administrative Agent or such Purchaser to, or for the respective account of, the Seller, the Servicer or the Originator against any amount owing by the Seller, the Servicer or the Originator, respectively, to such Person or to the Administrative Agent on behalf of such Person (even if contingent or unmatured). For the avoidance of doubt, the right of setoff set forth in this Section 13.15(b) does not permit setoff of deposits and indebtedness held or owing by one Person to or for the account of a second Person against amounts owing by any Person other than such second Person.

     Section 13.16 Assignments.

     (a) This Agreement and each Issuer’s rights and obligations herein (including ownership of each Asset) shall be assignable by the Issuers and their successors and assigns to any Eligible Assignee (including, without limitation, pursuant to the Liquidity Agreement). Each assigning Issuer shall notify the Administrative Agent and the Seller of any such assignment.

     (b) Each Class B Purchaser and Liquidity Bank may assign to any Eligible Assignee or to any other Purchaser or Liquidity Bank, as the case may be, all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and any Assets or interests therein owned by it); provided, however, that

     (i) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement,

     (ii) the amount being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance Agreement with respect to such

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assignment) shall in no event be less than the lesser of (x) $25,000,000 and (y) all of the assigning Purchaser’s Commitment,

     (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance Agreement, together with a processing and recordation fee of $2,500,

     (iv) with respect to any Liquidity Bank, concurrently with such assignment, such assignor Liquidity Bank shall assign to such assignee Liquidity Bank or other Eligible Assignee an equal percentage of its rights and obligations under the Liquidity Agreement (or, if such assignor Liquidity Bank is Citibank, it shall arrange for such assignee Liquidity Bank or other Eligible Assignee to become a party to the Liquidity Agreement for a maximum principal amount equal to the assignee’s Commitment), and

     (v) Citibank may not assign any portion of its Class A Commitment to the extent that it reduces such Class A Commitment below 50% of the Class A Facility Amount.

     Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment and Acceptance Agreement, (x) the assignee thereunder shall be a party to this Agreement and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance Agreement, have the rights and obligations of a Liquidity Bank or a Class B Purchaser, as applicable, hereunder and (y) the assigning Purchaser shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance Agreement, relinquish such rights and be released from such obligations under this Agreement (and, in the case of an Assignment and Acceptance Agreement covering all or the remaining portion of an assigning Purchaser’s rights and obligations under this Agreement, such Purchaser shall cease to be a party hereto).

     (c) With respect to the Liquidity Banks, the Administrative Agent shall maintain at its address referred to in Section 13.2 of this Agreement a copy of each Assignment and Acceptance Agreement delivered to and accepted by it and a register for the recordation of the names and addresses of the Liquidity Banks and the Commitment of, and aggregate outstanding principal of Advances owned by, each Liquidity Bank from time to time (the “Register”). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Seller, the Originator, the Administrative Agent and the Liquidity Banks may treat each person whose name is recorded in the Register as a Liquidity Bank under this Agreement for all purposes of this Agreement. The Register shall be available for inspection by the Seller or any Liquidity Bank at any reasonable time and from time to time upon reasonable prior notice. Upon its receipt of an Assignment and Acceptance Agreement executed by an assigning Liquidity Bank and an Eligible Assignee, the Administrative Agent shall, if such Assignment and Acceptance Agreement has been completed, (i) accept such Assignment and Acceptance Agreement, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Seller.

     (d) Notwithstanding any other provision of this Section 13.16, any Liquidity Bank may at any time pledge or grant a security interest in all or any portion of its rights (including,

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without limitation, rights to payment of interest and principal) under this Agreement or under any Liquidity Agreement to secure obligations of such Liquidity Bank to a Federal Reserve Bank, without notice to or consent of the Seller or the Administrative Agent; provided that no such pledge or grant of a security interest shall release a Liquidity Bank from any of its obligations hereunder or under the Liquidity Agreement, as the case may be, or substitute any such pledgee or grantee for such Liquidity Bank as a party hereto or to the Liquidity Agreement, as the case may be.

     (e) Each Liquidity Bank may sell participations, to one or more banks or other entities, in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the Advances owned by it); provided, however, that

     (i) such Liquidity Bank’s obligations under this Agreement (including, without limitation, its Commitment to the Seller hereunder) shall remain unchanged,

     (ii) such Liquidity Bank shall remain solely responsible to the other parties to this Agreement for the performance of such obligations, and

     (iii) concurrently with such participation, the selling Liquidity Bank shall sell to such bank or other entity a participation in an equal percentage of its rights and obligations under the Liquidity Agreement.

     The Administrative Agent, the Purchasers, other Liquidity Banks and the Seller shall have the right to continue to deal solely and directly with such Liquidity Bank in connection with such Person’s rights and obligations under this Agreement.

     (f) This Agreement and the rights and obligations of the Administrative Agent herein shall be assignable by the Administrative Agent and its successors and assigns; provided, however, that the Administrative Agent agrees that it will not assign such rights and obligations to any Person other than an Affiliate of Citibank unless:

     (i) in the reasonable judgment of the Administrative Agent, the Administrative Agent determines that continued service by it (or its Affiliate) as Administrative Agent hereunder would be inconsistent with, or otherwise disadvantageous under, applicable legal, tax or regulatory restrictions, in which case the Administrative Agent shall notify the Seller of such determination and consult with the Seller regarding the selection of an assignee; or

     (ii) there shall have occurred any Termination Event, which shall be continuing; or

     (iii) the Seller shall have consented to such assignment (such consent not to be unreasonably withheld or delayed).

     (g) The Seller may not assign its rights or obligations hereunder or any interest herein, or permit any Lien (other than any Permitted Lien) to exist upon, any of the Seller’s

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rights, obligations or duties under this Agreement, without the prior written consent of the Administrative Agent and each Hedge Counterparty.

     Section 13.17 Heading and Exhibits.

     The headings herein are for purposes of references only and shall not otherwise affect the meaning or interpretation of any provision hereof. The schedules and exhibits attached hereto and referred to herein shall constitute a part of this Agreement and are incorporated into this Agreement for all purposes.

     Section 13.18 Loans Subject to Retained Interest Provisions.

     (a) With respect to any Loan included in the Collateral subject to the Retained Interest provisions of this Agreement, the Seller will own only the principal portion of such Loans outstanding as of the applicable Cut-Off Date. Collections from the Obligor on such Revolving Loan will be allocated first to the portion of such Revolving Loan owned by the Originator, its Affiliate special purpose entities under any warehouse facility involving the Originator or one of its Affiliates, any co-lenders under such facilities or a term transaction or warehouse facility involving the Originator or one of its Affiliates; provided that if (i) a payment default occurs, or an event of default occurs (without waiver) with respect to any of the related Loans, or an Insolvency Event with respect to the related Obligor, (ii) the Servicer has determined that the creditworthiness of the Obligor under such related Loan has deteriorated such that it materially and adversely affects the value of such related Loan or has reduced in a material manner the likelihood of repayment in full thereunder, (iii) the Originator has determined in its sole discretion to reduce or terminate its commitment to an Obligor, or (iv) a Termination Event or Unmatured Termination Event occurs, then at such time and all times thereafter, Collections received on (A) the applicable Loan (in the case of clause (i), (ii) or (iii) above) or (B) all the Revolving Loans (in the case of clause (iv) above) will be allocated between the portion owned by the Originator, its Affiliate special purpose entities under the warehouse or term facilities then outstanding and the portion owned by the Seller, pro rata based upon the outstanding principal amount of each such portion.

     (b) With respect to any Term Loans included in the Collateral subject to the Retained Interest provisions of this Agreement, Principal Collections and Interest Collections received by the Servicer will be allocated between the portion owned by the Seller and to the portion not owned by the Seller (if any) on a pro rata basis according to the outstanding principal amount of such portion.

     Section 13.19 Tax Treatment of Advances.

     It is the intention of the Seller and the Purchasers that, for U.S. federal, state and local income and franchise tax purposes only, the Advances made hereunder will be treated as indebtedness secured by the Collateral. The Seller, by entering into this Agreement, and the Purchasers, by making the Advances described herein, agree to treat the Advances for U.S. federal, state and local income and franchise tax purposes as indebtedness. The provisions of this Agreement and all related Transaction Documents shall be construed to further these intentions of the parties.

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     Section 13.20 Acknowledgement.

     Each of the parties hereto acknowledges and agrees that the amendment and restatement of the Original Agreement on the terms and conditions set forth herein shall not in any way affect any sales, transfers, assignments or security interest grants effected pursuant to the Original Agreement or any representations, warranties, covenants or indemnities made by the Seller, the Servicer, the Backup Servicer or the Collateral Custodian with respect to such sales, transfers, assignments or security interest grants or any rights or remedies of the Administrative Agent or the Purchasers with respect thereto. Each of the parties hereto confirms all sales, transfers, assignments and security interests effected pursuant to the Original Agreement.

[Remainder of Page Intentionally Left Blank.]

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     IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

THE SELLER:	CAPITALSOURCE REAL ESTATE LOAN LLC, 2007-A
	By:	/s/ Jeffrey A. Lipson
		Name:	Jeffrey A. Lipson
		Title:	Vice President and Treasurer
	CapitalSource Real Estate Loan LLC, 2007-A 4445 Willard Avenue, 12th Floor Chevy Chase, Maryland 20815 Attention: Treasurer Facsimile No.: (301) 841-2375 Confirmation No.: (301) 841-2731]
THE ORIGINATOR, SERVICER AND CLASS B PURCHASER:	CSE MORTGAGE LLC
	By:	/s/ Jeffrey A. Lipson
		Name:	Jeffrey A. Lipson
		Title:	Vice President and Treasurer
	CSE Mortgage LLC 4445 Willard Avenue, 12th Floor Chevy Chase, Maryland 20815 Attention: Treasurer Facsimile No.: (301) 841-2375 Confirmation No.: (301) 841-2731

[Signatures Continued on the Following Page]

Issuer:	CRC FUNDING, LLC, in its capacity as an Issuer
	By:	Citicorp North America, Inc., as Attorney-in-Fact
	By:	/s/ Gerald F. Keefe
		Name:	Gerald F. Keefe
		Title:	Authorized Signatory
	CRC Funding, LLC 450 Mamaroneck Avenue Harrison, N.Y. 10528 Attention: Global Securitization Facsimile No.: 914-899-7890 Confirmation No.: 914-899-7218

Issuer:	CAFCO, LLC, in its capacity as an Issuer
	By:	Citicorp North America, Inc., as Attorney-in-Fact
	By:	/s/ Gerald F. Keefe
		Name:	Gerald F. Keefe
		Title:	Authorized Signatory
	CAFCO, LLC 450 Mamaroneck Avenue Harrison, N.Y. 10528 Attention: Global Securitization Facsimile No.: 914-899-7890 Confirmation No.: 914-899-7218

[Signatures Continued on the Following Page]

Issuer:	CIESCO, LLC, in its capacity as an Issuer
	By:	Citicorp North America, Inc., as Attorney-in-Fact
	By:	/s/ Gerald F. Keefe
		Name:	Gerald F. Keefe
		Title:	Authorized Signatory
	CIESCO, LLC 450 Mamaroneck Avenue Harrison, N.Y. 10528 Attention: Global Securitization Facsimile No.: 914-899-7890 Confirmation No.: 914-899-7218

[Signatures Continued on the Following Page]

Liquidity Bank:	CITIBANK, N.A., in its capacity as a Liquidity Bank
	By:	/s/ Gerald F. Keefe
		Name:	Gerald F. Keefe
		Title:	Vice President
	Citibank, N.A. 450 Mamaroneck Avenue Harrison, N.Y. 10528 Attention: Global Securitization Facsimile No.: 914-899-7890 Confirmation No.: 914-899-7218
THE ADMINISTRATIVE AGENT	CITICORP NORTH AMERICA, INC.
	By:	/s/ Gerald F. Keefe
		Name:	Gerald F. Keefe
		Title:	Authorized Signatory
	Citicorp North America, Inc., as Administrative Agent 450 Mamaroneck Avenue Harrison, N.Y. 10528 Attention: Global Securitization Facsimile No.: 914-899-7890 Confirmation No.: 914-899-7218

[Signatures Continued on the Following Page]

THE BACKUP SERVICER: AND THE COLLATERAL CUSTODIAN:	WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its individual capacity but solely as Backup Servicer
	By:	/s/ Jeanine C. Casey
		Name:	Jeanine C. Casey
		Title:	Assistant Vice President
	Wells Fargo Bank, National Association Sixth Street and Marquette Avenue MAC N9311-161 Minneapolis, Minnesota 55479 Attention: Corporate Trust Services                     Collateral-Backed Administration Facsimile No.: (612) 667-3539 Confirmation No.: (612) 667-8058

[Signatures Continued on the Following Page]

Acknowledged and Agreed to as of the date first written above.
CITIBANK, N.A., as the Hedge Counterparty
By:	/s/ Gerald F. Keefe
	Name:	Gerald F. Keefe
	Title:	Vice President
Citibank, N.A. 450 Mamaroneck Avenue Harrison, N.Y. 10528 Attention: Global Securitization Facsimile No.: 914-899-7890 Confirmation No.: 914-899-7218

EX-10.17.3

Exhibit 10.17.3

NOTICE OF GRANT OF STOCK OPTIONS	CapitalSource Inc.
	ID: 35-2206895
	4445 Willard Avenue
	Twelfth Floor
	Chevy Chase, MD 20815
[Name]	Option Number:
[Address]	Plan:	Y2KB
	ID:

Effective [DATE], you have been granted a Non-Qualified Stock Option (the “Option”) to buy [NUMBER] shares of CapitalSource Inc. (the “Company”) common stock at [PRICE] per share.

The Option shall vest as follows:

Shares Vest Type Vest Date Expiration

By your signature and the Company’s signature below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the attached Option Agreement and the Company’s Third Amended and Restated Equity Incentive Plan, as amended, all of which are available on the Company’s intranet.

CapitalSource Inc.	Date
[NAME]	Date

Exhibit 10.17.3

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

NON-QUALIFIED OPTION AGREEMENT

Non-qualified Option	This Agreement evidences an award of a Stock Option exercisable for that number of shares of Stock set forth on your Notice of Grant of Stock Options to which this Agreement is attached (“Grant Notice”) and subject to the vesting and other conditions set forth herein, in the Plan and on the Grant Notice. This option is not intended to be an incentive option under Section 422 of the Internal Revenue Code and will be interpreted accordingly.
Transfer of Stock Option	During your lifetime, only you (or, in the event of your legal incapacity or incompetency, your guardian or legal representative) may exercise the Stock Option. The Stock Option may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Stock Option be made subject to execution, attachment or similar process.
	If you attempt to do any of these things, this Stock Option will immediately become forfeited.
	Notwithstanding these restrictions on transfer, the Board or the Committee may authorize, in its sole discretion, the transfer of a vested Stock Option (in whole or in part) to a member of your immediate family or a trust for the benefit of your immediate family.
Vesting	Your Stock Option shall vest in accordance with the vesting schedule shown in the Grant Notice so long as you continue in Service on the vesting dates set forth on the Grant Notice and is exercisable only as to its vested portion.
Forfeiture of Unvested Stock Options / Term	Unless the termination of your Service triggers accelerated vesting of your Stock Option pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company (or any Affiliate) and you, you will automatically forfeit to the Company those portions of the Stock Option that have not yet vested in the event your Service terminates for any reason.
Expiration of Vested Options After Service Terminates	If your Service terminates for any reason, other than death, Disability or Cause, then the vested portion of your Stock Option will expire at the close of business at Company headquarters on the 90th day after your termination date.

	If your Service terminates because of your death or Disability, or if you die during the 90-day period after your termination for any reason (other than Cause), then the vested portion of your Stock Option will expire at the close of business at Company headquarters on the date twelve (12) months after the date of your death or termination for Disability. During that twelve (12) month period, your estate or heirs may exercise the vested portion of your Stock Option.
	If your Service is terminated for Cause, then you shall immediately forfeit all rights to your entire Stock Option and the Stock Option shall immediately expire.
	In all events, your Stock Option will expire on the Expiration Date shown on the Grant Notice. Your Stock Option will expire earlier if your Service terminates, as described herein.
Forfeiture of Rights	If you should take actions in violation or breach of or in conflict with any non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality obligation with respect to the Company or any Affiliate thereof or otherwise in competition with the Company or any Affiliate thereof, the Company has the right to cause an immediate forfeiture of your rights to this Stock Option and the Stock Option shall immediately expire.
	In addition, if you have exercised any options during the two year period prior to your actions, you will owe the Company a cash payment (or forfeiture of shares) in an amount determined as follows: (1) for any Shares that you have sold prior to receiving notice from the Company, the amount will be the proceeds received from the sale(s), less the option exercise price, and (2) for any Shares that you still own, the amount will be the number of Shares owned times the Fair Market Value of the Shares on the date you receive notice from the Company, less the option exercise price (provided, that the Company may require you to satisfy your payment obligations hereunder either by forfeiting and returning to the Company the shares or any other shares or making a cash payment or a combination of these methods as determined by the Company in its sole discretion).
Leaves of Absence	For purposes of this Agreement, your Service does not terminate when you go on a bona fide employee leave of absence that was approved by the Company in writing if the terms of the leave provide for continued Service crediting, or when continued Service crediting

	is required by applicable law. Your Service terminates in any event when the approved leave ends unless you immediately return to active employee work.
	The Company determines, in its sole discretion, which leaves count for this purpose, and when your Service terminates for all purposes under the Plan.
Notice of Exercise	The Stock Option may be exercised, in whole or in part, to purchase a whole number of vested shares of Stock of not less than 100 shares, unless the number of vested shares purchased is the total number available for purchase under the option, by following the procedures set forth in the Plan and in this Agreement.
	When you wish to exercise this Stock Option, you must exercise in a manner required or permitted by the Company.
	If someone else wants to exercise this Stock Option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.
Form of Payment	When you exercise your Stock Option, you must include payment of the option price indicated on the Grant Notice for the shares you are purchasing. Payment may be made in one (or a combination) of the following forms:
	• Cash, your personal check, a cashier’s check, a money order or another cash equivalent acceptable to the Company.
	• Shares of Stock which have already been owned by you for more than six months and which are surrendered to the Company. The Fair Market Value of the shares as of the effective date of the option exercise will be applied to the option price.
	• To the extent a public market exists for the shares of Stock as determined by the Company, delivery (in a form prescribed or accepted by the Company) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate option price and any withholding taxes.
Evidence of Issuance	The issuance of the shares upon exercise of this Stock Option shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more share certificates.

Withholding Taxes	You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the Stock Option exercise or sale of Stock acquired under this Stock Option. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the exercise of this Stock Option or sale of Stock arising from this Stock Option, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested shares of Stock otherwise deliverable under this Agreement).
Retention Rights	This Agreement and this Stock Option do not give you the right to be retained by the Company (or any Affiliate) in any capacity. Unless otherwise specified in an employment or other written agreement between the Company (or any Affiliate) and you, the Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Stockholder Rights	You, or your estate or heirs, have no rights as a shareholder of the Company until the Stock has been issued upon exercise of your Stock Option and either a certificate evidencing your Stock has been issued or an appropriate entry has been made on the Company’s books. No adjustments are made for dividends, distributions or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book entry is made), except as described in the Plan.
	Your Stock Option shall be subject to the terms of any applicable agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan	The text of the Plan is incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
	This Agreement, the associated Grant Notice and the Plan constitute the entire understanding between you and the Company regarding this Stock Option. Any prior agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition and/or severance agreement between you and the Company (or any Affiliate) shall supersede this Agreement with respect to its subject matter.

Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement or the Grant Notice and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting this grant, you give explicit consent to the Company to process any such personal data.
Code Section 409A	It is intended that this Award comply with Section 409A of the Code (“Section 409A”) or an exemption to Section 409A. To the extent that the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company.

     By signing the Grant Notice, you agree to all of the terms and conditions described above and in the Plan.

EX-10.18.3

Exhibit 10.18.3

NOTICE OF GRANT OF STOCK OPTIONS	CapitalSource Inc.
	ID: 35-2206895
	4445 Willard Avenue
	Twelfth Floor
	Chevy Chase, MD 20815
[Name]	Option Number:
[Address]	Plan:	Y2KB
	ID:

Effective [DATE], you have been granted a Non-Qualified Stock Option (the “Option”) to purchase [NUMBER] shares of CapitalSource Inc. (the “Company”) common stock at [PRICE] per share.

The Option shall vest as follows:

Shares Vest Type Vest Date Expiration

By your signature and the Company’s signature below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the attached Option Agreement and the Company’s Third Amended and Restated Equity Incentive Plan, as amended, which is also attached.

CapitalSource Inc.	Date
[NAME]	Date

Exhibit 10.18.3

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

NON-QUALIFIED OPTION AGREEMENT
FOR DIRECTORS

Non-qualified Option	This Agreement evidences an award of a Stock Option exercisable for that number of shares of Stock set forth on your Notice of Grant of Stock Options to which this Agreement is attached (“Grant Notice”) and subject to the vesting and other conditions set forth herein, in the Plan and on the Grant Notice. This option is not intended to be an incentive option under Section 422 of the Internal Revenue Code and will be interpreted accordingly.
Transfer of Stock Option	During your lifetime, only you (or, in the event of your legal incapacity or incompetency, your guardian or legal representative) may exercise the Stock Option. The Stock Option may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Stock Option be made subject to execution, attachment or similar process.
	If you attempt to do any of these things, this Stock Option will immediately become forfeited.
	Notwithstanding these restrictions on transfer, the Board or the Committee may authorize, in its sole discretion, the transfer of a vested Stock Option (in whole or in part) to a member of your immediate family or a trust for the benefit of your immediate family.
Vesting	Your Stock Option shall vest in accordance with the vesting schedule shown in the Grant Notice so long as you continue in Service on the vesting dates set forth on the Grant Notice, and is exercisable only as to its vested portion.
Forfeiture of Unvested Stock Options / Term	Unless the termination of your Service triggers accelerated vesting of your Stock Option pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company (or any Affiliate) and you, you will automatically forfeit to the Company those portions of the Stock Option that have not yet vested in the event your Service terminates for any reason.
Expiration of Vested Options After Service Terminates	If your Service terminates for any reason, other than for Cause, then the vested portion of your Stock Option will expire at the close of business at Company headquarters on the earlier of the Expiration Date or the third anniversary of your termination date.
	If your Service is terminated for Cause, then you shall immediately forfeit all rights to your entire Stock Option and the Stock Option shall immediately expire.

	In all events, your Stock Option will expire on the Expiration Date shown on the Grant Notice. Your Stock Option will expire earlier if your Service terminates, as described herein.
Notice of Exercise	The Stock Option may be exercised, in whole or in part, to purchase a whole number of vested shares of Stock of not less than 100 shares, unless the number of vested shares purchased is the total number available for purchase under the option, by following the procedures set forth in the Plan and in this Agreement.
	When you wish to exercise this Stock Option, you must exercise in a manner required or permitted by the Company.
	If someone else wants to exercise this Stock Option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.
Form of Payment	When you exercise your Stock Option, you must include payment of the option price indicated on the Grant Notice for the shares you are purchasing. Payment may be made in one (or a combination) of the following forms:
	• Cash, your personal check, a cashier’s check, a money order or another cash equivalent acceptable to the Company.
	• Shares of Stock which have already been owned by you for more than six months and which are surrendered to the Company. The Fair Market Value of the shares as of the effective date of the option exercise will be applied to the option price.
	• To the extent a public market exists for the shares of Stock as determined by the Company, delivery (in a form prescribed or accepted by the Company) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate option price and any withholding taxes.
Evidence of Issuance	The issuance of the shares upon exercise of this Stock Option shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more share certificates.
Withholding Taxes	You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the Stock Option exercise or sale of Stock acquired under this Stock Option. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the exercise of this Stock Option or sale of Stock

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	arising from this Stock Option, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested shares of Stock otherwise deliverable under this Agreement).
Retention Rights	This Agreement and this Stock Option do not give you the right to be retained by the Company (or any Affiliate) in any capacity.
Stockholder Rights	You, or your estate or heirs, have no rights as a shareholder of the Company until the Stock has been issued upon exercise of your Stock Option and either a certificate evidencing your Stock has been issued or an appropriate entry has been made on the Company’s books. No adjustments are made for dividends, distributions or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book entry is made), except as described in the Plan.
	Your Stock Option shall be subject to the terms of any applicable agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan	The text of the Plan is incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
	This Agreement, the associated Grant Notice and the Plan constitute the entire understanding between you and the Company regarding this Stock Option. Any prior agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition and/or severance agreement between you and the Company (or any Affiliate) shall supersede this Agreement with respect to its subject matter.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement or the Grant Notice and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting this grant, you give explicit consent to the Company to process any such personal data.

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Code Section 409A It is intended that this Award comply with Section 409A of the Code (“Section 409A”) or an exemption to Section 409A. To the extent that the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company.

By signing the Grant Notice, you agree to all of the terms and conditions described above and in the Plan.

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EX-10.19.3

Exhibit 10.19.3

Grant No.: «NUM»

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT

     CapitalSource Inc., a Delaware corporation (the “Company”), hereby grants shares of its common stock (“Stock”) to the Grantee named below, subject to the vesting and other conditions set forth below. Additional terms and conditions of the grant are set forth in the attached Restricted Stock Agreement (the “Agreement”) and in the Company’s Third Amended and Restated Equity Incentive Plan (as amended from time to time, the “Plan”).

Name of Grantee: «FIRST_NAME» «MIDDLE_NAME» «LAST_NAME»

Grantee’s Social Security Number: «SSN»

Number of shares of Restricted Stock: «SHARES»

Grant Date: «GRANT_DATE»

Vest Base Date: «VEST_BASE_DATE»

Vesting Schedule:

     By your signature below, you agree to all of the terms and conditions described herein, in the attached Agreement and in the Plan, a copy of which is available on the Company’s intranet. You acknowledge that you have carefully reviewed the Plan, and agree that the Plan will control in the event any provision of this cover sheet or Agreement should appear to be inconsistent.

	Date:
Grantee
	Date:
CapitalSource Inc.
Title:

Attachment

     This is not a stock certificate or a negotiable instrument.

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CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT

Restricted Stock	This Agreement evidences an award of shares of Stock in the number set forth on the cover sheet and subject to the vesting and other conditions set forth herein, in the Plan and on the cover sheet (the “Restricted Stock”).
Transfer of Unvested Restricted Stock	Unvested Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Restricted Stock be made subject to execution, attachment or similar process. If you attempt to do any of these things, the Restricted Stock will immediately become forfeited.
Issuance and Vesting	The Company will issue your Restricted Stock in the name set forth on the cover sheet.
	Your right to the Stock under this Restricted Stock grant and this Agreement shall vest in accordance with the vesting schedule set forth on the cover sheet so long as you continue in Service on the vesting dates set forth on the cover sheet.
Evidence of Issuance	The issuance of the Stock under the grant of Restricted Stock evidenced by this Agreement shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more Stock certificates, with any unvested Restricted Stock bearing the appropriate restrictions imposed by this Agreement. As your interest in the Restricted Stock vests, the recordation of the number of shares of Restricted Stock attributable to you will be appropriately modified if necessary. In so far as any share certificates are issued for unvested Restricted Stock, such certificates shall be held in escrow and shall contain an appropriate legend.
Forfeiture of Unvested Restricted Stock	Unless the termination of your Service triggers accelerated vesting of your Restricted Stock pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company (or any Affiliate) and you, you will automatically forfeit to the Company all of the unvested shares of Restricted Stock in the event your Service terminates for any reason.
Forfeiture of Rights	If you should take actions in violation or breach of or in conflict with any non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality obligation with respect to the Company or any Affiliate

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	thereof or otherwise in competition with the Company or any Affiliate thereof, the Company has the right to cause an immediate forfeiture of your rights to the Restricted Stock and the Restricted Stock shall immediately expire.
	In addition, if you have vested in Shares of Restricted Stock during the two year period prior to your actions, you will owe the Company a cash payment (or forfeiture of shares) in an amount determined as follows: (1) for any Shares that you have sold prior to receiving notice from the Company, the amount will be the proceeds received from the sale(s), and (2) for any Shares that you still own, the amount will be the number of Shares owned times the Fair Market Value of the Shares on the date you receive notice from the Company (provided, that the Company may require you to satisfy your payment obligations hereunder either by forfeiting and returning to the Company the shares or any other shares or making a cash payment or a combination of these methods as determined by the Company in its sole discretion).
Leaves of Absence	For purposes of this Agreement, your Service does not terminate when you go on a bona fide employee leave of absence that was approved by the Company in writing if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. Your Service terminates in any event when the approved leave ends unless you immediately return to active employee work.
	The Company determines, in its sole discretion, which leaves count for this purpose, and when your Service terminates for all purposes under the Plan.
Section 83(b) Election	You may not make an election under Section 83 of the Internal Revenue Code (a “Section 83(b) Election”) to be taxed at the time the unvested shares of Restricted Stock are acquired rather than when such shares of Restricted Stock become vested. If you do make a Section 83(b) Election, you will forfeit all of the Restricted Stock.
Withholding Taxes	You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the vesting or receipt of the Restricted Stock. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the vesting or receipt of Stock arising from this grant, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested shares of Stock otherwise deliverable under this Agreement).
Retention Rights	This Agreement and the grant evidenced hereby do not give you the right to be retained by the Company (or any Affiliate) in any capacity.

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	Unless otherwise specified in an employment or other written agreement between the Company (or any Affiliate) and you, the Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Stockholder Rights	You will be entitled to receive, upon the Company’s payment of a cash dividend on outstanding shares of Stock, an amount of cash, Restricted Stock or Restricted Stock Units (as determined by the Company from time to time) equal to the per-share dividend paid on the shares of Restricted Stock that you hold as of the record date for such dividend, which shall be subject to the same vesting, forfeiture and other conditions as the associated Restricted Stock. No adjustments are made for dividends or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book entry is made), except as described in the Plan.
	Your grant shall be subject to the terms of any applicable agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity.
Legends	If and to the extent that the shares of Stock are represented by certificates rather than book entry, all certificates representing the Stock issued under this grant shall, where applicable, have endorsed thereon the following legends:
	“THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN VESTING, FORFEITURE AND OTHER RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE SUCH SHARES SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS CERTIFICATE.”
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan	The text of the Plan is incorporated in this Agreement by reference.
	Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
	This Agreement, the associated cover sheet, and the Plan constitute the entire understanding between you and the Company regarding this grant. Any prior agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition and/or severance

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	agreement between you and the Company (or any Affiliate) shall supersede this Agreement with respect to its subject matter.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement or the cover sheet hereto and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting this grant, you give explicit consent to the Company to process any such personal data.
Code Section 409A	It is intended that this Award comply with Section 409A of the Code (“Section 409A”) or an exemption to Section 409A. To the extent that the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the Plan.

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EX-10.20.2

Exhibit 10.20.2

Grant No.: «NUM»

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT
FOR DIRECTORS

     CapitalSource Inc., a Delaware corporation (the “Company”), hereby grants shares of its common stock (“Stock”) to the Grantee named below, subject to the vesting and other conditions set forth below. Additional terms and conditions of the grant are set forth in the attached Restricted Stock Agreement (the “Agreement”) and in the Company’s Third Amended and Restated Equity Incentive Plan (as amended from time to time, the “Plan”).

Name of Grantee: «FIRST_NAME» «MIDDLE_NAME» «LAST_NAME»

Grantee’s Social Security Number: «SSN»

Number of shares of Restricted Stock: «SHARES»

Grant Date: «GRANT_DATE»

Vest Base Date: «VEST_BASE_DATE»

Vesting Schedule:

     By your signature below, you agree to all of the terms and conditions described herein, in the attached Agreement and in the Plan, a copy of which is also attached. You acknowledge that you have carefully reviewed the Plan, and agree that the Plan will control in the event any provision of this cover sheet or Agreement should appear to be inconsistent.

	Date:
Grantee
	Date:
CapitalSource Inc.
Title:

Attachment

     This is not a stock certificate or a negotiable instrument.

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT

FOR DIRECTORS

Restricted Stock	This Agreement evidences an award of shares of Stock in the number set forth on the cover sheet and subject to the vesting and other conditions set forth herein, in the Plan and on the cover sheet (the “Restricted Stock”).
Transfer of Unvested Restricted Stock	Unvested Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Restricted Stock be made subject to execution, attachment or similar process. If you attempt to do any of these things, the Restricted Stock will immediately become forfeited.
Issuance and Vesting	The Company will issue your Restricted Stock in the name set forth on the cover sheet.
	Your right to the Stock under this Restricted Stock grant and this Agreement shall vest in accordance with the vesting schedule set forth on the cover sheet so long as you continue in Service on the vesting dates set forth on the cover sheet.
Evidence of Issuance	The issuance of the Stock under the grant of Restricted Stock evidenced by this Agreement shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more Stock certificates, with any unvested Restricted Stock bearing the appropriate restrictions imposed by this Agreement. As your interest in the Restricted Stock vests, the recordation of the number of shares of Restricted Stock attributable to you will be appropriately modified if necessary. In so far as any share certificates are issued for unvested Restricted Stock, such certificates shall be held in escrow and shall contain an appropriate legend.
Forfeiture of Unvested Restricted Stock	Unless the termination of your Service triggers accelerated vesting of your Restricted Stock pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company (or any Affiliate) and you, you will automatically forfeit to the Company all of the unvested shares of Restricted Stock in the event your Service terminates for any reason.
Section 83(b) Election	You may not make an election under Section 83 of the Internal Revenue Code (a “Section 83(b) Election”) to be taxed at the time the unvested shares of Restricted Stock are acquired rather than when such shares of Restricted Stock become vested. If you do make a Section 83(b) Election, you will forfeit all of the Restricted Stock.

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Withholding Taxes	You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the vesting or receipt of the Restricted Stock. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the vesting or receipt of Stock arising from this grant, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested shares of Stock otherwise deliverable under this Agreement).
Retention Rights	This Agreement and the grant evidenced hereby do not give you the right to be retained by the Company (or any Affiliate) in any capacity. Unless otherwise specified in an employment or other written agreement between the Company (or any Affiliate) and you, the Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Stockholder Rights	You will be entitled to receive, upon the Company’s payment of a cash dividend on outstanding shares of Stock, an amount of cash, Restricted Stock or Restricted Stock Units (as determined by the Company from time to time) equal to the per-share dividend paid on the shares of Restricted Stock that you hold as of the record date for such dividend, which shall be subject to the same vesting, forfeiture and other conditions as the associated Restricted Stock. No adjustments are made for dividends or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book entry is made), except as described in the Plan.
	Your grant shall be subject to the terms of any applicable agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity.
Legends	If and to the extent that the shares of Stock are represented by certificates rather than book entry, all certificates representing the Stock issued under this grant shall, where applicable, have endorsed thereon the following legends:
	“THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN VESTING, FORFEITURE AND OTHER RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE SUCH SHARES SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS CERTIFICATE.”

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Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan	The text of the Plan is incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan. This Agreement, the associated cover sheet, and the Plan constitute the entire understanding between you and the Company regarding this grant. Any prior agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition and/or severance agreement between you and the Company (or any Affiliate) shall supersede this Agreement with respect to its subject matter.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement or the cover sheet hereto and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting this grant, you give explicit consent to the Company to process any such personal data.
Code Section 409A	It is intended that this Award comply with Section 409A of the Code (“Section 409A”) or an exemption to Section 409A. To the extent that the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the Plan.

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EX-10.21.3

Exhibit 10.21.3

Grant No.: «NUM»

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT

     CapitalSource Inc., a Delaware corporation (the “Company”), hereby grants restricted stock units (“Restricted Stock Units”) for shares of its common stock (“Stock”) to the Grantee named below, subject to the vesting and other conditions set forth below. Additional terms and conditions of the grant are set forth in the attached Restricted Unit Agreement (the “Agreement”) and in the Company’s Third Amended and Restated Equity Incentive Plan (as amended from time to time, the “Plan”).

Name of Grantee: «FIRST_NAME» «MIDDLE_NAME» «LAST_NAME»

Grantee’s Social Security Number: «SSN»

Number of Restricted Stock Units: «SHARES»

Grant Date: «GRANT_DATE»

Vest Base Date: «VEST_BASE_DATE»

Vesting Schedule:

     By your signature below, you agree to all of the terms and conditions described herein, in the attached Agreement and in the Plan, a copy of which is available on the Company’s intranet. You acknowledge that you have carefully reviewed the Plan, and agree that the Plan will control in the event any provision of this cover sheet or Agreement should appear to be inconsistent.

	Date:
Grantee
	Date:
CapitalSource Inc.
Title:

Attachment

     This is not a stock certificate or a negotiable instrument.

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CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT

Restricted Stock Units	This Agreement evidences an award of restricted stock units in the number set forth on the cover sheet and subject to the vesting and other conditions set forth herein, in the Plan and on the cover sheet (the “Restricted Stock Units”).
Transfer of Unvested Restricted Stock Units	Unvested Restricted Stock Units may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Restricted Stock Units be made subject to execution, attachment or similar process. If you attempt to do any of these things, the Restricted Stock Unit will immediately become forfeited.
Vesting	The Company will issue your Restricted Stock Units in the name set forth on the cover sheet.
	Your Restricted Stock Units shall vest in accordance with the vesting schedule set forth on the cover sheet so long as you continue in Service on the vesting dates set forth on the cover sheet.
Delivery	As your Restricted Stock Units vest, the Company will issue the shares of Stock to which the then vested Restricted Stock Units relate. Notwithstanding the preceding sentence, if the shares of Stock would otherwise be delivered to you during a period in which you are:
	(i) subject to a lock-up agreement restricting your ability to sell shares of Stock in the open market or (ii) restricted from selling shares of Stock in the open market because you are not then eligible to sell under the Company’s insider trading or similar plan as then in effect (whether because a trading window is not open or you are otherwise restricted from trading), delivery of the shares of Stock will be delayed until the first date on which you are no longer prohibited from selling shares of Stock due to a lock-up agreement or insider trading or similar plan restriction, but in any event no later than the later of (i) March 15 of the calendar year following the calendar year in which the Restricted Stock Units vested and (ii) the last day of the calendar year in which the shares of Stock otherwise would have been delivered.
Evidence of Issuance	The issuance of the Stock under the grant of Restricted Stock Units evidenced by this Agreement shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more Stock certificates. You will have no further rights with regard to a Restricted Stock Unit once the share of Stock related to such Restricted Stock Unit has been issued.

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Forfeiture of Unvested Restricted Stock Units	Unless the termination of your Service triggers accelerated vesting of your Restricted Stock pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company (or any Affiliate) and you, you will automatically forfeit to the Company all of the unvested shares of Restricted Stock in the event your Service terminates for any reason.
Forfeiture of Rights	If you should take actions in violation or breach of or in conflict with any non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality obligation with respect to the Company or any Affiliate thereof or otherwise in competition with the Company or any Affiliate thereof, the Company has the right to cause an immediate forfeiture of your rights to this Restricted Stock Unit and the Restricted Stock Unit shall immediately expire.
	In addition, if you have received Shares in connection with Restricted Stock Units during the two year period prior to your actions, you will owe the Company a cash payment (or forfeiture of shares) in an amount determined as follows: (1) for any Shares that you have sold prior to receiving notice from the Company, the amount will be the proceeds received from the sale(s), and (2) for any Shares that you still own, the amount will be the number of Shares owned times the Fair Market Value of the Shares on the date you receive notice from the Company (provided, that the Company may require you to satisfy your payment obligations hereunder either by forfeiting and returning to the Company the shares or any other shares or making a cash payment or a combination of these methods as determined by the Company in its sole discretion).
Leaves of Absence	For purposes of this Agreement, your Service does not terminate when you go on a bona fide employee leave of absence that was approved by the Company in writing if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. Your Service terminates in any event when the approved leave ends unless you immediately return to active employee work.
	The Company determines, in its sole discretion, which leaves count for this purpose, and when your Service terminates for all purposes under the Plan.
Withholding Taxes	You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the vesting or receipt of the Restricted Stock Units or the Stock. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the vesting of the Restricted Stock Unit or receipt of Stock arising from this grant, the Company shall have the right to require such payments

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	from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested shares of Stock otherwise deliverable under this Agreement).
Retention Rights	This Agreement and the grant evidenced hereby do not give you the right to be retained by the Company (or any Affiliate) in any capacity. Unless otherwise specified in an employment or other written agreement between the Company (or any Affiliate) and you, the Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Stockholder Rights	You, or your estate or heirs, do not have any of the rights of a shareholder with respect to any unvested Restricted Stock Unit.
	You will, however, be entitled to receive, upon the Company’s payment of a cash dividend on outstanding shares of Stock, an amount of cash, or Restricted Stock Units (as determined by the Company from time to time) equal to the per-share dividend paid on the shares of Restricted Stock Units that you hold as of the record date for such dividend, which shall be subject to the same vesting, forfeiture and other conditions as the associated Restricted Stock Units. No adjustments are made for dividends or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book entry is made), except as described in the Plan.
	Your grant shall be subject to the terms of any applicable agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan	The text of the Plan is incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
	This Agreement, the associated cover sheet, and the Plan constitute the entire understanding between you and the Company regarding this grant. Any prior agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition and/or severance agreement between you and the Company (or any Affiliate) shall supersede this Agreement with respect to its subject matter.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement or the cover sheet hereto and any changes

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	thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting this grant, you give explicit consent to the Company to process any such personal data.
Code Section 409A	It is intended that this Award comply with Section 409A of the Code (“Section 409A”) or an exemption to Section 409A. To the extent that the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company. For purposes of this Award, a termination of employment only occurs upon an event that would be a Separation from Service within the meaning of Section 409A.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the Plan.

5

EX-10.22.2

Exhibit 10.22.2

Grant No.: «NUM»

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT
FOR DIRECTORS

     CapitalSource Inc., a Delaware corporation (the “Company”), hereby grants restricted stock units (“Restricted Stock Units”) for shares of its common stock (“Stock”) to the Grantee named below, subject to the vesting and other conditions set forth below. Additional terms and conditions of the grant are set forth in the attached Restricted Unit Agreement (the “Agreement”) and in the Company’s Third Amended and Restated Equity Incentive Plan (as amended from time to time, the “Plan”).

Name of Grantee: «FIRST_NAME» «MIDDLE_NAME» «LAST_NAME»

Grantee’s Social Security Number: «SSN»

Number of Restricted Stock Units: «SHARES»

Grant Date: «GRANT_DATE»

Vest Base Date: «VEST_BASE_DATE»

Vesting Schedule:

     By your signature below, you agree to all of the terms and conditions described herein, in the attached Agreement and in the Plan, a copy of which is also attached. You acknowledge that you have carefully reviewed the Plan, and agree that the Plan will control in the event any provision of this cover sheet or Agreement should appear to be inconsistent.

	Date:
Grantee
	Date:
CapitalSource Inc.
Title:

Attachment

     This is not a stock certificate or a negotiable instrument.

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT
FOR DIRECTORS

Restricted Stock Units	This Agreement evidences an award of restricted stock units in the number set forth on the cover sheet and subject to the vesting and other conditions set forth herein, in the Plan and on the cover sheet (the “Restricted Stock Units”).
Transfer of Unvested Restricted Stock Units	Unvested Restricted Stock Units may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Restricted Stock Units be made subject to execution, attachment or similar process. If you attempt to do any of these things, the Restricted Stock Unit will immediately become forfeited.
Vesting	The Company will issue your Restricted Stock Units in the name set forth on the cover sheet.
	Your Restricted Stock Units shall vest in accordance with the vesting schedule set forth on the cover sheet so long as you continue in Service on the vesting dates set forth on the cover sheet.
Delivery	Upon your termination of Service, the Company will issue the shares of Stock to which the then vested Restricted Stock Units relate. Notwithstanding the preceding sentence, if the shares of Stock would otherwise be delivered to you during a period in which you are: (i) subject to a lock-up agreement restricting your ability to sell shares of Stock in the open market or (ii) restricted from selling shares of Stock in the open market because you are not then eligible to sell under the Company’s insider trading or similar plan as then in effect (whether because a trading window is not open or you are otherwise restricted from trading), delivery of the shares of Stock will be delayed until the first date on which you are no longer prohibited from selling shares of Stock due to a lock-up agreement or insider trading or similar plan restriction, but in any event no later than the later of (i) March 15 of the calendar year following the calendar year in which the Restricted Stock Units vested and (ii) the last day of the calendar year in which the shares of Stock otherwise would have been delivered.
Evidence of Issuance	The issuance of the Stock under the grant of Restricted Stock Units evidenced by this Agreement shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more Stock certificates. You will have no further rights with regard to a Restricted Stock Unit once the share of Stock related to such Restricted Stock Unit has been issued.

Forfeiture of Unvested Restricted Stock Units	Unless the termination of your Service triggers accelerated vesting of your Restricted Stock Units pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company (or any Affiliate) and you, you will automatically forfeit to the Company all of the unvested Restricted Stock Units in the event your Service terminates for any reason.
Withholding Taxes	You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the vesting or receipt of the Restricted Stock Units or the Stock. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the vesting of the Restricted Stock Unit or receipt of Stock arising from this grant, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested shares of Stock otherwise deliverable under this Agreement).
Retention Rights	This Agreement and the grant evidenced hereby do not give you the right to be retained by the Company (or any Affiliate) in any capacity.
Stockholder Rights	You, or your estate or heirs, do not have any of the rights of a shareholder with respect to any unvested Restricted Stock Unit. You will, however, be entitled to receive, upon the Company’s payment of a cash dividend on outstanding shares of Stock, an amount of cash, or Restricted Stock Units (as determined by the Company from time to time) equal to the per-share dividend paid on the shares of Restricted Stock Units that you hold as of the record date for such dividend, which shall be subject to the same vesting, forfeiture and other conditions as the associated Restricted Stock Units. No adjustments are made for dividends or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book entry is made), except as described in the Plan.
	Your grant shall be subject to the terms of any applicable agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan/Deferred	The text of the Plan is incorporated in this Agreement by reference.

Compensation Plan	Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan. Your Restricted Stock Units and this Agreement are also subject to the terms of the CapitalSource Inc. Amended and Restated Deferred Compensation Plan (as amended from time to time, the “Deferred Compensation Plan”).
	This Agreement, the associated cover sheet, the Deferred Compensation Plan and the Plan constitute the entire understanding between you and the Company regarding this grant. Any prior agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition and/or severance agreement between you and the Company (or any Affiliate) shall supersede this Agreement with respect to its subject matter.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement or the cover sheet hereto and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting this grant, you give explicit consent to the Company to process any such personal data.
Code Section 409A	It is intended that this Award comply with Section 409A of the Code (“Section 409A”) or an exemption to Section 409A. To the extent that the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company. For purposes of this Award, a termination of Service only occurs upon an event that would be a Separation from Service within the meaning of Section 409A.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above, in the Plan and the Deferred Compensation Plan.

EX-10.24

Exhibit 10.24

CapitalSource Inc.
Compensation for Non-Employee Directors

Annual Fees and Meeting Fees

The compensation program for Company outside directors consists of annual retainer fees, meeting fees and long-term equity awards. The Company currently pays its directors an annual retainer fee of $25,000. Members of the Audit Committee are paid an additional retainer fee of $20,000, or $44,000 in the case of the chairperson. Members of certain other Board committees are paid an additional retainer fee of $5,000 for each committee on which they serve, or $7,500 in the case of the chairperson of each such other committee. All retainer fees are generally paid within two weeks of our Annual Meeting of Stockholders.

Each director also receives $1,000 for each Board meeting attended (in person or telephonically), and members of the Audit Committee and members of certain other Board committees are paid $2,000 and $1,000, respectively, for each meeting of their respective committees attended (in person or telephonically). Meeting fees are paid quarterly.

Directors may elect to receive their annual retainers and meeting fees in whole or in part in the form of cash, immediately vested shares of restricted stock and/or immediately exercisable stock options. Restricted stock is valued based on the closing market price of the Company’s common stock on the grant date and stock options are valued in an amount equal to five times the number of shares that would have been payable had the director elected to receive fees in the form of restricted stock. Stock options have a ten-year term and an exercise price equal to the closing market price of the Company’s common stock on the grant date.

Annual Equity Awards
In connection with each Annual Meeting of Stockholders, each director then serving on the Board of Directors receives a long-term equity award of $75,000, which is paid, at the election of each director, in whole or in part in shares of restricted stock and/or stock options calculated as described in the preceding paragraph. Unlike annual retainers and meeting fees, restricted stock and options paid for long-term equity awards are intended to vest or become exercisable, as applicable, in full one year after the grant date. The Company sets these vest dates on the date of the next Annual Meeting of Stockholders. For unvested restricted stock, cash dividends paid during the vesting period are credited in the form of additional shares of unvested restricted stock with the same vesting schedule as the restricted stock to which they relate. Stock options have a ten-year term and an exercise price equal to the closing market price of the Company’s common stock on the grant date.

Deferral

Directors may elect to defer retainers, fees and equity awards received in cash or restricted stock into restricted stock units under our deferred compensation plan with the same vesting as the restricted stock to which they relate. A restricted stock unit is an unfunded right to receive one share of our common stock at future date. Restricted stock units are credited with dividend equivalents in the form of additional stock units with the same vesting schedule as the restricted stock units to which they relate and are payable in the form of common stock at the earlier of the date elected by the director or in a lump sum following termination of the director’s service.

Expenses

Directors do no receive any perquisites and do not receive above-market nonqualified deferred compensation plan earnings. Directors are reimbursed for their reasonable expenses of attending Board and committee meetings.

EX-10.34 14 w50322exv10w34.htm EX-10.34

Exhibit 10.34

EMPLOYMENT AGREEMENT

     This EMPLOYMENT AGREEMENT (“Agreement”) is entered into as of this 1st day of February 2007 (the “Effective Date”), by and between CapitalSource Inc., a Delaware corporation (the “Employer” or the “Company”), and Steven A. Museles, an individual (the “Executive”).

     WHEREAS, the Executive is currently employed as Executive Vice President and Chief Legal Officer; and

     WHEREAS, the Employer and the Executive desire to enter into this Agreement to set out the terms and conditions for the continued employment relationship of the Executive with the Employer.

     NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto agree as follows:

     1. Employment Agreement. On the terms and conditions set forth in this Agreement, the Employer agrees to continue to employ the Executive and the Executive agrees to continue to be employed by the Employer for the Employment Period set forth in Section 2 and in the positions and with the duties set forth in Section 3. Terms used herein with initial capitalization not otherwise defined are defined in Section 25.

     2. Term. The initial term of employment under this Agreement shall be for a five-year period commencing on the Effective Date (the “Initial Term”). The term of employment shall be automatically extended for an additional consecutive 12-month period (the “Extended Term”) on February 1, 2012 and each subsequent February 1, unless and until the Employer or Executive provides written notice to the other party in accordance with Section 13 hereof not less than 60 days before such anniversary date that such party is electing not to extend the term of employment under this Agreement (“Non-Renewal”), in which case the term of employment hereunder shall end as of the end of such Initial Term or Extended Term, as the case may be, unless sooner terminated as hereinafter set forth. Such Initial Term and all such Extended Terms are collectively referred to herein as the “Employment Period.” Anything herein to the contrary notwithstanding, if on the date of a Change in Control the remaining term of the Employment Period is less than 24 months, the Employment Period shall be automatically extended to the end of the 24-month period following such Change in Control.

     3. Position and Duties. During the Employment Period, the Executive shall serve as Executive Vice President, Chief Legal Officer, Secretary and General Counsel, and as a member of the Employer’s Credit and Executive Committees (or any successor committees thereto). In such capacities, prior to a Change in Control the Executive shall report to the Chief Executive Officer and, in a dual reporting role, the President of the Employer. Subsequent to a Change in Control, the Executive shall report exclusively to the Chief Executive Officer. In any publications, news releases, and public filings of the Employer in which the position of the Executive is described, the Executive shall be referred to as a senior executive, a member of senior management, or other comparable language. The Executive shall devote the Executive’s reasonable best efforts

and full business time to the performance of the Executive’s duties hereunder and the advancement of the business and affairs of the Employer; provided that the Executive shall be entitled to serve as a member of the board of directors of a reasonable number of other companies, to serve on civic, charitable, educational, religious, public interest or public service boards, and to manage the Executive’s personal and family investments, in each case, to the extent such activities do not materially interfere with the performance of the Executive’s duties and responsibilities hereunder.

     4. Place of Performance. During the Employment Period, the Executive shall be based primarily at a principal office of the Employer designated by the Employer (currently in Chevy Chase, Maryland) except for reasonable travel on the Employer’s business consistent with the Executive’s position.

     5. Compensation and Benefits.

          (a) Base Salary. During the Employment Period, the Employer shall pay to the Executive a base salary (the “Base Salary”) at the rate of no less than $364,000 per calendar year, less applicable deductions, and prorated for any partial year. The Base Salary shall be reviewed for increase by the Employer no less frequently than annually and shall be increased in the discretion of the Employer, provided however, that such Base Salary shall be increased annually by at least the same amount as the median base salary increase of the other executive officers of the Employer. Any such adjusted Base Salary shall constitute the “Base Salary” for purposes of this Agreement. The Base Salary shall be paid in substantially equal installments in accordance with the Employer’s regular payroll procedures. The Executive’s Base Salary may not be decreased during the Employment Period.

          (b) Annual Bonus. For each calendar year that ends prior to a Change in Control, the Executive shall receive an annual cash bonus in an amount determined reasonably and in good faith by the Employer based upon Employer’s overall performance and business prospects and the performance of the Executive. For each calendar year that ends after a Change in Control, the Executive shall be paid in cash an annual bonus in an amount not less than two times the Executive’s Base Salary as in effect on the last day of such calendar year. Any annual bonus payable to the Executive hereunder shall be paid at the time bonuses are otherwise paid to other executive officers of the Employer, but in any event, by March 15 of the calendar year following the year with respect to which such annual bonus is earned.

          (c) Vacation; Benefits. During the Employment Period, the Executive shall be entitled to at least four weeks of vacation annually. In addition, the Employer shall provide to the Executive all employee and executive benefit plans, practices, perquisites and programs maintained by the Employer and made generally available to employees or executives including, without limitation, all investment opportunities, pension, retirement, profit sharing, incentive compensation, savings, medical, hospitalization, disability, dental, life or travel accident insurance, benefit plans, and sick leave on a basis that (i) prior to a Change in Control is comparable in all material respects to that provided to any other member of the Employer’s Executive Committee (or successor committee performing substantially similar functions), excluding the Chief Executive Officer and Chief Investment Officer of the Employer and (ii) following a Change in Control is comparable in all material respects to that provided to other senior executives of the

Employer. Subject to the terms of this Agreement, all benefits are provided at the Employer’s sole discretion. Subject to the terms of this Agreement, the Employer shall have the right to change insurance carriers and to adopt, amend, terminate or modify employee benefit plans and arrangements at any time and without the consent of the Executive.

     6. Expenses. The Executive is expected and is authorized to incur reasonable expenses in the performance of his duties hereunder. The Employer shall reimburse the Executive for all such expenses reasonably and actually incurred in accordance with policies which may be adopted from time to time by the Employer promptly upon periodic presentation by the Executive of an itemized account, including reasonable substantiation, of such expenses.

     7. Confidentiality, Non-Disclosure and Non-Competition Agreement. The Employer and the Executive acknowledge and agree that during the Executive’s employment with the Employer, the Executive will have access to and may assist in developing Company Confidential Information and will occupy a position of trust and confidence with respect to the Employer’s affairs and business and the affairs and business of the Company Affiliates. The Executive agrees that the following obligations are necessary to preserve the confidential and proprietary nature of Company Confidential Information and to protect the Employer and the Company Affiliates against harmful solicitation of employees and customers, harmful competition and other actions by the Executive that would result in serious adverse consequences for the Employer and the Company Affiliates:

          (a) Non-Disclosure. During and after the Executive’s employment with the Employer, the Executive will not knowingly use, disclose or transfer any Company Confidential Information other than as authorized in writing by the Employer or within the scope of the Executive’s duties with the Employer as determined reasonably and in good faith by the Executive. Anything herein to the contrary notwithstanding, the provisions of this Section 7(a) shall not apply (i) when disclosure is required by law or by any court, arbitrator, mediator or administrative or legislative body (including any committee thereof) with actual or apparent jurisdiction to order the Executive to disclose or make accessible any information; (ii) with respect to any other litigation, arbitration or mediation involving this Agreement, including, but not limited to, the enforcement of this Agreement; (iii) as to information that becomes generally known to the public or within the relevant trade or industry other than due to the Executive’s violation of this Section 7(a); (iv) as to information that is or becomes available to the Executive on a non-confidential basis from a source which is entitled to disclose it to the Executive; or (v) as to information that the Executive possessed prior to the commencement of employment with the Employer.

          (b) Materials. The Executive will not remove any Company Confidential Information or any other property of the Employer or any Company Affiliate from the Employer’s premises or make copies of such materials except for normal and customary use in the Employer’s business as determined reasonably and in good faith by the Executive. The Employer acknowledges that the Executive, in the ordinary course of his duties, routinely uses and stores Company Confidential Information at home and other locations. The Executive will return to the Employer all Company Confidential Information and copies thereof and all other property of the Employer or any Company Affiliate at any time upon the request of the Employer and in any event promptly after termination of Executive’s employment. The Executive agrees to attempt in good

faith to identify and return to the Employer any copies of any Company Confidential Information after the Executive ceases to be employed by the Employer. Anything to the contrary notwithstanding, nothing in this Section 7 shall prevent the Executive from retaining a home computer, papers and other materials of a personal nature, including diaries, calendars and Rolodexes, information relating to his compensation or relating to reimbursement of expenses, information that he reasonably believes may be needed for tax purposes, and copies of plans, programs and agreements relating to his employment.

          (c) No Solicitation or Hiring of Employees. During the Non-Compete Period, the Executive shall not solicit, entice, persuade or induce any individual who is employed by the Employer or the Company Affiliates (or who was so employed within 180 days prior to the Executive’s action) to terminate or refrain from continuing such employment or to become employed by or enter into contractual relations with any other individual or entity other than the Employer or the Company Affiliates, and the Executive shall not hire, directly or indirectly, as an employee, consultant or otherwise, any such person. Anything to the contrary notwithstanding, the Employer agrees that (i) the Executive’s responding to an unsolicited request from any former employee of the Employer for advice on employment matters; and (ii) the Executive’s responding to an unsolicited request for an employment reference regarding any former employee of the Employer from such former employee, or from a third party, by providing a reference setting forth his personal views about such former employee, shall not be deemed a violation of this Section 7(c). Notwithstanding the foregoing, this Section 7(c) shall not preclude the Executive from soliciting for employment or hiring any person who has been discharged by the Employer or any Company Affiliate without cause.

          (d) Non-Competition.

               (i) During the Non-Compete Period, the Executive shall not, directly or indirectly, (A) solicit or encourage any client or customer of the Employer or a Company Affiliate, or any person or entity who was a client or customer within 180 days prior to Executive’s action to terminate, reduce or alter in a manner adverse to the Employer, any existing business arrangements with the Employer or a Company Affiliate or to transfer existing business from the Employer or a Company Affiliate to any other person or entity, or (B) provide services to any entity if (i) during the preceding 12 months more than 5% of the revenues of such entity and its affiliates is derived from any business from which the Employer derived more than 5% of its revenues during such period (a “Material Business”) or (ii) the services to be provided by the Executive are competitive with a Material Business and substantially similar to those previously provided by the Executive to the Employer; provided, however, that following a Change in Control this Section 7(d)(i)(B)(i) shall not apply to the Executive, or (C) own an interest in any entity described in subsection (B)(i) immediately above; provided, however, that Executive may own, as a passive investor, securities of any such entity. For purposes of this Section 7(d), a “client or customer” shall be limited to any actual borrower of the Employer (as set forth in the Employer’s CAM or substantially similar successor or related system) and any other entity in the “term sheet issued,” “term sheet executed” or “credit committee approved” categories listed in the Employer’s DealTracker or substantially similar successor or related system. The Executive agrees that, before providing services, whether as an employee or consultant, to any entity during the Non-Compete Period, he will provide a copy of this Agreement to such entity, and such entity

shall acknowledge to the Employer in writing that it has read this Agreement. The Executive acknowledges that this covenant has a unique, very substantial and immeasurable value to the Employer, that the Executive has sufficient assets and skills to provide a livelihood for the Executive while such covenant remains in force and that, as a result of the foregoing, in the event that the Executive breaches such covenant, monetary damages would be an insufficient remedy for the Employer and equitable enforcement of the covenant would be proper.

               (ii) If the restrictions contained in Section 7(d)(i) shall be determined by any court of competent jurisdiction to be unenforceable by reason of their extending for too great a period of time or over too great a geographical area or by reason of their being too extensive in any other respect, Section 7(d)(i) shall be modified to be effective for the maximum period of time for which it may be enforceable and over the maximum geographical area as to which it may be enforceable and to the maximum extent in all other respects as to which it may be enforceable.

          (e) Non-Disparagement. Neither the Company nor the Executive shall initiate, participate or engage in any communication whatsoever with any current or former customer, supplier, vendor or competitor of the Company or any Company Affiliate or any of their respective shareholders, partners, members, directors, managers, officers, employees or agents, or with any current or former shareholder, director, manager, officer, employee or agent of the Company or any Company Affiliate, or with any third party, which communication could reasonably be interpreted as derogatory or disparaging to the Executive or the Company or any Company Affiliate, including but not limited to the business, practices, policies, shareholders, partners, members, directors, managers, officers, employees, agents, advisors and attorneys of the Company or any Company Affiliate.

          (f) Publicity. During the Employment Period, the Executive hereby grants to the Employer the right to use, in a reasonable and appropriate manner, the Executive’s name and likeness, without additional consideration, on, in and in connection with technical, marketing or disclosure materials, or any combination thereof, published by or for the Employer or any Company Affiliate.

          (g) Conflicting Obligations and Rights. The Executive agrees to inform the Employer of any apparent conflicts between the Executive’s work for the Employer and any obligations the Executive may have to preserve the confidentiality of another’s proprietary information or related materials before using the same on the Employer’s behalf. The Employer shall receive such disclosures in confidence and consistent with the objectives of avoiding any conflict of obligations and rights or the appearance of any conflict of interest.

          (h) Enforcement. The Executive acknowledges that in the event of any breach of this Section 7, the business interests of the Employer and the Company Affiliates will be irreparably injured, the full extent of the damages to the Employer and the Company Affiliates will be impossible to ascertain, monetary damages will not be anadequate remedy for the Employer and the Company Affiliates, and the Employer will be entitled to enforce this Agreement by a temporary, preliminary and/or permanent injunction or other equitable relief, without the necessity of posting bond or security, which the Executive expressly waives. The Executive understands that the Employer may waive some of the requirements expressed in this Agreement, but that such

a waiver to be effective must be made in writing and should not in any way be deemed a waiver of the Employer’s right to enforce any other requirements or provisions of this Agreement. The Executive agrees that each of the Executive’s obligations specified in this Agreement is a separate and independent covenant and that the unenforceability of any of them shall not preclude the enforcement of any other covenants in this Agreement. The Executive further agrees that any breach of this Agreement by the Employer prior to the Date of Termination shall not release the Executive from compliance with his obligations under this Section 7, so along as the Employer fully complies with Sections 9, 10, 11, and 12. The Employer further agrees that any breach of this Agreement by the Executive that does not result in the Executive’s being terminated for Cause, other than a willful (as defined in the definition of “Cause”) and material breach of Sections 7(d)(i)(B) or 7(d)(i)(C) after his employment has terminated, shall not release the Employer from compliance with its obligations under this Agreement. Notwithstanding the foregoing two sentences, neither party shall be precluded from pursuing judicial remedies as a result of any such breaches.

     8. Termination of Employment.

          (a) Permitted Terminations. The Executive’s employment hereunder may be terminated during the Employment Period under the following circumstances:

               (i) Death. The Executive’s employment hereunder shall terminate upon the Executive’s death;

               (ii) By the Employer. The Employer may terminate the Executive’s employment for:

                    (A) Disability. If the Executive shall have been substantially unable to perform, despite reasonable accommodation, the Executive’s material duties hereunder by reason of illness, physical or mental disability or other similar incapacity, which inability shall continue for 180 consecutive days or 270 days in any 24-month period (a “Disability”) (provided, that until such termination, the Executive shall continue to receive his compensation and benefits hereunder, reduced by any benefits payable to him under any Employer-provided disability insurance policy or plan applicable to him or her); or

                    (B) Cause. For Cause or without Cause;

               (iii) By the Executive. The Executive may terminate his employment for any reason (including Good Reason) or for no reason.

          (b) Termination. Any termination of the Executive’s employment by the Employer or the Executive (other than because of the Executive’s death) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 13 hereof. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon, if any, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated. Termination of the Executive’s employment shall take effect on the Date of Termination. The Executive agrees, in the event of

any dispute under Section 8(a)(ii)(A) as to whether a Disability exists, and if requested by the Employer, to submit to a physical examination by a licensed physician selected by mutual consent of the Employer and the Executive, the cost of such examination to be paid by the Employer. The written medical opinion of such physician shall be conclusive and binding upon each of the parties hereto as to whether a Disability exists and the date when such Disability arose. This Section shall be interpreted and applied so as to comply with the provisions of the Americans with Disabilities Act and any applicable state or local laws.

     9. Compensation Upon Termination.

          (a) Death. If the Executive’s employment is terminated during the Employment Period as a result of the Executive’s death, this Agreement and the Employment Period shall terminate without further notice or any action required by the Employer or the Executive’s legal representatives. Upon the Executive’s death, the Employer shall pay or provide the following:

               (i) Base Salary. The Employer shall pay to the Executive’s legal representative or estate, as applicable, a cash lump sum amount equal to one year’s Base Salary within thirty days following the Executive’s death;

               (ii) Accrued Benefits. The Employer shall pay to the Executive’s legal representative or estate, as applicable, the Accrued Benefits and the rights of the Executive’s legal representative or estate with respect to equity or equity-related awards shall be governed by the applicable terms of the related plan or award agreement; and

               (iii) Equity Awards. All outstanding equity awards held by the Executive immediately prior to his death shall immediately vest (with outstanding options remaining exercisable for the length of their remaining term).

     The Employer shall pay to the Executive’s estate, or as may be directed by the legal representatives of such estate, the Executive’s Accrued Benefits due pursuant to Section 9(a)(ii), at the time such payments are due. Any payments by the Employer pursuant to this Section 9(a) shall be reduced by the amount of any payments to the Executive’s beneficiaries or estate paid on account of any life insurance plan or policy provided by the Employer for the benefit of the Executive. Except as set forth herein, the Employer shall have no further obligation to the Executive under this Agreement.

          (b) Disability. If the Employer terminates the Executive’s employment during the Employment Period because of the Executive’s Disability pursuant to Section 8(a)(ii)(A), (i) the Employer shall pay to the Executive the Executive’s Base Salary due through the Date of Termination, (ii) all Accrued Benefits, if any, to which the Executive is entitled as of the Date of Termination at the time such payments are due, and (iii) all outstanding equity awards held by the Executive immediately prior to his termination shall immediately vest (with outstanding options remaining exercisable for the length of their remaining term). Except as set forth herein, the Employer shall have no further obligations to the Executive under this Agreement.

          (c) Termination by the Employer for Cause or by the Executive without Good Reason. If, during the Employment Period, the Employer terminates the Executive’s employment for Cause pursuant to Section 8(a)(ii)(B) or the Executive terminates his employment without Good Reason, the Employer shall pay to the Executive the Executive’s Base Salary due through the Date of Termination and all Accrued Benefits, if any, to which the Executive is entitled as of the Date of Termination, at the time such payments are due, and the Executive’s rights with respect to equity or equity-related awards shall be governed by the applicable terms of the related plan or award agreement. In addition, if the Executive voluntarily terminates his employment without Good Reason after a Change in Control, the Employer shall: (i) continue to pay the Executive his Base Salary in effect on his Date of Termination (without giving any effect to reductions thereto after a Change in Control) during the Non-Compete Period; and (ii) immediately pay the Executive in a cash lump sum an amount equal to a pro rata portion (based upon the number of days that the Executive was employed during the calendar year in which the Date of Termination occurs) of the minimum cash bonus required to be paid by the Employer under Section 5(b) for the year of his termination. Except as set forth herein, the Employer shall have no further obligations to the Executive under this Agreement.

          (d) Termination by the Employer without Cause or by the Executive with Good Reason. If the Employer terminates the Executive’s employment during the Employment Period other than for Cause or Disability pursuant to Section 8(a) or if the Executive terminates his employment hereunder with Good Reason, (i) the Employer shall pay the Executive (A) the Executive’s Base Salary due through the Date of Termination, (B) a cash lump sum in an amount equal to a pro rata portion (based upon the number of days the Executive was employed during the calendar year in which the Date of Termination occurs) of the higher of (1) the average amount of the annual bonuses, if any, that were earned by the Executive for the two calendar years immediately preceding the year of the Date of Termination and (2) $750,000, (C) a cash lump sum in an amount equal to the greater of (i) two times the sum of the Executive’s Base Salary and the average of the annual bonuses earned by the Executive for the two calendar years immediately preceding the year of the Date of Termination, if any, and (ii) $1.8 million (D) all Accrued Benefits, if any, to which the Executive is entitled as of the Date of Termination, in each case at the time such payments are due; and (ii) (A) all deferred compensation credited on the Executive’s behalf and all equity or equity-related awards held by, or credited to, the Executive (including, without limitation, stock options, stock appreciation rights, restricted stock awards, dividend equivalent rights, restricted stock units or deferred stock awards) shall immediately vest and, if applicable, become exercisable, (B) all stock options, stock appreciation rights or other similar rights held by the Executive shall remain exercisable for the remainder of their originally scheduled terms, and (C) all deferred compensation or other equity or equity-related awards will be transferred or distributed to the Executive within 10 days of the Executive’s Date of Termination; and (iii) the Executive and his covered dependents shall be entitled to continued participation on the same terms and conditions as applicable immediately prior to the Executive’s Date of Termination for the greater of (A) 24 months or (B) the balance of the Employment Period in such medical, dental, hospitalization and life insurance coverages in which the Executive and his eligible dependents were participating immediately prior to the Date of Termination; provided that if such continued coverage is not permitted under the terms of such benefit plans, the Employer shall pay Executive an additional grossed up amount that, on an after-tax basis, such payment is equivalent to the cost of comparable coverage obtained by Executive.

          (e) Liquidated Damages. The parties acknowledge and agree that damages which will result to the Executive for termination by the Employer of the Executive’s employment without Cause or by the Executive for Good Reason shall be extremely difficult or impossible to establish or prove, and agree that the amounts payable to the Executive under Section 9(d) (the “Severance Payments”) shall constitute liquidated damages for any such termination. The Executive agrees that, except for such other payments and benefits to which the Executive may be entitled as expressly provided by the terms of this Agreement or any other applicable benefit plan, such liquidated damages shall be in lieu of all other claims that the Executive may make by reason of any such termination of his employment and that, as a condition to receiving the Severance Payments, the Executive will execute a release of claims substantially in the form of the release attached hereto as Exhibit A. Within two business days of the Date of Termination, the Employer shall deliver to the Executive the release for the Executive to execute. Subject to Section 9(g) below, the Severance Payments shall be made within three business days of the expiration of the revocation period without the release being revoked. In addition, the Employer will execute a release of claims substantially in the form of the release attached hereto as Exhibit B and will deliver such release to the Executive along with the Severance Payments.

          (f) No Offset. In the event of termination of his employment, the Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due to him on account of any remuneration or benefits provided by any subsequent employment he may obtain. The Employer’s obligation to make any payment pursuant to, and otherwise to perform its obligations under, this Agreement shall not be affected by any offset, counterclaim or other right that the Employer or its affiliates may have against him for any reason.

          (g) Section 409A. To the extent the Executive would be subject to the additional 20% tax imposed on certain deferred compensation arrangements pursuant to Section 409A of the Code as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such tax and the parties shall promptly execute any amendment reasonably necessary to implement this Section 9(g). The Executive and the Employer agree to cooperate to make such amendments to the terms of this Agreement as may be necessary to avoid the imposition of penalties and additional taxes under Section 409A of the Code to the extent possible; provided however, that the Employer agrees that any such amendment shall provide the Executive with economically equivalent payments and benefits, and the Executive agrees that any such amendment will not materially increase the cost to, or liability of, the Employer with respect to any payments.

     (10). Certain Additional Payments by the Employer.

          (a) If it shall be determined that any benefit provided to the Executive or payment or distribution by or for the account of the Employer to or for the benefit of the Executive, whether provided, paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a “Payment”) would be subject to the excise tax imposed by Section 4999, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, collectively, the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an

amount such that after payment by the Executive of the Excise Tax and all other U.S. federal, state, and local income, employment, excise and other taxes that are imposed on the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the sum of (A) the Excise Tax imposed upon the Payments and (B) the product of any deductions disallowed because of the inclusion of the Gross-Up Payment in the Executive’s adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made.

          (b) All determinations required to be made under this Section 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Employer’s independent, certified public accounting firm or such other certified public accounting firm as may be designated by the Executive and shall be reasonably acceptable to the Employer (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Employer and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Employer. If the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting a change in the ownership or effective control (as defined for purposes of Section 280G of the Code) of the Employer, the Executive shall appoint another nationally recognized accounting firm which is reasonably acceptable to the Employer to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Employer. Any Gross-Up Payment, as determined pursuant to this Section 10, shall be paid by the Employer to the Executive within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Employer and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that additional Gross-Up Payments shall be required to be made to compensate the Executive for amounts of Excise Tax later determined to be due, consistent with the calculations required to be made hereunder (an “Underpayment”). If the Employer exhausts its remedies pursuant to Section 10(c) and the Executive is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Employer to or for the benefit of the Executive.

          (c) The Executive shall notify the Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employer of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Employer of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employer notifies the Executive in writing prior to the expiration of such period that they desire to contest such claim, the Executive shall:

               (i) give the Employer any information reasonably requested by the Employer relating to such claim;

               (ii) take such action in connection with contesting such claim as the Employer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Employer;

               (iii) cooperate with the Employer in good faith effectively to contest such claim; and

               (iv) permit the Employer to participate in any proceedings relating to such claim; provided, however, that the Employer shall bear and pay directly all costs and expenses (including additional interest and penalties incurred in connection with such contest) and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses.

     11. Indemnification. During the Employment Period and thereafter, the Employer agrees to indemnify and hold the Executive and the Executive’s heirs and representatives harmless, to the maximum extent permitted by law, against any and all damages, costs, liabilities, losses and expenses (including reasonable attorneys’ fees) as a result of any claim or proceeding (whether civil, criminal, administrative or investigative), or any threatened claim or proceeding (whether civil, criminal, administrative or investigative), against the Executive that arises out of or relates to the Executive’s service as an officer, director or employee, as the case may be, of the Employer, or the Executive’s service in any such capacity or similar capacity with an affiliate of the Employer or other entity at the request of the Employer, both prior to and after the Effective Date, and promptly to advance to the Executive or the Executive’s heirs or representatives any and all such expenses upon written request with appropriate documentation of such expense and upon receipt of an undertaking by the Executive or on the Executive’s behalf to repay such amount if it shall ultimately be determined that the Executive is not entitled to be indemnified by the Employer. During the Employment Period and thereafter, the Employer also shall provide the Executive with coverage under its current directors’ and officers’ liability policy to the same extent that it provides such coverage to its other executive officers. If the Executive has any knowledge of any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative, as to which the Executive may request indemnity under this provision, the Executive will give the Employer prompt written notice thereof; provided that the failure to give such notice shall not affect the Executive’s right to indemnification. The Employer shall be entitled to assume the defense of any such proceeding and the Executive will use reasonable efforts to cooperate with such defense. To the extent that the Executive in good faith determine that there is an actual or potential conflict of interest between the Employer and the Executive in connection with the defense of a proceeding, the Executive shall so notify the Employer and shall be entitled to separate representation at the Employer’s expense by counsel selected by the Executive (provided that the Employer may reasonably object to the selection of counsel within ten (10) business days after notification thereof) which counsel shall cooperate, and coordinate the defense, with the Employer’s counsel and minimize the expense of such separate representation to the extent

consistent with the Executive’s separate defense and to the extent possible and consistent with all applicable rules of legal ethics. This Section 11 shall continue in effect after the termination of the Executive’s employment or the termination of this Agreement.

     12. Attorney’s Fees. The Employer shall advance the Executive (and his beneficiaries) any and all costs and expenses (including without limitation attorneys’ fees and other charges of counsel) incurred by the Executive (or any of his beneficiaries) in resolving any controversy, dispute or claim arising out of or relating to this Agreement, any other agreement or arrangement between the Executive and the Employer, the Executive’s employment with the Employer, or the termination thereof; provided that the Executive shall reimburse the Employer any advances on a net after-tax basis to cover expenses incurred by the Executive for claims (a) brought by the Employer on account of the Executive’s alleged breach of Section 7 of this Agreement, breach of the Executive’s fiduciary duty of loyalty, or fraud or material misconduct, if it is judicially determined that the Employer is the prevailing party, or (b) brought by the Executive that are judicially determined to be frivolous or advanced in bad faith. Pending the resolution of any such claim, the Executive (and his beneficiaries) shall continue to receive all payments and benefits described in Section 5 of this Agreement. This Section 12 shall continue in effect after the termination of the Executive’s employment or the termination of this Agreement.

     13. Notices. All notices, demands, requests, or other communications which may be or are required to be given or made by any party to any other party pursuant to this Agreement shall be in writing and shall be hand delivered, mailed by first-class registered or certified mail, return receipt requested, postage prepaid, delivered by overnight air courier, or transmitted by facsimile transmission addressed as follows:

(i) If to the Employer:

   CapitalSource Inc.
   4445 Willard Avenue
   12th Floor
   Chevy Chase, Maryland 20815
               Attn: Chief Executive Officer
   Facsimile Number: 301-841-2340

(ii) If to the Executive:

     Steven A. Museles
     Address last shown on the Employer’s Records

     Each party may designate by notice in writing a new address to which any notice, demand, request or communication may thereafter be so given, served or sent. Each notice, demand, request, or communication that shall be given or made in the manner described above shall be deemed sufficiently given or made for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt, confirmation of facsimile transmission or the affidavit of messenger being deemed conclusive but not exclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation.

     14. Severability. The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which shall remain in full force and effect.

     15. Effect on Other Agreements. The provisions of this Agreement shall supersede the terms of any plan, policy, agreement, award or other arrangement of the Employer (whether entered into before or after the Effective Date) to the extent application of the terms of this Agreement is more favorable to the Executive.

     16. Survival. It is the express intention and agreement of the parties hereto that the provisions of Sections 7, 9, 10, 11, 12, 13, 15, 17, 18, 19, 21, 22 and 24 hereof and this Section 16 shall survive the termination of employment of the Executive. In addition, all obligations of the Employer to make payments hereunder shall survive any termination of this Agreement on the terms and conditions set forth herein.

     17. Assignment. The rights and obligations of the parties to this Agreement shall not be assignable or delegable, except that (i) in the event of the Executive’s death, the personal representative or legatees or distributees of the Executive’s estate, as the case may be, shall have the right to receive any amount owing and unpaid to the Executive hereunder and (ii) the rights and obligations of the Employer hereunder shall be assignable and delegable in connection with any subsequent merger, consolidation, sale of all or substantially all of the assets or equity interests of the Employer or similar transaction involving the Employer or a successor corporation. The Employer shall require any successor to the Employer to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no such succession had taken place.

     18. Binding Effect. Subject to any provisions hereof restricting assignment, this Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties and their respective heirs, devisees, executors, administrators, legal representatives, successors and assigns.

     19. Amendment; Waiver. This Agreement shall not be amended, altered or modified except by an instrument in writing duly executed by the party against whom enforcement is sought. Neither the waiver by either of the parties hereto of a breach of or a default under any of the provisions of this Agreement, nor the failure of either of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder, shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any such provisions, rights or privileges hereunder.

     20. Headings. Section and subsection headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof.

     21. Governing Law. This Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto, shall be governed by and construed in accordance with the laws of the State of Maryland (but not including any choice of law rule thereof that would cause the laws of another jurisdiction to apply).

     22. Entire Agreement. This Agreement constitutes the entire agreement between the parties respecting the employment of the Executive, there being no representations, warranties or commitments except as set forth herein.

     23. Counterparts. This Agreement may be executed in two counterparts, each of which shall be an original and all of which shall be deemed to constitute one and the same instrument.

     24. Withholding. The Employer may withhold from any benefit payment under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling; provided that any withholding obligation arising in connection with the exercise of a stock option or the transfer of stock or other property shall be satisfied through withholding an appropriate number of shares of stock or appropriate amount of such other property.

     25. Definitions.

     “Accrued Benefits” means (i) any compensation deferred by the Executive prior to the Date of Termination and not paid by the Employer or otherwise specifically addressed by this Agreement; (ii) any amounts or benefits owing to the Executive or to the Executive’s beneficiaries under the then applicable benefit plans of the Employer; (iii) any amounts owing to the Executive for reimbursement of expenses properly incurred by the Executive prior to the Date of Termination and which are reimbursable in accordance with Section 6; and (iv) any other benefits or amounts due and owing to the Executive under the terms of any plan, program or arrangement of the Employer.

     “Cause” shall be limited to the following events (i) the Executive’s conviction of, or plea of nolo contendere to, a felony (other than in connection with a traffic violation) under any state or federal law; (ii) the Executive’s willful and continued failure to substantially perform his essential job functions hereunder after receipt of written notice from the Employer that specifically identifies the manner in which the Executive has substantially failed to perform his essential job functions and specifying the manner in which the Executive may substantially perform his essential job functions in the future; (iii) a material act of fraud or willful and material misconduct with respect, in each case, to the Employer, by the Executive; (iv) a willful and material breach of Section 7(d)(i) of this Agreement, or (v) the hiring of any person who was an employee of the Employer within 180 days prior to such hiring, other than to perform services for the benefit of the Employer. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Employer. Anything herein to the contrary notwithstanding, the Executive shall not be terminated for “Cause” hereunder unless (A) written notice stating the basis for the termination is provided to

the Executive, and (B) as to clauses (ii), (iii) or (iv) of this paragraph, he is given 30 days to cure the neglect or conduct that is the basis of such claim (it being understood that any errors in expense reimbursement may be cured by repayment), (C) if he fails to cure such neglect or conduct, the Executive has an opportunity to be heard with counsel of his choosing before the full Board prior to any vote regarding the existence of Cause and (D) there is a vote of a majority of the members of the Board to terminate him for Cause.

     “Change in Control” means the occurrence of one or more of the following events: (i) any “person” (as such terms is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 as amended (the “Act”)) or “group” (as such term is used in Section 14(d)(d) of the Act) is or becomes a “beneficial owner” (as such term is used in Rule 13d-3 promulgated under the Act) of more than 30% of the voting Stock of the Employer; (ii) the majority of the Board of Directors of the Employer (the “Board”) consists of individuals other than Incumbent Directors, which term means the members of the Board on the Effective Date; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director; (iii) the Employer adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iv) the Employer transfers all or substantially all of its assets or business (unless the shareholders of the Employer immediately prior to such transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of the Employer, all of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Employer); or (v) any merger, reorganization, consolidation or similar transaction unless, immediately after consummation of such transaction, the shareholders of the Employer immediately prior to the transaction hold, directly or indirectly, more than 50% of the Voting Stock of the Employer or the Employer’s ultimate parent company if the Employer is a subsidiary of another corporation (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the combined company, any shares received by Affiliates of such other company in exchange for stock of such other company). For purposes of this Change in Control definition, the “Employer” shall include any entity that succeeds to all or substantially all of the business of the Employer and “Voting Stock” shall mean securities of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation.

     “Company Affiliate” means any entity controlled by, in control of, or under common control with, the Employer.

     “Company Confidential Information” means information known to the Executive to constitute trade secrets or proprietary information belonging to the Employer or other confidential financial information, operating budgets, strategic plans or research methods, personnel data, projects or plans, or non-public information regarding the terms of any existing or pending lending transaction between Employer and an existing or pending client or customer (as the phrase “client or customer” is defined in Section 7(d)(i) hereof), in each case, received by the Executive in the course of his employment by the Employer or in connection with his duties with the Employer. Notwithstanding anything to the contrary contained herein, the general skills, knowledge and experience gained during the Executive’s employment with the Employer, information publicly available or generally known within the industry or trade in which the Employer competes and

information or knowledge possessed by the Executive prior to his employment by the Employer, shall not be considered Company Confidential Information.

     “Date of Termination” means (i) if the Executive’s employment is terminated by the Executive’s death, the date of the Executive’s death; (ii) if the Executive’s employment is terminated because of the Executive’s Disability pursuant to Section 8(a)(ii)(A), 30 days after Notice of Termination, provided that the Executive shall not have returned to the performance of the Executive’s duties on a full-time basis during such 30-day period; (iii) if the Executive’s employment is terminated by the Employer for Cause pursuant to Section 8(a)(ii)(B) or by the Executive pursuant to Section 8(a)(iii), the date specified in the Notice of Termination; or (iv) if the Executive’s employment is terminated during the Employment Period other than pursuant to Section 8(a), the date on which Notice of Termination is given.

     “Extended Term” shall have the meaning set forth in Section 2.

     “Good Reason” means, unless otherwise agreed to in writing by the Executive, (i) any diminution or adverse change in any of the Executive’s titles; (ii) reduction in the Executive’s Base Salary or, after a Change in Control, the annual bonus payable to the Executive under Section 5(b); (iii) prior to a Change in Control a requirement that the Executive report to someone other than the Employer’s Chief Executive Officer and, in a dual reporting role, President; (iv) subsequent to a Change in Control a requirement that the Executive report to someone other than the Employer’s Chief Executive Officer; (v) a material diminution in the Executive’s authority, responsibilities or duties or material interference with the Executive’s carrying out his duties; (vi) the assignment of duties inconsistent with the Executive’s position or status with the Employer as of the date hereof; (vii) a relocation of the Executive’s primary place of employment to a location more than 25 miles further from the Executive’s primary residence than the current location of the Employer’s offices; (viii) any other material breach of the terms of this Agreement or any other agreement that breach is not cured within ten days after the Executive’s delivery of a written notice of such breach to the Employer; (ix) any purported termination of the Executive’s employment by the Employer that is not effected in accordance with the applicable provisions of this Agreement; (x) the failure of the Employer to obtain the assumption in writing of its obligations under this Agreement by any successor to all or substantially all of the assets of the Employer within 15 days after a merger, consolidation, sale or similar transaction; or (xi) the delivery of a notice of Non-Renewal by the Employer at any time up to and including February 1, 2024. In order to invoke a termination for Good Reason, the Executive must terminate his employment, if at all, within 30 days of the occurrence of any event of “Good Reason.” Notwithstanding anything to the contrary herein, after a Change of Control, “Good Reason” shall include Employer no longer having its equity securities trading on the New York Stock Exchange or the NASDAQ Stock Market.

     “Non-Compete Period” means the period commencing on the Effective Date and ending twelve months after the earlier of the expiration of the Employment Period or the Executive’s Date of Termination.

     IN WITNESS WHEREOF, the undersigned have duly executed and delivered this Agreement, or have caused this Agreement to be duly executed and delivered on their behalf.

CAPITALSOURCE INC.
	/s/ John K. Delaney
	Name:	John K. Delaney
	Title:	CEO
EXECUTIVE
	/s/ Steven A. Museles
	Steven A. Museles

EX-10.34

exv10w34

EX-12.1

EXHIBIT 12.1

Computation of Ratios of Earnings to Fixed Charges

	Years Ended December 31,
	2007			2006			2005			2004			2003
Fixed charges(1):
Interest expense	$	847,241		$	606,725		$	185,935		$	79,053		$	39,956
Interest capitalized		357			414			932			—			—
Interest portion of rental expense		1,697			1,327			1,244			1,494			843
Total fixed charges	$	849,295		$	608,466		$	188,111		$	80,547		$	40,799
Earnings:
Net income before noncontrolling interest expenses and income taxes	$	268,788		$	350,749		$	269,072		$	205,421		$	132,480
Fixed charges		849,295			608,466			188,111			80,547			40,799
Less: Interest capitalized		(357	)		(414	)		(932	)		—			—
Total earnings	$	1,117,726		$	958,801		$	456,251		$	285,968		$	173,279
Ratio of earnings to fixed charges		1.3	x		1.6	x		2.4	x		3.6	x		4.2	x

(1) Excludes interest related to the application of FIN 48

EX-21.1

Exhibit 21.1

CAPITALSOURCE INC. SUBSIDIARIES
AS OF FEBRUARY 26, 2008

	Jurisdiction of
Corporate Entity	Incorporation
Alexander Funding, LLC	Delaware
Alpha Packaging Associates I, LLC	Delaware
Boulder City LLC	Delaware
CapitalSource (UK) Limited	England
CapitalSource Advisors II LLC	Delaware
CapitalSource Analytics LLC	Delaware
CapitalSource Bahamas LLC	Delaware
CapitalSource Bank	Utah
CapitalSource Canada ULC	Novia Scotia
CapitalSource CF II Inc.	Delaware
CapitalSource CF LLC	Delaware
CapitalSource Commercial Loan Company LLC, 2007-3	Delaware
CapitalSource Commercial Loan LLC, 2006-1	Delaware
CapitalSource Commercial Loan LLC, 2006-2	Delaware
CapitalSource Commercial Loan LLC, 2007-1	Delaware
CapitalSource Commercial Loan LLC, 2007-2	Delaware
CapitalSource Commercial Loan LLC, 2007-3	Delaware
CapitalSource Commercial Loan Trust 2006-1	Delaware
CapitalSource Commercial Loan Trust 2006-2	Delaware
CapitalSource Commercial Loan Trust 2007-1	Delaware
CapitalSource Commercial Loan Trust 2007-2	Delaware

1

	Jurisdiction of
Corporate Entity	Incorporation
CapitalSource Europe Limited	England
CapitalSource Finance II Inc.	Delaware
CapitalSource Finance LLC	Delaware
CapitalSource Funding III LLC	Delaware
CapitalSource Funding VII Trust	Delaware
CapitalSource Funding LLC	Delaware
CapitalSource Funding V Trust	Delaware
CapitalSource Funding VIII LLC	Delaware
CapitalSource International Inc.	Delaware
CapitalSource Limited	England
CapitalSource Mortgage Finance LLC	Delaware
CapitalSource Real Estate Loan Limited, 2007-A	Cayman Islands
CapitalSource Real Estate Loan LLC, 2006-A	Delaware
CapitalSource Real Estate Loan LLC, 2007-A	Delaware
CapitalSource Real Estate Loan Trust 2006-A	Delaware
CapitalSource Servicing LLC	Delaware
CapitalSource SF Equity LLC	Delaware
CapitalSource SF Finance LLC	Delaware
CapitalSource SF TRS Inc.	Delaware
CapitalSource SNF Funding LLC	Delaware
CapitalSource TRS Inc.	Delaware
CapitalSource Trust Preferred Securities 2005-1	Delaware
CapitalSource Trust Preferred Securities 2005-2	Delaware
CapitalSource Trust Preferred Securities 2006-1	Delaware
CapitalSource Trust Preferred Securities 2006-2	Delaware

2

	Jurisdiction of
Corporate Entity	Incorporation
CapitalSource Trust Preferred Securities 2006-3	Delaware
CapitalSource Trust Preferred Securities 2006-4	Delaware
CapitalSource Trust Preferred Securities 2006-5	Delaware
CapitalSource Trust Preferred Securities 2007-1	Delaware
CapitalSource Trust Preferred Securities 2007-2	Delaware
Carnegie Gardens, Inc.	Florida
CIG International, LLC	Delaware
CS Bluesky II LLC	Delaware
CS Capital Advisors LLC	Delaware
CS Central City LLC	Delaware
CS CF Equity I LLC	Delaware
CS CF Equity Investments Inc.	Delaware
CS Equity II LLC	Delaware
CS Equity III LLC	Delaware
CS Equity Investments Inc.	Delaware
CS Equity IV LLC	Delaware
CS Europe Finance Limited	England
CS Funding V Depositor LLC	Delaware
CS Funding VII Depositor LLC	Delaware
CS Note LLC	Delaware
CS OT I LLC	Delaware
CS Strategic Capital LLC	Delaware
CS Strategic Management LLC	Delaware
CS Strategic Partners LP	Delaware
CS Tower Acquisition LLC	Delaware

3

	Jurisdiction of
Corporate Entity	Incorporation
CS UK Finance Limited	England
CS Watermark LLC	Delaware
CSE Alamo LLC	Delaware
CSE Albany LLC	Delaware
CSE Amarillo LLC	Delaware
CSE Anchorage LLC	Delaware
CSE Arden L.P.	Delaware
CSE Augusta LLC	Delaware
CSE Bedford LLC	Delaware
CSE Blountville LLC	Delaware
CSE Bolivar LLC	Delaware
CSE Cambridge LLC	Delaware
CSE Cambridge Realty LLC	Delaware
CSE Camden LLC	Delaware
CSE Canton LLC	Delaware
CSE Cape Cod LLC	Delaware
CSE Casablanca Holdings II LLC	Delaware
CSE Casablanca Holdings LLC	Delaware
CSE Cedar Rapids LLC	Delaware
CSE Centennial Village	Delaware
CSE Chelmsford LLC	Delaware
CSE Chesterton LLC	Delaware
CSE Claremont LLC	Delaware
CSE Corpus North LLC	Delaware
CSE Crane LLC	Delaware

4

	Jurisdiction of
Corporate Entity	Incorporation
CSE Denver Iliff LLC	Delaware
CSE Denver LLC	Delaware
CSE Douglas LLC	Delaware
CSE Dumas LLC	Delaware
CSE Elkton LLC	Delaware
CSE Elkton Realty LLC	Delaware
CSE Equity Holdings LLC	Delaware
CSE Exclusive LLC	Delaware
CSE Fairhaven LLC	Delaware
CSE Fort Wayne LLC	Delaware
CSE Frankston LLC	Delaware
CSE Georgetown LLC	Delaware
CSE Green Bay LLC	Delaware
CSE Hilliard LLC	Delaware
CSE Hillsdale LLC	Delaware
CSE Huntingdon LLC	Delaware
CSE Huntsville LLC	Delaware
CSE Indianapolis – Continental LLC	Delaware
CSE Indianapolis – Greenbriar LLC	Delaware
CSE International Holdings LLC	Delaware
CSE Issaquah LLC	Delaware
CSE Jacinto City LLC	Delaware
CSE Jeffersonville – Hillcrest Center LLC	Delaware
CSE Jeffersonville – Jennings House LLC	Delaware

5

	Jurisdiction of
Corporate Entity	Incorporation
CSE Jefferson City LLC	Delaware
CSE Kerrville LLC	Delaware
CSE King L.P.	Delaware
CSE Kingsport LLC	Delaware
CSE Knightdale L.P.	Delaware
CSE Lake City LLC	Delaware
CSE Lake Worth LLC	Delaware
CSE Lakewood LLC	Delaware
CSE Las Vegas LLC	Delaware
CSE Lawrenceburg LLC	Delaware
CSE Lenoir L.P.	Delaware
CSE Lexington Park LLC	Delaware
CSE Lexington Park Realty LLC	Delaware
CSE Ligonier LLC	Delaware
CSE Live Oak LLC	Delaware
CSE Logansport LLC	Delaware
CSE Lowell LLC	Delaware
CSE MacArthur Holdings LLC	Delaware
CSE Memphis LLC	Delaware
CSE Mobile LLC	Delaware
CSE Moore LLC	Delaware
CSE Mortgage LLC	Delaware
CSE North Carolina Holdings I LLC	Delaware
CSE North Carolina Holdings II LLC	Delaware

6

	Jurisdiction of
Corporate Entity	Incorporation
CSE Omro LLC	Delaware
CSE Orange Park LLC	Delaware
CSE Orlando – Pinar Terrace Manor LLC	Delaware
CSE Orlando – Terra Vista Rehab LLC	Delaware
CSE Pennsylvania Holdings	Delaware
CSE PHC LLC	Delaware
CSE Piggott LLC	Delaware
CSE Pilot Point LLC	Delaware
CSE Pine View LLC	Delaware
CSE Pittsburg LLC	Delaware
CSE Ponca City LLC	Delaware
CSE Port St. Lucie LLC	Delaware
CSE QRS Funding I LLC	Delaware
CSE QRS Funding II LLC	Delaware
CSE Richmond LLC	Delaware
CSE Ripley LLC	Delaware
CSE Ripon LLC	Delaware
CSE Safford LLC	Delaware
CSE Salina LLC	Delaware
CSE Seminole LLC	Delaware
CSE Shawnee LLC	Delaware
CSE SLB LLC	Delaware
CSE SNF Holding II LLC	Delaware
CSE SNF Holding LLC	Delaware

7

	Jurisdiction of
Corporate Entity	Incorporation
CSE Spring Branch LLC	Delaware
CSE State College	Delaware
CSE Stillwater LLC	Delaware
CSE Taylorsville LLC	Delaware
CSE Texarkana LLC	Delaware
CSE Texas City LLC	Delaware
CSE The Village LLC	Delaware
CSE Upland LLC	Delaware
CSE Vincennes LLC	Delaware
CSE Walnut Cove L.P.	Delaware
CSE West Point LLC	Delaware
CSE Whitehouse LLC	Delaware
CSE Wichita LLC	Delaware
CSE Williamsport LLC	Delaware
CSE Winter Haven LLC	Delaware
CSE WKTM Contributor LLC	Delaware
CSE Woodfin L.P.	Delaware
CSE Yorktown LLC	Delaware
Dakota Ridge Holdings LLC	Delaware
Desert Lane LLC	Delaware
Dixie White House Nursing Home, Inc.	Delaware
Florida Real Estate Company, LLC	Florida
Greenbough, LLC	Delaware
JRC/CSE Eagle Ridge JV, LLC	Delaware

8

	Jurisdiction of
Corporate Entity	Incorporation
LAD I Real Estate Company, LLC	Delaware
Legends Funding, LLC	Delaware
Marianna Holdings, Inc.	Florida
Mauna Loa Funding, LLC	Delaware
Mexico Realty Del Sur Funding	Mexico
North Las Vegas LLC	Delaware
Ocean Springs Nursing Home, Inc.	Mississippi
Panama City Nursing Center, Inc.	Florida
Paradise Canyon Funding, LLC	Delaware
Pensacola Real Estate Holdings I, Inc.	Florida
Pensacola Real Estate Holdings II, Inc.	Florida
Pensacola Real Estate Holdings III, Inc.	Florida
Pensacola Real Estate Holdings IV, Inc.	Florida
Pensacola Real Estate Holdings V, Inc.	Florida
PrivateSource Mortgage LLC	Delaware
Silver Lake Real Estate, LLC	Pennsylvania
Skyler Boyington, Inc.	Mississippi
Skyler Florida, Inc.	Mississippi
Skyler Maitland, Inc.	Florida
Skyler Pensacola, Inc.	Florida
South Peters Funding, LLC	Delaware
Suwanee, LLC	Delaware
Tower Acquisition LLC	Delaware
VO Receivable Funding, LLC	Delaware

9

	Jurisdiction of
Corporate Entity	Incorporation
WKM Real Estate, LLC	Delaware
WKTM-Florida, LLC	Delaware

10

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements: (1) Registration Statements (Form S-3 Nos. 333-130681, 333-118738 and 333-118744) of CapitalSource Inc., (2) Registration Statements (Form S-3 Nos. 333-130681-02, 333-118738-02 and 333-118744-02) of CapitalSource Finance LLC and (3) Registration Statements (Form S-8 Nos. 333-107725, 333-117422 and 333-134377) of CapitalSource Inc., of our reports dated February 25, 2008, with respect to the consolidated financial statements of CapitalSource Inc., and the effectiveness of internal control over financial reporting of CapitalSource Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2007.

/s/ Ernst & Young LLP  

McLean, Virginia
February 25, 2008

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, John K. Delaney, certify that:

1. I have reviewed this annual report on Form 10-K of CapitalSource Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 28, 2008

/s/  John K. Delaney

John K. Delaney

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Thomas A. Fink, certify that:

1. I have reviewed this annual report on Form 10-K of CapitalSource Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 28, 2008

/s/  Thomas A. Fink

Thomas A. Fink

Chief Financial Officer

(Principal Financial Officer)

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of CapitalSource Inc. (the “Company”) on Form 10-K for the annual period ending December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, John K. Delaney and Thomas A. Fink, Chairman and Chief Executive Officer and Chief Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: February 28, 2008

/s/  John K. Delaney

John K. Delaney

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

Date: February 28, 2008

/s/  Thomas A. Fink

Thomas A. Fink

Chief Financial Officer

(Principal Financial Officer)