-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HKLgkvUeWaKgEbqVgMtDFfOtSdhRetR2PgRXdl0js1I7YFPM2uO9m04OEIXLb5yT VexFBptJ2ZzUgZd4SWvqgg== 0000944209-98-001874.txt : 19981113 0000944209-98-001874.hdr.sgml : 19981113 ACCESSION NUMBER: 0000944209-98-001874 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED PANAM FINANCIAL CORP CENTRAL INDEX KEY: 0001049231 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 953211687 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24051 FILM NUMBER: 98744957 BUSINESS ADDRESS: STREET 1: 1300 SOUTH EL CAMINO REAL CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6503451800 MAIL ADDRESS: STREET 1: 1300 SOUTH EL CAMINO REAL CITY: SAN MATEO STATE: CA ZIP: 94402 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 Or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ___________ Commission File Number 000-24051 UNITED PANAM FINANCIAL CORP. (Exact name of registrant as specified in its charter) California 95-3211687 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1300 SOUTH EL CAMINO REAL SAN MATEO, CALIFORNIA 94402 (Address of principal executive offices) (Zip Code) (650) 345-1800 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report) 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 X No ------ ----- The number of shares outstanding of the Registrant's Common Stock as of November 6, 1998 was 17,275,000 shares. UNITED PANAM FINANCIAL CORP. FORM 10-Q SEPTEMBER 30, 1998 INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition as of September 30, 1998 and December 31, 1997 1 Consolidated Statements of Operations for the three and nine months ended September 30, 1998 and September 30, 1997 2 Consolidated Statements of Cash Flows for the three and nine months ended September 30, 1998 and September 30, 1997 3 Notes to Unaudited Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings 30 Item 2. Changes in Securities and Use of Proceeds 30 Item 3. Defaults Upon Senior Securities 30 Item 4. Submission of Matters to a Vote of Security Holders 31 Item 5. Other Information 31 Item 6. Exhibits and Reports on Form 8-K 31
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. -------------------- UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
September 30, December 31, (Dollars in thousands, except per share data) 1998 1997 ------------------- ------------------ ASSETS Cash and due from banks $ 45,436 $ 15,026 Short term investments 15,500 4,000 ------------------- ------------------ Cash and cash equivalents 60,936 19,026 Securities available for sale, at fair value -- 1,002 Residual interests in securitizations, at fair value -- 8,230 Loans, net 187,197 148,535 Loans held for sale 167,070 120,002 Federal Home Loan Bank stock, at cost 2,089 1,945 Accrued interest receivable 2,046 1,494 Real estate owned, net 1,192 562 Premises and equipment, net 4,650 3,085 Deferred tax assets 2,975 3,171 Intangible assets 363 457 Other assets 8,758 3,333 ------------------- ------------------ Total assets $437,276 $310,842 =================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $317,342 $233,194 Notes payable 10,930 12,930 Federal Home Loan Bank advances -- 28,000 Warehouse line of credit -- 6,237 Accrued expenses and other liabilities 22,285 17,472 ------------------- ------------------ Total liabilities 350,557 297,833 ------------------- ------------------ Commitments and contingencies Preferred stock (par value $0.01 per share): -- -- Authorized, 2,000,000 shares None issued and outstanding Common stock (par value $0.01 per share): -- -- Authorized, 20,000,000 shares Issued and outstanding, 17,275,000 and 10,950,000 shares at September 30, 1998 and December 31, 1997, respectively 173 110 Additional paid-in capital 68,438 5,127 Retained earnings 18,108 7,772 ------------------- ------------------ Total stockholders' equity 86,719 13,009 ------------------- ------------------ Total liabilities and stockholders' equity $437,276 $310,842 =================== ==================
See notes to unaudited consolidated financial statements. 1 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Nine Months (Dollars in thousands, except per share data) Ended September 30, Ended September 30, --------------------------------- -------------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- INTEREST INCOME Loans $11,617 $ 6,775 $32,786 $17,867 Short term investments and securities available for sale 353 174 819 447 ------------- ------------- ------------- ------------- Total interest income 11,970 6,949 33,605 18,314 ------------- ------------- ------------- ------------- INTEREST EXPENSE Deposits 4,063 2,532 11,186 6,710 Federal Home Loan Bank advances 114 389 659 1,001 Warehouse line of credit 652 -- 2,118 -- Notes payable 145 184 485 482 ------------- ------------- ------------- ------------- Total interest expense 4,974 3,105 14,448 8,193 ------------- ------------- ------------- ------------- Net interest income 6,996 3,844 19,157 10,121 Provision for loan losses 661 66 1,784 445 ------------- ------------- ------------- ------------- Net interest income after provision for loan losses 6,335 3,778 17,373 9,676 ------------- ------------- ------------- ------------- NON-INTEREST INCOME Gain on sale of loans, net 17,071 8,183 44,262 15,260 Loan related charges and fees 33 166 105 360 Service charges and fees 173 18 478 123 Other income 33 17 96 40 ------------- ------------- ------------- ------------- Total non-interest income 17,310 8,384 44,941 15,783 ------------- ------------- ------------- ------------- NON-INTEREST EXPENSE Compensation and benefits 9,961 5,164 28,733 12,195 Occupancy expense 1,458 720 3,936 1,847 Other expenses 4,223 2,105 11,737 5,243 ------------- ------------- ------------- ------------- Total non-interest expense 15,642 7,989 44,406 19,285 ------------- ------------- ------------- ------------- Income before income taxes 8,003 4,173 17,908 6,174 Income taxes 3,333 1,752 7,572 2,580 ------------- ------------- ------------- ------------- Net income $ 4,670 $ 2,421 $10,336 $ 3,594 ============= ============= ============= ============= Earnings per share-basic $ 0.27 $ 0.23 $ 0.71 $ 0.34 ============= ============= ============= ============= Earnings per share-diluted $ 0.26 $ 0.21 $ 0.67 $ 0.32 ============= ============= ============= ============= Weighted average shares outstanding-basic 17,275 10,669 14,565 10,669 ============= ============= ============= ============= Weighted average shares outstanding-diluted 18,021 11,126 15,359 11,117 ============= ============= ============= =============
See notes to unaudited consolidated financial statements. 2 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands) Three Months Nine Months Ended September 30, Ended September 30, ---------------------------- ---------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,670 $ 2,421 $ 10,336 $ 3,594 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Gain on sale of loans (17,071) (8,183) (44,262) (15,260) Origination of mortgage loans held for sale (359,090) (161,726) (957,247) (338,214) Sales of mortgage loans held for sale 356,443 158,660 919,009 298,454 Net proceeds from sale of residual interests in securitizations -- -- 8,302 -- Provision for loan losses 661 66 1,784 445 Accretion of discount on loans (24) (185) (566) (538) Depreciation and amortization 485 219 1,241 504 FHLB stock dividend (30) (33) (86) (74) (Increase) decrease in accrued interest receivable (534) 76 (552) (82) Increase in other assets (512) (2,711) (5,124) (3,345) Deferred income taxes 26 (1,145) 196 (1,125) Increase in accrued expenses and other liabilities 3,816 2,157 4,814 6,675 ------------ ------------ ------------ ------------ Net cash used in operating activities (11,160) (10,384) (62,155) (48,966) ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities -- -- 1,002 -- Repayments of mortgage loans 11,055 6,615 30,196 16,859 Originations, net of repayments, of non-mortgage loans (4,336) (2,322) (36,357) (30,346) Purchase of securities available for sale -- -- -- (2,002) Purchase of premises and equipment (581) (636) (2,684) (1,869) Purchase of FHLB stock, net -- (65) (58) (407) Proceeds from sale of real estate owned 545 609 995 1,797 Other, net -- -- (330) -- ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities 6,683 4,201 (7,236) (15,968) ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds, net of repayments, from notes payable to shareholders -- 1,940 (2,000) 1,940 Net increase in deposits 17,008 15,632 84,148 51,722 Proceeds from initial public offering of common stock, net -- -- 63,390 -- Proceeds, net of repayments, from warehouse line of credit -- -- (6,237) -- Proceeds, net of repayments, from FHLB advances -- 15,000 (28,000) 31,000 ------------ ------------ ------------ ------------ Net cash provided by financing activities 17,008 32,572 111,301 84,662 ------------ ------------ ------------ ------------ Net increase in cash and cash equivalents 12,531 26,389 41,910 19,728 Cash and cash equivalents at beginning of period 48,405 19,402 19,026 26,063 ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period $ 60,936 $ 45,791 $ 60,936 $ 45,791 ============ ============ ============ ============
See notes to unaudited consolidated financial statements. 3 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (UNAUDITED)
(Dollars in thousands) Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1998 1997 1998 1997 --------- -------- --------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest $5,047 $3,135 $14,625 $8,062 --------- -------- --------- -------- Taxes $5,775 $1,500 $ 8,285 $2,380 --------- -------- --------- -------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Acquisition of real estate owned through foreclosure of related mortgage loans $ 797 $ 416 $ 2,105 $1,446 --------- -------- --------- --------
See notes to unaudited consolidated financial statements. 4 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 1. ORGANIZATION United PanAm Financial Corp. (the "Company") was incorporated in California on April 9, 1998 for the purpose of reincorporating its business in that state, through the merger of United PanAm Financial Corp., a Delaware corporation (the "Predecessor"), into the Company. Unless the context indicates otherwise, all references herein to the "Company" include the Predecessor. The Company was originally organized as a holding company for Pan American Financial, Inc. ("PAFI") and Pan American Bank, FSB (the "Bank") to purchase certain assets and assume certain liabilities of Pan American Federal Savings Bank from the Resolution Trust Corporation (the "RTC") on April 29, 1994 pursuant to a whole purchase and assumption agreement. The Company, PAFI and the Bank are considered to be minority owned. PAFI is a wholly-owned subsidiary of the Company, and the Bank is a wholly-owned subsidiary of PAFI. United PanAm Mortgage Corporation, a California corporation, was organized in 1997 as a wholly-owned subsidiary of the Company and is presently acting as agent for the Bank in secondary marketing activities. In 1997, the Company changed its fiscal year end from June 30 to December 31 for financial and income tax reporting purposes. 2. BASIS OF PRESENTATION Certain statements in this Quarterly Report on Form 10-Q, including statements regarding the Company's strategies, plans, objectives, expectations and intentions, may include forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: limited operating history; loans made to credit-impaired borrowers; need for additional sources of financing; concentration of business in California; reliance on operational systems and controls and key employees; competitive pressure in the banking and mortgage lending industry; changes in the interest rate environment; rapid growth of the Company's businesses; risks in connection with the securitization of mortgage loans; general economic conditions; and other risks identified from time to time in the Company's filings with the Securities and Exchange Commission (the "SEC"). See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Results." The accompanying unaudited consolidated financial statements include the accounts of United PanAm Financial Corp., Pan American Financial, Inc., United PanAm Mortgage Corporation and Pan American Bank, FSB. Substantially all of the Company's revenues are derived from the operations of the Bank and United PanAm Mortgage Corporation and they represent substantially all of the Company's consolidated assets and liabilities as of September 30, 1998 and December 31, 1997. Significant inter-company accounts and transactions have been eliminated in consolidation. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company's financial condition and results of operations for the interim periods presented in this Form 10-Q have been included. Operating results for the interim periods are not necessarily indicative of financial results for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Registration Statement on Form S-1 (File No. 333-39941), as amended, declared effective by the SEC on April 23, 1998 in connection with its initial public offering. 5 The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. EARNINGS PER SHARE At December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS 128"). Under SFAS 128, basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock. Basic EPS and diluted EPS are calculated as follows for the three and nine months ended September 30, 1998 and 1997:
Three Months Nine Months (Dollars in thousands, except per share amounts) Ended September 30, Ended September 30, -------------------------------- ----------------------------------- 1998 1997 1998 1997 ------------ ------------ ----------- ------------ Earnings per share -- basic Net income $ 4,670 $ 2,421 $10,336 $ 3,594 ============ ============ =========== ============ Average common shares outstanding 17,275 10,669 14,565 10,669 ============ ============ =========== ============ Earnings per share -- basic $ 0.27 $ 0.23 $ 0.71 $ 0.34 ============ ============ =========== ============ Earnings per share -- diluted Net income $ 4,670 $ 2,421 $10,336 $ 3,594 ============ ============ =========== ============ Average common shares outstanding 17,275 10,669 14,565 10,669 Add: Stock options 746 457 794 448 ------------ ------------ ----------- ------------ Average common shares outstanding -- diluted 18,021 11,126 15,359 11,117 ============ ============ =========== ============ Earnings per share -- diluted $ 0.26 $ 0.21 $ 0.67 $ 0.32 ============ ============ =========== ============
4. ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. SFAS 130 does not, however, require a specific format for presenting such information, but requires the Company to display an amount representing total comprehensive income for the periods presented in that financial statement. For the three and nine months ended September 30, 1998 and 1997, the Company had no items of comprehensive income to report other than net income. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for the way that public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 is effective for financial statements for periods beginning after December 31, 1997, and the Company is in the process of determining its preferred format for disclosure purposes. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statements of financial condition and measure those instruments at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. 6 5. INITIAL PUBLIC OFFERING On April 23, 1998, the Company's Registration Statement on Form S-1 for the initial public offering of 5,500,000 shares of its common stock at a price of $11.00 per share was declared effective by the SEC. The Company received approximately $56 million from the sale of its common stock after underwriting discount and expenses associated with the offering. On May 22, 1998, the Underwriters' over-allotment option for 825,000 shares of common stock was exercised resulting in $8 million of additional proceeds being received by the Company, after underwriting discount. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS. --------------------- Certain statements in this Quarterly Report on Form 10-Q including statements regarding the Company's strategies, plans, objectives, expectations and intentions, may include forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. For discussion of the factors that might cause such a difference, see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Factors That May Affect Future Results" and other risks identified from time to time in the Company's filings with the SEC. GENERAL THE COMPANY The Company is a diversified specialty finance company engaged primarily in originating and acquiring for investment or sale residential mortgage loans, personal automobile insurance premium finance contracts and retail automobile installment sales contracts. The Company markets to customers who generally cannot obtain financing from traditional lenders. These customers usually pay higher loan origination fees and interest rates than those charged by traditional lenders to gain access to consumer financing. The Company believes that management's experience in originating, assessing, pricing and managing credit risk enables the Company to earn attractive risk-adjusted returns. The Company has funded its operations to date principally through retail deposits, Federal Home Loan Bank ("FHLB") advances, a mortgage warehouse line of credit, loan securitizations, and whole loan sales at the Bank. The Company commenced operations in 1994 by purchasing from the RTC certain assets and assuming certain liabilities of the Bank's predecessor, Pan American Federal Savings Bank. The Company has used the Bank as a base for expansion into its current specialty finance businesses. In 1995, the Company commenced its insurance premium finance business through a joint venture with BPN Corporation ("BPN"). In 1996, the Company commenced its current mortgage and automobile finance businesses. The Company was incorporated in California on April 9, 1998 for the purpose of reincorporating its business in that state, through the merger of the Predecessor into the Company. Unless the context indicates otherwise, all references herein to the "Company" include the Predecessor. Finance companies, such as the Company, generate income from a combination of (i) "spread" or "net interest" income (i.e., the difference between the yield on loans, net of loan losses, and the cost of funding) and (ii) "non-interest" income (i.e., the fees received for various services and gain on the sale of loans). Income is used to cover operating expenses incurred (i.e., compensation and benefits, occupancy and other expenses) in generating that income. Each of the Company's businesses, as described below, generates income from a combination of spread and non-interest income. MORTGAGE FINANCE The Company originates and sells or securitizes subprime mortgage loans collateralized primarily by first mortgages on single family residences. The Company's mortgage finance customers are considered "subprime" because of factors such as impaired credit history or high debt-to-income ratios compared to customers of traditional mortgage lenders. The Company has funded its mortgage finance business to date primarily through the Bank's deposits, FHLB advances, a mortgage warehouse line of credit, the sale of its mortgage loan originations to mortgage companies and investors through whole loan packages offered for bid several times per month and, to a lesser extent, from loan securitizations. The Company completed its first securitization of mortgage loans in December 1997 and in March 1998 sold the residual interests in this securitization for cash at a price in excess of its carrying value. 8 To date, the Company's mortgage lending income is generated from cash gains on sales of loans, and a spread component resulting from loans held prior to sale. Income generated from this mortgage finance business covers operating costs, including compensation, occupancy, loan origination, and administrative expenses. INSURANCE PREMIUM FINANCE In May 1995, the Bank entered into a joint venture with BPN under the name "ClassicPlan" (such business, "IPF"). Under this joint venture, which commenced operations in September 1995, the Bank underwrites and finances primarily automobile insurance premiums in California and BPN markets the financing program and services the loans for the Bank. The Bank lends to individuals for the purchase of single premium automobile insurance policies and the Bank's collateral is the unearned insurance premium held by the insurance company. The unearned portion of the insurance premium is refundable to IPF in the event the underlying insurance policy is canceled. The Company does not sell or have the risk of underwriting the underlying insurance policy. As a result of BPN performing substantially all marketing and servicing activities, the Company's role is primarily that of an underwriter and funder of loans. Therefore, IPF's income is generated primarily on a spread basis, supplemented by non-interest income generated from late payment and returned check fees. The Bank uses this income to cover the costs of underwriting and loan administration, including compensation, occupancy and data processing expenses. In January 1998, the Company and BPN purchased from Providian National Bank and others the right to solicit new and renewal personal and commercial insurance premium finance business from brokers who previously have provided contracts to Commonwealth Premium Finance. The purchase price for the agreement was provided 60% by the Company and 40% by BPN. The relationship between the Company and BPN continues to be governed by the joint venture agreement already in effect. The Company also acquired the Commonwealth name and certain equipment and software. The agreement also provides that Providian National Bank and the servicers of its insurance premium finance business may not solicit or engage in the insurance premium finance business in California for a period of three years. As a result of the Commonwealth acquisition, IPF increased its commercial insurance premium financing to approximately 10.9% of loans outstanding at September 30, 1998, and it is expected that this business will increase to approximately 15% of loans outstanding by the end of the year. AUTOMOBILE FINANCE In 1996, the Bank commenced its automobile finance business through its subsidiary, United Auto Credit Corporation (such business, "UACC"). UACC acquires, holds for investment and services subprime retail automobile installment sales contracts ("auto contracts") generated by franchised and independent dealers of used automobiles. UACC's customers are considered "subprime" because they typically have limited credit histories or credit histories that preclude them from obtaining loans through traditional sources. As UACC provides all marketing, origination, underwriting and servicing activities for its loans, income is generated from a combination of spread and non-interest income and is used to cover all operating costs, including compensation, occupancy and systems expense. THE BANK The Company has funded its operations to date primarily through the Bank's deposits, FHLB advances, a mortgage warehouse line of credit and loan sales and securitizations. As of September 30, 1998, the Bank was a five-branch federal savings bank with $317.3 million in deposits. The loans generated by the Company's mortgage, insurance premium and automobile finance businesses currently are funded and held by the Bank. In addition, the Bank holds a portfolio of primarily traditional residential mortgage loans acquired from the RTC in 1994 and 1995 at a discount from the unpaid principal balance of such loans, which loans aggregated $66.9 million in principal amount (before unearned discounts and premiums) at September 30, 1998. 9 The Bank generates spread income not only from loans originated or purchased by each of the Company's principal businesses, but also from (i) loans purchased from the RTC, (ii) its short term investments portfolio, and (iii) consumer loans originated by its retail deposit branches. This income is supplemented by non-interest income from its branch banking activities (e.g., deposit service charges, safe deposit box fees), and is used to cover operating costs and other expenses. YEAR 2000 COMPLIANCE State of Readiness. The Company is working to resolve the potential impact of the Year 2000 on the ability of the Company's computerized information systems to accurately process information that may be date-sensitive. Any of the Company's programs that recognize a date using "00" as the Year 1900 rather than the Year 2000 could result in errors or system failures. The Company utilizes a number of computer programs across its entire operations. The Company established a Year 2000 project management team in 1997 to ensure that its operating systems will be fully capable of processing its transactions. The Company also adopted a Year 2000 operating plan in accordance with the guidelines prescribed by the Office of Thrift Supervision and the Federal Financial Institutions Examination Council. The assessment and awareness phases of the plan have been completed and the Company is now in the testing phase. It is expected that all internal computer applications will be tested and validated by the end of 1998. The Company relies upon third-party software vendors and service providers for a substantial amount of its electronic data processing. Thus, one of the Company's Year 2000 focuses is to monitor the progress of its primary software vendors and service providers towards compliance with Year 2000 issues and prepare to test actual data of the Company on simulated processing of future sensitive dates. It is expected that all critical systems provided by third party service providers will be tested and validated by June 1999. The Company has initiated formal communications with its customers and vendors to determine the extent to which the Company may be affected by the failure of these parties to correct their own year 2000 issues. The company's borrowers and customers are generally consumers which mitigates much of the Year 2000 risk. As of this time, the Company has not identified any significant issues with its major customers or vendors. Costs to Address the Year 2000 Issue. The Company has budgeted expenditures of approximately $600,000 in 1998 and 1999 to ensure that its systems are ready for processing information in the Year 2000. The majority of these expenditures relate to the cost of fully dedicated Year 2000 project management team resources, some of whom are third party contractors. The Company estimates that it has incurred approximately $200,000 of its Year 2000 budget expenditures through September 30, 1998 and will incur an additional $75,000 by the end of 1998. In addition, the Company has incurred, and will continue to incur, certain costs relating to the temporary reallocation of its internal resources to address Year 2000 issues. Risks Presented by the Year 2000 Issue. Should the Company and/or its third-party software vendors and service providers upon whom the Company relies fail to timely identify, address and correct material Year 2000 issues, such failure could have a material adverse impact on the Company's ability to operate. The range of adverse impacts may include the requirement to pay significant overtime to manually process certain transactions and added costs to process certain financing activity through a centralized administrative function. In addition, if corrections made by such third-party software vendors and service providers to address Year 2000 issues are incompatible with the Company's systems, the Year 2000 issue could have a material adverse impact on the Company's operations. 10 Despite the Company's activities in regards to the Year 2000 issue, there can be no assurance that partial or total systems interruptions or the costs necessary to update hardware and software will not have a material adverse effect on the Company's business, financial condition, results of operations and business prospects. Contingency Plans. The Year 2000 project management team currently is developing contingency plans in the event of an unanticipated business interruption as a result of a Year 2000 systems failure. These plans will address how the Company operates its critical activities in a business interruption resulting from any Year 2000 issues. An initial draft of the plan is scheduled to be completed by the end of 1998 with final plans adopted by June 1999. There can be no assurance, however, that such contingency plans will be successful. AVERAGE BALANCE SHEETS The following tables set forth information relating to the Company for the three and nine months ended September 30, 1998 and 1997. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. The yields and costs include fees which are considered adjustments to yields.
Three Months Ended September 30, -------------------------------------------------------------------------------- 1998 1997 --------------------------------------- -------------------------------------- Average Average (Dollars in thousands) Average Yield/ Average Yield/ Balance(1) Interest Cost Balance(1) Interest Cost ------------ ----------- ---------- ------------ ------------ --------- (Unaudited) ASSETS Interest earning assets Investment securities $ 32,474 $ 353 4.35% $ 12,510 $ 174 5.56% Mortgage loans, net(2) 299,338 6,839 9.14% 155,668 3,855 9.91% IPF loans, net(3) 53,725 1,756 13.07% 48,696 1,688 13.87% Automobile installment Contracts, net(4) 50,118 3,022 24.12% 19,112 1,232 25.78% ----------- --------- ----------- --------- Total interest earning assets 435,655 11,970 10.99% 235,986 6,949 11.78% --------- --------- Non-interest earnings assets 37,630 21,311 ----------- ----------- Total assets $473,285 $257,297 =========== =========== LIABILITIES AND EQUITY Interest bearing liabilities Customer deposits $306,254 $ 4,063 5.26% $203,968 $2,532 4.93% Notes payable 10,930 145 5.26% 11,415 184 6.40% FHLB advances 7,871 114 5.75% 23,607 389 6.54% Warehouse line of credit 38,039 652 6.71% -- -- -- ----------- --------- ----------- --------- Total interest bearing liabilities 363,094 4,974 5.43% 238,990 3,105 5.15% Non-interest bearing liabilities 26,665 10,776 ----------- ----------- Total liabilities 389,759 249,766 Equity 83,526 7,531 ----------- ----------- Total liabilities and equity $473,285 $257,297 =========== =========== Net interest income before provision for loan losses $ 6,996 $3,844 --------- --------- Net interest rate spread(5) 5.56% 6.62% Net interest margin(6) 6.42% 6.52% Ratio of interest earning assets to 99% interest bearing liabilities 120%
__________________________________ (1) Average balances are measured on a month-end basis. (2) Net of deferred loan origination fees, unamortized discounts, premiums and allowance for estimated loan losses; includes loans held for sale and non- performing loans. (3) Net of allowance for estimated losses; includes non-performing loans. (4) Net of unearned finance charges and allowance for estimated losses; includes non-performing loans. (5) Net interest rate spread represents the difference between the yield on interest earning assets and the cost of interest bearing liabilities. (6) Net interest margin represents net interest income divided by average interest earning assets. 11
Nine Months Ended September 30, -------------------------------------------------------------------------------- 1998 1997 --------------------------------------- -------------------------------------- Average Average (Dollars in thousands) Average Yield/ Average Yield/ Balance(1) Interest Cost Balance(1) Interest Cost ------------ ----------- ---------- ------------ ------------ --------- (Unaudited) ASSETS Interest earning assets Investment securities $ 20,893 $ 819 5.23% $ 9,772 $ 447 6.12% Mortgage loans, net(2) 275,573 20,197 9.77% 143,715 10,378 9.63% IPF loans, net(3) 49,725 4,992 13.39% 44,591 4,735 14.16% Automobile installment contracts, net(4) 40,450 7,597 25.04% 14,113 2,754 26.09% ----------- --------- ----------- --------- Total interest earning assets 386,641 33,605 11.59% 212,191 18,314 11.51% --------- --------- Non-interest earnings assets 36,390 17,485 ----------- ----------- Total assets $423,031 $229,676 =========== =========== LIABILITIES AND EQUITY Interest bearing liabilities Customer deposits $283,814 $11,186 5.27% $183,134 $ 6,710 4.89% Notes payable 11,730 485 5.53% 11,124 482 5.79% FHLB advances 15,441 659 5.71% 20,334 1,001 6.38% Warehouse line of credit 43,498 2,118 6.51% -- -- -- ----------- --------- ----------- --------- Total interest bearing liabilities 354,483 14,448 5.45% 214,592 8,193 5.10% --------- --------- Non-interest bearing liabilities 20,671 7,459 ----------- ----------- Total liabilities 375,154 222,051 Equity 47,877 7,625 ----------- ----------- Total liabilities and equity $423,031 $229,676 =========== =========== Net interest income before provision for loan losses $19,157 $10,121 ========= ========= Net interest rate spread(5) 6.14% 6.41% Net interest margin(6) 6.61% 6.36% Ratio of interest earning assets to interest bearing liabilities 109% 99%
__________________________________ (1) Average balances are measured on a month-end basis. (2) Net of deferred loan origination fees, unamortized discounts, premiums and allowance for estimated loan losses; includes loans held for sale and non- performing loans. (3) Net of allowance for estimated losses; includes non-performing loans. (4) Net of unearned finance charges and allowance for estimated losses; includes non-performing loans. (5) Net interest rate spread represents the difference between the yield on interest earning assets and the cost of interest bearing liabilities. (6) Net interest margin represents net interest income divided by average interest earning assets. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 GENERAL Net income increased from $2.4 million for the three months ended September 30, 1997 to $4.7 million for the three months ended September 30, 1998. This increase was due primarily to the expansion of the Company's mortgage, insurance premium and auto finance businesses, all of which showed improved operating results during 1997 and 1998. Also contributing to the favorable operating results for the three months ended September 30, 1998 compared with the same period in 1997 was an increase of $8.9 million in gain on sale of loans from the Company's mortgage finance operations and $3.2 million in net interest income offset by an increase in non-interest expense of $7.7 million and an increase in provision for loan losses of $595,000. Net interest income also was favorably impacted during the third quarter of 1998 by using the $63.4 million of net proceeds from the Company's initial public offering of common stock to finance a portion of its mortgage operations. 12 As a result of the expansion of the Company's lending operations, mortgage loan originations increased from $161.1 million for the three months ended September 30, 1997 to $358.6 million for the three months ended September 30, 1998, while insurance premium finance originations increased from $31.9 million to $35.4 million, respectively, and auto contracts purchased increased from $12.4 million to $23.0 million, respectively. Sales of mortgage loans were $347.9 million for the three months ended September 30, 1998 and $140.4 million for the comparable period in 1997. INTEREST INCOME Interest income increased from $6.9 million for the three months ended September 30, 1997 to $12.0 million for the three months ended September 30, 1998 due primarily to a $199.7 million increase in average interest earning assets offset by a decline of 0.79% in the average yield on interest earning assets. The largest components of growth in average interest earning assets were mortgage loans, automobile installment contracts and investment securities, which increased $143.7 million, $31.0 million and $20.0 million, respectively. The increase in mortgage loan receivables was a result of an increase in loans held for sale, which increased from $70.2 million at September 30, 1997 to $167.1 million at September 30, 1998. Generally, these loans are originated for sale or securitization in the secondary mortgage market. The increase in such loans was primarily a result of growth in the Company's mortgage finance business and the opening of 10 retail lending branches and one wholesale loan center since September of 1997. The increase in auto contracts principally resulted from the opening of five new branch offices since September of 1997 and the purchasing of additional dealer contracts in existing and new markets. The increase in investment securities was a result of an increase in the Company's liquidity and short-term investment portfolio reflecting the overall growth in the Company's total assets. The decline in the average yield on interest earning assets was principally due to an increase in non-accrual mortgage loans from $3.6 million at September 30, 1997 to $19.5 million at September 30, 1998. The Company ceases to accrue interest on its mortgage loans when a borrower is delinquent two payments or more. As a result of an increase in mortgage loans 60-89 days or more delinquent and the repurchase of certain mortgage loans relating to first payment defaults on loans originated prior to June 1998, the Company placed $10.7 million of loans on non-accrual status during the quarter ended September 30, 1998. INTEREST EXPENSE Interest expense increased from $3.1 million for the three months ended September 30, 1997 to $5.0 million for the three months ended September 30, 1998 due to a $124.1 million increase in average interest bearing liabilities and a 0.28% increase in the weighted average interest rate on interest bearing liabilities. The largest component of growth in average interest bearing liabilities was deposits of the Bank, which increased from an average balance of $204.0 million during the quarter ended September 30, 1997 to $306.3 million during the quarter ended September 30, 1998. The average cost of deposits increased from 4.93% for the three months ended September 30, 1997 to 5.26% for the comparable period in 1998 generally as a result of an increase in the Bank's wholesale deposits. The increase in deposits resulted from the use of retail and wholesale certificates of deposit ("CDs") to finance the Company's lending growth, and the increase in the average yield on the Bank's deposits reflects the repricing of accounts to higher rates and overall growth in the deposit portfolio at interest rates higher than those in previous quarters. The second largest component of growth in average interest bearing liabilities was from borrowings under the Bank's warehouse line of credit, increasing to $38.0 million for the three months ended September 30, 1998. In October 1997, the Bank entered into a master repurchase agreement under which it may sell and repurchase, at a set price, mortgage loans pending the sale or securitization of these loans. The weighted average interest rate on such borrowings was 6.71% for the three months ended September 30, 1998. There were no warehouse line of credit advances outstanding during the quarter ended September 30, 1997. 13 PROVISION FOR LOAN LOSSES Provision for loan losses increased from $66,000 for the three months ended September 30, 1997 to $661,000 for the three months ended September 30, 1998. The increase in provision for losses reflects the Company's loan growth over the past 12 months as well as an increase in specific loss allowances related to non-performing mortgage loans. The total allowance for loan losses was $6.2 million at September 30, 1997 compared with $8.9 million at September 30, 1998, representing 4.73% and 4.07% of loans held for investment at September 30, 1998 and 1997, respectively. In addition to its provision for losses, the Company's allowance for loan losses is also increased by its allocation of acquisition discounts related to the purchase of automobile installment contracts. The Company allocates the estimated amount of its acquisition discounts attributable to credit risk to the allowance for loan losses. Annualized net charge-offs to average loans were 1.92% for the three months ended September 30, 1998 compared with 1.04% for the comparable period in 1997. A provision for loan losses is charged to operations based on the Company's regular evaluation of its loans held for investment and the adequacy of its allowance for loan losses. The Company reports its loans held for sale at the lower of cost or market value, accordingly, loan loss provisions are not established for this portfolio. While management believes it has adequately provided for losses and does not expect any material loss on its loans in excess of allowances already recorded, no assurance can be given that economic or real estate market conditions or other circumstances will not result in increased losses in the loan portfolio. NON-INTEREST INCOME Non-interest income increased $8.9 million, from $8.4 million for the three months ended September 30, 1997 to $17.3 million for the three months ended September 30, 1998. This increase resulted from cash gains on sales of mortgage loans and is due primarily to a substantial increase in the volume of mortgage loans sold by the Company. During the three months ended September 30, 1998, the Company sold $347.9 million in mortgage loans on a whole loan primarily non- recourse basis compared with $140.4 million in mortgage loans sold during the comparable period in 1997. Net gains on sales of loans, as a percentage of loans sold, were 4.91% for the three months ended September 30, 1998 compared with 5.83% for the three months ended September 30, 1997. The decline reflects continued competitive pressure in the securitization and whole loan sale markets resulting, in part, from higher industry-wide loan prepayment rates in the later part of 1997 and 1998 as compared to the third quarter of 1997. Other components of non-interest income include fees and charges for Bank services and miscellaneous other income. The total of all of these items increased $38,000, from $201,000 for the three months ended September 30, 1997 to $239,000 for the three months ended September 30, 1998. NON-INTEREST EXPENSE Non-interest expense increased $7.6 million, from $8.0 million for the three months ended September 30, 1997 to $15.6 million for the three months ended September 30, 1998. This increase primarily reflects an increase in salaries, loan commissions, employee benefits and other personnel costs of $4.8 million associated with the expansion of the Company's mortgage and automobile finance operations. In addition, occupancy expense increased $758,000, reflecting an increase in the number of mortgage and automobile lending offices. Marketing expense was $1.1 million for the three months ended September 30, 1998, compared with $434,000 for the three months ended September 30, 1997. This increase is attributable to the Company's retail mortgage lending operations which use extensive direct mail and telemarketing campaigns to target prospective borrowers. Also, as a result of growth in the Company's mortgage finance and automobile lending operations, other operating expense, including stationery and supplies, data processing, insurance, telephone and postage, increased $1.4 million during the three months ended September 30, 1998 compared with the same period in 1997. 14 During the last 12 months, the Company expanded significantly its mortgage and automobile finance operations, resulting in an increase from 260 employees in six offices and 54 employees in 11 offices, respectively, as of September 30, 1997, to 534 employees in 28 offices and 93 employees in 14 offices, respectively, as of September 30, 1998. INCOME TAXES Income taxes increased $1.5 million, from $1.8 million for the three months ended September 30, 1997 to $3.3 million for the three months ended September 30, 1998. This increase occurred as a result of a $3.8 million increase in income before income taxes between the two periods offset by a decrease in the effective tax rate from 42.0% for the three months ended September 30, 1997 to 41.6% for the three months ended September 30, 1998. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 GENERAL Net income increased from $3.6 million for the nine months ended September 30, 1997 to $10.3 million for the nine months ended September 30, 1998. This increase was due primarily to the expansion of the Company's mortgage, insurance premium and auto finance businesses in the second half of 1997 and during 1998. Also contributing to the favorable operating results for the nine months ended September 30, 1998 compared with the same period in 1997 was an increase of $29.0 million in gain on sale of loans from the Company's mortgage finance operations and $9.0 million in net interest income offset by an increase in non- interest expense of $25.1 million and an increase in provision for loan losses of $1.3 million. As a result of the expansion of the Company's lending operations, mortgage loan originations increased from $336.9 million for the nine months ended September 30, 1997 to $957.4 million for the nine months ended September 30, 1998, while insurance premium finance originations increased from $117.1 million to $123.2 million, respectively, and auto contracts purchased increased from $29.8 million to $60.7 million, respectively. Sales of mortgage loans were $886.4 million for the nine months ended September 30, 1998 and $273.1 million for the comparable period in 1997. INTEREST INCOME Interest income increased from $18.3 million for the nine months ended September 30, 1997 to $33.6 million for the nine months ended September 30, 1998 due primarily to a $174.5 million increase in average interest earning assets and a 0.08% increase in the yield on average earning assets. The largest components of growth in average earning assets were mortgage loans, auto contracts and investment securities, which increased $131.9 million, $26.3 million and $11.1 million, respectively. The increase in mortgage loan receivables was a result of an increase in loans held for sale. These loans are generally held for sale in the secondary mortgage market and the increase in such loans was primarily a result of growth in the Company's mortgage finance business and the opening of additional retail lending branches and wholesale loan centers. The increase in auto contracts principally resulted from the opening of new branch offices and the purchasing of additional dealer contracts in these new markets. The increase in investment securities resulted from an increase in the Company's liquidity and short-term investment portfolio reflecting the overall growth in the Company's total assets. The increase in the average yield on interest earning assets was attributable to an increase in the origination or purchase of higher yielding loans principally related to the expansion and growth of the mortgage, insurance premium and automobile finance businesses. 15 INTEREST EXPENSE Interest expense increased from $8.2 million for the nine months ended September 30, 1997 to $14.4 million for the nine months ended September 30, 1998 due to a $139.9 million increase in average interest bearing liabilities and a 0.35% increase in the weighted average interest rate on interest bearing liabilities. The largest component of growth in interest bearing liabilities was deposits of the Bank, which increased from an average balance of $183.1 million for the nine months ended September 30, 1997 to $283.8 million for the nine months ended September 30, 1998. The average cost of deposits increased from 4.89% for the nine months ended September 30, 1997 to 5.27% for the comparable period in 1998. The second largest component of growth in average interest bearing liabilities was from borrowings under the Bank's warehouse line of credit. During the nine months ended September 30, 1998, the average balance outstanding under this warehouse line of credit was $43.5 million with an average interest rate of 6.51%. There were no warehouse line of credit advances outstanding during the nine months ended September 30, 1997. The increase in both deposits and the warehouse line of credit were attributable to additional financing requirements as a result of the growth in the Company's lending operations. PROVISION FOR LOAN LOSSES Provision for loan losses increased from $445,000 for the nine months ended September 30, 1997 to $1.8 million for the nine months ended September 30, 1998. The increase in provision for loan losses reflects management's decision to increase general valuation allowances as a result of the increase in loans made by the Company and an increase in specific loss allowances related to non- performing loans. Annualized net charge-offs to average loans were 2.03% for the nine months ended September 30, 1998 compared with 0.81% for the comparable period in 1997. A provision for loan losses is charged to operations based on the Company's regular evaluation of its loan portfolio and the adequacy of its allowance for loan losses. While management believes it has adequately provided for losses and does not expect any material loss on its loans in excess of allowances already recorded, no assurance can be given that economic or real estate market conditions or other circumstances will not result in increased losses in the loan portfolio. NON-INTEREST INCOME Non-interest income increased $29.2 million, from $15.7 million for the nine months ended September 30, 1997 to $44.9 million for the nine months ended September 30, 1998. This increase resulted from cash gains on sales of mortgage loans and is due to a substantial increase in the volume of mortgage loans sold by the Company. During the nine months ended September 30, 1998, the Company sold $886.4 million in mortgage loans on a whole loan primarily non-recourse basis compared with $273.1 million in mortgage loans sold during the comparable period in 1997. Net gains on sales of loans, as a percentage of loans sold, were 4.99% for the nine months ended September 30, 1998 compared with 5.59% for the nine months ended September 30, 1997. The decline reflects continued competitive pressure in the securitization and whole loan sale markets resulting, in part, from higher industry-wide loan prepayment rates in the later part of 1997 and 1998. Other components of non-interest income include fees and charges for Bank services and miscellaneous other income. The total of all of these items increased $156,000, from $523,000 for the nine months ended September 30, 1997 to $679,000 for the nine months ended September 30, 1998. NON-INTEREST EXPENSE Non-interest expense increased $25.1 million, from $19.3 million for the nine months ended September 30, 1997 to $44.4 million for the nine months ended September 30, 1998. This increase reflects 16 an increase in salaries, loan commissions, employee benefits and other personnel costs of $16.5 million associated with the growth and expansion of the Company's mortgage and automobile finance operations. Also, as a result of this growth, occupancy expense increased from $1.8 million for the nine months ended September 30, 1997 to $3.9 million for the nine months ended September 30, 1998. Marketing expense was $2.8 million for the nine months ended September 30, 1998, compared with $932,000 for the comparable period in 1997. This increase is attributable to the Company's retail mortgage lending operations, which use extensive direct mail and telemarketing campaigns to target prospective borrowers. Other operating expense, including stationery and supplies, data processing, insurance, telephone and postage, increased $4.6 million during the nine months ended September 30, 1998 compared with the same period in 1997. INCOME TAXES Income taxes increased $5.0 million from $2.6 million for the nine months ended September 30, 1997 to $7.6 million for the nine months ended September 30, 1998. This increase occurred as a result of a $11.7 million increase in income before taxes between the two periods and an increase in the effective tax rate from 41.8% for the nine months ended September 30, 1997 to 42.3% for the nine months ended September 30, 1998. COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 Total assets increased $126.5 million, from $310.8 million at December 31, 1997 to $437.3 million at September 30, 1998. This increase occurred primarily as a result of an $85.8 million increase in loans, from $268.5 million at December 31, 1997 to $354.3 million as of September 30, 1998. The increase in loans was comprised of a $64.6 million increase in subprime mortgage loans, a $26.3 million increase (net of unearned finance charges) in auto contracts and a $11.5 million increase in insurance premium finance loans, offset by a $15.1 million decrease in loans purchased from the RTC as a result of scheduled principal amortization and prepayments. Cash and cash equivalents increased $41.9 million, from $19.0 million at December 31, 1997 to $60.9 million at September 30, 1998, primarily as a result of an increase in the Company's liquidity and short-term investments portfolio. Residual interests in securitizations were $8.2 million at December 31, 1997 which were entirely attributable to the Company's first securitization in December 1997. In March 1998, the Company sold its residual interests from the December securitization for $8.3 million in cash and recorded a gain on sale of approximately $100,000. Accordingly, as of September 30, 1998, the Company had no remaining residual interests in securitizations reflected on its balance sheet. Premises and equipment increased from $3.1 million at December 31, 1997 to $4.7 million at September 30, 1998 as a result of purchases of furniture and equipment for the Company's new branch offices and the continued growth in lending operations. Deposits increased $84.1 million, from $233.2 million at December 31, 1997 to $317.3 million at September 30, 1998, due primarily to an increase in CDs of $77.0 million, from $197.1 million at December 31, 1997 to $274.1 million at September 30, 1998. Included in deposits at September 30, 1998 and December 31, 1997 are $25.0 million in brokered CDs. The growth in deposits reflects the continued financing of the Company's mortgage, insurance premium finance and auto lending activities with retail and wholesale deposits through the Bank's five-branch network. Other interest bearing liabilities include the RTC notes payable which remained unchanged at $10.9 million between the period ends, FHLB advances which were $28.0 million as of December 31, 1997 at a weighted average interest rate of 7.07%, notes payable to shareholders which were $2.0 million at December 31, 1997 and a warehouse line of credit which was $6.2 million at December 31, 1997. At 17 September 30, 1998, there were no FHLB advances or warehouse line of credit advances outstanding. In addition, the notes payable to shareholders were paid off. Net deferred tax assets were $2.9 million at September 30, 1998 due principally to temporary differences in the recognition of gain on sale of loans for federal and state income tax reporting and financial statement reporting purposes. For income tax purposes, loans held for sale are marked-to-market as compared to financial statement reporting where loans are recorded at the lower of cost or market. Shareholders' equity increased from $13.0 million at December 31, 1997 to $86.7 million at September 30, 1998, solely as a result of the Company's net income of $10.3 million during the nine months ended September 30, 1998 and the net proceeds received of $63.4 million from the Company's initial public offering completed in the second quarter of 1998. MANAGEMENT OF INTEREST RATE RISK The principal objective of the Company's interest rate risk management program is to evaluate the interest rate risk inherent in the Company's business activities, determine the level of appropriate risk given the Company's operating environment, capital and liquidity requirements and performance objectives and manage the risk consistent with guidelines approved by the Board of Directors. Through such management, the Company seeks to reduce the exposure of its operations to changes in interest rates. The Board of Directors reviews on a quarterly basis the asset/liability position of the Company, including simulation of the effect on capital of various interest rate scenarios. The Company's profits depend, in part, on the difference, or "spread," between the effective rate of interest received on the loans it originates and the interest rates paid on deposits and other financing facilities which can be adversely affected by movements in interest rates. In addition, between the time the Company originates loans and investors' sales commitments are received, the Company may be exposed to interest rate risk to the extent that interest rates move upward or downward during the time the loans are held for sale. The Company mitigates these risks somewhat by purchasing or originating adjustable rate mortgages that reprice frequently in an increasing or declining interest rate environment. Also, the Company sells substantially all of its loans held for sale on a regular basis, thereby reducing significantly the amount of time these loans are held by the Company. The Bank's interest rate sensitivity is monitored by the Board of Directors and management through the use of a model which estimates the change in the Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off- balance sheet instruments, and "NPV Ratio" is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The Company reviews a market value model (the "OTS NPV model") prepared quarterly by the Office of Thrift Supervision (the "OTS"), based on the Bank's quarterly Thrift Financial Reports filed with the OTS. The OTS NPV model measures the Bank's interest rate risk by approximating the Bank's NPV under various scenarios which range from a 400 basis point increase to a 400 basis point decrease in market interest rates. The OTS has incorporated an interest rate risk component into its regulatory capital rule for thrifts. Under the rule, an institution whose sensitivity measure, as defined by the OTS, in the event of a 200 basis point increase or decrease in interest rates exceeds 20% would be required to deduct an interest rate risk component in calculating its total capital for purposes of the risk-based capital requirement. At June 30, 1998, the most recent date for which the relevant OTS NPV model is available, the Bank's sensitivity measure resulting from (i) a 200 basis point decrease in interest rates was 79 basis points and would result in a $4.3 million increase in the NPV of the Bank and (ii) a 200 basis point increase in interest rates was 75 basis points and would result in a $3.9 million decrease in the NPV of the Bank. At June 30, 1998, the Bank's sensitivity measure was below the threshold at which the Bank could be required to hold additional risk- based capital under OTS regulations. 18 Although the NPV measurement provides an indication of the Bank's interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on the Bank's net interest income and will differ from actual results. Management monitors the results of this modeling, which are presented to the Board of Directors on a quarterly basis. The following table shows the NPV and projected change in the NPV of the Bank at June 30, 1998 assuming an instantaneous and sustained change in market interest rates of 100, 200, 300 and 400 basis points ("bp"). This table is based on data prepared by the OTS. The Company makes no representation as to the accuracy of this data. INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
NPV as % of Portfolio Net Portfolio Value Value of Assets ------------------------------------------------- ------------------------------------ Change in Rates $ Amount $ Change % Change NPV Ratio % Change --------------- ------------ ------------ ------------ -------------- --------------- (Dollars in thousands) +400 bp $38,742 $(13,164) -25% 9.37% -269 bp +300 bp 43,961 (7,945) -15% 10.48% -158 bp +200 bp 48,016 (3,890) -7% 11.31% -75 bp +100 bp 50,581 (1,325) -3% 11.82% -24 bp 0 bp 51,906 -- -- 12.06% -- - -100 bp 53,732 1,826 +4% 12.39% +33 bp - -200 bp 56,202 4,296 +8% 12.85% +79 bp - -300 bp 59,453 7,547 +15% 13.46% +140 bp - -400 bp 63,451 11,545 +22% 14.20% +214 bp
LIQUIDITY AND CAPITAL RESOURCES GENERAL The Company's primary sources of funds have been deposits at the Bank, FHLB advances, financing under a secured warehouse line of credit, principal and interest payments on loans, cash proceeds from the sale or securitization of loans and, to a lesser extent, interest payments on short-term investments and proceeds from the maturation of securities. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. However, the Company has continued to maintain the required minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio is currently 4%, and the Company has always met or exceeded this requirement. Management, through its Asset and Liability Committee, which meets monthly or more frequently if necessary, monitors rates and terms of competing sources of funds to use the most cost-effective source of funds wherever possible. Sales and securitizations of loans have been one of the primary sources of funds for the Company. During the nine months ended September 30, 1998 and 1997, cash flows from sales of loans were $919.0 million, and $298.5 million, respectively. Another source of funds consists of deposits obtained through the Bank's five retail branches in California. The Bank offers checking accounts, various money market accounts, regular passbook accounts, fixed interest rate certificates with varying maturities and retirement accounts. Deposit account terms vary by interest rate, minimum balance requirements and the duration of the account. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank periodically based on 19 liquidity and financing requirements, rates paid by competitors, growth goals and federal regulations. At September 30, 1998, such retail deposits were $234.2 million or 73.8% of total deposits. The Bank uses wholesale and broker-originated deposits to supplement its retail deposits and, at September 30, 1998, wholesale deposits were $58.1 million or 18.3% of total deposits while broker-originated deposits were $25.0 million or 7.9% of total deposits. The Bank solicits wholesale deposits by posting its interest rates on a national on-line service which advertises the Bank's wholesale products to investors. Generally, most of the wholesale deposit account holders are institutional investors, commercial businesses or public sector entities. Broker deposits are originated through major dealers specializing in such products. The following table sets forth the balances and rates paid on each category of deposits for the dates indicated.
December 31, September 30, -------------------------------------------------------------- 1998 1997 1996 --------------------------- -------------------------- ----------------------------- Weighted Weighted Weighted Average Average Average Balance Rate Balance Rate Balance Rate ----------- ------------- ----------- ----------- ----------- ------------- (Dollars in thousands) Passbook accounts $ 32,745 3.96% $ 26,095 3.76% $ 17,054 2.84% Checking accounts 10,481 1.41% 9,959 1.33% 10,642 1.32% Certificates of deposit Under $100,000 214,625 5.52% 144,926 5.56% 123,914 5.47% $100,000 and over 59,491 5.75% 52,214 5.89% 7,451 5.89% ----------- ----------- ----------- Total $317,342 5.27% $233,194 5.25% $159,061 4.68% =========== =========== ===========
The following table sets forth the time remaining until maturity for all CDs at September 30, 1998, December 31, 1997 and 1996.
September 30, December 31, December 31, 1998 1997 1996 ------------------ ----------------- ------------------ (Dollars in thousands) Maturity within one year $246,005 $181,858 $103,369 Maturity within two years 27,998 14,984 26,819 Maturity within three years 113 298 1,177 ------------------ ----------------- ------------------ Total certificates of deposit $274,116 $197,140 $131,365 ================== ================= ==================
Although the Bank has a significant amount of deposits maturing in less than one year, the Company believes that the Bank's current pricing strategy will enable it to retain a significant portion of these accounts at maturity and that it will continue to have access to sufficient amounts of CDs which, together with other funding sources, will provide the necessary level of liquidity to finance its lending businesses. However, as a result of these shorter-term deposits, the rates on these accounts may be more sensitive to movements in market interest rates which may result in a higher cost of funds. At September 30, 1998, the Bank exceeded all of its regulatory capital requirements with (i) tangible capital of $33.6 million, or 7.73% of total adjusted assets, which is above the required level of $6.5 million, or 1.50%; (ii) core capital of $33.6 million, or 7.73% of total adjusted assets, which is above the required level of $13.0 million, or 3.00%; and (iii) risk-based capital of $37.3 million, or 12.50% of risk-weighted assets, which is above the required level of $23.9 million, or 8.00%. Under the Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), the Bank is deemed to be "well capitalized" at September 30, 1998. 20 The Company has other sources of liquidity, including FHLB advances, a warehouse line of credit and its liquidity and short-term investments portfolio. Through the Bank, the Company obtains advances from the FHLB, collateralized by its portfolio of mortgage loans purchased from the RTC and the Bank's FHLB stock. The FHLB functions as a central reserve bank providing credit for thrifts and certain other member financial institutions. Advances are made pursuant to several programs, each of which has its own interest rate and range of maturities. Limitations on the amount of advances are based generally on a fixed percentage of net worth or on the FHLB's assessment of an institution's credit-worthiness. As of September 30, 1998, the Bank's available borrowing capacity under this credit facility was $30.1 million. The Bank has $300 million in master repurchase agreements under which it may sell and repurchase at a set price mortgage loans pending the sale or securitization of such loans. These agreements may be terminated at any time at the option of either party. At September 30, 1998, there were no balances outstanding under these warehouse lines of credit. Other borrowings of the Company at September 30, 1998 consist of the RTC Notes Payable (as defined below) which mature in 1999. The following table sets forth certain information regarding the Company's short-term borrowed funds (consisting of FHLB advances and its warehouse line of credit) at or for the periods ended on the dates indicated.
December 31, September 30, ------------------------------------------ 1998 1997 1996 ---------------- ------------------ ------------------ (Dollars in thousands) FHLB advances Maximum month-end balance $34,500 $40,900 $4,000 Balance at end of period -- 28,000 4,000 Average balance for period 15,441 18,526 1,170 Weighted average interest rate on Balance at end of period --% 7.07% 5.70% Average balance for period 5.71% 5.95% 6.15% Warehouse line of credit Maximum month-end balance $95,000 $64,359 $ -- Balance at end of period -- 6,237 -- Average balance for period 43,498 8,914 -- Weighted average interest rate on Balance at end of period --% 6.70% --% Average balance for period 6.51% 6.10% --%
The Company had no material contractual obligations or commitments for capital expenditures at September 30, 1998. However, the Company is in the process of expanding its mortgage and auto finance operations, which will entail lease commitments and expenditures for leasehold improvements and furniture, fixtures and equipment. At September 30, 1998, the Company had outstanding commitments to originate loans of $41.1 million, compared to $9.6 million at December 31, 1997. The Company anticipates that it will have sufficient funds available to meet its current origination commitments. 21 RTC NOTES PAYABLE In connection with its acquisition of certain assets from the RTC, the Bank obtained loans (the "RTC Notes Payable") from the RTC in the aggregate amount of $10.9 million under the RTC's Minority Interim Capital Assistance Program provided for in Section 21A(u) of the Federal Home Loan Bank Act, as amended (the "FHLBA"). The FHLBA gives the RTC authority to provide interim capital assistance to minority-owned institutions, defined in the FHLBA as more than fifty percent (50%) owned or controlled by one or more minorities. The Bank, PAFI and the RTC entered into an Interim Capital Assistance Agreement on April 29, 1994 with respect to a loan of $6,930,000 and a second Interim Capital Assistance Agreement on September 9, 1994 with respect to a loan of $4,000,000 (together, the "RTC Agreements"). The RTC Agreements provide for repayment of the entire principal amount, plus any accrued, previously unpaid interest thereon, in a single lump sum installment on April 28, 1999 and September 8, 1999, respectively. The RTC Notes Payable may be prepaid at the option of the Bank and must be prepaid in the event that PAFI obtains all or any material portion of its permanent financing prior to maturity of the RTC Notes Payable. The RTC is entitled to declare the entire principal amount of the RTC Notes Payable, plus all interest accrued and unpaid thereon, immediately due and payable upon the occurrence of certain events of default. The rate at which interest accrues on the RTC Notes Payable is based on the RTC's "Cost of Funds," defined in the RTC Agreements at the end of the calendar quarter Monday auction yield price for 13 week United States Treasury Bills plus 12.5 basis points, and adjusts annually, in the case of the $6.9 million loan due April 1999, and quarterly, in the case of the $4 million loan due September 1999. Interest accrues on any amount of principal or interest not paid when due at the rate of the RTC's Cost of Funds plus 300 basis points, beginning on the date such unpaid amount became due. In connection with the RTC Agreements, PAFI and the RTC have entered into Stock Pledge Agreements pursuant to which PAFI has pledged to the RTC all of the issued and outstanding shares of the capital stock of the Bank as security for the repayment of the RTC Notes Payable. LENDING ACTIVITIES To date, the Company has sold most of its loan originations to mortgage companies and other investors through whole loan packages on a primarily non- recourse, servicing released basis. As a result, upon sale, risks and rewards of ownership transfer to the buyer. In December 1997, the Company completed its first securitization of mortgage loans and in March 1998 sold its residual interests in this securitization to a third-party. Summary of Loan Portfolio. At September 30, 1998, the Company's loan portfolio constituted $354.3 million, or 81.0% of the Company's total assets, of which $187.2 million, or 52.8%, were held for investment and $167.1 million, or 47.2%, were held for sale. Loans held for investment are reported at cost, net of unamortized discounts or premiums and allowance for losses. Loans held for sale are reported at the lower of cost or market value. 22 The following table sets forth the composition of the Company's loan portfolio at the dates indicated.
September 30, December 31, December 31, 1998 1997 1996 ----------------- ----------------- ---------------- (Dollars in thousands) MORTGAGE LOANS Mortgage loans (purchased primarily from RTC) $ 66,893 $ 81,995 $102,733 ----------------- ----------------- ---------------- Subprime mortgage loans Held for sale 167,070 120,002 20,766 Held for investment 22,949 5,375 1,294 ----------------- ----------------- ---------------- Total subprime mortgage loans 190,019 125,377 22,060 ----------------- ----------------- ---------------- Total mortgage loans 256,912 207,372 124,793 ----------------- ----------------- ---------------- CONSUMER LOANS Automobile installment contracts 72,483 40,877 10,830 Insurance premium financing 51,487 39,990 32,058 Other consumer loans 361 267 230 ----------------- ----------------- ---------------- Total consumer loans 124,331 81,134 43,118 ----------------- ----------------- ---------------- Total loans 381,243 288,506 167,911 Unearned discounts and premiums (2,237) (2,901) (3,697) Unearned finance charges (15,881) (10,581) (3,271) Allowance for loan losses (8,858) (6,487) (5,356) ----------------- ----------------- ---------------- Total loans, net $354,267 $268,537 $155,587 ================= ================= ================
Loan Maturities. The following table sets forth the dollar amount of loans maturing in the Company's loan portfolio at September 30, 1998 based on scheduled contractual amortization. Loan balances are reflected before unearned discounts and premiums, unearned finance charges and allowance for losses.
September 30, 1998 ---------------------------------------------------------------------------------------------------------- More Than 1 More Than 3 More Than 5 More Than 10 One Year or Year to Years to Years to Years to 20 More Than 20 Total Less 3 Years 5 Years 10 Years Years Years Loans ------------ -------------- -------------- -------------- -------------- -------------- ------------ (Dollars in thousands) Mortgage loans held for investment $ 52 $ 1,046 $ 3,339 $11,294 $36,488 $ 37,623 $ 89,842 Mortgage loans held for sale -- -- -- -- 9,682 157,388 167,070 Consumer loans 53,146 34,934 35,162 1,089 -- -- 124,331 ------------ -------------- -------------- -------------- -------------- -------------- ------------ Total $53,198 $35,980 $38,501 $12,383 $46,170 $195,011 $381,243 ============ ============== ============== ============== ============== ============== ============
CLASSIFIED ASSETS AND ALLOWANCE FOR LOAN LOSSES The Company maintains an asset review and classification process for purposes of assessing loan portfolio quality and the adequacy of its loan loss allowances. The Company's Asset Review Committee reviews for classification all problem and potential problem assets and reports the results of its review to the Board of Directors quarterly. The Company has incorporated the OTS internal asset classifications as a part of its credit monitoring systems and in order of increasing weakness, these designations are "substandard," "doubtful" and "loss." Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, condition and values, questionable and there is a high possibility of loss. Loss assets are considered uncollectible and of such little value that continuance as an asset is not warranted. Assets which do have weaknesses but do not currently have sufficient risk to warrant classification in one of the categories described above are designated as "special mention." 23 At September 30, 1998, the Company had $1.5 million in assets classified as special mention, $21.6 million of assets classified as substandard, $57,000 in assets classified as doubtful and no assets classified as loss. The following table sets forth the remaining balances of all loans (before specific reserves for losses) that were more than 30 days delinquent at September 30, 1998, December 31, 1997 and 1996.
Loan - ---- September 30, % of Total December 31, % of Total December 31, % of Total Delinquencies 1998 Loans 1997 Loans 1996 Loans - ------------- ------------- ----------- ------------ ------------ ------------ ----------- (Dollars in thousands) 30 to 59 days $ 8,410 2.32% $ 356 0.1% $1,941 1.2% 60 to 89 days 3,959 1.09% 994 0.4% 109 0.1% 90+ days 15,726 4.33% 7,101 2.6% 6,430 3.9% ------------- ----------- ------------ ------------ ------------ ----------- Total $28,095 7.74% $8,451 3.1% $8,480 5.2% ============= =========== ============ ============ ============ ===========
Nonaccrual and Past Due Loans. The Company's general policy is to discontinue accrual of interest on a mortgage loan when it is two payments or more delinquent, accordingly, loans are placed on non-accrual status generally when they are 60-89 days delinquent. A non-mortgage loan is placed on nonaccrual status when it is delinquent for 120 days or more. When a loan is reclassified from accrual to nonaccrual status, all previously accrued interest is reversed. Interest income on nonaccrual loans is subsequently recognized only to the extent that cash payments are received or the borrower's ability to make periodic interest and principal payments is in accordance with the loan terms, at which time the loan is returned to accrual status. Accounts which are deemed fully or partially uncollectible by management are generally fully reserved or charged off for the amount that exceeds the estimated fair value (net of selling costs) of the underlying collateral. The Company does not generally modify, extend or rewrite loans and at September 30, 1998 had no troubled debt restructured loans. The following table sets forth the aggregate amount of nonaccrual loans (net of unearned discounts and premiums and unearned finance charges) at September 30, 1998, December 31, 1997 and 1996.
December 31, September 30, ------------------------------------- 1998 1997 1996 --------------- ----------------- --------------- (Dollars in thousands) Nonaccrual loans Single-family residential $18,901 $5,766 $5,504 Multi-family residential and commercial 604 605 605 Consumer and other loans 1,446 1,426 928 --------------- ----------------- --------------- Total $20,951 $7,797 $7,037 =============== ================= =============== Nonaccrual loans as a percentage of Total loans held for investment 11.19% 5.25% 5.22% Total assets 4.80% 2.51% 3.73% Allowance for loan losses as a percentage of Total loans held for investment 4.73% 4.37% 3.97% Nonaccrual loans 42.28% 83.20% 76.11%
Real Estate Owned. Real estate acquired through foreclosure or by deed in lieu of foreclosure ("REO") is recorded at the lower of cost or fair value at the time of foreclosure. Subsequently, an allowance for estimated losses is established when the recorded value exceeds fair value less estimated selling costs. Holding and maintenance costs related to real estate owned are recorded as expenses in the period incurred. At September 30, 1998, December 31, 1997 and 1996, real estate owned was $1.2 million, $562,000 and $988,000, respectively, and consisted entirely of one to four family residential properties. 24 Allowance for Loan Losses. The following is a summary of the changes in the consolidated allowance for loan losses of the Company for the periods indicated.
At or For the At or For the Nine Year Ended Months Ended December 31, September 30, ----------------------------------------- 1998 1997 1996 --------------------- ---------------- ----------------- (Dollars in thousands) ALLOWANCE FOR LOAN LOSSES Balance at beginning of period $ 6,487 $ 5,356 $5,250 Provision for loan losses 1,784 507 194 Charge-offs Mortgage loans held for investment (36) (373) (285) Mortgage loans held for sale (959) -- -- Consumer loans (2,769) (2,101) (433) --------------------- ---------------- ----------------- (3,764) (2,474) (718) Recoveries Mortgage loans held for investment 9 77 -- Mortgage loans held for sale 40 -- -- Consumer loans 1,060 1,068 274 --------------------- ---------------- ----------------- 1,109 1,145 274 --------------------- ---------------- ----------------- Net charge-offs (2,655) (1,329) (444) Acquisition discounts allocated to loss allowance 3,242 1,953 356 --------------------- ---------------- ----------------- Balance at end of period $ 8,858 $ 6,487 $5,356 ===================== ================ ================= Annualized net charge-offs to average loans 2.03% 0.60% 0.30% Ending allowance to period end loans, net 4.73% 4.37% 3.97%
The Company's policy is to maintain an allowance for loan losses to absorb future losses which may be realized on its loan portfolio. These allowances include specific reserves for identifiable impairments of individual loans and general valuation allowances for estimates of probable losses not specifically identified. In addition, the Company's allowance for loan losses is also increased by its allocation of acquisition discounts related to the purchase of automobile installment contracts. The determination of the adequacy of the allowance for loan losses is based on a variety of factors, including an assessment of the credit risk inherent in the portfolio, prior loss experience, the levels and trends of non-performing loans, the concentration of credit, current and prospective economic conditions and other factors. The Company's management uses its best judgment in providing for possible loan losses and establishing allowances for loan losses. However, the allowance is an estimate which is inherently uncertain and depends on the outcome of future events. In addition, regulatory agencies, as an integral part of their examinations process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to increase the allowance based upon their judgment of the information available to them at the time of their examination. The Bank's current year examination by its regulatory agencies was recently completed and no adjustments to the Bank's allowance for loan losses were required. CASH EQUIVALENTS AND SECURITIES PORTFOLIO The Company's cash equivalents and securities portfolios are used primarily for liquidity purposes and secondarily for investment income. Cash equivalents and securities, which generally have maturities of less than 90 days, satisfy regulatory requirements for liquidity. 25 The following is a summary of the Company's cash equivalents and securities portfolios as of the dates indicated.
December 31, September 30, ------------------------------------------- 1998 1997 1996 ------------------ ------------------ ------------------ (Dollars in thousands) Balance at end of period Overnight deposits $15,500 $4,000 $21,000 Commercial paper -- -- -- U.S. agency securities -- 1,002 -- ------------------ ------------------ ------------------ Total $15,500 $5,002 $21,000 ================== ================== ================== Weighted average yield at end of period Overnight deposits 5.38% 3.50% 5.02% Commercial paper -- -- U.S. agency securities -- 6.54% -- Weighted average maturity at end of period -- Overnight deposits 1 day 1 day 1 day Commercial paper -- -- -- U.S. agency securities -- 24 months --
FACTORS THAT MAY AFFECT FUTURE RESULTS LIMITED OPERATING HISTORY The Company purchased certain assets and assumed certain liabilities of Pan American Federal Savings Bank from the RTC in 1994. In 1995, the Company commenced its insurance premium finance business through a joint venture with BPN, and in 1996 the Company commenced its subprime mortgage and automobile finance businesses. Accordingly, the Company has only a limited operating history upon which an evaluation of the Company and its prospects can be based. CREDIT-IMPAIRED BORROWERS Loans made to borrowers who cannot obtain financing from traditional lenders generally entail a higher risk of delinquency and default and higher losses than loans made to borrowers with better credit. Substantially all of the Company's mortgage and auto loans are made to individuals with impaired or limited credit histories, limited documentation of income or higher debt-to- income ratios than are permitted by traditional lenders. If the Company experiences higher losses than anticipated, the Company's financial condition, results of operations and business prospects would be materially and adversely affected. NEED FOR ADDITIONAL FINANCING The Company's ability to maintain or expand its current level of lending activity will depend on the availability and terms of its sources of financing. The Company has funded its operations to date principally through deposits, FHLB advances, a mortgage warehouse line of credit, loan securitizations, and whole loan sales at the Bank. The Bank competes for deposits primarily on the basis of interest rates and, accordingly, the Bank could experience difficulty in attracting deposits if it does not continue to offer rates that are competitive with other financial institutions. Federal regulations restrict the Bank's ability to lend to affiliated companies and limit the amount of non-mortgage consumer loans that may be held by the Bank. Accordingly, the growth of the Company's mortgage, insurance premium and automobile finance businesses will depend to a significant extent on the availability of additional sources of financing. There can be no assurance that the Company will be able to develop additional financing sources on acceptable terms or at all. To the extent the Bank is unable to maintain its deposits and the Company is unable to develop additional sources of financing, the Company will have to restrict its lending activities which would materially and adversely affect the Company's financial condition, results of operations and business prospects. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources." 26 CONCENTRATION OF BUSINESS IN CALIFORNIA The Company's lending activities are concentrated primarily in California and are likely to remain so for the foreseeable future. The occurrence of adverse economic conditions or natural disasters in California could have a material adverse effect on the Company's financial condition, results of operations and business prospects. RELIANCE ON SYSTEMS AND CONTROLS The Company depends heavily upon its systems and controls, some of which have been designed specifically for a particular business, to support the evaluation, acquisition, monitoring, collections and administration of that business. There can be no assurance that these systems and controls, including those specially designed and built for the Company, are adequate or will continue to be adequate to support the Company's growth. A failure of the Company's automated systems, including a failure of data integrity or accuracy, could have a material adverse effect upon the Company's financial condition, results of operations and business prospects. RELIANCE ON KEY EMPLOYEES AND OTHERS The Company is dependent upon the continued services of its key employees as well as the key employees of BPN. The loss of the services of any key employee, or the failure of the Company to attract and retain other qualified personnel, could have a material adverse effect on the Company's financial condition, results of operations and business prospects. COMPETITION Each of the Company's businesses is highly competitive. Competition in the Company's markets can take many forms, including convenience in obtaining a loan, customer service, marketing and distribution channels, amount and terms of the loan, loan origination fees and interest rates. Many of the Company's competitors are substantially larger and have considerably greater financial, technical and marketing resources than the Company. The Company's competitors in subprime mortgage finance include other consumer finance companies. The Company competes in the insurance premium finance business with other specialty finance companies, independent insurance agents who offer premium finance services, captive premium finance affiliates of insurance companies and direct bill plans established by insurance companies. The Company competes in the subprime automobile finance industry with commercial banks, the captive finance affiliates of automobile manufacturers, savings associations and companies specializing in subprime automobile finance, many of which have established relationships with automobile dealerships and may offer dealerships or their customers other forms of financing, including dealer floor plan financing and lending, which are not offered by the Company. In attracting deposits, the Bank competes primarily with other savings institutions, commercial banks, brokerage firms, mutual funds, credit unions and other types of investment companies. CHANGES IN INTEREST RATES The Company's results of operations depend to a large extent upon its net interest income, which is the difference between interest income on interest- earning assets, such as loans and investments, and interest expense on interest- bearing liabilities, such as deposits and other borrowings. When interest- bearing liabilities mature or reprice more quickly than interest-bearing assets in a given period, a significant increase in market rates of interest could have a material adverse effect on the Company's net income. Further, a significant increase in market rates of interest could adversely affect demand for the Company's financial products and services. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions, which are beyond the Company's control. The Company's liabilities generally have shorter terms and are more interest rate 27 sensitive than its assets. Accordingly, changes in interest rates could have a material adverse effect on the profitability of the Company's lending activities. MANAGEMENT OF GROWTH The Company has experienced rapid growth in each of its businesses and intends to pursue growth for the foreseeable future, particularly in its mortgage and automobile finance businesses. In addition, the Company intends to broaden its product offerings to include additional types of consumer or, in the case of IPF, commercial loans. Further, the Company may enter other specialty finance businesses. This growth strategy will require additional capital, systems development and human resources. The failure of the Company to implement its planned growth strategy would have a material adverse effect on the Company's financial condition, results of operations and business prospects. DEPENDENCE ON LOAN SALE AND SECURITIZATION MARKETS The Company generates substantial revenues from whole loan sales or securitizations. There can be no assurance that whole loan purchasers will continue to purchase the Company's loans or that they will continue to purchase loans at present prices, and failure to do so could have a material adverse effect on the Company's financial condition, results of operations and business prospects. Further, adverse conditions in the asset-backed securitization market could adversely affect the Company's ability to sell or securitize loans at present prices. SECURITIZATIONS The Company completed its first securitization of mortgage loans in December 1997 and expects to sell or securitize mortgage loans on a periodic basis in the future. The Company will, in the future, consider the securitization of other financial assets. In March 1998, the Company sold its residual interests in this securitization for cash in the amount of $8.3 million which exceeded the carrying value of approximately $8.2 million at the date of sale. The Company believes that the gain on sale from such securitizations could represent a significant portion of the Company's future revenues and net income. The Company's ability to complete securitizations will depend on a number of factors, including conditions in the securities markets generally, conditions in the asset-backed securities market specifically, the performance of the Company's portfolio of securitized loans and the Company's ability to obtain credit enhancement for its securitized loans. If securitizations represented a significant portion of the Company's revenues and net income and the Company were unable to securitize profitably a sufficient number of loans in a particular quarter, then the Company's revenues for the quarter could decline, which could result in lower earnings or a loss reported for the quarter. In addition, delays in closing a securitization could require the Company to seek additional alternative funding under current and future credit facilities in order to finance additional loan originations and purchases and could increase the Company's interest rate risk by increasing the period during which newly originated loans are held prior to sale and could increase the Company's interest expense. The Company may rely on credit enhancements to guarantee or otherwise support senior certificates issued in securitizations. If the Company is unable to obtain credit enhancement in connection with the senior certificates, the Company might be unable to securitize its loans, which could have a material adverse effect on the Company's results of operations, financial condition and business prospects. Although alternative structures to securitizations may be available, there can be no assurance that the Company will be able to use these structures or that these structures will be economically viable for the Company. The Company's ability to obtain credit enhancement for its securitizations also may be adversely affected by poor performance of the Company's securitizations or the securitizations of others. The inability of the Company to complete securitizations for any reason could have a material adverse effect on the Company's results of operations, financial condition and business prospects. 28 CHANGE IN GENERAL ECONOMIC CONDITIONS Each of the Company's businesses is affected directly by changes in general economic conditions, including changes in employment rates, prevailing interest rates and real wages. During periods of economic slowdown or recession, the Company may experience a decrease in demand for its financial products and services, an increase in its servicing costs, a decline in collateral values and an increase in delinquencies and defaults. A decline in collateral values and an increase in delinquencies and defaults increase the possibility and severity of losses. Although the Company believes that its underwriting criteria and collection methods enable it to manage the higher risks inherent in loans made to such borrowers, no assurance can be given that such criteria or methods will afford adequate protection against such risks. Any sustained period of increased delinquencies, defaults or losses would materially and adversely affect the Company's financial condition, results of operations and business prospects. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and notes thereto presented herein have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ---------------------------------------------------------- See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management of Interest Rate Risk; and Factors That May Affect Future Results Dependence on Loan Sale and Securitization Markets" 29 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. ----------------- Not applicable ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. ----------------------------------------- Use of proceeds -- As discussed in Note 5 to Unaudited Notes to Consolidated Financial Statements under "Item 1. Financial Information" of this Quarterly Report, the Company completed an initial public offering of common stock. in connection therewith: 1. The effective date of the Company's Registration Statement on Form S-1, as amended (File No. 333-39941) ("Registration Statement"), was April 23, 1998. 2. The offering commenced on April 23, 1998 and was terminated on May 28, 1998 with the sale of all of the registered securities at a price to the public of $11.00 per share. 3. NationsBanc Montgomery Securities LLC and Piper Jaffray Inc. acted as managing underwriters for the Company. 4. The class of securities registered pursuant to the Registration Statement was common stock, no par value per share. The aggregate amount of such securities registered and sold was 6,325,000 shares for an aggregate dollar amount of $69.6 million. There were no selling shareholders. 5. Expenses incurred by the Company in connection with the sale of the shares of common stock, none of which were paid directly or indirectly to directors or officers of the Company or their associates, included the following (dollars in thousands): Underwriting discounts and commissions $4,870 Finders' fees -- Expenses paid to or for underwriters -- Other expenses 1,394 ------ $6,264 ======
6. The net offering proceeds to the Company after deduction of the above expenses were approximately $63.3 million and were used for general corporate purposes, including financing the growth of the Company's mortgage and automobile finance operations, and to repay $2.0 million in indebtedness to certain shareholders. Such use of proceeds did not represent a material change in the use of proceeds described in the Company's Registration Statement. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. ------------------------------- Not applicable 30 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. --------------------------------------------------- Not applicable ITEM 5. OTHER INFORMATION. ----------------- Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. -------------------------------- (a) Exhibits (b) 10.87 Assignment, Assumption and Recognition Agreement dated August 14, 1998, between Countrywide Home Loans, Inc., Associates Home Equity Services, Inc. and Pan American Bank, FSB. 10.88 Assignment, Assumption and Recognition Agreement dated August 14, 1998, between Countrywide Home Loans, Inc., Fidelity Federal Bank, FSB and Pan American Bank, FSB. 10.89 Assignment, Assumption and Recognition Agreement dated September 15, 1998 between Countrywide Home Loans, Inc., Southern Mortgage Acquisitions, Inc. and Pan American Bank, FSB. 10.90 Assignment, Assumption and Recognition Agreement dated September 30, 1998, between Countrywide Home Loans, Inc., Fidelity Federal Bank, FSB and Pan American Bank, FSB. 10.91 Employment Agreement dated July 6, 1998, between United PanAm Mortgage Corporation and Edward Pollard. 27.1 Financial Data Schedule (c) Reports on Form 8-K None 31 SIGNATURES PURSUANT TO THE REQUIREMENTS 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. UNITED PANAM FINANCIAL CORP. DATE: November 6, 1998 By: /s/ Lawrence J. Grill ------------------------------------- Lawrence J. Grill President and Chief Executive Officer (Principal Executive Officer) November 6, 1998 By: /s/ Carol M. Bucci ------------------------------------- Carol M. Bucci Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) EX-10.87 2 ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT EXHIBIT 10.87 ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT ------------------------------------------------ This Assignment, Assumption and Recognition Agreement (the "Agreement") is made and entered into on August 14, 1998, by Countrywide Home Loans, Inc., a New York corporation, having an address at 4500 Park Granada Boulevard, Calabasas, California 91302 (the "Seller"), Associates Home Equity Services, Inc., having an address at 250 Carpenter Freeway, Building 6 Decker, Irving, Texas 75062 (the "Purchaser") and Pan American Bank, FSB, having an address at 625 The City Drive, Orange, California 92868 (the "Company"). In consideration of the mutual promises and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Assignment and Assumption. Except as expressly provided for ------------------------- herein, the Seller hereby grants, transfers and assigns to the Purchaser (a) all of its right, title and interest as "Purchaser" in, to and under that certain Mortgage Loan Purchase and Interim Servicing Agreement dated as of August 14, 1998, and duly executed by the Company and the Seller (attached hereto as Exhibit A, the "Purchase Agreement"), with respect to the Mortgage Loans (as - --------- defined herein), (b) all of its right, title and interest in and to each of the mortgage loans identified in Exhibit B hereto (the "Mortgage Loans"), and (c) --------- all servicing rights relating to the Mortgage Loans. Except for the provisions pertaining to the payment of the purchase price, the Purchaser hereby assumes all of the Seller's obligations as "Purchaser" under the Purchase Agreement with respect to the Mortgage Loans from and after the date hereof, and the Seller shall be relieved and released by the Company of all of its obligations under the Purchase Agreement from and after the date hereof, with respect to the Mortgage Loans. Except as is otherwise expressly provided herein, the Seller makes no representations, warranties or covenants to the Purchaser and the Purchaser acknowledges that the Seller has no obligations to the Purchaser under the terms of the Purchase Agreement or otherwise relating to the transaction contemplated herein (including but not limited to any obligation to repurchase any of the Mortgage Loans or to indemnify the Purchaser). 2. Consideration. In consideration for the transfers and ------------- assignments set forth in paragraph 1 of this Agreement, the Purchaser agrees to pay to the Seller the amounts referenced in that certain Funding Schedule dated as of August 14, 1998 (the "Funding Schedule") and duly executed by the Seller and the Purchaser (the "Purchase Price"). The purchaser agrees to wire the agreed upon Purchase Price to the Seller to the account designated below: Bank of New York ABA - 021000018 Countrywide Home Loans ACCT - 8900038632 REF - Stuart Levitt 3. Recognition of the Purchaser by the Company. From and after the ------------------------------------------- date hereof, the Company shall recognize the Purchaser as the owner of the Mortgage Loans and the "Purchaser" under the Purchase Agreement with respect to such Mortgage Loans. 4. Servicing of the Mortgage Loans. From and after the date hereof, ------------------------------- the Company shall interim service the Mortgage Loans for the Purchaser in accordance with the terms and conditions of the Purchase Agreement, as if the Purchaser and Company had entered into the Purchase Agreement. The address of the Purchaser set forth in Section 6.1 of the Purchase Agreement shall be changed to read as follows: Associates Home Equity Services, Inc. 250 Carpenter Freeway Building 6 Decker Irving, Texas 75062 Attn: Ms. Marilyn Mocilnikar 5. Status of Purchase Agreement. The Company and the Seller ---------------------------- represent and warrant that with respect to each of the Mortgage Loans (a) the Purchase Agreement is in full force and effect as of the date hereof, (b) the Purchase Agreement has not been amended or modified in any respect, and (c) there has been no waiver or any agreement to waive any provision, nor has any notice of termination been given, under the Purchase Agreement. 6. No Claims. The Company represents and warrants that it has no --------- offsets, counterclaims or other defenses available to it with respect to the Purchase Agreement. 7. Covenants, Representations and Warranties of the Seller. The ------------------------------------------------------- Seller represents and warrants to, and covenants with, the Purchaser that: a. The Seller is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has all requisite corporate power and authority to acquire, own and sell the Mortgage Loans; b. The Seller has full corporate power and authority to execute, deliver and perform under this Agreement, and to consummate the transactions set forth herein. The execution, delivery and performance of the Seller of this Agreement, and the consummation by it of the transactions contemplated hereby, have been duly authorized by all necessary corporate action of the Seller. This Agreement has been fully executed and delivered by the Seller and constitutes the valid and legally binding obligation of the Seller enforceable against the Seller in accordance with its respective terms; c. No material consent, approval, order or authorization of, or declaration, filing or registration with, any governmental entity is required to be obtained or made by the Seller in connection with the execution, delivery or performance by the Seller of this Agreement, or the consummation by it of the transaction contemplated hereby; d. There is no action, suit, proceeding, investigation or litigation pending or, to the Seller's knowledge, threatened, which either in any instance or in the aggregate, if determined adversely to the Seller, would adversely affect the sale of the Mortgage Loans to the Purchaser, the execution, delivery or enforceability of this Agreement, or the Seller's ability to perform its obligations under this Agreement; and e. Immediately prior to payment of the purchase price for the Mortgage Loans, the Seller is the lawful owner of the Mortgage Loans with the full right to transfer the Mortgage Loans free from any and all claims and encumbrances whatsoever. 2 8. Covenants, Representations and Warranties of Purchaser. The ------------------------------------------------------ Purchaser represents and warrants to, and covenants with, the Seller and the Company that except for the provisions pertaining to the payment of the purchase price thereunder, the Purchaser agrees to be bound as "Purchaser" by all of the terms, covenants and conditions of the Purchase Agreement, and from and after the date hereof, the Purchaser assumes for the benefit of the Seller and the Company all of the Seller's obligations as "Purchaser" thereunder. 9. Governing Law. This Agreement shall be construed in accordance ------------- with the laws of the State of California and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with the laws of the State of California, except to the extent preempted by federal law. 10. Confidentiality. The Seller and the Purchaser hereby acknowledge --------------- and agree that this Agreement shall be kept confidential and its contents will not be divulged to any party without the other party's consent except to the extent that it is appropriate for the Seller or the Purchaser to do so in working with legal counsel, auditors, taxing authorities or other governmental agencies. 11. Conflict with Purchase Agreement. To the extent there is any -------------------------------- conflict between the terms of the Purchase Agreement and this Agreement, the latter shall be controlling, notwithstanding anything to the contrary contained in the Purchase Agreement. 12. Capitalized Terms. All capitalized terms used herein and not ----------------- otherwise defined herein shall have the meanings assigned to such terms in the Purchase Agreement. 13. Counterparts. This Agreement may be executed in any number of ------------ counterparts. Each counterpart shall be deemed to be an original and all such counterparts shall constitute one and the same instrument. 14. Additional Mortgage Loans. The parties acknowledge that the ------------------------- Mortgage Loans being transferred and assigned by the Seller to the Purchaser pursuant to this Agreement are not all of the mortgage loans which were purchased by the Seller from the Company under the Purchase Agreement. The remaining mortgage loans are identified in Exhibit C hereto (the "Additional --------- Mortgage Loans"). The Seller and the Purchaser shall consummate the purchase and sale of the Additional Mortgage Loans on or before August 19, 1998; provided, however, the Mortgage Loans in Exhibit C are not thirty (30) or more --------- days contractually delinquent and such sale and purchase will be pursuant to all of the terms and conditions set forth in the Purchase Agreement and this Agreement provided, further, however, that the purchase price relating to such additional Mortgage Loans shall be as set forth in a separate funding agreement to be executed by the parties on the date hereof. [Signature page follows] 3 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. COUNTRYWIDE HOME LOANS, INC., the Seller /s/ Michael W. Schloessmann By _________________________________ Michael W. Schloessmann Vice President ASSOCIATES HOME EQUITY SERVICES, INC., the Purchaser /s/ [Signature Illegible] By ________________________________ Name: Title: PAN AMERICAN BANK, FSB the Company /s/ Blair F. Kenny By _________________________________ Name: Blair F. Kenny Title: Senior Vice President 4 EXHIBIT A MORTGAGE LOAN PURCHASE AND INTERIM SERVICING AGREEMENT (attached) 5 MORTGAGE LOAN PURCHASE AND INTERIM SERVICING AGREEMENT ------------------------------------------------------ This Mortgage Loan Purchase and Interim Servicing Agreement is dated and effective as of August 14, 1998 (the "Agreement"), between Pan American Bank, FSB, having an address at 625 The City Drive, Orange, California 92868 (the "Seller"), and Countrywide Home Loans, Inc., having an address at 4500 Park Granada, Calabasas, California 91302 (the "Purchaser"). R E C I T A L S - - - - - - - - The Seller desires to sell and transfer to the Purchaser, and the Purchaser desires to purchase from the Seller, those certain mortgage loans identified on Exhibit A hereto, including all servicing rights relating thereto --------- (the "Mortgage Loans") upon such terms as are set forth below. In consideration of the promises and the mutual agreements and undertakings set forth herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I Definitions ----------- Whenever used herein, the following words and phrases, unless the context otherwise requires, shall have the following meanings: ACCRUED INTEREST: Accrued interest owing to the Seller on the Stated ---------------- Principal Balance of each Mortgage Loan at a rate equal to the Mortgage Interest Rate of each such Mortgage Loan, from the date through which interest has last been paid (as of Cut-off Date) through the day prior to the Closing Date, inclusive; provided, however, with respect to those Mortgage Loans for which interest has been paid through a date beyond the Cut-off Date, such accrued interest owing to Seller shall be reduced by the amount of interest accruing on the Stated Principal Balance of each such Mortgage Loan at a rate equal to the Mortgage Interest Rate of such Mortgage Loan, from the Closing Date to the day prior to the interest paid through date for such Mortgage Loan, inclusive. AGENCIES: Both FNMA or FHLMC. -------- AGREEMENT: This Mortgage Loan Purchase and Interim Servicing --------- Agreement, including all exhibits and supplements hereto, and all amendments hereof. APPRAISED VALUE: With respect to any Mortgage Loan, the value of the --------------- related Mortgaged Property based upon the lesser of (i) the appraisal made for the originator at the time of origination of the Mortgage Loan or (ii) the purchase price of the Mortgaged Property at the time of origination of the Mortgage Loan, provided, however, that in the case of a refinanced Mortgage Loan, such value is based solely upon the appraisal made at the time of origination of such refinanced Mortgage Loan and in the case of a Mortgage Loan originated under the streamlined documentation program, such value shall be based on an appraisal obtained at the time the original loan was originated. ASSIGNMENT OF MORTGAGE: An assignment of the Mortgage, notice of ---------------------- transfer or equivalent instrument in recordable form, sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to reflect the sale of the Mortgage to the Purchaser. 1 BUSINESS DAY: Any day other than (i) a Saturday or Sunday, or (ii) a ------------ day on which banking and savings and loan institutions in the State of California, are authorized or obligated by law or executive order to be closed. CLOSING DATE: August 14, 1998, or such other date as may be mutually ------------ agreed upon by the Seller and the Purchaser. CUT-OFF DATE: August 7, 1998. ------------ DUE DATE: The day of the month on which a Monthly Payment is due on a -------- Mortgage Loan, exclusive of any days of grace. ESCROW ACCOUNT: An account or accounts maintained by the Seller, or -------------- the Seller's predecessor in interest, maintained for the deposit of Escrow Payments received in respect of one or more Mortgage Loans. ESCROW PAYMENTS: The amounts held in Escrow Accounts which include --------------- amounts being held for payment of taxes, assessments, water rates, mortgage insurance premiums, fire and hazard insurance premiums and other payments required to be escrowed by the Mortgagor pursuant to any Mortgage Loan. FHLMC: The Federal Home Loan Mortgage Corporation, or any successor ----- thereto. FNMA: The Federal National Mortgage Association or any successor ---- thereto. GROSS MARGIN: The fixed percentage amount set forth in the related ------------ Mortgage Note which amount is added to the Index in accordance with the terms of the related Mortgage Note to determine the Mortgage Interest Rate for such Mortgage Loan. HMDA: The Home Mortgage Disclosure Act, as amended. ---- HUD: The Department of Housing and Urban Development or any successor --- thereto. INDEX: On each Interest Adjustment Date, the Index shall mean the ----- rate per annum equal to the average of interbank offered rates for six-month U.S. dollar denominated deposits in the London market (LIBOR), as published in the Wall Street Journal as of the first Business Day of the month immediately preceding the month in which such Interest Adjustment Date occurs. INTEREST ADJUSTMENT DATE: With respect to each Mortgage Loan, the ------------------------ date on which an adjustment to the Mortgage Interest Rate on a Mortgage Note becomes effective. INTERIM SERVICING PERIOD: The period commencing with the Closing Date ------------------------ and ending with the Servicing Transfer Date. LIFETIME MORTGAGE INTEREST RATE CAP: The absolute maximum Mortgage ----------------------------------- Interest Rate payable for a Mortgage Loan, above which the Mortgage Interest Rate shall not be adjusted, as provided in the Mortgage Loan Schedule. LOAN-TO-VALUE RATIO OR LTV: With respect to any Mortgage Loan, the -------------------------- ratio of the original outstanding principal amount to the Appraised Value of the Mortgage Loan. 2 MONTHLY PAYMENT: The scheduled monthly payment of principal and --------------- interest on a Mortgage Loan. MORTGAGE: The mortgage, deed of trust or other such instrument -------- securing a Mortgage Note, which creates a first lien on an unsubordinated estate in fee simple in real property securing the Mortgage Note or a first lien, upon a leasehold estate of Mortgagor, as the case may be. MORTGAGE FILE: The file containing the Mortgage Loan Documents, all ------------- other documents in connection with the origination of a particular Mortgage Loan and all documents, files and other information reasonably necessary to service the Mortgage Loans, including, but not limited to, good faith estimate, HUD 1 Settlement Statement, Truth in Lending Disclosure Statement, and Truth in Lending Notice of Right to Cancel (if required by law). MORTGAGE INTEREST RATE: The annual rate at which interest accrues on ---------------------- any Mortgage Loan, exclusive of any primary mortgage insurance, as adjusted from time to time in accordance with the provisions of the related Mortgage Note, if applicable. MORTGAGE LOAN: A mortgage loan identified in the Mortgage Loan ------------- Schedule which is sold pursuant to this Agreement, which Mortgage Loan includes without limitation the Mortgage File, the Monthly Payments, Principal Prepayments and all other rights, benefits, proceeds and obligations arising from or in connection with such Mortgage Loan. MORTGAGE LOAN DOCUMENTS: The following documents pertaining to any ----------------------- Mortgage Loan: (a) The original Mortgage Note bearing all intervening endorsements, endorsed "Pay to the order of _________ " and signed in the name of the Seller by an authorized officer; (b) The original Assignment of Mortgage for each Mortgage Loan in blank; (c) The original Mortgage with evidence of recording thereon; (d) The originals of all intervening assignments of mortgage with evidence of recording thereon; and (e) The original mortgagee title insurance policy. MORTGAGE LOAN SCHEDULE: The schedule of Mortgage Loans set forth on ---------------------- Exhibit A hereto. - --------- MORTGAGE NOTE: The note or other evidence of the indebtedness of a ------------- Mortgagor secured by a Mortgage. MORTGAGED PROPERTY: The real property securing repayment of the debt ------------------ evidenced by a Mortgage Note. MORTGAGOR: The obligor on a Mortgage Note. --------- 3 NET ESCROW PAYMENTS: Escrow Payment balances remaining after advances ------------------- by the Seller for taxes and insurance to the extent documented under a detailed statement provided to the Purchaser. PERIODIC MORTGAGE INTEREST RATE CAP: The provision of a Mortgage Note ----------------------------------- which provides for an absolute maximum amount by which the Mortgage Interest Rate therein may increase or decrease on an Interest Adjustment Date above the Mortgage Interest Rate previously in effect, equal to the rate set forth in the Mortgage Loan Schedule, if applicable. PRIMARY MORTGAGE INSURANCE POLICY: A policy of primary mortgage --------------------------------- guaranty insurance issued by a Qualified Insurer, providing coverage at least equal to the level of coverage required by the Agencies at the time the related Mortgage Loan was originated if such Mortgage Loan was to be eligible for sale to, and securitization by, either FNMA or FHLMC. PRINCIPAL PREPAYMENT: Any payment or other recovery of principal on a -------------------- Mortgage Loan which is received in advance of its scheduled Due Date, including any prepayment penalty or premium thereon, which is not accompanied by an amount of interest representing scheduled interest due on any date or dates in any month or months subsequent to the month of prepayment. PURCHASE PRICE: The purchase price to be paid by the Purchaser for -------------- the Mortgage Loans (including the Servicing Rights relating thereto) which shall equal the product of (a) the Purchase Price Percentage, times (b) the Stated Principal Balance of the Mortgage Loans. PURCHASE PRICE PERCENTAGE: The purchase price percentage set forth in ------------------------- the a separate funding schedule. PURCHASE PROCEEDS: The aggregate of the Purchase Price and the ----------------- Accrued Interest. PURCHASER: Any entity which purchases the Mortgage Loans pursuant to --------- this Agreement or its successor in interest or any successor or assign to the Purchaser under this Agreement as herein provided. Unless the context requires otherwise, all references to "Purchaser" in this Agreement shall be deemed to include such Purchaser's successors in interest, assignees or designees. QUALIFIED INSURER: An insurance company duly qualified as such under ----------------- the laws of the states in which the Mortgaged Properties are located, duly authorized and licensed in such states to transact the applicable insurance business and to write the insurance provided, approved as an insurer by the Agencies and whose claims paying ability is rated in the two highest rating categories by the Standard & Poor's Ratings Group or Moody's Investors Service with respect to primary mortgage insurance and in the two highest rating categories by Best's with respect to hazard and flood insurance. REPURCHASE PRICE: With respect to any Mortgage Loan, a price equal to ---------------- the sum of (a) the product of (i) the unpaid principal balance of the Mortgage Loan at the time of repurchase, and (ii) the greater of par or the Purchase Price Percentage, and (b) interest on such unpaid principal balance at the Mortgage Interest Rate from the last date through which interest has been paid and distributed to the Purchaser to the date of repurchase. SEGMENT(S): One or more segments of Mortgage Loans (each, a ---------- "Segment") comprising the Segment A Mortgage Loans, and the Segment B Mortgage Loans, whether individually or in the aggregate, as applicable. Each such Segment and the Mortgage Loans relating thereto are identified on Exhibit A and --------- may hereafter be referred to as Segments A and B, respectively. 4 SEGMENT A MORTGAGE LOANS: The Mortgage Loans identified under Segment ------------------------ A of the Mortgage Loan Schedule. SEGMENT B MORTGAGE LOANS: The Mortgage Loans identified under Segment ------------------------ B of the Mortgage Loan Schedule. SERVICING RIGHTS: With respect to each Mortgage Loan, any and all of ---------------- the following: (a) all rights to service the Mortgage Loans; (b) any payments or monies payable or received for servicing the Mortgage Loans; (c) any late fees, assumption fees, penalties or similar payments with respect to the Mortgage Loans; (d) all agreements or documents creating, defining or evidencing any such Servicing Rights and all rights of the Seller thereunder, including, but not limited to, any clean-up calls and termination options; (e) Escrow Payments or other similar payments with respect to the Mortgage Loans and any amounts actually collected with respect thereto; (f) all accounts and other rights to payments related to any of the property described in this paragraph; (g) possession and use of any and all Mortgage Files pertaining to the Mortgage Loans or pertaining to the past, present, or prospective servicing of the Mortgage Loans; and (h) all rights, powers and, privileges incident to any of the foregoing. SERVICING TRANSFER DATE: September 21, 1998, or such other date the ----------------------- Purchaser may select upon reasonable notice to the Seller. STATED PRINCIPAL BALANCE: The unpaid principal balance of the ------------------------ Mortgage Loans at the Cut-off Date. ARTICLE II SALE OF THE MORTGAGE LOANS -------------------------- SECTION 2.1 AGREEMENT OF SALE. The Seller does hereby agree to sell, ----------------- convey, transfer and assign to the Purchaser on the Closing Date all right, title and interest in and to the Mortgage Loans, the Servicing Rights, the Mortgage Loan Documents, the Mortgage Files and the Escrow Accounts relating to the Mortgage Loans, all in accordance with the terms and conditions set forth herein. SECTION 2.2 PAYMENT OF THE PURCHASE PROCEEDS. No later than 1:00 -------------------------------- p.m. (Pacific time) on the Closing Date, the Purchaser shall pay to the Seller the Purchase Proceeds, by wire transfer in immediately available funds to the account designated by the Seller. Upon completion of the wire transfer to the Seller's designated account, the Purchaser shall own the Mortgage Loans and the Servicing Rights, free and clear of any lien or encumbrance whatsoever. SECTION 2.3 ENTITLEMENT TO PAYMENT ON THE MORTGAGE LOANS. The -------------------------------------------- Purchaser shall be entitled to all collections and recoveries of principal and interest received or applied to any Mortgagor's account after the Cut-off rate. All payments and remittances on the Mortgage Loans received by the Seller after the Closing Date and payable to the Purchaser shall be paid promptly to the Purchaser in accordance to the terms set forth in Article IV or Article V, as applicable. SECTION 2.4 EXAMINATION OF MORTGAGE LOAN DOCUMENTS BY THE --------------------------------------------- PURCHASER. Prior to the Closing Date, the Purchaser shall have the right to review the Mortgage File and, based on its review, decline to purchase any Mortgage Loan which the Purchaser, in its sole discretion, determines not to be in compliance with each of the representations and warranties contemplated hereby or which is otherwise unsatisfactory to the Purchaser in its reasonable discretion. The Seller agrees to deliver 5 or make available to the Purchaser a complete Mortgage File for each Mortgage Loan on or before such date as may be reasonably requested by the Purchaser. The fact that the Purchaser has conducted or has failed to conduct any partial or complete examination of the Mortgage Files shall not affect the Purchaser's right to demand repurchase or to avail itself of any other remedy available hereunder. Notwithstanding anything contained herein to the contrary, should there be a material adverse change in the characteristics of the Mortgage Loans remaining after the exclusion or rejection of one or more Mortgage Loans by the Purchaser as contemplated above, the Purchaser may, in its sole discretion, elect not to purchase the remaining Mortgage Loans and the Purchaser shall have no liability therefor. SECTION 2.5 DELIVERY OF MORTGAGE LOAN DOCUMENTS. At least two (2) ----------------------------------- Business Days prior to the Closing Date, the Seller shall deliver the Mortgage Loan Documents with respect to each Mortgage Loan to the Purchaser or a bonded third party custodian (the "Custodian") and, in the case of the latter, shall cause the Custodian to deliver to the Purchaser a custodian's certification pursuant to which the Custodian certifies to the Purchaser that (i) with respect to each Mortgage Loan, it has in its possession originals of each of the Mortgage Loan Documents, (ii) all of the Mortgage Loan Documents appear on their face to be genuine originals or copies, as applicable, and (iii) upon the Purchaser's wiring of the Purchase Proceeds to the Seller, that the Custodian shall hold the Mortgage Loan Documents with respect to each Mortgage Loan in trust for the Purchaser and will, subsequent thereto, act only in a manner consistent with the Purchaser's instructions with respect thereto. In the event that any of the Mortgage Loan Documents set forth in clauses (c) through (e) of the definition of Mortgage Loan Documents in Article I have not been delivered to the Purchaser in the time specified above (the "Missing Documents") either ----------------- because such Missing Documents have not been returned by the applicable public recording office with respect to items (c) and (d), or because the final original title policy has not yet been issued by the title company with respect to item (e), then the Seller shall deliver to the Purchaser certified true and correct copies of the same and shall further deliver the originals of any such Missing Documents promptly upon its receipt thereof, but in no event later than one hundred and twenty (120) days from the Closing Date. If the Seller fails to deliver any of the Missing Documents relating to a Mortgage Loan within the time specified above, the Seller shall, upon written request from the Purchaser, repurchase such Mortgage Loan in accordance with Section 3.3. ----------- SECTION 2.6 CONDITIONS TO CLOSING. The Purchaser's obligations --------------------- hereunder are subject to the fulfillment of the following conditions precedent. In the event that any of the conditions set forth below are not satisfied in all material respects, the Purchaser shall not have any obligation to purchase any of the Mortgage Loans or to pay the Purchase Proceeds as contemplated hereunder and shall instead be entitled, in its sole discretion, to terminate this Agreement in its entirety. (a) Each of the representations and warranties made by the Seller hereunder shall be true and correct in all material respects as of the Closing Date and no event shall have occurred which, with notice or the passage of time, would constitute a default under this Agreement. (b) The Seller shall have delivered to the Purchaser all of the Mortgage Loan Documents in accordance with Section 2.5 and a ----------- complete Mortgage File with respect to each Mortgage Loan. (c) Each of the terms and conditions set forth herein which are required to be satisfied on or before the Closing Date shall have been satisfied unless waived by the prejudiced party(ies). 6 (d) The Seller shall have delivered to the Purchaser on or before the Closing Date the following documents: (1) a fully executed Agreement; (2) the Mortgage Loan Schedule, which shall include, without limitation, the Stated Principal Balance of each Mortgage Loan; (3) an executed Funding Schedule, in the form of Exhibit B --------- hereto; (4) an Officer's Certificate, in the form of Exhibit C hereto; --------- and (5) such other documents related to the purchase and sale of the Mortgage Loans and the Servicing Rights as the Purchaser may reasonably request. SECTION 2.7 RECORD TITLE. Record title to each Mortgage and the ------------ related Mortgage Note shall be transferred by the Seller to the Purchaser. The Seller shall, at the option of the Purchaser, either (i) prepare and cause to be recorded the Assignment of Mortgage for each Mortgage Loan and shall, promptly upon its receipt of each original recorded Assignment of Mortgage from the applicable recording office, deliver the same to the Purchaser, or (ii) prepare and deliver to the Purchaser an original Assignment of Mortgage in blank, in each case, within the time and in the manner specified in Section 2.5. ----------- The Seller shall bear the cost and expense related to (i) providing all Assignments of Mortgages and endorsements of Mortgage Notes for any transfer of record title required hereunder with respect to the obligations of the Mortgage Notes and the underlying security interest related to each Mortgage Loan and (ii) recording title of the Mortgage Loans including, but not limited to, recording fees and fees for title policy endorsements. ARTICLE III REPRESENTATIONS AND WARRANTIES ------------------------------ SECTION 3.1 REPRESENTATIONS AND WARRANTIES RESPECTING THE SELLER. ---------------------------------------------------- The Seller represents, warrants and covenants to the Purchaser that, as of the Closing Date: (a) The Seller is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and is qualified to transact business in and is in good standing under the laws of each state where a Mortgaged Property is located or is otherwise exempt under applicable law from such qualification or is otherwise not required under applicable law to effect such qualification and no demand for such qualification has been made upon the Seller by any state having jurisdiction and in any event the Seller is or will be in compliance with the laws of any such state to the extent necessary to insure the enforceability of each Mortgage Note and the sale of the Mortgage Loans and Servicing Rights as contemplated by this Agreement; (b) The Seller has the full power and authority to perform, and to enter into and consummate, all transactions contemplated by this Agreement. As of the Closing Date, the Seller has the full power and authority to hold each Mortgage Loan and to sell each Mortgage Loan and the Servicing Rights; 7 (c) Neither the acquisition or origination of the Mortgage Loans by the Seller, the sale of the Mortgage Loans or the Servicing Rights to the Purchaser, the consummation of the transactions contemplated hereby, nor the fulfillment of or compliance with the terms and conditions of this Agreement, will conflict with or result in a breach of any of the terms, conditions or provisions of the Seller's certificate of incorporation or bylaws or result in a material breach of any legal restriction or any agreement or instrument to which the Seller is now a party or by which it is bound, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Seller or its property is subject; (d) The Seller is an approved seller/servicer for the Agencies, in good standing with each such agency, and is a mortgagee approved by the Secretary of HUD. No event has occurred, including but not limited to, a change in insurance coverage, which would make the Seller unable to comply with FNMA, FHLMC or HUD eligibility requirements or which would require notification to the Agencies or HUD; (e) The Seller does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement; (f) There is no action, suit, proceeding, investigation or litigation pending or, to the best of the Seller's knowledge, threatened, which either in any one instance or in the aggregate, if determined adversely to the Seller, would adversely affect the sale of the Mortgage Loans or the Servicing Rights to the Purchaser, or the Seller's ability to perform its obligations under this Agreement; (g) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by the Seller of or compliance by the Seller with this Agreement or the terms of the Mortgage Loans, the delivery of the Mortgage Files to the Purchaser, the sale of the Mortgage Loans and the Servicing Rights to the Purchaser or the consummation of the transactions contemplated by this Agreement, or if required, such consent, approval, authorization or order has been obtained prior to the Closing Date; and (h) The consummation of the transactions contemplated by this Agreement are in the ordinary course of business of the Seller, and the transfer, assignment and conveyance of the Mortgage Notes, the Mortgages and/or the Servicing Rights by the Seller pursuant to this Agreement are not subject to the bulk transfer or any similar statutory provisions in effect and applicable to this transaction. SECTION 3.2 REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL --------------------------------------------------- MORTGAGE LOANS. With respect to each Mortgage Loan, the Seller represents and - -------------- warrants to the Purchaser that as of the Closing Date: (a) The information set forth in the Mortgage Loan Schedule and in each Mortgage File is complete, true and correct; (b) All payments required under the terms of the Mortgage Note to be made on or prior to the Closing Date have been made; the Seller has not advanced funds, or induced, solicited or knowingly received any advance of funds from a party 8 other than the owner of the Mortgaged Property subject to the Mortgage, directly or indirectly, for the payment of any amount required under the Mortgage Loan; and there has been no delinquency of thirty (30) days or more in any payment by the Mortgagor thereunder during the last twelve (12) months. No Mortgage Loan is subject to any pending foreclosure, bankruptcy, insolvency, or reorganization proceeding. Nothing contained in this Section 3.2(b) shall in any way limit any other rights of the -------------- Purchaser as provided hereunder; (c) There are no delinquent taxes, water charges, sewer rents, assessments, insurance premiums, leasehold payments, including assessments currently due and owing in future installments, or other outstanding charges affecting the related Mortgaged Property; (d) The terms of the Mortgage Note and the Mortgage have not been impaired, waived, altered or modified in any respect, except by written instruments which are in the Mortgage File and have been or will be recorded, if necessary to protect the interests of the Purchaser, and which have been delivered to the Purchaser, all in accordance with this Agreement. The substance of any such waiver, alteration or modification has been approved by the primary mortgage guaranty insurer, if any, and by the title insurer, to the extent required by the related policy, and its terms are reflected on the Mortgage Loan Schedule. No Mortgagor has been released, in whole or in part, except in connection with an assumption agreement approved by the primary mortgage insurer, if any, and title insurer, to the extent required by the policy, and which assumption agreement is part of the Mortgage File and the terms of which are reflected in the Mortgage Loan Schedule, if executed prior to the Closing Date; (e) The Mortgage Note and the Mortgage are not subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, nor will the operation of any of the terms of the Mortgage Note and the Mortgage, or the exercise of any right thereunder, render the Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (f) All buildings upon, or comprising part of, the Mortgaged Property are insured by an insurer acceptable to the Agencies against loss by fire, hazards of extended coverage and such other hazards as are customary in the area where the Mortgaged Property is located, and such insurer is licensed to do business in the state where the Mortgaged Property is located. All such insurance policies (collectively, the "hazard insurance policy") contain a standard mortgagee clause naming the Seller, its successors and assigns as mortgagee and all premiums thereon have been paid. If upon origination of the Mortgage Loan, the Mortgaged Property was, or was subsequently deemed to be, in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards (and such flood insurance has been made available), which require under applicable law that a flood insurance policy meeting the requirements of the current guidelines of the Federal Insurance Administration (or any successor thereto) be obtained, such flood insurance policy is in effect which policy conforms to the requirements of the Agencies. The Mortgage obligates the Mortgagor thereunder to maintain 9 all such insurance at Mortgagor's cost and expense and, on the Mortgagor's failure to do so, authorizes the holder of the Mortgage to maintain such insurance at Mortgagor's cost and expense and to obtain reimbursement therefor from the Mortgagor. Each Mortgage Loan has in place a fully-paid life of loan flood certification from a FNMA or FHLMC-approved vendor, assigned in care of the Purchaser, which provides for notification to the Purchaser of changes in designated flood areas which would affect such Mortgage Loan; (g) Any and all requirements of any federal, state or local law including, without limitation, usury, truth in lending, real estate settlement procedures including, without limitation, the Real Estate Settlement Procedures Act of 1974, as amended, consumer credit protection, equal credit opportunity or disclosure laws applicable to the Mortgage Loan have been complied with in all material respects; (h) The Mortgage has not been satisfied, canceled, subordinated, or rescinded, in whole or in part, and the Mortgaged Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission; (i) The Mortgage is a valid, existing and enforceable first lien on the Mortgaged Property, including all improvements on the Mortgaged Property, if any, subject only to (a) the lien of current real property taxes and assessments not yet due and payable, (b) covenants, conditions and restrictions, rights of way, easements and other matters of the public record as of the date of recording being acceptable to mortgage lending institutions generally and specifically referred to in the lender's title insurance policy delivered to the originator of the Mortgage Loan and which do not adversely affect the Appraised Value (as defined in clause (i) of such definition) of the Mortgaged Property, and (c) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property. The Seller has full right to sell and assign the Mortgage to the Purchaser; (j) The Mortgage Note and the related Mortgage are genuine and each is the legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or reorganization; (k) All parties to the Mortgage Note and the Mortgage had the legal capacity to enter into the Mortgage Loan transaction and to execute and deliver the Mortgage Note and the Mortgage, and the Mortgage Note and the Mortgage have been duly and properly executed by such parties; (l) The proceeds of the Mortgage Loan have been fully disbursed and there is no requirement for future advances thereunder and any and all requirements as to completion of any on-site or off-site improvement and as to disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making or closing the Mortgage Loan and the recording of the Mortgage were paid, and the Mortgagor is not entitled to any refund of any amounts paid or due under the Mortgage Note or Mortgage; 10 (m) The Seller is the sole owner and holder of the Mortgage Loan and the related Servicing Rights and is the custodian of the related Escrow Account, if applicable. The Mortgage Loan has neither been assigned nor pledged, and the Seller has good and marketable title thereto, and has full right to transfer and sell the Mortgage Loan and the related Servicing Rights to the Purchaser free and clear of any encumbrance, equity, lien, pledge, charge, claim or security interest and has full right and authority subject to no interest or participation of, or agreement with, any other party, to sell and assign each Mortgage Loan and the related Servicing Rights to the Purchaser pursuant to the terms of this Agreement; (n) All parties which have had any interest in the Mortgage, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (a) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (b) (i) organized under the laws of such state, or (ii) qualified to do business in such state, or (iii) a federal savings and loan association or national bank, or (iv) not deemed to be doing business in such state under applicable law; (o) The Mortgage Loan is covered by an ALTA lender's title insurance policy acceptable to the Agencies, issued by a title insurer acceptable to the Agencies and qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring (subject to the exceptions contained in (i)(a) and (b) above) the Seller, its successors and assigns as to the first priority lien of the Mortgage in the original principal amount of the Mortgage Loan and against any loss by reason of the invalidity or unenforceability of the lien resulting from the provisions of the Mortgage Note and/or Mortgage providing for adjustment in the Mortgage Interest Rate and Monthly Payment. Additionally, such lender's title insurance policy affirmatively insures ingress and egress, and against encroachments by or upon the Mortgaged Property or any interest therein. The Seller is the sole insured of such lender's title insurance policy, and such lender's title insurance policy is in full force and effect and will be in full force and effect upon the consummation of the transactions contemplated by this Agreement. No claims have been made under such lender's title insurance policy, and no prior holder of the related Mortgage, including the Seller, has done, by act or omission, anything which would impair the coverage of such lender's title insurance policy; (p) There is no default, breach, violation or event of acceleration existing under the Mortgage or the Mortgage Note and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration, and the Seller has nor waived any default, breach, violation or event of acceleration; (q) There are no mechanics' or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under law could give rise to such lien) affecting the related Mortgaged Property which are or may be liens prior to or equal with, the lien of the related Mortgage; (r) All improvements which were considered in determining the Appraised Value (as defined in clause (i) of said definition) of the related Mortgaged Property 11 lay wholly within the boundaries and building restriction lines of the Mortgaged Property, and no improvements on adjoining properties encroach upon the Mortgaged Property; (s) The Mortgage Loan was originated by the Seller or by a FNMA- approved or FHLMC-approved mortgage banker (which mortgage banker is a mortgagee approved by HUD), or savings and loan association, a savings bank, a commercial bank or similar banking institution which is supervised and examined by a federal or state authority, or by another mortgagee approved by the Secretary of HUD; (t) The origination, servicing and collection practices with respect to each Mortgage Note and Mortgage including, without limitation, the establishment, maintenance and servicing of the Escrow Accounts and Escrow Payments, if any, since origination, have been conducted in all respects in accordance with the terms of Mortgage Note and in compliance with all applicable laws and regulations and, unless otherwise required by law or FNMA/FHLMC standard, in accordance with the proper, prudent and customary practices in the mortgage origination and servicing business. With respect to the Escrow Accounts and Escrow Payments, if any, all such payments are in the possession or under the control of the Seller and there exists no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made. No escrow deposits or Escrow Payments or other charges or payments due the Seller have been capitalized under any Mortgage or the related Mortgage Note. All Mortgage Interest Rate adjustments have been made in strict compliance with state and federal law and the terms of the related Mortgage Note. Any interest required to be paid pursuant to state and local law has been properly paid and credited; (u) The Mortgaged Property is free of material damage and waste and there is no proceeding pending for the total or partial condemnation thereof; (v) The Mortgage contains customary and enforceable provisions to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security intended to be provided thereby, including, (a) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (b) otherwise by judicial foreclosure. There is no other exemption available to the Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage. The Mortgagor has not notified the Seller and the Seller has no knowledge of any relief requested or allowed to the Mortgagor under the Soldiers and Sailors Civil Relief Act of 1940; (w) The Mortgage Note is not and has not been secured by any collateral except the lien of the applicable Mortgage; (x) The Mortgage File contains an appraisal of the related Mortgaged Property signed prior to the approval of the Mortgage Loan application by an appraiser who meets the minimum requisite qualifications of the Agencies for appraisers, duly appointed by the originator, who had no interest, direct or indirect, in the Mortgaged Property or in any loan made on the security thereof, and whose compensation is not affected by the approval or disapproval of the Mortgage 12 Loan; the appraisal is in a form acceptable to the Agencies, with such riders as are acceptable to the Agencies; (y) In the event the Mortgage constitutes a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by the Purchaser to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Mortgagor; (z) No Mortgage Loan contains a permanent or temporary "buydown" provision; (aa) The Mortgagor has executed one or more statements to the effect that the Mortgagor has received all disclosure materials required by applicable law with respect to the making of the Mortgage Loan. The Seller shall maintain all such statements in the Mortgage File; (bb) No Mortgage Loan was made in connection with (a) the construction or rehabilitation of a Mortgaged Property or (b) facilitating the trade-in or exchange of a Mortgaged Property; (cc) [Intentionally left blank]; (dd) To the best of Seller's knowledge, the Mortgaged Property is lawfully occupied under applicable law and all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy, have been made or obtained from the appropriate authorities; (ee) [Intentionally left blank]; (ff) The Assignment of Mortgage is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located; (gg) Any future advances made to the Mortgagor prior to the Closing Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term. The lien of the Mortgage securing the consolidated principal amount is expressly insured as having first lien priority by a title insurance policy, an endorsement to the policy insuring the mortgagee's consolidated interest or by other title evidence acceptable to the Agencies. The consolidated principal amount does not exceed the original principal amount of the Mortgage Loan; (hh) If the Mortgaged Property is a condominium unit or a planned unit development, such condominium or planned unit development project meets the eligibility requirements of the Agencies; (ii) The Mortgage Note and Mortgage are on forms acceptable to either of the Agencies; 13 (jj) The Mortgaged Property is located in the state indicated on the Mortgage Loan Schedule, and consist of a single parcel of real property with a detached single family residence erected thereon, or an individual condominium unit, or a 2-4 family dwelling or an individual unit in a planned unit development as defined by FNMA, none of which is a mobile home or manufactured dwelling; (kk) There are no circumstances or conditions with respect to the Mortgage, the Mortgage Property, the Mortgagor, the Mortgage File or the Mortgagor's credit standing that can reasonably be expected to cause private institutional investors to regard the Mortgage Loan as an unacceptable investment, cause the Mortgage Loan to become delinquent, or adversely affect the value or marketability of the Mortgage Loan; (ll) The Mortgage contains an enforceable provision for the acceleration of the payment of the unpaid principal balance of the Mortgage Loan in the event that the Mortgaged Property is sold or transferred without the prior written consent of the mortgagee thereunder; (mm) The Seller has no knowledge of any circumstances existing that could reasonably be expected to adversely affect the value or the marketability of any Mortgaged Property or Mortgage Loan or to cause the Mortgage Loans to prepay during any period materially faster or slower than the mortgage loans of similar characteristics originated by the Seller generally; (nn) Each Mortgage Loan is covered by a valid and transferable tax service contract with First American, or such other vendor as may be reasonably acceptable to the Purchaser; (oo) Each Mortgage Loan is an adjustable rate mortgage loan requiring monthly payments sufficient to amortize the original principal balance over the original term set forth in the Mortgage Loan Schedule. No Mortgage Loan has negatively amortized nor shall any Mortgage Loan have any negative amortization after the Closing Date. The Mortgage Interest Rate adjusts semi-annually in accordance with the related Mortgage Note, provided, however, with respect to Segment B, the Mortgage Interest Rate shall be fixed for an initial period of two (2) years. On each Interest Adjustment Date, the Mortgage Interest Rate shall be adjusted to equal the Index plus the Gross Margin (rounded up or down to the nearest 0.125%), subject to the Periodic Mortgage Interest Rate Cap and the Lifetime Mortgage Interest Rate Cap as set forth in the respective Mortgage Note and the Mortgage Loan Schedule. None of the Mortgage Loans contain a provision allowing the Mortgagor to convert the Mortgage Note from an adjustable rate mortgage loan to a fixed rate mortgage loan; (pp) Each Mortgage Loan at the time of origination was underwritten in accordance with the credit underwriting guidelines of the Seller attached hereto as Exhibit D and, to the extent not --------- inconsistent therewith, generally accepted sub-prime credit underwriting guidelines; (qq) As of the Closing Date, the Seller shall have received neither actual nor constructive notice that either a Mortgage Loan will be paid in full (whether by virtue of a demand statement or otherwise) or that any Mortgagor has elected 14 to convert the related Mortgage Loan into a fixed-rate mortgage loan in accordance with the terms of the related Mortgage Note; (rr) The Mortgage Note is not and has not been secured by any collateral except the lien of corresponding Mortgage on the Mortgaged Property; (ss) No Mortgage Loan contains provisions pursuant to which Monthly Payments are (a) paid or partially paid with funds deposited in any separate account established by the Seller, the Mortgagor, or anyone on behalf of the Mortgagor or (b) paid by any source other than the Mortgagor or contains any other similar provisions which may constitute a "buydown" provision. The Mortgage Loan is not a graduated payment mortgage loan and the Mortgage Loan does not have a shared appreciation or other contingent interest feature; (tt) No error, omission, misrepresentation, negligence, fraud or similar occurrence with respect to a Mortgage Loan has taken place on the part of the Seller, or, to the best of Seller's knowledge, on the part of any other person including without limitation the Mortgagor, any appraiser, any builder or developer, or any other party involved in the origination of the Mortgage Loan or in the application of any insurance in relation to such Mortgage Loan; and (uu) Notwithstanding anything to the contrary contained in this Agreement, none of the Mortgage Loans have Escrow Accounts as of the Closing Date. SECTION 3.3 REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES. ----------------------------------------------------- The representations and warranties set forth in Sections 3.1 and 3.2 shall -------------------- survive the sale of the Mortgage Loans to the Purchaser and shall inure to the benefit of the Purchaser, notwithstanding any restrictive or qualified endorsement on any Mortgage Note or Assignment of Mortgage or the examination or failure to examine any Mortgage File. Furthermore, the absence of the Seller in either the chain of title or endorsement shall in no way limit the Purchaser's recourse against the Seller as provided in this Section 3.3 for a breach of one ----------- or more of the Seller's representations and warranties made herein. Upon discovery by either the Seller or the Purchaser of a breach of any of the foregoing representations and warranties which materially and adversely affects the value of one or more of the Mortgage Loans or the Purchaser's interest therein, the party discovering such breach shall give prompt written notice to the other. Without in any way limiting the generality of the foregoing, if the first payment due to the Purchaser under the Mortgage Note is not received by the Purchaser, whether from the Mortgagor directly or forwarded by the Seller if the Mortgagor has submitted the payment to the Seller, by the last day of the month in which it is due, the Seller shall, at the Purchaser's option and not later than five (5) Business Days after receipt of notice of such breach from the Purchaser, repurchase such Mortgage Loan at the Repurchase Price. The Seller shall have a period of sixty (60) days from the earlier of the discovery of a breach or the receipt by the Purchaser of notice of a breach within which to correct or cure such breach. If any such breach cannot be corrected or cured within such sixty (60) day period, the Seller shall, at the Purchaser's option and not later than sixty (60) days after its discovery or its receipt of notice of such breach, repurchase such Mortgage Loan at the Repurchase Price. In the event that a breach shall involve any representation or warranty set forth in Section 3.1 and such breach cannot be cured within ----------- sixty (60) days of the earlier of either discovery by or notice to the Seller of such breach, all of the Mortgage Loans shall, at the Purchaser's option, be repurchased by the Seller at the Repurchase Price. Any repurchase of a Mortgage Loan(s) pursuant to the foregoing provisions of this Section 3.3 shall be ----------- accomplished by wire transfer of immediately available funds on the repurchase date to an account designated by the Purchaser. 15 At the time of repurchase, the Purchaser and the Seller shall arrange for the reassignment of the repurchased Mortgage Loan to the Seller and the delivery to the Seller of any documents held by the Purchaser or its custodian relating to such Mortgage Loan. The Seller shall, simultaneously with such reassignment, give written notice to the Purchaser that such repurchase has taken place. Any cause of action against the Seller relating to or arising out of the breach of any representations and warranties made in Sections 3.1 or 3.2 ------------------- shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the Seller to cure such breach or repurchase such Mortgage Loan as specified above, and (iii) demand upon the Seller by the Purchaser for compliance with the relevant provisions of this Agreement. SECTION 3.4 INDEMNIFICATION OF THE PURCHASER. In addition to the -------------------------------- repurchase obligations set forth in Section 3.3, the Seller shall indemnify the ----------- Purchaser and hold it harmless against any losses, damages, penalties, fines, forfeitures, judgments and any related costs including, without limitation, reasonable and necessary legal fees, resulting from any claim, demand, defense or a material omission on the part of the Seller in receiving, processing, funding or servicing any Mortgage Loan, or from any assertion based on, grounded upon or resulting from a breach of any of the Seller's representations and warranties contained in this Article Ill. In addition to the obligations of the Seller set forth in this Article 111, the Purchaser may pursue any and all remedies otherwise available at law or in equity, including, but not limited to, the right to seek damages. Notwithstanding the foregoing, Seller shall not be liable for any special, consequential or punitive damages. SECTION 3.5 PREPAYMENT AND CONVERSION PROTECTION. In the event that ------------------------------------ any of the Mortgage Loans are (i) paid in full by the related Mortgagor or (ii) converted to a fixed-rate mortgage loan, in either case, on or prior to the Servicing Transfer Date, or (iii) subject to a breach of the representation set forth in Section 3.2(qq), the Seller shall, with respect to each such Mortgage --------------- Loan, pay to the Purchaser, in addition to the unpaid principal balance plus accrued interest at the time of such payoff or conversion, the product of (a) the positive difference, if any, between the Purchase Price Percentage and 100%, times (b) the unpaid principal balance of such Mortgage Loan at the time such Mortgage Loan is paid in full or converted, as applicable. ARTICLE IV INTERIM SERVICING OF THE MORTGAGE LOANS --------------------------------------- SECTION 4.1 GENERAL. The Mortgage Loans will be purchased by the ------- Purchaser and sold by the Seller on a servicing-released basis and the purchase of the Mortgage Loans by the Purchaser shall, for all purposes, include all Servicing Rights relating thereto. From the Closing Date to the Servicing Transfer Date, the Seller shall interim service the Mortgage Loans in strict accordance with the terms of this Agreement and, to the extent not inconsistent herewith, the servicing standards of the Agencies. Without limiting the generality of the foregoing, the Seller shall not take, or fail to take, any action which would result in the Purchaser's interest in the Mortgage Loans being adversely affected. It is expressly understood by the Seller that, during the Interim Servicing Period, the Purchaser intends to market the Mortgage Loans for sale to a whole loan investor and, as such, the Seller agrees to comply with all reasonable requests of the Purchaser made prior to the Servicing Transfer Date in order to effectuate the foregoing including, without limitation, any request for information or documentation in connection with any Mortgage Loan which the Purchaser deems is necessary to carry out the foregoing. 16 SECTION 4.2 REPORTING AND REMITTANCE. Within five (5) Business Days ------------------------ following the conclusion of each calendar month reporting and remittance cycle occurring during the Interim Servicing Period (each, a "Reporting Cycle"), if any, the Seller shall forward to the Purchaser with respect to the Mortgage Loans a full set of tapes or other computer or like records and a trial balance as of the end of each such Reporting Cycle, which tapes or computer records and trial balance shall include information relating to all payment and other activity on the Mortgage Loans. With respect to any payments of principal or interest (including all prepayments) received, or applied to any Mortgagor's account, by the Seller during the Interim Servicing Period (or prior to the Closing Date, if any such payments were not reflected in the calculation of the Purchaser Proceeds), the Seller shall remit to the Purchaser all such payments of principal and interest on the Mortgage Loans no later than the fifth (51/th/) day of the month following the conclusion of each Reporting Cycle and, with respect to the month in which the Servicing Transfer Date occurs, no later than the fifth (5/th/) Business Day thereafter. With respect to each Mortgage Loan for which an Escrow Account has been established for the payment of taxes, insurance and other similar payments, the Seller shall effect the termination of such Escrow Account on or prior to the Servicing Transfer Date and refund any positive balance therein to the related Mortgagor(s). ARTICLE V TRANSFER OF SERVICING RIGHTS ---------------------------- SECTION 5.1 TRANSFER OF SERVICING. The Seller agrees to act --------------------- reasonably, in good faith and in accordance with all applicable laws and regulations and to do all things necessary to effect the transfer of the Servicing Rights to the Purchaser on the Servicing Transfer Date including, without limitation, complying with all reasonable instructions provided by the Purchaser relating to the transfer of the Servicing Rights. SECTION 5.2 OBLIGATIONS OF THE SELLER PRIOR TO THE SERVICING TRANSFER --------------------------------------------------------- DATE. Without limiting the generality of Section 5.1, the Seller shall take, or - ---- ----------- cause to be taken, the following actions with respect to the Mortgage Loans prior to the Servicing Transfer Date (or within such time as may otherwise be specified below) in order to effect the transfer of the Servicing Rights to the Purchaser on the Servicing Transfer Date: (a) Preliminary Test Tape. On or prior to the Closing Date, the --------------------- Seller shall forward to the Purchaser a preliminary test tape or other computer or like records (including master file, escrow file, payee file, ARM master file, ARM history, all HMDA data required by the Agencies, etc.) containing all of the Mortgage Loans as of a date mutually agreed upon by the Seller and the Purchaser. The preliminary test tape or computer records shall include all field descriptions and record layouts; (b) Notice to Hazard Insurers. The Seller shall inform by written ------------------------- notice all hazard insurance companies and/or their agents of the transfer and request a change in the loss payee mortgage endorsement clause to the Purchaser's name. The Seller shall provide the Purchaser with a form of the notification letter and an officer's certification that all hazard insurance companies have been notified by an identical letter; (c) Notice to Mortgage Insurance Companies. The Seller shall inform -------------------------------------- by written notice all mortgage insurance companies providing any Primary Mortgage Insurance Policy of the change in insured's name on each such policy to the 17 Purchaser's name. The Seller shall provide the Purchaser with a form of the notification letter and an officer's written certification that all such mortgage insurance companies have been notified by an identical letter; (d) Tax Service Contracts. The Seller shall have obtained a life of --------------------- loan, transferable real estate tax service contract with a tax service company reasonably acceptable to the Purchaser on all of the Mortgage Loans and shall assign all such contracts to the Purchaser or, in the alternative, the Seller shall notify the -- Purchaser as to any Mortgage Loans for which it has not procured the requisite contract and shall pay to the Purchaser a fee of twenty-five dollars ($25.00) for each such Mortgage Loan; (e) Flood Certifications. The Seller shall have obtained a life of -------------------- loan, transferable flood certification contract for each Mortgage Loan and shall assign all such contracts to the Purchaser or, in -- the alternative, the Seller shall notify the Purchaser as to any Mortgage Loans for which it has not procured the flood certification referenced above and shall pay to the Purchaser a fee of fifteen dollars ($15.00) for each such Mortgage Loan; (f) Notice to Mortgagors. The Seller shall, no later than fifteen -------------------- (15) days prior to the Servicing Transfer Date, inform in writing all Mortgagors of the change in servicer from the Seller to the Purchaser, all in accordance with applicable law. The Seller shall obtain the Purchaser's approval of the form of such notifications prior to their mailing. The Seller acknowledges that the Purchaser's review of this notice shall not be a review for statutory or regulatory compliance purposes, and that the Seller shall have the sole responsibility for such compliance. The Seller shall provide the Purchaser with a form of the notification letter and an officer's written certification that all Mortgagors have been notified by an identical letter; (g) Payment of Real Estate Taxes. The Seller shall make or cause to ---------------------------- be made all payments of all real estate taxes on the Mortgage Loans which (i) will be delinquent on or prior to the Servicing Transfer Date, (ii) are required to be paid within thirty (30) days after the Closing Date to receive a discount, or (iii) will be delinquent within thirty (30) days after the Closing Date. If tax bills have not been received by the Seller by the Servicing Transfer Date on any Mortgage Loans subject to this subsection, the Seller shall obtain and pay all tax bills subsequent to the Servicing Transfer Date and the Purchaser will promptly reimburse the Seller upon receipt from the Seller of documentation evidencing such payment. On non-impounded accounts, the Seller shall ensure that all taxes which would otherwise be delinquent by the Servicing Transfer Date, if not paid by such date, have been paid. With respect to each of the Mortgage Loans which do not have an impound or escrow account maintained for the payment of taxes and insurance, the Seller shall hold harmless and indemnify the Purchaser against any and all costs, expenses, penalties, fines, damages and judgments of whatever kind arising from the Seller's failure to pay, or cause to be paid, any delinquent taxes or tax penalties outstanding as of the Servicing Transfer Date; (h) Payment of Insurance Premiums. The Seller shall pay all hazard and ----------------------------- flood insurance and Primary Mortgage Insurance Policy premiums required to be 18 paid prior to the Servicing Transfer Date or within thirty (30) days after the Closing Date on all impounded accounts relating to the Mortgage Loans and shall ensure that all premiums required to be paid prior to the Servicing Transfer Date by the Mortgagors on non-impounded accounts have been paid. With respect to each of the Mortgage Loans which do not have an impound or escrow account maintained for the payment of taxes and insurance, the Seller shall hold harmless and indemnify the Purchaser against any and all costs, expenses, penalties, fines, damages and judgments of whatever kind arising from the Seller's failure to ensure that the related Mortgagor is maintaining adequate insurance coverage on the Mortgaged Property at all times prior to the Servicing Transfer Date in accordance with the terms of the any document contained in the Mortgage File or any applicable law or regulation including, without limitation, adequate flood insurance coverage for all Mortgaged Properties located within an "A" or N" flood hazard area; and (i) ARM Adjustments. With respect to each adjustable rate Mortgage --------------- Loan whose index value for any Interest Adjustment Date is available on or prior to the Servicing Transfer Date, the Seller shall make all such adjustments and shall inform the related Mortgagors of such adjustments. SECTION 5.3 OBLIGATIONS OF THE SELLER AFTER THE SERVICING TRANSFER ------------------------------------------------------ DATE. Without limiting the generality of Section 5.1, the Seller shall take, or - ---- ----------- cause to be taken, the following actions with respect to the Mortgage Loans within three 3) Business Days following the Servicing Transfer Date (or within such time as may otherwise be specified below): (a) Tape. The Seller shall furnish to the Purchaser all available ---- computer or like records requested by the Purchaser reflecting the status of payments, balances and other pertinent information with respect to the Mortgage Loans as of the Servicing Transfer Date (including, without limitation, (i) master file, (ii) escrow file, (iii) payee file, which includes comprehensive tax and insurance information identifying payee, payee address, next payment due date, next amount payable and policy number/parcel number, and (iv) ARM master file). Such records shall include magnetic tapes reflecting all computer files maintained on the Mortgage Loans and shall include hard copy trial balance reports as specifically requested by the Purchaser; (b) Mortgage File. If the Seller has not already done so, the Seller ------------- shall have forwarded a complete Mortgage File with respect to each Mortgage Loan; (c) Accounting Reports. The Seller shall furnish to the Purchaser ------------------ copies of all accounting reports relating to the Mortgage Loans as of the Servicing Transfer Date including, without limitation, a trial balance and reports of collections, delinquencies, prepaids, curtailments, escrow payments, escrow balances, partial payments, partial payment balances and other like information with respect to the Mortgage Loans; (d) Other Documentation. The Seller shall provide the Purchaser any ------------------- and all further documents reasonably required by the Purchaser in order to fully transfer to the Purchaser possession of all tangible evidence of the Servicing Rights and escrow, impound and trust funds transferred hereunder;. 19 (e) Transfer of Escrow Funds and Other Proceeds. The Seller shall ------------------------------------------- transfer to the Purchaser, by wire transfer to the account designated by the Purchaser, an amount equal to the sum of (i) the Net Escrow Payments, (ii) all undistributed insurance loss draft funds, (iii) all unapplied funds received by the Seller, (iv) all unapplied interest an escrow balances accrued through the Servicing Transfer Date, (v) all buydown funds held by the Seller as of the Servicing Transfer Date, and (vi) all other amounts held by the Seller with respect to the Mortgage Loans as of the Servicing Transfer Date for which the Seller is not entitled to retain (collectively, the 'Escrow Proceeds'). Within five (5) Business Days following the Purchaser's receipt of the Escrow Proceeds, the Seller and the Purchaser shall resolve any discrepancies between the Seller's accounting statement and the Purchaser's Reconciliation with respect thereto. No later than ten (10) Business Days following the Servicing Transfer Date, the Seller or the Purchaser, as the case may be, shall transfer to the other, by wire transfer to the designated account, any amounts to which the other party is entitled; and (f) Mortgage Payments Received After Servicing Transfer Date. The -------------------------------------------------------- Seller shall promptly forward to the Purchaser any payment received by it after the Servicing Transfer Date with respect to any of the Mortgage Loans, whether such payment is in the form of principal, interest, taxes, insurance, loss drafts, insurance refunds, etc., in the original form received, unless such payment has been received in cash or by the Seller's lock box facility, in which case the Seller shall forward such payment in a form acceptable to the Purchaser. The Seller shall notify the Purchaser of the particulars of the payment, which notification shall set forth sufficient information to permit timely and appropriate processing of the payment by the Purchaser. ARTICLE VI MISCELLANEOUS ------------- SECTION 6.1 NOTICES. All demands, notices and communications ------- required to be provided hereunder shall be in writing and shall be deemed to have been duly given if mailed by registered or certified mail, postage prepaid, and return receipt requested, or, if by other means, when received by the other party at the address as follows: (i) if to the Seller: United PanAm Mortgage 625 The City Drive Orange, CA 92868 Attn: Mr. Blair Kenney (ii) if to the Purchaser: As provided by Purchaser in writing. or such other address as may hereafter be furnished to the other party by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date 20 delivered to or received at the premises of the addressee (as evidenced, in the case of registered or certified mail, by the date noted on the return receipt). SECTION 6.2 INTENTION OF THE PARTIES. Pursuant to this Agreement, ------------------------ the Purchaser is purchasing, and the Seller is selling the Mortgage Loans and not a debt instrument of the Seller or any other security. Accordingly, the Seller and the Purchaser shall each treat the transaction for federal income tax purposes as a sale by the Seller, and a purchase by the Purchaser, of the Mortgage Loans and the Servicing Rights. The Purchaser shall have the right to review the Mortgage Loans and the related Mortgage Loan Files to determine the characteristics of the Mortgage Loans which shall affect the federal income tax consequences of owning the Mortgage Loans and the Servicing Rights and the Seller shall cooperate with all reasonable requests made by the Purchaser in the course of such review. SECTION 6.3 EXHIBITS. The exhibits to this Agreement are hereby -------- incorporated and made a part hereof and are an integral part of this Agreement. SECTION 6.4 GENERAL INTERPRETIVE PRINCIPLES. For purposes of this ------------------------------- Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Agreement have the meanings assigned to them in this Agreement and include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other gender; (b) accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles; (c) references herein to "Sections," "Subsections," "Paragraphs," and other Subdivisions without reference to a document are to designated Sections, Subsections, Paragraphs and other subdivisions of this Agreement; (d) reference to a Subsection without further reference to a Section is a reference to such Subsection as contained in the same Section in which the reference appears, and this rule shall also apply to Paragraphs and other subdivisions; (e) the words "herein," "hereof," "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular provision; and (f) the term "include" or "including" shall mean without limitation by reason of enumeration. SECTION 6.5 REPRODUCTION OF DOCUMENTS. This Agreement and all ------------------------- documents relating thereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by any party at the closing, and (c) financial statements, certificates and other information previously or hereafter furnished, may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. SECTION 6.6 FURTHER AGREEMENTS. The Seller shall execute and deliver ------------------ to the Purchaser and the Purchaser shall execute and deliver to the Seller such reasonable and appropriate 21 additional documents, instruments or agreements as may be necessary or appropriate to effectuate the purposes of this Agreement. SECTION 6.7 EXECUTION OF AGREEMENT. This Agreement may be executed ---------------------- simultaneously in any number of counterparts. Each counterpart shall be deemed to be an original, and all such counterparts shall constitute one and the same instrument. This Agreement shall be deemed binding when executed by both the Purchaser and the Seller. Telecopy signatures shall be deemed valid and binding to the same extent as the original. SECTION 6.8 SUCCESSORS AND ASSIGNS. This Agreement shall bind and ---------------------- inure to the benefit of and be enforceable by the Seller and the Purchaser and the respective permitted successors and assigns of the Seller and the successors and assigns of the Purchaser. This Agreement shall not be assigned, pledged or hypothecated by the Seller without the consent of the Purchaser. This Agreement may be assigned, pledged or hypothecated or otherwise transferred or encumbered by the Purchaser, in whole or part, without the consent of the Seller. If the Purchaser assigns all of its rights as the Purchaser hereunder relating to some or all of the Mortgage Loans, the assignee of the Purchaser, upon notification to the Seller, will become the "Purchaser" hereunder with respect to such Mortgage Loans assigned hereby. SECTION 6.9 SEVERABILITY CLAUSE. Any part, provision, representation ------------------- or warranty of this Agreement which is prohibited or which is held to be void or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any part, provision, representation or warranty of this Agreement which is prohibited or unenforceable or is held to be void or unenforceable in any relevant jurisdiction shall be ineffective, as to such jurisdiction, to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction as to any Mortgage Loan shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties hereto waive any provision of law which prohibits or renders void or unenforceable any provision hereof. SECTION 6.10 COSTS. The Purchaser shall pay any commissions due its ----- salesmen and the legal fees and expenses of its attorneys and expenses of its custodian. All other costs and expenses incurred in connection with the transfer and delivery of the Mortgage Loans, including recording fees, fees for title policy endorsements and continuations and the Seller's attorney's fees, shall be paid by the Seller. SECTION 6.11 ATTORNEYS' FEES. If any claim, legal action or any --------------- arbitration or other proceeding is brought for the enforcement of this Agreement or because of a dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that claim, action or proceeding, in addition to any other relief to which such party may be entitled. SECTION 6.12 GOVERNING LAW. This Agreement shall be governed by and ------------- interpreted in accordance with the laws of the State of California applicable to agreements entered into and wholly performed within said jurisdiction. SECTION 6.13 SURVIVAL. All covenants, agreements, representations -------- and warranties made herein shall survive the execution and delivery of this Agreement. SECTION 6.14 ENTIRE AGREEMENT. This Agreement the entire ---------------- understanding between the parties hereto and supersedes any and all prior or contemporaneous oral or written communications with respect to the subject matter hereof, all of which communications are merged 22 herein. It is expressly understood and agreed that no employee, agent or other representative of the Seller or the Purchaser has any authority to bind such party with regard to any statement, representation, warranty or other expression unless said statement, representation, warranty or other expression is specifically included within the express terms of this Agreement. This Agreement shall not be modified, amended or in any way altered except by an instrument in writing signed by both the parties hereto. SECTION 6.15 CONFIDENTIALITY. The Seller and the Purchaser hereby --------------- acknowledge and agree that this Agreement shall be kept confidential and its contents will not be divulged to any party without the other party's consent except to the extent that it is appropriate for the Seller or the Purchaser to do so in working with legal counsel, auditors, taxing authorities or other governmental agencies. SECTION 6.16 NO SOLICITATION. From and after the Closing Date, the --------------- Seller agrees that for a period of five (5) years, it will not take any action or cause any action to be taken by any of its employees, agents or affiliates, or by any independent contractors acting on the Seller's behalf, to solicit in any manner whatsoever any Mortgagor to prepay, or refinance a Mortgage Loan. It is understood and agreed by the Seller and the Purchaser that all rights and benefits relating to the solicitation of any Mortgagors to refinance any Mortgage Loans shall be transferred to the Purchaser pursuant hereto on the Closing Date and the Seller shall take no action to undermine these rights and benefits. The Seller shall use its best efforts to prevent the sale of the name of any Mortgagor to any person or entity. It is understood that promotions undertaken by the Seller or Seller's affiliate(s) which are directed to the general public at large (i.e., newspaper advertisements, radio or T.V. ads, etc.) and not specifically directed to any Mortgagor or any borrower identified in any Mortgage Loan shall not constitute a breach of the obligations set forth in this Section 6.16. SECTION 6.17 NON-CIRCUMVENTION. The Seller and the Purchaser ----------------- understand and agree that the Purchaser may introduce prospective buyers of the Mortgage Loans to the Seller, that, such buyers are customers of the Purchaser and that relationships of the Purchaser to such buyers are confidential. The Seller agrees with respect to a particular buyer of the Mortgage Loans, the Seller will not, for the purpose of buying and selling other mortgage loans communicate with or sell such other mortgage loans to such buyer unless such buyer is or has been independently introduced to the Seller or the Seller has had previous dealings (other than any transactions involving the Purchaser) with such buyer. [SIGNATURE PAGE FOLLOWS] 23 IN WITNESS WHEREOF, the Seller and the Purchaser have caused their names to be signed hereto by their respective officers thereunto duly authorized as first above written. COUNTRYWIDE HOME LOANS, INC., the Seller /s/ Michael W. Schloessmann By _________________________________ Michael W. Schloessmann Vice President PAN AMERICAN BANK, FSB as Seller /s/ Blair F. Kenney By ________________________________ Name: Blair F. Kenney Title: Senior Vice President 24 EXHIBIT A MORTGAGE LOAN SCHEDULE (attached) 25 EX-10.88 3 ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT EXHIBIT 10.88 ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT ------------------------------------------------ This Assignment, Assumption and Recognition Agreement (the "Agreement") is made and entered into on August 14, 1998, by Countrywide Home Loans, Inc., a New York corporation, having an address at 4500 Park Granada Boulevard, Calabasas, California 91302 (the "Seller"), Fidelity Federal Bank, FSB, having an address at 4565 Colorado Boulevard, Los Angeles, California 90039 (the "Purchaser") and Pan American Bank, FSB, having an address at 625 The City Drive, Orange, California 92868 (the "Company"). In consideration of the mutual promises and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Assignment and Assumption. Except as expressly provided for herein, the ------------------------- Seller hereby grants, transfers and assigns to the Purchaser (a) all of its right, title and interest as "Purchaser" in, to and under that certain Mortgage Loan Purchase and Interim Servicing Agreement dated as of August 14, 1998, and duly executed by the Company and the Seller (attached hereto as Exhibit A, the "Purchase Agreement"), (b) all of its right, title and --------- interest in and to the each of the mortgage loans identified in Exhibit B --------- hereto (the "Mortgage Loans"), and (c) all servicing rights relating to the Mortgage Loans. Except for the provisions pertaining to the payment of the purchase price, the Purchaser hereby assumes all of the Seller's obligations as "Purchaser" under the Purchase Agreement from and after the date hereof, and the Seller shall be relieved and released by the Company of all of its obligations under the Purchase Agreement from and after the date hereof. Except as is otherwise expressly provided herein, the Seller Makes no representations, warranties or covenants to the Purchaser and the Purchaser acknowledges that the Seller has no obligations to the Purchaser under the terms of the Purchase Agreement or otherwise relating to the transaction contemplated herein (including but not limited to any obligation to repurchase any of the Mortgage Loans or to indemnify the Purchaser). 2. Consideration. In consideration for the transfers and assignments set ------------- forth in paragraph 1 of this Agreement, the Purchaser agrees to pay to the Seller the amounts referenced in that certain Funding Schedule dated as of August 14, 1998 (the "Funding Schedule") and duly executed by the Seller and the Purchaser (the "Purchase Price"). The Purchaser agrees to wire the agreed upon Purchase Price to the Seller to the account designated below: Bank of New York ABA - 021000018 Countrywide Home Loans ACCT - 8900038632 REF - Stuart Levitt 3. Recognition of the Purchaser by the Company. From and after the date ------------------------------------------- hereof, the Company shall recognize the Purchaser as the owner of the Mortgage Loans and the "Purchaser" under the Purchase Agreement. 4. Servicing of the Mortgage Loans. From and after the date hereof, the ------------------------------- Company shall interim service the Mortgage Loans for the Purchaser in accordance with the terms and conditions of the Purchase Agreement, as if the Purchaser and Company had entered into the Purchase Agreement. The address of the Purchaser set forth in Section 6.1 of the Purchase Agreement shall be changed to read as follows: Fidelity Federal Bank, FSB 4565 Colorado Boulevard Los Angeles, California 90039 Attn: Mark Mason, Executive Vice President 5. Status of Purchase Agreement. The Company and the Seller represent and ---------------------------- warrant that (a) the Purchase Agreement is in full force and effect as of the date hereof, (b) the Purchase Agreement has not been amended or modified in any respect, and (c) there has been no waiver or any agreement to waive any provision, nor has any notice of termination been given, under the Purchase Agreement. 6. No Claims. The Company represents and warrants that it has no offsets, --------- counterclaims or other defenses available to it with respect to the Purchase Agreement. 7. Covenants, Representations and Warranties of the Seller. The Seller ------------------------------------------------------- represents and warrants to, and covenants with, the Purchaser that: a. The Seller is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has all requisite corporate power and authority to acquire, own and sell the Mortgage Loans; b. The Seller has full corporate power and authority to execute, deliver and perform under this Agreement, and to consummate the transactions set forth herein. The execution, delivery and performance of the Seller of this Agreement, and the consummation by it of the transactions contemplated hereby, have been duly authorized by all necessary corporate action of the Seller. This Agreement has been fully executed and delivered by the Seller and constitutes the valid and legally binding obligation of the Seller enforceable against the Seller in accordance with its respective terms; c. No material consent, approval, order or authorization of, or declaration, filing or registration with, any governmental entity is required to be obtained or made by the Seller in connection with the execution, delivery or performance by the Seller of this Agreement, or the consummation by it of the transaction contemplated hereby; d. There is no action, suit, proceeding, investigation or litigation pending or, to the Seller's knowledge, threatened, which either in any instance or in the aggregate, if determined adversely to the Seller, would adversely affect the sale of the Mortgage Loans to the Purchaser, the execution, delivery or enforceability of this Agreement, or the Seller's ability to perform its obligations under this Agreement; and e. Immediately prior to payment of the purchase price for the Mortgage Loans, the Seller is the lawful owner of the Mortgage Loans with the full right to transfer the Mortgage Loans free from any and all claims and encumbrances whatsoever. 8. Covenants, Representations and Warranties of Purchaser. The Purchaser ------------------------------------------------------ represents and warrants to, and covenants with, the Seller and the Company that except for the provisions pertaining to the payment of the purchase price thereunder, the Purchaser agrees to be bound as "Purchaser" by all of the terms, covenants and conditions of the Purchase Agreement, and from and after the date hereof, the Purchaser assumes for the benefit of the Seller and the Company all of the Seller's obligations as "Purchaser" thereunder. 9. Governing Law. This Agreement shall be construed in accordance with the ------------- laws of the State of California and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with the laws of the State of California, except to the extent preempted by federal law. 10. Confidentiality. The Seller and the Purchaser hereby acknowledge and agree --------------- that this Agreement shall be kept confidential and its contents will not be divulged to any party without the other party's consent except to the extent that it is appropriate for the Seller or the Purchaser to do so in working with legal counsel, auditors, taxing authorities or other governmental agencies. 2 11. Conflict with Purchase Agreement. To the extent there is any conflict -------------------------------- between the terms of the Purchase Agreement and this Agreement, the latter shall be controlling, notwithstanding anything to the contrary contained in the Purchase Agreement. 12. Capitalized Terms. All capitalized terms used herein and not otherwise ----------------- defined herein shall have the meanings assigned to such terms in the Purchase Agreement. 13. Counterparts. This Agreement may be executed in any number of ------------ counterparts. Each counterpart shall be deemed to be an original and all such counterparts shall constitute one and the same instrument. [Signature page follows] 3 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. COUNTRYWIDE HOME LOANS, INC., the Seller By /s/ Michael W. Schloessmann -------------------------------------- Michael W. Schloessmann Vice President FIDELITY FEDERAL BANK, FSB, the Purchaser By /s/ Mark Mason -------------------------------------- Mark Mason Executive Vice President PAN AMERICAN BANK, FSB the Company By /s/ Blair Kenny -------------------------------------- Name: Blair Kenny Title: Senior Vice President 4 EXHIBIT A MORTGAGE LOAN PURCHASE AND INTERIM SERVICING AGREEMENT (attached) 5 MORTGAGE LOAN PURCHASE AND INTERIM SERVICING AGREEMENT ------------------------------------------------------ This Mortgage Loan Purchase and Interim Servicing Agreement is dated and effective as of August 14, 1998 (the "Agreement"), between Pan American Bank, FSB, having an address at 625 The City Drive, Orange, California 92868 (the "Seller"), and Countrywide Home Loans, Inc., having an address at 4500 Park Granada, Calabasas, California 91302 (the "Purchaser"). R E C I T A L S - - - - - - - - The Seller desires to sell and transfer to the Purchaser, and the Purchaser desires to purchase from the Seller, those certain mortgage loans identified on Exhibit A hereto, including all servicing rights relating thereto (the "Mortgage Loans") upon such terms as are set forth below. In consideration of the promises and the mutual agreements and undertakings set forth herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I Definitions ----------- Whenever used herein, the following words and phrases, unless the context Otherwise requires, shall have the following meanings: ACCRUED INTEREST: Accrued interest owing to the Seller on the Stated ---------------- Principal Balance of each Mortgage Loan at a rate equal to the Mortgage Interest Rate of each such Mortgage Loan, from the date through which interest has last been paid (as of Cut-off Date) through the day prior to the Closing Date, inclusive; provided, however, with respect to those Mortgage Loans for which interest has been paid through a date beyond the Cut-off Date, such accrued interest owing to Seller shall be reduced by the amount of interest accruing on the Stated Principal Balance of each such Mortgage Loan at a rate equal to the Mortgage Interest Rate of such Mortgage Loan, from the Closing Date to the day prior to the interest paid through date for such Mortgage Loan, inclusive. AGENCIES: Both FNMA or FHLMC. -------- AGREEMENT: This Mortgage Loan Purchase and Interim Servicing --------- Agreement, including all exhibits and supplements hereto, and all amendments hereof. APPRAISED VALUE: With respect to any Mortgage Loan, the value of the --------------- related Mortgaged Property based upon the lesser of (i) the original, signed appraisal made by a Qualified Appraiser for the originator at the time of origination of the Mortgage Loan or (ii) the purchase price of the Mortgaged Property at the time of origination of the Mortgage Loan, provided, however, that in the case of a refinanced Mortgage Loan, such value is based solely upon the appraisal made at the time of origination, of such refinanced Mortgage Loan and in the case of a Mortgage Loan originated under the streamlined documentation program, such value shall be based on an appraisal obtained at the time the original loan was originated. ASSIGNMENT OF MORTGAGE: An assignment of the Mortgage, notice of ---------------------- transfer or equivalent instrument in recordable form, sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to reflect the sale of the Mortgage to the Purchaser. BUSINESS DAY: Any day other than (i) a Saturday or Sunday, or (ii) a ------------ day on which banking and savings and loan institutions in the State of California, are authorized or obligated by law or executive order to be closed. 1 CLOSING DATE: August 14, 1998, or such other date as may be mutually ------------ agreed upon by the Seller and the Purchaser. CUT-OFF DATE: August 7, 1998. ------------ DUE DATE: The day of the month on which a Monthly Payment is due on a -------- Mortgage Loan, exclusive of any days of grace. ESCROW ACCOUNT: An account or accounts maintained by the Seller, or -------------- the Seller's predecessor in interest, maintained for the deposit of Escrow Payments received in respect of one or more Mortgage Loans. ESCROW PAYMENTS: The amounts held in Escrow Accounts which include --------------- amounts being held for payment of ground rents, property taxes, assessments, water rates, sewer rents, municipal charges, mortgage insurance premiums, fire and hazard insurance premiums, condo charges and other payments required to be escrowed by the Mortgagor pursuant to any Mortgage Loan. FHLMC: The Federal Home Loan Mortgage Corporation, or any successor ----- thereto. FNMA: The Federal National Mortgage Association or any successor ---- thereto. GROSS MARGIN: The fixed percentage amount set forth in the related ------------ Mortgage Note which amount is added to the Index in accordance with the terms of the related Mortgage Note to determine the Mortgage Interest Rate for such Mortgage Loan. HMDA: The Home Mortgage Disclosure Act, as amended. ---- HUD: The Department of Housing and Urban Development or any successor --- thereto. INDEX: On each Interest Adjustment Date, the Index shall mean the ----- rate per annum equal to the average of interbank offered rates for six-month U.S. dollar denominated deposits in the London market (LIBOR), as published in the Wall Street Journal as of the first Business Day of the month immediately preceding the month in which such Interest Adjustment Date occurs. INTEREST ADJUSTMENT DATE: With respect to each Mortgage Loan, the ------------------------ date on which an adjustment to the Mortgage Interest Rate on a Mortgage Note becomes effective. INTERIM SERVICING PERIOD: The period commencing with the Cut-off Date ------------------------ and ending with the Servicing Transfer Date. INTEREST PAID TO DATE: As of the Cut-off Date, the date for each --------------------- Mortgage Loan through which the Mortgagor has paid interest to the holder of the Note and which is listed on the Mortgage Loan Schedule. LIFETIME MORTGAGE INTEREST RATE CAP: The absolute maximum Mortgage ----------------------------------- Interest Rate payable for a Mortgage Loan, above which the Mortgage Interest Rate shall not be adjusted, as provided in the Mortgage Loan Schedule. LOAN-TO-VALUE RATIO OR LTV: With respect to any Mortgage Loan, the ------------------- --- ratio of the original outstanding principal amount to the Appraised Value of the Mortgage Loan. MONTHLY PAYMENT: The scheduled monthly payment of principal and --------------- interest on a Mortgage Loan. 2 MORTGAGE: The mortgage, deed of trust or other such instrument -------- securing a Mortgage Note, which creates a first lien on an unsubordinated estate in fee simple in real property securing the Mortgage Note. MORTGAGE FILE: The file containing the Mortgage Loan Documents, all ------------- other documents in connection with the origination of a particular Mortgage Loan and all documents, files and other information reasonably necessary to service the Mortgage Loans, including, but not limited to, good faith estimate, HUD 1 Settlement Statement, Truth in Lending Disclosure Statement, and Truth in Lending Notice of Right to Cancel (if required by law). MORTGAGE INTEREST RATE: The annual rate at which interest accrues on ---------------------- any Mortgage Loan, exclusive of any primary mortgage insurance, as adjusted from time to time in accordance with the provisions of the related Mortgage Note, if applicable. MORTGAGE LOAN: A mortgage loan identified in the Mortgage Loan ------------- Schedule which is sold pursuant to this Agreement, which Mortgage Loan includes without limitation the Mortgage File, the Monthly Payments, Principal Prepayments and all other rights, benefits, proceeds and obligations arising from or in connection with such Mortgage Loan. MORTGAGE LOAN DOCUMENTS: The following documents pertaining to any ----------------------- Mortgage Loan: (a) The original Mortgage Note bearing all intervening endorsements, endorsed "Pay to the order of _______________" and signed in the name of the Seller by an authorized officer; (b) The original Assignment of Mortgage for each Mortgage Loan in blank; (c) The original Mortgage with evidence of recording thereon; (d) The originals of all intervening assignments of mortgage with evidence of recording thereon; (e) The original mortgagee title insurance policy; and (f) The originals of any modification agreement. MORTGAGE LOAN SCHEDULE: The schedule of Mortgage Loans set forth on ---------------------- Exhibit A hereto. - --------- MORTGAGE NOTE: The note or other evidence of the indebtedness of a ------------- Mortgagor secured by a Mortgage. MORTGAGED PROPERTY: The real property securing repayment of the debt ------------------ evidenced by a Mortgage Note. MORTGAGOR: The obligor on a Mortgage Note. --------- NET ESCROW PAYMENTS: Escrow Payment balances remaining after advances ------------------- by the Seller for taxes and insurance to the extent documented under a detailed statement provided to the Purchaser. NEXT DUE DATE: As of the Cut-off Date, the date upon which a ------------- Mortgagor is required to make its next Monthly Payment, as set out on the Mortgage Loan Schedule. PERIODIC MORTGAGE INTEREST RATE CAP: The provision of a Mortgage Note ----------------------------------- which provides for an absolute maximum amount by which the Mortgage Interest Rate therein may increase or decrease 3 on an Interest Adjustment Date above the Mortgage Interest Rate previously in effect, equal to the rate set forth in the Mortgage Loan Schedule, if applicable. PRIMARY MORTGAGE LNSURANCE POLICY: A policy of primary mortgage --------------------------------- guaranty insurance issued by a Qualified Insurer, providing coverage at least equal to the level of coverage required by the Agencies at the time the related Mortgage Loan was originated if such Mortgage Loan was to be eligible for sale to, and securitization by, either FNMA or FHLMC. PRINCIPAL PREPAYMENT: Any payment or other recovery of principal on a -------------------- Mortgage Loan which is received in advance of its scheduled Due Date, including any prepayment penalty or premium thereon, which is not accompanied by an amount of interest representing scheduled interest due on any date or dates in any month or months subsequent to the month of prepayment. PURCHASE PRICE: The purchase price to be paid by the Purchaser for -------------- the Mortgage Loans (including the Servicing Rights relating thereto) which shall equal the product of (a) the Purchase Price Percentage, times (b) the Stated Principal Balance of the Mortgage Loans. PURCHASE PRICE PERCENTAGE: The purchase price percentage set forth in ------------------------- the Funding Schedule. PURCHASE PROCEEDS: The aggregate of the Purchase Price and the ----------------- Accrued Interest. PURCHASER: Any entity which purchases the Mortgage Loans pursuant to --------- this Agreement or its successor in interest or any successor or assign to the Purchaser under this Agreement as herein provided. Unless the context requires otherwise, all references to "Purchaser" in this Agreement shall be deemed to include such Purchaser's successors in interest, assignees or designees. QUALIFIED APPRAISER: An appraiser who (i) is licensed in the state ------------------- where the Mortgaged Property is located, (ii) has no interest, direct or indirect, in the Mortgaged Property or in any Mortgage Loan or the security therefore, (iii) complies with the Uniform Standards or Professional Appraisal Practice and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), and (iv) does not receive compensation that is affected by the approval or disapproval of the Mortgage Loan or by the amount of the appraisal." QUALIFIED INSURER: An insurance company duly qualified as such under ----------------- the laws of the states in which the Mortgaged Properties are located, duly authorized and licensed in such states to transact the applicable insurance business and to write the insurance provided, approved as an insurer by the Agencies and whose claims paying ability is rated in the two highest rating categories by the Standard & Poor's Ratings Group or Moody's Investors Service with respect to primary mortgage insurance and in the two highest rating categories by Best's with respect to hazard and flood insurance. REPURCHASE PRICE: With respect to any Mortgage Loan, a price equal to ---------------- the sum of (a) the product of (i) the unpaid principal balance of the Mortgage Loan at the time of repurchase, and (ii) the greater of par or the Purchase Price Percentage, and (b) interest on such unpaid principal balance at the Mortgage Interest Rate from the last date through which interest has been paid and distributed to the Purchaser to the date of repurchase. SEGMENT(S): One or more segments of Mortgage Loans (each, a ---------- "Segment") comprising the Segment A Mortgage Loans and the Segment B Mortgage Loans, whether individually or in the aggregate, as applicable. Each such Segment and the Mortgage Loans relating thereto are identified on Exhibit A and --------- may hereafter be referred to as Segments A and B, respectively. SEGMENT A MORTGAGE LOANS: The Mortgage Loans identified under Segment ------------------------ A of the Mortgage Loan Schedule. 4 SEGMENT B MORTGAGE LOANS: The Mortgage Loans identified under Segment ------------------------ B of the Mortgage Loan Schedule. SERVICING RIGHTS: With respect to each Mortgage Loan, any and all of ---------------- the following: (a) all rights to service the Mortgage Loans; (b) any payments or monies payable or received for servicing the Mortgage Loans; (c) any late fees, assumption fees, penalties or similar payments with respect to the Mortgage Loans; (d) all agreements or documents creating, defining or evidencing any such Servicing Rights and all rights of the Seller thereunder, including, but not limited to, any clean-up calls and termination options; (e) Escrow Payments or other similar payments with respect to the Mortgage Loans and any amounts actually collected with respect thereto; (f) all accounts and other rights to payments related to any of the property described in this paragraph; (g) possession and use of any and all Mortgage Files pertaining to the Mortgage Loans or pertaining to the past, present, or prospective servicing of the Mortgage Loans; and (h) all rights, powers and privileges incident to any of the foregoing. SERVICING TRANSFER DATE: September 21, 1998, or such other date the ----------------------- Purchaser may select upon reasonable notice to the Seller. STATED PRINCIPAL BALANCE: The unpaid principal balance of the ------------------------ Mortgage Loans at the Cut-off Date. ARTICLE II SALE OF THE MORTGAGE LOANS -------------------------- SECTION 2.1 AGREEMENT OF SALE. The Seller does hereby agree to sell, ----------------- convey, transfer and assign to the Purchaser on the Closing Date all right, title and interest in and to the Mortgage Loans, the Servicing Rights, the Mortgage Loan Documents, the Mortgage Files and the Escrow Accounts relating to the Mortgage Loans, all in accordance with the terms and conditions set forth herein. SECTION 2.2 PAYMENT OF THE PURCHASE PROCEEDS. No later than 1:00 -------------------------------- p.m. (Pacific time) on the Closing Date, the Purchaser shall pay to the Seller the Purchase Proceeds, by wire transfer in immediately available funds to the account designated by the Seller. Upon completion of the wire transfer to the Seller's designated account, the Purchaser shall own the Mortgage Loans and the Servicing Rights, free and clear of any lien or encumbrance whatsoever. SECTION 2.3 ENTITLEMENT TO PAYMENT ON THE MORTGAGE LOANS. The -------------------------------------------- Purchaser shall be entitled to all collections and recoveries of principal and interest received or applied to any Mortgagor's account after the Cut-off Date. All payments and remittances on the Mortgage Loans received by the Seller after the Cut-off Date and payable to the Purchaser shall be paid promptly to the Purchaser in accordance to the terms set forth in Article IV or Article V, as ---------- --------- applicable. SECTION 2.4 EXAMINATION OF MORTGAGE LOAN DOCUMENTS BY THE PURCHASER. ------------------------------------------------------- Prior to the Closing Date, the Purchaser shall have the right to review the Mortgage File and, based on its review, decline to purchase any Mortgage Loan which the Purchaser, in its sole discretion, determines not to be in compliance with each of the representations and warranties contemplated hereby or which is otherwise unsatisfactory to the Purchaser in its reasonable discretion. The Seller agrees to deliver or make available to the Purchaser a complete Mortgage File for each Mortgage Loan on or before such date as may be reasonably requested by the Purchaser. The fact that the Purchaser has conducted or has failed to conduct any partial or complete examination of the Mortgage Files shall not affect the Purchaser's right to demand repurchase or to avail itself of any other remedy available hereunder. Notwithstanding anything contained herein to the contrary, should there be a material adverse change in the characteristics of the Mortgage Loans remaining after the exclusion or rejection of one or more Mortgage Loans by the Purchaser as contemplated above, the Purchaser may, in its sole discretion, elect not to purchase the remaining Mortgage Loans and the Purchaser shall have no liability therefor. 5 SECTION 2.5 DELIVERY OF MORTGAGE LOAN DOCUMENTS. At least two (2) ----------------------------------- Business Days prior to the Closing Date, the Seller shall deliver the Mortgage Loan Documents with respect to each Mortgage Loan to the Purchaser or a bonded third party custodian (the "Custodian") and, in the case of the latter, shall cause the Custodian to deliver to the Purchaser a custodian's certification pursuant to which the Custodian certifies to the Purchaser that (i) with respect to each Mortgage Loan, it has in its Possession originals of each of the Mortgage Loan Documents, (ii) all of the Mortgage Loan Documents appear on their face to be genuine originals or copies, as applicable, and (iii) upon the Purchaser's wiring of the Purchase Proceeds to the Seller, that the Custodian shall hold the Mortgage Loan Documents with respect to each Mortgage Loan in trust for the Purchaser and will, subsequent thereto, act only in a manner consistent with the Purchaser's instructions with respect thereto. In the event that any of the Mortgage Loan Documents set forth in clauses (c) through (e) of the definition of Mortgage Loan Documents in Article I have not been delivered --------- to the Purchaser in the time specified above (the "Missing Documents") either ----------------- because such Missing Documents have not been returned by the applicable public recording office with respect to items (c) and (d), or because the final original title policy has not yet been issued by the title company with respect to item (e), then the Seller shall deliver to the Purchaser certified true and correct copies of the same and shall further deliver the originals of any such Missing Documents within fifteen (15) days of its receipt thereof, but in no event later than one hundred and twenty (120) days from the Closing Date. If the Seller fails to deliver any of the Missing Documents relating to a Mortgage Loan within the time specified above, the Seller shall, upon written request from the Purchaser, repurchase such Mortgage Loan in accordance with Section 3.3. ----------- SECTION 2.6 CONDITIONS TO CLOSING. The Purchaser's obligations --------------------- hereunder are subject to the fulfillment of the following conditions precedent. In the event that any of the conditions set forth below are not satisfied in all material respects, the Purchaser shall not have any obligation to purchase any of the Mortgage Loans or to pay the Purchase Proceeds as contemplated hereunder and shall instead be entitled, in its sole discretion, to terminate this Agreement in its entirety. (a) Each of the representations and warranties made by the Seller hereunder shall be true and correct in all material respects as of the Closing Date and no event shall have occurred which, with notice or the passage of time, would constitute a default under this Agreement. (b) The Seller shall have delivered to the Purchaser all of the Mortgage Loan Documents in accordance with Section 2.5 and a complete Mortgage ----------- File with respect to each Mortgage Loan. (c) Each of the terms and conditions set forth herein which are required to be satisfied on or before the Closing Date shall have been satisfied unless waived by the prejudiced party(ies). (d) The Seller shall have delivered to the Purchaser on or before the Closing Date the following documents: (1) a fully executed Agreement; (2) the Mortgage Loan Schedule, which shall include, without limitation, the Stated Principal Balance of each Mortgage Loan; (3) an executed Funding Schedule, in the form of Exhibit 8 --------- hereto; (4) an Officer's Certificate, in the form of Exhibit C hereto; --------- (5) State Licenses of the Seller; (6) Opinion of Counsel, substantially in the form of Exhibit E hereto; (7) Certificate of Good Standing of the Seller; and 6 (8) such other documents related to the purchase and sale of the Mortgage Loans and the Servicing Rights as the Purchaser may reasonably request. SECTION 2.7 RECORD TITLE. Record title to each Mortgage and the ------------ related Mortgage Note shall be transferred by the Seller to the Purchaser. The Seller shall, at the option of the Purchaser, either (i) prepare and ca use to be recorded the Assignment of Mortgage for each Mortgage Loan and shall, promptly upon its receipt of each original recorded Assignment of Mortgage from the applicable recording office, deliver the same to the Purchaser, or (ii) prepare and deliver to the Purchaser an original Assignment of Mortgage in blank, in each case, within the time and in the manner specified in Section 2.5. ----------- The Seller shall bear the cost and expense related to (i) providing all Assignments of Mortgages and endorsements of Mortgage Notes for any transfer of record title required hereunder with respect to the obligations of the Mortgage Notes and the underlying security interest related to each Mortgage Loan and (ii) recording title of the Mortgage Loans including, but not limited to, recording fees and fees for title policy endorsements. ARTICLE III REPRESENTATIONS AND WARRANTIES ------------------------------ SECTION 3.1 REPRESENTATIONS AND WARRANTIES RESPECTING THE SELLER. ---------------------------------------------------- The Seller represents, warrants and covenants to the Purchaser that, as of the Closing Date: (a) The Seller is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and is qualified to transact business in and is in good standing under the laws of each state where a Mortgaged Property is located or is otherwise exempt under applicable law from such qualification or is otherwise not required under applicable law to effect such qualification and no demand for such qualification has been made upon the Seller by any state having jurisdiction and in any event the Seller is or will be in compliance with the laws of any such state to the extent necessary to insure the enforceability of each Mortgage Note and the sale of the Mortgage Loans and Servicing Rights as contemplated by this Agreement; (b) The Seller has the full power and authority to perform, and to enter into and consummate, all transactions contemplated by this Agreement. As of the Closing Date, the Seller has the full power and authority to hold each Mortgage Loan and to sell each Mortgage Loan and the Servicing Rights; (c) Neither the acquisition or origination of the Mortgage Loans by the Seller, the sale of the Mortgage Loans or the Servicing Rights to the Purchaser, the consummation of the transactions contemplated hereby, nor the fulfillment of or compliance with the terms and conditions of this Agreement, will conflict with or result in a breach of any of the terms, conditions or provisions of the Seller's certificate of incorporation or bylaws or result in a material breach of any legal restriction or any agreement or instrument to which the Seller is now a party or by which it is bound, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Seller or its property is subject; (d) The Seller is an approved seller/servicer for the Agencies, in good standing with each such agency, and is a mortgagee approved by the Secretary of HUD. No event has occurred, including but not limited to, a change in insurance coverage, which would make the Seller unable to comply with FNMA-, FHLMC- or HUD-eligibility requirements or which would require notification to the Agencies or HUD; (e) The Seller does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement; 7 (f) There is no action, suit, proceeding, investigation or litigation pending or, to the best of the Seller's knowledge, threatened, which either in any one instance or in the aggregate, if determined adversely to the Seller, would adversely affect the sale of the Mortgage Loans or the Servicing Rights to the Purchaser, or the Seller's ability to perform its obligations under this Agreement; (g) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by the Seller of or compliance by the Seller with this Agreement or the terms of the Mortgage Loans, the delivery of the Mortgage Files to the Purchaser, the sale of the Mortgage Loans and the Servicing Rights to the Purchaser or the consummation of the transactions contemplated by this Agreement, or if required, such consent, approval, authorization or order has been obtained prior to the Closing Date; and (h) The consummation of the transactions contemplated by this Agreement are in the ordinary course of business of the Seller, and the transfer, assignment and conveyance of the Mortgage Notes, the Mortgages and/or the Servicing Rights by the Seller pursuant to this Agreement are not subject to the bulk transfer or any similar statutory provisions in effect and applicable to this transaction. (i) Seller has previously furnished Purchaser with Seller's most recent audited financial statements, together with the respective reports thereon of the Seller's independent public accountant, and Seller's most recent unaudited financial statements, each of which has been prepared in accordance with generally accepted accounting principles. Each of the balance sheets included in the financial statements sets for the Seller's financial condition as of the date thereof, and there have been no material adverse changes in Seller's business or financial conditions since that date. (j) Neither this Agreement, nor any statement, report, or other document furnished or to be furnished pursuant to this Agreement or in connection with the transaction contemplated hereby, contains any untrue statement of fact by Seller, or omits to state a fact necessary to make the statements of Seller contained therein not misleading. (k) Upon request, Seller will deliver to Purchaser a true and correct copy of Seller's fidelity bond and Seller's errors and omissions policy, and/or certificates evidencing the same as currently in effect, the amounts and coverages of both of which will be acceptable to Purchaser. Seller shall, at its own expense, maintain a fidelity bond and an errors and omissions policy, in amounts at least as great as, and with the coverages at least as broad as, those currently in effect. Seller shall, upon request, furnish proof of such coverage at or before the first Purchase and, upon request, annually thereafter. (l) The Mortgage Loans were not intentionally selected in a manner intended to adversely affect the interest of the Purchaser. (m) Seller has not dealt with any broker or Agent or other Person who might be entitled to a fee, commission or compensation in connection with this transaction other than the Purchaser except as Seller has previously disclosed to Purchaser in writing. (n) The consideration received by Seller upon the sale of the Mortgage Loans under this Agreement constitutes fair consideration and reasonably equivalent value for the Mortgage Loans. (o) Seller has determined that the disposition of the Mortgage Loans pursuant to this Agreement will be afforded sale treatment for accounting and tax purposes. SECTION 3.2 REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL MORTGAGE ------------------------------------------------------------ LOANS. With respect to each Mortgage Loan, the Seller represents and warrants - ----- to the Purchaser that as of the Closing Date: (a) The information set forth in the Mortgage Loan Schedule and in each Mortgage File is complete, true and correct; 8 (b) All payments required under the terms of the Mortgage Note to be made on or prior to the Closing Date have been made; the Seller has not advanced funds, or induced, solicited or knowingly received any advance of funds from a party other than the owner of the Mortgaged Property subject to the Mortgage, directly or indirectly, for the payment of any amount required under the Mortgage Loan; and there has been no delinquency of thirty (30) days or more in any payment by the Mortgagor thereunder during the last twelve (12) months. Each Mortgagor has made or shall make, as the case may be, the first Monthly Payment with respect to the related Mortgage Loan on its Due Date or in no event later than twenty-nine (29) days thereafter. No Mortgage Loan is subject to any pending foreclosure, bankruptcy, insolvency, or reorganization proceeding. Nothing contained in this Section 3.2(b) shall in any way limit any other rights -------------- of the Purchaser as provided hereunder; (c) There are no delinquent taxes, water charges, sewer rents, assessments, insurance premiums, leasehold payments, including assessments currently due and owing in future installments or other outstanding charges affecting the related Mortgaged Property; (d) The terms of the Mortgage Note and the Mortgage have not been impaired, waived, altered or modified in any respect, except by written instruments which are in the Mortgage File and have been or will be recorded, if necessary to protect the interests of the Purchaser, and which have been delivered to the Purchaser, all in accordance with this Agreement. The substance of any such waiver, alteration or modification has been approved by the primary mortgage guaranty insurer, if any, and by the title insurer, to the extent required by the related policy, and its terms are reflected on the Mortgage Loan Schedule. No Mortgagor has been released, in whole or in part, except in connection with an assumption agreement approved by the primary mortgage insurer, if any, and title insurer, to the extent required by the policy, and which assumption agreement is part of the Mortgage File and the terms of which are reflected in the Mortgage Loan Schedule, if executed prior to the Closing Date; (e) The Mortgage Note and the Mortgage are not subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, nor will the operation of any of the terms of the Mortgage Note and the Mortgage, or the exercise of any right thereunder, render the Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set- off, counterclaim or defense, including the defense of usury and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (f) All buildings upon, or comprising part of, the Mortgaged Property are insured by an insurer acceptable to the Agencies against loss by fire, hazards of extended coverage and such other hazards as are customary in the area where the Mortgaged Property is located, and such insurer is licensed to do business in the state where the Mortgaged Property is located. All such insurance policies (collectively, the "hazard insurance policy") contain a standard mortgagee clause naming the Seller, its successors and assigns as mortgagee and all premiums thereon have been paid. If upon origination of the Mortgage Loan, the Mortgaged Property was, or was subsequently deemed to be, in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards (and such flood insurance has been made available), which require under applicable law that a flood insurance policy meeting the requirements of the current guidelines of the Federal Insurance Administration (or any successor thereto) be obtained, such flood insurance policy is in effect which policy conforms to the requirements of the Agencies. The Mortgage obligates the Mortgagor thereunder to maintain all such insurance at Mortgagor's cost and expense and, on the Mortgagor's failure to do so, authorizes the holder of the Mortgage to maintain such insurance at Mortgagor's cost and expense and to obtain reimbursement therefor from the Mortgagor. Each Mortgage Loan has in place a fully-paid life of loan flood certification from a FNMA- or FHLMC-approved vendor, assigned in care of the Purchaser, which provides for notification to the Purchaser of changes in designated flood areas which would affect such Mortgage Loan; (g) Any and all requirements of any federal, state or local law including, without limitation, usury, truth in lending, real estate settlement procedures including, without limitation, the Real Estate Settlement Procedures Act of 1974, as amended, consumer credit protection, equal credit 9 opportunity or disclosure laws applicable to the Mortgage Loan have been complied with in all material respects; (h) The Mortgage has not been satisfied, canceled, subordinated, or rescinded, in whole or in part, and the Mortgaged Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission; (i) The Mortgage is a valid, existing and enforceable first lien on the Mortgaged Property, including all improvements on the Mortgaged Property, if any, subject only to (a) the lien of current real property taxes and assessments not yet due and payable, (b) covenants, conditions and restrictions, rights of way, easements and other matters of the public record as of the date of recording being acceptable to mortgage lending institutions generally and specifically referred to in the lender's title insurance policy delivered to the originator of the Mortgage Loan and which do not adversely affect the Appraised Value (as defined in clause (i) of such definition) of the Mortgaged Property, and (c) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property. The Seller has full right to sell and assign the Mortgage to the Purchaser; (j) The Mortgage Note and the related Mortgage are genuine and each is the legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or reorganization. (k) All parties to the Mortgage Note and the Mortgage had the legal capacity to enter into the Mortgage Loan transaction and to execute and deliver the Mortgage Note and the Mortgage, and the Mortgage Note and the Mortgage have been duly and properly executed by such parties; (l) The proceeds of the Mortgage Loan have been fully disbursed and there is no requirement for future advances thereunder and any and all requirements as to completion of any on-site or off-site improvement and as to disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making or closing the Mortgage Loan and the recording of the Mortgage were paid, and the Mortgagor is not entitled to any refund of any amounts paid or due under the Mortgage Note or Mortgage; (m) The Seller is the sole owner and holder of the Mortgage Loan and the related Servicing Rights and is the custodian of the related Escrow Account, if applicable. The Mortgage Loan has neither been assigned nor pledged, and the Seller has good and marketable title thereto, and has full right to transfer and sell the Mortgage Loan and the related Servicing Rights to the Purchaser free and clear of any encumbrance, equity, lien, pledge, charge, claim or security interest and has full right and authority subject to no interest or participation of, or agreement with, any other party, to sell and assign each Mortgage Loan and the related Servicing Rights to the Purchaser pursuant to the terms of this Agreement; (n) All parties which have had any interest in the Mortgage, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest were (a) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (b) (i) organized under the laws of such state, or (ii) qualified to do business in such state, or (iii) a federal savings and loan association or national bank, or (iv) not deemed to be doing business in such state under applicable law; (o) The Mortgage Loan is covered by an ALTA lender's title insurance policy acceptable to the Agencies, issued by a title insurer acceptable to the Agencies and qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring (subject to the exceptions contained in (i)(a) and (b) above) the Seller, its successors and assigns as to the first priority lien of the Mortgage in the original principal amount of the Mortgage Loan and against any loss by reason of the invalidity or unenforceability of the lien resulting from the provisions of the Mortgage Note and/or Mortgage 10 providing for adjustment in the Mortgage Interest Rate and Monthly Payment. Additionally, such lender's title insurance policy affirmatively insures ingress and egress, and against encroachments by or upon the Mortgaged Property or any interest therein. The Seller is the sole insured of such lender's title insurance policy, and such lender's title insurance policy is in full force and effect and will be in full force and effect upon the consummation of the transactions contemplated by this Agreement. No claims have been made under such lender's title insurance policy, and no prior holder of the-related Mortgage, including the Seller, has done, by act or omission, anything which would impair the coverage of such lender's title insurance policy; (p) There is no default, breach, violation or event of acceleration existing under the Mortgage or the Mortgage Note and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration, and the Seller has not waived any default, breach, violation or event of acceleration; (q) There are no mechanics or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under law could give rise to such lien) affecting the related Mortgaged Property which are or may be liens prior to or equal with, the lien of the related Mortgage; (r) All improvements which were considered in determining the Appraised Value (as defined in clause (i) of said definition) of the related Mortgaged Property lay wholly within the boundaries and building restriction lines of the Mortgaged Property, and no improvements on adjoining properties encroach upon the Mortgaged Property; (s) The Mortgage Loan was originated by the Seller or by a FNMA- approved or FHLMC-approved mortgage banker (which mortgage banker is a mortgagee approved by HUD), or savings and loan association, a savings bank, a commercial bank or similar banking institution which is supervised and examined by a federal or state authority, or by another mortgagee approved by the Secretary of HUD; (t) The origination, servicing and collection practices with respect to each Mortgage Note and Mortgage including, without limitation, the establishment, maintenance and servicing of the Escrow Accounts and Escrow Payments, if any, since origination, have been conducted in all respects in accordance with the terms of Mortgage Note and in compliance with all applicable laws and regulations and, unless otherwise required by law or FNMA/FHLMC standard, in accordance with the proper, prudent and customary practices in the mortgage origination and servicing business. With respect to the Escrow Accounts and Escrow Payments, if any, all such payments are in the possession or under the control of the Seller and there exists no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made. No escrow deposits or Escrow Payments or other charges or payments due the Seller have been capitalized under any Mortgage or the related Mortgage Note. All Mortgage Interest Rate adjustments have been made in strict compliance with state and federal law and the terms of the related Mortgage Note. Any interest required to be paid pursuant to state and local law has been properly paid and credited; (u) The Mortgaged Property is free of material damage and waste and there is no proceeding pending for the total or partial condemnation thereof; (v) The Mortgage contains customary and enforceable provisions to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security intended to be provided thereby, including, (a) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (b) otherwise by judicial foreclosure. There is no other exemption available to the Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage. The Mortgagor has not notified the Seller and the Seller has no knowledge of any relief requested or allowed to the Mortgagor under the Soldiers and Sailors Civil Relief Act of 1940; 11 (w) The Mortgage Note is not and has not been secured by any collateral except the lien of the applicable Mortgage; (x) The Mortgage File contains an original appraisal of the related Mortgaged Property signed prior to the approval of the Mortgage Loan application by a Qualified Appraiser duly appointed by the originator; the signature appearing on such appraisal is the genuine signature of such Qualified Appraiser; the appraisal is in a form acceptable to the Agencies, with such riders as are acceptable to the Agencies; (y) In the event the Mortgage constitutes a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by the Purchaser to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Mortgagor; (z) No Mortgage Loan contains a permanent or temporary "buydown" provision; (aa) The Mortgagor has executed one or more statements to the effect that the Mortgagor has received all disclosure materials required by applicable law with respect to the making of the Mortgage Loan. The Seller shall maintain all such statements in the Mortgage File; (bb) No Mortgage Loan was made in connection with (a) the construction or rehabilitation of a Mortgaged Property or (b) facilitating the trade-in or exchange of a Mortgaged Property; (cc) [Intentionally left blank]; (dd) To the best of Seller's knowledge, the Mortgaged Property is lawfully occupied under applicable law and all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy, have been made or obtained from the appropriate authorities; (ee) [Intentionally left blank]; (ff) The Assignment of Mortgage is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located; (gg) Any future advances made to the Mortgagor prior to the Closing Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term. The lien of the Mortgage securing the consolidated principal amount is expressly insured as having first lien priority by a title insurance policy, an endorsement to the policy insuring the mortgagee's consolidated interest or by other title evidence acceptable to the Agencies. The consolidated principal amount does not exceed the original principal amount of the Mortgage Loan; (hh) If the Mortgaged Property is a condominium unit or a planned unit development, such condominium or planned unit development project meets the eligibility requirements of the Agencies; (ii) The Mortgage Note and Mortgage are on forms acceptable to either of the Agencies; (jj) The Mortgaged Property is located in the state indicated on the Mortgage Loan Schedule, and consists of a single parcel of real property with a detached single family residence erected thereon or an individual condominium unit, or a 2-4 family dwelling or an individual unit in a planned unit development as defined by FNMA, none of which is a mobile home or manufactured dwelling; 12 (kk) There are no circumstances or conditions with respect to the Mortgage, the Mortgage Property, the Mortgagor, the Mortgage File or the Mortgagor's credit standing that can reasonably be expected to cause private institutional investors to regard the Mortgage Loan as an unacceptable investment, cause the Mortgage Loan to become delinquent, or adversely affect the value or marketability of the Mortgage Loan; (ll) The Mortgage contains an enforceable provision for the acceleration of the payment of the unpaid principal balance of the Mortgage Loan in the event that the Mortgaged Property is sold or transferred without the prior written consent of the mortgagee thereunder; (mm) The Seller has no knowledge of any circumstances existing that could reasonably be expected to adversely affect the value or the marketability of any Mortgaged Property or Mortgage Loan or to cause the Mortgage Loans to prepay during any period materially faster or slower than the mortgage loans of similar characteristics originated by the Seller generally; (nn) Each Mortgage Loan is covered by a valid and transferable tax service contract with First American, or such other vendor as may be reasonably acceptable to the Purchaser; (oo) Each Mortgage Loan is an adjustable rate mortgage loan requiring monthly payments sufficient to amortize the original principal balance over the original term set forth in the Mortgage Loan Schedule. No Mortgage Loan has negatively amortized nor shall any Mortgage Loan have any negative amortization after the Closing Date. The Mortgage Interest Rate adjusts semi-annually in accordance with the related Mortgage Note, provided, however, with respect to Segments A and B, the Mortgage Interest Rate shall be fixed for an initial period of two (2) and three (3) years, respectively. On each Interest Adjustment Date, the Mortgage Interest Rate shall be adjusted to equal the Index plus the Gross Margin (rounded up or down to the nearest 0.125%), subject to the Periodic Mortgage Interest Rate Cap and the Lifetime Mortgage Interest Rate Cap as set forth in the respective Mortgage Note and the Mortgage Loan Schedule. None of the Mortgage Loans contain a provision allowing the Mortgagor to convert the Mortgage Note from an adjustable rate mortgage loan to a fixed rate mortgage loan; (pp) Each Mortgage Loan at the time of origination was underwritten in accordance with the credit underwriting guidelines of the Seller attached hereto as Exhibit D and, to the extent not inconsistent therewith, generally accepted --------- sub-prime credit underwriting guidelines; (qq) As of the Closing Date, the Seller shall have received neither actual nor constructive notice that either a Mortgage Loan will be paid in full (whether by virtue of a demand statement or otherwise) or that any Mortgagor has elected to convert the related Mortgage Loan into a fixed-rate mortgage loan in accordance with the terms of the related Mortgage Note; (rr) The Mortgage Note is not and has not been secured by any collateral except the lien of corresponding Mortgage on the Mortgaged Property; (ss) No Mortgage Loan contains provisions pursuant to which Monthly Payments are (a) paid or partially paid with funds deposited in any separate account established by the Seller, the Mortgagor, or anyone on behalf of the Mortgagor or (b) paid by any source other than the Mortgagor or contains any other similar provisions which may constitute a "buydown" provision. The Mortgage Loan is not a graduated payment mortgage loan and the Mortgage Loan does not have a shared appreciation or other contingent interest feature; and (tt) No error, omission, misrepresentation, negligence, fraud or similar occurrence with respect to a Mortgage Loan has taken place on the part of the Seller, or, to the best of Seller's knowledge, on the part of any other person including without limitation the Mortgagor, any appraiser, any builder or developer, or any other party involved in the origination of the Mortgage Loan or in the application of any insurance in relation to such Mortgage Loan. 13 (uu) There is no homestead or other exemption available to the Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage subject to applicable federal and state laws and judicial precedent with respect to bankruptcy and right of redemption. (vv) There exists no violation of any local, state or federal environmental law, rule or regulation in respect of the Mortgaged Property which violation has or could have a material adverse effect on the market value of such Mortgaged Property. There exists no pending action or proceeding directly or indirectly involving the related Mortgaged Property in which compliance with any environmental law, rule or regulation is in issue; and, to the best of Seller's knowledge, nothing further remains to be done to satisfy in full all requirements of each such law, rule or regulation constituting a prerequisite to the use and enjoyment of such Mortgaged Property. There has been no release in or on the Mortgaged Property of any hazardous substances, hazardous wastes or solid wastes, as such terms are defined in the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation and Recovery Act of 1976, or other federal, state and local environmental laws and the Mortgage Property is not and has not been used for the storage or transportation of any such hazardous substances, hazardous wastes or solid wastes. There are no underground storage tanks on the Mortgaged Property. (ww) Except as disclosed on the Mortgage Loan Schedule, none of the Mortgage Loans are classified as "high cost" Mortgage Loans under Section 32 of the Home Ownership and Equity Protection Act of 1994. (xx) None of the Mortgaged Properties are located in the State of Alabama. (yy) If during the origination or acquisition of a Mortgage Loan a yield spread premium or other origination fee was paid to any agent or affiliate of Seller, Seller represents that such fees were disclosed on the settlement statement provided to the related Mortgagor that evidences such Mortgagor's acknowledgment of such fees and such disclosure will be included in the related Mortgage File. SECTION 3.3 REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES. ----------------------------------------------------- The representations and warranties set forth in Sections 3.1 and 3.2 shall -------------------- survive the sale of the Mortgage Loans to the Purchaser and shall inure to the benefit of the Purchaser, notwithstanding any restrictive or qualified endorsement on any Mortgage Note or Assignment of Mortgage or the examination or failure to examine any Mortgage File. Furthermore, the absence of the Seller in either the chain of title or endorsement shall in no way limit the Purchaser's recourse against the Seller as provided in this Section 3.3 for a breach of one ----------- or more of the Seller's representations and warranties made herein. Upon discovery by either the Seller or the Purchaser of a breach of any of the foregoing representations and warranties which materially and adversely affects the value of one or more of the Mortgage Loans or the Purchaser's interest therein, the party discovering such breach shall give written notice within thirty (30) days of such discovery to the other. The Seller shall have a period of thirty (30) days from the earlier of the discovery of a breach or the receipt by the Purchaser of notice of a breach within which to correct or cure such breach. If any such breach cannot be corrected or cured within such thirty (30) day period, the Seller shall, at the Purchaser's option and not later than thirty (30) days after its discovery or its receipt of notice of such breach, repurchase such Mortgage Loan at the Repurchase Price. In the event that a breach shall involve any representation or warranty set forth in Section 3.1 and such breach cannot be cured within ----------- sixty (60) days of the earlier of either discovery by or notice to the Seller of such breach, all of the Mortgage Loans shall, at the Purchaser's option, be repurchased by the Seller at the Repurchase Price. Any repurchase of a Mortgage Loan(s) pursuant to the foregoing provisions of this Section 3.3 shall be ----------- accomplished by wire transfer of immediately available funds on the repurchase date to an account designated by the Purchaser. At the time of repurchase, the Purchaser and the Seller shall arrange for the reassignment of the repurchased Mortgage Loan to the Seller and the delivery to the Seller of any documents held by the Purchaser or its custodian relating to such Mortgage Loan. The Seller shall, simultaneously with such 14 reassignment, give written notice to the Purchaser that such repurchase has taken place. All out of pocket costs incurred by the Purchaser in connection with the reassignment shall be paid by the Seller. Any cause of action against the Seller relating to or arising out of the breach of any representations and warranties made in Sections 3.1 or 3.2 ------------------- shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the Seller to cure such breach or repurchase such Mortgage Loan as specified above, and (iii) demand upon the Seller by the Purchaser for compliance with the relevant provisions of this Agreement. Purchaser has the right to perform a field review of all appraisals of the Mortgage Properties related to the Mortgage Loans on or before September 14, 1998, provided that Seller shall have delivered to the Purchaser, on or before the Closing Date, copies of appraisals relating to certain Mortgaged Properties (a list of which shall be provided by Purchaser to Seller prior to the Closing Date) and the addresses of each of the Mortgagor. If during such review Purchaser determines using a third party appraisal service, that the Appraised Value of any Mortgage Property varies by more than (i) ten percent (10%) for Mortgage Loans disclosed on a Mortgage Loan Schedule with a Loan-To-Value Ratio of less than or equal to 75% or (ii) five percent (5%) for Mortgage Loans disclosed on a Mortgage Loan Schedule with a Loan-To-Value Ratio of greater than 75% then Purchaser will notify Seller of such variance. Within five (5) Business Days of receipt of such notification by Purchaser, Seller, at its own expense, may request an additional independent appraisal and/or a drive-by appraisal completed on FNMA form 2055 using an appraisal service approved by Purchaser (such approval not to be unreasonably withheld). If such additional appraisal indicates that the variance is less than 10% or 5%, as applicable, Purchaser will not pursue a repurchase; provided, -------- however, if such additional appraisal indicates a variance of more than 10% or - ------- 5%, as applicable, Seller must repurchase such Mortgage Loan by depositing in an account specified by Purchaser the amount of the Repurchase Price within five (5) Business Days. When the Repurchase Price is wire transferred to the specified account, Seller shall, simultaneously with such deposit, give written notice to Purchaser that such deposit has taken Place. SECTION 3.4 INDEMNIFICATION OF THE PURCHASER. (a) In addition to -------------------------------- the repurchase obligations set forth in Section 3.3, the Seller shall indemnify -------------- the Purchaser and hold it harmless against any losses, damages, penalties, fines, forfeitures, judgments and any related costs including, without limitation, reasonable and necessary legal fees, resulting from any claim, demand, defense or a material omission on the part of the Seller in receiving, processing, funding or servicing any Mortgage Loan, or from any assertion based on, grounded upon or resulting from a breach of any of the Seller's representations and warranties contained in this Article III, or failure to ----------- perform any warranty/agreements contained in this Agreement. Notwithstanding the foregoing, Seller shall not be liable for any damages resulting from a material omission on the part of the Purchaser in servicing any Mortgage Loan after the Servicing Transfer Date. In addition to the obligations of the Seller set forth in this Article III, the Purchaser may pursue any and all remedies ----------- otherwise available at law or in equity, including, but not limited to, the right to seek damages. Notwithstanding the foregoing, Seller shall not be liable for any special, consequential or punitive damages. This section shall survive the transfer of the Mortgage Loans under this Agreement and the term of this Agreement. (b) Within ten (10) Business Days after a receipt by a party of a third party claim, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Agreement, deliver a claim notice to the indemnifying party; provided, however, that the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability that the indemnifying party may have to the indemnified party otherwise than under this subsection, unless the indemnifying party is materially prejudiced thereby. In the event that any third party claim is made against the indemnified party and the indemnified party notifies the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof, with counsel satisfactory to the indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), which consent shall not be unreasonably withheld. The indemnified party shall have the right to employ separate counsel in any 15 action or claim and to participate in the defense thereof at the expense of the indemnifying party, if the retention of such counsel has been specifically authorized by the indemnifying party, if such counsel is retained because the indemnifying party does not notify the indemnified party within fifteen (15) Business Days after receipt of a claim notice that it elects to undertake the defense thereof, or if there is a reasonable basis on which the indemnified party's interest may differ from those of the indemnifying party. The indemnifying party shall remit payment for the amount of a valid and substantiated claim for indemnification hereunder within fifteen (15) Business Days of the receipt of a claim notice therefor. Upon the payment in full of any claim hereunder, the indemnifying party shall be subrogated to the rights of the indemnified party against any person with respect to the subject matter of such claim. In the event of a dispute, the parties shall proceed in good faith to negotiate a resolution of such dispute. The indemnified party shall have the right to reject any settlement approved by the indemnifying party if the indemnified party waives its right to indemnification hereunder. The indemnified party shall have the right to settle any third party claim over the objection of the indemnifying party; provided, -------- however, that if the indemnifying party is contesting such claim in good faith - ------- and has assumed the defense of such claim from the indemnified party, the indemnified party waives any right to indemnity therefor. In the event that the indemnifying party reimburses the indemnified party with respect to any third party claim and the indemnified party subsequently receives reimbursement from another person with respect to that third party claim, then the indemnified party shall remit such reimbursement from such other person to the indemnifying party within thirty (30) days of receipt thereof. SECTION 3.5 PREPAYMENT AND CONVERSION PROTECTION. In the event that ------------------------------------ any of the Mortgage Loans are (i) paid in full by the related Mortgagor or (ii) converted to a fixed rate mortgage loan, in either case, on or prior to the Servicing Transfer Date, or (iii) subject to a breach of the representation set forth in Section 3.2(qq), the Seller shall, with respect to each such Mortgage ------- Loan, pay to the Purchaser, in addition to the unpaid principal balance plus accrued interest at the time of such payoff or conversion, the product of (a) the positive difference, if any, between the Purchase Price Percentage and 100%, times (b) the unpaid principal balance of such Mortgage Loan at the time such Mortgage Loan is paid in full or converted, as applicable. ARTICLE IV INTERIM SERVICING OF THE MORTGAGE LOANS --------------------------------------- SECTION 4.1 GENERAL. The Mortgage Loans will be purchased by the ------- Purchaser and sold by the Seller on a servicing-released basis and the purchase of the Mortgage Loans by the Purchaser shall, for all purposes, include all Servicing Rights relating thereto. From the Closing Date to the Servicing Transfer Date, the Seller shall interim service the Mortgage Loans in strict accordance with the terms of this Agreement, applicable law, and, to the extent not inconsistent herewith, the servicing standards of the Agencies. Without limiting the generality of the foregoing, the Seller shall not take, or fail to take, any action which would result in the Purchaser's interest in the Mortgage Loans being adversely affected. It is expressly understood by the Seller that, during the Interim Servicing Period, the Purchaser intends to market the Mortgage Loans for sale to a whole loan investor and, as such, the Seller agrees to comply with all reasonable requests of the Purchaser made prior to the Servicing Transfer Date in order to effectuate the foregoing including, without limitation, any request for information or documentation in connection with any Mortgage Loan which the Purchaser deems is necessary to carry out the foregoing. With respect to each Mortgage Loan for which an Escrow Account has been established for the payment of taxes, insurance and other similar payments, the Seller shall, upon notice from the Purchaser, effect the termination of such Escrow Account on or prior to the Servicing Transfer Date, and refund any positive balance therein to the related Mortgagor(s). SECTION 4.2 REPORTING AND REMITTANCE. Within five (5) Business Days ------------------------ following the conclusion of each calendar month reporting and remittance cycle occurring during the Interim Servicing Period (each, a "Reporting Cycle"), if any, the Seller shall forward to the Purchaser with respect to the 16 Mortgage Loans a full set of tapes or other computer or like records and a trial balance as of the end of each such Reporting Cycle, which tapes or computer records and trial balance shall include information relating to all payment and other activity on the Mortgage Loans. With respect to any payments of principal or interest (including all prepayments) received, or applied to any Mortgagor's account, by the Seller during the Interim Servicing Period (or prior to the Closing Date, if any such payments were not reflected in the calculation of the Purchaser Proceeds), the Seller shall remit to the Purchaser all such payments of principal and interest on the Mortgage Loans no later than the fifth (5/th/) day of the month following the conclusion of each Reporting Cycle and, with respect to the month in which the Servicing Transfer Date occurs, no later than the fifth (5/th/) Business Day thereafter. ARTICLE V TRANSFER OF SERVICING RIGHTS ---------------------------- SECTION 5.1 TRANSFER OF SERVICING. The Seller agrees to act --------------------- reasonably, in good faith and in accordance with all applicable laws and regulations and to do all things necessary to effect the transfer of the Servicing Rights to the Purchaser on the Servicing Transfer Date including, without limitation, complying with all reasonable instructions provided by the Purchaser relating to the transfer of the Servicing Rights. SECTION 5.2 OBLIGATIONS OF THE SELLER PRIOR TO THE SERVICING TRANSFER --------------------------------------------------------- DATE. Without limiting the generality of Section 5.1, the Seller shall take, or - ---- cause to be taken, the following actions with respect to the Mortgage Loans prior to the Servicing Transfer Date (or within such time as may otherwise be specified below) in order to effect the transfer of the Servicing Rights to the Purchaser on the Servicing Transfer Date: (a) Preliminary Test Tape. On or prior to the Closing Date, the --------------------- Seller shall forward to the Purchaser a preliminary test tape or other computer or like records (including master file, escrow file, payee file, ARM master file, ARM history, all HMDA data required by the Agencies, etc.) containing all of the Mortgage Loans as of a date mutually agreed upon by the Seller and the Purchaser. The preliminary test tape or computer records shall include all field descriptions and record layouts; (b) Notice to Hazard Insurers. The Seller shall inform by written ------------------------- notice all hazard insurance companies and/or their agents of the transfer and request a change in the loss payee mortgage endorsement clause to the Purchaser's name. The Seller shall provide the Purchaser with a form of the notification letter and an officer's certification that all hazard insurance companies have been notified by an identical letter; (c) Notice to Mortgage Insurance Companies. The Seller shall inform -------------------------------------- by written notice all mortgage insurance companies providing any Primary Mortgage Insurance Policy of the change in insured's name on each such policy to the Purchaser's name. The Seller shall provide the Purchaser with a form of the notification letter and an officer's written certification that all such mortgage insurance companies have been notified by an identical letter; (d) Tax Service Contracts. The Seller shall have obtained a life of --------------------- loan, transferable real estate tax service contract with a tax service company reasonably acceptable to the Purchaser on all of the Mortgage Loans and shall assign all such contracts to the Purchaser or, in the alternative, the Seller, -- shall notify the Purchaser as to any Mortgage Loans for which it has not procured the requisite contract and shall pay to the Purchaser a fee of twenty- five dollars ($25.00) for each such Mortgage Loan; (e) Flood Certifications. The Seller shall have obtained a life of -------------------- loan, transferable flood certification contract for each Mortgage Loan and shall assign all such contracts to the Purchaser or, in the alternative, the Seller -- shall notify the Purchaser as to any Mortgage Loans for which it has not procured the flood certification referenced above and shall pay to the Purchaser a fee of fifteen dollars ($15.00) for each such Mortgage Loan; 17 (f) Notice to Mortgagors. The Seller shall, no later than fifteen -------------------- (15) days prior to the Servicing Transfer Date, inform in writing all Mortgagors of the change in servicer from the Seller to the Purchaser, all in accordance with applicable law. The Seller shall obtain the Purchaser's approval of the form of such notifications prior to their mailing. The Seller acknowledges that the Purchaser's review of this notice shall not be a review for statutory or regulatory compliance purposes, and that the Seller shall have the sole responsibility for such compliance. The Seller shall provide the Purchaser with a form of the notification letter and an officer's written certification that all Mortgagors have been notified by an identical letter; (g) Payment of Real Estate Taxes. The Seller shall make or cause to ---------------------- be made all payments of all real estate taxes on the Mortgage Loans which (i) will be delinquent on or prior to the Servicing Transfer Date, (ii) are required to be paid within thirty (30) days after the Closing Date to receive a discount, or (iii) will be delinquent within thirty (30) days after the Closing Date. If tax bills have not been received by the Seller by the Servicing Transfer Date on any Mortgage Loans subject to this subsection, the Seller shall obtain and pay all tax bills subsequent to the Servicing Transfer Date and the Purchaser will promptly reimburse the Seller upon receipt from the Seller of documentation evidencing such payment. On non-impounded accounts, the Seller shall ensure that all taxes which would otherwise be delinquent by the Servicing Transfer Date, if not paid by such date, have been paid. With respect to each of the Mortgage Loans which do not have an impound or escrow account maintained for the payment of taxes and insurance, the Seller shall hold harmless and indemnify the Purchaser against any and all costs, expenses, penalties, fines, damages and judgments of whatever kind arising from the Seller's failure to pay, or cause to be paid, any delinquent taxes or tax penalties outstanding as of the Servicing Transfer Date; (h) Payment of Insurance Premiums, The Seller shall pay all hazard and flood insurance and Primary Mortgage Insurance Policy premiums required to be paid prior to the Servicing Transfer Date or within thirty (30) days after the Closing Date on all impounded accounts relating to the Mortgage Loans and shall ensure that all premiums required to be paid prior to the Servicing Transfer Date by the Mortgagors on non-impounded accounts have been paid. With respect to each of the Mortgage Loans which do not have an impound or escrow account maintained for the payment of taxes and insurance, the Seller shall hold harmless and indemnify the Purchaser against any and all costs, expenses, penalties, fines, damages and judgments of whatever kind arising from the Seller's failure to ensure that the related Mortgagor is maintaining adequate insurance coverage on the Mortgaged Property at all times prior to the Servicing Transfer Date in accordance with the terms of the any document contained in the Mortgage File or any applicable law or regulation including, without limitation, adequate flood insurance coverage for all Mortgaged Properties located within an "A" or "V" flood hazard area; and (i) ARM Adjustments. With respect to each adjustable rate Mortgage --------------- Loan whose index value for any Interest Adjustment Date is available on or prior to the Servicing Transfer Date, the Seller shall make all such adjustments and shall inform the related Mortgagors of such adjustments. SECTION 5.3 OBLIGATIONS OF THE SELLER AFTER THE SERVICING TRANSFER ------------------------------------------------------ DATE. Without limiting the generality of Section 5.1, the Seller shall take, or - ---- ----------- cause to be taken, the following actions with respect to the Mortgage Loans within three (3) Business Days following the Servicing Transfer Date (or within such time as may otherwise be specified below): (a) Tape. The Seller shall furnish to the Purchaser all available ---- computer or like records requested by the Purchaser reflecting the status of payments, balances and other pertinent information with respect to the Mortgage Loans as of the Servicing Transfer Date (including, without limitation, (I) master file, (ii) escrow file, (iii) payee file, which includes comprehensive tax and insurance information identifying payee, payee address, next payment due date, next amount payable and policy number/parcel number, and (iv) ARM master file). Such records shall include magnetic tapes reflecting all computer files maintained on the Mortgage-Loans and shall include hard copy trial balance reports as specifically requested by the Purchaser; 18 (b) Mortgage File. If the Seller has not already done so, the Seller ------------- shall have forwarded a complete Mortgage File with respect to each Mortgage Loan; (c) Accounting Reports. The Seller shall furnish to the Purchaser ------------------ copies of all accounting reports relating to the Mortgage Loans as of the Servicing Transfer Date including, without limitation, a trial balance and reports of collections, delinquencies, prepaids, curtailments, escrow payments, escrow balances, partial payments, partial payment balances and other like information with respect to the Mortgage Loans; (d) Other Documentation. The Seller shall provide the Purchaser any ------------------- and all further documents reasonably required by the Purchaser in order to fully transfer to the Purchaser possession of all tangible evidence of the Servicing Rights and escrow, impound and trust funds transferred hereunder; (e) Transfer of Escrow Funds and Other Proceeds. The Seller shall ------------------------------------------- transfer to the Purchaser, by wire transfer to the account designated by the Purchaser, an amount equal to the sum of (i) the Net Escrow Payments, (ii) all undistributed insurance loss draft funds, (iii) all unapplied funds received by the Seller, (iv) all unapplied interest on escrow balances accrued through the Servicing Transfer Date, (v) all buydown funds held by the Seller as of the Servicing Transfer Date, and (vi) all other amounts held by the Seller with respect to the Mortgage Loans as of the Servicing Transfer Date for which the Seller is not entitled to retain (collectively, the "Escrow Proceeds"). Within five (5) Business Days following the Purchaser's receipt of the Escrow Proceeds, the Seller and the Purchaser shall resolve any discrepancies between the Seller's accounting statement and the Purchaser's reconciliation with respect thereto. No later than ten (10) Business Days following the Servicing Transfer Date, the Seller or the Purchaser, as the case may be, shall transfer to the other, by wire transfer to the designated account, any amounts to which the other party is entitled; and (f) Mortgage Payments Received After Servicing Transfer Date. The -------------------------------------------------------- Seller shall, within two (2) Business Days of receipt, forward to the Purchaser any payment received by it after the Servicing Transfer Date with respect to any of the Mortgage Loans, whether such payment is in the form of principal, interest, taxes, insurance, loss drafts, insurance refunds, etc., in the original form received, unless such payment has been received in cash or by the Seller's lock box facility, in which case the Seller shall forward such payment in a form acceptable to the Purchaser. The Seller shall notify the Purchaser of the particulars of the payment, which notification shall set forth sufficient information to permit timely and appropriate processing of the payment by the Purchaser. ARTICLE VI MISCELLANEOUS ------------- SECTION 6.1 NOTICES. All demands, notices and communications ------- required to be provided hereunder shall be in writing and shall be deemed to have been duly given if mailed, by registered or certified mail, postage prepaid, and return receipt requested, or, if by other means, when received by the other party at the address as follows: (i) if to the Seller: United PanAm Mortgage 625 The City Drive Orange, CA 92868 Attn: Mr. Blair Kenny (ii) if to the Purchaser: As provided by Purchaser in writing. 19 or such other address as may hereafter be furnished to the other party by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee (as evidenced, in the case of registered or certified mail, by the date noted on the return receipt). SECTION 6.2 INTENTION OF THE PARTIES. Pursuant to this Agreement, ------------------------ the Purchaser is purchasing, and the Seller is selling the Mortgage Loans and not a debt instrument of the Seller or any other security. Accordingly, the Seller and the Purchaser shall each treat the transaction for federal income tax purposes as a sale by the Seller, and a purchase by the Purchaser, of the Mortgage Loans and the Servicing Rights. The Purchaser shall have the right to review the Mortgage Loans and the related Mortgage Loan Files to determine the characteristics of the Mortgage Loans which shall affect the federal income tax consequences of owning the Mortgage Loans and the Servicing Rights and the Seller shall cooperate with all reasonable requests made by the Purchaser in the course of such review. SECTION 6.3 EXHIBITS. The exhibits to this Agreement are hereby -------- incorporated and made a part hereof and are an integral part of this Agreement. SECTION 6.4 GENERAL INTERPRETIVE PRINCIPLES. For purposes of this ------------------------------- Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Agreement have the meanings assigned to them in this Agreement and include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other gender; (b) accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles; (c) references herein to "Sections," "Subsections," "Paragraphs," and other Subdivisions without reference to a document are to designated Sections, Subsections, Paragraphs and other subdivisions of this Agreement; (d) reference to a Subsection without further reference to a Section is a reference to such Subsection as contained in the same Section in which the reference appears, and this rule shall also apply to Paragraphs and other subdivisions; (e) the words "herein," "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular provision; and (f) the term "include" or "including" shall mean without limitation by reason of enumeration. SECTION 6.5 REPRODUCTION OF DOCUMENTS. This Agreement and all ------------------------- documents relating thereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by any party at the closing, and (c) financial statements, certificates and other information previously or hereafter furnished, may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. SECTION 6.6 FURTHER AGREEMENTS. The Seller shall execute and deliver ------------------ to the Purchaser and the Purchaser shall execute and deliver to the Seller such reasonable and appropriate additional documents, instruments or agreements as may be necessary or appropriate to effectuate the purposes of this Agreement. 20 SECTION 6.7 EXECUTION OF AGREEMENT. This Agreement may be executed ---------------------- simultaneously in any number of counterparts. Each counterpart shall be deemed to be an original, and all such counterparts shall constitute one and the same instrument. This Agreement shall be deemed binding when executed by both the Purchaser and the Seller. Telecopy signatures shall be deemed valid and binding to the same extent as the original. SECTION 6.8 SUCCESSORS AND ASSIGNS. This Agreement shall bind and ---------------------- inure to the benefit of and be enforceable by the Seller and the Purchaser and the respective permitted successors and assigns of the Seller and the successors and assigns of the Purchaser. This Agreement shall not be assigned, pledged or hypothecated by the Seller without the consent of the Purchaser. This Agreement may be assigned, pledged or hypothecated or otherwise transferred or encumbered by the Purchaser, in whole or part, without the consent of the Seller. If the Purchaser assigns all of its rights as the Purchaser hereunder relating to some or all of the Mortgage Loans, the assignee of the Purchaser, upon notification to the Seller, will become the "Purchaser" hereunder with respect to such Mortgage Loans assigned hereby. SECTION 6.9 SEVERABILITY CLAUSE. Any part, provision, representation ------------------- or warranty of this Agreement which is prohibited or which is held to be void or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any part, provision, representation or warranty of this Agreement which is prohibited or unenforceable or is held to be void or unenforceable in any relevant jurisdiction shall be ineffective, as to such jurisdiction, to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction as to any Mortgage Loan shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties hereto waive any provision of law which prohibits or renders void or unenforceable any provision hereof. SECTION 6.10 COSTS. The Purchaser shall pay any commissions due its ----- salesmen and the legal fees and expenses of its attorneys and expenses of its custodian. All other costs and expenses incurred in connection with the transfer and delivery of the Mortgage Loans, including recording fees, fees for title policy endorsements and continuations and the Seller's attorney's fees, shall be paid by the Seller. SECTION 6.11 ATTORNEYS' FEES. If any claim, legal action or any --------------- arbitration or other proceeding is brought for the enforcement of this Agreement or because of a dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that claim, action or proceeding, in addition to any other relief to which such party may be entitled. SECTION 6.12 GOVERNING LAW. This Agreement shall be governed by and ------------- interpreted in accordance with the laws of the State of California applicable to agreements entered into and wholly performed within said jurisdiction. SECTION 6.13 SURVIVAL. All covenants, agreements, representations -------- and warranties made herein shall survive the execution and delivery of this Agreement. SECTION 6.14 ENTIRE AGREEMENT. This Agreement constitutes the entire ---------------- understanding between the parties hereto and supersedes any and all prior or contemporaneous oral or written communications with respect to the subject matter hereof, all of which communications are merged herein. It is expressly understood and agreed that no employee, agent or other representative of the Seller or the Purchaser has any authority to bind such party with regard to any statement, representation, warranty or other expression unless said statement, representation, warranty or other expression is specifically included within the express terms of this Agreement. This Agreement shall not be modified, amended or in any way altered except by an instrument in writing signed by both the parties hereto. SECTION 6.15 CONFIDENTIALITY. The Seller and the Purchaser hereby --------------- acknowledge and agree that this Agreement shall be kept confidential and its contents will not be divulged to any party 21 without the other party's consent except to the extent that it is appropriate for the Seller or the Purchaser to do so in working with legal counsel, auditors, taxing authorities or other governmental agencies. Neither Seller nor any of its affiliates or agents shall issue any press release or public announcement concerning the contemplated transaction, the existence of this Agreement, or the terms, conditions, and provisions of this Agreement (i) without the prior written consent of Purchaser or (ii) except as required by law, in which event Seller shall consult with Purchaser to the extent practicable before making such disclosure. SECTION 6.16 NO SOLICITATION. From and after the Closing Date, the --------------- Seller agrees that for a period of five (5) years, it will not take any action or cause any action to be taken by any of its employees, agents or affiliates, or by any independent contractors acting on the Seller's behalf, to solicit in any manner whatsoever any Mortgagor to prepay or refinance a Mortgage Loan. It is understood and agreed by the Seller and the Purchaser that all rights and benefits relating to the solicitation of any Mortgagors to refinance any Mortgage Loans shall be transferred to the Purchaser pursuant hereto on the Closing Date and the Seller shall take no action to undermine these rights and benefits. The Seller shall use its best efforts to prevent the sale of the name of any Mortgagor to any person or entity. It is understood that promotions undertaken by the Seller or Seller's affiliate(s) which are directed to the general public at large (i.e., newspaper advertisements, radio or T.V. ads, etc.) and not specifically directed to any Mortgagor or any borrower identified in any Mortgage Loan shall not constitute a breach of the obligations set forth in this Section 6.16. SECTION 6.17 NON-CIRCUMVENTION. The Seller and the Purchaser ------------------ understand and agree that the Purchaser may introduce prospective buyers of the Mortgage Loans to the Seller, that such buyers are customers of the Purchaser and that relationships of the Purchaser to such buyers are confidential. The Seller agrees with respect to a particular buyer of the Mortgage Loans, the Seller will not, for the purpose of buying and selling other mortgage loans, and for a period of nine (9) months from the Closing Date, communicate with or sell such other mortgage loans to such buyer unless such buyer is or has been independently introduced to the Seller or the Seller has had previous dealings (other than any transactions involving the Purchaser) with such buyer. [SIGNATURE PAGE FOLLOWS] 22 IN WITNESS WHEREOF, the Seller and the Purchaser have caused their names to be signed hereto by their respective officers thereunto duly authorized as of e date first above written. COUNTRYWIDE HOME LOANS, INC., as Purchaser By: /s/ Michael W. Schloessmann -------------------------------- Michael W. Schloessmann Vice President PAN AMERICAN BANK, FSB, as Seller By: /s/ Blair Kenny -------------------------------- Name: Blair Kenny Title: Senior Vice President 23 EX-10.89 4 ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT EXHIBIT 10.89 ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT ------------------------------------------------ This Assignment, Assumption and Recognition Agreement (the "Agreement") is made and entered into on September 15, 1998, by Countrywide Home Loans, Inc., a New York corporation, having an address at 4500 Park Granada Boulevard, Calabasas, California 91302 (the "Seller"), Southern Mortgage Acquisition, Inc., d/b/a U.C. Acquisition, Inc., having an address at 4041 Essen Lane, Baton Rouge, Louisiana (the "Buyer") and Pan American Bank, FSB, having an address at 625 The City Drive, Orange, California 92868 (the "Company"). In consideration of the mutual promises and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Assignment and Assumption. The Seller hereby grants, transfers ------------------------- and assigns to the Buyer (a) all of its right, title and interest as "Buyer" in, to and under that certain Mortgage Loan Sale Agreement dated as of September 15, 1998, and duly executed by the Company and the Seller, a true, complete and accurate copy of which is attached hereto as Exhibit A, the "Sale Agreement"), --------- (b) all of its right, title and interest in and to the each of the mortgage loans identified in Exhibit B hereto (the "Mortgage Loans"), and (c) all --------- servicing rights relating to the Mortgage Loans. Except for the provisions pertaining to the payment of the purchase price, the Buyer hereby assumes all of the Seller's obligations as "Buyer" under the Sale Agreement from and after the date hereof, and the Seller shall be relieved and released by the Company of all of its obligations under the Sale Agreement from and after the date hereof. Except as is otherwise expressly provided herein, (i) the Seller makes no representations, warranties or covenants to the Buyer and (ii) the Buyer acknowledges that the Seller has no obligations to the Buyer under the terms of the Sale Agreement or otherwise relating to the transaction contemplated herein (including but not limited to any obligation to repurchase any of the Mortgage Loans or to indemnify the Buyer). 2. Consideration. In consideration for the transfers and ------------- assignments set forth in Section 1 of this Agreement, the Buyer agrees to pay to the Seller the amounts referenced in that certain funding schedule (the "Funding Schedule") dated as of September 15, 1998 (the "Purchase Price") and duly executed by the Seller and the Buyer (for purposes hereof, the purchase price percentage referenced in the Funding Schedule in excess of 100%, the "Assigned Premium Percentage"). The Buyer agrees to wire the agreed upon Purchase Price to the Seller to the account designated below: Bank of New York ABA - 021000018 Countrywide Home Loans ACCT - 8900038632 REF - Stuart Levitt - U.C. Acquisition 3. Recognition of the Buyer by the Company. From and after the date --------------------------------------- hereof, the Company shall recognize the Buyer as the owner of the Mortgage Loans and the "Buyer" under the Sale Agreement. 4. Servicing of the Mortgage Loans. From and after the date hereof, ------------------------------- the Company shall interim service the Mortgage Loans for the Buyer in accordance with the terms and conditions of the Sale Agreement, as if the Buyer and the Company had entered into the Sale Agreement. The address of the Buyer set forth in Article IX of the Sale Agreement shall be changed to read as follows: Southern Mortgage Acquisition, Inc. d/b/a U.C. Acquisition, Inc. 4041 Essen Lane Baton Rouge, Louisiana 70809 Attention: Ashley Lawson Facsimile: (504) 922-4241 5. Status of Sale Agreement. The Company and the Seller represent ------------------------ and warrant to the Buyer that (a) the Sale Agreement is in full force and effect as of the date hereof, (b) the Sale Agreement has not been amended or modified in any respect, and (c) there has been no waiver or any agreement to waive any provision, nor has any notice of termination been given, under the Sale Agreement. 6. Repurchase of Mortgage Loans. In the event the Company is ---------------------------- required to repurchase a Mortgage Loan pursuant to the Sale Agreement, the Seller shall pay to the Buyer, at the time of repurchase, an amount equal to the product of (i) the unpaid principal balance of the Mortgage Loan at the time the repurchase obligation occurs, and (ii) the difference between the Premium Rebate Percentage (as calculated below) and the Premium Percentage (as defined in the Sale Agreement), if any. For the purpose of determining the additional amount that the Seller has to pay to the Buyer, if any, in connection with a repurchase of a Mortgage Loan by the Company, the Premium Rebate Percentage shall be determined as follows: If the repurchase obligation occurs during Premium Rebate Percentage will be: the indicated month following Closing Date: Month: 0-6, inclusive 100% of the Assigned Premium Percentage 7-12, inclusive 75% of the Assigned Premium Percentage 13-18, inclusive 50% of the Assigned Premium Percentage 19-24, inclusive 25% of the Assigned Premium Percentage 25 and thereafter 0% of the Assigned Premium Percentage
7. No Claims. The Company represents and warrants that it has no --------- offsets, counterclaims or other defenses available to it with respect to the Sale Agreement. 8. Covenants, Representations and Warranties of the Seller. The ------------------------------------------------------- Seller represents and warrants to, and covenants with, the Buyer that: a. The Seller is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has all requisite corporate power and authority to acquire, own and sell the Mortgage Loans; b. The Seller has full corporate power and authority to execute, deliver and perform under this Agreement, and to consummate the transactions set forth herein. The execution, delivery and performance of the Seller of this Agreement, and the consummation by it of the transactions contemplated hereby, have been duly authorized by all necessary corporate action of the Seller. This Agreement has been fully executed and delivered by the Seller and constitutes the valid and legally binding obligation of the Seller enforceable against the Seller in accordance with its respective terms; c. No material consent, approval, order or authorization of, or declaration, filing or registration with, any governmental entity is required to be 2 obtained or made by the Seller in connection with the execution, delivery or performance by the Seller of this Agreement, or the consummation by it of the transaction contemplated hereby; d. There is no action, suit, proceeding, investigation or litigation pending or, to the Seller's knowledge, threatened, which either in any instance or in the aggregate, if determined adversely to the Seller, would adversely affect the sale of the Mortgage Loans to the Buyer, the execution, delivery or enforceability of this Agreement, or the Seller's ability to perform its obligations under this Agreement; e. Immediately prior to payment of the purchase price for the Mortgage Loans, the Seller is the lawful owner of the Mortgage Loans with the full right to transfer the Mortgage Loans free from any and all claims and encumbrances whatsoever; and f. The Seller is not in violation of, and the execution and delivery of this Agreement and the Sale Agreement by the Seller and its performance and compliance with the terms of this Agreement and the Sale Agreement will not constitute a violation with respect to, any order or decree of any court or any order or regulation of any federal, state, municipal or governmental agency having jurisdiction over the Seller or its assets, which violation might have consequences that would adversely affect the condition (financial or otherwise) or the operation of the seller or its assets or might have consequences that would adversely affect the performance of its obligations and duties thereunder. 9. Covenants, Representations and Warranties of Buyer. The Buyer -------------------------------------------------- represents and warrants to, and covenants with, the Seller and the Company that except for the provisions pertaining to the payment of the purchase price thereunder, the Buyer agrees to be bound as "Buyer" by all of the terms, covenants and conditions of the Sale Agreement, and from and after the date hereof, the Buyer assumes for the benefit of the Seller and the Company all of the Seller's obligations as "Buyer" thereunder. 10. Governing Law. This Agreement shall be construed in accordance ------------- with the laws of the State of California and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with the laws of the State of California, except to the extent preempted by federal law. 11. Confidentiality. The Seller and the Buyer hereby acknowledge and --------------- agree that this Agreement shall be kept confidential and its contents will not be divulged to any party without the other party's consent except to the extent that it is appropriate for the Seller or the Buyer to do so in working with legal counsel, auditors, taxing authorities or other governmental agencies, or to enforce their rights hereunder or under the Sale Agreement. 12. Nonsolicitation. Subject to the provisions set forth in this --------------- Section 1.2, and in connection with this transaction specifically between the Seller and the Buyer, from and after the date hereof, neither Seller nor any of its affiliates shall specifically target and solicit, by means of direct mail or telephonic or personal solicitation or by any other means, the Mortgagors to prepay such Mortgage Loans. Notwithstanding the foregoing, the following solicitations, if undertaken by Seller or any affiliate of Seller, shall not be prohibited under this Section 12: (i) solicitations that are directed to the general public at large, including, without limitation, mass mailings based on commercially acquired mailing lists and newspaper, radio, television and other mass media advertisements; (ii) solicitations made in response to an inquiry from a Mortgagor on his or her own initiative relating to a payoff or information pertaining to a mortgage loan product; and (iii) solicitations made as a part of a campaign directed to all mortgagors with mortgage loans 3 meeting certain defined parameters (other than parameters relating to the Mortgagors or Mortgage Loans specifically). 13. Conflict with Sales Agreement. To the extent there is any ----------------------------- conflict between the terms of the Sales Agreement and this Agreement, the latter shall be controlling, notwithstanding anything to the contrary contained in the Sale Agreement. 14. Capitalized Terms. All capitalized terms used herein and not ----------------- otherwise defined herein shall have the meanings assigned to such terms in the Sale Agreement. 15. Counterparts. This Agreement may be executed in any number of ------------ counterparts. Each counterpart shall be deemed to be an original and all such counterparts shall constitute one and the same instrument. 16. Survival. The representations, warranties and covenants of the -------- parties hereto as set forth herein shall survive the execution and delivery of this Agreement. 17. Waivers. No term or provision of this Agreement may be waived or ------- modified unless such waiver or modification is in writing and signed by the party against whom such waiver or modification is sought to be enforced. 18. Successors and Assigns. This Agreement shall be binding on and ---------------------- inure to the benefit of and be enforceable by the Seller, the Company and the Buyer and their respective successors and assigns. 19. Notices. All communications to be provided hereunder to any ------- party shall be provided to such party in writing or facsimile at the address specified below or such other address as such party may provide to the other parties hereto and shall be effective upon receipt by the party to be notified: (i) if to the Company Pan American Bank, FSB 625 The City Drive, Suite 490 Orange, California 92868 Attn: Blair Kenney Facsimile: (714) 621-1131 (ii) if to the Seller Countrywide Home Loans, Inc. 4500 Park Granada Calabasas, California 91302 Attn: David Sambol Facsimile: (818) 225-4011 4 (iii) if to the Buyer Southern Mortgage Acquisition, Inc. 4041 Essen Lane Baton Rouge, Louisiana 70809 Attn: Ashley Lawson Facsimile: (504) 922-4241 20. Severability. Any part, provision, representation or warranty of ------------ this Agreement which is prohibited or which is held to be void or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any part, provision, representation or warranty of this Agreement which is prohibited or unenforceable or is held to be void or unenforceable in any jurisdiction shall be ineffective, as to such jurisdiction, to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction as to any Mortgage Loan shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties hereto waive any provision of law which prohibits or renders void or unenforceable any provision hereof. If the invalidity of any part, provision, representation or warranty of this Agreement shall deprive any party of the economic benefit intended to be conferred by this Agreement, the parties shall negotiate, in good-faith, to develop a structure the economic effect of which is nearly as possible the same as the economic effect of this Agreement without regard to such invalidity. [Signature page follows] 5 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. COUNTRYWIDE HOME LOANS, INC., the Seller By /s/ Michael W. Schloessmann --------------------------------- Michael W. Schloessmann Vice President SOUTHERN MORTGAGE ACQUISITION, INC., D/B/A U.C. ACQUISITION, INC., the Buyer By: ________________________________ Name: Title: PAN AMERICAN BANK, FSB, the Company By: /s/ Blair F. Kenny --------------------------------- Name: Blair F. Kenny Title: Senior Vice President 6 EXHIBIT A MORTGAGE LOAN SALE AGREEMENT (attached) 7 MORTGAGE LOAN SALE AGREEMENT ---------------------------- THIS MORTGAGE LOAN SALE AGREEMENT is made and entered into as of and effective on the 15th day of September, 1998, by and between COUNTRYWIDE HOME LOANS, INC., a New York corporation (the "Buyer"), having its principal office at 4500 Park Granada Boulevard, Calabasas, California 91302, and PAN AMERICAN BANK, FSB (the "Seller"), a federally chartered savings bank, having its principal office for purposes hereof at 625 The City Drive, Suite 490, Orange, CA 92868. W I T N E S S E T H: -------------------- WHEREAS, the Seller is the legal, beneficial and record owner of certain Mortgage Loans, as defined in this Agreement, and desires to sell such Mortgage Loans to the Buyer in accordance with the terms of this Agreement; and WHEREAS, the Buyer desires to purchase such Mortgage Loans, in accordance with the terms of this Agreement. NOW, THEREFORE, in consideration of the mutual promises herein set forth and other valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Seller and the Buyer agree as follows: ARTICLE I --------- DEFINITIONS For purposes of this Agreement, the following terms shall have the meanings indicated: "Agreement" means this Mortgage Loan Sale Agreement, including all --------- Addenda, Exhibits and Schedules attached hereto, and all supplements, modifications and amendments, if any, thereto. "Bill of Sale" means the document to be executed and delivered by the ------------ Seller to the Buyer or its designee to be effective on the Closing Date, in the form attached hereto as Exhibit A, together with a Final Mortgage Loan Schedule --------- in accordance with Article II. ---------- "Book Value" means the unpaid principal balance of each Mortgage Loan ---------- as of the Cut-Off Date. "Business Day" means any day on which the Buyer is open for business ------------ other than a Saturday, a Sunday or a federal or State of Louisiana holiday. "Closing" means the payment of the Mortgage Loan Purchase Price and ------- the execution and/or delivery of the Closing Documents. "Closing Date" means September 15, 1998, or such other date as the ------------ Buyer and the Seller may mutually agree. "Closing Documents" means the Bill of Sale, the Final Mortgage Loan ----------------- Schedule, the documents described in Paragraph A(vi) and (vii) of Article IV, --------------------------------------- and the documents identified in Paragraph B of Article V which are to be ----------- --------- contained in the Mortgage File pertaining to each Mortgage Loan included on the Final Mortgage Loan Schedule. "Credit File" means all documents, if any, other than the Mortgage ----------- File, in the possession or under the control of the Seller or its servicer(s), agent(s), or custodians pertaining to each Mortgage Loan included on the Final Mortgage Loan Schedule and relating to the origination and/or servicing of such Mortgage Loan, including without limitation appraisals, payment histories, primary mortgage guarantee insurance certificates, signed loan applications, disclosure statements, credit records, and hazard, flood or other policies of insurance. "Current Loan-to-Value Ratio" means the Book Value divided by (a) if --------------------------- no appraisal has been performed on the Mortgage Property subsequent to the appraisal made in connection with the origination of the Mortgage Loan, the lesser of (i) the original appraised value, or (ii) the price at which the Mortgaged Property was purchased by Mortgagor or (b) the most recent appraised value of the Mortgaged Property based upon any appraisal subsequent to the origination of the Mortgage Loan which is contained in the Credit File. "Cut-Off Date" means the date that shall be used to calculate the ------------ Mortgage Loan Purchase Price, which shall be September 1, 1998, unless the Seller and the Buyer mutually agree on another date. "Disclosure Data" means the information provided by the Seller to the --------------- Buyer relating to the Mortgage Loans. "Final Mortgage Loan Schedule" means the mortgage loan schedule to be ---------------------------- attached to the Bill of Sale in accordance with Article II. ---------- "HOEPA" means the Home Ownership Equity Protection Act and the ----- regulations promulgated thereunder. "Insurer" means the Federal Housing Administration, the Veterans ------- Administration or any private mortgage insurer that insures or guarantees any of the Mortgage Loans, as well as any provider of life, hazard, disability or other insurance with respect to any Mortgage Loan or Mortgaged Property. "Mortgage" means the mortgage, deed of trust or other instrument -------- creating a first lien on residential real property securing a Mortgage Note, as further identified in the Mortgage Loan Schedule or Final Mortgage Loan Schedule. "Mortgage File" means, with respect to each Mortgage Loan included on ------------- the Final Mortgage Loan Schedule, the items referred to in Paragraph B of ----------- Article V. - --------- "Mortgaged Property" means the property securing a Mortgage Note. ------------------ "Mortgage Loan" means any loan, evidenced by a Mortgage Note and ------------- secured by a Mortgage on one-to-four family residential real property, described on the Mortgage Loan Schedule and thereby made subject to this Agreement. "Mortgage Loan Percentage Amount" means the percentage set forth in ------------------------------- the funding schedule between the Buyer and the Seller dated September 15, 1998 (the percentage thereof in excess of 100%, the "Premium Percentage"); provided, however, for purposes of computing the Mortgage Loan Repurchase Price, the Mortgage Loan Percentage Amount shall be determined as follows: If Repurchase Occurs During Mortgage Loan Percentage the Indicated Month After the Amount will be the sum of 100% Closing Date plus the following: Month: 0-6, inclusive 100% of the Premium Percentage 7-12, inclusive 75% of the Premium Percentage 13-18, inclusive 50% of the Premium Percentage 19-24, inclusive 25% of the Premium Percentage 25 and thereafter 0%
"Mortgage Loan Purchase Price" means the sum of (i) the Book Value of ---------------------------- the Mortgage Loans to be purchased by the Buyer as set forth on the Final Mortgage Loan Schedule, multiplied by the Mortgage Loan Percentage Amount and (ii) interest on the Book Value of each Mortgage Loan accrued at the interest rate borne by such Mortgage Loan from the Cut-Off Date to but not including the Closing Date. "Mortgage Loan Repurchase Price" shall have the meaning given in ------------------------------ Paragraph F(ii)(a) of Article IV hereof. - ------------------ ---------- "Mortgage Loan Schedule" means the mortgage loan schedule, attached as ---------------------- Exhibit B hereto, setting forth the following information concerning each - --------- Mortgage Loan: street address of the Mortgaged Property (including state and zip code), name of the Mortgagor(s), unpaid principal balance as of close of business on the Cut-Off Date, last payment due date preceding the Cut-Off Date in respect of which a payment of principal and interest was made, status as a first lien, original loan amount, loan number, maturity date, mortgage interest rate as of the Cut-Off Date, required monthly payment of principal and interest as of the Cut-Off Date, Current Loan-to-Value Ratio, property type, occupancy status, appraised value, the Pool of which such Mortgage Loan forms a part, and whether the Mortgage Loan is subject to HOEPA. "Mortgage Note" means the original executed note evidencing the ------------- indebtedness of a Mortgagor(s) under a Mortgage Loan. "Mortgagor" means the current and unreleased obligor(s) on a Mortgage --------- Note. "Paying Party" shall have the meaning given in Paragraph E of Article ------------ ----------- ------- II hereof. - -- "Pool" means one pool of Mortgage Loans which are to be purchased and ---- sold hereunder, such pools being designated as A. "Servicing Documents" means, to the extent not already included in the ------------------- Credit File or the Mortgage File, any credit and closing packages, custodial documents, servicing documents, escrow documents, Mortgage documents, and all other files, records, documents and computer data and tapes necessary to service a Mortgage Loan. "Servicing Transfer Date" means October 2, 1998, or such other date as ----------------------- the Buyer and the Seller may mutually agree in writing. "Substitute Mortgage Loan" shall have the meaning given in Paragraph F ------------------------ ----------- of Article IV hereof. ---------- "Substitution Date" shall have the meaning given in Paragraph F of ----------------- ----------- Article V hereof. - --------- ARTICLE II ---------- PURCHASE AND SALE OF THE MORTGAGE LOANS A. Agreement to Sell and Purchase Mortgage Loans. On the Closing Date, --------------------------------------------- the Seller agrees to sell, and the Buyer agrees to purchase, those Mortgage Loans described in the Mortgage Loan Schedule which are included on the Final Mortgage Loan Schedule. The Mortgage Loans shall be sold pursuant to the representations, warranties and covenants of the Seller and the Buyer set forth in this Agreement. B. Bill of Sale. On the Closing Date, the Seller shall deliver to the ------------ Buyer a Bill of Sale, in the form of Exhibit A hereto, executed by an authorized --------- representative of the Seller as evidenced by certified resolution(s) of the Board of Directors of the Seller (if the Seller is a corporation) and by certified authorizing documents for the Seller (if the Seller is not a corporation), in form and substance satisfactory to the Buyer, to be delivered at the Closing, which Bill of Sale shall sell, transfer, assign, set-over and convey to the Buyer or its designee each of the Mortgage Loans, to which shall be attached as an exhibit the Final Mortgage Loan Schedule identifying the Mortgage Loans conveyed to the Buyer, and setting forth the Mortgage Loan Purchase Price for such Mortgage Loans. C. Mortgage Loan Schedule. Attached hereto is a Mortgage Loan Schedule ---------------------- setting forth all of the Mortgage Loans which are the subject of this Agreement. On or prior to the Closing Date, the Buyer shall advise the Seller the Mortgage Loans that do not qualify for sale under this Agreement and the Seller shall delete such Mortgage Loans from, and provide to the Buyer a copy of, the Final Mortgage Loan Schedule. The Final Mortgage Loan Schedule shall list the Mortgage Loans described in the Mortgage Loan Schedule, except for those Mortgage Loans which have been removed from the Mortgage Loan Schedule by the Seller or the Buyer for lack of conformity to the representations and warranties of the Seller set forth in this Agreement or have been removed by mutual agreement of the Buyer and the Seller. Only the Mortgage Loans described in the Final Mortgage Loan Schedule shall be conveyed to the Buyer, and the Mortgage Loan Purchase Price shall be calculated only with respect to such Mortgage Loans. D. Payment for Mortgage Loans. The Buyer shall pay to the Seller, on the -------------------------- Closing Date, by wire transfer in immediately available funds, to an account specified in writing by and for the credit of the Seller, the Mortgage Loan Purchase Price. The Seller agrees that payment as aforesaid shall constitute payment to it of the Mortgage Loan Purchase Price and shall acknowledge receipt thereof in writing on the Closing Date. In computing the Mortgage Loan Purchase Price, for the purpose of determining the Book Value of any Mortgage Loan as of the Cut-Off Date: (i) principal payments due and payable on or before the Cut- Off Date shall be applied only if received on or before the Cut-Off Date; and (ii) principal payments which are due and payable after the Cut-Off Date shall not be applied to the related Mortgage Loan until after the Cut-Off Date notwithstanding the date of receipt. The Seller shall hold any principal payments to be applied after the Cut-Off Date for the account of the Buyer and shall immediately deliver such payments to the Buyer. All payments by Mortgagors of interest accrued, whether paid or unpaid, before the Cut-Off Date and all payments of interest by Mortgagors due on and after the Cut-Off Date shall belong to the Buyer and the Seller shall immediately deliver any payments thereof received by it. Except as provided below with respect to Defective Mortgage Loans, all other payments made by Mortgagors shall belong to the Buyer. E. Adjustments to Mortgage Loan Purchase Price. Upon written notice ------------------------------------------- given by either party to the other no later than thirty (30) days following the date on which such servicing is transferred to the Buyer, the Mortgage Loan Purchase Price shall be adjusted to reflect changes resulting from miscalculations of interest and principal or other accounting errors reflected in the Mortgage Loan Purchase Price. The party benefitting from such errors (the "Paying Party") shall pay an amount sufficient to correct and reconcile the Mortgage Loan Purchase Price and shall provide such documentation as is reasonable and necessary to satisfy the other party that the Mortgage Loan Purchase Price has been corrected and reconciled. Such payment shall be made by the Paying Party within thirty (30) days following the date on which the written notice required herein was first received by the Paying Party. F. Examination of the Mortgage Files. Prior to the Closing Date, the --------------------------------- Buyer or its designee may examine the Mortgage Files under the supervision of the Seller or its designee; provided however, that (a) each date on which such ---------------- examination shall occur shall be a Business Day, and (b) such examination shall take place during the normal business hours of the Seller. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER A. Authority. The Buyer represents that it is a corporation duly and --------- validly existing under the laws of the State of New York, and is duly and legally authorized to enter into this Agreement, and that its undersigned representative is authorized to act on behalf of and bind the Buyer to the terms of this Agreement. B. Enforceability. The Buyer represents and warrants that, assuming due -------------- authorization, execution and delivery by each other party hereto, this Agreement and all of the obligations of the Buyer hereunder are the legal, valid and binding obligations of the Buyer, enforceable in accordance with the terms of this Agreement, except as such enforcement may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or at law). C. Other Representations. --------------------- a. The Buyer changed its corporate name from Countrywide Funding Corporation to Countrywide Home Loans, Inc., effective on March 11, 1996. b. The Buyer has conducted its business under the fictitious or assumed name America's Wholesale Leader and, in connection therewith, has filed or caused to be filed all necessary documents and certificates to properly, validly and legally authorize the transaction of business by the Seller under the name America's Wholesale Lender. ARTICLE IV ----------- REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLER A. General Representations, Warranties and Covenants. The Seller hereby ------------------------------------------------- represents and warrants that: (1) The Seller is a federally chartered savings bank duly organized, validly existing and in good standing under the laws of the United States. The Seller has full power and authority (corporate, partnership and trust, as the case may be, and regulatory) to own its properties and conduct its business, as presently conducted by it, and to enter into and perform its obligation under this Agreement and the Servicing Transfer Addendum, if any (together, the "Agreements"). The Seller holds all licenses and permits necessary to carry on its business as now being conducted, and is licensed in, qualified to transact business in, in good standing under, and in compliance with, the laws of each state where necessary in order to own and service the Mortgage Loans and perform its obligations under the Agreements. (2) The Seller has taken all necessary action to authorize its execution, delivery and performance of the Agreements and has the power and authority to execute, deliver and perform the Agreements and all the transactions contemplated hereby, including, but not limited to, the authority to sell, assign and transfer the Mortgage Loans in accordance with this Agreement and to perform its obligations under this Agreement; and assuming due authorization, execution and delivery by each other party thereto, the Agreements and all the obligations of the Seller thereunder are the legal, valid and binding obligations of the Seller, enforceable against the Seller in accordance with the terms of the Agreements, except as such enforcement may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); and (3) The execution and delivery of the Agreements and the performance of its obligations thereunder by the Seller will not conflict with any provision of any law or regulation to which the Seller is subject or conflict with or result in a breach of or constitute a default under any of the terms, conditions or provisions of the Seller's organizational and governing documents or any agreement or instrument to which the Seller is a party or by which the Seller is a party or by which it is bound or any order or decree applicable to the Seller or result in the creation or imposition of any lien on any of its assets or property which would adversely affect the ability of the Seller to carry out the terms of this Agreement; and the Seller has obtained any consent, approval, authorization or order of any court or governmental agency or body required for the execution, delivery and performance by the Seller of the Agreements. (4) The Seller hereby further represents and warrants that there is no action, suit or proceeding pending against the Seller in any court or by or before any other governmental agency or instrumentality which seeks to prohibit the Seller from entering into this Agreement or which would adversely affect the ability of the Seller to carry out the transactions contemplated by this Agreement or would materially and adversely affect the condition (financial or otherwise) or operations of the Seller. (5) The Seller is the beneficial owner of the Mortgage Loans identified on the Mortgage Loan Schedule, free and clear of any encumbrance of any kind, and no other person claims an ownership interest in, security interest in, or right to acquire any of the Mortgage Loans. Upon recordation of all assignments previously sent by the Seller for recordation, the record title of no Mortgage Loan will be in an entity other than the Seller. (6) The Seller shall, pursuant to Paragraph B of Article V, endorse in ----------- --------- blank and deliver to the Buyer or its designee at the Closing each of the Mortgage Notes, and shall execute in favor of the Buyer or its designee and deliver to the Buyer or its designee at the Closing an individual assignment in blank of each of the Mortgage Notes and related Mortgages in recordable form; provided, however, where record title to a Mortgage Loan is in an assumed - -------- ------- fictitious name of the Seller, the Seller, acting pursuant to duly authorized officers, shall execute and deliver such endorsements and assignments to properly reflect such assumed or fictitious name and to make such endorsements and assignments legal, valid and enforceable. (7) The Seller shall also provide the Buyer at the Closing with (i) certified copies of its federal charter and by-laws and all amendments thereto (or certified copies of its organizational and other governing documents if the Seller is not a corporation); (ii) a certificate of good standing of a recent date issued by Office of Thrift Supervision; (iii) an opinion of counsel to the Seller in form and content satisfactory to the Buyer; (vi) certified extracts of resolutions of its Board of Directors or other authorizing documents, as the case may be, authorizing this Agreement and any other related documents or agreements relating to the transaction contemplated herein (including appropriate authorizing documents for officers of record owners of the Mortgage Loans if different from the Seller), in each case in form and content satisfactory to the Buyer; and (v) a certificate of incumbency and authority for its officers or other representatives executing this Agreement, the Bill of Sale and any related assignments and endorsements. (8) The Seller is an approved Federal Housing Administration lender. (9) The Seller has not retained the services of a broker and has not agreed to pay any broker's fee upon the Closing of this Agreement. The Seller agrees to defend and hold the Buyer harmless and indemnify the Buyer from any claim, demand, cause of action or judgment which may arise as a result of any broker retained by or asserting claims by or through the Seller. The indemnity and hold harmless by the Seller hereunder shall include all costs and expenses that may be incurred by the Buyer, including without limitation its attorneys' fees. (10) The Seller expressly understands and agrees that the Buyer is relying on the representations, warranties and covenants of the Seller, and not on the Buyer's limited examination, investigation and review of the Mortgage Files, in entering into this Agreement and consummating the purchase of the Mortgage Loans contemplated hereby, and no information or documents known or available to the Buyer shall modify or diminish the Seller's representations, warranties and covenant's set forth in this Agreement or affect the Buyer's rights or the Seller's obligations as a result of an inaccuracy in any representation or warranty or breach of any covenant of the Seller. (11) No certificate of an officer, statement furnished in writing, report or electronic tape delivered pursuant to the terms hereof by the Seller contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the certificate, statement or report not misleading. (12) Upon the receipt of each Mortgage Loan on the Closing Date, the Buyer will have good title (beneficial and record) to such Mortgage Loan, free and clear of any lien (other than liens which will be simultaneously released). (13) The origination and servicing practices used by the Seller and, with respect to servicing practices, any of its subservicers, with respect to the Mortgage Loans have been, in all material respects, legal, proper, prudent and customary in residential lending and servicing business. (14) The transactions contemplated by this Agreement are in the ordinary course of business of the Seller. (15) Completion by the Buyer or its designee of the in blank endorsements and assignments of the Mortgage Notes and Mortgages, respectively, is expressly authorized hereby and such completion after the Closing will not render such endorsements ineffective, invalid, illegal or unenforceable. B. Representations and Warranties as to Each Mortgage Loan. The Seller ------------------------------------------------------- hereby represents and warrants, as to each Mortgage Loan sold hereunder, as of the date hereinbelow specified or, if no such date is specified, then as of the Closing Date (or, with respect to any Substitute Mortgage Loan, as of the Substitution Date) that: (1) All Disclosure Data has been disclosed to the Buyer before the execution of this Agreement, and all such Disclosure Data, as well as the information with respect to each Mortgage Loan set forth on the Mortgage Loan Schedule(s), is true and correct to the best of the Seller's knowledge as of the date thereof; (2) (a) Prior to the transfer and assignment of each Mortgage Loan to the Buyer or its designee, the Seller held good and indefeasible title to, and was the sole owner and holder of such Mortgage Loan subject to no liens, charges, mortgages, encumbrances or rights of others other than liens which will be or were, as the case may be, released simultaneously with such transfer and assignment; and immediately upon the transfer and assignment herein contemplated, the Buyer will hold good and indefeasible title to, and will be the sole owner of, each Mortgage Loan subject to no liens, charges, mortgages, encumbrances or rights of others other than liens which will be released simultaneously with such transfer and assignment; and the Seller has full authority, right and power to sell and assign such Mortgage Loan to the Buyer; (b) The balance on such Mortgage Loan is free from arithmetic error; (c) There exists no defense to the enforceability of the Mortgage Loan's obligations; and there is no offset, right of rescission, defense or counterclaim to any Mortgage Note or Mortgage, including the defense of usury; (d) Such Mortgage Loan complies with, or is exempt from, applicable state or federal laws, regulations and other requirements pertaining to usury; and any and all other requirements of any federal, state or local law, including, without limitation, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to such Mortgage Loan (including all notices required by HOEPA), have been complied with; (e) The related Mortgage Note, related Mortgage and other agreements executed in connection therewith are genuine and each is the legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms except as such enforcement may be limited by bankruptcy, insolvency, reorganization or other similar law affecting the enforcement of creditors' rights generally and by general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or at law), and all parties to each Mortgage Loan had full legal capacity to execute all documents relating to such Mortgage Loan and to convey the estate therein purported to be conveyed and each Mortgage and Mortgage Note have been duly and properly executed by such parties; (f) The Seller is transferring such Mortgage Loan free and clear of any and all liens, pledges, charges or security interests of any nature encumbering such Mortgage Loan and free and clear of any right to repurchase such Mortgage Loan by such Seller or any other party; (g) The related Mortgage is a valid, perfected and enforceable first lien on the related Mortgaged Property, which Mortgaged Property is free and clear of all encumbrances and liens having priority over the first lien of the Mortgage except for (i) liens for real estate taxes and special assessments not yet due and payable, (ii) covenants, conditions and restrictions, rights of way, easements and other matters of public record as of the date of recording of such Mortgage, such exceptions appearing of record being acceptable to mortgage lending institutions generally or specifically reflected in the appraisal made in connection with the origination of the related Mortgage Loan, and (iii) other matters to which like properties are commonly subject which do not, individually or in the aggregate, materially interfere with the benefits of the security intended to be provided by such Mortgage; and each original Mortgage was recorded, and all subsequent assignments of the original Mortgage have been recorded or sent for recording in the appropriate jurisdictions; (h) Except as evidenced by an appropriate written amendment or modification that has been executed and recorded and a certified copy of which is contained in the related Mortgage File, neither the Seller nor any prior holder of the Mortgage Loan has impaired, altered or modified the related Mortgage or Mortgage Note in any respect; and the substance of any such alteration or modification is reflected on the Mortgage Loan Schedule; (i) The related Mortgage or Mortgage Note has not been satisfied, canceled or subordinated in whole or in part; and no portion of the Mortgaged Property has been released from the lien of the Mortgage; (j) Neither the Seller nor any prior holder of the Mortgage Loan has advanced funds or received any advance of funds by a party other than the Mortgagor(s) directly or indirectly, for the payment of any amount required by the related Mortgage Note or the related Mortgage, except for interest accruing from the date of the Mortgage Note or date of disbursement of the Mortgage Loan proceeds, whichever is later, to the date which precedes by thirty (30) days the first due date under the related Mortgage Note; (k) The proceeds of the Mortgage Loan have been fully disbursed and there is no requirement for future advances thereunder; all costs, fees and expenses incurred in making or closing or recording such Mortgage Loan were paid; (l) Such Mortgage Loan is covered by an American Land Title Association mortgagee title insurance policy or other generally acceptable form of title insurance policy issued by, and is the valid and binding obligation of, a solvent title insurer qualified to do business in the jurisdiction where the related Mortgaged Property is located, insuring the Seller, its successors and assigns, as to the first priority lien of the Mortgage in the original principal amount of the Mortgage Loan, as increased by deferred and capitalized interest, if applicable. Any such title policy was effective on the date of the origination of the Mortgage Loan and is assignable to or endorsable in favor of the Buyer or its designee without the consent of or notice to the insurer. On the date of the transfer and assignment of the Mortgage Loan to the Buyer or its designee, such title insurance policy is valid and in full force and effect, with all premiums thereon having been paid, and immediately following the transfer and assignment of such Mortgage Loan to the Buyer or-its designee, such title insurance policy will inure to the benefit of the Buyer or its designee. Neither the Seller nor any prior holder of the Mortgage has made any claim under such title insurance policy, and no act or omission has occurred that would impair or extinguish the coverage provided by such policy. The name of the Mortgagor on each such policy matches the name of the Mortgagor on the related Mortgage; (m) The related Mortgage Note is payable in substantially level and equal monthly installments, so as to result in complete amortization of the Mortgage Loan over the stated term, which stated term does not exceed 360 months; (n) Such Mortgage Loan is secured by a Mortgage on a single family residential real property or other type of residential property as set forth on the Mortgage Loan Schedule; (o) Each Mortgage Note is in a form that is acceptable to prudent mortgage lenders which make mortgage loans comparable to the Mortgage Loans; (p) As of the Closing Date, no payment required under any Mortgage Loan was past due more than twenty-nine (29) days; (q) There is no pending or, to the best knowledge of the Seller, threatened suit, action, litigation or claim of any kind by the Mortgagor(s) relating to the Mortgage Loan; (r) Any security agreement, chattel mortgage or equivalent document related to such Mortgage Loan establishes in the Seller a valid first lien on the property described therein and the Seller has full right to sell and assign the same hereunder; (s) To the best knowledge of the Seller, all taxes, governmental assessments, insurance premiums, and water, sewer and municipal charges which previously became due and owing in respect of the related Mortgaged Property have been paid, or an escrow of funds in an amount sufficient to cover such payments has been established; (t) There is no proceeding pending or, to the best knowledge of the Seller, threatened for the total or partial condemnation of the related Mortgaged Property and the Mortgaged Property is in good repair and is undamaged by waste, fire, earthquake, earth movement, windstorm (including a hurricane), flood, tornado or other casualty; (u) The related Mortgaged Property is free and clear of all mechanics' and materialmen's liens or liens in the nature thereof, and no rights are outstanding that under law could give rise to any such liens, any of which liens are or may be prior to, or equal with the lien of the Mortgage; (v) To the best knowledge of the Seller, all of the improvements which were included for the purpose of determining the appraised value of the related Mortgaged Property at the time of the origination of the Mortgage Loan lie wholly within the boundaries and building restriction lines of such property, and no improvements on adjoining properties encroach upon such Mortgaged Property; (w) To the best knowledge of the Seller, no improvement located on or forming part of the related Mortgaged Property is in violation of any applicable zoning and subdivision laws and ordinances; to the best of the Seller's knowledge, all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of each Mortgaged Property and, with respect to the use and occupancy of the same, have been made or obtained from the appropriate authorities and such Mortgaged Property is lawfully occupied under the applicable law; (x) To the best of the Seller's knowledge, to the extent required under applicable taw, each originator and subsequent mortgagee was authorized to transact and do business in the jurisdiction in which the related Mortgaged Property is located at all times when it held the Mortgage Loan; (y) If upon origination of the Mortgage Loan, the Mortgaged Property was in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards (and the flood insurance described below has been made available), a flood insurance policy meeting the requirements of the current guidelines of the Federal Insurance Administrator is in effect with a generally acceptable insurance carrier, in an amount representing coverage not less than the least of (A) the unpaid principal balance of the Mortgage Loan, (B) the full insurable value of the Mortgaged Property or (C) the maximum amount of insurance which was available under the Flood Disaster Protection Act of 1973; (z) Such Mortgage Loan obligates the Mortgagor thereunder, at his cost and expense, to maintain a hazard insurance policy with a standard mortgagee clause and, if it was in place at origination of the Mortgage Loan, flood insurance, at the Mortgagor's cost and expense. At the Closing Date, the improvements upon each Mortgaged Property are covered by a valid and existing hazard insurance policy with a carrier licensed in the state in which the Mortgaged Property is located that provides for fire and extended coverage representing coverage not less than the least of (A) the outstanding principal balance of the related Mortgage Loan, and (B) the minimum amount required to compensate for loss or damage on a replacement cost basis, or (C) the full insurable value of the Mortgaged Property. All individual insurance policies are the valid and binding obligation of the insurer and contain a standard mortgage clause naming the Seller, its successors and assigns, as mortgagee. All premiums then due thereon have been paid; (aa) Except for payments past due less than thirty (30) days as permitted by clause (p) above, there is no default, breach, violation or event of acceleration existing under the related Mortgage or the related Mortgage Note and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration; and neither the servicer nor the Seller has waived any default, breach, violation or event of acceleration; except that the servicer or the Seller may have heretofore waived late payments or granted extensions of payments (none of which extensions are material); (bb) The related Mortgage Note or the related Mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security, including realization by judicial or, if applicable, trustee's sale or non-judicial foreclosure, and any homestead or other exemption available to the Mortgagor which would interfere with such right to foreclose or sell has been effectively waived; (cc) There are no "white outs" on any Mortgage Note or Mortgage and all corrections thereon, or any other documents in the Mortgage File or on any other document required by law referred to in clause (d) above, if any, have been properly approved in writing by the Mortgager. (dd) Each Mortgage Loan is being serviced by the Seller pursuant to a sub-servicing agreement between it and Ocwen Federal Bank, FSB, which sub- servicing agreement permits the transfer of servicing of the Mortgage Loans in accordance with this Agreement at no cost to the Buyer. (ee) No Mortgage Loan had more than one delinquency during the 12-month period immediately preceding the Cut-Off Date and any such delinquency extended for no more than 59 days; (ff) The Seller has caused and will cause to be performed any and all acts required to be performed to preserve the rights and remedies of the Buyer or its designee in any hazard, title or flood insurance policies applicable to any of the Mortgage Loans delivered by the Seller to the Buyer including, without limitation, any necessary notifications of insurers, assignments of policies or interests therein, and establishments of co-insured, joint loss payee and mortgagee rights in favor of the Buyer; (gg) To the best knowledge of the Seller, no Mortgage Loan was originated under a buydown plan; (hh) No Mortgage Loan has a shared appreciation feature, or other contingent interest feature; (ii) Each Mortgage contains a provision for the acceleration of the payment of the unpaid principal balance of the related Mortgage Loan in the event the related Mortgaged Property is sold without the prior consent of the mortgagee thereunder and such provision is enforceable to the extent permitted by applicable law; (jj) Any advances made after the date of origination of a Mortgage Loan but prior to the Cut-Off Date have been consolidated with the outstanding principal amount secured by the related Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term reflected on the Mortgage Loan Schedule. The consolidated principal amount does not exceed the original principal amount of the related Mortgage Loan. No Mortgage Note permits or obligates the servicer to make future advances to the related Mortgagor at the option of the Mortgagor; (kk) With respect to each Mortgage constituting a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in such Mortgage, and no fees or expenses are or will become payable by the Buyer to the trustee under the deed of trust, except in connection with a trustee's sale after default by the related Mortgagor; (ll) No instrument of release or waiver has been executed in connection with any Mortgage Loan, and no Mortgagor has been released, in whole or in part; (mm) The Credit File contains an appraisal of the related Mortgaged Property signed prior to the approval of the Mortgage Loan application by an appraiser duly appointed by the Seller (i) who meets the minimum requisite qualifications of Federal National Mortgage Association for appraisers, (ii) that had no interest, direct or indirect, in the Mortgaged Property, and (iii) whose compensation is not affected by the approval or disapproval of the Mortgage Loan; and such appraisal and appraiser comply substantially with the requirements set forth in the Seller's underwriting guidelines; (nn) Each Mortgage Loan was underwritten substantially in accordance with the Seller's underwriting guidelines and other requirements set forth in the Seller's Manual dated June 1, 1998, a complete copy of which has been provided to the Buyer. (oo) As of the Closing Date, the Seller has no actual knowledge that there exists on any Mortgaged Property any hazardous substances, hazardous wastes or solid wastes, as such terms are defined in the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation and Recovery Act of 1976, or other federal, state or local environmental legislation. For purposes of this Clause (oo), actual knowledge of the Seller means actual knowledge of an officer of the Seller involved in the servicing of the related Mortgage Loan. Actual knowledge of the Seller does not include knowledge imputable by virtue of the availability of or accessibility to information relating to environmental or hazardous waste sites or the locations thereof; (pp) All parties which have had any interest in any Mortgage Loan prior to their sale on the Closing Date, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (1) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (2) (A) organized under the laws of such state, or (B) qualified to do business in such state, or (C) federal savings and loan associations or national banks having principal offices in such state, or (D) not doing business in such state so as to require qualification or licensing; (qq) Any Mortgage Loan which is secured by a leasehold estate conforms to the requirements of Federal National Mortgage Association for mortgage loans secured by leasehold estates; and no Mortgagor under any Mortgage Loan is an Illinois land trust; (rr) As of the Cut-Off-Date, no Mortgage Loan is a bankruptcy loan in which the Mortgagor is subject to bankruptcy proceedings; (ss) Each Credit File contains an appraisal and no appraisal for a Mortgage Loan was based solely upon a cost approach analysis; (tt) Reserved; (uu) No fraud was committed, nor was any material misrepresentation made, by the Seller, by any employee, agent or representative of the Seller, or to the-best knowledge of the Seller, by any other person, including without limitation the related Mortgagor, in connection with the origination of the Mortgage Loan. C. Additional Representations and Warranties. The Seller hereby makes, ----------------------------------------- with respect to each Mortgage Loan sold hereunder, each additional representation and warranty, if any, set forth in Addendum A attached hereto. ---------- D. Reserved. E. Remedy to Insure Accuracy of Real Estate Appraisals. Buyer may, at --------------------------------------------------- its own expense, in order to verify the accuracy of real property appraisals prepared for Seller, order a reappraisal of the property secured by a Mortgage. If the reappraisal obtained by Buyer indicates a fair market value which is more than fifteen (15%) percent less than the original appraisal value, then no later than October 30, 1998, upon receipt by Seller from Buyer of a signed copy of the reappraisal, Seller shall repurchase the Mortgage Loan at the Mortgage Loan Repurchase Price and reimburse Buyer for the cost of the appraisal subject to the following: If Seller disputes the validity of the reappraisal prepared by Buyer's appraiser, Seller may, at its own expense, request Buyer to obtain a third appraisal, and only if such third appraisal is also more than fifteen (15%) percent less than the original appraisal value shall the Seller be required to repurchase the Loan at the Mortgage Loan Repurchase Price. Buyer shall choose the appraiser for the third appraisal with Seller's approval, which shall not be unreasonably withheld, but such appraiser must possess the minimum qualifications specified in Buyer's Underwriting Guidelines. The appraisal must be performed in accordance with industry standards for the appraising industry in the area in which the property is located, and the appraiser must be independent with respect to both parties unless otherwise agreed to by the parties. In determining the appropriate appraisal value, the review appraiser must determine the appraised value as of the original appraisal date using comparable sales that were available as of the date of the original appraisal. However, anything to the contrary notwithstanding, the Buyer reserves the sole right not to request the Seller to repurchase the Mortgage Loan should the reappraisal cause the combined loan-to-value not to exceed the maximum allowable combined loan-to-value of the loan class under which the loan was purchased. F. Remedies Upon Breach. -------------------- (1) Upon discovery by the Buyer or the Seller of an inaccuracy or a breach of (I) any of the Seller's representations and warranties set forth in Paragraph A(xv) or Paragraph B(ii)(c), (e) or (f) of this Article IV, or (II) - --------------- ------------------------------ ---------- any of the Seller's other representations and warranties set forth in this Article IV which materially and adversely affects the value of any Mortgage Loan - ---------- owned by the Buyer or the interests of the Buyer, the party discovering such breach shall give prompt written notice of such breach to the other party. (2) Within 55 days of its discovery or its receipt of notice of any such inaccuracy or a breach, the Seller, at its election, shall (I) cure such inaccuracy or breach in all material respects, or shall either (II) repurchase the affected Mortgage Loan pursuant to Subparagraph (a) below, or (III) ---------------- substitute a Substitute Mortgage Loan for the affected Mortgage Loan pursuant to Subparagraph (b) below: - ---------------- (a) If the Seller elects to repurchase an affected Mortgage Loan, the Seller shall repurchase such affected Mortgage Loan, on a whole loan, servicing released basis, at a price (the "Mortgage Loan Repurchase Price") equal to the principal balance of such Mortgage Loan multiplied by the Mortgage Loan Percentage Amount, plus accrued interest on such principal balance at the interest rate borne by such Mortgage Loan through the date of repurchase. The Seller shall pay such price on the repurchase date to the Buyer in immediately available funds to the account designated by the Buyer. In connection with any repurchase of a Mortgage Loan hereunder by the Seller and as a condition to the payment of the Mortgage Loan Repurchase Price, the Buyer shall tender to the Seller all portions of the Mortgage File and Credit File with respect to such Mortgage Loan previously delivered to the Buyer, and each document that constitutes a part of the Mortgage File and the Credit File, and which was endorsed or assigned to the Buyer as required by Article V, shall be endorsed --------- and assigned to the Seller without recourse and without any representations or warranties whatsoever, express or implied, except as set forth in the last sentence of this Subparagraph (a). Additionally, the Buyer shall cause to be ---------------- re-assigned and turned over to the Seller all escrow and impound accounts relating to the re-assigned Mortgage Loan(s). With respect to any Mortgage Loan repurchased by the Seller from the Buyer as aforesaid, the Buyer warrants on the date of such repurchase that the Mortgage Loan is free and clear of any and all claims to the title thereof or encumbrances created by the Buyer or any assignee of the Buyer and has not been assigned on such date by the Buyer to any other person. (b) The Seller may elect to substitute for an affected Mortgage Loan a different mortgage loan (a "Substitute Mortgage Loan"), maturing no later than and not more than one year earlier than the Mortgage Loan being substituted for and having a principal balance equal to or less than, an interest rate equal to or greater than, that of such affected Mortgage Loan and otherwise having such characteristics that the representations and warranties of the Seller would not have been incurred had such Substitute Mortgage Loan originally been a Mortgage Loan. In the event that the principal balance of such Substitute Mortgage Loan is less than the principal balance of the affected Mortgage Loan, the Seller, no later than the date on which it delivers the related Mortgage File to the Buyer (the "Substitution Date"), shall pay to the Buyer the amount by which the principal balance of the affected Mortgage Loan exceeds the principal balance of the Substitute Mortgage Loan, in both cases as of the Substitution Date, multiplied by the Mortgage Loan Percentage Amount. Payments of principal and interest made in respect of the month of substitution with respect to such affected Mortgage Loan will be the property of the Seller and payments of principal and interest made in respect of the month of substitution with respect to such Substitute Mortgage Loan will be the property of the Buyer. In connection with the substitution of a Substitute Mortgage Loan hereunder, the Seller shall tender to the Buyer the Mortgage File and Credit File relating to such Substitute Mortgage Loan in the form and in the manner required by Article ------- V hereof. In addition, and as a condition to the Seller's tender of the - - Mortgage File and Credit File relating to the Substitute Mortgage Loan, the Buyer shall tender to the Seller all portions of the Mortgage File and Credit File with respect to the Mortgage Loan previously delivered to the Buyer, and each document that constitutes a part of the Mortgage File and the Credit File, and which was endorsed or assigned to the Buyer as required by Article V hereof, --------- shall be endorsed and assigned to the Seller without recourse and without any representations or warranties whatsoever, express or implied, except as set forth in the last sentence of Paragraph F(ii)(a) of this Article IV. ------------------ ---------- (c) Notwithstanding anything contained herein to the contrary, the Seller agrees at its sole cost to cure in a manner satisfactory to the Buyer the exceptions set forth on Exhibit C hereto with respect to the Mortgage Loans --------- identified thereon no later than October 2, 1998. In the event that the Seller fails to cure the exception(s) relating to a Mortgage Loan on or before October 2, 1998, then, upon the request of the Buyer, the Seller agrees to repurchase any such Mortgage Loan at the Mortgage Loan Repurchase Price in the manner provided in Paragraph F(ii)(a) of this Article IV. The Seller acknowledges that ------------------ ---------- the original documents relating to Mortgage Loans identified on Exhibit C which --------- may be transmitted by or on behalf of the Buyer to the Seller in order for the Seller to undertake the curative work required by this Paragraph F(ii)(c), shall ------------------ be held by the Seller in trust exclusively for the benefit of the Buyer, and the Seller shall note in its records that the related Mortgage Loans are owned by the Buyer and segregate such original documents from its other files and records, and return all such original documents to the Buyer upon its request. The curative work to be undertaken by the Seller shall include, without limitation or exclusion, recordation in the appropriate public filing offices of the necessary amendatory documents. (3) The Seller shall defend and indemnify the Buyer, its designee, its successor servicer, and their representatives, officers, directors, employees, agents shareholders and affiliates against, and hold each of them harmless from, any and all losses, liabilities, expenses, claims, demands, costs or judgments of any type (including without limitation reasonable attorneys' fees) arising out of the breach of any of the Seller's representations, warranties or covenants set forth in this Agreement that materially and adversely affects the value of any one or more Mortgage Loans. The foregoing indemnity shall not be applicable to claims resulting from the failure of the Buyer or its servicer to properly service the Mortgage Loans after the Servicing Transfer Date. G. Non-Solicitation. The Seller agrees that for the time period of 36 ---------------- months beginning from the Closing Date, not to take any action to solicit the Mortgagors individually in order to effect the refinancing of any Mortgage Loans previously purchased by the Buyer from the Seller. Not by way of limitation or exclusion, the Seller shall not during such 36 month period provide inducements to its brokers to specifically target the Mortgagors for solicitation, provide a list of such Mortgagors to its brokers or other third parties or implement any special programs intended to encourage the refinancing of any such Mortgage Loans. Notwithstanding the foregoing, the provisions of this Paragraph G shall not restrict the general advertising or marketing ----------- programs of the Seller which are directed to the pubic at large, nor shall they restrict Seller from soliciting any Mortgagor of a Mortgage Loan whose name Seller acquires from a non-affiliated third party that is not prohibited from selling or disclosing such name to Seller. ARTICLE V --------- CLOSING A. Payment. Payment for the Mortgage Loans shall be made on the Closing ------- Date no later than 1:00 p.m., C.S.T., in accordance with Paragraph D of Article ----------- ------- II. Conveyance of the Mortgage Files and delivery of the other Closing - -- Documents required to be delivered by the Seller shall be made against delivery of the Mortgage Loan Purchase Price. The Closing shall, upon mutual agreement between the Seller and the Buyer, be either by telephone, confirmed by letter or wire or conducted in person at the place designated by the Seller and approved by the Buyer. If no such mutual agreement can be reached, the Closing shall be conducted in person at the place designated by the Buyer. B. Assignment and Delivery of Mortgage Files. On or prior to the Closing ----------------------------------------- Date, the Seller shall deliver to the Buyer the following documents or instruments with respect to each Mortgage Loan conveyed to the Buyer: (1) the original Mortgage Note, endorsed by the Seller in blank and, with respect to Mortgage Loans secured by Mortgaged Property located in the State of Louisiana, if any, paraphed for identification with the related assignment by the notary public before whom such assignment was executed; (2) an assignment, in notarial form acceptable to the Buyer, of the Mortgage Note and the Mortgage executed by the Seller in blank in recordable form; (3) originals or certified copies of all intervening assignments, in proper form and content, with the recording information indicated thereon; (4) originals or certified copies of all assumption, modification and substitution agreements, in proper form and content, with recording information indicated thereon in those instances where the terms or provisions of the Mortgage or the Mortgage Note have been modified or the Mortgage or the Mortgage Note has been assumed; (5) the original or a certified copy of the Mortgage, including all Mortgage riders relating to the Mortgage Loan, with the recording information indicated thereon; and (6) a mortgagee's title insurance policy issued on the date of the origination of such Mortgage Loan (with all applicable endorsements) or, in the event such policy has not yet been issued, an unconditional commitment therefor, which policies or commitments shall meet the requirements of this Agreement and are valid and remain in full force and effect; With respect to item (iii), the Seller may deliver, on or prior to the ---------- Closing Date, a certified copy of such document if the original is unavailable by reason of having been delivered for recording; provided, however, that such ----------------- recorded document shall be delivered by the Seller to the Buyer or its designee promptly when and if available to the Seller. With respect to item (v), the -------- Seller may deliver, on or before the Closing Date, a certified copy of such document if the original is unavailable by reason of having been recorded; provided, however, that each such recorded document shall be delivered by the - ----------------- Seller to the Buyer or its designee promptly when and if available to the Seller; and in any event the recorded documents required by items (iii) and (v) shall be delivered by the Seller to the Buyer or its designee within six (6) months following the Closing Date (such six (6) month period to be extended at the written request of the Seller, up to but not in excess of an additional six (6) months in the event of delays caused by the public recording office in returning such documents to the Seller). The mortgagee title insurance policy (with all applicable endorsements) required by item (vi) shall be delivered by the Seller to the Buyer or its designee within ninety (90) days of the Closing Date. Conveyance of the Mortgage Files to the Buyer or its designee shall be deemed to occur at such time as the Seller has received payment of the Mortgage Loan Purchase Price in accordance with Paragraph D of Article II. ----------- ---------- The Buyer shall be solely responsible for the costs of recording the assignment to the Buyer or its designee from the Seller of any Mortgage Note and related Mortgage. The Seller shall be solely responsible for recording all intervening assignments and all assumption, modification and substitution agreements at their own expense. C. Delivery of Credit Files. The Buyer (or such agent as the Buyer may ------------------------ designate to the Seller, which agent may be an attorney, escrow agent, delivery or courier service or any other person or entity) shall take delivery of the Credit Files on or prior to the Servicing Transfer Date at the place or places designated by the Seller and approved by the Buyer. ARTICLE VI ---------- ASSIGNMENT OF RIGHTS TO THIRD PARTIES With respect to any Mortgage Loan, the Buyer and any subsequent holder shall have the right, at any time after the Closing, to assign its rights under this Agreement to any subsequent transferee of such Mortgage Loan. ARTICLE VII ----------- SERVICING OF THE MORTGAGE LOANS A. Release of Servicing. The Mortgage Loans shall be sold and conveyed -------------------- to the Buyer on a servicing released basis, and, as of the Servicing Transfer Date, all rights and responsibilities with respect to the servicing of the Mortgage Loans shall pass to the Buyer, its designee or the successor servicer designated by it; provided, however, the Seller agrees to timely ----------------- prepare and forward to each Mortgagor a Form 1098 and an escrow statement for the current calendar year to and including the Closing Date. B. Interim Sub-Servicing by the Seller and Transfer of Servicing to the -------------------------------------------------------------------- Buyer. - ----- a. In order to provide for the orderly transition of servicing to the Buyer, the parties have agreed on the servicing transfer procedures set forth herein. b. The transfer of servicing shall occur on October 2, 1998. In accordance with RESPA Guidelines, the Seller shall mail to each Mortgagor a notice of assignment, sale or transfer of servicing rights pursuant to the Real Estate Settlement Procedures Act. On October 3, 1998, the Seller shall transfer data relating to the Mortgage Loans to the Buyer's servicer pursuant to procedures previously utilized by the Seller and such servicer in prior whole loan sales transactions. c. In connection with the transfer of servicing, all unremitted payments of principal and interest, and all escrows and impounds, held by the Seller and pertaining to the Mortgage Loans shall be transferred and turned over to the Buyer or the Buyer's servicer on or prior to the Servicing Transfer Date. Such transfer and turn over shall be performed in accordance with the laws of the state in which the collateral for the related Mortgage Loan is located. d. The Seller shall cooperate fully with the Buyer or its designee and shall use reasonable efforts to enable the Buyer or its designee to convert the Mortgage Loans to the Buyer's or its successor servicer's own servicing system as soon as possible, and, in any event, before the Servicing Transfer Date. Without limiting the scope of the foregoing, the Seller shall provide the following reasonable assistance at the Buyer's or its designee's request: (1) space at the Seller's processing facilities during normal business hours to accommodate the reasonable needs of the Buyer's or its successor servicer's personnel in overseeing the conversion of the Mortgage Loans; (2) assistance to the Buyer or its successor servicer in reviewing and analyzing the Seller and the Service Bureau's books and records to enable the Buyer or its designee or its successor servicer to take over the servicing; and (3) all other assistance reasonably necessary to enable the Buyer or its successor servicer to take over the servicing. e. The Seller shall notify the Buyer or its successor servicer of any questions, complaints, legal notices, or other communications relating to the foreclosure or material default of a Mortgage Loan that are received by the Seller. f. The Seller shall cooperate fully with the Buyer or its designee in the physical transfer of the Servicing Documents to the Buyer or its successor servicer. The Seller, at its own expense, shall make the Servicing Documents available for transfer to the Buyer or its successor servicer on the Servicing Transfer Date at the Buyer's offices in Baton Rouge, Louisiana, or at another location mutually agreeable to the Seller and the Buyer. The Seller shall make the Servicing Documents available for transfer in an orderly fashion and in good condition. On the Servicing Transfer Date, the Buyer or its designee (or such agent as the Buyer or its designee may designate, which agent may be an attorney, escrow agent, delivery or courier service or any other person or entity) shall take delivery, at the Buyer's or its designee's expense, of the Servicing Documents at the Seller's said offices or such other location as is mutually agreeable to said Seller and the Buyer. g. Prior to the Servicing Transfer Date, the Seller shall promptly notify the Buyer or its successor servicer of any Mortgage Loan as to which litigation is instituted and the status of the litigation related to such Mortgage Loan and shall provide to the Buyer or its successor servicer copies of all pertinent information related to such litigation, including, without limitation, copies of related Servicing Documents, in the Seller's possession. h. The Seller and the Buyer shall submit for each other's approval and acceptance any and all documentation, including, without limitation, any notifications to Mortgagors, which may be required to effectuate the transfer of servicing with respect to the Mortgage Loans, such approvals and acceptances not to be unreasonably withheld. i. Unremitted principal and interest, escrow funds another amounts or balances related to the Mortgage Loans which are held or controlled by a Seller on the Servicing Transfer Date shall be transferred by the Seller to the Buyer or its successor servicer on October 2, 1998. All such funds shall be reconciled and adjusted within thirty (30) days after the Servicing Transfer Date. The Seller shall transfer such funds, amounts or balances to such account(s) at such financial institution(s) designated to the Seller by notice from the Buyer. The Seller shall have no further dominion or control over such deposits after they are so transferred. j. All bills which are in a Seller's possession, which are due and payable on or prior to the Servicing Transfer Date and which normally would be paid prior to the Servicing Transfer Date by a servicer shall be paid by said Seller. All other bills, and all bills which are received after the Servicing Transfer Date, together with transmittal lists and any other information used to pay such bills, shall be immediately forwarded by said Seller to the Buyer or its successor servicer. All penalties and interest due on any Mortgage Loan resulting from said Seller's failure to pay bills in its possession which are required to be paid by the Seller pursuant to the preceding sentence, or as a result of the Seller's failure to forward bill information to the Buyer, shall be borne by the Seller. k. The Seller shall provide to the Buyer or its successor servicer promptly after the Servicing Transfer Date the following information, in each case as of the Servicing Transfer Date: (a) a ledger accounting as of the Servicing Transfer Date, which itemizes the dates and amounts of all payments made, received or applied by the Seller with regard to each Mortgage Loan, itemizing principal and interest payments, tax payments, special assessments, hazard insurance, mortgage insurance premiums, ground rents and other payments; and (b) a current trial balance. The Seller shall provide to the Buyer or its successor servicer on the Servicing Transfer Date current master record data on magnetic tape. l. The Seller shall promptly endorse and send to the Buyer or its successor servicer via overnight mail or delivery service any checks or other funds in respect of any Mortgage Loan which are received by the Seller on and after October 2, 1998, until sixty (60) calendar days after the Servicing Transfer Date. Any checks or other funds in respect of any Mortgage Loan which are received after such 60-day period shall be endorsed promptly by the Seller to the Buyer or its designee and sent by U.S. Mail to the Buyer or its designee on a weekly basis. m. The Seller shall promptly forward to the Buyer or its designee all Mortgagor correspondence, insurance notices, tax bills or any other correspondence or documentation related to the Mortage Loans which is received by the Seller after the Servicing Transfer Date. n. The Seller shall, where notification is required by the terms of the applicable policy, certificate or agreement, within thirty (30) calendar days after the Closing Date, provide written notice of the sale of the Mortgage Loans to any Insurer and shall send duplicates of such notices to the Buyer or its designee; provided, however, that said Seller may give aggregate notice ----------------- whenever possible. Where required by the terms of the applicable insurance policy insuring one or more Mortgage Loans, the Seller shall use its best efforts prior to the Servicing Transfer Date to obtain from such Insurer permission for the transfer of the Servicing to the Buyer or its designee. In addition, the Seller shall notify tax services and taxing authorities of the sale of the Mortgage Loans. o. Except as set forth in Article IV, Paragraph G above, the Seller ---------- ----------- hereby agrees that it will not take any action or cause any action to be taken by any of its agents or affiliates, or independent contractors working on its behalf, to personally, by telephone or mail, solicit the prepayment of any Mortgage Loan by any Mortgagor, in whole or in part, without the prior written consent of the Buyer. p. From time to time prior to or after the Servicing Transfer Date, the Seller shall furnish the Buyer such information and file such reports supplementary to the information contained in the documents and schedules delivered pursuant hereto as the Buyer may reasonably request. q. The Seller shall credit to the account of Mortgagors all interest required to be paid on any escrow account until the Servicing Transfer Date. r. All records relating to the Mortgage Loans, including but not limited to Mortgage Files and Credit Files, as well as any reproductions or copies of such records furnished for the purposes of performing Services, from the Closing Date are and shall continue at all times to be the sole and exclusive property of the Buyer or its designee. s. The Seller shall defend and indemnify the Buyer, its designee, its successor servicer, and their representatives, officers, directors, employees, agents, shareholders and affiliates against, and hold each of them harmless from, any and all losses, liabilities, expenses, claims, demands, costs, or judgments of any type (including without limitation reasonable attorney's fees) arising out of an actual or alleged negligent or willful failure of the Seller, any service bureau or any person hired by the Seller to properly perform any servicing of the Mortgage Loans prior to the Servicing Transfer Date. The Buyer shall defend and indemnify the Seller, its designee, its successor servicer, and their representatives, officers, directors, employees, agents, shareholders an affiliates against, and hold each of them harmless from, any and all losses, liabilities, expenses, claims, demands, costs, or judgments of any type (including without limitation reasonable attorney's fees) arising out of an actual or alleged negligent or willful failure of the Buyer, any service bureau or any person hired by the Buyer to properly perform any servicing of the Mortgage Loans after the Servicing Transfer Date. t. The Seller agrees to cause its subservicer to comply with all of the Seller's obligations set forth in Paragraph B of this Article VII and shall be responsible for any failure to comply or breach by its subservicer. u. From the Closing Date to the Servicing Transfer Date, the Seller shall continue to service the Mortgage Loans, as sub-servicer on behalf of the Buyer or its designee, and shall do all things necessary to perform such servicing, including without limitation: (1) preparing and maintaining such books and records as are appropriate, customary, and necessary with respect to the servicing; (2) receiving, processing, and accounting for payments and credits on the Mortgage Loans, including, without limitation, administration of, accounting for, and provision of required notices with respect to, interest rate adjustments, payment adjustments and conversions of the Mortgage Loans; (3) making all escrow disbursements in its own name; (4) responding as appropriate in writing or by telephone to Mortgagor inquiries, requests, or billing error notices and making appropriate adjustments with the concurrence of the Buyer; (5) collecting past-due Mortgage Loan payments; (6) providing and handling any guarantor or insurer delinquency notices in its own name; (7) providing supplies, telecommunications, and data transmission and processing equipment and programs as needed to permit the proper administration and operation of all Mortgage Loans; and (8) prepare and timely deliver an escrow account statement. v. The contents of each related Credit File and other Servicing Documents required to be retained by the Seller to service the Mortgage Loans on an interim basis pursuant to this Agreement and thus not delivered to the Buyer are and shall be held in trust by the Seller for the benefit of the Buyer as the owner thereof. The Seller's possession of any portion of each such Credit File and other Servicing Documents is at the will of the Buyer for the sole purpose of facilitating servicing on an interim basis of the related Mortgage Loan pursuant to this Agreement, and such retention and possession by the Seller shall be in a custodial capacity only. The ownership of each Mortgage Note, Mortgage, and the contents of the Mortgage File and Credit File, and the other Servicing Documents is vested in the Buyer and the ownership of all records and documents with respect to the related Mortgage Loan prepared by or which come into the possession of the Seller shall immediately vest in the Buyer and shall be retained maintained, in trust, by the Seller at the will of the Buyer in such custodial capacity only. The Seller shall, or shall cause the Seller's subservicer to, perform all the foregoing services in a prompt, efficient and competent manner; the Seller, or the Seller's subservicer's, degree of care shall not be less than that which is standard in the industry with respect to the servicing of first and second lien, residential Mortgage loans. In addition, the Seller or the Seller's subservicer shall at all times perform such services in accordance with all applicable federal, state and local statutes and regulations, including, without limitation, any statute or regulation relating to unfair credit collection practices. ARTICLE VII ----------- SUBSEQUENT DOCUMENTATION At any time, and from time to time hereafter, upon the reasonable request of the Buyer, and without payment of further consideration to the Seller, other than reimbursement for the Seller's reasonable out-of-pocket expenses, the Seller covenants to do, execute, acknowledge and deliver, and cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may be required in order to better assign, transfer, grant, convey, assure and confirm to the Buyer or its designee, or to collect and reduce to possession, any or all of the Mortgage Loans as provided for herein. ARTICLE IX ---------- NOTICES Unless otherwise provided for herein, all notices and other communications required or permitted hereunder shall be in writing (including a writing delivered by facsimile transmission) and shall be deemed to have been duly given (a) when delivered, if sent by registered or certified mail (return receipt requested), (b) when delivered, if delivered personally or by facsimile or (c) on the second following Business Day, if sent by overnight mail or overnight courier, in each case to the parties at the following addresses (or at such other addresses as shall be specified by like notice): If to the Buyer: Countrywide Home Loans, Inc. 4500 Park Granada Boulevard Calabasas, CA 91302 Attention: David Sambol Telephone No.: (800) 669-6091 Facsimile No.: (818) 225-4011 If to the Seller: Pan American Bank, FSB 625 The City Drive Suite 490 Orange, CA 92868 Attention: Blair Kenny Telephone No: (714) 705-1201 Facsimile No: (714) 621-1131 ARTICLE X ---------- MISCELLANEOUS PROVISIONS A. Severability. Each part of this Agreement is intended to be ------------ severable. If any term, covenant, condition or provision hereof is unlawful, invalid, or unenforceable for any reason whatsoever, and such illegality, invalidity, or unenforceability does not affect the remaining parts of this Agreement, then all such remaining parts hereof shall be valid and enforceable and have full force and effect as if the invalid or unenforceable part had not been included. B. Rights Cumulative; Waivers. The rights of each of the parties under -------------------------- this Agreement are cumulative and may be exercised as often as any party considers appropriate. The rights of each of the parties hereunder shall not be capable of being waived or varied otherwise than by an express waiver or variation that is in writing and signed by the parties. Any failure to exercise or any delay in exercising any of such rights shall not operate as a waiver or variation of that or any other such right. Any defective or partial exercise of any of such rights shall not preclude any other or further exercise of that or any other such right. No act or course of conduct or negotiation on the part of any party shall in any way preclude such party from exercising any such right or constitute a suspension or any variation of any such right. C. Headings. The headings of the Articles and Paragraphs contained in -------- this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any provision thereof. D. Construction. Unless the context otherwise requires, singular nouns ------------ and pronouns, when used herein, shall be deemed to include the plural of such noun or pronoun and pronouns of one gender shall be deemed to include the equivalent pronoun of the other gender. E. Assignment. This Agreement and the terms, covenants, conditions, ---------- provisions, obligations, undertakings, rights and benefits hereof, including the Addenda, Exhibits and Schedules hereto, shall be binding upon, and shall inure to the benefit of, the undersigned parties and their respective successors and assigns. F. Prior Understandings. This Agreement supersedes any and all prior -------------------- discussions and agreements between the Seller and the Buyer with respect to the purchase and sale of the Mortgage Loans and other matters contained herein, and this Agreement contains the sole and entire understanding between the parties hereto with respect to the transactions contemplated herein. G. Integrated Agreement. This Agreement and all Addenda, Exhibits and -------------------- Schedules hereto constitute the final complete expression of the intent and understanding of the Buyer and the Seller. This Agreement shall not be altered or modified except by a subsequent writing signed by the Buyer and the Seller. H. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing any such counterpart. I. Survival. Each and every covenant, representation and warranty -------- hereinabove made by the Buyer or the Seller shall survive the Closing and shall not merge into the Closing Documents, but instead shall be independently enforceable. J. Governing Law. This Agreement shall be construed, and the rights and ------------- obligations of the Seller and the Buyer hereunder determined, in accordance with the laws of the State of California without regard to the conflicts of laws and rules thereof. K. Consent to Identify the Seller. The Seller acknowledges that the ------------------------------ Buyer may include the Mortgage Loans in a publicly offered mortgage-backed securitization transaction, and, in such event, the Seller consents to the use of its name in the disclosure documents relating to such transaction in order to identify the Seller as the originator of the Mortgage Loans. IN TESTIMONY WHEREOF, the parties hereto have executed this Agreement in multiple originals to be effective as of the date fixed set forth hereof. BUYER: COUNTRY HOME LOANS, INC. By: /s/ Michael Schloessmann ---------------------------- Michael Schloessmann Vice-President Date: September 15, 1998 SELLER: PAN AMERICAN BANK, FSB By: /s/ Blair F. Kenny ------------------------------ Name: Blair F. Kenny ---------------------- Title: Senior Vice President --------------------- Date: September 15, 1998 EXHIBITS - -------- A - Form of Bill of Sale B - Mortgage Loan Schedule C - Exceptions to Be Cured by Seller ADDENDA A - Additional Representations and Warranties EXHIBIT A --------- BILL OF SALE On this 15th day of September, 1998, for and in consideration of the sum of $____________, the receipt and adequacy of which is hereby acknowledged by PAN AMERICAN BANK, FSB (the "Seller"), the Seller hereby absolutely sells, transfers, assigns, sets-over and conveys to COUNTRYWIDE HOME LOANS, INC., a corporation organized under the laws of the State of New York (the "Buyer"): (a) Each of the mortgage loans identified in the Final Mortgage Loan Schedule attached hereto as Exhibit B (the "Mortgage Loans"); --------- (b) All principal, interest or other proceeds of any kind with respect to the Mortgage Loans (including but not limited to proceeds derived from the conversion, voluntary or involuntary, of any of the Mortgage Loans into cash or other liquidated property, including, without limitation, insurance proceeds and condemnation awards); and (c) All collateral security of any kind relating to the Mortgage Loans. This Bill of Sale shall be governed by the laws of the State of California without regard to the conflicts of laws and rules thereof. This Bill of Sale may be executed in any number of counterparts, each of which shall constitute one and the same instrument, and either party hereto may execute this Bill of Sale by signing any such counterpart. SELLER: PAN AMERICAN BANK, FSB By: ----------------------------------- Name: ---------------------------- Title: --------------------------- Date: September 15, 1998 BUYER: COUNTRYWIDE HOME LOANS, INC. By: ----------------------------------- Michael Schloessmann Vice-President Date: September 15, 1998 EXHIBIT B --------- FINAL MORTGAGE LOAN SCHEDULE EX-10.90 5 ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT EXHIBIT 10.90 ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT ------------------------------------------------ This Assignment, Assumption and Recognition Agreement (the "Agreement") is made and entered into on September 30, 1998, by Countrywide Home Loans, Inc., a New York corporation, having an address at 4500 Park Granada Boulevard, Calabasas, California 91302 (the "Seller"), Fidelity Federal Bank, FSB, having an address at 4565 Colorado Boulevard, Los Angeles, California 90039 (the "Purchaser") and Pan American Bank, FSB, having an address at 625 The City Drive, Orange, California 92868 (the "Company"). In consideration of the mutual promises and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Assignment and Assumption. Except as expressly provided for herein, the ------------------------- Seller hereby grants, transfers and assigns to the Purchaser (a) all of its right, title and interest as "Purchaser" in, to and under that certain Mortgage Loan Purchase and Interim Servicing Agreement dated as of September 30, 1998, and duly executed by the Company and the Seller (attached hereto as Exhibit A, the "Purchase Agreement"), (b) all of its --------- right, title and interest in and to the each of the mortgage loans identified in Exhibit B hereto (the "Mortgage Loans"), and (c) all --------- servicing rights relating to the Mortgage Loans. Except for the provisions pertaining to the payment of the purchase price, the Purchaser hereby assumes all of the Seller's obligations as "Purchaser" under the Purchase Agreement from and after the date hereof, and the Seller shall be relieved and released by the Company of all of its obligations under the Purchase Agreement from and after the date hereof. Except as is otherwise expressly provided herein, the Seller makes no representations, warranties or covenants to the Purchaser and the Purchaser acknowledges that the Seller has no obligations to the Purchaser under the terms of the Purchase Agreement or otherwise relating to the transaction contemplated herein (including but not limited to any obligation to repurchase any of the Mortgage Loans or to indemnify the Purchaser). 2. Consideration. In consideration for the transfers and assignments set ------------- forth in paragraph 1 of this Agreement, the Purchaser agrees to pay to the Seller the amounts referenced in that certain Funding Schedule dated as of September 30, 1998 (the "Funding Schedule") and duly executed by the Seller and the Purchaser (the "Purchase Price"). The Purchaser agrees to wire the agreed upon Purchase Price to the Seller to the account designated below: Bank of New York ABA - 021000018 Countrywide Home Loans ACCT - 8900038632 REF - Stuart Levitt 3. Recognition of the Purchaser by the Company. From and after the date ------------------------------------------- hereof, the Company shall recognize the Purchaser as the owner of the Mortgage Loans and the "Purchaser" under the Purchase Agreement. 4. Servicing of the Mortgage Loans. From and after the date hereof, the ------------------------------- Company shall interim service the Mortgage Loans for the Purchaser in accordance with the terms and conditions of the Purchase Agreement, as if the Purchaser and Company had entered into the Purchase Agreement. The address of the Purchaser set forth in Section 6.1 of the Purchase Agreement shall be changed to read as follows: Fidelity Federal Bank, FSB 4565 Colorado Boulevard Los Angeles, California 90039 Attn: Mark Mason, Executive Vice President 5. Status of Purchase Agreement. The Company and the Seller represent and ---------------------------- warrant that (a) the Purchase Agreement is in full force and effect as of the date hereof, (b) the Purchase Agreement has not been amended or modified in any respect, and (c) there has been no waiver or any agreement to waive any provision, nor has any notice of termination been given, under the Purchase Agreement. 6. No Claims. The Company represents and warrants that it has no offsets, --------- counterclaims or other defenses available to it with respect to the Purchase Agreement. 7. Covenants, Representations and Warranties of the Seller. The Seller ------------------------------------------------------- represents and warrants to, and covenants with, the Purchaser that: a. The Seller is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has all requisite corporate power and authority to acquire, own and sell the Mortgage Loans; b. The Seller has full corporate power and authority to execute, deliver and perform under this Agreement, and to consummate the transactions set forth herein. The execution, delivery and performance of the Seller of this Agreement, and the consummation by it of the transactions contemplated hereby, have been duly authorized by all necessary corporate action of the Seller. This Agreement has been fully executed and delivered by the Seller and constitutes the valid and legally binding obligation of the Seller enforceable against the Seller in accordance with its respective terms; c. No material consent, approval, order or authorization of, or declaration, filing or registration with, any governmental entity is required to be obtained or made by the Seller in connection with the execution, delivery or performance by the Seller of this Agreement, or the consummation by it of the transaction contemplated hereby; d. There is no action, suit, proceeding, investigation or litigation pending or, to the Seller's knowledge, threatened, which either in any instance or in the aggregate, if determined adversely to the Seller, would adversely affect the sale of the Mortgage Loans to the Purchaser, the execution, delivery or enforceability of this Agreement, or the Seller's ability to perform its obligations under this Agreement; and e. Immediately prior to payment of the purchase price for the Mortgage Loans, the Seller is the lawful owner of the Mortgage Loans with the full right to transfer the Mortgage Loans free from any and all claims and encumbrances whatsoever. 8. Covenants, Representations and Warranties of Purchaser. The Purchaser ------------------------------------------------------ represents and warrants to, and covenants with, the Seller and the Company that except for the provisions pertaining to the payment of the purchase price thereunder, the Purchaser agrees to be bound as "Purchaser" by all of the terms, covenants and conditions of the Purchase Agreement, and from and after the date hereof, the Purchaser assumes for the 2 benefit of the Seller and the Company all of the Seller's obligations as "Purchaser" thereunder. 9. Governing Law. This Agreement shall be construed in accordance with the ------------- laws of the State of California and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with the laws of the State of California, except to the extent preempted by federal law. 10. Confidentiality. The Seller and the Purchaser hereby acknowledge and agree --------------- that this Agreement shall be kept confidential and its contents will not be divulged to any party without the other party's consent except to the extent that it is appropriate for the Seller or the Purchaser to do so in working with legal counsel, auditors, taxing authorities or other governmental agencies. 11. Conflict with Purchase Agreement. To the extent there is any conflict -------------------------------- between the terms of the Purchase Agreement and this Agreement, the latter shall be controlling, notwithstanding anything to the contrary contained in the Purchase Agreement. 12. Capitalized Terms. All capitalized terms used herein and not otherwise ----------------- defined herein shall have the meanings assigned to such terms in the Purchase Agreement. 13. Counterparts. This Agreement may be executed in any number of ------------ counterparts. Each counterpart shall be deemed to be an original and all such counterparts shall constitute one and the same instrument. [Signature page follows] 3 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. COUNTRYWIDE HOME LOANS, INC., the Seller /s/ Michael W. Schloessmann By ------------------------------- Michael W. Schloessmann Vice President FIDELITY FEDERAL BANK, FSB, the Purchaser By _______________________________ Mark Mason Executive Vice President PAN AMERICAN BANK, FSB the Company /s/ Blair F. Kenny By ------------------------------- Name: Blair F. Kenny Title: Senior Vice President 4 EXHIBIT A MORTGAGE LOAN PURCHASE AND INTERIM SERVICING AGREEMENT (attached) 5 MORTGAGE LOAN PURCHASE AND INTERIM SERVICING AGREEMENT ------------------------------------------------------ This Mortgage Loan Purchase and Interim Servicing Agreement is dated and effective as of September 30, 1998 (the "Agreement"), between Pan American Bank, FSB, having an address at 625 The City Drive, Orange, California 92868 (the "Seller"), and Countrywide Home Loans, Inc., having an address at 4500 Park Granada, Calabasas, California 91302 (the "Purchaser"). R E C I T A L S --------------- The Seller desires to sell and transfer to the Purchaser, and the Purchaser desires to purchase from the Seller, those certain mortgage loans identified on Exhibit A hereto, including all servicing rights relating thereto --------- (the "Mortgage Loans") upon such terms as are set forth below. In consideration of the promises and the mutual agreements and undertakings set forth herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I Definitions ----------- Whenever used herein, the following words and phrases, unless the context otherwise requires, shall have the following meanings: ACCRUED INTEREST: Accrued interest owing to the Seller on the Stated ---------------- Principal Balance of each Mortgage Loan at a rate equal to the Mortgage Interest Rate of each such Mortgage Loan, from the date through which interest has last been paid (as of Cut-Off Date) through the day prior to the Closing Date, inclusive; provided, however, with respect to those Mortgage Loans for which interest has been paid through a date beyond the Cut-Off Date, such accrued interest owing to Seller shall be reduced by the amount of interest accruing on the Stated Principal Balance of each such Mortgage Loan at a rate equal to the Mortgage Interest Rate of such Mortgage Loan, from the Closing Date to the day prior to the interest paid through date for such Mortgage Loan, inclusive. AGENCIES: Both FNMA or FHLMC. -------- AGREEMENT: This Mortgage Loan Purchase and Interim Servicing --------- Agreement, including all exhibits and supplements hereto, and all amendments hereof. APPRAISED VALUE: With respect to any Mortgage Loan, the value of the --------------- related Mortgaged Property based upon the lesser of (i) the original, signed appraisal made by a Qualified Appraiser for the originator at the time of origination of the Mortgage Loan or (ii) the purchase price of the Mortgaged Property at the time of origination of the Mortgage Loan, provided, however, that in the case of a refinanced Mortgage Loan, such value is based solely upon the appraisal made at the time of origination of such refinanced Mortgage Loan and in the case of a Mortgage Loan originated under the streamlined documentation program, such value shall be based on an appraisal obtained at the time the original loan was originated. 1 ASSIGNMENT OF MORTGAGE: An assignment of the Mortgage, notice of ---------------------- transfer or equivalent instrument in recordable form, sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to reflect the sale of the Mortgage to the Purchaser. BUSINESS DAY: Any day other than (i) a Saturday or Sunday, or (ii) a ------------ day on which banking and savings and loan institutions in the State of California are authorized or obligated by law or executive order to be closed. CLOSING DATE: September 30, 1998, or such other date as may be ------------ mutually agreed upon by the Seller and the Purchaser. CUT-OFF DATE: September 28, 1998. ------------ DUE DATE: The day of the month on which a Monthly Payment is due on a -------- Mortgage Loan, exclusive of any days of grace. ESCROW ACCOUNT: An account or accounts maintained by the Seller, or -------------- the Seller's predecessor in interest, maintained for the deposit of Escrow Payments received in respect of one or more Mortgage Loans. ESCROW PAYMENTS: The amounts held in Escrow Accounts which include --------------- amounts being held for payment of ground rents, property taxes, assessments, water rates, sewer rents, municipal charges, mortgage insurance premiums, fire and hazard insurance premiums, condo charges and other payments required to be escrowed by the Mortgagor pursuant to any Mortgage Loan. FHLMC: The Federal Home Loan Mortgage Corporation, or any successor ----- thereto. FNMA: The Federal National Mortgage Association or any successor ---- thereto. GROSS MARGIN: The fixed percentage amount set forth in the related ------------ Mortgage Note which amount is added to the Index in accordance with the terms of the related Mortgage Note to determine the Mortgage Interest Rate for such Mortgage Loan. HMDA: The Home Mortgage Disclosure Act, as amended. ---- HUD: The Department of Housing and Urban Development or any successor --- thereto. INDEX: On each Interest Adjustment Date, the Index shall mean the ----- rate per annum equal to the average of interbank offered rates for six-month U.S. dollar denominated deposits in the London market (LIBOR), as published in the Wall Street Journal as of the first Business Day of the month immediately preceding the month in which such Interest Adjustment Date occurs. INTEREST ADJUSTMENT DATE: With respect to each Mortgage Loan, the ------------------------ date on which an adjustment to the Mortgage Interest Rate on a Mortgage Note becomes effective. INTERIM SERVICING PERIOD: The period commencing with the Cut-Off Date ------------------------ and ending with the Servicing Transfer Date. 2 INTEREST PAID TO DATE: As of the Cut-Off Date, the date for each --------------------- Mortgage Loan through which the Mortgagor has paid interest to the holder of the Note and which is listed on the Mortgage Loan Schedule. LIFETIME MORTGAGE INTEREST RATE CAP: The absolute maximum Mortgage ----------------------------------- Interest Rate payable for a Mortgage Loan, above which the Mortgage Interest Rate shall not be adjusted, as provided in the Mortgage Loan Schedule. LOAN-TO-VALUE RATIO or LTV: With respect to any Mortgage Loan, the ------------------- --- ratio of the original outstanding principal amount to the Appraised Value of the Mortgage Loan. MONTHLY PAYMENT: The scheduled monthly payment of principal and --------------- interest on a Mortgage Loan. MORTGAGE: The mortgage, deed of trust or other such instrument -------- securing a Mortgage Note, which creates a first lien on an unsubordinated estate in fee simple in real property securing the Mortgage Note. MORTGAGE FILE: The file containing the Mortgage Loan Documents, all ------------- other documents in connection with the origination of a particular Mortgage Loan and all documents, files and other information reasonably necessary to service the Mortgage Loans, including, but not limited to, good faith estimate, HUD 1 Settlement Statement, Truth in Lending Disclosure Statement, and Truth in Lending Notice of Right to Cancel (if required by law). MORTGAGE INTEREST RATE: The annual rate at which interest accrues on ---------------------- any Mortgage Loan, exclusive of any primary mortgage insurance, as adjusted from time to time in accordance with the provisions of the related Mortgage Note, if applicable. MORTGAGE LOAN: A mortgage loan identified in the Mortgage Loan ------------- Schedule which is sold pursuant to this Agreement, which Mortgage Loan includes without limitation the Mortgage File, the Monthly Payments, Principal Prepayments and all other rights, benefits, proceeds and obligations arising from or in connection with such Mortgage Loan. MORTGAGE LOAN DOCUMENTS: The following documents pertaining to any ----------------------- Mortgage Loan: (a) The original Mortgage Note bearing all intervening endorsements, endorsed "Pay to the order of ______________________" and signed in the name of the Seller by an authorized officer; (b) The original Assignment of Mortgage for each Mortgage Loan in blank; (c) The original Mortgage with evidence of recording thereon; (d) The originals of all intervening assignments of mortgage with evidence of recording thereon; (e) The original mortgagee title insurance policy; and (f) The originals of any modication agreement. 3 MORTGAGE LOAN SCHEDULE: The schedule of Mortgage Loans set forth on ---------------------- Exhibit A hereto. - --------- MORTGAGE NOTE: The note or other evidence of the indebtedness of a ------------- Mortgagor secured by a Mortgage. MORTGAGED PROPERTY: The real property securing repayment of the debt ------------------ evidenced by a Mortgage Note. MORTGAGOR: The obligor on a Mortgage Note. --------- NET ESCROW PAYMENTS: Escrow Payment balances remaining after advances ------------------- by the Seller for taxes and insurance to the extent documented under a detailed statement provided to the Purchaser. NEXT DUE DATE: As of the Cut-Off Date, the date upon which a ------------- Mortgagor is required to make its next Monthly Payment, as set out on the Mortgage Loan Schedule. PERIODIC MORTGAGE INTEREST RATE CAP: The provision of a Mortgage Note ----------------------------------- which provides for an absolute maximum amount by which the Mortgage Interest Rate therein may increase or decrease on an Interest Adjustment Date above the Mortgage Interest Rate previously in effect, equal to the rate set forth in the Mortgage Loan Schedule, if applicable. PRIMARY MORTGAGE INSURANCE POLICY: A policy of primary mortgage --------------------------------- guaranty insurance issued by a Qualified Insurer, providing coverage at least equal to the level of coverage required by the Agencies at the time the related Mortgage Loan was originated if such Mortgage Loan was to be eligible for sale to, and securitization by, either FNMA or FHLMC. PRINCIPAL PREPAYMENT: Any payment or other recovery of principal on a -------------------- Mortgage Loan which is received in advance of its scheduled Due Date, including any prepayment penalty or premium thereon, which is not accompanied by an amount of interest representing scheduled interest due on any date or dates in any month or months subsequent to the month of prepayment. PURCHASE PRICE: The purchase price to be paid by the Purchaser for -------------- the Mortgage Loans (including the Servicing Rights relating thereto) which shall equal the product of (a) the Purchase Price Percentage, times (b) the Stated Principal Balance of the Mortgage Loans. PURCHASE PRICE PERCENTAGE: The purchase price percentage set forth in ------------------------- the Trade Confirmation. PURCHASE PROCEEDS: The aggregate of the Purchase Price and the ----------------- Accrued Interest. PURCHASER: Any entity which purchases the Mortgage Loans pursuant to --------- this Agreement or its successor in interest or any successor or assign to the Purchaser under this Agreement as herein provided. Unless the context requires otherwise, all references to "Purchaser" in this Agreement shall be deemed to include such Purchaser's successors in interest, assignees or designees. 4 QUALIFIED APPRAISER: An appraiser who (i) is licensed in the state ------------------- where the Mortgaged Property is located, (ii) has no interest, direct or indirect, in the Mortgaged Property or in any Mortgage Loan or the security therefore, (iii) complies with the Uniform Standards or Professional Appraisal Practice and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), and (iv) does not receive compensation that is affected by the approval or disapproval of the Mortgage Loan or by the amount of the appraisal. QUALIFIED INSURER: An insurance company duly qualified as such under ----------------- the laws of the states in which the Mortgaged Properties are located, duly authorized and licensed in such states to transact the applicable insurance business and to write the insurance provided, approved as an insurer by the Agencies and whose claims paying ability is rated in the two highest rating categories by the Standard & Poor's Ratings Group or Moody's Investors Service with respect to primary mortgage insurance and in the two highest rating categories by Best's with respect to hazard and flood insurance. REPURCHASE PRICE: With respect to any Mortgage Loan, a price equal to ---------------- the sum of (a) the product of (i) the unpaid principal balance of the Mortgage Loan at the time of repurchase, and (ii) the greater of par or the Purchase Price Percentage (subject to any buyup or buydown adjustments as contemplated in the Trade Confirmation), and (b) interest on such unpaid principal balance at the Mortgage Interest Rate from the last date through which interest has been paid and distributed to the Purchaser to the date of repurchase. SEGMENT(S): One or more segments of Mortgage Loans (each, a ---------- "Segment") comprising the Segment A Mortgage Loans, the Segment B Mortgage Loans, and the Segment C Mortgage Loans, whether individually or in the aggregate, as applicable. Each such Segment and the Mortgage Loans relating thereto are identified on Exhibit A and may hereafter be referred to as Segments --------- A, B, and C, respectively. SEGMENT A MORTGAGE LOANS: The Mortgage Loans identified under Segment ------------------------ A of the Mortgage Loan Schedule. SEGMENT B MORTGAGE LOANS: The Mortgage Loans identified under Segment ------------------------ B of the Mortgage Loan Schedule. SEGMENT C MORTGAGE LOANS: The Mortgage Loans identified under Segment ------------------------ C of the Mortgage Loan Schedule. SERVICING RIGHTS: With respect to each Mortgage Loan, any and all of ---------------- the following: (a) all rights to service the Mortgage Loans; (b) any payments or monies payable or received for servicing the Mortgage Loans; (c) any late fees, assumption fees, penalties or similar payments with respect to the Mortgage Loans; (d) all agreements or documents creating, defining or evidencing any such Servicing Rights and all rights of the Seller thereunder, including, but not limited to, any clean-up calls and termination options; (e) Escrow Payments or other similar payments with respect to the Mortgage Loans and any amounts actually collected with respect thereto; (f) all accounts and other rights to payments related to any of the property described in this paragraph; (g) possession and use of any and all Mortgage Files pertaining to the Mortgage Loans or pertaining to the past, present, or prospective servicing of the Mortgage Loans; and (h) all rights, powers and privileges incident to any of the foregoing. SERVICING TRANSFER DATE: October 15, 1998, or such other date the ----------------------- Purchaser may select upon reasonable notice to the Seller. 5 STATED PRINCIPAL BALANCE: The unpaid principal balance of the ------------------------ Mortgage Loans at the Cut-Off Date. TRADE CONFIRMATION: That certain letter agreement dated September 11, ------------------ 1998, between the Seller and the Purchaser setting forth the general terms and conditions of the transaction contemplated herein and identifying certain of the loan characteristics of the Mortgage Loans to be purchased hereunder. ARTICLE II SALE OF THE MORTGAGE LOANS -------------------------- SECTION 2.1 AGREEMENT OF SALE. The Seller does hereby agree to ----------------- sell, convey, transfer and assign to the Purchaser on the Closing Date all right, title and interest in and to the Mortgage Loans, the Servicing Rights, the Mortgage Loan Documents, the Mortgage Files and the Escrow Accounts relating to the Mortgage Loans, all in accordance with the terms and conditions set forth herein. SECTION 2.2 PAYMENT OF THE PURCHASE PROCEEDS. No later than 1:00 -------------------------------- p.m. (Pacific time) on the Closing Date, the Purchaser shall pay to the Seller the Purchase Proceeds, by wire transfer in immediately available funds to the account designated by the Seller. Upon completion of the wire transfer to the Seller's designated account, the Purchaser shall own the Mortgage Loans and the Servicing Rights, free and clear of any lien or encumbrance whatsoever. SECTION 2.3 ENTITLEMENT TO PAYMENT ON THE MORTGAGE LOANS. The -------------------------------------------- Purchaser shall be entitled to all collections and recoveries of principal and interest received or applied to any Mortgagor's account after the Cut-Off Date. All payments and remittances on the Mortgage Loans received by the Seller after the Cut-Off Date and payable to the Purchaser shall be paid promptly to the Purchaser in accordance to the terms set forth in Article IV or Article V, as ---------- --------- applicable. SECTION 2.4 EXAMINATION OF MORTGAGE LOAN DOCUMENTS BY THE --------------------------------------------- PURCHASER. Prior to the Closing Date, the Purchaser shall have the right to review the Mortgage File and, based on its review, decline to purchase any Mortgage Loan which the Purchaser, in its sole discretion, determines not to be in compliance with each of the representations and warranties contemplated hereby or which is otherwise unsatisfactory to the Purchaser in its reasonable discretion. The Seller agrees to deliver or make available to the Purchaser a complete Mortgage File for each Mortgage Loan on or before such date as may be reasonably requested by the Purchaser. The fact that the Purchaser has conducted or has failed to conduct any partial or complete examination of the Mortgage Files shall not affect the Purchaser's right to demand repurchase or to avail itself of any other remedy available hereunder. Notwithstanding anything contained herein to the contrary, should there be a material adverse change in the characteristics of the Mortgage Loans remaining after the exclusion or rejection of one or more Mortgage Loans by the Purchaser as contemplated above, the Purchaser may, in its sole discretion, elect not to purchase the remaining Mortgage Loans and the Purchaser shall have no liability therefor. SECTION 2.5 DELIVERY OF MORTGAGE LOAN DOCUMENTS. At least two (2) ----------------------------------- Business Days prior to the Closing Date, the Seller shall deliver the Mortgage Loan Documents with respect to each Mortgage Loan to the Purchaser or a bonded third party custodian (the 6 "Custodian") and, in the case of the latter, shall cause the Custodian to deliver to the Purchaser a custodian's certification pursuant to which the Custodian certifies to the Purchaser that (i) with respect to each Mortgage Loan, it has in its possession originals of each of the Mortgage Loan Documents, (ii) all of the Mortgage Loan Documents appear on their face to be genuine originals or copies, as applicable, and (iii) upon the Purchaser's wiring of the Purchase Proceeds to the Seller, that the Custodian shall hold the Mortgage Loan Documents with respect to each Mortgage Loan in trust for the Purchaser and will, subsequent thereto, act only in a manner consistent with the Purchaser's instructions with respect thereto. In the event that any of the Mortgage Loan Documents set forth in clauses (c) through (e) of the definition of Mortgage Loan Documents in Article I have not been delivered to the Purchaser in the time --------- specified above (the "Missing Documents") either because such Missing Documents ----------------- have not been returned by the applicable public recording office with respect to items (c) and (d), or because the final original title policy has not yet been issued by the title company with respect to item (e), then the Seller shall deliver to the Purchaser certified true and correct copies of the same and shall further deliver the originals of any such Missing Documents within fifteen (15) days of its receipt thereof, but in no event later than one hundred and twenty (120) days from the Closing Date. If the Seller fails to deliver any of the Missing Documents relating to a Mortgage Loan within the time specified above, the Seller shall, upon written request from the Purchaser, repurchase such Mortgage Loan in accordance with Section 3.3. ----------- SECTION 2.6 CONDITIONS TO CLOSING. The Purchaser's obligations --------------------- hereunder are subject to the fulfillment of the following conditions precedent. In the event that any of the conditions set forth below are not satisfied in all material respects, the Purchaser shall not have any obligation to purchase any of the Mortgage Loans or to pay the Purchase Proceeds as contemplated hereunder and shall instead be entitled, in its sole discretion, to terminate this Agreement in its entirety. (a) Each of the representations and warranties made by the Seller hereunder shall be true and correct in all material respects as of the Closing Date and no event shall have occurred which, with notice or the passage of time, would constitute a default under this Agreement. (b) The Seller shall have delivered to the Purchaser all of the Mortgage Loan Documents in accordance with Section 2.5 and a complete Mortgage ----------- File with respect to each Mortgage Loan. (c) Each of the terms and conditions set forth herein which are required to be satisfied on or before the Closing Date shall have been satisfied unless waived by the prejudiced party(ies). (d) The Seller shall have delivered to the Purchaser on or before the Closing Date the following documents: (1) a fully executed Agreement; (2) the Mortgage Loan Schedule, which shall include, without limitation, the Stated Principal Balance of each Mortgage Loan; (3) an executed Funding Schedule, in the form of Exhibit B --------- hereto; (4) an Officer's Certificate, in the form of Exhibit C hereto; --------- 7 (5) State Licenses of the Seller, if applicable; (6) Opinion of Counsel, substantially in the form of Exhibit E --------- hereto; (7) Certificate of Good Standing of the Seller; and (8) such other documents related to the purchase and sale of the Mortgage Loans and the Servicing Rights as the Purchaser may reasonably request. SECTION 2.7 RECORD TITLE. Record title to each Mortgage and the ------------ related Mortgage Note shall be transferred by the Seller to the Purchaser. The Seller shall, at the option of the Purchaser, either (i) prepare and cause to be recorded the Assignment of Mortgage for each Mortgage Loan and shall, promptly upon its receipt of each original recorded Assignment of Mortgage from the applicable recording office, deliver the same to the Purchaser, or (ii) prepare and deliver to the Purchaser an original Assignment of Mortgage in blank, in each case, within the time and in the manner specified in Section 2.5. The ----------- Seller shall bear the cost and expense related to (i) providing all Assignments of Mortgages and endorsements of Mortgage Notes for any transfer of record title required hereunder with respect to the obligations of the Mortgage Notes and the underlying security interest related to each Mortgage Loan and (ii) recording title of the Mortgage Loans including, but not limited to, recording fees and fees for title policy endorsements. ARTICLE III REPRESENTATIONS AND WARRANTIES ------------------------------ SECTION 3.1 REPRESENTATIONS AND WARRANTIES RESPECTING THE SELLER. ---------------------------------------------------- The Seller represents, warrants and covenants to the Purchaser that, as of the Closing Date: (a) The Seller is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and is qualified to transact business in and is in good standing under the laws of each state where a Mortgaged Property is located or is otherwise exempt under applicable law from such qualification or is otherwise not required under applicable law to effect such qualification and no demand for such qualification has been made upon the Seller by any state having jurisdiction and in any event the Seller is or will be in compliance with the laws of any such state to the extent necessary to insure the enforceability of each Mortgage Note and the sale of the Mortgage Loans and Servicing Rights as contemplated by this Agreement; (b) The Seller has the full power and authority to perform, and to enter into and consummate, all transactions contemplated by this Agreement. As of the Closing Date, the Seller has the full power and authority to hold each Mortgage Loan and to sell each Mortgage Loan and the Servicing Rights; (c) Neither the acquisition or origination of the Mortgage Loans by the Seller, the sale of the Mortgage Loans or the Servicing Rights to the Purchaser, the consummation of the transactions contemplated hereby, nor the fulfillment of or compliance with the terms and conditions of this Agreement, will conflict with or result in a breach of any of the terms, conditions or provisions of the Seller's certificate of incorporation or bylaws or result in a material breach of any legal restriction or any agreement or instrument to which the Seller is now a party or by 8 which it is bound, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Seller or its property is subject; (d) The Seller is an approved seller/servicer for the Agencies, in good standing with each such agency, and is a mortgagee approved by the Secretary of HUD. No event has occurred, including, but not limited to, a change in insurance coverage, which would make the Seller unable to comply with FNMA-, FHLMC- or HUD- eligibility requirements or which would require notification to the Agencies or HUD; (e) The Seller does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement; (f) There is no action, suit, proceeding, investigation or litigation pending or, to the best of the Seller's knowledge, threatened, which either in any one instance or in the aggregate, if determined adversely to the Seller, would adversely affect the sale of the Mortgage Loans or the Servicing Rights to the Purchaser, or the Seller's ability to perform its obligations under this Agreement; (g) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by the Seller of or compliance by the Seller with this Agreement or the terms of the Mortgage Loans, the delivery of the Mortgage Files to the Purchaser, the sale of the Mortgage Loans and the Servicing Rights to the Purchaser or the consummation of the transactions contemplated by this Agreement, or, if required, such consent, approval, authorization or order has been obtained prior to the Closing Date; and (h) The consummation of the transactions contemplated by this Agreement are in the ordinary course of business of the Seller, and the transfer, assignment and conveyance of the Mortgage Notes, the Mortgages and/or the Servicing Rights by the Seller pursuant to this Agreement are not subject to the bulk transfer or any similar statutory provisions in effect and applicable to this transaction. (i) Seller has previously furnished Purchaser with Seller's most recent audited financial statements, together with the respective reports thereon of the Seller's independent public accountant, and Seller's most recent unaudited financial statements, each of which has been prepared in accordance with generally accepted accounting principles. Each of the balance sheets included in the financial statements sets for the Seller's financial condition as of the date thereof, and there have been no material adverse changes in Seller's business or financial conditions since that date. (j) Neither this Agreement, nor any statement, report, or other document furnished or to be furnished pursuant to this Agreement or in connection with the transaction contemplated hereby, contains any untrue statement of fact by Seller, or omits to state a fact necessary to make the statements of Seller contained therein not misleading. (k) Upon request, Seller will deliver to Purchaser a true and correct copy of Seller's fidelity bond and Seller's errors and omissions policy, and/or certificates evidencing the same as currently in effect, the amounts and coverages of both of which will be acceptable to Purchaser. Seller shall, at its own expense, maintain a fidelity bond and an errors and omissions policy, in amounts at least as great as, and with the coverages at least as broad as, 9 those currently in effect. Seller shall, upon request, furnish proof of such coverage at or before the first Purchase and, upon request, annually thereafter. (l) The Mortgage Loans were not intentionally selected in a manner intended to adversely affect the interest of the Purchaser. (m) Seller has not dealt with any broker or Agent or other Person who might be entitled to a fee, commission or compensation in connection with this transaction other than the Purchaser except as Seller has previously disclosed to Purchaser in writing. (n) The consideration received by Seller upon the sale of the Mortgage Loans under this Agreement constitutes fair consideration and reasonably equivalent value for the Mortgage Loans. (o) Seller has determined that the disposition of the Mortgage Loans pursuant to this Agreement will be afforded sale treatment for accounting and tax purposes. SECTION 3.2 REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL --------------------------------------------------- MORTGAGE LOANS. With respect to each Mortgage Loan, the Seller represents and - -------------- warrants to the Purchaser that as of the Closing Date: (a) The information set forth in the Mortgage Loan Schedule and in each Mortgage File is complete, true and correct; (b) All payments required under the terms of the Mortgage Note to be made on or prior to the Closing Date have been made; the Seller has not advanced funds, or induced, solicited or knowingly received any advance of funds from a party other than the owner of the Mortgaged Property subject to the Mortgage, directly or indirectly, for the payment of any amount required under the Mortgage Loan; and there has been no delinquency of thirty (30) days or more in any payment by the Mortgagor thereunder during the last twelve (12) months. Each Mortgagor has made or shall make, as the case may be, the first Monthly Payment with respect to the related Mortgage Loan on its Due Date or in no event later than twenty-nine (29) days thereafter. No Mortgage Loan is subject to any pending foreclosure, bankruptcy, insolvency, or reorganization proceeding. Nothing contained in this Section 3.2(b) shall in any way limit any other rights -------------- of the Purchaser as provided hereunder; (c) There are no delinquent taxes, water charges, sewer rents, assessments, insurance premiums, leasehold payments, including assessments currently due and owing in future installments, or other outstanding charges affecting the related Mortgaged Property; (d) The terms of the Mortgage Note and the Mortgage have not been impaired, waived, altered or modified in any respect, except by written instruments which are in the Mortgage File and have been or will be recorded, if necessary to protect the interests of the Purchaser, and which have been delivered to the Purchaser, all in accordance with this Agreement. The substance of any such waiver, alteration or modification has been approved by the primary mortgage guaranty insurer, if any, and by the title insurer, to the extent required by the related policy, and its terms are reflected on the Mortgage Loan Schedule. No Mortgagor has been released, in whole or in part, except in connection with an assumption agreement approved by the primary mortgage insurer, if any, and title insurer, to the extent required by the policy, and which assumption agreement is part of the Mortgage File and the terms of which are reflected in the Mortgage Loan Schedule, if executed prior to the Closing Date; 10 (e) The Mortgage Note and the Mortgage are not subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, nor will the operation of any of the terms of the Mortgage Note and the Mortgage, or the exercise of any right thereunder, render the Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set- off, counterclaim or defense, including the defense of usury and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (f) All buildings upon, or comprising part of, the Mortgaged Property are insured by an insurer acceptable to the Agencies against loss by fire, hazards of extended coverage and such other hazards as are customary in the area where the Mortgaged Property is located, and such insurer is licensed to do business in the state where the Mortgaged Property is located. All such insurance policies (collectively, the "hazard insurance policy") contain a standard mortgagee clause naming the Seller, its successors and assigns as mortgagee and all premiums thereon have been paid. If upon origination of the Mortgage Loan, the Mortgaged Property was, or was subsequently deemed to be, in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards (and such flood insurance has been made available), which require under applicable law that a flood insurance policy meeting the requirements of the current guidelines of the Federal Insurance Administration (or any successor thereto) be obtained, such flood insurance policy is in effect which policy conforms to the requirements of the Agencies. The Mortgage obligates the Mortgagor thereunder to maintain all such insurance at Mortgagor's cost and expense and, on the Mortgagor's failure to do so, authorizes the holder of the Mortgage to maintain such insurance at Mortgagor's cost and expense and to obtain reimbursement therefor from the Mortgagor. Each Mortgage Loan has in place a fully-paid life of loan flood certification from a FNMA- or FHLMC-approved vendor, assigned in care of the Purchaser, which provides for notification to the Purchaser of changes in designated flood areas which would affect such Mortgage Loan; (g) Any and all requirements of any federal, state or local law including, without limitation, usury, truth in lending, real estate settlement procedures including, without limitation, the Real Estate Settlement Procedures Act of 1974, as amended, consumer credit protection, equal credit opportunity or disclosure laws applicable to the Mortgage Loan have been complied with in all material respects; (h) The Mortgage has not been satisfied, canceled, subordinated, or rescinded, in whole or in part, and the Mortgaged Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission; (i) The Mortgage is a valid, existing and enforceable first lien on the Mortgaged Property, including all improvements on the Mortgaged Property, if any, subject only to (a) the lien of current real property taxes and assessments not yet due and payable, (b) covenants, conditions and restrictions, rights of way, easements and other matters of the public record as of the date of recording being acceptable to mortgage lending institutions generally and specifically referred to in the lender's title insurance policy delivered to the originator of the Mortgage Loan and which do not adversely affect the Appraised Value (as defined in clause (i) of such definition) of the Mortgaged Property, and (c) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property. The Seller has full right to sell and assign the Mortgage to the Purchaser; 11 (j) The Mortgage Note and the related Mortgage are genuine and each is the legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or reorganization; (k) All parties to the Mortgage Note and the Mortgage had the legal capacity to enter into the Mortgage Loan transaction and to execute and deliver the Mortgage Note and the Mortgage, and the Mortgage Note and the Mortgage have been duly and properly executed by such parties; (l) The proceeds of the Mortgage Loan have been fully disbursed and there is no requirement for future advances thereunder and any and all requirements as to completion of any on-site or off-site improvement and as to disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making or closing the Mortgage Loan and the recording of the Mortgage were paid, and the Mortgagor is not entitled to any refund of any amounts paid or due under the Mortgage Note or Mortgage; (m) The Seller is the sole owner and holder of the Mortgage Loan and the related Servicing Rights and is the custodian of the related Escrow Account, if applicable. The Mortgage Loan has neither been assigned nor pledged, and the Seller has good and marketable title thereto, and has full right to transfer and sell the Mortgage Loan and the related Servicing Rights to the Purchaser free and clear of any encumbrance, equity, lien, pledge, charge, claim or security interest and has full right and authority subject to no interest or participation of, or agreement with, any other party, to sell and assign each Mortgage Loan and the related Servicing Rights to the Purchaser pursuant to the terms of this Agreement; (n) All parties which have had any interest in the Mortgage, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (a) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (b) (i) organized under the laws of such state, or (ii) qualified to do business in such state, or (iii) a federal savings and loan association or national bank, or (iv) not deemed to be doing business in such state under applicable law; (o) The Mortgage Loan is covered by an ALTA lender's title insurance policy acceptable to the Agencies, issued by a title insurer acceptable to the Agencies and qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring (subject to the exceptions contained in (i)(a) and (b) above) the Seller, its successors and assigns as to the first priority lien of the Mortgage in the original principal amount of the Mortgage Loan and against any loss by reason of the invalidity or unenforceability of the lien resulting from the provisions of the Mortgage Note and/or Mortgage providing for adjustment in the Mortgage Interest Rate and Monthly Payment. Additionally, such lender's title insurance policy affirmatively insures ingress and egress, and against encroachments by or upon the Mortgaged Property or any interest therein. The Seller is the sole insured of such lender's title insurance policy, and such lender's title insurance policy is in full force and effect and will be in full force and effect upon the consummation of the transactions contemplated by this Agreement. No claims have been made under such lender's title insurance policy, and no prior holder of the related Mortgage, including the Seller, has done, by act or omission, anything which would impair the coverage of such lender's title insurance policy; (p) There is no default, breach, violation or event of acceleration existing under the Mortgage or the Mortgage Note and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, 12 violation or event of acceleration, and the Seller has not waived any default, breach, violation or event of acceleration; (q) There are no mechanics' or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under law could give rise to such lien) affecting the related Mortgaged Property which are or may be liens prior to or equal with, the lien of the related Mortgage; (r) All improvements which were considered in determining the Appraised Value (as defined in clause (i) of said definition) of the related Mortgaged Property lay wholly within the boundaries and building restriction lines of the Mortgaged Property, and no improvements on adjoining properties encroach upon the Mortgaged Property; (s) The Mortgage Loan was originated by the Seller or by a FNMA- approved or FHLMC-approved mortgage banker (which mortgage banker is a mortgagee approved by HUD), or savings and loan association, a savings bank, a commercial bank or similar banking institution which is supervised and examined by a federal or state authority, or by another mortgagee approved by the Secretary of HUD; (t) The origination, servicing and collection practices with respect to each Mortgage Note and Mortgage including, without limitation, the establishment, maintenance and servicing of the Escrow Accounts and Escrow Payments, if any, since origination, have been conducted in all respects in accordance with the terms of Mortgage Note and in compliance with all applicable laws and regulations and, unless otherwise required by law or FNMA/FHLMC standard, in accordance with the proper, prudent and customary practices in the mortgage origination and servicing business. With respect to the Escrow Accounts and Escrow Payments, if any, all such payments are in the possession or under the control of the Seller and there exists no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made. No escrow deposits or Escrow Payments or other charges or payments due the Seller have been capitalized under any Mortgage or the related Mortgage Note. All Mortgage Interest Rate adjustments have been made in strict compliance with state and federal law and the terms of the related Mortgage Note. Any interest required to be paid pursuant to state and local law has been properly paid and credited; (u) The Mortgaged Property is free of material damage and waste, has not been damaged in any material respect by fire, flood, wind, earthquake, or arson, or suffered any other natural or human-caused casualty loss (whether or not covered by insurance), except to the extent that the loss has been fully repaired or replaced as of the Closing Date, and there is no proceeding pending for the total or partial condemnation thereof; (v) The Mortgage contains customary and enforceable provisions to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security intended to be provided thereby, including, (a) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (b) otherwise by judicial foreclosure. There is no other exemption available to the Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage. The Mortgagor has not notified the Seller and the Seller has no knowledge of any relief requested or allowed to the Mortgagor under the Soldiers and Sailors Civil Relief Act of 1940; (w) The Mortgage Note is not and has not been secured by any collateral except the lien of the applicable Mortgage; 13 (x) The Mortgage File contains an original appraisal of the related Mortgaged Property signed prior to the approval of the Mortgage Loan application by a Qualified Appraiser duly appointed by the originator; the signature appearing on such appraisal is the genuine signature of such Qualified Appraiser; the appraisal is in a form acceptable to the Agencies, with such riders as are acceptable to the Agencies; (y) In the event the Mortgage constitutes a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by the Purchaser to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Mortgagor; (z) No Mortgage Loan contains a permanent or temporary "buydown" provision; (aa) The Mortgagor has executed one or more statements to the effect that the Mortgagor has received all disclosure materials required by applicable law with respect to the making of the Mortgage Loan. The Seller shall maintain all such statements in the Mortgage File; (bb) No Mortgage Loan was made in connection with (a) the construction or rehabilitation of a Mortgaged Property or (b) facilitating the trade-in or exchange of a Mortgaged Property; (cc) [Intentionally left blank]; (dd) To the best of Seller's knowledge, the Mortgaged Property is lawfully occupied under applicable law and all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy, have been made or obtained from the appropriate authorities; (ee) [Intentionally left blank]; (ff) The Assignment of Mortgage is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located; (gg) Any future advances made to the Mortgagor prior to the Closing Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term. The lien of the Mortgage securing the consolidated principal amount is expressly insured as having first lien priority by a title insurance policy, an endorsement to the policy insuring the mortgagee's consolidated interest or by other title evidence acceptable to the Agencies. The consolidated principal amount does not exceed the original principal amount of the Mortgage Loan; (hh) If the Mortgaged Property is a condominium unit or a planned unit development, such condominium or planned unit development project meets the eligibility requirements of the Agencies; (ii) The Mortgage Note and Mortgage are on forms acceptable to either of the Agencies; 14 (jj) The Mortgaged Property is located in the state indicated on the Mortgage Loan Schedule, and consists of a single parcel of real property with a detached single family residence erected thereon, or an individual condominium unit, or a 2-4 family dwelling or an individual unit in a planned unit development as defined by FNMA, none of which is a mobile home or manufactured dwelling; (kk) There are no circumstances or conditions with respect to the Mortgage, the Mortgage Property, the Mortgagor, the Mortgage File or the Mortgagor's credit standing that can reasonably be expected to cause private institutional investors to regard the Mortgage Loan as an unacceptable investment, cause the Mortgage Loan to become delinquent, or adversely affect the value or marketability of the Mortgage Loan; (ll) The Mortgage contains an enforceable provision for the acceleration of the payment of the unpaid principal balance of the Mortgage Loan in the event that the Mortgaged Property is sold or transferred without the prior written consent of the mortgagee thereunder; (mm) The Seller has no knowledge of any circumstances existing that could reasonably be expected to adversely affect the value or the marketability of any Mortgaged Property or Mortgage Loan or to cause the Mortgage Loans to prepay during any period materially faster or slower than the mortgage loans of similar characteristics originated by the Seller generally; (nn) Each Mortgage Loan is covered by a valid and transferable tax service contract with First American, or such other vendor as may be reasonably acceptable to the Purchaser; (oo) Each Mortgage Loan is an adjustable rate mortgage loan requiring monthly payments sufficient to amortize the original principal balance over the original term set forth in the Mortgage Loan Schedule. No Mortgage Loan has negatively amortized nor shall any Mortgage Loan have any negative amortization after the Closing Date. The Mortgage Interest Rate adjusts semi-annually in accordance with the related Mortgage Note, provided, however, with respect to Segments B and C, the Mortgage Interest Rate shall be fixed for an initial period of two (2) and three (3) years, respectively. On each Interest Adjustment Date, the Mortgage Interest Rate shall be adjusted to equal the Index plus the Gross Margin (rounded up or down to the nearest 0.125%), subject to the Periodic Mortgage Interest Rate Cap and the Lifetime Mortgage Interest Rate Cap as set forth in the respective Mortgage Note and the Mortgage Loan Schedule. None of the Mortgage Loans contain a provision allowing the Mortgagor to convert the Mortgage Note from an adjustable rate mortgage loan to a fixed rate mortgage loan; (pp) Each Mortgage Loan at the time of origination was underwritten in accordance with the credit underwriting guidelines of the Seller attached hereto as Exhibit D and, to the extent not inconsistent therewith, generally accepted --------- sub-prime credit underwriting guidelines; (qq) As of the Closing Date, the Seller shall have received neither actual nor constructive notice that either a Mortgage Loan will be paid in full (whether by virtue of a demand statement or otherwise) or that any Mortgagor has elected to convert the related Mortgage Loan into a fixed-rate mortgage loan in accordance with the terms of the related Mortgage Note; (rr) The Mortgage Note is not and has not been secured by any collateral except the lien of corresponding Mortgage on the Mortgaged Property; 15 (ss) No Mortgage Loan contains provisions pursuant to which Monthly Payments are (a) paid or partially paid with funds deposited in any separate account established by the Seller, the Mortgagor, or anyone on behalf of the Mortgagor or (b) paid by any source other than the Mortgagor or contains any other similar provisions which may constitute a "buydown" provision. The Mortgage Loan is not a graduated payment mortgage loan and the Mortgage Loan does not have a shared appreciation or other contingent interest feature; and (tt) No error, omission, misrepresentation, negligence, fraud or similar occurrence with respect to a Mortgage Loan has taken place on the part of the Seller, or, to the best of Seller's knowledge, on the part of any other person including without limitation the Mortgagor, any appraiser, any builder or developer, or any other party involved in the origination of the Mortgage Loan or in the application of any insurance in relation to such Mortgage Loan. (uu) There is no homestead or other exemption available to the Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage subject to applicable federal and state laws and judicial precedent with respect to bankruptcy and right of redemption. (vv) There exists no violation of any local, state or federal environmental law, rule or regulation in respect of the Mortgaged Property which violation has or could have a material adverse effect on the market value of such Mortgaged Property. There exists no pending action or proceeding directly or indirectly involving the related Mortgaged Property in which compliance with any environmental law, rule or regulation is in issue; and, to the best of Seller's knowledge, nothing further remains to be done to satisfy in full all requirements of each such law, rule or regulation constituting a prerequisite to the use and enjoyment of such Mortgaged Property. There has been no release in or on the Mortgaged Property of any hazardous substances, hazardous wastes or solid wastes, as such terms are defined in the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation and Recovery Act of 1976, or other federal, state and local environmental laws and the Mortgage Property is not and has not been used for the storage or transportation of any such hazardous substances, hazardous wastes or solid wastes. There are no underground storage tanks on the Mortgaged Property. (ww) Except as disclosed on the Mortgage Loan Schedule, none of the Mortgage Loans are classified as "high cost" Mortgage Loans under Section 32 of the Home Ownership and Equity Protection Act of 1994. (xx) None of the Mortgaged Properties are located in the State of Alabama. (yy) If during the origination or acquisition of a Mortgage Loan a yield spread premium or other origination fee was paid to any agent or affiliate of Seller, Seller represents that such fees were disclosed on the settlement statement provided to the related Mortgagor that evidences such Mortgagor's acknowledgment of such fees and such disclosure will be included in the related Mortgage File. SECTION 3.3 REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES. ----------------------------------------------------- The representations and warranties set forth in Sections 3.1 and 3.2 shall -------------------- survive the sale of the Mortgage Loans to the Purchaser and shall inure to the benefit of the Purchaser, notwithstanding any restrictive or qualified endorsement on any Mortgage Note or Assignment of Mortgage or the examination or failure to examine any Mortgage File. Furthermore, the absence of the Seller in either the chain of title or endorsement shall in no way limit the Purchaser's recourse against the Seller as provided in this Section 3.3 for a breach of one ----------- or more of the 16 Seller's representations and warranties made herein. Upon discovery by either the Seller or the Purchaser of a breach of any of the foregoing representations and warranties which materially and adversely affects the value of one or more of the Mortgage Loans or the Purchaser's interest therein, the party discovering such breach shall give written notice within thirty (30) days of such discovery to the other. The Seller shall have a period of thirty (30) days from the earlier of the discovery of a breach or the receipt by the Purchaser of notice of a breach within which to correct or cure such breach. If any such breach cannot be corrected or cured within such thirty (30) day period, the Seller shall, at the Purchaser's option and not later than thirty (30) days after its discovery or its receipt of notice of such breach, repurchase such Mortgage Loan at the Repurchase Price. In the event that a breach shall involve any representation or warranty set forth in Section 3.1 and such breach cannot be cured within ----------- sixty (60) days of the earlier of either discovery by or notice to the Seller of such breach, all of the Mortgage Loans shall, at the Purchaser's option, be repurchased by the Seller at the Repurchase Price. Any repurchase of a Mortgage Loan(s) pursuant to the foregoing provisions of this Section 3.3 shall be ----------- accomplished by wire transfer of immediately available funds on the repurchase date to an account designated by the Purchaser. At the time of repurchase, the Purchaser and the Seller shall arrange for the reassignment of the repurchased Mortgage Loan to the Seller and the delivery to the Seller of any documents held by the Purchaser or its custodian relating to such Mortgage Loan. The Seller shall, simultaneously with such reassignment, give written notice to the Purchaser that such repurchase has taken place. All out-of-pocket costs incurred by the Purchaser in connection with the reassignment shall be paid by the Seller. Any cause of action against the Seller relating to or arising out of the breach of any representations and warranties made in Sections 3.1 or 3.2 ------------------- shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the Seller to cure such breach or repurchase such Mortgage Loan as specified above, and (iii) demand upon the Seller by the Purchaser for compliance with the relevant provisions of this Agreement. Purchaser has the right to perform a field review of all appraisals of the Mortgage Properties related to the Mortgage Loans within thirty (30) days of the Closing Date, provided that Seller shall have delivered to the Purchaser, on or before the Closing Date, copies of appraisals relating to certain Mortgaged Properties (a list of which shall be provided by Purchaser to Seller prior to the Closing Date) and the addresses of each of the Mortgagors. If during such review Purchaser determines using a third party appraisal service, that the Appraised Value of any Mortgage Property varies by more than (i) ten percent (10%) for Mortgage Loans disclosed on a Mortgage Loan Schedule with a Loan-to- Value Ratio of less than or equal to 75% or (ii) five percent (5%) for Mortgage Loans disclosed on a Mortgage Loan Schedule with a Loan-to-Value Ratio of greater than 75% then Purchaser will notify Seller of such variance. Within five (5) Business Days of receipt of such notification by Purchaser, Seller, at its own expense, may request an additional independent appraisal and/or a drive-by appraisal completed on FNMA form 2055 using an appraisal service approved by Purchaser (such approval not to be unreasonably withheld). If such additional appraisal indicates that the variance is less than 10% or 5%, as applicable, Purchaser will not pursue a repurchase; provided, -------- however, if such additional appraisal indicates a variance of more than 10% or - ------- 5%, as applicable, Seller must repurchase such Mortgage Loan by depositing in an account specified by Purchaser the amount of the Repurchase Price within five (5) Business Days. When the 17 Repurchase Price is wire transferred to the specified account, Seller shall, simultaneously with such deposit, give written notice to Purchaser that such deposit has taken place. SECTION 3.4 INDEMNIFICATION OF THE PURCHASER. (a) In addition to -------------------------------- the repurchase obligations set forth in Section 3.3, the Seller shall indemnify ----------- the Purchaser and hold it harmless against any losses, damages, penalties, fines, forfeitures, judgments and any related costs including, without limitation, reasonable and necessary legal fees, resulting from any claim, demand, defense or a material omission on the part of the Seller in receiving, processing, funding or servicing any Mortgage Loan, or from any assertion based on, grounded upon or resulting from a breach of any of the Seller's representations and warranties contained in this Article III, or failure to ----------- perform any warranty/agreements contained in this Agreement. Notwithstanding the foregoing, Seller shall not be liable for any damages resulting from a material omission on the part of the Purchaser in servicing any Mortgage Loan after the Servicing Transfer Date. In addition to the obligations of the Seller set forth in this Article III, the Purchaser may pursue any and all remedies otherwise ----------- available at law or in equity, including, but not limited to, the right to seek damages. Notwithstanding the foregoing, Seller shall not be liable for any special, consequential or punitive damages. This section shall survive the transfer of the Mortgage Loans under this Agreement and the term of this Agreement. (b) Within ten (10) Business Days after a receipt by a party of a third party claim, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Agreement, deliver a claim notice to the indemnifying party; provided, however, that the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability that the indemnifying party may have to the indemnified party otherwise than under this subsection, unless the indemnifying party is materially prejudiced thereby. In the event that any third party claim is made against the indemnified party and the indemnified party notifies the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof, with counsel satisfactory to the indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), which consent shall not be unreasonably withheld. The indemnified party shall have the right to employ separate counsel in any action or claim and to participate in the defense thereof at the expense of the indemnifying party, if the retention of such counsel has been specifically authorized by the indemnifying party, if such counsel is retained because the indemnifying party does not notify the indemnified party within fifteen (15) Business Days after receipt of a claim notice that it elects to undertake the defense thereof, or if there is a reasonable basis on which the indemnified party's interest may differ from those of the indemnifying party. The indemnifying party shall remit payment for the amount of a valid and substantiated claim for indemnification hereunder within fifteen (15) Business Days of the receipt of a claim notice therefor. Upon the payment in full of any claim hereunder, the indemnifying party shall be subrogated to the rights of the indemnified party against any person with respect to the subject matter of such claim. In the event of a dispute, the parties shall proceed in good faith to negotiate a resolution of such dispute. The indemnified party shall have the right to reject any settlement approved by the indemnifying party if the indemnified party waives its right to indemnification hereunder. The indemnified party shall have the right to settle any third party claim over the objection of the indemnifying party (such settlement to include a complete release of the indemnifying party); provided, -------- however, that if the indemnifying party is contesting such claim in good faith - ------- and has assumed the defense of such claim from the indemnified party, the indemnified party waives any right to indemnity therefor. 18 In the event that the indemnifying party reimburses the indemnified party with respect to any third party claim and the indemnified party subsequently receives reimbursement from another person with respect to that third party claim, then the indemnified party shall remit such reimbursement from such other person to the indemnifying party within thirty (30) days of receipt thereof. SECTION 3.5 PREPAYMENT AND CONVERSION PROTECTION. In the event ------------------------------------ that any of the Mortgage Loans are (i) paid in full by the related Mortgagor or (ii) converted to a fixed-rate mortgage loan, in either case, on or prior to the Servicing Transfer Date, or (iii) subject to a breach of the representation set forth in Section 3.2(qq), the Seller shall, with respect to each such Mortgage -------------- Loan, pay to the Purchaser, in addition to the unpaid principal balance plus accrued interest at the time of such payoff or conversion, the product of (a) the positive difference, if any, between the Purchase Price Percentage (subject to any buyup or buydown adjustments as contemplated in the Trade Confirmation) and 100%, times (b) the unpaid principal balance of such Mortgage Loan at the time such Mortgage Loan is paid in full or converted, as applicable. ARTICLE IV INTERIM SERVICING OF THE MORTGAGE LOANS --------------------------------------- SECTION 4.1 GENERAL. The Mortgage Loans will be purchased by the ------- Purchaser and sold by the Seller on a servicing-released basis and the purchase of the Mortgage Loans by the Purchaser shall, for all purposes, include all Servicing Rights relating thereto. From the Closing Date to the Servicing Transfer Date, the Seller shall interim service the Mortgage Loans in strict accordance with the terms of this Agreement, applicable law, and, to the extent not inconsistent herewith, the servicing standards of the Agencies. Without limiting the generality of the foregoing, the Seller shall not take, or fail to take, any action which would result in the Purchaser's interest in the Mortgage Loans being adversely affected. It is expressly understood by the Seller that, during the Interim Servicing Period, the Purchaser intends to market the Mortgage Loans for sale to a whole loan investor and, as such, the Seller agrees to comply with all reasonable requests of the Purchaser made prior to the Servicing Transfer Date in order to effectuate the foregoing including, without limitation, any request for information or documentation in connection with any Mortgage Loan which the Purchaser deems is necessary to carry out the foregoing. With respect to each Mortgage Loan for which an Escrow Account has been established for the payment of taxes, insurance and other similar payments, the Seller shall, upon notice from the Purchaser, effect the termination of such Escrow Account on or prior to the Servicing Transfer Date, and refund any positive balance therein to the related Mortgagor(s). SECTION 4.2 REPORTING AND REMITTANCE. Within five (5) Business ------------------------ Days following the conclusion of each calendar month reporting and remittance cycle occurring during the Interim Servicing Period (each, a "Reporting Cycle"), if any, the Seller shall forward to the Purchaser with respect to the Mortgage Loans a full set of tapes or other computer or like records and a trial balance as of the end of each such Reporting Cycle, which tapes or computer records and trial balance shall include information relating to all payment and other activity on the Mortgage Loans. With respect to any payments of principal or interest (including all prepayments) received, or applied to any Mortgagor's account, by the Seller during the Interim Servicing Period (or prior to the Closing Date, if any such payments were not reflected in the calculation of the Purchaser Proceeds), the Seller shall remit to the Purchaser all such payments of principal and interest on the Mortgage Loans no later than the fifth (5/th/) day of the month 19 following the conclusion of each Reporting Cycle and, with respect to the month in which the Servicing Transfer Date occurs, no later than the fifth (5/th/) Business Day thereafter. ARTICLE V TRANSFER OF SERVICING RIGHTS ---------------------------- SECTION 5.1 TRANSFER OF SERVICING. The Seller agrees to act --------------------- reasonably, in good faith and in accordance with all applicable laws and regulations and to do all things necessary to effect the transfer of the Servicing Rights to the Purchaser on the Servicing Transfer Date including, without limitation, complying with all reasonable instructions provided by the Purchaser relating to the transfer of the Servicing Rights. SECTION 5.2 OBLIGATIONS OF THE SELLER PRIOR TO THE SERVICING DATE. ----------------------------------------------------- Without limiting the generality of Section 5.1, the Seller shall take, or cause ----------- to be taken, the following actions with respect to the Mortgage Loans prior to the Servicing Transfer Date (or within such time as may otherwise be specified below) in order to effect the transfer of the Servicing Rights to the Purchaser on the Servicing Transfer Date: (a) Preliminary Test Tape. On or prior to the Closing Date, the --------------------- Seller shall forward to the Purchaser a preliminary test tape or other computer or like records (including master file, escrow file, payee file, ARM master file, ARM history, all HMDA data required by the Agencies, etc.) containing all of the Mortgage Loans as of a date mutually agreed upon by the Seller and the Purchaser. The preliminary test tape or computer records shall include all field descriptions and record layouts; (b) Notice to Hazard Insurers. The Seller shall inform by written ------------------------- notice all hazard insurance companies and/or their agents of the transfer and request a change in the loss payee mortgage endorsement clause to the Purchaser's name. The Seller shall provide the Purchaser with a form of the notification letter and an officer's certification that all hazard insurance companies have been notified by an identical letter; (c) Notice to Mortgage Insurance Companies. The Seller shall inform -------------------------------------- by written notice all mortgage insurance companies providing any Primary Mortgage Insurance Policy of the change in insured's name on each such policy to the Purchaser's name. The Seller shall provide the Purchaser with a form of the notification letter and an officer's written certification that all such mortgage insurance companies have been notified by an identical letter; (d) Tax Service Contracts. The Seller shall have obtained a life of --------------------- loan, transferable real estate tax service contract with a tax service company reasonably acceptable to the Purchaser on all of the Mortgage Loans and shall assign all such contracts to the Purchaser or, in the alternative, the Seller -- shall notify the Purchaser as to any Mortgage Loans for which it has not procured the requisite contract and shall pay to the Purchaser a fee of ten dollars ($10.00) for each such Mortgage Loan; (e) Flood Certifications. The Seller shall have obtained a life of -------------------- loan, transferable flood certification contract for each Mortgage Loan and shall assign all such contracts to the Purchaser or, in the alternative, the Seller -- shall notify the Purchaser as to any Mortgage Loans for which it has not procured the flood certification referenced above and shall pay to the Purchaser a fee of fifteen dollars ($15.00) for each such Mortgage Loan; 20 (f) Notice to Mortgagors. The Seller shall, no later than fifteen -------------------- (15) days prior to the Servicing Transfer Date, inform in writing all Mortgagors of the change in servicer from the Seller to the Purchaser, all in accordance with applicable law. The Seller shall obtain the Purchaser's approval of the form of such notifications prior to their mailing. The Seller acknowledges that the Purchaser's review of this notice shall not be a review for statutory or regulatory compliance purposes, and that the Seller shall have the sole responsibility for such compliance. The Seller shall provide the Purchaser with a form of the notification letter and an officer's written certification that all Mortgagors have been notified by an identical letter; (g) Payment of Real Estate Taxes. The Seller shall make or cause to ---------------------------- be made all payments of all real estate taxes on the Mortgage Loans which (i) will be delinquent on or prior to the Servicing Transfer Date, (ii) are required to be paid within thirty (30) days after the Closing Date to receive a discount, or (iii) will be delinquent within thirty (30) days after the Closing Date. If tax bills have not been received by the Seller by the Servicing Transfer Date on any Mortgage Loans subject to this subsection, the Seller shall obtain and pay all tax bills subsequent to the Servicing Transfer Date and the Purchaser will promptly reimburse the Seller upon receipt from the Seller of documentation evidencing such payment. On non-impounded accounts, the Seller shall ensure that all taxes which would otherwise be delinquent by the Servicing Transfer Date, if not paid by such date, have been paid. With respect to each of the Mortgage Loans which do not have an impound or escrow account maintained for the payment of taxes and insurance, the Seller shall hold harmless and indemnify the Purchaser against any and all costs, expenses, penalties, fines, damages and judgments of whatever kind arising from the Seller's failure to pay, or cause to be paid, any delinquent taxes or tax penalties outstanding as of the Servicing Transfer Date; (h) Payment of Insurance Premiums. The Seller shall pay all hazard and ----------------------------- flood insurance and Primary Mortgage Insurance Policy premiums required to be paid prior to the Servicing Transfer Date or within thirty (30) days after the Closing Date on all impounded accounts relating to the Mortgage Loans and shall ensure that all premiums required to be paid prior to the Servicing Transfer Date by the Mortgagors on non-impounded accounts have been paid. With respect to each of the Mortgage Loans which do not have an impound or escrow account maintained for the payment of taxes and insurance, the Seller shall hold harmless and indemnify the Purchaser against any and all costs, expenses, penalties, fines, damages and judgments of whatever kind arising from the Seller's failure to ensure that the related Mortgagor is maintaining adequate insurance coverage on the Mortgaged Property at all times prior to the Servicing Transfer Date in accordance with the terms of the any document contained in the Mortgage File or any applicable law or regulation including, without limitation, adequate flood insurance coverage for all Mortgaged Properties located within an "A" or "V" flood hazard area; and (i) ARM Adjustments. With respect to each adjustable rate Mortgage --------------- Loan whose index value for any Interest Adjustment Date is available on or prior to the Servicing Transfer Date, the Seller shall make all such adjustments and shall inform the related Mortgagors of such adjustments. SECTION 5.3 OBLIGATIONS OF THE SELLER AFTER THE SERVICING TRANSFER ------------------------------------------------------ DATE. Without limiting the generality of Section 5.1, the Seller shall take, or - ---- ----------- cause to be taken, the following actions with respect to the Mortgage Loans within three (3) Business Days following the Servicing Transfer Date (or within such time as may otherwise be specified below): (a) Tape. The Seller shall furnish to the Purchaser all available ---- computer or like records requested by the Purchaser reflecting the status of payments, balances and other 21 pertinent information with respect to the Mortgage Loans as of the Servicing Transfer Date (including, without limitation, (i) master file, (ii) escrow file, (iii) payee file, which includes comprehensive tax and insurance information identifying payee, payee address, next payment due date, next amount payable and policy number/parcel number, and (iv) ARM master file). Such records shall include magnetic tapes reflecting all computer files maintained on the Mortgage Loans and shall include hard copy trial balance reports as specifically requested by the Purchaser; (b) Mortgage File. If the Seller has not already done so, the Seller ------------- shall have forwarded a complete Mortgage File with respect to each Mortgage Loan; (c) Accounting Reports. The Seller shall furnish to the Purchaser ------------------ copies of all accounting reports relating to the Mortgage Loans as of the Servicing Transfer Date including, without limitation, a trial balance and reports of collections, delinquencies, prepaids, curtailments, escrow payments, escrow balances, partial payments, partial payment balances and other like information with respect to the Mortgage Loans; (d) Other Documentation. The Seller shall provide the Purchaser any ------------------- and all further documents reasonably required by the Purchaser in order to fully transfer to the Purchaser possession of all tangible evidence of the Servicing Rights and escrow, impound and trust funds transferred hereunder; (e) Transfer of Escrow Funds and Other Proceeds. The Seller shall ------------------------------------------- transfer to the Purchaser, by wire transfer to the account designated by the Purchaser, an amount equal to the sum of (i) the Net Escrow Payments, (ii) all undistributed insurance loss draft funds, (iii) all unapplied funds received by the Seller, (iv) all unapplied interest on escrow balances accrued through the Servicing Transfer Date, (v) all buydown funds held by the Seller as of the Servicing Transfer Date, and (vi) all other amounts held by the Seller with respect to the Mortgage Loans as of the Servicing Transfer Date for which the Seller is not entitled to retain (collectively, the "Escrow Proceeds"). Within five (5) Business Days following the Purchaser's receipt of the Escrow Proceeds, the Seller and the Purchaser shall resolve any discrepancies between the Seller's accounting statement and the Purchaser's reconciliation with respect thereto. No later than ten (10) Business Days following the Servicing Transfer Date, the Seller or the Purchaser, as the case may be, shall transfer to the other, by wire transfer to the designated account, any amounts to which the other party is entitled; and (f) Mortgage Payments Received After Servicing Transfer Date. The -------------------------------------------------------- Seller shall, within two (2) Business Days of receipt, forward to the Purchaser any payment received by it after the Servicing Transfer Date with respect to any of the Mortgage Loans, whether such payment is in the form of principal, interest, taxes, insurance, loss drafts, insurance refunds, etc., in the original form received, unless such payment has been received in cash or by the Seller's lock box facility, in which case the Seller shall forward such payment in a form acceptable to the Purchaser. The Seller shall notify the Purchaser of the particulars of the payment, which notification shall set forth sufficient information to permit timely and appropriate processing of the payment by the Purchaser. 22 ARTICLE VI MISCELLANEOUS ------------- SECTION 6.1 NOTICES. All demands, notices and communications ------- required to be provided hereunder shall be in writing and shall be deemed to have been duly given if mailed, by registered or certified mail, postage prepaid, and return receipt requested, or, if by other means, when received by the other party at the address as follows: (i) if to the Seller: United PanAm Mortgage 625 The City Drive Orange, CA 92868 Attn: Mr. Blair Kenny (ii) if to the Purchaser: As provided by Purchaser in writing. or such other address as may hereafter be furnished to the other party by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee (as evidenced, in the case of registered or certified mail, by the date noted on the return receipt). SECTION 6.2 INTENTION OF THE PARTIES. Pursuant to this Agreement, ------------------------ the Purchaser is purchasing, and the Seller is selling the Mortgage Loans and not a debt instrument of the Seller or any other security. Accordingly, the Seller and the Purchaser shall each treat the transaction for federal income tax purposes as a sale by the Seller, and a purchase by the Purchaser, of the Mortgage Loans and the Servicing Rights. The Purchaser shall have the right to review the Mortgage Loans and the related Mortgage Loan Files to determine the characteristics of the Mortgage Loans which shall affect the federal income tax consequences of owning the Mortgage Loans and the Servicing Rights and the Seller shall cooperate with all reasonable requests made by the Purchaser in the course of such review. SECTION 6.3 EXHIBITS. The exhibits to this Agreement are hereby -------- incorporated and made a part hereof and are an integral part of this Agreement. SECTION 6.4 GENERAL INTERPRETIVE PRINCIPLES. For purposes of this ------------------------------- Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Agreement have the meanings assigned to them in this Agreement and include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other gender; (b) accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles; (c) references herein to "Sections," "Subsections," "Paragraphs," and other Subdivisions without reference to a document are to designated Sections, Subsections, Paragraphs and other subdivisions of this Agreement; 23 (d) reference to a Subsection without further reference to a Section is a reference to such Subsection as contained in the same Section in which the reference appears, and this rule shall also apply to Paragraphs and other subdivisions; (e) the words "herein," "hereof," "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular provision; and (f) the term "include" or "including" shall mean without limitation by reason of enumeration. SECTION 6.5 REPRODUCTION OF DOCUMENTS. This Agreement and all ------------------------- documents relating thereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by any party at the closing, and (c) financial statements, certificates and other information previously or hereafter furnished, may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. SECTION 6.6 FURTHER AGREEMENTS. The Seller shall execute and ------------------ deliver to the Purchaser and the Purchaser shall execute and deliver to the Seller such reasonable and appropriate additional documents, instruments or agreements as may be necessary or appropriate to effectuate the purposes of this Agreement. SECTION 6.7 EXECUTION OF AGREEMENT. This Agreement may be executed ---------------------- simultaneously in any number of counterparts. Each counterpart shall be deemed to be an original, and all such counterparts shall constitute one and the same instrument. This Agreement shall be deemed binding when executed by both the Purchaser and the Seller. Telecopy signatures shall be deemed valid and binding to the same extent as the original. SECTION 6.8 SUCCESSORS AND ASSIGNS. This Agreement shall bind and ---------------------- inure to the benefit of and be enforceable by the Seller and the Purchaser and the respective permitted successors and assigns of the Seller and the successors and assigns of the Purchaser. This Agreement shall not be assigned, pledged or hypothecated by the Seller without the consent of the Purchaser. This Agreement may be assigned, pledged or hypothecated or otherwise transferred or encumbered by the Purchaser, in whole or part, without the consent of the Seller. If the Purchaser assigns all of its rights as the Purchaser hereunder relating to some or all of the Mortgage Loans, the assignee of the Purchaser, upon notification to the Seller, will become the "Purchaser" hereunder with respect to such Mortgage Loans assigned hereby. SECTION 6.9 SEVERABILITY CLAUSE. Any part, provision, ------------------- representation or warranty of this Agreement which is prohibited or which is held to be void or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any part, provision, representation or warranty of this Agreement which is prohibited or unenforceable or is held to be void or unenforceable in any relevant jurisdiction shall be ineffective, as to such jurisdiction, to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction as to any Mortgage Loan shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, 24 the parties hereto waive any provision of law which prohibits or renders void or unenforceable any provision hereof. SECTION 6.10 COSTS. The Purchaser shall pay any commissions due its ----- salesmen and the legal fees and expenses of its attorneys and expenses of its custodian. All other costs and expenses incurred in connection with the transfer and delivery of the Mortgage Loans, including recording fees, fees for title policy endorsements and continuations and the Seller's attorney's fees, shall be paid by the Seller. SECTION 6.11 ATTORNEYS' FEES. If any claim, legal action or any --------------- arbitration or other proceeding is brought for the enforcement of this Agreement or because of a dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that claim, action or proceeding, in addition to any other relief to which such party may be entitled. SECTION 6.12 GOVERNING LAW. This Agreement shall be governed by and ------------- interpreted in accordance with the laws of the State of California applicable to agreements entered into and wholly performed within said jurisdiction. SECTION 6.13 SURVIVAL. All covenants, agreements, representations -------- and warranties made herein shall survive the execution and delivery of this Agreement. SECTION 6.14 ENTIRE AGREEMENT. This Agreement constitutes the ---------------- entire understanding between the parties hereto and supersedes any and all prior or contemporaneous oral or written communications with respect to the subject matter hereof, all of which communications are merged herein, except for the Trade Confirmation which shall remain in full force and effect, but only to the extent not inconsistent herewith. It is expressly understood and agreed that no employee, agent or other representative of the Seller or the Purchaser has any authority to bind such party with regard to any statement, representation, warranty or other expression unless said statement, representation, warranty or other expression is specifically included within the express terms of this Agreement or the Trade Confirmation. This Agreement shall not be modified, amended or in any way altered except by an instrument in writing signed by both the parties hereto. SECTION 6.15 CONFIDENTIALITY. The Seller and the Purchaser hereby --------------- acknowledge and agree that this Agreement shall be kept confidential and its contents will not be divulged to any party without the other party's consent except to the extent that it is appropriate for the Seller or the Purchaser to do so in working with legal counsel, auditors, taxing authorities or other governmental agencies. Neither Seller nor any of its affiliates or agents shall issue any press release or public announcement concerning the contemplated transaction, the existence of this Agreement, or the terms, conditions, and provisions of this Agreement (i) without the prior written consent of Purchaser or (ii) except as required by law, in which event Seller shall consult with Purchaser to the extent practicable before making such disclosure. SECTION 6.16 NO SOLICITATION. From and after the Closing Date, the --------------- Seller agrees that for a period of forty two (42) months, it will not take any action or cause any action to be taken by any of its employees, agents or affiliates, or by any independent contractors acting on the Seller's behalf, to solicit in any manner whatsoever any Mortgagor to prepay or refinance a Mortgage Loan. It is understood and agreed by the Seller and the Purchaser that all rights and benefits relating to the solicitation of any Mortgagors to refinance any Mortgage Loans shall be 25 transferred to the Purchaser pursuant hereto on the Closing Date and the Seller shall take no action to undermine these rights and benefits. The Seller shall use its best efforts to prevent the sale of the name of any Mortgagor to any person or entity. It is understood that promotions undertaken by the Seller or Seller's affiliate(s) which are directed to the general public at large (i.e., newspaper advertisements, radio or T.V. ads, etc.) and not specifically directed to any Mortgagor or any borrower identified in any Mortgage Loan shall not constitute a breach of the obligations set forth in this Section 6.16. SECTION 6.17 NON-CIRCUMVENTION. The Seller and the Purchaser ----------------- understand and agree that the Purchaser may introduce prospective buyers of the Mortgage Loans to the Seller, that such buyers are customers of the Purchaser and that relationships of the Purchaser to such buyers are confidential. The Seller agrees with respect to a particular buyer of the Mortgage Loans, the Seller will not, for the purpose of buying and selling other mortgage loans, and for a period of nine (9) months from August 14, 1998, communicate with or sell such other mortgage loans to such buyer unless such buyer is or has been independently introduced to the Seller or the Seller has had previous dealings (other than any transactions involving the Purchaser) with such buyer. [SIGNATURE PAGE FOLLOWS] 26 IN WITNESS WHEREOF, the Seller and the Purchaser have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the date first above written. COUNTRYWIDE HOME LOANS, INC., as Purchaser /s/ Michael W. Schloessmann By: ----------------------------- Michael W. Schloessmann Vice President PAN AMERICAN BANK, FSB, the Seller /s/ Blair F. Kenny By: ------------------------------ Name: Blair F. Kenny Title: Senior Vice President 27 EXHIBIT A MORTGAGE LOAN SCHEDULE (attached) 28 EX-10.91 6 EMPLOYMENT AGREEMENT EXHIBIT 10.91 UPAM UNITED PANAM MORTGAGE A DIVISION OF PAN AMERICAN BANK, FSB July 6, 1998 Mr. Edward L. Pollard 304 Marigold Avenue Corona del Mar, CA 92625 Dear Ed: This letter sets forth the basic terms and conditions of your employment with UNITED PANAM MORTGAGE CORPORATION ("UPAM"). By signing this letter, you will be agreeing to these terms. 1. UPAM agrees to employ and Employee agrees to serve UPAM as President in accordance with the terms of this Agreement and for a term of three years, subject to Paragraph 7. 2. Duties. Employee will serve UPAM as President and shall have such corporate ------ authority as shall be reasonably required to enable Employee to discharge his duties. Employee, if requested, shall serve, without any additional compensation, as Division President of Pan American Bank, FSB ("PAB") to the extent some or all mortgage operations are operated as a division of PAB. Employee agrees to observe and comply with the rules and regulations of UPAM as adopted by UPAM or PAB Boards of Directors and to carry out and perform orders, directives and policies of such Boards as they may from time to time direct. Employee shall report to the Chairman of the Board of UPAM and with respect to any duties to PAB or United PanAm Financial Corp. ("UPFC") to the President and Chief Executive Officer. 3. Compensation. ------------ a) Base Salary. You will be paid a base monthly salary of $15,000 (payable ----------- as $7,500 semimonthly), which covers all hours worked. Generally, your salary will be reviewed by the Board of UPAM at least annually or at the time of any promotion. b) Bonuses. At least annually, the UPAM Board will review your performance ------- and based on such review, and on such other factors as the Board may deem to be relevant pursuant to the annual Bonus Plan in effect for the year ending December 31, 1998, shall pay Employee a prorated bonus of up to 75% of Employee's Base Salary at the discretion of the Board taking into consideration Employee's contribution to UPAM's attainment of operating goals which have been established by the Board relating to pre-tax net income, return on shareholders' equity and other similar factors, provided however, a minimum bonus only for the year ended December 31, 1998 of $50,000 will be paid by February 15, 1999. For the years 1999 and thereafter a business plan, which Employee will direct the preparation thereof and that will be approved by the UPAM Board of Directors, which will project pre-tax income for each year, the attainment of which will become the primary goal for bonus compensation payment. c) Additional Benefits. During the Term hereof, Employee shall participate ------------------- in any bonus, pension, 401(k), profit, incentive compensation, medical, life insurance, disability or similar plan, and shall receive all perquisites, available to executives of UPAM (or United PanAm Financial Corp. ("UPFC") to the extent it provides umbrella plans to cover executives of all subsidiaries) at or below Employee's level of responsibility to the extent Employee meets the eligibility requirements. As additional benefits, UPAM will reimburse Employee for the cost of an additional $250,000 of term life insurance each year during the term hereof, and will attempt to obtain a waiver of the eligibility waiting period for medical insurance and, if not able to do so, reimburse Employee for the COBRA cost while waiting. Employee shall also be entitled to receive the benefits specified on Exhibit I to this Agreement ("Additional Benefits"). d) Vacation. Employee shall be entitled to twenty (20) days of paid vacation -------- each twelve month period, which shall accrue on a pro rata basis from the -------- date of this employment agreement. 4. Services. Employee shall devote his full business time, energy and ability -------- exclusively to the business affairs and interest of UPAM and PAB. 5. Trade Secret and Confidential Information. During the term of this ----------------------------------------- Agreement, you will have access to "Confidential Information", which includes, but is not limited to, (i) financial and other sensitive information that UPAM receives from its customers; (ii) confidential business, trade secret and financial information provided you by UPAM; (iii) personnel information (including without limitation employee compensation); and (iv) other confidential business information. You understand that information concerning UPAM's business and the business of its customers is a valuable, special and unique asset and must be held in the strictest confidence. You agree that you will not disclose information concerning UPAM business or the business of its customers; except as required by UPAM or by law. All Confidential Information shall be the sole property of UPAM, and where applicable, its customers. You agree that upon termination of your employment for any reason, or upon request, you will deliver to UPAM all Confidential Information as well as all documents, data, records and communications, and all drawings, models, prototypes or similar visual or conceptual presentation of any type, and all copies or duplicates, provided to you or obtained by you during your employment. 6. Nonsolicitation. During your employment and for a period of two years --------------- immediately following your employment, you shall not, directly or indirectly, engage or participate in the solicitation or attempt to solicit fellow employees to work for any business that is in competition in any manner whatsoever with the business of UPAM, including such business as conducted through PAB as a division thereof 7. Termination. UPAM may terminate this Agreement of Employment at any time for ----------- cause without further obligation or liability to Employee. The term "for cause" shall include the grounds specified in the Office of Thrift Supervision Rules and Regulations and Federal Deposit Insurance Corporation. UPAM may, notwithstanding any other provision of this agreement, terminate Employee's employment at will for any reason without any liability or obligation to Employee, except for the following termination payments: i) During the three year term of this agreement after the commencement of employment an amount equal to one year base salary, or ii) If in the event of a change of control (more than a 50% change in ownership or sale of substantially all the assets) where you are not offered substantially the same position, an amount equal to one year base salary. 8. Employment. You and UPAM acknowledge and agree that you were previously ---------- employed by one or more other financial institutions in capacities similar to the capacities proposed herein. In connection with any such prior employment, you hereby represent and warrant to UPAM as follows: . No Breach of Prior Agreement. Your execution and delivery of this Agreement and your performance of the obligations contemplated hereunder will not result in a breach of any prior employment agreement, whether written or oral, that you may have entered into with any former employer or other third party. . No use of Confidential or Proprietary Information. While in the employ of UPAM, whether pursuant to this Agreement or otherwise, you will not make use of any information, manuals, document, files, reports, studies or other materials that may have been used and/or developed while you were in the employ of any prior employer(s), which information and/or materials are or may be deemed of a confidential or proprietary nature by such other prior employer(s). . You further acknowledge and agree that any violation by you of this Section shall constitute grounds for termination of your employment hereunder and that you may be held liable by UPAM for any losses or damages suffered by UPAM as a result of any such violation. 9. Integrated Agreement. This Agreement supersedes any prior agreements, -------------------- representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein. It constitutes the full, complete and exclusive agreement between you and UPAM, PAB and UPFC with respect to the subject matters herein. We look forward to your joining UPAM and helping us achieve even greater levels of success. In order to confirm your agreement with and acceptance of these terms, please sign one copy of this letter and return in to me. Very truly yours, /s/ John T. French John T. French Chairman United PanAm Mortgage Corporation ______________________________________________________________________________ I agree to the terms of employment set forth in this Agreement. /s/ Edward L. Pollard July 8, 1998 _____________________________________________________________________ Associate Date EXHIBIT I --------- ADDITIONAL BENEFITS SIGN-ON BONUS - ------------- Employee will receive a $50,000 one-time bonus upon the commencement of employment. GRANT OF OPTIONS - ---------------- Approximately upon the date Employee signs this Agreement, Employee shall receive a grant of options covering 70,000 shares of United PanAm Financial Corp. ("UPFC") exercisable at a price based on the closing market price on such date. Such options shall vest over a three year period. The options, and all rights thereto, shall be governed solely by the UPFC Plan and administration by the UPFC Board or a Committee thereof. In the event of a change of control, as defined in Paragraph 7 of the Agreement, all such options shall vest immediately. GUARANTEE OF EXCHANGE VALUE - --------------------------- Employee presently has existing grants of stock options from his former employer, certain of which are unvested. A schedule setting forth the approximate total value based on an agreed market price of $21 per share, of such unvested Options over their total exercise price (the ("gain") is attached as Exhibit I(a), which Employee represents and affirms, is accurate. Concurrently with the commencement of employment, Employee shall receive an Option grant for 70,000 of UPFC shares as set forth above. It is the intention of the parties to assure Employee that he will obtain, in realized value of UPFC Options and/or cash, the approximate "gain" on the unexercised options with his former employer. UPAM will collectively guarantee that Employee will realize $362,000 of equivalent "gain" by the dates and as computed hereinafter. Accordingly, on the dates set forth below, Employee shall be entitled to receive additional cash compensation, if any, as follows: 1. On August 31, 2001, an amount equal to the excess, if any, of $362,000 over the Value as defined below, of Employee's UPFC options which are then vested, or 2. On the date your employment shall be terminated, other than for cause, and including the result of a change of control, the measurement, the date, and the payment amount referred to in (1) above shall be accelerated to a date that precedes Employee's termination of employment by five business days. For the purpose hereof, the term "Value" shall mean the average closing price of UPFC stock for fifteen trading days proceeding the dates referred to in (1) and (2) above, less the exercise price of the relevant vested UPFC options as of such date, multiplied by the number of shares covered by such relevant vested options. In the event employment is terminated voluntarily by Employee before the full term of the Agreement or by the Company for cause, then no excess over the Value of the vested UPFC option shall be due and owing and Employee will be allowed to exercise his vested options as provided by the terms of the Option Plan. EX-27.1 7 FINANCIAL DATA SCHEDULE
9 9-MOS 12-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 SEP-30-1998 DEC-31-1997 45,436,000 15,026,000 15,500,000 4,000,000 0 0 0 0 0 0 0 0 0 0 354,267,000 268,537,000 8,858,000 6,487,000 437,276,000 310,842,000 317,342,000 233,194,000 10,930,000 34,237,000 22,285,000 17,472,000 0 12,930,000 0 0 0 0 173,000 110,000 86,546,000 12,899,000 437,276,000 310,842,000 32,786,000 25,872,000 819,000 639,000 0 0 33,605,000 26,511,000 11,186,000 10,095,000 14,448,000 12,411,000 19,157,000 14,100,000 1,784,000 507,000 0 0 1,486,000 946,000 17,908,000 10,739,000 17,908,000 10,739,000 0 0 0 0 10,336,000 6,248,000 0.71 0.58 0.67 0.53 11.95 11.41 20,951,000 6,633,000 0 0 0 0 0 0 6,487,000 5,356,000 3,764,000 2,474,000 1,109,000 1,145,000 8,858,000 6,487,000 8,858,000 6,487,000 0 0 613,000 593,000
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