-----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, CVULej03gbAgHp5w+vHsrAewGttgQlC6hiyWmJMrvX/Y/EXHqsIOgAHc4TsGFKOt QR5PRMkds5Tw0M6HifeFYQ== 0000950124-97-002002.txt : 19970401 0000950124-97-002002.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950124-97-002002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOURCE ONE MORTGAGE SERVICES CORP CENTRAL INDEX KEY: 0000801543 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 382011419 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12898 FILM NUMBER: 97570202 BUSINESS ADDRESS: STREET 1: 27555 FARMINGTON RD CITY: FARMINGTON HILLS STATE: MI ZIP: 48334-3357 BUSINESS PHONE: 8104887000 MAIL ADDRESS: STREET 1: 27555 FARMINGTON ROAD CITY: FARMINGTON HILLS STATE: MI ZIP: 48334-3357 FORMER COMPANY: FORMER CONFORMED NAME: FIREMANS FUND MORTGAGE CORP DATE OF NAME CHANGE: 19911104 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _____________ to _____________ Commission file number 1-12898 SOURCE ONE MORTGAGE SERVICES CORPORATION (Exact name of registrant as specified in its charter) Delaware 38-2011419 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 27555 Farmington Road, Farmington Hills, Michigan 48334-3357 (Address of principal executive offices) (Zip-code) Registrant's telephone number, including area code: (810) 488-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE 8.42% CUMULATIVE PREFERRED STOCK, SERIES A ON WHICH REGISTERED 9.375% QUARTERLY INCOME CAPITAL SECURITIES NEW YORK STOCK EXCHANGE (SUBORDINATED INTEREST DEFERRED DEBENTURES, DUE 2025) NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] THERE IS NO AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT. AS OF MARCH 28, 1997, THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING WAS 2,561,054 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended December 31, 1996 (Parts II and IV). 2 FORM 10-K Source One Mortgage Services Corporation and Subsidiaries PART I ITEM 1. BUSINESS
GENERAL Source One Mortgage Services Corporation, a Delaware corporation (together with its subsidiaries, the "Company" or "Source One"), is one of the largest mortgage banking companies in the United States. As of December 31, 1996, the Company had a mortgage loan servicing portfolio totaling $29.2 billion, including $2.8 billion of loans subserviced for others, which is serviced on behalf of approximately 320 institutional investors and numerous other security holders. As of December 31, 1996, the Company had 131 retail branch offices in 26 states and originated $3.8 billion in mortgage loans for the year then ended. As a mortgage banker, the Company engages primarily in the business of producing, selling and servicing residential mortgage loans and subservicing residential mortgage loans for third parties. Its primary sources of revenue are net servicing revenue, net interest revenue, net gain on sale of mortgages, net gain on sale of servicing and other revenue (including underwriting and appraisal fees). Through subsidiaries, the Company also engages in the sale of credit-related insurance products (such as life, disability, health, accidental death and property and casualty insurance). The Company was incorporated in 1972 and is the successor to Citizens Mortgage Corporation which was organized in 1946. The Company is now an indirect wholly-owned subsidiary of Fund American Enterprises Holdings, Inc. ("Fund American"), a Delaware corporation organized in 1980, which was formerly known as The Fund American Companies, Inc. and Fireman's Fund Corporation. The Company's principal executive offices are located at 27555 Farmington Road, Farmington Hills, Michigan 48334-3357; its telephone number is (810) 488-7000. INDUSTRY OVERVIEW Mortgage banking is the business of serving as a financial intermediary in (i) the origination and purchase of mortgage loans, (ii) the holding of such loans while aggregating sufficient loans to form appropriate mortgage-backed security pools, (iii) the subsequent sale of such loans through pools or directly to investors, and (iv) the ongoing management or servicing of such loans during the repayment period. Mortgage bankers generate revenue in each of the four stages of the mortgage banking process. MORTGAGE LOAN PRODUCTION The Company produces residential mortgage loans through a system of retail branch offices, a specialized marketing program, mortgage brokers and a correspondent network of banks, thrift institutions and other mortgage lenders. The existence of these mortgage production sources gives the Company the flexibility to shift its production between those sources as market conditions warrant and allows it to emphasize the production mode which is most economically advantageous. Loans produced, whether through origination or purchase, include conventional residential mortgage loans as well as mortgage loans which are either insured by the Federal Housing Administration ("FHA") or partially guaranteed by the Veterans Administration ("VA") (government loans). In evaluating loans purchased through its correspondent network and loans originated through its broker network, the Company applies the same quality standards as required for loans originated by the Company itself. The Company's quality control department reviews a sample of the loans purchased to determine compliance with Company standards. 1 3 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries It is a policy of the Company to primarily produce fixed rate mortgage loans. Fixed rate mortgages tend to capture a larger share of the market in a declining interest rate environment and are less susceptible to prepayment risk than adjustable-rate mortgages. Accordingly, in a rising interest rate environment, consumer preference for adjustable-rate mortgages tends to increase, which could have an adverse impact on the Company's mortgage production operations. However, the possible adverse impact on mortgage production may be mitigated by the positive impact on the Company's servicing portfolio. In 1996, fixed rate mortgage originations accounted for approximately 90% of the Company's total mortgage loan production as compared to 87% in 1995. The increase reflects overall lower interest rates in 1996 relative to 1995. The following table sets forth selected information regarding the Company's mortgage loan production:
(in millions) Year ended December 31, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------- FHA/VA $2,035 $1,565 $2,065 $ 3,453 $1,927 Conventional 1,796 1,287 2,521 7,999 5,664 - ---------------------------------------------------------------------------------------- Total production $ 3,831 $2,852 $4,586 $11,452 $7,591 ======================================================================================== Retail branch originations $1,590 $1,347 $2,005 $ 4,922 $3,326 Correspondent network acquisitions 1,640 1,157 1,081 2,643 2,578 Mortgage broker originations 369 196 696 1,708 1,026 Specialized marketing program originations 232 152 804 2,179 661 - ---------------------------------------------------------------------------------------- Total production $3,831 $2,852 $4,586 $11,452 $7,591 ========================================================================================
Mortgage loans originated by the Company are subject to a defined underwriting process in order to assess each prospective borrower's ability to repay the loan requested and the adequacy of each property as collateral. In addition, the Company is subject to the underwriting guidelines of FHA, VA, the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") and the Federal National Mortgage Association ("FNMA" or "Fannie Mae"), as well as specific contractual requirements of institutional investors who have agreed to acquire mortgage loans originated by the Company. RETAIL BRANCH OFFICES. As of December 31, 1996, the Company had 131 retail branch offices in 26 states. Each office has sales representatives who originate mortgage loans through contacts with real estate brokers, builders, developers and others, as well as through direct contact with homebuyers. As of December 31, 1996, the Company's retail branch offices were located in the following states: - -------------------------------------------------------------------
State Number of Offices State Number of Offices State Number of Offices - ------------------------------------------------------------------------------------------------ California 31 Missouri 5 Kansas 1 Washington 22 Colorado 4 Maryland 1 Texas 11 Ohio 4 Oregon 1 Illinois 7 Alaska 2 Rhode Island 1 Arizona 6 Kentucky 2 Tennessee 1 Nevada 6 Massachusetts 2 Utah 1 New York 6 New Jersey 2 Vermont 1 Florida 5 Pennsylvania 2 Virginia 1 Michigan 5 Arkansas 1 - ------------------------------------------------------------------------------------------------
2 4 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries Most branch office originations are referred to regional operating centers for preparation of loan documentation, evaluation of compliance with the Company's underwriting conditions and closing of the loans. CORRESPONDENT NETWORK. The Company conducts a program through which it agrees to purchase mortgage loans from a network of banks, thrift institutions and other mortgage lenders. The funding price for such loans is set by the Company on a daily basis. In addition, the Company pays a premium for the release of servicing rights, which is negotiated on a case-by-case basis. As of December 31, 1996 there were approximately 209 participants in the Company's correspondent network, with no single participant or group of affiliated participants accounting for more than 10% of the Company's total mortgage loan originations. MORTGAGE BROKERS. The Company conducts a program through which it closes loans originated by a network of mortgage brokers. The funding price for such loans is set by the Company on a daily basis. The mortgage broker receives compensation equivalent to the difference between the Company's pricing schedule and the closing price. As of December 31, 1996 there were approximately 366 active participants in the Company's mortgage broker network, with no single broker or group of affiliated brokers accounting for more than 10% of the Company's total mortgage loan originations. SPECIALIZED MARKETING PROGRAM. The Company also generates mortgage loan originations through affinity programs and by responding to refinancing requests from the population of loans currently serviced by the Company. The products currently offered by the Specialized Marketing Program consist of purchase money first mortgages, home equity lines of credit, closed-end second mortgages, refinancing and relocation assistance. The Company is continuing its efforts to increase outsource services provided for other mortgage lenders through this program. SALES OF LOANS The Company sells loans either through mortgage-backed securities issued pursuant to programs of the Government National Mortgage Association ("GNMA" or "Ginnie Mae"), FNMA and FHLMC or to institutional investors. Most loans are aggregated in pools of $1.0 million or more, which are purchased by institutional investors after having been guaranteed by GNMA, FNMA or FHLMC. Substantially all GNMA securities are sold without recourse to the Company for loss of principal in the event of a subsequent default by the mortgage borrower due to the underlying FHA and VA insurance. The following table summarizes the principal amount of the Company's loans sold:
- ------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Principal Principal Principal amount Percentage amount Percentage amount Percentage (in millions) of total (in millions) of total (in millions) of total - ------------------------------------------------------------------------------------------------- GNMA $1,678 42.82% $1,252 46.30% $2,301 40.94% FNMA 1,384 35.32 927 34.29 2,282 40.61 FHLMC 453 11.56 251 9.28 929 16.53 Other 404 10.30 274 10.13 108 1.92 - ------------------------------------------------------------------------------------------------- Total loan sales $3,919 100.00% $ 2,704 100.00% $5,620 100.00% =================================================================================================
Servicing agreements relating to mortgage-backed securities issued pursuant to the programs of GNMA, FNMA and FHLMC require the Company to advance funds to make the required payments to investors in the event of a delinquency by the borrower. The Company expects that it would recover most funds advanced upon cure of default by the borrower or at foreclosure. However, in connection 3 5 [LOGO] FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries with VA partially guaranteed loans and certain conventional loans (which may be, at most, partially insured by private mortgage insurers), funds advanced may not cover losses due to potential declines in collateral value. The Company is subject to limited amounts of principal risk with respect to these loans since the insurer has the option to reimburse the servicer for the lower of fair market value of the property or the mortgage loan outstanding, in addition to the VA guarantee on the loan. In addition, most of the Company's servicing agreements for mortgage-backed securities typically require the payment to investors of a full month's interest on each loan although the loan may be paid off (by optional prepayment or foreclosure) other than on a month-end basis. In this instance, the Company is obligated to pay the investor interest at the note rate from the date of the loan payoff through the end of that calendar month without reimbursement. The Company, through private placements and public offerings, has also sold mortgage loans through the issuance of mortgage pass-through certificates. The Company issued $521.7 million of real estate mortgage investment conduit ("REMIC") certificates through December 31, 1990. The Company is the primary servicer for these REMIC certificates, which were sold pursuant to five separate trusts that have no recourse provisions. The Company has not issued any mortgage pass-through certificates since 1990, however, the Company may offer additional mortgage pass-through certificates in the future if economic and market conditions warrant. Historically, the Company's sales of loans have generated net gains. However, if secondary market interest rates decline after the Company obtains a mandatory forward commitment for a loan, the loan may not close and the Company may incur a loss from the cost of covering its obligations under such commitment. If secondary market interest rates increase after the Company commits to an interest rate for a loan, and the Company has not obtained a forward commitment, the Company may incur a loss when the loan is subsequently sold. To minimize this risk, the Company obtains mandatory forward commitments of up to 120 days to sell mortgage-backed securities with respect to all loans which have been funded and a substantial portion of loans in process ("pipeline") which it believes will close. The Company's risk management function closely monitors the mortgage loan pipeline to determine appropriate forward commitment coverage on a daily basis. In addition, the risk management area seeks to reduce counterparty risk by committing to sell mortgage loans only to approved dealers, with no dealer having in excess of 20% of current commitments. The Company currently transacts business with nine approved dealers. LOAN SERVICING Mortgage loan servicing consists primarily of (i) collecting principal, interest and funds to be escrowed for tax and insurance payments from mortgage loan borrowers; (ii) remitting principal and interest to mortgage loan investors; (iii) paying property taxes and insurance premiums on mortgaged property; (iv) in some cases, advancing uncollected payments to mortgage loan investors; (v) administering delinquent loans; (vi) supervising foreclosures in the event of unremedied defaults; and (vii) performing all related accounting and reporting activities. Servicing generates cash income in the form of fees, which represent a percentage of the declining outstanding principal amount of the loans serviced and are collected from each mortgage loan payment received plus any late charges. The Company currently retains the rights to service substantially all of the mortgage loans it produces. In addition, the Company may acquire the rights to service or subservice a mortgage loan portfolio without originating or acquiring the underlying mortgage loans. The Company customarily makes such purchases of servicing rights from banks, thrift institutions and other mortgage lenders. The fees paid to acquire such servicing rights are negotiated on a case-by-case basis. The Company purchased the rights to service $2.8 billion, $4.7 billion and $3.7 billion of mortgage loans from third parties during 1996, 1995 and 1994, respectively. The Company also sells servicing rights when management deems it economically advantageous. In 1996 and 1995, the Company sold the rights to service a total of $3.3 billion and $11.0 billion, respectively, 4 6 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries of mortgage loans to third parties resulting in a pretax gain of $10.1 million and $40.0 million, respectively. In 1994, the Company sold the rights to service $3.9 billion of mortgage loans to a third party and continues to subservice the majority of these loans pursuant to a five-year subservicing agreement. During 1996, the Company forged a new strategy with respect to its servicing operations. A major focus of this strategy is reducing exposure to interest rate risk, which increases with the size of an owned servicing portfolio. To reduce the exposure, the Company is taking actions to contract its owned servicing portfolio and expand its subservicing business. Consistent with this corporate strategy, the Company sold, subject to regulatory and investor approvals, approximately $17 billion of its non-recourse mortgage servicing portfolio to a third party for estimated proceeds of $271.5 million in February of 1997. The transaction is expected to result in the recognition of an after tax loss of approximately $2.1 million in the first quarter of 1997. Source One will retain subservicing on the portfolio for a minimum of one year and a maximum of three years, at the option of the purchaser. The Company is currently evaluating its options as to how it will utilize the proceeds from the sale. These options include: (i) purchasing additional mortgage servicing rights from third parties; (ii) reducing its outstanding indebtedness; (iii) reducing its outstanding preferred or common shareholders' equity; or (iv) a combination of any of the foregoing. As a result of the 1997 servicing sale, the Company expects that its mortgage servicing revenue and its related amortization for 1997 and thereafter will be significantly less than its mortgage servicing revenue and related amortization in 1996. The Company is currently analyzing its cost structure to identify expenses that may be reduced as a result of the sale. The following table summarizes the changes in the Company's mortgage loan servicing portfolio including loans subserviced, interim servicing contracts and those under contract to acquire and excluding loans sold but not transferred: - --------------------------------------------------------------------------------
(in millions) Year ended December 31, 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------- Balance at beginning of year $31,831 $39,568 $38,403 $37,312 $41,014 Mortgage loan production 3,831 2,852 4,586 11,452 7,591 Servicing acquisitions 2,789 4,674 3,707 6,368 2,323 - --------------------------------------------------------------------------------- Total servicing in 6,620 7,526 8,293 17,820 9,914 - --------------------------------------------------------------------------------- Regular payoffs 3,006 2,271 4,728 13,563 11,532 Sale of servicing 3,302 10,973 - - - Principal amortization, servicing released, foreclosures and other 1,997 2,019 2,400 3,166 2,084 Subservicing transfers 945 - - - - - --------------------------------------------------------------------------------- Total servicing out 9,250 15,263 7,128 16,729 13,616 - --------------------------------------------------------------------------------- Balance at end of year $29,201 $31,831 $39,568 $38,403 $37,312 - ---------------------------------------------------------------------------------
The above table includes loans suberviced for others having a principal balance of $2,791 million, $4,039 million and $4,294 million as of December 31, 1996, 1995 and 1994, respectively. 5 7 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries The Company closely monitors the rate of delinquencies and foreclosures incident to its servicing portfolio. The following table summarizes the Company's delinquency and foreclosure experience with respect to residential mortgage loans serviced by the Company. - --------------------------------------------------------------------------------
(% of total residential loans serviced) December 31, 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------- 31-59 days past due 4.74% 3.99% 3.15% 3.41% 3.26% 60-89 days past due .95 .70 .54 .58 .65 90 days or more past due .55 .59 .38 .45 .48 - -------------------------------------------------------------------------------- Total delinquencies 6.24% 5.28% 4.07% 4.44% 4.39% - -------------------------------------------------------------------------------- Foreclosures .93% .80% .77% .92% .77% - --------------------------------------------------------------------------------
The increase in delinquencies in 1995 and 1996, is primarily the result of servicing portfolios acquired by the Company during the fourth quarters of 1995 and 1996. The delinquency rates of these acquired portfolios were higher than the Company's historical average delinquency rate. The Company purchased these portfolios for prices which were reflective of these higher delinquency rates. The value of the Company's investment in mortgage servicing rights ("MSR") is affected by changes in mortgage interest rates. Interest rates directly influence prepayment rates as well as other assumptions used in valuing the Company's MSR asset. In order to offset changes in the value of its MSR asset and to mitigate the effect on earnings of higher amortization and impairment of the asset which results from increased prepayment activity, the Company invests in various financial instruments. As interest rates decline, prepayment activity generally increases, thereby reducing the value of the MSR asset, while the value of the financial instruments increases. Conversely, as interest rates increase, the value of the MSR asset increases while the value of such financial instruments decreases. The financial instruments utilized by the Company include interest rate floor contracts ("floors") and principal-only ("P/O") swaps. With respect to the floors, the Company is not exposed to losses in excess of its initial investment in the floors. The Company's exposure to loss in the P/O swaps is related to changes in the market value of the underlying P/O security over the life of the contract. RELATED ACTIVITIES In conjunction with its mortgage origination and servicing activities, the Company provides certain credit-related insurance products (such as life, disability, health, accidental death and property and casualty insurance) through subsidiaries. The insurance subsidiaries act as agents and receive fees based on premium value, but do not assume any insurance risk. Insurance products are sold through (i) solicitation at the time of mortgage application, (ii) direct mail solicitation shortly after mortgage loan closing, (iii) solicitation by a direct solicitor and (iv) resolicitation of the Company's servicing portfolio on an annual basis. At certain locations, personal solicitation by Company staff is permitted by state regulations which determine allowable insurance sales practices. The fees recognized under these programs were as follows: - --------------------------------------------------------------------------------
(in thousands) Year ended December 31, 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------- Insurance revenue $4,554 $4,762 $4,582 $5,039 $5,605 - --------------------------------------------------------------------------------
CERTAIN BUSINESS CONDITIONS Changes in the economy or prevailing interest rates can have significant effects, including material adverse effects, on the mortgage banking business and the Company. Inflation and changes in interest rates can have differing effects on various aspects of the Company's business, particularly with respect to marketing gains and losses from the sale of mortgage loans, mortgage loan production, the value of the Company's servicing portfolio and net interest revenue. Historically, the Company's loan originations and loan production income have increased in response to falling interest rates and have decreased during periods of rising interest rates. Periods of low inflation 6 8 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries and falling interest rates tend to reduce loan servicing income and the value of the Company's mortgage loan servicing portfolio because prepayments of mortgages increase and the average life of loan servicing rights is shortened. Conversely, periods of increasing inflation and rising interest rates tend to increase loan servicing income and the value of the Company's mortgage loan servicing portfolio because prepayments of mortgages decline and the average life of loan servicing rights is lengthened. COMPETITION The Company competes nationally and locally with other mortgage bankers, state and national banks, thrift institutions and insurance companies. National banks and thrift institutions have substantially more flexibility in their loan origination programs than the Company, which must originate loans meeting the standards of the secondary market. Mortgage lenders compete primarily with respect to price and service. Competition may also occur on mortgage terms and closing costs. The Company competes, in part, by using its commissioned sales force to maintain close relationships with real estate brokers, builders, developers and members of its correspondent and broker networks. In the opinion of management, no single mortgage lender dominates the industry. REGULATION The Company is subject to the rules and regulations of, and examinations by, FNMA, FHLMC, GNMA, FHA and VA with respect to originating, processing, selling and servicing mortgage loans. These rules and regulations, among other things, prohibit discrimination, provide for inspections and appraisals of properties, require credit reports on prospective borrowers and, in some cases, establish maximum interest rates, fees and loan amounts. Lenders are required to submit audited financial statements annually. FNMA and GNMA require the maintenance of specified net worth levels which vary depending on the amount of FNMA loans serviced and GNMA mortgage-backed securities issued by the Company. Mortgage loan origination activities are also subject to fair housing laws, the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act, the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act, the Home Mortgage Disclosure Act and the regulations promulgated thereunder which, among other things, prohibit discrimination in residential lending and require the disclosure of certain information to borrowers. Certain conventional mortgage loans are also subject to state usury statutes. FHA and VA loans are exempt from the effect of such usury statutes. There are various other state laws and regulations affecting the Company's mortgage banking and insurance operations. The Company's internal audit and quality control departments monitor compliance with these laws and regulations. EMPLOYEES As of December 31, 1996, the Company employed approximately 1,682 persons (of whom approximately 376 were engaged in loan servicing activities and approximately 1,306 were engaged in residential loan production activities, appraisal functions, administrative and managerial responsibilities). None of the Company's employees are covered by a collective bargaining agreement. Management believes that the Company's employee relations are good. FORWARD-LOOKING STATEMENTS From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, new products and similar matters. Such information is often subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause its actual results and experience to differ Source One Mortgage Services Corporation and Subsidiaries materially from the anticipated results or other expectations expressed in its forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include those discussed elsewhere herein (such as loan servicing, competition and regulation). 7 9 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries ITEM 2. PROPERTIES The Company owns its principal executive offices in Farmington Hills, Michigan which house the majority of the Company's employees. The Company also owns an office building in West Bloomfield, Michigan which is currently leased to a third party. The Company leases several other office facilities and operating equipment under cancelable and noncancelable agreements. Most leases contain renewal clauses. ITEM 3. LEGAL PROCEEDINGS Various claims have been made against the Company in the ordinary course of business. Management believes that any liabilities which could result from such claims would not materially affect the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 10 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Reported on page 4 of the Company's 1996 Annual Report to Shareholders, herein incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA Reported on pages 3-4 of the Company's 1996 Annual Report to Shareholders, herein incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reported on pages 5-12 of the Company's 1996 Annual Report to Shareholders, herein incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements reported in the consolidated financial statements of the Company and the notes thereto and the report thereon of Ernst & Young LLP, independent auditors, appearing on pages 13-40 of the Company's Annual Report to Shareholders, herein incorporated by reference. Selected Quarterly Financial Data reported on page 41 of the Company's 1996 Annual Report to Shareholders, herein incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On January 24, 1997, the Company, upon recommendation of the Audit Committee of the Board of Directors of its ultimate parent, Fund American Enterprises Holding, Inc., appointed KPMG Peat Marwick LLP as its independent auditors for the fiscal year ending December 31, 1997, to replace Ernst & Young LLP ("Ernst & Young") effective upon the date of Ernst & Young's report on the consolidated financial statements of the Company for the year ended December 31, 1996, contained herein. In connection with the audits of the two years ended December 31, 1996, there were no disagreements with Ernst & Young on any matter of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to their satisfaction, would have caused them to make reference in connection with their opinion to the subject matter of the disagreement. The Company has requested Ernst & Young to furnish a letter addressed to the Commission stating whether it agrees with the above statements. A copy of that letter, dated March 27, 1997, is filed as Exhibit 16 (a) hereto. 9 11 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - --------------------------------------------------------------------------------
Board of Directors (as of March 28, 1997) Director Name Age Since - -------------------------------------------------------------------------------- Michael C. Allemang 54 1993 Terry L. Baxter 51 1994 James A. Conrad 55 1987 Robert R. Densmore 48 1986 Robert P. Keller 59 1995 Gordon S. Macklin 68 1996 James H. Ozanne 53 1996 Roger K. Taylor 44 1995 Allan L. Waters 39 1993 - --------------------------------------------------------------------------------
Mr. Allemang has served as a director, Executive Vice President and Chief Financial Officer of the Company since November 1993 and has also served as Secretary of the Company since August 1996. He was a director and Vice President of Fund American Enterprises, Inc. from August 1992 to December 1993. Mr. Allemang was formerly Senior Vice President of Fireman's Fund Insurance Company ("Fireman's Fund") from 1991 to 1992 and served as Vice President and Treasurer of Fund American from 1989 to 1991 and Vice President of Fireman's Fund from 1986 to 1991. Mr. Baxter has served as a director of the Company since 1994. He served as Chairman of the Company from June 1996 to March 1997. He has served as President of White Mountains Holdings, Inc. since February 1997 and President of Fund American Enterprises, Inc. from January 1994 to February 1997. He was the Managing Director of the National Transportation Safety Board from 1990 to 1993, and prior to that was Senior Vice President of the National Bank of Washington. Mr. Baxter previously served as Assistant Director of The Office of Management and Budget under President Reagan and was a Vice President of GEICO Corporation. Mr. Baxter is also a director of Fund American Enterprises, Inc., Centricut, LLC., Main Street America Holdings, Inc., White Mountains Holdings, Inc. and White Mountains Insurance Company. Mr. Conrad has served as a director of the Company since 1987. He has served as President of the Company since December 1989 and President and Chief Executive Officer of the Company since April 1990. He was Executive Vice President, Production Division from 1987 to 1989 and Corporate Vice President, Wholesale Division from 1985 to 1987. He is currently a member of the Board of Governors for the Mortgage Banker's Association of America. Mr. Conrad joined the Company in 1983. Mr. Densmore has served as a director of the Company since 1986. He has served as Executive Vice President of the Company's Servicing Division since 1987. He was the Chief Financial Officer from 1978 to 1987. Mr. Densmore joined the Company in 1976. Mr. Keller has served as a director of the Company since August 1995. He has served as the President and Chief Executive Officer of Commerce Security Bancorp, Inc. or its predecessor SDN Bancorp, Inc. since October 1995, and President and Chief Executive Officer of Dartmouth Capital Group, Inc. since June 1995. Commerce and Dartmouth are bank holding companies. From August 1994 to March 1995, Mr. Keller was the President and Chief Executive Officer of Independent Bancorp of Arizona, Inc., a bank holding company. Prior to August 1994, Mr. Keller served as a consultant to Independent Bancorp of Arizona, Inc. and Caliber Bank, and as President and Chief Executive Officer of New Dartmouth Bank in Manchester, New Hampshire. Mr. Keller is also a director of Pennichuck Corporation (a public utility holding company), Centricut, LLC and White Mountains Holdings, Inc. 10 12 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries Mr. Macklin has served as a director of the Company since February 1996. He has served as Chairman of White River Corporation since December 1993. He is also a director of Fund American Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information Services Group, Inc., MedImmune, Inc., Shoppers Express and Spacehab, Inc. Mr. Macklin is director, trustee or managing general partner, as the case may be, of 53 of the investment companies in the Franklin Templeton Group of Funds. He was formerly Chairman of Hambrecht and Quist Group, Director of H&Q Healthcare Investors and President of the National Association of Securities Dealers, Inc. Mr. Ozanne has served as a director of the Company since August 1996. He has served as Chairman of the Company since March 1997 and as President of Fund American Enterprises, Inc. since February 1997. He is the founder and principal of Greenrange Partners. He was Chairman, President & Chief Executive Officer of Nations Financial Holdings Corporation (formerly US WEST Capital Corporation) from 1989 to 1996. From 1983 to 1989 he was Executive Vice President, Asset Management and Consumer Groups, of General Electric Capital Corporation ("GECC"), Stamford Connecticut and held other executive positions with GECC. He is currently a director of Financial Security Assurance Holdings, Ltd.("FSA"), a publicly-held financial guaranty insurer with securities listed on the New York Stock Exchange. Mr. Taylor has served as a director of the Company since August 1995. He has served as the Chief Operating Officer of FSA, since May 1993. He is also a member of FSA's management review committee for structured transactions and its underwriting committee for municipal transactions. Prior to joining FSA in 1990 as an advisor for its new municipal bond insurance business, Mr. Taylor was an Executive Vice President, founder and executive committee member of Financial Guaranty Insurance Company. He is also a director of FSA. Mr. Waters has served as a director of the Company since 1993. He is also a director of Folksamerica Holding Co., Fund American Enterprises, Inc., FSA, White Mountains Holdings, Inc. and White Mountains Insurance Company. Mr. Waters has served as Senior Vice President and Chief Financial Officer of Fund American since 1993. He was formerly Vice President and Controller of Fund American Enterprises, Inc. from 1991 to 1993. Mr. Waters was Vice President, Controller and Assistant Secretary of Fund American from 1990 to 1991, and was Vice President, Finance of Fund American from 1988 to 1990. COMMITTEES OF THE BOARD OF DIRECTORS The major committees of the Board of Directors, committee membership and the functions of those committees are described below. EXECUTIVE COMMITTEE. The members of the Executive Committee are: Gordon S. Macklin (Chairman), Terry L. Baxter and James A. Conrad. The Executive Committee has been delegated all of the powers and authority of the Board on all but such matters which are reserved to the Board by the Delaware General Corporate Law. AUDIT COMMITTEE. The members of the Audit Committee are: Allan L. Waters (Chairman), Robert P. Keller and James H. Ozanne. The Audit Committee exercises the powers of the Board in the management of the business and affairs of the Company regarding the accounting, reporting and financial control practices of the Company. It reviews the qualifications of the independent certified public accountants, makes recommendations to the Board as to their selection, reviews the plan, fees and results of their audit, and reviews their non-audit services and related fees. HUMAN RESOURCES COMMITTEE. The members of the Human Resources Committee are: Terry L. Baxter (Chairman), Gordon S. Macklin and Roger K. Taylor. The Human Resources Committee establishes compensation for executive officers of the Company. 11 13 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries - -------------------------------------------------------------------------------- EXECUTIVE OFFICERS (as of March 28, 1997)
Executive Officer Name Age Position Since - -------------------------------------------------------------------------------- Michael C. Allemang 54 Executive Vice President, 1993 Chief Financial Officer and Secretary James A. Conrad 55 President and 1985 Chief Executive Officer John A. Courson 54 Senior Vice President; 1990 President and Chief Executive Officer of Central Pacific Mortgage Company Robert R. Densmore 48 Executive Vice President 1983 Mark A. Janssen 38 Executive Vice President 1996 - --------------------------------------------------------------------------------
Mr. Courson has served as a Senior Vice President of the Company and President and Chief Executive Officer of Central Pacific Mortgage Company ("Central Pacific"), a wholly-owned subsidiary of the Company, since July 1990. Prior to that he was President and Chief Operating Officer of Fundamental Mortgage Corporation of Dallas, Texas. Mr. Janssen has served as Executive Vice President of Capital Markets since 1996. He has also served as Senior Vice President of Finance from 1992 to 1996, Corporate Vice President and Controller from 1991 to 1992 and Vice President of the Financial Division from 1988 to 1992. Mr. Janssen joined the Company in 1981. Based upon its review of the reports furnished to the Company for 1996 pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, the Company believes that all of such reports were filed on a timely basis, except for an inadvertent late filing of a Form 3 by James H. Ozanne, a director. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth certain information regarding the salary, incentive compensation and benefits paid by the Company to its Chief Executive Officer, its four most highly compensated executive officers other than the Chief Executive Officer and its executive officer who retired during 1996 (collectively, the "Named Executive Officers") during each of the three most recent fiscal years. 12 14 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation ------------------- ---------------------- Awards Payouts ------ ------- Long-term All Other Incentive Other Name and Annual Compensation SARs Plan Compensation Principal Position Year Salary Bonus (a) (#) Payouts (b) - --------------------------------------------------------------------------------------------------------------------------------- James A. Conrad 1996 $237,936 $110,000 $ 7,481 - $- $ 7,500 President and Chief 1995 222,627 38,000 40,034 - - 4,500 Executive Officer 1994 219,212 75,000 32,718 - - 4,500 Robert R. Densmore 1996 $178,196 $ 64,000 $ 1,468 - $- $ 7,500 Executive Vice President 1995 166,748 34,500 10,698 - - 4,500 1994 160,000 54,000 23,920 - - 4,500 Michael C. Allemang 1996 $172,136 $ 62,000 $ 9,000 - $- $ 7,500 Executive Vice President, 1995 163,847 27,000 12,000 - - 4,500 Chief Financial Officer 1994 156,107 52,000 12,381 - - 4,500 and Secretary Mark A. Janssen 1996 $125,033 $ 75,000 $ 9,000 - $- $ 7,352 Executive Vice President 1995 109,160 22,000 12,000 - - 4,025 1994 93,080 25,000 12,000 - - 3,212 John A. Courson 1996 $187,044 $138,496 $12,570 - $- $ 7,500 Senior Vice President; 1995 187,044 87,512 14,945 - - 4,500 President and Chief 1994 187,293 24,531 14,316 - - 4,500 Executive Officer of Central Pacific Robert W. Richards 1996 $116,829 $ - $ 4,652 - $- $442,500(c) Chairman (retired) 1995 218,059 36,000 32,099 - - 4,500 1994 211,528 72,000 25,295 - - 4,500 - ---------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (a) Amounts shown for 1996 consist of the following: (i) Mr. Conrad: interest reimbursement of $2,309 on amounts paid to purchase investment contracts and reimbursement of automobile expenses; (ii) Mr. Densmore: reimbursement of automobile expenses; (iii) Mr. Allemang: reimbursement of automobile expenses; (iv) Mr. Janssen: reimbursement of automobile expenses; (v) Mr. Courson: interest reimbursement of $570 on amounts paid to purchase investment contracts and reimbursement of automobile expenses; (vi) Mr. Richards: interest reimbursement of $2,252 on amounts paid to purchase investment contracts and reimbursement of automobile expenses. Amounts shown for 1995 consist of the following: (i) Mr. Conrad: interest reimbursement of $32,578 on amounts paid to purchase investment contracts and reimbursement of automobile expenses; (ii) Mr. Densmore: reimbursement of automobile expenses; (iii) Mr. Allemang: reimbursement of automobile expenses; (iv) Mr. Janssen: reimbursement of automobile expenses; (v) Mr. Courson: interest reimbursement of $2,945 on amounts paid to purchase investment contracts and reimbursement of automobile expenses; (vi) Mr. Richards: interest reimbursement of $23,661 on amounts paid to purchase investment contracts and reimbursement of automobile expenses. Amounts shown for 1994 consist of the following: (i) Mr. Conrad: interest reimbursement of $25,638 on amounts paid to purchase investment contracts and reimbursement of automobile expenses; (ii) Mr. Densmore: interest reimbursement of $13,222 on amounts paid to purchase investment contracts and reimbursement of automobile expenses; (iii) Mr. Allemang: reimbursement of automobile and relocation expenses; (iv) Mr. Janssen: reimbursement of automobile expenses; (v) Mr. Courson: reimbursement of automobile expenses and interest reimbursement of $2,316 on amounts paid to purchase investment contracts; (vi) Mr. Richards: interest reimbursement of $18,611 on amounts paid to purchase investment contracts and reimbursement of automobile expenses. (b) Represents amounts allocated pursuant to the Company's employee stock ownership plan ("ESOP"), except for (c) below. (c) In addition to (b) above, amount includes: (i) consulting fee of $35,000 and (ii) payment of $400,000 pursuant to the Agreement between Mr. Richards and the Company. INVESTMENT CONTRACTS AND STOCK APPRECIATION RIGHTS In 1993, certain directors and executive officers of the Company exchanged all their shares of the Company's Class B common stock for 1.558 units in an investment contract and 1.558 units of Stock Appreciation Rights ("SAR") for each Class B share held. The investment contract entitles the holder to receive the lesser of $86.625 or the closing price of Fund American's common stock on the day preceding exercise of the investment contract, multiplied by a factor of 1.223 in cash for each unit held. The units may be exercised at any time at the option of the holder. 13 15 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries The SARs may be exercised at any time simultaneously with each exercised investment contract unit at the option of the holders thereof. The value of each SAR is equal to the difference between $86.625 and the closing price of Fund American's common stock on the date preceding the exercise of the SAR multiplied by a factor of 1.223. The following table summarizes SAR values as of December 31, 1996. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
- ------------------------------------------------------------------------------------------------------------------------- Number of Securities Value of unexercised underlying unexercised in-the-money SARs at fiscal year end (b) SARs at fiscal year-end (b) ------------------------------ ------------------------------ Shares acquired on Name exercise (a) Value realized Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------------------------------------------------------------------------------------------- James A. Conrad 12,800 $ 92,432 4,000 0 $121,909 $0 Robert R. Densmore 0 0 12,000 0 365,727 0 Michael C. Allemang 0 0 0 0 0 0 Mark A. Janssen 104 963 0 0 0 0 John A. Courson 1,162 8,058 871 0 26,551 0 Robert W. Richards 18,804 151,020 0 0 0 0 - -------------------------------------------------------------------------------------------------------------------------
(a) Represents the number of investment contract units with respect to which the SARs were exercised. (b) The number and value of unexercised SARs are based on shares of Fund American common stock. PENSION BENEFITS
- -------------------------------------------------------------------------- Years of Service ----------------------------------------------------- Remuneration 15 20 25 30 35 - -------------------------------------------------------------------------- $125,000 $30,000 $ 40,000 $ 50,000 $ 60,000 $ 70,000 150,000 36,000 48,000 60,000 72,000 84,000 175,000 42,000 56,000 70,000 84,000 98,000 200,000 48,000 64,000 80,000 96,000 112,000 225,000 54,000 72,000 90,000 108,000 126,000 250,000 60,000 80,000 100,000 120,000 140,000 300,000 72,000 96,000 120,000 144,000 168,000 400,000 96,000 128,000 160,000 192,000 224,000 450,000 108,000 144,000 180,000 216,000 252,000 500,000 120,000 160,000 200,000 240,000 280,000 - --------------------------------------------------------------------------
The gross annual benefit paid is computed as a straight-life annuity reduced by .485% of average salary up to covered compensation; that is, the average of social security wage bases for the 35 years prior to retirement. The annual benefits shown in the above table are not reduced to reflect the limitations imposed by the Internal Revenue Code, which limit the annual benefits payable from qualified plans to any individual. The Company maintains a Supplemental Retirement Plan which is a non-qualified, unfunded deferred compensation plan. Under the plan, certain highly compensated employees affected by these limitations will receive additional retirement income payments from the Company so that their pension benefits will equal the amounts they would otherwise have been were it not for the limitations. Messrs. Conrad, Densmore, Allemang, Janssen and Courson participate in retirement plans under which they are entitled to receive estimated annual retirement benefits in accordance with the table shown above. Participants in the retirement plans are eligible to receive normal retirement benefits at age 65, reduced normal retirement benefits at age 55 with at least ten years of service or a deferred vested benefit if they terminate employment prior to retirement but after five years of service. Eligible compensation for Messrs. Conrad, Densmore, Allemang, Janssen and Courson, includes base salary plus bonus received, 14 16 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries but is limited to not more than one and one-third of base salary in total. Benefits accrued under the retirement plans are limited to eligible compensation of $150,000 for each of the Named Executive Officers. Benefits under the retirement plans for a single person are computed on a straight-life basis and benefits for a married person are generally computed on a joint and 50% survivor basis, subject to each participant's right to elect alternative survivor benefits. As of December 31, 1996, Messrs. Conrad, Densmore, Allemang, Janssen and Courson had 13, 20, 3, 15 and 6 whole years of credited service, respectively, for purposes of computing their benefits under the retirement plans. COMPENSATION OF DIRECTORS Directors who are neither employees of the Company nor employees or directors of Fund American (Messrs. Keller, Macklin, Ozanne and Taylor) receive an annual retainer of $10,000 and a fee of $1,500 for each board meeting attended. In addition, Mr. Macklin receives an annual retainer of $15,000 as Chairman of the Executive Committee and $60,000 as a consultant to the Chairman of the Board of Directors. Mr. Ozanne receives an additional annual retainer of $35,000 as a consultant to the Company. EMPLOYMENT CONTRACTS IN TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS In connection with the June 1996 retirement of Robert W. Richards as Chairman of the Board of the Company and pursuant to a certain agreement between him and the Company dated June 5, 1996, the Company agreed to pay Mr. Richards (who is currently 54 years of age) the following: (i) the balance of his ESOP account and the portion of any contribution by the Company to the ESOP which would have been allocated to this account had he retired at age 55 under the Company's Retirement Plan; (ii) a consulting fee of $5,000 per month from June 1996 to December 1996; (iii) a lump sum payment of not less than $400,000 in satisfaction of any claims he was entitled to under the Company's Long Term Incentive Plan, (iv) medical and dental benefit coverage he would have received had he retired at age 55 under the Company's Retirement Plan and (v) pension benefits he would have received had he retired at age 58 (representing 30 years of credited service) under the Company's Retirement Plan. In addition, Mr. Richards exercised his remaining 4,000 investment contract units and corresponding rights under the Company's Stock Appreciation Rights Plan in June 1996. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Human Resources Committee of the Board of Directors establishes compensation for executive officers of the Company. None of the members of the Human Resources Committee, namely Terry L. Baxter, Gordon S. Macklin and Roger K. Taylor, is, or was, an officer or employee of the Company or any of the Company's subsidiaries. 15 17 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 28, 1997, there were two holders of the 2,561,054 shares of the Company's issued and outstanding common stock, each entitled to one vote, as follows: - --------------------------------------------------------------------------------
Title of Name and address of Number of Percent Class beneficial owners shares owned of class - ------------------------------------------------------------------------------------- Common stock Fund American Enterprises, Inc. 2,456,054 96.0% The 1820 House Norwich, Vermont 05055-0850 Fund American Enterprises Holdings, Inc. 105,000 4.0% 80 South Main Street Hanover, NH 03755 - -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- The following table sets forth, as of March 28, 1997, beneficial ownership of Fund American common stock by each director of the Company and each of the current "Named Executive Officers" as defined herein. - --------------------------------------------------------------------------------
Name of Number of Percent Title of Class beneficial owner shares owned (b) of class (c) - ---------------------------------------------------------------------- Common stock (a) Michael C. Allemang 202 * Terry L. Baxter 43 * James A. Conrad 921 * John A. Courson 344 * Robert R. Densmore 842 * Mark A. Janssen 423 * Robert P. Keller - - Gordon S. Macklin 8,000 * James H. Ozanne 600 * Roger K. Taylor - - Allan L. Waters 5,900 * - ----------------------------------------------------------------------
*Represents less than 1% of the outstanding shares. (a) Represents Fund American common stock pursuant to Item 403(b) of Regulation S-K of the Securities Act of 1933. (b) Except for Messrs. Keller, Macklin, Ozanne, Taylor and Waters, includes shares beneficially owned by the Company's Employee Stock Ownership Plan and 401(k) Savings Plan (whereby voting rights are exercised by the Plan's trustee and attributable under the terms of the Plan to such person). (c) Determined based on the beneficial ownership provisions specified in Rule 13d-3(d)(1) of the Exchange Act. Except to the extent indicated above, all executive officers and directors have (or share with their spouses) sole voting and investment power with respect to the shares for which they claim beneficial ownership. 16 18 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to the terms of a tax allocation agreement between the Company and Fund American, Fund American has agreed to compensate the Company for the use of certain accumulated unrealized losses associated with the Company's common equity securities portfolio if such losses, when realized, can be utilized in Fund American's consolidated tax returns. During 1995, the Company transferred a total of $27 million of certain common equity securities and $93 million in cash and money market investments to Fund American Enterprises, Inc. ("FAE"), then the sole common shareholder of the Company, in exchange for 959,049 shares of the Company's common stock held by FAE, which were retired by the Company. The Company recognized a $2.2 million pretax loss on the noncash exchanges. During 1996, the Company sold $1.4 million of common equity securities to FAE for cash proceeds of $.5 million. The Company recognized a $.9 million pretax loss from the sale. In January 1997, the Company transferred $2.3 million of common equity securities to FAE in exchange for 21,239 shares of the Company's common stock held by FAE, which were retired by the Company. The Company recognized a $.3 million pretax gain from the transfer in the first quarter of 1997. During 1996, Mr. Conrad received $1,108,799 upon the exercise of 12,800 investment contract units, Mr. Janssen received $9,042 upon the exercise of 104 investment contract units, Mr. Courson received $100,659 upon the exercise of 1,162 investment contract units and Mr. Richards received $1,628,896 upon the exercise of 18,804 investment contract units. See discussion of "Investment Contracts and Stock Appreciation Rights" on page 12. 17 19 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a. (1) Financial Statements The Financial Statements applicable to Source One Mortgage Services Corporation and consolidated subsidiaries have been incorporated by reference herein from Source One Mortgage Services Corporation's 1996 Annual Report to Shareholders as they appear in the Index to Financial Statements and Financial Statement Schedules appearing on page 19 of this Annual Report on Form 10-K. (2) Financial Statement Schedules None. (3) Exhibits The exhibits required to be filed by Item 601 of Regulation S-K and by this form are listed on page 22 of this Annual Report on Form 10-K. The management contracts and compensatory plans or arrangements required to be filed as exhibits and included in such list of exhibits are as follows: Exhibit 10(a) Source One Mortgage Services Corporation Employee Stock Ownership and 401(k) Savings Plan and Trust Agreement, as amended and restated effective as of October 1, 1996. Exhibit 10(b) Form of Source One Mortgage Services Corporation Voluntary Deferred Compensation Plan. Exhibit 10(c) First Amendment to Source One Mortgage Services Corporation Voluntary Deferred Compensation Plan. Exhibit 10(d) Form of Source One Mortgage Services Corporation Retirement Plan, as amended and restated. Exhibit 10(e) First Amendment to Source One Mortgage Services Corporation Retirement Plan. Exhibit 10(f) Second Amendment to Source One Mortgage Services Corporation Retirement Plan. Exhibit 10(g) Third Amendment to Source One Mortgage Services Corporation Retirement Plan. Exhibit 10(h) Form of Source One Mortgage Services Corporation Retirement Plan Trust Agreement. Exhibit 10(i) Source One Mortgage Services Corporation Supplemental Retirement Plan. Exhibit 10(j) Source One Mortgage Services Corporation Stock Appreciation Rights Plan. Exhibit 10(w) Investment Contract by and between Source One Mortgage Services Corporation and James A. Conrad. Exhibit 10(x) Investment Contract by and between Source One Mortgage Services Corporation and John A. Courson. 18 20 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries Exhibit 10(y) Investment Contract by and between Source One Mortgage Services Corporation and Robert R. Densmore. Exhibit 10(aa) Source One Mortgage Services Corporation Long Term Incentive Plan. Exhibit 10(gg) Incentive Agreement in the event of a sale of Source One Mortgage Services Corporation among certain Senior Officers of Source One Mortgage Services Corporation and Fund American Enterprises, Inc. Exhibit 10 (hh) Retirement Agreement dated June 5, 1996 between Source One Mortgage Services Corporation and Robert W. Richards. 19 21 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries Source One Mortgage Services Corporation and Subsidiaries Index to Financial Statements and Financial Statement Schedules (Item 14(a)) - --------------------------------------------------------------------------------
Annual Report page(s)* - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS: Consolidated statements of condition as of December 31, 1996 and 1995........................................... 14 Consolidated statements of income for each of the years ended December 31, 1996, 1995 and 1994............................... 15 Consolidated statements of stockholders' equity for each of the years ended December 31, 1996, 1995 and 1994........................ 16 Consolidated statements of cash flows for each of the years ended December 31, 1996, 1995 and 1994..................... 17-18 Notes to consolidated financial statements................................ 19-40 OTHER FINANCIAL INFORMATION: Report of independent auditors.............................................. 13 Selected quarterly financial data (unaudited)............................... 41 - --------------------------------------------------------------------------------
Schedules for which provision is made in Regulation S-X are not required under the related instructions or are inapplicable and, therefore, have been omitted or the information required is included in the consolidated financial statements or notes thereto. *Source One Mortgage Services Corporation's 1996 Annual Report to Shareholders. 20 22 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries b. Reports on Form 8-K The Company filed 7 reports on Form 8-K during the fourth quarter of 1996. The dates and contents are described below. October 23, 1996 Reported Distribution Date Statements for October 25, November 1, November 1, and October 20, 1996 relating to the Source One Mortgage Services Corporation Agency MBS Multi-Class Pass-Through Certificates Series 1987-2, 1988-1, 1988-2 and 1990-1, respectively. October 25, 1996 Reported Report to the Trustee and Report to the Certificate Holders for the month of October 1996 relating to the Source One Mortgage Services Corporation 11 1/2% Mortgage Pass-Through Certificates, Series A. November 22, 1996 Reported Distribution Date Statements for November 25, December 1, December 1, and November 20, 1996 relating to the Source One Mortgage Services Corporation Agency MBS Multi-Class Pass-Through Certificates Series 1987-2, 1988-1, 1988-2 and 1990-1, respectively. November 25, 1996 Reported Report to the Trustee and Report to the Certificate Holders for the month of November 1996 relating to the Source One Mortgage Services Corporation 11 1/2% Mortgage Pass-Through Certificates, Series A. December 20, 1996 Reported Source One Mortgage Services Corporation bid acceptance to sell mortgage servicing rights to Chase Manhattan Mortgage Corporation. December 23, 1996 Reported Distribution Date Statements for December 25, 1996, December 25, 1996, January 1, 1997, January 1, 1997 and December 20, 1996 relating to the Source One Mortgage Services Corporation Agency MBS Multi-Class Pass-Through Certificates Series 1987-1, 1987-2, 1988-1, 1988-2 and 1990-1, respectively. December 26, 1996 Reported Report to the Trustee and Report to the Certificate Holders for the month of December 1996 relating to the Source One Mortgage Services Corporation 11 1/2% Mortgage Pass-Through Certificates, Series A.
21 23 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries c. Exhibits Exhibit No. 3(a) Restated Certificate of Incorporation of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 4(a) of the February 28, 1994 Current Report on Form 10-K, File No. 1-12898, formerly File No. 33-8562). (b) Certificate of Designation for Series A Preferred Stock of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 3(b) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (c) Amended and Restated Bylaws of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 4(d) of Amendment No. 1 to the registration statement on Form S-3, Registration No. 33-71924). 4(a) Pooling and Servicing Agreement between Manufacturers Hanover Mortgage Corporation (now "Source One Mortgage Services Corporation") and National Bank of Detroit dated March 1, 1983 and relating to Mortgage Pass-Through Certificates, Series A, 11(% Pass-Through Rate (incorporated by reference to Exhibit 4(a) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (b) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the First National Bank of Chicago dated September 25, 1987 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1987-1 (incorporated by reference to Exhibit 10(jj) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (c) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the First National Bank of Chicago dated January 28, 1988 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1987-2 (incorporated by reference to Exhibit 10(kk) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (d) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the First National Bank of Chicago dated March 30, 1988 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1988-1 (incorporated by reference to Exhibit 10(ll) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (e) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the First National Bank of Chicago dated June 28, 1988 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1988-2 (incorporated by reference to Exhibit 10(mm) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (f) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the First National Bank of Chicago dated July 30, 1990 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1990-1 (incorporated by reference to Exhibit 4(a) of the July 30, 1990 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (g) Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and National Bank of Detroit dated September 15, 1986 (incorporated by reference to Exhibit 4(a) of the registration statement on Form S-1, Registration No. 33-8562). 22 24 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries (h) First Supplemental Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and National Bank of Detroit dated November 1, 1986 (incorporated by reference to Exhibit 4(b) of the registration statement on Form S-1, Registration No. 33-8562). (i) Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated November 21, 1988 (incorporated by reference to Exhibit 4(h) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (j) First Supplemental Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated November 21, 1988 (incorporated by reference to Exhibit 4(i) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (k) Second Supplemental Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated October 10, 1991 (incorporated by reference to Exhibit 4(k) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (l) Third Supplemental Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated October 10, 1991 (incorporated by reference to Exhibit 4(l) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (m) Indenture between Source One Mortgage Services Corporation and The First National Bank of Chicago dated May 7, 1992 (incorporated by reference to Exhibit 19(a) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, File No. 1-12898, formerly File No. 33-8562). (n) Resolutions of the Chairman of the Board of Source One Mortgage Services Corporation regarding the issuance of medium-term indebtedness adopted pursuant to authority delegated by the Board of Directors of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 19(b) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, File No. 1-12898, formerly File No. 33-8562). (Said resolutions establish the terms of the Medium-Term Notes, Series B, of Source One Mortgage Services Corporation issuable under the Indenture between Source One Mortgage Services Corporation and The First National Bank of Chicago dated May 7, 1992). (o) Resolutions of the Chairman of the Board of Source One Mortgage Services Corporation regarding the issuance of a series of medium-term notes, Series B, entitled "9% Debentures due June 1, 2012" adopted pursuant to authority delegated by the Board of Directors of Source One Mortgage Services Corporation (incorporated by reference to Exhibit (i) of the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, File No. 1-12898, formerly File No. 33-8562). (Said resolutions establish the terms of the 9% Debentures due June 1, 2012 of Source One Mortgage Services Corporation issued under the Indenture between Source One Mortgage Services Corporation and The First National Bank of Chicago dated May 7, 1992). (p) Indenture dated December 1, 1995 between Source One Mortgage Services Corporation and IBJ Schroeder Bank & Trust Company, as trustee (incorporated by reference to Exhibit (a)(1) of Amendment No. 4 to the Report on Schedule 13E-4 filed with the Securities and Exchange Commission on December 21, 1995). 23 25 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries (q) First Supplemental Indenture dated December 1, 1995 between Source One Mortgage Services Corporation and IBJ Schroeder Bank & Trust Company, as trustee (incorporated by reference to Exhibit (a)(2) of Amendment No. 4 to the Report on Schedule 13E-4 filed with the Securities and Exchange Commission on December 21, 1995). (r) Form of 8.25% Debentures due 1996 (incorporated by reference to Exhibit 4(p) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (s) Form of Medium-Term Note, Series A (incorporated by reference to Exhibit 4(q) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (t) Form of 8.875% Notes due 2001 (incorporated by reference to Exhibit 4(r) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (u) Form of 9% Debentures due 2012 (incorporated by reference to Exhibit 4(s) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (v) Specimen Certificate for 8.42% Cumulative Preferred Stock, Series A, of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 4(a) of the Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, File No. 1-12898). (w) Form of 9.375% Quarterly Income Capital Securities (Subordinated Interest Deferrable Debentures, Due 2025); included in the First Supplemental Indenture dated December 1, 1995 between Source One Mortgage Services Corporation and IBJ Schroeder Bank & Trust Company, as trustee (incorporated by reference to Exhibit (a)(2) of Amendment No. 4 to the Report on Schedule 13E-4 filed with the Securities and Exchange Commission on December 21, 1995). 10 Material Contracts (a) Source One Mortgage Services Corporation Employee Stock Ownership and 401(k) Savings Plan and Trust Agreement (as amended and restated effective as of October 1, 1996).* (b) Form of Source One Mortgage Services Corporation Voluntary Deferred Compensation Plan (incorporated by reference to Exhibit 10(e) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (c) First Amendment to Source One Mortgage Services Corporation Voluntary Deferred Compensation Plan (incorporated by reference to Exhibit 10(g) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (d) Form of Source One Mortgage Services Corporation Retirement Plan, as amended and restated (incorporated by reference to Exhibit 10(hh) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (e) First Amendment to Source One Mortgage Services Corporation Retirement Plan (incorporated by reference to Exhibit 10(j) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (f) Second Amendment to Source One Mortgage Services Corporation Retirement Plan (incorporated by reference to Exhibit 10(k) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). 24 26 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries (g) Third Amendment to Source One Mortgage Services Corporation Retirement Plan (incorporated by reference to Exhibit 10(l) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (h) Form of Source One Mortgage Services Corporation Retirement Plan Trust Agreement (incorporated by reference to Exhibit 10(d) of the registration statement on Form S-1, Registration No. 33-8562). (i) Source One Mortgage Services Corporation Supplemental Retirement Plan (incorporated by reference to Exhibit 10(n) of the Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-12898, formerly File No. 33-8562). (j) Source One Mortgage Services Corporation Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10(c) of the Current Report on Form 8-K dated November 11, 1993, File No. 1-12898, formerly File No. 33-8562). (k) Second Amended and Restated Revolving Credit Agreement dated as of November 12, 1996 by and among Source One Mortgage Services Corporation, The Mortgage Authority, Inc. and Central Pacific Mortgage Company (subsidiaries of Source One Mortgage Services Corporation), and The First National Bank of Chicago, individually and as Administrative Agent and Certain Other Lenders.* (l) Second Amended and Restated Security and Collateral Agency Agreement dated as of November 12, 1996 by and among Source One Mortgage Services Corporation, The Mortgage Authority, Inc. and Central Pacific Mortgage Company (subsidiaries of Source One Mortgage Services Corporation), The First National Bank of Chicago (in its capacity as administrative agent for the lenders), Norwest Bank Minnesota, N.A. (as the successor trustee under certain Indentures under which Source One Mortgage Services Corporation is an issuer of certain debt securities) and National City Bank, Kentucky, as collateral agent.* (m) Federal Tax Sharing Agreement dated as of January 1, 1991, and effective for taxable years beginning after December 31, 1990, by and among Fund American Enterprises Holdings, Inc. and Source One Mortgage Services Corporation.* (n) Eurocommercial Paper Program Agreement dated August 1, 1988 among Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the Dealers named therein (incorporated by reference to Exhibit 10(bb) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (o) Commercial Paper Dealer Agreement dated September 25, 1986 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Shearson Lehman Commercial Paper Inc. (incorporated by reference to Exhibit 10(cc) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (p) Commercial Paper Dealer Agreement dated September 23, 1986 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and First Boston Corporation (incorporated by reference to Exhibit 10(dd) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). 25 27 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries (q) Issuing and Paying Agency Agreement dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10(s) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (r) Amendment dated June 20, 1992 to Issuing and Paying Agency Agreement dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10(x) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (s) Amendment dated August 1, 1988 to Issuing and Paying Agency Agreement dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10(t) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (t) Letter of Representations dated November 23, 1990 relating to Issuing and Paying Agency Agreement dated September 18, 1986 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Morgan Guaranty Trust Company of New York (incorporated by reference to Exhibit 10(v) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (u) Depository Agreement dated June 16, 1993 between Source One Mortgage Services Corporation and The First National Bank of Chicago (incorporated by reference to Exhibit 10(a) of the Current Report on Form 8-K dated February 28, 1994, File No. 1-12898, formerly File No. 33-8562). (v) Stock Purchase Agreement dated December 15, 1995, between Source One Mortgage Services Corporation and Fund American Enterprises, Inc. (incorporated by reference to Exhibit 10(bb) of the Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-12898). (w) Investment Contract by and between Source One Mortgage Services Corporation and James A. Conrad (incorporated by reference to Exhibit 10(dd) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (x) Investment Contract by and between Source One Mortgage Services Corporation and John A. Courson (incorporated by reference to Exhibit 10(ee) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (y) Investment Contract by and between Source One Mortgage Services Corporation and Robert R. Densmore (incorporated by reference to Exhibit 10(ff) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (z) Investment Services Agreement dated November 13, 1991 between Source One Mortgage Services Corporation and Fund American Enterprises, Inc. (incorporated by reference to Exhibit 10(rr) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (aa) Source One Mortgage Services Corporation Long Term Incentive Plan (incorporated by reference to Exhibit 10(ii) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (bb) Loan Agreement dated August 10, 1995 by and between Source One Mortgage Services Corporation and Comerica Bank, as amended by an Amendment No. 1 to Loan Agreement dated 1995 and by an Amendment No. 2 to Loan Agreement dated July 10, 1996.* 26 28 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries (cc) First Amendment to the Second Amended and Restated Revolving Credit Agreement by and among Source One Mortgage Services Corporation, The Mortgage Authority, Inc. and Central Pacific Mortgage Company (subsidiaries of Source One Mortgage Services Corporation), and The First National Bank of Chicago, individually and as Administrative Agent, and Certain Other Lenders.* (dd) FNMA/FHLMC/GNMA Mortgage Servicing Purchase and Sale Agreement dated February 28, 1997, by and between Source One Mortgage Services Corporation and Chemical Mortgage Company.* (ee) Mortgage Loan Interim Subservicing Agreement made as of March 1, 1997, by and between Chemical Mortgage Company and Source One Mortgage Services Corporation.* (ff) Mortgage Loan Subservicing Agreement, by and between Chemical Mortgage Company and Source One Mortgage Services Corporation.* (gg) Incentive Agreement in the event of a sale of Source One Mortgage Services Corporation among certain Senior Officers of Source One Mortgage Services Corporation and Fund American Enterprises, Inc. (incorporated by reference to Exhibit 10(ll) of the Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-12898). (hh) Retirement Agreement dated June 5, 1996 between Source One Mortgage Services Corporation and Robert W. Richards.* 13 Source One Mortgage Services Corporation 1996 Annual Report to Shareholders. Such report, except for those portions which are expressly incorporated by reference in this Annual Report on Form 10-K, is furnished only for the information of the Commission and is not deemed filed as part hereof.* 16(a) Letter of Ernst & Young LLP dated March 27, 1997.* 21 Subsidiaries of Source One Mortgage Services Corporation.* 23 Consent of Ernst & Young LLP.* 24 Powers of Attorney.* 27 Financial Data Schedule.* * Filed herewith 27 29 FORM 10-K - -------------------------------------------------------------------------------- Source One Mortgage Services Corporation and Subsidiaries SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Source One Mortgage Services Corporation Date: March 28, 1997 By: /s/ MICHAEL C. ALLEMANG ------------------------ Michael C. Allemang Executive Vice President, Chief Financial Officer and Secretary Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - ------------------------------------------------------------------------------------------ * Chairman and Director March 28, 1997 - ------------------- James H. Ozanne * President, Chief Executive Officer March 28, 1997 - ------------------- and Director (Principal Executive Officer) James A. Conrad /s/ Michael C. Allemang - ------------------------- Executive Vice President, Chief Financial March 28, 1997 Michael C. Allemang Officer, Secretary and Director (Principal Financial Officer and Principal Accounting Officer) * Executive Vice President and Director March 28, 1997 - ------------------- Robert R. Densmore * Executive Vice President March 28, 1997 - ------------------- Mark A. Janssen * Director March 28, 1997 - ------------------- Terry L. Baxter * Director March 28, 1997 - ------------------- Robert P. Keller * Director March 28, 1997 - ------------------- Gordon S. Macklin * Director March 28, 1997 - ------------------- Roger K. Taylor * Director March 28, 1997 - ------------------- Allan L. Waters *By: /s/ Michael C. Allemang ----------------------- Michael C. Allemang As Attorney-in-fact for the persons indicated
- -------------------------------------------------------------------------------- Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act. The Company does not have any voting securities registered under Section 12 of the Act, and all of the Company's voting securities are held by two entities. Accordingly, no proxy statement, form of proxy or other proxy soliciting material has been, or will be, sent to more than 10 of the registrant's security holders with respect to any annual or other meeting of security holders. 28 30 EXHIBIT NUMBER DESCRIPTION - ------ ----------- c. Exhibits Exhibit No. 3(a) Restated Certificate of Incorporation of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 4(a) of the February 28, 1994 Current Report on Form 10-K, File No. 1-12898, formerly File No. 33-8562). (b) Certificate of Designation for Series A Preferred Stock of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 3(b) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (c) Amended and Restated Bylaws of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 4(d) of Amendment No. 1 to the registration statement on Form S-3, Registration No. 33-71924). 4(a) Pooling and Servicing Agreement between Manufacturers Hanover Mortgage Corporation (now "Source One Mortgage Services Corporation") and National Bank of Detroit dated March 1, 1983 and relating to Mortgage Pass-Through Certificates, Series A, 11(% Pass-Through Rate (incorporated by reference to Exhibit 4(a) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (b) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the First National Bank of Chicago dated September 25, 1987 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1987-1 (incorporated by reference to Exhibit 10(jj) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (c) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the First National Bank of Chicago dated January 28, 1988 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1987-2 (incorporated by reference to Exhibit 10(kk) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (d) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the First National Bank of Chicago dated March 30, 1988 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1988-1 (incorporated by reference to Exhibit 10(ll) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (e) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the First National Bank of Chicago dated June 28, 1988 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1988-2 (incorporated by reference to Exhibit 10(mm) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (f) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the First National Bank of Chicago dated July 30, 1990 and relating to Agency MBS Multi-Class Pass-Through Certificates, Series 1990-1 (incorporated by reference to Exhibit 4(a) of the July 30, 1990 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (g) Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and National Bank of Detroit dated September 15, 1986 (incorporated by reference to Exhibit 4(a) of the registration statement on Form S-1, Registration No. 33-8562). (h) First Supplemental Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and National Bank of Detroit dated November 1, 1986 (incorporated by reference to Exhibit 4(b) of the registration statement on Form S-1, Registration No. 33-8562). (i) Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated November 21, 1988 (incorporated by reference to Exhibit 4(h) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (j) First Supplemental Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated November 21, 1988 (incorporated by reference to Exhibit 4(i) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (k) Second Supplemental Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated October 10, 1991 (incorporated by reference to Exhibit 4(k) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (l) Third Supplemental Indenture between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and The First National Bank of Chicago dated October 10, 1991 (incorporated by reference to Exhibit 4(l) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (m) Indenture between Source One Mortgage Services Corporation and The First National Bank of Chicago dated May 7, 1992 (incorporated by reference to Exhibit 19(a) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, File No. 1-12898, formerly File No. 33-8562). (n) Resolutions of the Chairman of the Board of Source One Mortgage Services Corporation regarding the issuance of medium-term indebtedness adopted pursuant to authority delegated by the Board of Directors of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 19(b) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, File No. 1-12898, formerly File No. 33-8562). (Said resolutions establish the terms of the Medium-Term Notes, Series B, of Source One Mortgage Services Corporation issuable under the Indenture between Source One Mortgage Services Corporation and The First National Bank of Chicago dated May 7, 1992). (o) Resolutions of the Chairman of the Board of Source One Mortgage Services Corporation regarding the issuance of a series of medium-term notes, Series B, entitled "9% Debentures due June 1, 2012" adopted pursuant to authority delegated by the Board of Directors of Source One Mortgage Services Corporation (incorporated by reference to Exhibit (i) of the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, File No. 1-12898, formerly File No. 33-8562). (Said resolutions establish the terms of the 9% Debentures due June 1, 2012 of Source One Mortgage Services Corporation issued under the Indenture between Source One Mortgage Services Corporation and The First National Bank of Chicago dated May 7, 1992). (p) Indenture dated December 1, 1995 between Source One Mortgage Services Corporation and IBJ Schroeder Bank & Trust Company, as trustee (incorporated by reference to Exhibit (a)(1) of Amendment No. 4 to the Report on Schedule 13E-4 filed with the Securities and Exchange Commission on December 21, 1995). (q) First Supplemental Indenture dated December 1, 1995 between Source One Mortgage Services Corporation and IBJ Schroeder Bank & Trust Company, as trustee (incorporated by reference to Exhibit (a)(2) of Amendment No. 4 to the Report on Schedule 13E-4 filed with the Securities and Exchange Commission on December 21, 1995). (r) Form of 8.25% Debentures due 1996 (incorporated by reference to Exhibit 4(p) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (s) Form of Medium-Term Note, Series A (incorporated by reference to Exhibit 4(q) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (t) Form of 8.875% Notes due 2001 (incorporated by reference to Exhibit 4(r) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (u) Form of 9% Debentures due 2012 (incorporated by reference to Exhibit 4(s) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (v) Specimen Certificate for 8.42% Cumulative Preferred Stock, Series A, of Source One Mortgage Services Corporation (incorporated by reference to Exhibit 4(a) of the Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, File No. 1-12898). (w) Form of 9.375% Quarterly Income Capital Securities (Subordinated Interest Deferrable Debentures, Due 2025); included in the First Supplemental Indenture dated December 1, 1995 between Source One Mortgage Services Corporation and IBJ Schroeder Bank & Trust Company, as trustee (incorporated by reference to Exhibit (a)(2) of Amendment No. 4 to the Report on Schedule 13E-4 filed with the Securities and Exchange Commission on December 21, 1995). 10 Material Contracts (a) Source One Mortgage Services Corporation Employee Stock Ownership and 401(k) Savings Plan and Trust Agreement (as amended and restated effective as of October 1, 1996).* (b) Form of Source One Mortgage Services Corporation Voluntary Deferred Compensation Plan (incorporated by reference to Exhibit 10(e) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (c) First Amendment to Source One Mortgage Services Corporation Voluntary Deferred Compensation Plan (incorporated by reference to Exhibit 10(g) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (d) Form of Source One Mortgage Services Corporation Retirement Plan, as amended and restated (incorporated by reference to Exhibit 10(hh) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (e) First Amendment to Source One Mortgage Services Corporation Retirement Plan (incorporated by reference to Exhibit 10(j) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (f) Second Amendment to Source One Mortgage Services Corporation Retirement Plan (incorporated by reference to Exhibit 10(k) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (g) Third Amendment to Source One Mortgage Services Corporation Retirement Plan (incorporated by reference to Exhibit 10(l) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (h) Form of Source One Mortgage Services Corporation Retirement Plan Trust Agreement (incorporated by reference to Exhibit 10(d) of the registration statement on Form S-1, Registration No. 33-8562). (i) Source One Mortgage Services Corporation Supplemental Retirement Plan (incorporated by reference to Exhibit 10(n) of the Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-12898, formerly File No. 33-8562). (j) Source One Mortgage Services Corporation Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10(c) of the Current Report on Form 8-K dated November 11, 1993, File No. 1-12898, formerly File No. 33-8562). (k) Second Amended and Restated Revolving Credit Agreement dated as of November 12, 1996 by and among Source One Mortgage Services Corporation, The Mortgage Authority, Inc. and Central Pacific Mortgage Company (subsidiaries of Source One Mortgage Services Corporation), and The First National Bank of Chicago, individually and as Administrative Agent and Certain Other Lenders.* (l) Second Amended and Restated Security and Collateral Agency Agreement dated as of November 12, 1996 by and among Source One Mortgage Services Corporation, The Mortgage Authority, Inc. and Central Pacific Mortgage Company (subsidiaries of Source One Mortgage Services Corporation), The First National Bank of Chicago (in its capacity as administrative agent for the lenders), Norwest Bank Minnesota, N.A. (as the successor trustee under certain Indentures under which Source One Mortgage Services Corporation is an issuer of certain debt securities) and National City Bank, Kentucky, as collateral agent.* (m) Federal Tax Sharing Agreement dated as of January 1, 1991, and effective for taxable years beginning after December 31, 1990, by and among Fund American Enterprises Holdings, Inc. and Source One Mortgage Services Corporation.* (n) Eurocommercial Paper Program Agreement dated August 1, 1988 among Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and the Dealers named therein (incorporated by reference to Exhibit 10(bb) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (o) Commercial Paper Dealer Agreement dated September 25, 1986 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Shearson Lehman Commercial Paper Inc. (incorporated by reference to Exhibit 10(cc) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (p) Commercial Paper Dealer Agreement dated September 23, 1986 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and First Boston Corporation (incorporated by reference to Exhibit 10(dd) of the September 22, 1988 Current Report on Form 8-K, File No. 1-12898, formerly File No. 33-8562). (q) Issuing and Paying Agency Agreement dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10(s) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (r) Amendment dated June 20, 1992 to Issuing and Paying Agency Agreement dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10(x) of the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-12898, formerly File No. 33-8562). (s) Amendment dated August 1, 1988 to Issuing and Paying Agency Agreement dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10(t) of the Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562). (t) Letter of Representations dated November 23, 1990 relating to Issuing and Paying Agency Agreement dated September 18, 1986 between Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services Corporation") and Morgan Guaranty Trust Company of New York (incorporated by reference to Exhibit 10(v) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (u) Depository Agreement dated June 16, 1993 between Source One Mortgage Services Corporation and The First National Bank of Chicago (incorporated by reference to Exhibit 10(a) of the Current Report on Form 8-K dated February 28, 1994, File No. 1-12898, formerly File No. 33-8562). (v) Stock Purchase Agreement dated December 15, 1995, between Source One Mortgage Services Corporation and Fund American Enterprises, Inc. (incorporated by reference to Exhibit 10(bb) of the Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-12898). (w) Investment Contract by and between Source One Mortgage Services Corporation and James A. Conrad (incorporated by reference to Exhibit 10(dd) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (x) Investment Contract by and between Source One Mortgage Services Corporation and John A. Courson (incorporated by reference to Exhibit 10(ee) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (y) Investment Contract by and between Source One Mortgage Services Corporation and Robert R. Densmore (incorporated by reference to Exhibit 10(ff) of the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-12898). (z) Investment Services Agreement dated November 13, 1991 between Source One Mortgage Services Corporation and Fund American Enterprises, Inc. (incorporated by reference to Exhibit 10(rr) of the Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-12898, formerly File No. 33-8562). (aa) Source One Mortgage Services Corporation Long Term Incentive Plan (incorporated by reference to Exhibit 10(ii) of the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-12898). (bb) Loan Agreement dated August 10, 1995 by and between Source One Mortgage Services Corporation and Comerica Bank, as amended by an Amendment No. 1 to Loan Agreement dated 1995 and by an Amendment No. 2 to Loan Agreement dated July 10, 1996.* (cc) First Amendment to the Second Amended and Restated Revolving Credit Agreement by and among Source One Mortgage Services Corporation, The Mortgage Authority, Inc. and Central Pacific Mortgage Company (subsidiaries of Source One Mortgage Services Corporation), and The First National Bank of Chicago, individually and as Administrative Agent, and Certain Other Lenders.* (dd) FNMA/FHLMC/GNMA Mortgage Servicing Purchase and Sale Agreement dated February 28, 1997, by and between Source One Mortgage Services Corporation and Chemical Mortgage Company.* (ee) Mortgage Loan Interim Subservicing Agreement made as of March 1, 1997, by and between Chemical Mortgage Company and Source One Mortgage Services Corporation.* (ff) Mortgage Loan Subservicing Agreement, by and between Chemical Mortgage Company and Source One Mortgage Services Corporation.* (gg) Incentive Agreement in the event of a sale of Source One Mortgage Services Corporation among certain Senior Officers of Source One Mortgage Services Corporation and Fund American Enterprises, Inc. (incorporated by reference to Exhibit 10(ll) of the Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-12898). (hh) Retirement Agreement dated June 5, 1996 between Source One Mortgage Services Corporation and Robert W. Richards.* 13 Source One Mortgage Services Corporation 1996 Annual Report to Shareholders. Such report, except for those portions which are expressly incorporated by reference in this Annual Report on Form 10-K, is furnished only for the information of the Commission and is not deemed filed as part hereof.* 16(a) Letter of Ernst & Young LLP dated March 27, 1997.* 21 Subsidiaries of Source One Mortgage Services Corporation.* 23 Consent of Ernst & Young LLP.* 24 Powers of Attorney.* 27 Financial Data Schedule.* * Filed herewith EX-10.(A) 2 EXHIBIT 10(A) 1 EXHIBIT 10(a) SOURCE ONE MORTGAGE SERVICES CORPORATION EMPLOYEE STOCK OWNERSHIP AND 401(k) SAVINGS PLAN AND TRUST AGREEMENT (as amended and restated effective as of October 1, 1996) 2 SOURCE ONE MORTGAGE SERVICES CORPORATION EMPLOYEE STOCK OWNERSHIP AND 401(K) SAVINGS PLAN AND TRUST AGREEMENT (AS AMENDED AND RESTATED EFFECTIVE OCTOBER 1, 1996) INDEX PART ONE ARTICLE I DEFINITIONS AND INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1 A. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1 B. Governing Law and Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-13 C. Power to Interpret . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-13 D. Adoption of Plan by Related Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-14 ARTICLE II PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 A. Eligibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 B. All Years of Service Counted for Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 C. Reemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 D. Inactive Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-2 ARTICLE III CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1 A. ESOP Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1 B. Elective Contributions; Adjusted $7,000 Limitation; Corrective Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1 C. Matching Company Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-3 D. Limitations on Company Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-3 E. Two or More Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-4 F. Deductibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-4 G. Contributions by Mistake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-5 H. Limitation on Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-5 I. No Employee Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-5 ARTICLE IV ALLOCATION AND ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1 A-1. Establishment of ESOP Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1 A-2. Allocation of ESOP Contributions and Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . IV-1 B. Elective Contributions Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-2 C. Matching Company Contributions Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-2 D. Limitations on Annual Additions to Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-2 E. Special Limitations on Allocations of Elective Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-5 F. Special Limitations on Allocations of Matching Company Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-6 G. Adjustments to Prevent Excess Allocations of Elective Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-8 H. Adjustments to Prevent Excess Allocations of Matching Company Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-11 I. Adjustments to Prevent Multiple Use of Alternative Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-13 J. Establishment and Objectives of Investment Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-13
-i- 3 K-1 Investment of Elective Contributions, Matching Company Contributions, and Rollover Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-14 K-2. Investment of ESOP Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-15 L. Participants' Rights to Periodic Reallocation of Elective Contributions, Matching Company Contributions and Rollover Contributions Accounts . . . . . . . . . . . . . . . . . . . . . . . IV-16 M. Participants' Credit Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-16 N. Periodic Revaluation of Investment Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-16 O. Periodic Adjustments to Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-17 P. Fixed Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-19 Q. Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-20 R. Accounting for Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-20 S. Company Stock Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-21 ARTICLE V RETIREMENT BENEFITS AND VESTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1 A. Normal Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1 B. Late Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-2 C. Early Retirement; Vesting Schedule for ESOP Contributions and Matching Company Contributions; Full Vesting of Elective Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-2 D. Deadline for Payment of Benefits; Required Beginning Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-5 E. Cash-Outs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-5 F. Limitations on Payment of Benefits Derived from Elective Contributions and Matching Company Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-6 G. Termination of Employment by Reason of Dissolution . . . . . . . . . . . . . . . . . . . . . . . . V-6 H. Termination of Employment in Other Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . V-6 I. Temporary Absences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-6 J. Manner of Payment of Benefits from ESOP Portion of Plan and from Company Stock Fund; Company Stock or Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-8 ARTICLE VI OTHER BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1 A. Death, Spousal Consent to Designation Required if Spouse is not Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1 B. Designation of Beneficiary and Method of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1 C. Required Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-2 C-1. Manner of Payment; Company Stock or Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-2 D. Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-3 E. Hardship Distributions; Distributions After Age 59-1/2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-3 F. Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-5 ARTICLE VII [RESERVED] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-1 PART TWO ARTICLE VIII COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1 A. Composition of Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1 B. Removal and Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
-ii- 4 C. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1 D. Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1 E. Records and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1 F. Powers and Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1 G. Rules and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-2 H. Claims Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-3 I. No Separate Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-4 J. Investment Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-4 K. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-4 ARTICLE IX TRUSTEE AND OTHER FIDUCIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1 A. Bonding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1 B. Protective Provisions for Fiduciaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1 C. Management and Control of Assets; Consultants and Investment Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1 D. Participant-Directed Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-4 E. Prohibited Transactions, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-4 F. General Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-4 G. General Powers of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-5 H. Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-7 I. Periodic Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-8 J. Protective Provisions for Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-9 K. Provisions Pertaining to Co-Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-10 L. Removal and Resignation of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-10 M. Successor Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-11 N. Settlement of Accounts upon Resignation or Removal of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-11 O. Segregated Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-11 P. Investments in Common Trust Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-11 Q. Voting Rights of Investment Committee with Respect to Company Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-11 R. Rights on Tender or Exchange Offer for Company Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-12 ARTICLE X TERMINATION, AMENDMENT AND SUSPENSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1 A. Termination, Etc.; Assumption of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1 B. Liquidation of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-2 C. Termination of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-2 D. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-2 ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1 A. Persons Prohibited from Serving as Fiduciaries, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1 B. Information Required by ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1 C. Retention of Records for Six Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1 D. No Reversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1 E. Nonforfeitability, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-2 F. Rollovers; Direct Transfers; Certain Transfers Prohibited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-3 G. Spendthrift Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5 H. Exceptions to Spendthrift Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5 I. Execution of Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6 J. Successors, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6 K. [Reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7 L. Miscellaneous Protective Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7
-iii- 5 M. No Duress or Retaliation Against Participants, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7 N. Record Keeping, Investigations, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7 O. Distributions to Minors and Incompetent or Missing Individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7 P. Expenses and Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-8 Q. No Warranty of Company Stock Value or Dividends . . . . . . . . . . . . . . . . . . . . . . . . . XI-9 ARTICLE XII INSURANCE PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII-1 A. No Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII-1 ARTICLE XIII TOP-HEAVY RULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII-1 A. Application; Top-Heavy Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII-1 B. Effect of Top-Heavy Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII-3 C. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII-5
-iv- 6 SOURCE ONE MORTGAGE SERVICES CORPORATION EMPLOYEE STOCK OWNERSHIP AND 401(k) SAVINGS PLAN AND TRUST AGREEMENT (as amended and restated effective October 1, 1996) THIS AGREEMENT, made effective the 1st day of October, 1996, by and between Source One Mortgage Services Corporation, a Delaware corporation (herein called the "Company"), and Merrill Lynch Trust Company (herein, with its predecessors and successors, called the "Trustee"), WITNESSETH THAT WHEREAS -- (A) On or about February 14, 1991, the Company amended its then existing profit-sharing plan, which met the requirements of Section 401(a) of the Internal Revenue Code and qualified as an eligible individual account plan under Section 407(d)(3) of ERISA, by adopting a document captioned "Fireman's Fund Mortgage Corporation Amended Employee Stock Ownership Plan" (herein called the "ESOP"); (B) The Company has amended the ESOP from time to time by adopting the amendments bearing the captions and dates set forth below in this paragraph: First Amendment to Fireman's Fund Mortgage Corporation Amended Employee Stock Ownership Plan May 19, 1992 Second Amendment to Source One Mortgage Services Corporation Amended Employee Stock Ownership Plan November 11, 1993 Third Amendment to Source One Mortgage Services Corporation Amended Employee Stock Ownership Plan January 1, 1994 Fourth Amendment to Source One Mortgage Services Corporation Amended Employee Stock Ownership Plan August 23, 1994,
the ESOP as so amended being hereinafter called the "Amended ESOP"; (C) On or about October 21, 1986, the Company and Manufacturers National Bank of Detroit, a predecessor trustee of the ESOP, entered into an agreement captioned "Fireman's Fund Mortgage Corporation Employee Stock Ownership Trust Agreement" (herein called the "Trust Agreement") establishing a trust (herein called the "ESOP Trust") to provide the benefits payable under the ESOP; 1 7 (D) The Company desires to amend and restate the Amended ESOP and the ESOP Trust (i) to add a Code Section 401(k) feature to the Amended ESOP (the Amended ESOP as so amended being herein called the "Plan"), (ii) to continue a single trust (herein called the "Trust") to hold the assets of the ESOP portion of the Plan and the 401(k) portion of the Plan in separate accounts, and (iii) to embody the terms of the Plan and the Trust in a single document; and (E) The Company intends that the Plan and Trust shall continuously qualify under those provisions of the federal income tax laws relating to qualified plans under Section 401(a) of the Code, that the ESOP portion of the Plan will continuously qualify as an eligible individual account plan under Section 407(d)(3) of ERISA and that the 401(k) portion of the Plan will continuously meet the requirements of Section 401(k) of the Code; NOW, THEREFORE, in consideration of the premises and of the provisions hereinafter set forth, it is agreed as follows: 1. The Amended ESOP and the Trust Agreement are hereby amended and restated in their entirety to read as set forth in Parts One and Two attached hereto. 2. No benefit provided under the Plan protected by Section 411(d)(6) of the Code and Regulations thereunder shall be eliminated by the adoption of this agreement, and this agreement shall be construed and administered so as to comply with such Code Section and Regulations. 3. This agreement shall be effective as of October 1, 1996. IN WITNESS WHEREOF, the Company has duly executed this Agreement on the _________ day of ____________________, 1996. Signed and delivered SOURCE ONE MORTGAGE SERVICES in the presence of: CORPORATION _____________________ By _________________________________ Its __________________________ 2 8 Signed and delivered MERRILL LYNCH TRUST COMPANY in the presence of: _____________________ By __________________________________ Its ____________________________ This Agreement was prepared for execution by and between Merrill Lynch Trust Bank of Michigan (the "Trustee") and Source One Mortgage Services Corporation (the "Company"). However, the Trustee refused to execute this Agreement. Instead, at its request it has entered into a separate Trust Agreement with the Company designating it as trustee of the Plan and setting forth the provisions relating to its service as a trustee of the Plan. The Company acknowledges that if there is any conflict between the provisions of the Plan and such separate Trust Agreement the provisions of the separate Trust Agreement control, to the extent such provisions comply with ERISA. 3 9 PART ONE ARTICLE I DEFINITIONS AND INTERPRETATION A. Definitions. The following words and phrases, wherever capitalized, shall have the following meanings respectively, unless the context otherwise requires: (1) "Account" or "account" means and includes a Participant's Company Stock Account, Other Investments Account, Elective Contributions Account, Matching Company Contributions Account, if any, and any additional accounts established for the Participant under this Agreement. "ESOP Account" means and includes a Participant's Company Stock Account and Other Investments Account. "401(k) Account" means and includes a Participant's Elective Contributions Account, Matching Company Contributions Account, if any, and Rollover Account, if any. (2) "Accrued Benefit" means the balance in a Participant's account separately maintained under Article IV hereof. (3) "Adjusted Equivalent", wherever applied to a dollar amount, means said amount adjusted for increases in the cost of living in accordance with applicable Treasury Regulations. (4) "Administrative Parties" means and includes the Company, the Trustee, the Committee and any Insurer. (5) "Agreement" means this Agreement, as from time to time amended or supplemented. (6) "Anniversary Date" means the last day of the Plan Year. (7) "Annual Addition" means the amounts allocated to a Participant's account for any taxable year of the Company (which taxable year also is the Limitation Year) which constitute - (a) Company contributions to the Trust (including Elective Contributions); (b) Forfeitures credited to the Participant's account in respect of such taxable year; (c) Contributions allocated to an individual medical account described in Section 415(l)(2) of the Code which is part of a pension or annuity plan maintained by the Company and amounts described in Section 419A(d)(2) of the Code dealing with separate accounts for key employees, as defined in Section 419(A)(d)(3) of the Code established for post-retirement medical benefits under a welfare benefit fund maintained by the Company; and I-1 10 (d) Employee after-tax contributions. Company Contributions initially allocated to a Participant's Elective Contributions Account or Matching Company Contributions Account and later determined to be an Excess Elective Deferral, Excess Contribution or Excess Matching Contribution do not cease to be Annual Additions even if corrected through distribution or other means. (8) "Attained Age" of any individual means his chronological age, not the age he was, or will be, on his nearest birthday. (9) "Beneficiary" means the person so designated by a Participant pursuant to this Agreement, or the person otherwise named as the Participant's beneficiary under (A) or (B) of Article VI. (10) "Board" means the Board of Directors of the Company. (11) "Code" means the Internal Revenue Code of 1986, as from time to time amended. (12) "Committee" means the administrative committee appointed under Article VIII, which shall be the plan administrator as defined in Section 414(g) of the Code, except as otherwise provided in Article VIII(I). (13) "Company Contributions" means and includes ESOP Contributions, Elective Contributions, Matching Company Contributions, if any, Qualified Nonelective Contributions and Qualified Matching Contributions. (14) "Company Stock" means shares of common stock, $1.00 par value, of Fund American Enterprises Holdings, Inc., a Delaware corporation, which is the indirect parent of the Company, as traded on the New York Stock Exchange. (15) "Company Stock Account" means the account maintained to record the number of shares and fractional shares of Company Stock allocable to a Participant under the ESOP portion of the Plan out of Company Stock contributed to the Trust by the Company, purchased and paid for by the Trust out of the ESOP portion of the Plan, or received by the Trust as a stock dividend on Company Stock held in a Participant's Company Stock Account. (16) "Compensation" means all compensation as that term is defined in Section 415(c)(3) of the Code. The Compensation of each Participant taken into account under the Plan for any Plan Year beginning before January 1, 1994 shall not exceed the Adjusted Equivalent of $200,000. In determining the Compensation of a Participant for purposes of this limitation, the rules of section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained I-2 11 age 19 before the close of the Plan Year. If, as a result of the application of such rules such limitation is exceeded, then (except for purposes of determining the portion of compensation up to the integration level if this Plan is integrated with Social Security), the limitation shall be prorated among the affected individuals in the ratio which each such individual's Compensation as determined prior to the application of the limitation bears to the total Compensation of all such individuals as so determined. "Creditable Compensation," where used with reference to any Participant or Employee, means the total Compensation (as above defined) paid to him by the Company, including overtime and bonuses, if any, plus any amount contributed by the Company pursuant to a salary reduction agreement and which is not includible in the gross income of such individual under Section 125, 402(e)(3) or 403(b) of the Code, but excluding -- (i) Compensation paid in kind, including personal use of a Company car and similar non-cash compensation, (ii) Special allowances or reimbursements to cover expenses on behalf of the Company or in the course of employment with the Company (for example, but not by way of limitation, travel and entertainment expenses), (iii) Deferred compensation and contributions to or under any other employee retirement, welfare, medical, dental, health, disability or insurance plan or arrangement, (iv) Compensation paid under the Source One Mortgage Services Corporation Long Term Incentive Plan, the Source One Mortgage Services Corporation Fund American Stock Appreciation Rights Plan and any Source One Mortgage Services Corporation Fund American Investment Contract, and (v) For purposes of the ESOP portion of the Plan only, bonuses and commissions which in the aggregate exceed one-third of the base salary paid in such taxable year to any Participant who in the taxable year in which such bonuses and commissions are earned is a corporate vice president or higher ranking officer of the Company or a vice president of the Company who participates in the Company's Executive Incentive Compensation Plan and is not a Regional Manager of the Company. The Creditable Compensation of each Participant taken into account under the Plan for any Plan Year beginning before January 1, 1994 shall not exceed the Adjusted Equivalent of $200,000, subject to the rules of Section 414(q)(6) of the Code applied in I-3 12 the same manner as in the first paragraph of this subparagraph (16) relating to Compensation. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the Compensation and Creditable Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost-of-living in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation and Creditable Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Section 401(a)(17) of the Code shall mean the OBRA '93 annual compensation limit set forth in this provision. If Compensation or Creditable Compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current Plan Year, the Compensation or Creditable Compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. (17) "Computation Period" means for purposes of determining eligibility to participate in the Plan an Eligibility Computation Period and for purposes of determining Years of Vesting Service a calendar year. (18) "Defined Contribution Plan" means a plan described in Section 415(k) of the Code which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account, except as otherwise provided by Section 414(k) of the Code for hybrid plans. (19) "Disqualified Person" means a disqualified person as defined in Section 4975(e)(2) of the Code. (20) "Eligibility Computation Period" means with respect to an Employee each consecutive twelve-month period commencing on the I-4 13 date the Employee first completes an Hour of Service and anniversaries thereof. (21) "Employee" means an individual who renders services to the Company as a common law employee or officer, i.e., a person whose compensation from the Company is subject to federal income tax withholding, who - (a) is not laid off without pay, on unpaid leave of absence, or on active duty in the armed forces of any nation or international body (other than as a member of the inactive reserve of the armed forces of the United States of America while not receiving pay from the Company); and (b) is not included in an employee unit covered by a collective bargaining agreement (not violated by this Subparagraph (b)) as to which there is evidence that retirement benefits were the subject of good faith bargaining, all within the meaning of Section 410(b)(3)(A) of the Code, except to the extent a collective bargaining agreement provides for coverage under the Plan. An individual rendering services to the Company purportedly as an independent contractor shall not be treated as an Employee before the Company has acknowledged that it must withhold federal income tax from the individual's compensation. For purposes of the pension requirements of Section 414(n)(3) of the Code (but not for purposes of eligibility to participate in the Plan) the term Employee shall include leased employees as defined in Section 414(n)(2) of the Code. Under this section of the Code the term leased employee means any person who is not an employee of the Company or a Related Company (in this paragraph any of such Companies being referred to as the "recipient") and who provides services to the recipient if (i) such services are provided pursuant to an agreement between the recipient and any other person (in this paragraph called the "leasing organization"), (ii) such person has performed such services for the recipient (or for the recipient and related persons) on a substantially full-time basis for a period of at least one year, and (iii) such services are performed under primary direction or control by the recipient or for Plan Years beginning before January 1, 1997 such services are of a type historically performed in the business field of the recipient by employees. Contributions or benefits provided by the leasing organization which are attributable to services performed for the recipient shall be treated as provided by the recipient. However, a leased employee shall not be considered an Employee if (i) such employee is covered by a money purchase pension plan providing (aa) a nonintegrated employer contribution rate of at least 10% of compensation, as defined in Section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross I-5 14 income under Section 125, Section 402(e)(3), Section 402(h) or Section 403(b) of the Code, (bb) immediate participation, and (cc) full and immediate vesting, and (ii) leased employees do not constitute more than 20% of the recipient's nonhighly compensated work force. (For purposes of meeting the minimum coverage requirements of Section 410(b) of the Code, employee shall mean any employee of the Company or any other employer required to be aggregated with the Company under Sections 414(b), (c), (m), or (o) of the Code.) (22) "Entry Date" means and includes for purposes of the ESOP portion of the Plan (a) the first day of a Plan Year and (b) the date six months thereafter, and for purposes of the 401(k) portion of the Plan, the beginning of the first payroll period coinciding with or next following (c) October 1, 1996 or (d) the first day of any subsequent calendar quarter. (23) "ERISA" means the Employee Retirement Income Security Act of 1974 (Public Law 93-406), as from time to time amended. (24) "ESOP portion of the Plan" and "ESOP portion of the Trust" mean the ESOP Accounts, the ESOP Contributions and the provisions of the Plan and Trust which pertain to such accounts and contributions. (25) "Excess Contribution" means Excess Contribution as defined in Article IV(G)(2)(c). (26) "Fiduciary" means and includes the Trustee, Committee members, and any other Person who - (a) Exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets, (b) Renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the Plan, or has any authority or responsibility to do so, (c) Has any discretionary authority or discretionary responsibility in the administration of the Plan, (d) Is described as a "fiduciary" in Section 3 of ERISA or is designated to carry out fiduciary responsibilities (other than trustee responsibilities) pursuant to this Agreement. Notwithstanding the foregoing provisions of this definition, the word "Fiduciary" shall in any particular context not include any Person or category of Persons to the extent excluded by any applicable Regulation. The Committee shall be the "Named I-6 15 Fiduciary" with respect to control and management of the operation and administration of the Plan. The Investment Committee shall be the "Named Fiduciary" with respect to the acquisition or sale of Company Stock, the selection of the Investment Funds and generally the investment of Plan assets as provided in Article VIII(I-1). The Trustee shall be the "Named Fiduciary" for custody of Plan assets, the investment of said assets other than Company Stock (except where an Investment Manager has been appointed to manage investments), the disbursement of benefits as instructed by the Committee, and the purchase and sale of Company Stock as instructed by the Committee. (27) "Fixed Account" means an account which has become fixed, Vested, set apart and segregated pursuant to Article IV(P), regardless of whether or not the assets thereof shall be commingled with any other such account or accounts. (28) "401(k) portion of the Plan" and "401(k) portion of the Trust" mean the 401(k) Accounts and the provisions of the Plan and Trust which pertain to such accounts. (29) "Highly Compensated Employee" means any Employee of the Company or a Related Company who, during a particular Plan Year or the preceding Plan Year - (a) Was at any time a 5-percent owner as defined in Code Section 416(i)(1); (b) Received aggregate compensation from the Company or any Related Company in excess of the Adjusted Equivalent of $75,000; (c) Received aggregate compensation from the Company or any Related Company in excess of the Adjusted Equivalent of $50,000 and was in the top paid group of Employees for the Plan Year; or (d) Was at any time an officer of the Company or a Related Company and received compensation greater than 50 percent of the amount in effect under Code Section 415(b)(1)(A) for the Plan Year; provided that an Employee not described in (b), (c) or (d) above for the preceding Plan Year shall not be treated as being described in (b), (c) or (d) for the current Plan Year unless such person is a member of the group of 100 Employees paid the greatest compensation from the Company or any Related Company during the current Plan Year. At the election of the Company the term "preceding Plan Year" as used above in this Section (A)(29) shall be deemed to mean the calendar year which coincides with the "particular Plan Year" as used above for which the determination of Highly Compensated Employees is being made, provided that if the Company makes this election with respect to this Plan it shall apply to all plans, entities and arrangements of the Company. As I-7 16 used above in this Article I(A)(29), "compensation" means compensation as described in Code Section 415(c)(3) increased by Elective Contributions and by any other compensation not includible in gross income under Section 125 of the Code; "top paid group" means the group consisting of the top 20-percent of Employees when ranked on the basis of Plan Year compensation; and Employee means Employee as defined in Article I(A)(19) but without regard to (b) of that provision and without restricting such term to employees of the Company. For purposes of (d) above no more than 50 Employees (or, if lesser, the greater of three Employees or 10% of the Employees) shall be treated as officers. If for any Plan Year no officer of the Company or a Related Company meets the compensation requirements of (d) above, the highest paid officer for such Plan Year shall be treated as a Highly Compensated Employee. A former Employee who Separated from the Service of the Company or a Related Company prior to the Plan Year for which the determination of Highly Compensated Employees is being made shall be treated as a Highly Compensated Employee if such Employee was a Highly Compensated Employee in the Plan Year of separation or in any Plan Year ending on or after the Employee's 55th birthday. If an Employee is during a particular Plan Year a family member of a 5-percent owner or of a Highly Compensated Employee who is one of the 10 most highly compensated Employees (ranked on the basis of compensation paid by the Company or any Related Company) during such Plan Year, then such Employee shall not be considered a separate Employee, and any compensation paid to the Employee and any contribution made on his behalf under the Plan shall be treated as paid to (or on behalf of) the 5-percent owner or top-ten compensated Employee. For these purposes, "family member" means the spouse or any lineal ascendant or descendant of such 5-percent owner or top-ten Employee as well as the spouses of such lineal ascendants and descendants. (30) "Hour of Service" means with respect to an employee of the Company: (a) Each hour for which an employee is paid, or entitled to payment, for the performance of duties for the Company during the applicable Computation Period, with such hours being credited to the employee for the Computation Period in which such duties were performed; (b) Each hour for which an employee is paid, or entitled to payment, by the Company on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence; provided, however that no more than 501 hours of service are required to be credited under this item (b) I-8 17 to an employee on account of any single continuous period during which the employee performs no duties (whether or not such period occurs in a single Computation Period); (c) Each Hour of Service for which he receives credit pursuant to Article V(I), provided that the counting of such hours shall not cause an individual who does not meet the requirements of Article I(A)(19)(a) to become a Participant while temporarily absent for a reason described in Article V(I); and (d) Each hour for which back pay irrespective of mitigation of damages, has been either awarded or agreed to by the Company. These hours shall be credited to the employee for the Computation Period or periods to which the award or agreement pertains rather than the Computation Period in which the award, agreement or payment is made. (e) Hours shall not be credited under (a), (b) and/or (c) if such hours are credited under (d) of this subparagraph (30). Also, solely for purposes of determining whether a One-Year Break in Service for eligibility and Vesting purposes has occurred, but not for purposes of determining the number of Years of Service of an Employee or Participant for eligibility or Vesting purposes, nor for any other purpose under the Plan, an Employee or Participant who is absent from work by reason of maternity or paternity shall be deemed to have completed Hours of Service during such absence subject to the following terms and conditions: (f) Absence from work by reason of maternity or paternity means and includes any absence (i) by reason of the pregnancy of the individual, (ii) by reason of the birth of a child of the individual, (iii) by reason of the placement of a child of the individual in connection with the adoption of such child by such individual, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement, (g) The number of Hours of Service deemed to have been completed during any such absence (not to exceed 501) shall be the number of Hours of Service which otherwise normally would have been credited to such Employee or Participant but for such absence, or in any case when the Committee is unable to determine such number of hours, eight Hours of Service per day of such absence, (h) Hours of Service shall be deemed to have been completed during an absence under this paragraph only in the Computation Period in which the absence begins if an Employee or Participant would be prevented from incurring a One-Year Break in Service in such Computation Period I-9 18 solely because Hours of Service are deemed to have been completed during such absence, or in any other case in the immediately following Computation Period, (i) No Hour of Service shall be deemed to have been completed during an absence under this paragraph unless the Employee or Participant furnishes to the Committee such timely information as the Committee may reasonably require to establish that the absence is for a reason described in (f) above and the number of days of such absence, and (j) Nothing in this paragraph shall be deemed to prevent the crediting of Hours of Service for any purpose under the Plan under Article II(D), even though such hours are not required to be credited under (f) through (i) above. The word Company as used in this paragraph shall be deemed to include any Related Company. The foregoing definition shall be interpreted in accordance with the rules set forth in Department of Labor Regulations Sections 2530.200b-2(b) and 2530.200b-2(c), the contents of which are hereby incorporated herein by reference. (31) "Investment Manager" means a Fiduciary which has fully complied with the provisions of Section 3(38) of ERISA and has provided the Committee and the Trustee with written acknowledgement that he has done so and is a Fiduciary with respect to the Plan. (32) "Limitation Year" shall mean the Plan Year unless the Company has designated a different 12 consecutive month period pursuant to a written resolution of its Board of Directors. (33) "Lump Sum" means one or more payments all made within a single taxable year of the recipient. (34) "Normal Retirement Age," in respect of any Participant, means his 65th birthday. (35) "Normal Retirement Benefit" means the benefit payable under Article V(A). (36) "Normal Retirement Date," in respect of any Participant, means the Anniversary Date coinciding with or next following his Normal Retirement Age. (37) "One-Year Break in Service" means a Computation Period during which the employee in question has not completed more than 500 Hours of Service. (38) "Other Investments Account" means the account maintained to record the amount (in dollars and cents) of Trust assets other than shares of Company Stock allocable to a Participant under the ESOP portion of the Plan. I-10 19 (39) "Participant" means a person who at the time in question is participating in the Plan pursuant to Article II. (40) "Person" means any individual, corporation or other entity mentioned in Section 3(9) of ERISA. (41) "Plan Year" means the fiscal year on which the records of the Plan are kept, which shall be the twelve consecutive month period ending on December 31st. (42) "Regulation" shall be construed as a reference to a regulation, ruling, or other interpretation, validly promulgated by the Department of Treasury or Department of Labor, as the case may be, and in effect at the time in question. (43) "Related Company" means and includes (i) each organization, whether or not incorporated, which is a service organization and is a member of an affiliated service group (within the meaning of Section 414(m) of the Code) of which the Company is a member, (ii) all corporations which are members of a controlled group of corporations (within the meaning of Section 414(b) of the Code) of which the Company is a member, (iii) each trade or business, whether or not incorporated, which is under common control (within the meaning of Section 414(c) of the Code) with the Company and (iv) any other entity required to be aggregated with the Company pursuant to Regulations under Section 414(o) of the Code; provided that no such corporation, organization, trade or business shall be considered to be a Related Company at any time prior or subsequent to the period of time during which it meets the foregoing definition; provided further that the status of being employed by a Related Company shall only pertain to an individual during the period of time when his employer is a Related Company, and not to any period of time prior or subsequent to its Related Company status, unless this Agreement or an amendment to it shall otherwise expressly provide. (44) "Rollover Account" means the account established for any Employee who makes a Rollover Contribution to the 401(k) portion of the Trust under Article XI(F) after October 1, 1996 consisting of the Rollover Contribution adjusted for earnings or losses. (45) "Separation (or Separated) from Service" means separation (or separated) from the service of the Company within the meaning of Section 410(a)(4) of the Code. (46) "Trust Fund" means and includes any and all property which shall comprise the corpus of the Trust at the inception thereof, together with any contributions thereto and such other property as shall from time to time become subject to the Trust, and any and all property acquired by the Trustee in substitution for any such contributions or other property, and any and all accumulations thereon, increments thereof, and accretions thereto, less amounts paid out or sustained as distributions, expenses, losses or otherwise; provided, further, that Contracts (as I-11 20 hereafter defined) shall be deemed to be property and included in the Trust Fund, except as otherwise expressly stated in this Agreement. (47) "Vested" when used with respect to a benefit, right or account hereunder, means a claim obtained by a Participant or his Beneficiary to that part of an immediate or deferred benefit under the Plan (arising from the Participant's service) which is unconditional and legally enforceable against the Trust; but a right to an Accrued Benefit derived from Company contributions shall not fail to meet this definition solely (i) because it is not payable if the Participant dies, or (ii) because the payment of benefits is suspended during the period that the Participant is employed by the Company. (48) "Year of Eligibility Service" means (i) with respect to a full-time Employee, the period of 12 months ending on the first anniversary of the date on which he first is credited with an Hour of Service and anniversaries thereof, and (ii) with respect to a part-time Employee, an Eligibility Computation Period during which such Employee is credited with at least one thousand (1,000) Hours of Service. For purposes of determining an Employee's Years of Eligibility Service, all periods of employment with the Company or a Related Company, including periods prior to the effective date of the Plan and periods when he does not meet the definition of an Employee, shall be recognized. (49) "Year of Vesting Service" means with respect to an Employee each calendar year during which such Employee is credited with at least one thousand (1,000) Hours of Service. For purposes of determining an Employee's vested interest in his Account, all periods of employment with an Employer or a Related Company, including periods prior to the Effective Date and periods when he does not meet the definition of an Employee, shall be recognized, except as provided in Article V(C)(2). (50) Definitions of the following words and phrases are contained in the following provisions, respectively: Actual Contribution Percentage Article IV(F) Actual Deferral Percentage Article IV(E) Company Opening Paragraph Company Stock Fund Article IV(S) Contribution Percentage Article IV(F) Deferral Percentage Article IV(E) ESOP Account Article I(A)(1) ESOP Contribution Article III(A) Elective Contribution(s) Article III(B) Elective Contributions Account Article IV(B) Excess Contribution Article IV(G)(2)(c) Excess Elective Deferrals Article III(B) Excess Matching Contributions Article IV(H)(3) 401(k) Account Article I(A)(1) Investment Fund Article IV(J)
I-12 21 Matching Company Contribution Article III(C) Matching Company Contributions Account Article IV(C) Plan Opening Paragraph Qualified Matching Contributions Article IV(G)(2)(b) Qualified Nonelective Contributions Article IV(G)(2)(a) Re-employment Commencement Date Article V(C)(2)(a) Required Beginning Date Article V(D)(2) Rollover Contribution Article XI(F) Top Heavy Plan and Related Definitions Article XIII Trust Opening Paragraph Trustee Opening Paragraph Valuation Date Article IV(P)(1)
B. Governing Law and Rules of Construction. This Agreement shall be governed in all respects, whether as to construction, capacity, validity, performance or otherwise, by applicable Federal law and, to the extent that Federal law is inapplicable, by the laws of the State of Michigan. Wherever reasonably necessary, pronouns of any gender shall be deemed synonymous, as shall singular and plural pronouns. The index to this Agreement and the headings to the Articles and paragraphs of this Agreement are included solely for convenience and shall in no event affect, or be used in connection with, the interpretation of this Agreement. Each provision of this Agreement shall be treated as a severable, to the end that, if any one or more provisions shall be adjudged or declared illegal, invalid or unenforceable, this Agreement shall be interpreted, and shall remain in full force and effect, as though such provision or provisions had never been contained in this Agreement. C. Power to Interpret. This Agreement shall be interpreted and effectuated to comply with the applicable requirements of ERISA and the Code; and all such applicable requirements are hereby incorporated herein by reference. Any reference in this Agreement to the requirements of ERISA or any section or title thereof shall be construed with due regard to Sections 108, 109 and 110 of ERISA. Subject to the above, the Committee shall have power to construe and interpret this Agreement and all related documents and administrative forms, including but not limited to the power to construe and interpret all provisions of this Agreement and related documents and forms relating to eligibility for benefits and the amount, manner, and time of payment of benefits, any such construction and interpretation by the Committee and any action taken thereon in good faith by any Administrative Party to be final and conclusive upon any affected party. The Committee shall also have power to correct any defect, supply any omission, or reconcile any inconsistency in such manner and to such extent as the Committee shall deem proper to carry out and put into effect this Agreement; and any construction made or other action taken by the I-13 22 Committee pursuant to this Paragraph (C), if and when communicated in writing to any other Administrative Party or affected party, shall be binding upon such other party and may be relied upon by such other party. D. Adoption of Plan by Related Companies. Any Related Company may adopt this Agreement and the Plan and Trust for the benefit of its eligible employees by action of its Board of Directors but only with the consent of the Company evidenced by a resolution of its Board of Directors or the written consent of its President or the Committee. Unless the context otherwise requires, at any time while a Related Company has adopted this Agreement (i) the term Company as used herein with respect to any Employee or Participant shall be construed to mean the adopting corporation by which such Employee or Participant is employed, and (ii) whenever the term Company is used in connection with action to be taken in connection with the Plan, or its administration, e.g., in Article X relating to the termination or amendment of the Plan or in Article VIII(A) relating to the appointment of the Committee, the term Company shall mean Company as defined in the opening paragraph of this Agreement. A transfer of employment by a Participant between Related Companies shall not be considered a termination of employment requiring a distribution from the Trust. A Related Company which has adopted this Agreement shall, by doing so, authorize Source One Mortgage Services Corporation to adopt any amendments to this Agreement on behalf of the Related Company without the separate authorization of such Related Company. I-14 23 ARTICLE II PARTICIPATION A. Eligibility. Eligibility to participate in the Plan will be determined as follows: (1) Each Employee who is a Participant in the ESOP portion of the Plan immediately prior to October 1, 1996, shall continue to be a Participant in the ESOP portion of the Plan, subject to the terms of this Agreement. Each other Employee who has completed at least one Year of Eligibility Service shall become a Participant in the ESOP portion of the Plan automatically on the Entry Date coinciding with or next succeeding the first date when said condition is fulfilled unless he was Separated from Service before such Entry Date and has not been restored to Employee status prior to such date. (2) Each Employee shall become a Participant in the 401(k) portion of the Plan automatically on the earlier of the Entry Date coinciding with or next following (i) the date on which he has completed one Year of Eligibility Service or (ii) the first Entry Date on which he is employed in a position normally requiring at least 1,000 Hours of Service annually. As a consequence of being or becoming a Participant in the 401(k) portion of the Plan, the Employee shall be eligible to elect as of the Entry Date on which he becomes a Participant, or as of any later January 1, April 1, July 1 or October 1 on which he is a Participant, to reduce his Creditable Compensation and to have the Company make Elective Contributions on his behalf to the Trust in the amount of such reductions in accordance with Article III(B). B. All Years of Service Counted for Eligibility. For purposes of determining eligibility to participate, all Years of Service with the Company and/or a Related Company shall be counted. C. Reemployment. A former Participant or Employee shall be subject to the following rules with respect to participation in the Plan upon reemployment: (1) A former Participant or other former Employee who (i) did not have a Nonforfeitable right to an accrued benefit derived from Company contributions on the date his employment with the Company or a Related Company terminated, (ii) did not complete at least one Year of Eligibility Service on the date his employment terminated, and (iii) subsequently is reemployed by the Company or a Related Company which has adopted the Plan shall become eligible, or again become eligible, to participate in the ESOP portion of the Plan and the 401(k) portion of the Plan upon meeting anew the eligibility requirements of Article II(A)(1) and/or (2) above, as applicable. (2) A former Participant or other former Employee who (i) had completed at least one Year of Eligibility Service on the date his employment with the Company or a Related Company terminated and II-1 24 (ii) subsequently is reemployed by the Company or a Related Company which has adopted the Plan again shall become a Participant as soon as administratively feasible after again becoming an Employee. D. Inactive Participants. Subject to Article IV(P)(1) and (R) with respect to certain Participants, it is agreed as follows: (1) During any Plan Year in which a Participant does not have at least 1,000 Hours of Service but remains employed by the Company throughout such Plan Year, he shall be deemed an inactive Participant in the ESOP portion of the Plan and as such he shall not share in the allocation of any ESOP Contributions or forfeitures of the same, if any, for such Plan Year under Article IV(A). However, he shall continue to be treated as a Participant in such portion of the Plan for other Plan purposes including the periodic adjustments to accounts of Participants described in Article IV(O)(1), (2), (3) and (5) and he shall continue to be eligible to make Elective Contributions to the Trust under Article II(A)(2). If in any subsequent Plan Year such an inactive Participant in the ESOP portion of the Plan completes at least 1,000 Hours of Service he again shall become an active Participant in the ESOP portion of the Plan. (2) During any period when a Participant fails to conform to the definition of an Employee because he is covered by a collective bargaining agreement within the meaning of Article I(A)(21)(b) but is still employed by the Company or because he is transferred to employment with a Related Company which has not adopted the Plan for its eligible employees, he shall be deemed an inactive Participant and during such period no Compensation paid to him by the Company shall be taken into account for the purpose of allocating ESOP Contributions or forfeitures of the same under Article IV or otherwise under the Plan. However, he shall continue to be treated as a Participant for other Plan purposes including the periodic adjustments to accounts of Participants described in Article IV(O)(1), (2), (3) and (5). If such an inactive Participant again conforms to the definition of an Employee he subsequently shall be treated as an active Participant for all Plan purposes and Compensation paid to him thereafter by the Company shall be taken into account for the foregoing purposes. (3) During any period (i) when an election under Article III(B) to reduce the Creditable Compensation which a Participant otherwise would be entitled to receive and to have the Company make Elective Contributions to the Trust on his behalf is not in effect, (ii) when a Participant fails to meet the definition of an Employee because he is covered by a collective bargaining agreement within the meaning of Article I(A)(21)(b), or (iii) when because of a transfer of employment he is employed by a Related Company which has not adopted the Plan, he shall be considered an inactive Participant in the 401(k) portion of the Plan and no Elective Contributions will be allocated to his Elective Contributions Account for such period. However, during such period the Participant shall continue to be treated as a Participant in the II-2 25 401(k) portion of the Plan for other Plan purposes including the periodic adjustments to accounts of Participants described in Article IV(O)(1), (2), (3) and (5). II-3 26 ARTICLE III CONTRIBUTIONS A. ESOP Contributions. Subject to the limitations of Article III(D) and (E), the Company shall in respect of each taxable year, within the time prescribed by law for filing its federal income tax return for such taxable year (including extensions thereof), contribute to the ESOP portion of the Trust in furtherance of the Plan, in cash or shares of Company Stock, such amount, if any, as may be determined in the discretion of the Company by or in accordance with a resolution of its Board of Directors adopted within the time prescribed by law for filing its federal income tax return for such taxable year, including extensions thereof, any such amounts being herein called "ESOP Contributions." B. Elective Contributions; Adjusted $7,000 Limitation; Corrective Distributions. Subject to the limitations of Article III(D) and (E) and Article IV(E), each Participant may elect within a reasonable time (to be specified by the Committee) before any Entry Date, and before any additional regular periodic dates which the Committee may designate and communicate to Participants, on a form to be furnished to him by the Committee, to reduce the Creditable Compensation which otherwise would be paid to him after such Entry Date (or other designated date) and to have the Company make contributions (herein called "Elective Contributions") to the 401(k) portion of the Trust in the amounts of such reductions on his behalf, provided, however, that no Participant may elect to have Elective Contributions (i) made to the 401(k) portion of the Trust on his behalf of less than 1% or more than 14% (in whole percentages) of such Creditable Compensation or (ii) made to the 401(k) portion of the Trust and/or to any other tax qualified plan of the Company on his behalf of more than the Adjusted Equivalent of $7,000 in any taxable year of the Participant. Such an election, and any election to change the same made pursuant to this Agreement, may be made only with respect to Creditable Compensation which is not currently available to the electing Participant on the Entry Date (or other designated date) as of which the election is made. Elective Contributions made by means of payroll reductions shall be paid by the Company to the Trustee at the earliest date on which they can reasonably be segregated from the Company's general assets and in no event later than the 15th business day of the month following the month in which (i) the Elective Contributions are received by the Company (in the case of amounts that a Participant pays to the Company) or (ii) such amounts would otherwise have been paid to the Participants in cash (in the case of amounts withheld by the Company from a Participant's Creditable Compensation), plus any extension of such maximum time period obtained by the Company in accordance with applicable U.S. Department of Labor Regulations, except that prior to February 3, 1997 Elective Contributions shall in no event be paid by the III-1 27 Company to the Trustee later than 90 days after the date on which such amounts otherwise would have been paid to the Participants as Creditable Compensation. Subject to the foregoing, Elective Contributions for a Plan Year shall be made during the Plan Year or within the time prescribed in A. above for making ESOP Contributions for the Plan Year, except that any additional Company Contributions made under Article IV(G)(2) and treated as Elective Contributions for the Plan Year may be made within 12 months following the close of the Plan Year. A Participant who has elected to have the Company make Elective Contributions to the 401(k) portion of the Trust on his behalf may, as of any Entry Date and as of any additional regular periodic dates as the Committee may determine and communicate to Participants, change the annual dollar amount of such Elective Contributions or the percentage of Creditable Compensation used to determine the amount of such Elective Contributions. Also, at any time, a Participant may elect to terminate his Elective Contributions for the period subsequent to the effective date of the election. All such elections may be made and become effective only in accordance with such reasonable rules as may be established by the Committee. In the event of the termination of Elective Contributions on behalf of a Participant under this paragraph, the Participant shall not be entitled, until a subsequent Entry Date, to again elect that Elective Contributions be made on his behalf. If the Elective Contributions made to the 401(k) portion of the Trust on behalf of a Participant under the Plan together with any elective deferrals (as defined in Section 402(g)(3) of the Code) under another qualified cash or deferred arrangement as defined in Section 401(k) of the Code, a simplified employee pension as defined in Section 408(k) of the Code, a salary reduction arrangement under Section 403(b) of the Code, a deferred compensation plan under Section 457 of the Code, or a trust described in Section 501(c)(18) of the Code, cumulatively exceed the limitation imposed by Section 402(g) of the Code for the Participant's taxable year, the Participant may, not later than March 1 following the close of such taxable year, notify the Committee in writing of the excess Elective Contributions made to the 401(k) portion of the Trust (in this Agreement called "Excess Elective Deferrals") and request that such Excess Elective Deferrals be paid to the Participant. In such event the Committee may direct the Trustee to pay such Excess Elective Deferrals plus any income, or less any loss, allocable to the same to the Participant not later than the first April 15 following the close of such taxable year. At the request of the Participant Excess Elective Deferrals for a taxable year of the Participant may be paid to the Participant from the 401(k) portion of the Trust during the taxable year for which they were made if the Committee so directs the Trustee, provided that in such event (i) the Participant designates the payment as an Excess Elective Deferral, (ii) the payment is made after the date on which the Trustee received the Excess Elective Deferral, and (iii) the III-2 28 Committee designates the payment as a distribution of Excess Elective Deferrals. Notwithstanding the foregoing, a Participant's Excess Elective Deferrals for the taxable year of the Participant shall be reduced, but not below zero, by any distribution of Excess Contributions made to the Participant pursuant to Article IV(G) for the Plan Year beginning with or within the taxable year of the Participant. The income or loss allocable to an Excess Elective Deferral paid to a Participant by the Trustee shall be an amount equal to the income or loss of the Participant's Elective Contributions Account for the taxable year of the Participant for which the Excess Elective Deferral was made multiplied by a fraction the numerator of which is the Excess Elective Deferral made on behalf of the Participant for such taxable year and the denominator of which is the Participant's Elective Contributions Account balance as of the beginning of such taxable year plus the Participant's Elective Contributions for such taxable year. If Elective Contributions for a Participant for any Plan Year exceed the percentage limitation imposed on the same by the first paragraph of this Article III(B) the excess shall be refunded to the Participant in the same manner as Excess Elective deferrals. C. Matching Company Contributions. Subject to the limitations of Article III(D) and (E) and Article IV(F) and the rights and obligations of the Committee under Article IV(G) and (H) to monitor and make adjustments in certain contributions, the Company may in the discretion of its Board of Directors make Matching Company Contributions for any Plan Year for those Participants who make elective contributions for such Plan Year in such amount, and subject to such limits, if any, as the Board of Directors may determine. A Participant's Elective Contribution for the Plan Year for purposes of this Paragraph (C) means his Elective Contribution remaining after distribution to him of any Excess Elective Deferrals under Article III(B) and any Excess Contributions under Article IV(G)(2)(c) for such Plan Year. The Company shall contribute all such Matching Company Contributions to the 401(k) portion of the Trust for each Plan Year from time to time during such Plan Year, or after the end of such Plan Year but not later than the time prescribed by law for filing its federal income tax return for its taxable year with respect to which the Matching Company Contribution is made, including extensions thereof. D. Limitations on Company Contributions. The Company Contributions to the Trust for any taxable year of the Company shall not exceed the least of: (1) The aggregate Company Contributions permitted by Article IV(D) (specifying maximum Annual Additions) as applied to all Participants; III-3 29 (2) An amount equal to 15% of the aggregate Compensation paid during such taxable year to Employees who are Participants as of the Anniversary Date falling within such taxable year, plus the amount of any unused pre-87 limitation carry forwards available under Section 404(a)(3)(A)(v) of the Code in respect of such taxable year; or (3) The Company contributions permitted by Article III(E) (pertaining to two or more plans). E. Two or More Plans. If the Company makes contributions for the taxable year in question, in connection with one or more additional tax qualified plans (including annuity plans) whose participants include one or more Participants in this Plan, the total amount so contributed by the Company for said taxable year, including its contribution for said taxable year under Paragraphs A, B and C of this Article III, shall not exceed the greater of (i) 25% of the Compensation otherwise paid during said taxable year to the participants in said additional plans and the Participants in this Plan or (ii) the amount of Company contributions necessary to satisfy the minimum funding standard provided by Section 412 of the Code for the Plan Year which ends with or within said taxable year (or for any prior Plan Year), all within the meaning of Section 404(a)(7) of the Code; provided that: (1) If any carry-over deduction is available to the Company for said taxable year from one or more prior taxable years under Section 404(a)(7)(B), the amount thereof shall reduce the limitation set forth in the foregoing portion of this Paragraph (E). (2) If said limitation (reduced, if appropriate, under (1) above) would otherwise be exceeded, the Company's contribution under this Plan for said taxable year shall be reduced by an amount equal to the excess. F. Deductibility. All Company Contributions to the Trust are conditioned upon the Plan and Trust being initially tax qualified and upon deductibility under Section 404 of the Code, unless otherwise expressly stated by the Company. Accordingly (unless so stated), if the Plan and Trust are submitted to the Internal Revenue Service for a determination letter within the time provided by law for filing the Company's federal income tax return for the fiscal year of the Company in which the Plan and Trust were adopted or by such later date as the Secretary of the Treasury may prescribe, and are determined to be not initially tax qualified, or if and to the extent that such a deduction is disallowed within the meaning of Section 403(c)(2) of ERISA, the contribution in question shall be repaid to the Company upon demand (but subject to Paragraph (H) below and, if by reason of disallowance, only to the extent disallowed) within one year after such disallowance or denial of initial qualification. Any Elective Contributions so returned to the Company shall be paid by the Company to the Employees on whose behalf they were made. If any Company III-4 30 contribution for any taxable year shall exceed the amount deductible for said taxable year under the Code, but shall not be repaid pursuant to the foregoing sentence, the portion not so deductible shall in like amount reduce the contribution required in respect of the subsequent taxable year during which the disallowance or other determination of nondeductibility is made and (to the extent not thereby consumed) any subsequent taxable year or years. G. Contributions by Mistake. If and to the extent that a Company contribution to the Trust is made as a result of facts and circumstances constituting a good faith mistake of fact, the same shall be repaid to the Company upon demand (but subject to Paragraph (H) below and only to the extent of such mistake) within one year after the payment of the contribution. Any Elective Contributions so returned to the Company shall be paid by the Company to the Employees on whose behalf they were made. H. Limitation on Repayments. All repayments of Company Contributions under Paragraphs (F) and (G) above shall be subject to the conditions that: (1) Such repayment shall not include any earnings attributable to that portion of the Company contribution which qualifies for repayment under Paragraphs (F) and (G) above. (2) There shall be deducted from the amount of such repayment any losses attributable to that portion of the Company Contribution which qualifies for repayment under Paragraphs (F) and (G) above. (3) If in any event such repayment would result in any Participant's account being reduced to a balance which is less than the balance which would have been in his account had the amount contributed by mistake of fact or in excess of the deductible amount not been contributed, then the amount to be repaid shall be reduced until no Participant's account shall be so reduced by reason of such repayment. I. No Employee Contributions. No Employee shall make any nondeductible (after-tax) employee contributions to the Trust. This prohibition shall not prevent rollovers or transfers to the Trust permitted under Article XI(F). III-5 31 ARTICLE IV ALLOCATION AND ACCOUNTS A-1. Establishment of ESOP Accounts. The Trustee shall from time to time establish a Company Stock Account and an Other Investments Account for each Participant in the ESOP portion of the Plan and shall thereafter maintain records thereof. Such accounts shall be credited, or debited, annually with shares of Company Stock and with amounts in dollars and cents, respectively, as follows: (1) Company Stock Account. The Company Stock Account maintained for each Participant will be credited with his allocable share, including fractional shares, of Company Stock purchased by the ESOP portion of the Trust or contributed in kind to the ESOP portion of the Trust by the Company and with any stock dividends on Company Stock held in his Company Stock Account. (2) Other Investments Account. The Other Investments Account maintained for each Participant will be credited, or debited, with its share of the net income, or net loss, of the ESOP portion of the Trust and with any cash dividends on Company Stock allocated to his Company Stock Account. A-2. Allocation of ESOP Contributions and Forfeitures. The Company's ESOP Contributions and forfeitures for any taxable year shall, subject to Article II(D) respecting inactive Participants, promptly upon receipt be allocated among the various Participants ESOP Accounts, as of the Anniversary Date falling within such taxable year, as follows: (1) Each Participant who (i) is employed by the Company on such Anniversary Date (including any individual who first became a Participant as of either Entry Date falling within such taxable year) and (ii) is credited with at least 1000 Hours of Service in such taxable year shall be entitled to an allocation of any ESOP Contributions for such taxable year. The amount of the Company's ESOP Contribution allocated to each Participant's ESOP Account shall be determined by multiplying the aggregate of such contribution by a fraction, the numerator of which is the Participant's Creditable Compensation for such taxable year and the denominator of which is the aggregate Creditable Compensation of all Participants entitled to an allocation of the Company's ESOP Contribution for such taxable year, provided that for purposes of this subparagraph (1) the Creditable Compensation of any Participant who becomes a Participant on the July 1st Entry Date falling within such taxable year shall include only that Creditable Compensation received by the Participant on and after such Entry Date. (2) Forfeitures occurring or becoming final, as the case may be, during each Plan Year, as provided in Article IV(Q) below (Forfeitures) shall, as of the Anniversary Date falling within such taxable year, be credited to the ESOP Accounts of Participants in IV-1 32 the same proportion as ESOP Contributions are to be credited under (1) above. B. Elective Contributions Accounts. The Trustee shall establish an account (herein called an "Elective Contributions Account") for each Participant who makes Elective Contributions and shall thereafter maintain a record thereof. Elective Contributions under Article III(B) for any Plan Year shall, subject to the limitations of Paragraphs (D) and (E) of this Article IV, be credited to the Participant's Elective Contributions Account upon receipt by the Trustee not less frequently than monthly and in no event later than as of the Anniversary Date falling within such Plan Year. C. Matching Company Contributions Accounts. The Trustee shall establish an account (herein called a "Matching Company Contributions Account") for each Participant in respect of whom the Company makes a Matching Company Contribution to the 401(k) portion of the Trust and shall thereafter maintain a record thereof. Matching Company Contributions under Article III (C) for any Plan Year in respect of each Participant shall be credited to the Participant's Matching Company Contributions Account upon receipt by the Trustee and in no event later than as of the Anniversary Date falling within such Plan Year. If a Participant's employment terminates for any reason during the taxable year an amount shall be allocated to his Matching Company Contribution Account only if, and to the extent, required by Article IV(P)(1) (relating to Fixed Accounts). D. Limitations on Annual Additions to Accounts. Notwithstanding the foregoing provisions of Paragraphs (A-2), (B) and (C) of this Article IV or of Article III, the contributions and other additions with respect to any one Participant for any Limitation Year under all Defined Contribution Plans of the Company, expressed as an Annual Addition to such Participant's Accounts under this Plan and as annual additions (defined similarly to Article I(A)(7) allocated to such Participant's accounts under all other Defined Contribution Plans of the Company, shall not exceed the lesser of: (1) The Adjusted Equivalent of $30,000.00, or, if greater, one-fourth of the defined benefit dollar limitation set forth in Section 415(b)(1) of the Code as in effect for the Plan Year; or (2) 25% of the Compensation paid to such Participant by the Company in said taxable year; provided that: (a) if the applicable limitation of (1) or (2) above would otherwise be exceeded, the amount allocated to said Participant's Accounts shall be reduced by an amount equal to the excess, and the Company's contributions for said Plan Year shall be reduced to the extent necessary to avoid such excess; provided, however, that if such reduction is not possible or practical in the IV-2 33 circumstances because the Company's contributions for such Plan Year have been made at the time it is discovered that said limitation would otherwise be exceeded and the Committee determines that the excess part of such contribution cannot be returned to the Company without adversely affecting the tax qualified status of the Plan either as a contribution made as a result of a mistake of fact or by reason of its nondeductibility, then if such excess was created as the result of the allocation of forfeitures, a reasonable error in estimating a Participant's Compensation or Creditable Compensation, a reasonable error in determining the amount of Elective Contributions that may be made with respect to any individual under the limits of Section 415 of the Code, or under other limited facts and circumstances which the Commissioner of Internal Revenue finds justify the availability of the rules set forth in the remainder of this Paragraph (D), the portion of such excess, if any, attributable to Excess Elective Deferrals may be distributed to the Participant to the extent such distribution reduces the excess, and any remaining excess shall be held in a suspense account, provided (i) no further Company contributions will be made to the Trust on behalf of the Participants for which such excess exists until they can be allocated to the accounts of such Participants without violating the aforesaid limitation, (ii) investment gains and/or losses and other Trust income are not allocated to such suspense account and (iii) the amounts in such suspense account are allocated to the accounts of Participants for which such excess exists as of each subsequent date on which Company contributions are normally allocated until such suspense account is exhausted. In the event the Plan and Trust are terminated any amount remaining in such suspense account at the time of termination shall be paid to the Company and to the extent any such amount consists of Elective Contributions, the Company shall pay the same to the appropriate Participants. (b) if said Participant is also a participant in a Defined Benefit Plan maintained by the Company, the sum of his Defined Benefit Plan Fraction and his Defined Contribution Plan Fraction shall not exceed 1.0 for any taxable year of the Company, except as otherwise permitted by Section 2004(a) of ERISA; provided, however, that if this requirement would otherwise be violated, the Company shall first adjust, freeze or suspend the rate of benefit accrual under any said Defined Benefit Plan and shall then reduce the amount of its contributions (or other components of Annual Additions) to any said Defined Contribution Plan to the extent necessary, whether or not including this Plan, with respect to the Participant in question, so that such violation will not occur. IV-3 34 (c) for purposes of applying the foregoing provisions of this Paragraph (D), all Defined Benefit Plans (whether or not terminated) of the Company are to be treated as one Defined Benefit Plan, and all Defined Contribution Plans (whether or not terminated) of the Company are to be treated as one Defined Contribution Plan, all within the meaning of (and to the extent necessary to comply with) Section 415 of the Code (including, in particular, subsection (f) thereof) and any applicable Treasury Regulations thereunder. (d) for purposes of this Article IV(D) the following terms, wherever capitalized, shall have the following meanings, respectively, unless the context otherwise requires: (1) "Defined Benefit Plan" means any plan described in Section 414(j) of the Code (listing tax qualified and similar plans) which is not a Defined Contribution Plan, except as otherwise provided in Section 414(k) of the Code for hybrid plans. (2) "Defined Benefit Plan Fraction" for a Participant for any Plan Year is a fraction - (i) The numerator of which is the projected annual benefit of the Participant under the Company's Defined Benefit Plan (determined as of the close of such Plan Year), and (ii) The denominator of which is the lesser of (A) the product of 1.25, multiplied by the dollar limitation in effect under Section 415(b)(1)(A) of the Code for such Plan Year, or (B) the product of 1.4, multiplied by the amount which may be taken into account under Section 415(b)(1)(B) of the Code with respect to the Participant under such Defined Benefit Plan for such Plan Year. (3) "Defined Contribution Plan" shall have the meaning given to this term in Article I(A)(13). (4) "Defined Contribution Plan Fraction" for a Participant for any Plan Year is a fraction - (i) The numerator of which is the sum of the Annual Additions to the Participant's account as of the close of such Plan Year, and (ii) The denominator of which is the sum of the lesser of the following amounts IV-4 35 determined for such Plan Year and for each prior year of service with the Company and/or a Related Company: (A) the product of 1.25, multiplied by the dollar limitation in effect under Section 415(c)(1)(A) of the Code for such Plan Year and for each prior year of service with the Company and/or a Related Company, or (B) the product of 1.4, multiplied by the amount which may be taken into account under Section 415(c)(1)(B) of the Code with respect to such Participant for such Plan Year. (e) The word Company as used above in this Article IV(D) shall be deemed to include any Related Company unless the context otherwise requires so that for purposes Section 415 of the Code all employees of the Company and any Related Company shall be treated as employed by a single employer. E. Special Limitations on Allocations of Elective Contributions. For each Plan Year beginning on or after October 1, 1996, allocations of Elective Contributions to the Participants' Elective Contribution Accounts shall be limited so that the Actual Deferral Percentage for the group of Participants who are Highly Compensated Employees shall bear a relationship to the Actual Deferral Percentage for the group of all other Participants which meets either of the following tests: (1) The Actual Deferral Percentage for the group of Participants who are Highly Compensated Employees is not more than the Actual Deferral Percentage for the group of all other Participants multiplied by 1.25, or (2) The excess of the Actual Deferral Percentage for the group of Participants who are Highly Compensated Employees over the actual Deferral Percentage for the group of all other Participants is not more than 2 percentage points, and the Actual Deferral Percentage for the group of Participants who are Highly Compensated Employees is not more than the Actual Deferral Percentage for the group of all other Participants multiplied by 2. For purposes of this Paragraph (E), "Actual Deferral Percentage" for each group of Participants referred to above for a Plan Year means the average of the ratios, calculated separately for each Participant in the group, of the amount of Elective Contributions paid to the Trust on behalf of the Participant for the Plan Year, to the Participant's Creditable Compensation paid in that portion of the Plan Year during which he was a Participant. As separately calculated for each Participant, such ratio is referred to as his "Deferral Percentage." IV-5 36 The Deferral Percentage of a Participant for whom no Elective Contribution is made for the Plan Year is zero. The Deferral Percentages of Participants and the Actual Deferral Percentage of each group of Participants shall be calculated to the nearest one hundredth of one percent. For purposes of the tests described in (1) and (2) above Elective Contributions shall include any amounts treated as Elective Contributions under Article IV(G). For purposes of this Paragraph (E), the following special rules shall apply: (3) The Deferral Percentage for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Elective Contributions allocated to his accounts under this Plan and under one or more other plans or arrangements described in Section 401(k) of the Code that are maintained by the Company or a Related Company shall be determined as if all such Elective Contributions were made under a single plan or arrangement. (4) For purposes of determining the Deferral Percentage of a Participant who is a five percent owner of the Company or one of the ten most highly paid Highly Compensated Employees, the Elective Contributions and Creditable Compensation of such Participant shall include the Elective Contributions and Creditable Compensation of family members, as defined in Article I(A)(29). Such family members shall be disregarded as separate Participants in determining the Actual Deferral Percentage for the group of Participants who are not Highly Compensated Employees. (5) The determination and treatment of the Elective Contributions and Deferral Percentage of any Participant shall satisfy such other requirements as may be prescribed by Regulation. The Company shall maintain for a reasonable time records sufficient to demonstrate compliance with the Regulations relating to the Actual Deferral Percentage test described above. F. Special Limitations on Allocations of Matching Company Contributions. For each Plan Year beginning on or after October 1, 1996, allocations of Matching Company Contributions, if any, to Participants' Matching Company Contributions Accounts shall be limited so that the Actual Contribution Percentage for the group of Participants who are Highly Compensated Employees shall bear a relationship to the Actual Contribution Percentage for the group of all other Participants which meets either of the following tests: (1) The Actual Contribution Percentage for the group of Participants who are Highly Compensated Employees is not more than the Actual Contribution Percentage for the group of all other Participants multiplied by 1.25, or (2) The excess of the Actual Contribution Percentage for the group of Participants who are Highly Compensated Employees over the Actual Contribution Percentage for the group of all other Participants is not more than 2 percentage points, and the Actual IV-6 37 Contribution Percentage for the group of Participants who are Highly Compensated Employees is not more than the Actual Contribution Percentage for the group of all other Participants multiplied by 2. For purposes of this Paragraph (F), "Actual Contribution Percentage" for each group of Participants for a Plan Year means the average of the ratios, calculated separately for each Participant in the group, of the amount of Matching Company Contributions paid to the Trust on behalf of each Participant for the Plan Year, to the Participant's Creditable Compensation paid in that portion of the Plan Year during which he was a Participant. As separately calculated for each Participant, such ratio is referred to as his "Contribution Percentage." The Contribution Percentage of a Participant for whom no Matching Company Contribution is made for the Plan Year is zero. The Contribution Percentages of Participants and the Actual Contribution Percentage of each group of Participants shall be calculated to the nearest one hundredth of one percent. For purposes of the tests described in (1) and (2) above Matching Company Contributions shall include any amounts treated as Matching Company Contributions under Article IV(H). For purposes of this Paragraph (F), the following special rules shall apply: (3) The Contribution Percentage for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Matching Company Contributions allocated to his accounts under this Plan and under one or more other plans or arrangements described in Section 401(k) of the Code that are maintained by the Company or a Related Company shall be determined as if all such Matching Company Contributions were made under a single plan or arrangement. (4) For purposes of determining the Contribution Percentage of a Participant who is a five percent owner of the Company or one of the ten most highly paid Highly Compensated Employees, the Matching Company Contributions and Creditable Compensation of such Participant shall include the Matching Company Contributions and Creditable Compensation of family members, as defined in Article I(A)(26). Such family members shall be disregarded as separate Participants in determining the Actual Contribution Percentage for the group of Participants who are not Highly Compensated Employees. (5) The determination and treatment of the Matching Company Contributions and Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by Regulation. The Company shall maintain for a reasonable time records sufficient to demonstrate compliance with the Regulations relating to the Actual Contribution Percentage test described above. IV-7 38 G. Adjustments to Prevent Excess Allocations of Elective Contributions. In order to assure that no amounts in excess of the limitations imposed by Paragraph (E) of this Article IV are allocated to the Elective Contributions Account of any Participant who is a Highly Compensated Employee, and in the case of (1) below also to assure that no amounts in excess of the limitations imposed by Article III(D) and (E) and Article IV(D) are exceeded, the following steps shall be taken: (1) The Committee shall monitor elections made by Participants under Article III(B) and Elective Contributions being made periodically to the Trust pursuant to such elections and may require changes in the elections of Participants, prior to or during any Plan Year, which would reduce the Elective Contributions being made to the Trust on behalf of such Participants and the Matching Company Contributions being made to the Trust on account of such Elective Contributions and/or may reduce or terminate such Elective Contributions and the Matching Company Contributions being made to the Trust on account of such Elective Contributions at any time, in order to assure compliance with any of the limitations referred to above. (2) If notwithstanding the Committee's efforts to monitor allocations to the Accounts of Participants as required by subparagraph (1) above, the Committee determines after the end of a Plan Year that the allocations of Elective Contributions to the Elective Contribution Accounts of Highly Compensated Employees for such Plan Year exceed the special limitations described in Paragraph (E) above: (a) The Company may make additional discretionary contributions to the Trust for such Plan Year for allocation to separate accounts of Participants who are not Highly Compensated Employees, or to accounts of all Participants, in amounts which in combination with Elective Contributions (and any Qualified Matching Contributions under (b) below) for such Plan Year are sufficient to cause such special limitations not to be exceeded. Any such contributions (i) shall be allocated to separate accounts of such Participants in proportion to the Creditable Compensation of each paid in that portion of the Plan Year during which he was a Participant, (ii) shall meet the requirements of Regulation 1.401(k)-1(b)(3), and (iii) shall normally be made within the time prescribed by law for filing the Company's federal income tax return for its taxable year with respect to which the discretionary contribution is made, including extensions thereof. Such special accounts shall be fully Vested at all times, shall be subject to the same limitations on distributions which are applicable to Elective Contributions described in Article V(F) and shall be treated as Elective Contributions for purposes of Article IV(E). Contributions made to separate accounts pursuant to this IV-8 39 subparagraph (a) are referred to in this Agreement as "Qualified Nonelective Contributions". (b) The Company may treat all or part of the Matching Company Contributions to the Trust for such taxable year, all of which are fully Vested and subject to the limitations of Article V(F), as Elective Contributions. The Company may make additional matching contributions to the Trust for such Plan Year for allocation to separate accounts of Participants for whom Elective Contributions were made to the Trust for such Plan Year and who are not Highly Compensated Employees in amounts which in combination with the Elective Contributions, the Matching Company Contributions treated as Elective Contributions (and any Qualified Nonelective Contributions under (a) above) for such Plan Year are sufficient to cause such special limitations not to be exceeded. Any such additional matching contributions (i) shall be allocated to separate accounts of such Participants in proportion to the Elective Contributions made on behalf of each for the Plan Year, (ii) shall meet the requirements of Regulation 1.401(k)-1(b)(3), and (iii) shall normally be made within the time prescribed by law for filing the Company's federal income tax return for its taxable year with respect to which the matching contribution is made, including extensions thereof. Such special accounts shall be fully Vested at all times and shall be subject to the same limitations on distributions which are applicable to Elective Contributions described in Article V(F) and shall be treated as Elective Contributions for purposes of Article IV(E). Also, the Company may transfer to separate accounts of the kind described above any Discretionary Company Contributions made to the Trust for such Plan Year in which event they shall be treated in the same manner and be subject to the same conditions as additional matching contributions to the Trust under this subparagraph (b). Matching Company Contributions which are fully Vested and subject to the limitations of Article V(F), and contributions made or transferred to separate accounts pursuant to this subparagraph (b) are referred to in this Agreement as "Qualified Matching Contributions". (c) The Committee may direct the Trustee to distribute to Participants who are Highly Compensated Employees that portion of the Elective Contributions made to the Trust on their behalf for such Plan Year which exceeds the special limitations of Article IV(E) (in this Agreement called "Excess Contributions") adjusted for earnings or losses. Any Excess Contributions, as so adjusted, to be distributed to Participants shall be designated as Excess Contributions by the Company and be distributed after the close of the Plan Year for which they were made normally within 2 1/2 months after the end of such Plan Year, and IV-9 40 in any event not later than 12 months after the end of such Plan Year. (If such Excess Contributions are distributed after 2 1/2 months after the end of such Plan Year an excise tax is imposed on the Company with respect to the same.) (d) The Excess Contribution for the Plan Year, if any, for each Participant who is a Highly Compensated Employee shall be determined and distributed as follows: (i) The Deferral Percentage of the Highly Compensated Employee with the highest Deferral Percentage shall be reduced to the extent required to either (A) enable the Plan to satisfy one of the Actual Deferral Percentage tests of Article IV(E), or (B) cause the Highly Compensated Employee's Deferral Percentage to equal the Deferral Percentage of the Highly Compensated Employee with the next highest Deferral Percentage. This process shall be repeated until the Plan satisfies one of the Actual Deferral Percentage tests of Article IV(E). When and if the Deferral Percentages of two or more Highly Compensated Employees to be reduced are the same, such percentages shall be reduced equally and simultaneously. (ii) The Excess Contribution to be distributed to each Highly Compensated Employee whose Deferral Percentage is reduced under (i) above shall be the Elective Contributions made to the Trust for the Plan Year on behalf of the Highly Compensated Employee (determined prior to the application of this subparagraph (d)) minus the amount determined by multiplying the Highly Compensated Employee's Creditable Compensation by his Deferral Percentage (determined after the application of this subparagraph (d)). (e) The income or loss allocable to an Excess Contribution distributed to a Highly Compensated Employee under (c) and (d) above by the Trustee shall be an amount equal to the income or loss of the Participant's Elective Contributions Account for the Plan Year for which the Excess Contribution was made multiplied by a fraction the numerator of which is the Excess Contribution made on behalf of the Participant for such Plan Year and the denominator of which is the Participant's Elective Contributions Account balance as of the beginning of such Plan Year plus the Participant's Elective Contributions for such Plan Year. IV-10 41 (f) If a Participant and one or more of his family members are subject to the family aggregation rules described in Article IV(E) and Code Section 414(q)(6), the allocation and distribution of Excess Contributions in respect of such individuals shall be made in accordance with Regulation 1.401(k)-l(f)(5)(iii). H. Adjustments to Prevent Excess Allocations of Matching Company Contributions. If notwithstanding the Committee's efforts to monitor allocations to the Accounts of Participants as required by Article IV(G)(1), the Committee determines after the end of a Plan Year that the allocations of Matching Company Contributions to the Matching Company Contribution Accounts of Highly Compensated Employees for such Plan Year exceed the special limitations described in Paragraph (F) above: (1) The Company may make Qualified Nonelective Contributions to the Trust for such Plan Year for allocation to separate accounts of Participants in the same manner and subject to the same conditions set forth in Article IV(G)(2)(a), which in combination with the Matching Company Contributions (and any additional matching contributions under (2) below) for such Plan Year are sufficient to cause such special limitations not to be exceeded. Also, to cause such special limitations not to be exceeded the Company may transfer to separate accounts of the kind described above any Elective Contributions made to the Trust for such Plan Year provided that Elective Contributions for such Plan Year meet the requirements of Reg. 1.401(m)-1(b)(2). (2) The Company may make additional matching contributions to the Trust for such Plan Year for allocation to the Matching Company Contributions Accounts of Participants for whom Elective Contributions were made to the Trust for such Plan Year and who are not Highly Compensated Employees in amounts which in combination with the Matching Company Contributions (and any Qualified Nonelective Contributions under (1) above) for such Plan Year are sufficient to cause such special limitations not to be exceeded. Any such contributions shall be allocated to the Matching Company Contributions Accounts of such Participants in proportion to the Matching Company Contributions theretofore made on behalf of each for the Plan Year, and shall normally be made within the time prescribed by law for filing the Company's federal income tax return for its taxable year with respect to which the additional matching contribution is made, including extensions thereof. Such additional matching contributions shall be subject to the same plan rules applicable to Matching Company Contributions and shall be treated as Matching Company Contributions for purposes of Article IV(F). (3) The Committee may direct the Trustee to distribute to Participants who are Highly Compensated Employees that portion of the Matching Company Contributions made to the Trust on their behalf for such Plan Year which exceeds the special limitations of Paragraph (F) of this Article IV (in this Agreement called "Excess IV-11 42 Matching Contributions") adjusted for earnings or losses. Any Excess Matching Contributions, as so adjusted, to be distributed to Participants shall be designated as Excess Matching Contributions by the Company and be distributed after the close of the Plan Year for which they were made normally within 2 1/2 months after the end of such Plan Year, and in any event not later than 12 months after the end of such Plan Year. (If such Excess Matching Company Contributions are distributed after 2 1/2 months after the end of such Plan Year an excise tax is imposed on the Company with respect to the same.) (4) The Excess Matching Company Contribution for the Plan Year, if any, for each Participant who is a Highly Compensated Employee shall be determined and, if not reallocated under subparagraph (7) below to the accounts of other Participants, shall be distributed, as follows: (a) The Contribution Percentage of the Highly Compensated Employee with the highest Contribution Percentage shall be reduced to the extent required to either (A) enable the Plan to satisfy one of the Actual Contribution Percentage tests of Article IV(F), or (B) cause the Highly Compensated Employee's Contribution Percentage to equal the Contribution Percentage of the Highly Compensated Employee with the next highest Contribution Percentage. This process shall be repeated until the Plan satisfies one of the Actual Contribution Percentage tests of Article IV(F). When and if the Contribution Percentages of two or more Highly Compensated Employees to be reduced are the same, such percentages shall be reduced equally and simultaneously. (b) The Excess Matching Company Contribution to be distributed to each Highly Compensated Employee whose Contribution Percentage is reduced under (a) above shall be the Matching Company Contributions made to the Trust on behalf of the Highly Compensated Employee (determined prior to the application of this subparagraph (4)) minus the amount determined by multiplying the Highly Compensated Employee's Creditable Compensation by his Contribution Percentage (determined after the application of this subparagraph (4)). (5) The income or loss allocable to an Excess Matching Contribution distributed to a Highly Compensated Employee under (3) and (4) above by the Trustee shall be an amount equal to the income or loss of the Participant's Matching Company Contributions Account for the Plan Year for which the Excess Matching Contribution was made multiplied by a fraction the numerator of which is the Excess Matching Company Contributions made on behalf of the Participant for such Plan Year and the denominator of which is the Participant's Matching Company Contributions Account balance as of the beginning of such Plan Year plus the Matching Company Contributions made on behalf of the Participant for such Plan Year. IV-12 43 (6) If a Participant and one or more of his family members are subject to the family aggregation rules described in Article IV(F) and Code Section 414(q)(6), the allocation and distribution of Excess Matching Contributions in respect of such individuals shall be made in accordance with Regulation 1.401(m)-l(e)(5)(iii). (7) Instead of directing the Trustee to distribute any Excess Matching Company Contributions for the Plan Year to Participants who are Highly Compensated Employees, the Committee may direct the Trustee to allocate such Excess Matching Company Contributions, adjusted for income or loss and determined and allocated as provided in (3) through (6) above, to the Matching Company Contribution Accounts of Participants who are not Highly Compensated Employees and for whom Elective Contributions were made to the Trust for the Plan Year. Such Excess Matching Company Contributions as so adjusted shall be allocated among such accounts in the ratio which each such Participant's Creditable Compensation for the Plan Year bears to the Creditable Compensation of all such Participants for the Plan Year. Any Matching Company Contribution for the Plan Year made to the Trust on account of an Elective Contribution which is determined to be an Excess Elective Deferral under Article III(B) or an Excess Contribution under Article IV(E) and (G) or (i) shall, after adjustment for income or loss, be allocated among the Matching Company Contribution Accounts of such participants in the same manner. I. Adjustments to Prevent Multiple Use of Alternative Limitation. If multiple use of the alternative limitations described in Articles IV(E)(2) and IV(F)(2), as defined by Regulation 1.401(m)-2, shall occur, such multiple use shall be corrected by reducing the Actual Deferral Percentage of the group of Highly Compensated Employees in the manner described in Article IV(G)(2)(d) and (e). In determining whether multiple use of such alternative limitations has occurred the applicable Actual Deferral Percentages and Actual Contribution Percentages shall be determined after all adjustments made under Article IV(G) and (H). The required reduction shall be treated as an Excess Contribution and shall be allocated and distributed in the same manner described in Article IV(G)(2)(c), (d) and (e). J. Establishment and Objectives of Investment Funds. Within the context of the Trust Fund, the Trustee at the direction of the Committee shall establish one or more Investment Funds for the investment of Trust Assets comprising the 401(k) portion of the Trust, having such investment objectives as may be ascribed to each such fund by the Investment Committee. Such Investment Funds may consist of the Trust's investment in (i) one or more pooled funds established by the Trustee, if it is a bank or trust company, for the investment of the assets of tax qualified pension and/or profit-sharing plans, (ii) one or more mutual funds, (iii) one or more contracts issued by an insurance company, (iv) a Company Stock fund (herein called the "Company Stock Fund") consisting of shares of Company Stock and short-term money market investments in which funds may be temporarily invested pending investment in shares of IV-13 44 Company Stock and/or in (v) any other investment vehicle suitable for the investment of assets of the Trust Fund and designated by the Investment Committee. The Committee shall provide information to Participants regarding the Investment Funds available under the Plan, including a description of the investment objectives and types of investments of each such Investment Fund. If a prospectus is required to be issued with respect to any such Investment Fund, the Committee will inform Participants of the availability of such prospectus or, if required by law, arrange to furnish a copy of the prospectus to each Participant. K-1. Investment of Elective Contributions, Matching Company Contributions and Rollover Contributions. As of the last business day of each calendar quarter, and as of any more frequent intervals designated by the Committee (including intervals as frequently as daily), each Participant shall have the right to designate on an investment election form furnished by the Committee (or by telephone call if permitted by the Committee) in accordance with procedures established by the Committee (or by the Trustee or Plan record keeper with the consent of the Committee) how Elective Contributions, Matching Company Contributions, if any, and Rollover Contributions, if any, hereafter made to the 401(k) portion of the Trust on his behalf are to be allocated among the Investment Funds. The Committee shall either furnish any such investment election forms to the Trustee or shall compile the results of any such elections and direct the Trustee how such contributions for each Participant are to be allocated among such Investment Funds. The Trustee shall as soon as reasonably possible after receipt of each Elective Contribution, Matching Company Contribution or Rollover Contribution made by the Company to the 401(k) portion of the Trust, and not less frequently than monthly, allocate such contribution among the Investment Funds in accordance with such investment elections or instructions. Until a new investment election or instruction (or telephone call if permitted by the Committee) for any Participant is received by the Trustee, the Trustee shall continue to invest Elective Contributions, Matching Company Contributions and Rollover Contributions made for such Participant in the manner designated on the most recently received written (or telephone) investment election or instruction relating to such Participant. If the Trustee shall receive an Elective Contribution, Matching Company Contribution or a Rollover Contribution for a Participant for whom it has not received any investment election or instruction, the Trustee shall invest such contribution in the Investment Fund which most nearly fits the description of a short-term fixed income fund. Notwithstanding the foregoing, if the Investment Committee so directs the Trustee in writing and advises the Participants in the summary description of the Plan or in another written communication, the amounts allocated to the Matching Company Contribution Accounts of Participants shall be invested in the sole discretion of the Trustee (or the Investment Committee) or an IV-14 45 investment manager appointed pursuant to Article IX(C). Such investments shall be considered to be a separate Investment Fund invested in the discretion of the Trustee (or the Investment Committee). K-2. Investment of ESOP Contributions. Trust assets comprising the ESOP portion of the Trust shall be invested primarily in Company Stock. Such Trust assets, including ESOP Contributions, may be used to acquire shares of Company Stock from Company shareholders, from former Participants (or Beneficiaries) or from the Company or a Related Company. Trust assets comprising the ESOP portion of the Trust invested in Company Stock shall be held in an investment fund separate from the Company Stock Fund referred to in Article IV(J)(iv) above. Such fund is sometimes referred to herein as the "ESOP Company Stock Fund." The Trustee may also invest Trust assets comprising the ESOP portion of the Trust in savings accounts, certificates of deposit, short-term fixed income funds, high-grade short-term securities including commercial paper, common and preferred stocks, bonds, bank pooled investment funds, mutual funds including a money market fund or other investments desirable for the ESOP portion of the Trust, or may be held in cash. Such investments also shall be held in an investment fund separate from any of the investment funds described in Article IV(J) above. Such fund is sometimes referred to herein as the "ESOP Other Investments Fund." All investments of Trust assets comprising the ESOP portion of the Trust, including all dispositions of Company Stock, shall be made by the Trustee only upon the direction of the Investment Committee, and all purchases of Company Stock shall be made at prices which result in the payment of not more than adequate consideration (as defined in Section 3(18) of ERISA) by the Trustee for such Company Stock. Moreover, all sales of Company Stock made by the Trustee upon the direction of the Investment Committee shall be made at prices which result in the payment to the Trustee of at least adequate consideration (as defined in Section 3(18) of ERISA) for such Company Stock. The Investment Committee may direct that up to 100% of the assets of the ESOP portion of the Trust be invested and held in Company Stock. No loans to the Trust by, or guaranteed by, a Disqualified Person shall be permitted, nor shall any purchases of Company Stock from a Disqualified Person on an installment basis be permitted. Notwithstanding the foregoing provisions of this Paragraph K-2 or any other provision of the Plan or Trust Agreement, if Fund American Enterprises Holdings,Inc., the indirect parent of the Company, ceases to be the indirect parent or parent of the Company or if the Investment Committee determines that it is likely that the Company will soon cease to be the indirect or direct parent of the Company, the Investment Committee may direct the Trustee to sell up to 100% of the Company Stock held by the Trust in the ESOP portion of the Trust and to invest the proceeds in other assets authorized in the Plan and Trust Agreement for the investment of assets of the ESOP portion of the Trust, pending amendment or IV-15 46 termination of the ESOP portion of the Plan and Trust by action of the Company's Board of Directors. L. Participants' Rights to Periodic Reallocation of Elective Contributions, Matching Company Contributions and Rollover Contributions Accounts. As of the last business day of each calendar quarter and as of any more frequent intervals designated by the Committee (including intervals as frequently as daily), each Participant shall be entitled to direct the Trustee in accordance with procedures established by the Committee (or by the Trustee or Plan record keeper with the Committee's consent) to reallocate all or a portion of his Elective Contributions, Matching Company Contributions and Rollover Contributions Accounts so that, as of the date of such reallocation, specified percentages (in multiples to be designated by the Committee) of such Accounts shall be invested in one or more of the Investment Funds. Upon receipt of timely instructions from the Committee (which shall be consistent with the directions of Participants desiring allocation or reallocation) (or upon timely telephone calls from Participants if permitted by the Committee) the Trustee shall, invest or reinvest such portions of the aforesaid Accounts of Participants thus directing allocation or reallocation as will (immediately following such investment or reinvestment) result in the aforesaid Accounts of each such Participant being invested in the Investment Funds substantially in accordance with the directions of each such Participant. However, no transfers between Investment Funds shall be permitted if prohibited by the rules applicable to the particular Investment Fund from or to which a transfer is to be made or by rules adopted by the Committee and communicated to the Participants. M. Participants' Credit Accounts. The Trustee shall establish and maintain one or more Credit Accounts for each Participant, showing the balance in each of his Accounts in the 401(k) portion of the Plan (and in each of the Investment Funds, if applicable), and for such other purposes as may be useful in the administration of the Trust under this Agreement, and shall cause to be furnished to each Participant at least annually a statement of the Credit Accounts. The fact that Credit Accounts are established and maintained shall not be construed to mean under any circumstances or event that any Participant has title to any specific asset held in trust hereunder. N. Periodic Revaluation of Investment Funds. As of each Valuation Date the Trustee shall determine as provided in Article IX(H) (Appraisal), or shall cause the organization(s) holding the assets of a particular Investment Fund, such as an insurance company or mutual fund, to determine the net earnings or the net loss of each Investment Fund including net capital gains or losses, if any, for the period ending on such date or since the previous Valuation Date, and shall revalue, or cause to be revalued, each Investment Fund so as to reflect the increase or decrease in the value of the investments of each Investment Fund as compared to the value of such investments as of the previous Valuation Date. To IV-16 47 the extent an Investment Fund is invested in shares or units of participation in a mutual fund or pooled fund maintained by the Trustee, such shares or units of participation shall be valued in the manner they are normally valued by the mutual fund or pooled fund. To the extent an Investment Fund is invested in an annuity or deposit administration contract, including a guaranteed income contract or similar contract issued by an insurance company, it shall be valued in the manner such contract is normally valued by the insurance company. O. Periodic Adjustments to Accounts. Adjustments shall from time to time be made to each Participant's Accounts as follows: (1) The Trustee shall debit such Accounts currently in respect of any distributions of benefits therefrom. (2) Promptly following each revaluation of an Investment Fund pursuant to Paragraph (N) above, the Trustee shall allocate, or shall cause to be allocated, to each 401(k) Account invested in such Investment Fund a portion of the net earnings or net loss of such Investment Fund, including appreciation or depreciation in the value of the assets of such fund, such portion being determined by applying to such net earnings or loss the ratio which the balance of each 401(k) Account in such fund on the immediately preceding Valuation Date bears to the total of the balances of all 401(k) Accounts in such fund on such Valuation Date, but taking into account in a manner determined to be equitable by the Trustee (with the consent of the Committee) any Company Contributions to, or distributions from, such 401(k) Accounts since the immediately preceding Valuation Date. Notwithstanding the foregoing, the Trustee may allocate, or cause to be allocated, to each such 401(k) Account invested in such Investment Fund a portion of the net earnings or net loss of such Investment Fund, periodically and not less frequently than quarterly (and as frequently as daily), on any other basis which in the Trustee's judgment is fair and equitable to Participants and which is based in substance on the sizes of the Accounts invested in such Investment Fund over the period during which such net earnings or net loss in value occurs; provided the Committee consents to such other basis of allocation. (3) The net income, or loss, of the ESOP portion of the Trust for each Plan Year shall be determined as of each Valuation Date and shall be allocated to the ESOP Accounts of Participants as follows: (a) Each Participant's shares of the net income or loss of the ESOP portion of the Trust as of each Valuation Date shall be allocated to his Other Investments Account in the ratio which the balance of such Other Investments Account on the preceding Valuation Date (reduced by the amount of any distribution of part of his ESOP Account from his Other Investments Account) bears to the sum of such balances for all Participants as of that date. The net income or loss, includes the increase or decrease in IV-17 48 the fair market value of Trust assets of the ESOP portion of the Trust (other than Company Stock), interest income, dividends and other income or expenses, attributable to Trust assets of the ESOP portion of the Trust (other than allocated Company Stock) since the preceding Valuation Date. (b) Any cash dividends received on shares of Company Stock allocated to Participants' Company Stock Accounts shall be allocated to their respective Other Investments Accounts. Any stock dividends received on Company Stock shall be credited to the Company Stock Account to which such Company Stock was allocated. (c) Rights to purchase Company Stock received by the Trustee with respect to a Participant's Company Stock Account shall be allocated in like manner as a dividend. After such allocation, the Committee shall determine with respect to each such Participant's Other Investments Account the maximum number of rights and fractions thereof which can be exercised by the use of the available cash therein; and shall instruct the Trustee to (and the Trustee shall) sell and exercise rights accordingly. The Company Stock thus purchased shall be allocated among the Participants' Company Stock Accounts in accordance with the rights therein which were exercised. Rights for the purchase of other than Company Stock received by the Trustee with respect to Company Stock in a Participant's Company Stock Account shall be sold and the proceeds allocated in like manner as a cash dividend. (d) In the event of a merger, reorganization or recapitalization in which Company Stock in the ESOP portion of the Trust is exchanged for other stock or securities, the Trustee shall effect such exchange with respect to all Company Stock in the ESOP portion of the Trust and the Committee shall allocate the stock and securities received in such exchange among the Participants' Company Stock Accounts in proportion to the number of shares and fractions of a share of Company Stock allocated or allocable to said accounts at the time of such exchange. Thereafter, such stock or securities shall be deemed to be Company Stock for all purposes of this Plan, except as the Committee may otherwise determine. Any fractional share or fractional unit received in such exchange shall be handled in like manner as a fractional share in a stock dividend. (4) As of each Anniversary Date, the Trustee shall credit each ESOP Account in the same proportion as ESOP Contributions are to be credited under Article IV (A-2) above, with respect to any forfeitures occurring or becoming final, as the case may be, since IV-18 49 the previous Anniversary Date, as provided in Paragraph (Q) below (Forfeitures). (5) Expenses and compensation of the Trustee and Committee may be charged to the Accounts of Participants as provided in Article XI(P). P. Fixed Accounts. Upon the termination of a Participant's employment with the Company, whether due to his retirement, death, disability or other cause whatsoever, he shall cease to be a Participant for purposes of Article III and, except for benefits payable or distributable under this Agreement, shall cease to have any further right, title or interest in the Plan and Trust; provided, further, that - (1) Such Participant's Accounts, except to the extent his ESOP Account and Matching Company Contributions Account may be forfeited, shall become fixed and Vested at their balances as close as administratively feasible to the Valuation Date coinciding with or next following the date of such termination. "Valuation Date" shall mean the last day of each calendar quarter or other date occurring regularly more frequently than quarterly (including daily) designated by the Committee and communicated to the Participants in writing. If such termination shall be by reason of his death, disability (as defined in Article VI(D)) or if he shall retire under the Source One Mortgage Services Corporation Retirement Plan on or after his early or normal retirement date as defined in such plan, his ESOP Account shall participate in the allocation of ESOP Contributions and forfeitures under Paragraphs (A-2) and (O)(4) of this Article IV as of the Anniversary Date coinciding with or next following his termination to the same extent as if he were still a Participant. Payment or the start of payments under Article V of the amount of such ESOP Contribution and forfeitures so allocated to the Participant's ESOP Account shall be made or shall occur as soon as administratively feasible after such allocation. Notwithstanding the foregoing, if the Valuation Date described above is subsequent to the Participant's Required Beginning Date then such Valuation Date shall be the Valuation Date immediately preceding the Participant's Required Beginning Date. (2) In determining the balance of any Account under (1) above, there shall be included any Company Contributions and other items which have been or should be credited or debited to such Account as of the Valuation Date or prior thereto. Thereafter, no further credits or debits shall be made to said Account, except as provided in (1) above and except for: (a) Distributions therefrom, (b) Special expenses chargeable thereto under Article XI(P)(2)(b), (c) Matters mentioned in Subparagraphs (3) below, and IV-19 50 (d) Any Elective Contributions and Matching Company Contributions made to the Trust with respect to the Participant after the Valuation Date. (3) If prior to the termination of the Participant's employment the Trustee was investing any of his 401(k) Accounts in accordance with the Participant's instructions, the Trustee shall continue to invest such Accounts in accordance with such instructions for as long as administratively feasible prior to the time such Accounts are paid to the Participant. Q. Forfeitures. With respect to all or any portion of a Participant's ESOP Account and Matching Company Contributions Account which are subject to forfeiture under Article V(C) below (Early Retirement; Vesting Schedule, etc.) - - (1) With respect to the ESOP Account, or portion thereof, of a Participant which is forfeited under Article V(C) below (Early Retirement; Vesting Schedule, etc.) or any other provision of this Agreement, on the date such Account or portion thereof is forfeited under Article V(C)(4), but (i) in the case of a Participant who consents to, and receives, the immediate payment of the Vested portion of his ESOP Account pursuant to Article V(E), as of the last day of the Plan Year in which the Participant's employment terminates, and (ii) in the case of a Participant who does not so consent to, and does not receive, the immediate payment of the Vested portion of his ESOP Account, as of the last day of the Plan Year in which the nonvested portion of such Account is forfeited, such forfeited amount shall be credited to other ESOP Accounts, as provided by Article IV(A-2) above (Allocation of ESOP Contributions and Forfeitures). If the Participant is not vested in any part of his ESOP Account, he shall be deemed to have elected to receive the Vested part of his ESOP Account, namely, zero, in a Lump Sum upon termination of his employment. (2) Matching Company Contributions forfeited under Article V(C) shall be treated in the same manner as forfeited ESOP Contributions under (1) above as if the terms Matching Company Contributions and Matching Company Contributions Accounts were substituted for the terms ESOP Contributions and ESOP Accounts, except that instead of allocating such forfeited Matching Company Contributions to the Matching Company Contribution Accounts of other Participants such forfeited amounts shall be applied to reduce Matching Company Contributions otherwise authorized to be made to the Trust for the Plan Year in which the forfeiture occurred or for the next following Plan Year or Plan Years and pending such application shall be held in a suspense account in the 401(k) portion of the Trust. R. Accounting for Allocations. The Committee shall establish accounting procedures for the purpose of making the allocations to Participants' Accounts provided for in this Article IV. The Committee shall maintain adequate records of the cost basis of Company Stock allocated to any Participant's Company Stock Account IV-20 51 and to the extent feasible the Participant's 401(k) Account. From time to time, the Committee may modify its accounting procedures for the purposes of achieving equitable and nondiscriminatory allocations among the Accounts of Participants, in accordance with the provisions of this Article IV and the applicable requirements of the Code and ERISA. S. Company Stock Fund. The Company Stock Fund, subject to the next following paragraph, shall be invested by the Trustee solely in Company Stock purchased by the Trustee in the open market or by private purchase from Fund American Enterprises Holdings, Inc. or others at the fair market value of such stock at the time of purchase as determined by the Trustee pursuant to Article IX(H). Company Stock may also be acquired within the Plan for the accounts of active Participants from the accounts of Participants who elect, or whose Beneficiaries elect, pursuant to Article V(J) or VI(C-1), to receive cash distributions from the Plan instead of shares of Company Stock allocated to their Company Stock Accounts or 401(k) accounts. All such acquisitions shall be at the fair market value of such shares at the close of the day of the transaction as determined by the Trustee pursuant to Article IX(H). In acquiring shares of Company Stock for the accounts of active Participants the Trustee may net purchases, including internal acquisitions of the kind described above, against sales of Company Stock. There shall be no percentage limitation on the portion of the 401(k) portion of the Trust which the Trustee may invest or hold in Company Stock. However, no Participant may direct that any portion of his Elective Contributions Account or Rollover Account be invested in the Company Stock Fund before the effective date of the registration of the Company Stock to be held in the Company Stock Fund with the U.S. Securities and Exchange Commission. Dividends, interest and other distributions received by the Trustee in respect of each Investment Fund, including the Company Stock Fund, shall be reinvested in the same Investment Fund. However, pending reinvestment, any such dividends, interest and other distributions in respect of the Company Stock Fund shall be invested by the Trustee in short-term fixed income investments, which may include units of participation in a short term fixed income fund maintained by the Trustee or a short term fixed income mutual fund. IV-21 52 ARTICLE V RETIREMENT BENEFITS AND VESTING A. Normal Retirement. A Participant may retire from the employment of the Company at his Normal Retirement Date, whereupon the Trustee shall as promptly as administratively feasible arrange to make benefits available to the Participant as follows: (1) Except as provided in (3)-(5) below, the balance of the Participant's Fixed Account shall be paid in a Lump Sum. (2) In no event shall the Participant's Account be paid, or commence to be paid, later than his Required Beginning Date. (3) If the Participant shall so specify in a written election delivered to the Company not later than 30 days after his retirement, the balance of the Participant's ESOP Account shall be paid in regular installments over a period not exceeding the lesser of (i) fifteen (15) years or (ii) the life expectancy of the Participant or the joint life expectancy of such Participant and his designated Beneficiary, which installments shall not be directed at a rate of less than $1200 per year nor payable more frequently than monthly, provided however, that the amount to be distributed each year, commencing with the year in which the Participant's Required Beginning Date falls, must be at least an amount equal to the quotient obtained by dividing the entire interest of the Participant under the ESOP portion of the Plan at the time the distribution is made (expressed in either dollars or units) by the life expectancy of the Participant and his designated Beneficiary (whichever is applicable); and provided, further, that payments in regular installments under this subparagraph (3) may not be elected by a Participant who elects under Article V(J) to receive his Vested ESOP Account in shares of Company Stock. (4) For purposes of paragraph (3) above life expectancy shall be computed by use of the return multiples included in Section 1.72-9 of the Income Tax Regulations or such other applicable successor regulations which may be issued by the Internal Revenue Service. For purposes of paragraph (3) above, the Participant's life expectancy, and the joint life and last survivor life expectancies of the Participant and his designated Beneficiary, if such designated Beneficiary is the Participant's spouse, may be recalculated from time to time but not more frequently than annually, but the life expectancy of a designated Beneficiary other than the Participant's spouse may not be recalculated. (5) If the installments required by paragraph (3) above are payable to the Participant and a designated Beneficiary who is not the Participant's spouse, the payments to be made to the Participant on or after the Participant's Required Beginning Date must satisfy the incidental benefits requirements of Section 401(a)(9) of the Code and the Regulations thereunder. V-1 53 (6) If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may be made or may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Regulations is given, provided that: (a) the Committee clearly informs the Participant that the Participant has a right for a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (b) the Participant, after receiving the notice, affirmatively elects a distribution. Notwithstanding the foregoing, a Participant's Normal Retirement Date under the Plan shall not be construed as a mandatory retirement date. B. Late Retirement. If a Participant shall continue in the Company's employ beyond his Normal Retirement Date (in which event he shall remain a Participant in the Plan for all purposes), no retirement benefits shall be payable to him under this Agreement until his actual retirement, at which time the same steps shall be taken as in the case of normal retirement, provided that in no event shall such benefits be paid or commence to be paid later than the Required Beginning Date or other deadline specified in Article V(D). C. Early Retirement; Vesting Schedule for ESOP Contributions and Matching Company Contributions; Full Vesting of Elective Contributions. Upon retirement of a Participant prior to his Normal Retirement Date, the Trustee shall as promptly as possible (but subject to Article V(E)) arrange to make benefits available to the Participant (except as otherwise provided in Article X(A)) in the same manner and form as at normal retirement; provided, however, that the Participant shall not have the right to elect that his ESOP Account be paid in installments as provided in Article V(A)(3) unless he retires under the Source One Mortgage Services Corporation Retirement Plan on or after his early retirement date (as defined in such plan), and provided, further, that - (1) Such Participant shall be entitled only to a percentage of the balance in his ESOP Account and his Matching Company Contributions Account based upon the number of his Years of Service, as follows:
Years of Percentage Vesting in ESOP and Service Matching Company Contribution Accounts ------------- ---------------------------------------
V-2 54 less than 3 0% 3 but less than 4 20% 4 but less than 5 40% 5 but less than 6 60% 6 but less than 7 80% 7 or more 100%
(2) In computing a Participant's period of service for purposes of (1) above, he shall be credited with one Year of Service for each Plan Year, i.e., the vesting Computation Period, during which he has completed at least 1,000 Hours of Service with the Company (regardless of whether or not he was a Participant at such time) except that the following shall not be counted: (a) For purposes of determining his Vested percentage in such account following a break in service, Years of Service during vesting Computation Periods prior to a One-Year Break in Service shall not be counted unless and until the Employee completes 1,000 Hours of Service during the 12 consecutive month period beginning on the date he first completes one Hour of Service (his "Re-employment Commencement Date") or during any subsequent 12 consecutive month period beginning on an anniversary of his Re-employment Commencement Date; and (b) In the case of a Participant or other Employee who does not have a Vested right to an Accrued Benefit derived from Company Contributions, i.e., who is not Vested in any part of his account balances under the Plan derived from ESOP Contributions and Matching Company Contributions, Years of Service prior to a period of consecutive One-Year Breaks in Service shall not be counted if the number of consecutive One-Year Breaks in Service in such period equals or exceeds five (excluding from the number of Years of Service before such period any Years of Service not required to be counted hereunder by reason of any prior break in service); provided, further, that Years of Service after five or more consecutive One-Year Breaks in Service shall not be counted for purposes of determining the Vested percentages under (1) above of the Participant's Accrued Benefit derived from ESOP Contributions and Matching Company Contributions which accrued before such five or more consecutive One-Year Breaks in Service. (3) If a Participant's eligibility Computation Period overlaps two vesting Computation Periods and he completed 1,000 Hours of Service during such eligibility Computation Period but failed to complete 1,000 Hours of Service in either of the overlapped vesting Computation Periods, then the Year of Service completed for eligibility to participate shall be deemed a Year of V-3 55 Service for the vesting Computation Period during which such eligibility Computation Period ended. (4) The portion of such Participant's ESOP Account to which he is not entitled under (1) above, if any, shall be forfeited and allocated among the other ESOP Accounts pursuant to Article IV(Q) (Forfeitures). If a Participant who is partially Vested in his ESOP Account has a balance in both his Company Stock Account and his Other Investments Account, shares of Company Stock in his Company Stock Account may be forfeited only after the balance in his Other Investments Account is forfeited, and if his Company Stock Account should include shares of more than one class of Company Stock the same proportion of each class shall be forfeited. The portion of such Participant's Matching Company Contributions Account to which he is not entitled under (1) above, if any, shall be forfeited and applied to reduce Matching Company Contributions pursuant to Article VI(Q)(2). If, following a distribution of the Vested portion of a partially Vested Participant's Account, he is re-employed by the Company in circumstances where he has not sustained five consecutive One-Year Breaks in Service, then, following such re- employment, the portion of the Participant's Account which was forfeited will be restored to its amount on the date of distribution if the Participant repays to the Trust the full amount of the distribution attributable to ESOP Contributions and Matching Company Contributions before the earlier of 5 years after the first date on which the Participant is re-employed by the Company, or the date the Participant incurs 5 consecutive One-Year Breaks in Service following the date of the distribution. If a Participant who was not Vested in any part of his ESOP Contributions Account and Matching Company Contributions Account and was deemed to have received a distribution pursuant to Article IV(Q) and the Participant is re-employed by the Company in circumstances where he has not sustained five consecutive One-Year Breaks in Service, upon the reemployment of such Participant, the forfeited Account balances of the Participant will be restored to their amounts on the date of such deemed distribution. The funds to be used to restore such account shall first be obtained out of forfeitures of ESOP Contributions and Matching Company Contributions, if any, and next out of ESOP Contributions and Matching Company Contributions to the Trust, for such Plan Year or succeeding Plan Years. (5) Notwithstanding the foregoing provisions of this Paragraph (C), if a Participant is discharged for participating in any fraud, theft, dishonesty or embezzlement towards or involving the Company or other Related Company at a time when the Participant has accumulated less than five (5) Years of Service, he shall not be entitled to any part of his ESOP Account, which shall be forfeited and allocated among the ESOP Accounts of the other Participants pursuant to Article IV(Q) (Forfeitures); provided, however, that this subparagraph (5) shall not apply to any discharge from employment occurring in any Plan Year in, or after, which the Plan becomes a Top-Heavy plan as described in Article XIII. V-4 56 (6) Notwithstanding the foregoing provisions, a Participant's ESOP Account and Matching Company Contributions Account shall be fully Vested at his Normal Retirement Age. (7) A Participant's Elective Contributions Account shall at all times be fully and immediately Vested. D. Deadline for Payment of Benefits; Required Beginning Date. The following deadlines shall apply to the payment, or commencement of payment, of any benefits under the Plan: (1) Unless the Participant shall otherwise elect, the payment of benefits under the Plan to the Participant shall be made or begin not later than the 60th day after the close of the Plan Year in which occurs the latest of the following: (a) The date on which he attains the earlier of age 65 or Normal Retirement Age; (b) The tenth anniversary of the year in which he commenced participation in the Plan; or (c) The termination of his service with the Company. If the Participant under another provision of this Agreement may elect to defer the payment, or commencement of payment, of benefits under the Plan beyond the latest of the foregoing dates, such election shall be subject to (2) below and to the distribution rules of Article V(A), must be submitted to the Committee in writing, signed by the Participant, and must describe the benefit and the date on which payment of such benefit shall be made or shall commence. (2) Any benefits payable under the Plan to a Participant shall be paid, or shall begin to be paid, not later than April 1 of the calendar year following the calendar year in which the Participant attains age 70-1/2 or (ii) the Participant's employment terminates, whichever is later, except in the case of a Participant who is a 5-percent owner (as defined in Code Section 416)(ii) above shall not apply. However, prior to January 1, 1997 any benefits payable under the Plan to a Participant who attains age 70-1/2 after 1988 shall be paid, or shall begin to be paid, not later than April 1, of the calendar year following the calendar year in which the Participant attains age 70-1/2. In the Plan the date by which any such benefits must be paid, or begin to be paid, as specified above in this paragraph, is called the "Required Beginning Date". E. Cash-Outs. Notwithstanding anything in this Article V or in Article VI to the contrary, if at the time of a Participant's death or other termination of employment the present value of any Accrued Benefit payable to or with respect to him under the Plan, i.e., the Vested portion of his Fixed Account derived from ESOP Contributions and 401(k) Contributions, does not exceed, or at the time of any prior distribution did not exceed, $3,500, such benefit shall be V-5 57 paid to his Beneficiary or to him in a Lump Sum. If a Participant's employment terminates before his Normal Retirement Date for any reason other than his death and such Accrued Benefit exceeds, or at the time of any prior distribution exceeded, $3,500, the Participant shall have the right to elect in writing delivered to the Committee to defer payment of such Accrued Benefit (subject to adjustment for profits or losses and fees and expenses as provided in Article IV(O)(5) to the Participant's Normal Retirement Date. The failure of such a Participant to elect either an immediate Lump Sum, or an immediate Lump Sum of his 401(k) Account and installments of his ESOP Account as permitted by Article V(C) and Article V(A)(1) and (3), shall be deemed an election by the Participant to defer payment of any such Accrued Benefit to his Normal Retirement Date as provided above. If payment of the Participant's Accrued Benefit is so deferred, such Accrued Benefit shall be paid to the Participant as soon as administratively feasible in a Lump Sum after the Valuation Date coinciding with or next following the earlier of (i) the Participant's Normal Retirement Date or (ii) receipt by the Committee of the Participant's written election to receive a distribution from the Plan prior to his Normal Retirement Date. F. Limitations on Payment of Benefits Derived from Elective Contributions and Matching Company Contributions. In no event shall any distribution from a Participant's account which is attributable to Elective Contributions or Matching Company Contributions (other than a hardship distribution under Article VI(E)) be made earlier than: (1) the Participant's retirement, death, disability, separation from service, or attainment of age 59-1/2; (2) the termination of the Plan and Trust pursuant to Article X without establishment of a successor plan; (3) the date of sale by the Company of substantially all of its assets to a corporation in whose employment the Participant continues; or (4) the date of sale by the Company of a subsidiary in whose employment the Participant continues. G. Termination of Employment by Reason of Dissolution. Subject to Paragraph (F) above, if a Participant's employment shall terminate by reason of complete or partial liquidation or dissolution of the Company, then such Participant shall be deemed to have retired under Article V(A), (B) or (C), as the case may be, except that, for purposes of said Paragraph (C) (Early Retirement; etc.), his percentage Vesting in his ESOP Account and Matching Company Contribution Account shall be 100%. H. Termination of Employment in Other Circumstances. Subject to Paragraph (F) above, if a Participant's employment shall terminate for any reason not covered by Article V(G) (Dissolution) or Article VI(A) (Death, etc.) or (D) (Disability), he shall be deemed to have retired and shall be entitled to only such benefits as are provided by Article V(A), (B) or (C), as the case may be. I. Temporary Absences. Any substantial absence from active employment with the Company other than during vacation, holidays V-6 58 and non-business hours shall constitute a termination of employment for purposes of the Plan except as follows: (1) If the Participant or other Employee shall be absent from active employment with the Company for a period not exceeding one year on account of (i) illness, (ii) mental or physical disability, (iii) leave of absence granted by the Company in accordance with uniform and nondiscriminatory rules so that all employees in similar circumstances are treated alike, (iv) temporary layoff or (v) jury duty, his employment with the Company or participation in the Plan, as the case may be, shall not be deemed to have terminated solely on account of such absence and during such absence he shall be provisionally credited with Hours of Service at the same weekly rate (not exceeding 37-1/2 hours per week and not exceeding 501 hours per Plan Year) he was being credited with Hours of Service at the time such absence commenced; provided, however, that if he does not resume active employment within thirty (30) days from the expiration of such illness, disability, leave of absence or jury duty, or if he fails promptly to report for work upon being recalled from such layoff, his employment or participation, as the case may be, shall be deemed to have terminated on the date when such absence commenced, provided, further that his Valuation Date shall be the Valuation Date coinciding with or preceding the expiration of such thirty (30) day period. (2) If the Participant or other Employee shall leave the active employment of the Company for the purpose of becoming (and thereupon becomes) a member of the Armed Forces of the United States, his employment with the Company or participation in the Plan, as the case may be, shall not be deemed to have terminated solely on account of such absence and during such absence he shall be credited with Hours of Service at the same weekly rate (not exceeding 37-1/2 hours per week) he was being credited with Hours of Service at the time such absence commenced; provided, however, that if he does not resume active employment within ninety (90) days after his first eligibility for release or discharge from said Armed Forces, his employment or participation, as the case may be, shall be deemed to have terminated on the date when such absence commenced, provided, further that his Valuation Date shall be the Valuation Date coinciding with or preceding the expiration of such ninety (90) day period. (3) During any period when a Participant or other Employee is not in fact actively employed by the Company, he shall not be regarded as receiving any Compensation except such as the Company may actually pay to him during such period. (4) If contributions or other credit or debit items shall be allocated to a Participant's account due to the provisions of Subparagraph (l) above and it shall later be determined that such Participant's employment should be deemed to have theretofore terminated, then the Trustee upon notification thereof shall treat V-7 59 such allocations as erroneous and shall reasonably endeavor to undo the effects thereof. (5) If the Participant timely resumes active employment (or reports for work) as contemplated by (1) or (2) above but his resumed employment is terminated (other than by death, permanent and total disability, normal or late retirement, or complete or partial dissolution or liquidation of the Company) prior to his having been in the Company's continuous employ for a period at least equal to the lesser of (a) six (6) months or (b) the period from the commencement of the absence in question to the resumption of his active employment, then his employment or participation, as the case may be, shall be deemed to have terminated on the date when such absence commenced. (6) The foregoing provisions of this Paragraph (i) shall not prevent the Company and the Participant or other employee in question from mutually determining in writing that his status as an employee or Participant, as the case may be, shall terminate (or have terminated) at any designated time, either with or without cause. (7) The foregoing provisions of this Paragraph (i) are subject to any contrary requirements, more favorable to the Participant or other employee in question, contained in Article II(A) or Article V(C). J. Manner of Payment of Benefits From ESOP Portion of Plan and From Company Stock Fund; Company Stock or Cash. The benefits payable to a Participant (or to a Beneficiary under Article VI) under the ESOP portion of the Plan and from the Company Stock Fund (which is one of the Investment Funds in the 401(k) portion of the Plan) shall be payable in the following manner: (1) All benefits payable under the Plan to a Participant or Beneficiary from the Participant's Other Investment Account or from any 401(k) Account other than the Company Stock Account shall be paid in cash. However, the Participant or Beneficiary shall be entitled to elect in accordance with (2) below and any rules and procedures which the Committee may adopt to receive all or any portion of his Vested Company Stock Account and all or any portion of his Vested 401(k) Account which is invested in the Company Stock Fund either in cash or in shares of Company Stock plus cash for any fractional share of Company Stock. (2) If pursuant to (1) above the Participant elects to receive any portion of his Vested or partially Vested 401(k) Account which is invested in the Company Stock Fund, in cash rather than in shares of Company Stock, the Trustee shall, as soon as administratively feasible after the applicable Valuation Date, sell such portion of the Vested shares of Company Stock in such accounts and pay the proceeds to the Participant in accordance with Article V(A), (B) or (C), or in accordance with Article V(E), whichever applies. If pursuant to (1) above the Participant elects to V-8 60 receive any portion of his Vested or partially Vested Company Stock Account and all or any portion of his Vested or partially Vested 401(k) Account which is invested in the Company Stock Fund, in shares of Company Stock rather than in cash, the Trustee shall distribute such shares to the Participant in accordance with Article V(A), (B) or (C), or in accordance with Article V(E), whichever applies. In the event of the Participant's death similar procedures shall be followed with respect to the Participant's Beneficiary depending upon the Beneficiary's election under Article VI(C-1). (3) Any ESOP contributions and forfeitures allocated to the ESOP Account of a Participant under Article IV(P)(1) for the Plan Year in which a Participant's employment terminates by reason of the Participant's death, permanent disability or retirement under the Source One Mortgage Services Corporation Retirement Plan after payment to the Participant (or Beneficiary) has been made or has commenced under Article V(A), (B) or (C) shall, as provided in Article IV(P), be paid (or shall commence to be paid) to the Participant (or Beneficiary) as soon as administratively feasible after the Anniversary Date as of which they are allocated. Any such payments shall be made in cash and not in shares of Company Stock. V-9 61 ARTICLE VI OTHER BENEFITS A. Death, Spousal Consent to Designation Required if Spouse is not Beneficiary. Upon the death of a Participant irrespective of whether his employment has theretofore terminated, the Trustee shall arrange as promptly as possible to pay the entire balance of such Participant's Fixed Account in a Lump Sum (reduced by any portion of the Participant's account applied pursuant to Article VI(F)(4) to pay the balance of any loan from the Trust to the Participant outstanding at the time of the Participant's death) to his surviving spouse (who, subject to the following provisions of this sentence, shall be deemed the Participant's designated Beneficiary), or if there is no surviving spouse, or the surviving spouse has consented in writing to the designation of another specific Beneficiary by the Participant, to the Participant's designated Beneficiary, subject, however, to Article VI (B) and (C) below. Any such written consent by the Participant's spouse shall acknowledge the effect of the consent and be witnessed by a representative of the Plan or a notary public. A representative of the Plan shall include any member of the Committee or any other person designated by the Committee for this purpose. No designation by a married Participant of a Beneficiary other than the Participant's spouse or method of payment shall be changed without the written consent of the spouse unless the written consent of the spouse to the first designation expressly permits further designations by the Participant without any requirement of further consent by the spouse. No such written consent of the spouse of a Participant need be obtained if it is established to the satisfaction of the Committee that such spouse cannot be located or that such other circumstances as may be described in Treasury Regulations promulgated under Section 417(a)(2)(B) of the Code exist. B. Designation of Beneficiary and Method of Distribution. Subject to Paragraphs (A) (requiring spousal consent if a person other than the Participant's spouse is to be designated as a Beneficiary) and (C) (imposing certain restrictions on distributions from the Plan on account of the death of the Participant) of this Article VI, a Participant shall have the right from time to time to file with the Committee a written designation of Beneficiary under the Plan, which designation may from time to time be amended or revoked. Upon receipt of any such designation or notice, the Committee shall inform the Trustee, who shall (subject to Paragraphs (A) and (C) of this Article VI) in turn take any and all steps reasonably necessary to make the same effective; provided, however, - (1) No designation of Beneficiary, and no amendment or revocation thereof, shall become effective if filed after such Participant's death, unless the Committee and Trustee shall determine such designation, amendment or revocation to be valid. VI-1 62 (2) A Participant shall not have the right, unless the Committee shall otherwise consent, to designate as a Beneficiary anyone except his estate, his dependents, individuals who are the natural objects of his bounty, or a trust or trusts for the principal benefit of one or more such dependents or Persons. (3) In the absence of an effective designation of Beneficiary, or if the Beneficiary designated shall not survive the Participant, then said death benefits shall be paid to the individual in (or paid in equal shares, per stirpes and not per capita, to the individuals in) the first of the following classes of successive preference Beneficiaries (deemed to have been designated as such by the Participant) in which there shall be an individual surviving such Participant: (a) His spouse, (b) His children, (c) His parents, or (d) His brothers and sisters and issue thereof. (4) In determining who are "children" for purposes of (3) above, adopted individuals shall be treated as if they are the natural offspring of their adoptive parents, rather than their natural parents. (5) If any individual who would be entitled to receive death benefits (either under (3) above or because designated by the Participant as a Beneficiary) shall be a minor or adjudged mentally incompetent, the Committee may in its discretion direct the Trustee to pay all or part of the death benefits otherwise distributable in accordance with Article XI(O). If and to the extent that there shall be no surviving Beneficiary under (3) above, or effectively designated by the Participant, the Participant's estate shall be deemed to be the Beneficiary. C. Required Distributions. Upon the death of a Participant the distribution of his interest under the Plan, i.e., the entire balance of his Fixed Account shall be made in a Lump Sum as soon as administratively feasible after the Valuation Date falling on or next following the Participant's death. C-1. Manner of Payment; Company Stock or Cash. Any benefits payable under the ESOP portion of the Plan and from the Company Stock Fund on account of the death of a Participant shall be payable in cash and/or in shares of Company Stock in accordance with the rules set forth in Article V(J) (Manner of Payment of Benefits from ESOP portion of Plan and from Company Stock Fund; Company Stock or Cash). All other benefits payable on account of the death of a Participant shall be payable in cash. VI-2 63 D. Disability. If, notwithstanding Article V(I) (Temporary Absences), a Participant's employment shall terminate on account of his permanent disability, mental or physical, evidenced by the certificate of a physician satisfactory to the Committee then the entire balance of his Fixed Account shall be paid in a Lump Sum (subject to the same restrictions set forth in Paragraph (2) of Article V(A)), except the entire balance of his ESOP account shall be paid in a Lump Sum or in regular annual or more frequent installments, subject to the restrictions set forth in paragraphs (2) and (3) of Article V, whichever the Participant shall elect in writing delivered to the Committee. E. Hardship Distributions; Distributions After Age 59-1/2. Subject to the application of uniform rules consistently applied, the Committee may upon the written request of a Participant direct the Trustee to distribute funds to such Participant from his Elective Contributions Account (but not amounts treated as Elective Contributions or income allocable thereto), in a Lump Sum, as follows: (1) Any such distribution from the Participant's Elective Contributions Account shall be subject to the following requirements: (a) No such distribution shall be made unless the Committee determines that the distribution will be made on account of an immediate and heavy financial need of the Participant and is necessary to satisfy such financial need. (b) A distribution will be deemed to be made on account of an immediate and heavy financial need only if the distribution is on account of: (i) Medical expenses described in Code Section 213(d) incurred by the Participant, the Participant's spouse, or any dependents of the Participant (as defined in Code Section 152 or necessary for these individuals to obtain medical care described in Code Section 213(d)); (ii) Purchase (excluding mortgage payments) of a principal residence for the Participant; (iii) Payment of tuition and related educational fees for the next 12 months of post-secondary education for the Participant, his or her spouse, children or dependents; (iv) The need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence; VI-3 64 (v) Any other immediate and heavy financial need of the Participant designated as such for purposes of Section 401(k) of the Code in a revenue ruling, notice, or other document of general applicability published by the U.S. Treasury Department; or (c) A distribution will be deemed necessary to satisfy an immediate and heavy financial need of a Participant if all of the following requirements are satisfied: (i) The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant. The amount of an immediate and heavy financial need may include any amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution. (ii) The Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under this Plan and all other plans maintained by the Company, (iii) All other plans maintained by the Company which cover the Participant provide that the Participant's elective contributions and employee contributions, if any, will be suspended for at least 12 months after receipt of the hardship distribution under the Plan, and (iv) All other plans maintained by the Company which cover the Participant provide that the Participant may not make elective contributions for the Participant's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Section 402(g) of the Code for such taxable year less the amount of the Participant's elective contributions (to this Plan and such other plans) for the taxable year of the hardship distribution. If a Participant receives a hardship distribution under this Plan the Participant's Elective Contributions to this Plan will be suspended for 12 months after receipt of the distribution and he may not make Elective Contributions to this Plan (and to any other plan of the Company) for his taxable year immediately following the taxable year of the VI-4 65 distribution in excess of the applicable limit under Section 402(g) of the Code for such taxable year less the amount of his Elective Contributions to this Plan (and his elective contributions to any other plan of the Company) for the taxable year of the hardship distribution. A Participant will not fail to be treated as an eligible employee for purposes of the coverage and discrimination requirements of Regulation Section 1.401(k)-1(b) merely because he is suspended from making elective contributions or employee contributions under the above requirements. (d) No such distribution shall exceed the Participant's Elective Contributions credited to his Elective Contributions Account. Earnings on the Participant's aggregate Elective Contributions shall not be distributed under this Article VI(E)(2). (2) Notwithstanding the foregoing provisions of this Paragraph (E), the Trustee may distribute up to 100% of the funds from the Participant's Elective Contributions Account under the Plan to such Participant in a Lump Sum while the Participant is still employed by the Company, provided the Participant has attained age 59-1/2 and requests such distribution in writing. F. Loans. Subject to the application of uniform rules consistently applied, the Committee may upon the written request of a Participant, which shall be treated as an election by the Participant to segregate and separately direct the investment of a portion of his account under Article IX(O), direct the Trustee to make a loan or loans to such Participant first from any Rollover Contribution, then from his Elective Contributions Account as follows: (1) The aggregate amount of such loan or loans to a Participant shall not exceed the lesser of - (a) $50,000 reduced by the excess, if any, of (i) the highest outstanding balance of loans from the Trust during the one-year period ending on the day before the date on which the loan is made, over (ii) the outstanding balance of loans from the Trust on the date on which the loan is made; or (b) 50% of the amount which would be the Vested balance of his 401(k) Account if he were to retire or otherwise terminate his employment with the Company at the time of the loan. (2) No such loan shall be made unless the Committee shall determine that there is a reasonable expectation of its repayment as and when due, otherwise than under (4) below. VI-5 66 (3) The Committee shall determine the amount, terms and conditions of any such loan; provided that each such loan must by its terms be repayable in substantially equal payments of principal and interest not less frequently than quarterly within five years from the date of the loan, bear interest at a reasonable rate, be adequately secured, and, if made to a so-called "disqualified person", meet the other requirements of Section 4975(d)(1) of the Code. Notwithstanding the limitation on the term of a loan set forth in this subparagraph, the Committee may agree to a loan term in excess of five years provided that the loan is used to acquire a dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as the principal residence of the Participant. (4) No payment out of the Trust shall be made to or in respect of such Participant or his Beneficiary (except under Paragraph (E) or this Paragraph (F)) unless and until all unpaid loans to such Participant have been satisfied in full, and if any loan to a Participant has not been satisfied in full at the time such Participant or the Participant's Beneficiary is to receive a payment out of the Trust, the Trustee may apply a sufficient part of the Participant's account in satisfaction of any unpaid part of such loan. No part of a Participant's Elective Contributions Account shall be applied in satisfaction of the unpaid part of a loan to the Participant prior to the earlier of an event entitling the Participant or the Participant's Beneficiary to the payment of his Elective Contributions Account or the Participant's attainment of age 59 1/2. (5) The aggregate of all loans to a Participant under this Plan and under all other tax qualified Plans of the Company or any Related Company shall not exceed the amount stated in (1)(a) above. (6) If the Company is or should become an electing small business (S) corporation, no such loan shall be made to any shareholder-employee of the Company in any taxable year of the Company in which it is an S corporation. For purposes of this paragraph a shareholder-employee means an employee or officer of the Company who owns, or is considered as owning within the meaning of Section 318(a)(1) of the Code, on any day during the taxable year of the Company, more than 5% of its outstanding capital stock. (7) The Committee shall, before directing the Trustee to make any loan under this Paragraph (F), adopt rules relating to loans consistent with this Paragraph (F) and in compliance with the applicable provisions of the Code and ERISA. VI-6 67 ARTICLE VII [RESERVED] VII-1 68 PART TWO ARTICLE VIII COMMITTEE AND INVESTMENT COMMITTEE A. Composition of Committee. Subject to Article IX, the Plan may, but need not, be administered by a Committee of one or more employees (or other individuals familiar with the affairs and personnel of the Company), who shall be appointed by, and hold office at the pleasure of, the Board of Directors of the Company. Vacancies in the Committee resulting from death, resignation, removal or otherwise shall be promptly filled by the Board, but the Committee may exercise its powers and authority notwithstanding the existence of vacancies. B. Removal and Resignation. A member of the Committee may resign at any time upon not less than ten days' written notice to the Board, specifying the effective date of resignation. A member may be removed or appointed by the Board for any reason or for no reason and at any meeting of the Board, whether or not called for that purpose. C. Quorum. The Committee shall act by a majority of its members at the time in office, and such action may be taken either by vote at a meeting or in writing without a meeting. A member of the Committee shall not vote or act on any matter relating solely to himself. D. Officers. The Committee may by such majority action appoint from among its number a Chairman to preside at its meetings and a Secretary, who need not be a member, to keep records of its meetings and activities and to perform such other duties and functions as the Committee may prescribe. It may in like manner designate any one or more of its members or its Secretary to execute any instrument or document upon its behalf, and the action of such person shall have the same force and effect as if taken by the entire Committee. In the event of such authorization, the Committee shall in writing notify the other Administrative Parties thereof, and such parties shall be entitled to rely upon such notification until the Committee shall give written notification to the contrary. E. Records and Reports. The Committee shall exercise such authority and responsibility as it deems appropriate in order to comply with ERISA, the Code, the Securities Exchange Act of 1934, and governmental regulations issued thereunder relating to reporting and disclosure, including the furnishing of information to Participants and Beneficiaries and the filing of information and reports with the Internal Revenue Service and the Department of Labor. F. Powers and Duties. The Committee shall control and manage the operation and administration of the Plan and shall have any and all VIII-1 69 powers, authority and duties which shall be necessary and proper to enable it to carry out its obligations under this Agreement, including by way of illustration and not limitation, the power and duty: (1) To construe and interpret the Plan as provided in Article I(C), decide all questions of eligibility, determine the amount, manner and time of payment of any benefits hereunder, and direct the Trustee with respect to the amount, manner and time of payment of such benefits; (2) To prescribe procedures to be followed by Participants or Beneficiaries filing applications to participate, elections, designation of beneficiary forms, applications for benefits, if any, and any other forms required or desirable under the Plan; (3) To prepare and distribute, in such manner as the Committee determines to be appropriate, information explaining the Plan; (4) To receive from the Company and from Participants such information as shall be necessary for the proper administration of the Plan; (5) To furnish the Company, upon request, such annual reports with respect to the administration of the Plan as are reasonable and appropriate; (6) To receive and review the periodic valuation of accounts made by the Trustee; (7) To receive, review and keep on file (as it deems convenient and proper) reports of account allocations and benefit payments by the Trustee and reports of disbursements for expenses directed by the Committee; (8) To appoint or employ individuals to assist in the administration of the Plan and any other agents it deems advisable, including legal, accounting, appraisal, and benefit consultant counsel and to delegate any of its administrative duties to other employees of the Company or any other Related Company, including employees in the Company's, or any other Related Company's, personnel department. G. Rules and Regulations. The Committee may adopt such rules and regulations as it deems necessary, desirable or appropriate in connection with the administration of the Plan including, but not limited to, rules and regulations relating to loans and hardship distributions. All rules and regulations of the Committee shall be uniformly and consistently applied to all Participants in similar circumstances. When making a determination or calculation, the Committee shall be entitled to rely upon information furnished by a Participant or Beneficiary, the Company, any Related Company, legal counsel for the Company, or the Trustee. VIII-2 70 H. Claims Procedure. If any Participant or Beneficiary shall claim benefits for which the Committee has determined he is ineligible, or shall dispute the amount or timing of benefits determined by the Committee to be payable hereunder, he shall be entitled to make a claim for benefits pursuant to this Paragraph (H). All claims for benefits under this Agreement, whether made by a Participant or Beneficiary, shall be in writing addressed and delivered to the Committee, or any member thereof, at the Company's main office, shall contain the claimant's name, mailing address, and telephone number, if any, and shall identify the claim in a manner reasonably calculated to make the claim understandable to the Committee. If the claim is defective in any foregoing respect, the Committee may at any time within ten days after said delivery give the claimant not less than ten days' written notice specifying the defect or defects and the deadline for correction. A claim shall be deemed to be effectively made when and if it is timely corrected in writing (addressed and delivered as aforesaid), or when it is timely and correctly prepared and delivered in the first place, or when it (or a revision thereof) is timely delivered as aforesaid if the Committee does not give written notice of any defect therein within ten days after said delivery. It is further agreed: (1) If a claim is (or is deemed to be) effectively made, the Committee, shall within 60 days thereafter notify the claimant in writing whether the claim has been granted or has been denied in whole or in part. Such notice shall be written in a manner calculated to be understood by the claimant, shall make specific reference to the Plan, and, if adverse in whole or in part, shall set forth: (a) The specific reason or reasons for the denial; (b) A description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary; and (c) An explanation of the claim review procedure set forth in (3) and (4) below. (2) If within said 60 days the claim has not been granted, it shall be deemed to have been denied for purposes of the claim review procedure set forth in (3) below, even if notice of denial has not been given under (1) above. (3) Upon denial of a claim in whole or in part, the claimant or his duly authorized representative shall have 60 days within which to file with the Committee or any member thereof a written request for a review of such denial, whereupon - (a) The Committee shall as promptly as is practicable, but not later than 60 days after receipt of such request, schedule a hearing to review said claim. VIII-3 71 (b) The claimant or his duly authorized representative shall, pending and/or at said hearing, be permitted at all reasonable hours to review the pertinent documents and also be entitled to submit issues and comments in writing. (4) The hearing mentioned in (3) above shall be held at the Company's main office during normal business hours, unless a different time and/or place are mutually agreed upon. It shall be attended by at least a majority of the Committee. A decision on the claim shall be rendered thereat or as soon as possible thereafter, but in no event later than 120 days after the Committee's receipt of the written request for review; shall be in writing and include specific reasons; shall be written in a manner calculated to be understood by the claimant; and shall contain specific reference to the pertinent Plan provisions on which the decision is based. I. No Separate Committee. Notwithstanding the foregoing provisions of this Article VIII - (1) If and while the one or more Persons comprising the Committee and Trustee are identical, the separation in this Agreement of the responsibilities, rights, powers, authority, and functions of the Committee and Trustee respectively shall be disregarded; said Persons shall act and serve in both said capacities combined; and they need not furnish information, directions, instructions or notices, or make reports or demands, by themselves in one such capacity to themselves in the other such capacity. (2) If and while there is no Committee, either because none is designated or no one or more Persons are at the time in question actively serving as members thereof, the responsibilities, rights, powers, authority, and functions of the Committee shall be vested in the Company; and the Company and Committee need not furnish information, directions, instructions or notices, or make reports or demands, one to the other. (3) Whoever performs the functions of the Committee shall be the Plan Administrator as defined in ERISA. J. Investment Committee. The Board shall appoint an Investment Committee of one or more individuals to select, deselect and monitor the performance of, the Investment Funds and to direct the Trustee as to the acquisition and disposition of shares of Company Stock. The Investment Committee shall have such powers as are necessary, desirable and/or appropriate to enable it to carry out its duties. The rules applicable to the Committee in Article VIII (B), (C) and (D) also shall apply to the Investment Committee. K. Indemnification. The Company shall indemnify each member of the Committee and the Investment Committee against any personal VIII-4 72 liability or expense in connection with serving as a Committee member except for his own gross negligence, willful misconduct or bad faith. The Company may obtain and maintain in effect fiduciary liability insurance covering each member of the Committee and the Investment Committee in amounts as determined by the Company to be sufficient to cover any liability or costs which could arise from their serving as members of the Committee and the Investment Committee. Such indemnification and/or insurance shall also apply to any individual serving as Trustee or co-Trustee but not to a corporate trustee. VIII-5 73 ARTICLE IX TRUSTEE AND OTHER FIDUCIARIES A. Bonding. Every Fiduciary shall be bonded to the extent (1) required by Section 412 of ERISA or applicable Labor Regulations or (2) directed by the Company. B. Protective Provisions for Fiduciaries. To the extent permitted by ERISA, it is agreed: (1) No Fiduciary shall be liable with respect to a breach of fiduciary duty if such breach was committed before he became a Fiduciary or after he ceased to be a Fiduciary. (2) Notwithstanding any other provisions of this Agreement - (a) Any Fiduciary may, but need not, purchase insurance from and for his own account to cover liability arising under or with respect to the Plan. (b) The Company may, but need not, purchase insurance to cover potential liability of one or more Persons who serve in a fiduciary capacity with respect to the Plan. (c) Upon first obtaining the written consent of the Company, any Trustee may use assets of the Trust to purchase insurance for itself and/or one or more other Fiduciaries and/or the Trust to cover liability or losses occurring by reason of the act or omission of itself and/or one or more other Fiduciaries, if such insurance permits recourse by the insurer against such Trustee and/or one or more other Fiduciaries in question in the case of its or their breach of a fiduciary obligation. (3) Any Fiduciary may, by written instrument, allocate and delegate to others any of such Fiduciary's powers, duties or responsibilities, terminable upon such notice as such Fiduciary deems prudent. Any person or entity may serve in more than one fiduciary capacity with respect to the Plan. A Fiduciary's responsibility shall be limited to performance of those duties conferred upon such Fiduciary by or pursuant to the Plan, and, subject to Section 405 and 410 of ERISA, no Fiduciary shall be responsible for the acts or omissions of any other Fiduciaries. C. Management and Control of Assets; Consultants and Investment Managers. To the extent permitted by Section 402(c) of ERISA: (1) Any Fiduciary may employ one or more Persons to render advice with regard to any responsibility which such Fiduciary has under this Agreement. (2) At the direction of the Committee, the Trustee shall invest and reinvest ESOP Contributions primarily in Company Stock, IX-1 74 in accordance with the terms of this Agreement. The Committee shall assume the responsibility and liability for the prudence of investment in Company Stock directed by it under this subparagraph (C)(2). Except as hereinafter otherwise provided, the Trustee shall be the Fiduciary with respect to the investment, management and control of the Trust Fund, with full discretion in the exercise of such investment, management and control; provided, however, that this subparagraph (C)(2) shall not apply to Trust assets which consist of Contracts issued by an Insurer qualified to do business in Michigan nor to any Trust assets held by such Insurer; nor shall it apply if the Plan is exempt from such requirements by reason of Section 403(b)(4) of ERISA and applicable Labor Regulations. (3) The Company may, by resolution of its Board of Directors, assume from the Trustee and transfer to the Committee or an Investment Manager the authority and duty to direct the investment and management of all or a portion of the Trust Fund; and, if such authority and duty have been transferred to the Committee, the Committee, by appropriate action, may appoint an Investment Manager to direct the investment and management of all or a portion of the Trust Fund, provided that: (a) A copy of any such Board resolution or Committee action shall be delivered to the Trustee whereupon the Committee or the Investment Manager, as the case may be, shall be the Fiduciary with respect to the investment and management of the Trust Fund (or designated portion thereof) and the Trustee shall have no responsibility therefor. (b) Any transfer of investment and management to the Committee or to an Investment Manager may be revoked upon receipt by the Trustee of a written notice to that effect by the Company through its Board of Directors or the Committee, as the case may be. (c) The appointment, selection and retention of a qualified Investment Manager shall be solely the responsibility of the Company or the Committee, as the case may be. (4) During such period or periods of time, if any, as the Committee or any Investment Manager is authorized to direct the investment and management of all or a part of the Trust Fund: (a) The Trustee is authorized and entitled to rely upon the fact that said Investment Manager is at all times a qualified Investment Manager, as defined in Section 3(38) of ERISA, until such time as the Trustee has received a written notice from the Company or Committee to the contrary, as well as to rely upon the fact that said Investment Manager is authorized to direct the investment and management of the Trust Fund until such time as the Company or Committee, as the case may be, shall notify the Trustee in writing that another Investment Manager IX-2 75 has been appointed in the place and stead of the Investment Manager named or, in the alternative, that the Investment Manager named has been removed and the responsibility for the investment and management of the Trust Fund has been assumed by the Committee or has been transferred back to the Trustee, as the case may be. (b) The Trustee shall not be liable or responsible for losses or unfavorable results arising from the Trustee's compliance with proper directions of the Committee which are made in accordance with this Agreement and which are not contrary to the provisions of any applicable Federal or State statute regulating such investment and management of the assets of an employee benefit trust. (c) The Trustee shall not be liable or responsible in any way for any losses or other unfavorable results arising from the Trustee's compliance with investment or management directions received by the Trustee from the Investment Manager. (d) All directions concerning investments made by the Committee or the Investment Manager shall be signed by such person or persons, acting on behalf of the Committee or the Investment Manager, as the case may be, as may be duly authorized in writing; provided, however, that the transmission to the Trustee of such directions by photostatic teletransmission with duplicate or facsimile signature or signatures shall be considered a delivery in writing of the aforesaid directions until the Trustee is notified in writing by the Committee that the use of such devices with duplicate or facsimile signatures is no longer authorized. (e) The Trustee shall, as promptly as possible, comply with any written directions given by the Committee or an Investment Manager hereunder and, where such directions are given by photostatic teletransmission with facsimile signature or signatures, the Trustee shall be entitled to presume that any directions so given are fully authorized. (f) The Trustee shall not be liable for its failure to invest any or all of the Trust Fund in the absence of such written directions. (g) The Trustee shall have no obligation to determine the existence of any conversion, redemption, exchange, subscription or other right relating to any of said securities purchased, of which notice was given prior to the purchase of such securities, and shall have no obligation to exercise any such right unless the Trustee is informed of the existence of the right and is instructed to exercise such right, in writing, by the IX-3 76 Committee or the Investment Manager, as the case may be, within a reasonable time prior to the expiration of such right. (h) Neither the Committee nor any Investment Manager referred to above shall direct the purchase, sale or retention of any assets of the Trust Fund if such directions are not in compliance with the applicable provisions of ERISA and any Regulations issued thereunder. D. Participant-Directed Investments. If, while, and to the extent that a Participant exercises control with the meaning of Section 404(c) of ERISA over the assets in his 401(k) Account by an election under Article IV(K-1) or (L), such Participant shall not be deemed to be a Fiduciary by reason of such exercise; and no Person who is otherwise a Fiduciary shall be liable under Title I, Subtitle B, Part 4, of ERISA (or comparable provisions of this Agreement) for any loss, or by reason of any breach, which results from such Participant's exercise of control. E. Prohibited Transactions, Etc. Notwithstanding any other provision of this Agreement - (1) Except as authorized by applicable Regulations, no Fiduciary may maintain the indicia of ownership of any assets of the Trust outside the jurisdiction of the district courts of the United States. (2) A Fiduciary shall not knowingly and willfully cause the Trust to engage in a transaction which violates Section 406 or 407 of ERISA or which is taxable under Section 4975 of the Code. F. General Duties of Trustee. In addition to all its other duties and responsibilities under this Article IX and other provisions of this Agreement, the Trustee shall - (1) Receive, collect, hold, safeguard, administer and retain, temporarily or permanently, the cash and other property originally or at any time comprising all or part of the Trust Fund, together with such income, rents, issues and profits as shall from time to time be produced thereby or arise therefrom. (2) Make such payments and distributions, and take such further action, as shall be proper to effectuate benefits under the Plan and to carry out this Agreement. (3) Maintain complete records and accounts of the Trust, including those which the Company or Committee may direct, and the Company or Committee may examine the same at all reasonable times during business hours. (4) Render such periodic accountings and reports, including but not limited to those hereafter described in this Article IX, as the Company or Committee may reasonably require. IX-4 77 (5) Carry out the proper directions and instructions of the Committee and, insofar as may be proper under this Agreement, make determinations, participate in consultations and conferences, and give or withhold approvals and consents. G. General Powers of Trustee. Except as otherwise expressly provided in this Agreement or required by law, the Trustee is authorized and empowered - (1) To sell, exchange, transfer, assign, lease, pledge, mortgage or otherwise encumber or dispose of, publicly or privately, any real or personal property at any time included in the Trust Fund as and when, for such (if any) price and consideration, on credit or otherwise, with or without security, and upon such other terms and conditions as the Trustee shall deem proper. (2) To invest and reinvest all or part of the Trust Fund, in such amounts, proportions and investments, including but not limited to bonds, notes, debentures, mortgages, equipment trust certificates, investment trust certificates, preferred or common stocks, mutual funds or other property, real or personal, either within or without the State of Michigan, as the Trustee may deem proper or the Committee shall direct. (3) To hold cash uninvested, or on deposit with any bank, savings and loan association or trust company, in such amount as the Trustee shall deem proper, for the purpose of defraying anticipated expenses of (and benefits out of) the Trust. At any time the Trustee is a bank or trust company the authority herein conferred shall extend to deposits with the Trustee. (4) To pay, perform, defend, collect, maintain, sue on, modify, settle, compromise, release, abandon or otherwise adjust or dispose of any claims or demands in favor of or against the Trust Fund or any Participant's account. (5) To vote or not vote any stock or securities in person, through designees or by proxy (but with respect to Company Stock, only as provided in Article IX(S). (6) To hold or register any stock, securities or other property in the name of any Trustee or nominee or unregistered or in such form that title shall pass by delivery, provided that the records of the Trustee shall always indicate the fiduciary nature of such ownership. (7) To exercise, not exercise, sell or otherwise dispose of any conversion or subscription right, or other right or option, and to make any payments incidental thereto. (8) To oppose, consent to or participate in any voting trust, pooling agreement, foreclosure, reorganization, consolidation, merger, liquidation, refinancing, or sale of assets, of or with IX-5 78 respect to any corporation or other organization, including the Company (subject to Article IX(S) through (W)), and in connection therewith to deposit stock, securities or other property with, and transfer title to, any protective committee or other Person whatsoever. (9) To pay calls, assessments and other charges which the Trustee shall deem proper. (10) To borrow and lend money in such circumstances and upon such terms and conditions, with or without security, as the Trustee shall deem proper and, further, to borrow from any lender (including the Company or the Trustee) solely for the purpose of financing the acquisition of Company Stock, giving its note as Trustee with such reasonable interest and security for the loan as may be appropriate or necessary, provided that any such borrowing shall comply with the provisions of Article IX(R). (11) To make or not make any provision for amortization or a sinking fund with respect to any security which is received at a value or purchased at a price in excess of par or of the amount payable on its call, redemption, maturity or liquidation. (12) Subject to Article IX(E)(1), to keep all or part of the Trust Fund at any place or places, and to hold and administer the Trust Fund in one or more common trust funds or other consolidated funds, in which the various accounts may have undivided interests, and without distinction between income and corpus. (13) To retain as an investment any stock, securities or other property received through the exercise of any foregoing powers and authority. (14) To make, execute and deliver any and all agreements, instruments and documents whatsoever, including but not limited to those incidental to the foregoing powers and authority, and to make the same binding and enforceable beyond the duration of the Trust. (15) To buy, sell and trade in option contracts and 'short' sales for cash, and for such purpose the Trustee may maintain and operate cash accounts with brokers, and may deliver and pledge any securities held or purchased by the Trustee with such brokers both as security for loans and advances made to the Trustee and to ensure the Trustee's ability to deliver stock against short options provided that all such purchases, sales and trades shall be made on one or more designated national securities exchanges whose plans regulating such transactions have been declared effective pursuant to the Securities Exchange Act of 1934, such as the Chicago Board Options Exchange, Incorporated. (16) To do any and all additional acts and things which the Trustee shall be authorized to do under the laws of the State of Michigan or of any other jurisdiction in which it may act or which IX-6 79 the Trustee in its discretion shall deem proper to carry out this Agreement, to the end that the Trustee shall have and may exercise all the powers and authority of an absolute owner, except as the Committee shall otherwise direct; and no Person dealing with the Trustee shall be bound to see to the application of any money or other property paid, delivered or transferred to the Trustee or to inquire into the validity or propriety of any transaction whatsoever. (17) As directed by the Committee, to invest any reinvest the assets of the ESOP portion of the Plan and the assets of the Company Stock Fund primarily in Company Stock in accordance with this Agreement. (18) In the event that the Committee directs the Trustee to dispose of any Company Stock held as Trust assets, under circumstances which require registration and/or qualification of the securities under applicable Federal or state securities laws, then the Company, at its own expense, will take, or cause to be taken, any and all such actions as may be necessary or appropriate to effect such registration and/or qualification. H. Appraisal. As of each Anniversary Date and Valuation Date, and as of such other dates as the Company or Committee may reasonably direct, the Trustee shall determine the fair market value of the assets comprising the Trust Fund, including the assets of each Investment Fund, established within the context of the Trust Fund by appraising such assets as follows, except as otherwise required by ERISA: (1) Stocks and securities which are listed or reported on any national exchange shall be valued on the basis of their closing prices on such exchange on the appraisal date or, if there were no reported sales on such exchange on the appraisal date, then at their bid prices at the close of market. (2) Stocks and securities not susceptible of valuation under (4), but which are traded over-the-counter, shall be valued on the basis of their closing prices on the market on the appraisal date or, if there were no reported sales over-the-counter on the appraisal date, then at their bid prices at the close of market. (3) Stocks and securities not susceptible of valuation under (4) or (5), but which would be susceptible of valuation as of a date not more than seven (7) days prior to the appraisal date, shall be valued as of such prior date as near as possible to the appraisal date. (4) For purposes of (2), (3), and (4) above, information contained in any newspaper of general circulation or any standard financial periodical, or furnished by any national securities exchange or by any broker who is a member of any national securities exchange, as the case may be, may be fully relied upon IX-7 80 by the Trustee in the absence of actual knowledge or advice to the contrary. (5) property not subject to valuation by the foregoing methods shall be valued at its fair market value in accordance with written directions given to the Trustee by the Committee (except as otherwise provided in Article XII). (6) There shall be excluded from the assets valued under this Paragraph (H), if appraisal is being made as of an Anniversary Date, the amount of the Company's contribution which is allocable to the Participants' accounts as of said date. (7) Valuations determined by appraisal under this Paragraph (H) shall be binding and conclusive upon each and every Person beneficially interested in the Trust, but shall not be binding upon the Company or Committee unless incorporated in an accounting under Paragraph (i) below. (8) Upon completion of an appraisal, the Trustee shall file copies thereof with the Committee and the Company. (9) Notwithstanding the foregoing, any assets of the Trust Fund or any Investment Fund within the context of the Trust Fund consisting of units of participation in any pooled fund established and maintained by the Trustee under any trust instrument establishing a pooled fund or funds for the investment of the assets of pension and profit-sharing plans of various employers for which the Trustee acts as trustee shall be valued in accordance with the terms of such trust instrument. I. Periodic Accounting. Within 60 days after such Anniversary Date, and at such other times as the Company or Committee may reasonably direct or as ERISA may require, the Trustee shall prepare and deliver to the Company and Committee an accounting of the administration of the Trust, which accounting shall include a description of all assets then comprising the Trust Fund and shall be in such further detail as the Company or Committee may reasonably request. Within 90 days after receiving such accounting, the Company and Committee, respectively, shall notify the Trustee in writing whether or not such accounting is approved; and unless so disapproved, it shall be deemed to be approved. It is in addition agreed: (1) Either the Company or the Committee or both may require the Trustee to furnish such other or additional information with respect to the administration of the Trust as may be reasonably necessary or desirable prior to determining upon the approval thereof; and in such event the aforesaid 90-day period shall be tolled until such information is received by the party requesting it. (2) If the Company or Committee shall notify the Trustee that the aforesaid accounting is not approved, an audit or opinion shall IX-8 81 thereupon be made by an independent public accountant or accountants chosen by the Company or Committee, as the case may be. Upon completion of such audit or opinion, any errors in the accounting shall be corrected, and the corrected accounting shall be deemed to be approved by the Company and Committee. (3) The approval by the Company and Committee of the accounting or corrected accounting shall constitute an account stated between the Company, Committee, Trustee, all Participants, all Beneficiaries, and any other Persons having any interest in the Trust or Plan. (4) Nothing in this Paragraph (i) shall prevent the Trustee from having an accounting settled and allowed by, or being required by the Company or Committee to account in, a court of competent jurisdiction. (5) The foregoing provisions of this Paragraph (i) are subject to the provisions of ERISA. J. Protective Provisions for Trustee. The Trustee accepts the Trust solely upon the terms and conditions of this Agreement, and no duties or responsibilities not expressly set forth herein or in ERISA shall be implied or imposed. It is further agreed: (1) The Trustee shall have no duty to ascertain whether any directions or instructions of the Company or Committee are in accordance with this Agreement, nor to see to the application of any payment made pursuant to such directions or instructions. (2) Any benefit or other payment under the Plan shall be made only if and when the Trustee has sufficient assets of the Trust Fund available for the purpose intended. (3) In the event of any dispute as to the Persons to whom payment of any money or delivery of any other property shall be made by the Trustee, the Trustee may withhold such payment or delivery in whole or part until such dispute shall be settled to the satisfaction of the Trustee or determined by a court of competent jurisdiction. (4) The Trustee may withhold all or such part of any distribution as the Trustee in its discretion may deem proper to protect the Trustee and the Trust Fund against any liability or claim or account of any estate, inheritance, income or other tax whatsoever, and with all or any part of any such distribution so withheld may discharge any such liability. Any part of any such distribution so withheld by the Trustee that may be determined by the Trustee to be in excess of any such liability shall upon such determination by the Trustee be distributed forthwith to the Person from whom it was withheld. (5) The Trustee shall not be obligated to institute any action or proceedings for the collection of money or other property IX-9 82 due the Trust, or in defense of any claim against the Trust or any portion of the Trust Fund, unless the Trustee shall first have been indemnified to its satisfaction for all costs, expenses, attorney fees and liabilities to which the Trustee might become subject. K. Provisions Pertaining to Co-Trustees. During any period of time when the Trustee shall consist of two or more Persons (whether individuals, corporations or otherwise), the following provisions shall apply: (1) Except as otherwise provided in the foregoing provisions of this Article IX - (a) Each such Person shall use reasonable care to prevent a co-Trustee from committing a breach; and (b) Such Persons shall jointly manage and control the Trust assets, except that this item (b) shall not preclude any agreement, and the co-Trustees are hereby authorized to agree (in a written document executed by all co-Trustees) to allocate specific responsibilities, obligations or duties among themselves, in which event a co-Trustee to whom certain responsibilities, obligations or duties have not been allocated shall not be liable by reason of this item (b), either individually or as a Trustee, for any loss resulting to the Trust arising from acts or omissions on the part of another co-Trustee to whom such responsibilities, obligations or duties have been allocated. (2) Nothing in (1) above shall limit any liability that a Fiduciary may have under Part 4 of Title I of ERISA. (3) The Trustee shall act by a majority of such Persons at the time in office, and such action may be taken either by vote at a meeting or in writing without a meeting. (4) Said Persons serving as co-Trustees may unanimously designate any one or more co-Trustees to execute any instrument or document on behalf of all, including but not limited to the signing or endorsement of any check and the signing of any applications for Contracts, and the action of such designated co-Trustee shall have the same force and effect as if taken by all the co-Trustees. In the event of such authorization, all the co-Trustees shall in writing notify the other Administrative Parties thereof, and such parties shall be entitled to rely upon such notifications until one or more co-Trustees shall give written notification to the contrary. L. Removal and Resignation of Trustee. Any sole or co-Trustee may resign at any time upon not less than 60 days written notice to the Board of Directors of the Company specifying the effective date of resignation. Any sole or co-Trustee may be removed by the Board with or without cause, but only upon not less than 60 days' written IX-10 83 notice to such sole or co-Trustee specifying the effective date of removal and enclosing a copy of the resolution of the Board. No such removal shall become effective until all sums due to such sole or co-Trustee under this Agreement have been paid. The Trustee and the Committee may waive any of the provisions of this Paragraph by mutual agreement in writing. M. Successor Trustees. The lack of a Trustee due to resignation, removal or otherwise shall not terminate the Trust. The Company shall promptly appoint one or more successor Trustees. In the absence of any other Trustee, the Committee shall act and serve as an interim Trustee. Each and every estate, title, right, power, authority, discretion, duty and obligation conferred upon the Trustee by this Agreement shall devolve upon, and be exercised and performed by, such successor Trustees, including the Committee or any remaining Trustee. N. Settlement of Accounts upon Resignation or Removal of Trustee. In the event of the resignation or removal of a sole or co-Trustee, such sole or co-Trustee shall have the right to a settlement of its accounts at the expense of the Trust, which accounting shall be made as provided in Paragraph (i) above. Upon completion of such accounting and payment to the outgoing sole or co-Trustee of its compensation and expenses, including court costs and legal fees, such sole or co-Trustee or its legal representative shall promptly assign, transfer and deliver unto the remaining or successor Trustee (or in the absence thereof, to the Committee) the Trust Fund and all records and data (or copies thereof) pertaining to the Plan and Trust. O. Segregated Accounts. Except as provided in Article IV(K-1), no Participant shall be permitted to segregate and/or separately direct the investment of his account under the Plan and any reference to segregated accounts elsewhere in this Agreement shall be disregarded. P. Investments in Common Trust Funds. Notwithstanding any other provisions of this Agreement, all or any part of the assets of the Trust may be invested in any collective investment trust; provided that such collective investment trust is exempted under the Code or regulations or rulings issued by the Internal Revenue Service and is then maintained by the Trustee. The provisions of the document governing any such collective investment trust, as amended from time to time, shall govern any investment therein and are hereby made a part of this Agreement. Q. Voting Rights of Investment Committee with respect to Company Stock. The Investment Committee shall have the right to direct the Trustee as to the manner in which voting rights appurtenant to Company Stock held by the Trustee, whether or not allocated to the Company Stock Accounts or 401(k) Accounts of Participants, are to be exercised in each matter brought before an annual or special stockholders meeting of the Company and on each matter as to which shareholder authorization of corporate action is solicited by IX-11 84 written consent. Before each such meeting or solicitation, the Company shall cause to be furnished to each member of the Investment Committee a copy of the proxy, other information or solicitation material furnished to other stockholders, together with a form requesting directions on how the shares of Company Stock held by the Trustee shall be voted on each such matter. Upon timely receipt of such directions the Trustee shall on each such matter vote as directed the number of shares held by the Trustee and covered by such instructions. If the Investment Committee fails to give the Trustee timely instructions as to how to vote any Company Stock, the Trustee shall not vote such Company Stock. R. Rights on Tender or Exchange Offer for Company Stock. Each present or former Participant (or, in the event of his death, his Beneficiary) shall have the right, to the extent of the number of shares of Company Stock allocated to his Company Stock Account and 401(k) Account, to instruct the Trustee in writing as to the manner in which to respond to a tender or exchange offer with respect to such shares of Company Stock. The Committee shall use its best efforts timely to distribute or cause to be distributed to each present or former Participant (or Beneficiary thereof) such information as will be distributed to stockholders of the Company in connection with any such tender offer or exchange offer. Upon timely receipt of such instructions, the Trustee shall respond as instructed with respect to shares of such Company Stock. The instructions received by the Trustee from Participants shall be held by the Trustee in confidence and shall not be divulged or released to any person, including officers or employees of the Company or any Related Company. If the Trustee does not receive timely instruction from a Participant (or Beneficiary) as to the manner in which to respond to such a tender or exchange offer, such Participant (or Beneficiary) shall be deemed to have instructed the Trustee not to tender or exchange the shares allocated to his Company Stock Account and 401(k) Account, and the Trustee shall not tender or exchange any such shares. If pursuant to instructions from any Participant or Beneficiary (each in this paragraph being referred to as a "Tendering Participant") given pursuant to this Paragraph R the Trustee tenders shares of Company Stock in the Tendering Participant's Company Stock Account and 401(k) Account, if any, and receives cash for these shares, the Tendering Participant's (i) Company Stock Account shall be reduced by the number of shares in his Company Stock Account which were sold, his Other Investments Account shall be increased by the amount of cash received, and the proceeds of the sale if they consist of cash shall be invested in investments other than Company Stock authorized for the ESOP portion of the Trust and (ii) the portion of the Participant's 401(k) Account, if any, invested in the Company Stock Fund shall be reduced by the number of shares in the Company Stock Fund portion of his 401(k) Account which were sold, and the proceeds of the sale if they consist of cash shall be invested in any one or more of the Other Investment Funds as directed by the Participant. If the Trustee receives property other than cash for any tendered shares IX-12 85 of Company Stock, the Tendering Participant's (i) Company Stock Account shall be reduced by the number of shares sold, the property received shall be retained in a separate fund to be established by the Trustee pending a decision by the Trustee of its disposition, and the Tendering Participant shall be credited with his allocable share of such special fund and any successor investments and (ii) the portion of the Participant's 401(k) Account, if any, invested in the Company Stock Fund shall be reduced by the number of shares in the Company Stock Fund portion of his 401(k) Account which were sold, the property received shall be retained in a separate Investment Fund in the 401(k) portion of the Trust pending a decision by the Trustee of its disposition, and the Tendering Participant shall be credited with his allocable share of such separate Investment Fund. Notwithstanding the foregoing provisions of this Paragraph R, no Participant or Beneficiary shall have the right under this Paragraph R to instruct the Trustee as to the manner in which to respond to a tender or exchange offer made by any Related Company, and the Trustee shall tender or exchange any shares of Company Stock held by the Trust in response to such a tender or exchange offer only if so directed by the Investment Committee, which, in so directing, shall act solely in accordance with the principles set forth in Section 404(a) of ERISA. The Trustee shall tender or exchange unallocated shares of Company Stock only if so directed by the Investment Committee, which, in so directing, shall act solely in accordance with the principles set forth in Section 404(a) of ERISA. IX-13 86 ARTICLE X TERMINATION, AMENDMENT AND SUSPENSION A. Termination, Etc.; Assumption of Plan. It is the present intention of the Company permanently to maintain the Plan and continue to make contributions under Article III(A); provided, however, that subject to Article XI(E) - (1) The Company reserves the right at any time to revoke this Agreement, terminate the Plan, or terminate or suspend its liability to make further contributions to the Trust, but no such action shall become effective until the Company shall notify the Committee and Trustee. (2) The Plan shall automatically terminate, and likewise the Company's liability to make contributions to the Trust, upon the Company's legal dissolution, or upon its adjudication as bankrupt or insolvent, or upon its making a general assignment for the benefit of creditors, or upon a receiver being appointed for its assets, or upon its merger or consolidation with or into any other corporation or corporations, or upon a complete discontinuance of contributions under the Plan within the meaning of Section 411(d)(3) of the Code. (3) Termination of the Plan may be forestalled if and to the extent that any successor corporation, or any corporation or business entity employing a majority of the then Participants, shall expressly assume the Plan and the Company's liability to make contributions. Such assumption shall be expressed in a written agreement between the Company and such corporation or business entity, pursuant to proper resolution of the latter's Board of Directors or other governing body, but shall not be effective unless copies of such agreement and resolution shall be filed with the Trustee prior to termination. Such agreement shall provide for assumption of the Plan and the liability to make contributions, with respect to all Participants employed by such corporation or business entity, and such corporation or business entity shall thereupon be substituted pro tanto in the place and stead of the Company. With respect to any then Participants who are not taken over as employees of such corporation or business entity, the Plan shall be deemed to terminate, and Paragraph (B) below shall be invoked. (4) In the event of any termination or suspension under (1) or (2) above, the Company and the Trustee shall give prompt notice thereof to the Internal Revenue Service, if, and to the extent required by the Code or ERISA; and, subject to Paragraph (B) below, each Participant's account shall be Vested to the extent required by Article XI(E)(2). (5) The Company may cause a termination referred to above to apply to the ESOP portion of the Plan or the 401(k) portion of the Plan or to the entire Plan. X-1 87 B. Liquidation of Trust. In the event of termination of the Plan, after each such account has been appropriately adjusted to cover any expenses of distribution and final liquidation costs, the Trustee shall pay the balance of such account to the Participant (or, if deceased, his Beneficiary) in an immediate Lump Sum, provided that, at the time the Trust is terminated the Company does not maintain any other defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code), and the consent of the Participant or his Beneficiary to such immediate Lump Sum distribution shall not be required. Alternatively, if so directed by the Committee, the Trustee shall continue the 401(k) portion of the Plan and Trust and/or the ESOP portion of the Plan and Trust in existence as "frozen" Plans and Trusts (without receiving any additional Company contributions and without admitting any additional Participants) and shall pay the balances of the accounts of Participants to them at such times as they are entitled to receive the same under this Agreement, i.e., at retirement, death, other termination of employment. In such event the frozen Plan and Trust shall be operated and maintained so that they continue to meet the qualification requirements of Section 401(a) of the Code, including the minimum coverage requirements of Section 410(b) of the Code to the extent such requirements apply to a frozen Plan. C. Termination of Trust. Notwithstanding termination of the Plan, the Trust shall terminate when and if, but not until, the Trust Fund shall be entirely paid out and distributed in accordance with this Agreement. D. Amendment. Subject to Article XI(E) (Nonforfeitability, etc.) the Company reserves the right at any time and from time to time to amend this Agreement, without the consent of any Participant or Beneficiary, in any manner which the Company deems to be proper, whether or not (1) for reasons of business necessity or (2) for the purpose of causing the Plan and Trust to be tax qualified or to continue to be tax qualified. No such amendment, except upon written consent, shall increase the duties or liabilities of the Trustee or Committee, or diminish their compensation, or deprive any Participant or Beneficiary of any then Vested equitable interest in the Trust; provided, however, that such amendment may be retroactive to the extent necessary to take full advantage of Section 401(b) of the Code if such amendment is adopted for the purpose of causing the Plan and Trust to be tax qualified or to continue to be tax qualified with respect to any taxable year of the Company and is adopted and effective within the time limit specified in Article III(A) with respect to making contributions for such taxable year or within such longer period permitted under applicable Regulations. Notwithstanding anything herein to the contrary, any provisions of Article IV relating to allocations to ESOP Accounts shall not be amended more than once every six months other than to comport with changes in the Code, ERISA or the rules thereunder. X-2 88 ARTICLE XI MISCELLANEOUS A. Persons Prohibited from Serving as Fiduciaries, Etc. No person shall serve as a Committee member, Fiduciary, officer, Trustee, custodian, counsel, agent or employee of the Trust, or as a consultant to the Trust or in any other capacity, if prohibited so to do by Section 411 of ERISA. B. Information Required by ERISA. If some or all of the information necessary to enable the Committee to comply with the requirements of Title I of ERISA is maintained by - (1) An insurance carrier or other organization (normally the Insurer) which provides some or all of the benefits under the Plan, or holds assets of the Plan in a separate account, (2) A bank or similar institution (normally a corporate Trustee) which holds some or all of the assets of the Plan in a common or collective trust or a separate trust or custodial account, or (3) A Plan sponsor (normally the Company) as defined in Section 3(16)(B) of ERISA, such carrier, organization, bank, institution or sponsor shall transmit and certify the accuracy of such information to the Committee within 120 days after the end of the Plan Year (or such other date as may be prescribed by applicable Labor Regulations). C. Retention of Records for Six Years. Every Person (such as the Trustee, Committee, Insurer, Company or an accountant) who is subject to a requirement to file any description or report or to certify any information therefor under Title I of ERISA (whether or not expressly required to do so by this Agreement), or who would be subject to such a requirement but for an exemption or simplified reporting requirement under Section 104(a)(2) or (3) of ERISA, shall maintain records on matters of which disclosure is required which will provide in sufficient detail the necessary basic information and data from which the documents thus required may be verified, explained or clarified, and checked for accuracy and completeness, and shall include vouchers, worksheets, receipts, and applicable resolutions, and shall keep such records available for examination for a period of not less than six (6) years after the filing date of the documents based on the information which they contain, or six (6) years after the date on which such documents would have been filed but for the aforesaid exemption or simplified reporting requirement. D. No Reversion. The assets of the Trust shall never inure to the benefit of the Company and shall be held for the exclusive purposes of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering XI-1 89 the Plan; and except as otherwise provided in Article III(F) and (G), the Company shall not be entitled to receive or recover any part of its contributions to the Trust or the earnings thereof. E. Nonforfeitability, Etc. In compliance with ERISA and the Code, it is agreed: (1) A Participant's right to his normal retirement benefits under Article V(A) shall be Vested upon his attaining his Normal Retirement Age. (2) Upon termination or partial termination of the Plan, or the complete discontinuance of contributions by the Company under the Plan, the rights of all Participants to Accrued Benefits as of such time (i.e., those accrued to the date of such event), to the extent then funded or credited, shall be Vested, except as otherwise required or permitted by applicable Regulations (e.g., Regulation Section 1.411(d)- 2(a)) mentioned in Section 411(d)(3) of the Code. (3) The Accrued Benefit of a Participant shall never be decreased by an amendment of the Plan, except an amendment described in Section 412(c)(8) of the Code and Section 302(c)(8) of ERISA. An amendment which has the effect of eliminating an optional form of benefit with respect to benefits attributable to service before the amendment shall be treated as decreasing the Accrued Benefit of a Participant except as otherwise provided by Treasury Regulations. (4) The vesting schedule in Article V(C) and any other vesting provision of this Agreement based thereon shall not be amended unless - (a) The Vested percentage of the Accrued Benefit derived from the ESOP Contributions and Matching Company Contributions (determined as of the later of the date such amendment is adopted, or the date such amendment becomes effective) of any Participant is at least equal to such Vested percentage computed without regard to such amendment; and (b) Each Participant with at least three Years of Service is permitted within a period beginning no later than the date such amendment is adopted, an election complying with the requirements of Regulation Section 1.411(a)-8T(b) to have his aforesaid Vested percentage computed without regard to such amendment. (5) In the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, within the meaning of Section 401(a)(12) of the Code, each Participant shall (if the Plan then terminates) receive a benefit immediately after XI-2 90 the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated). (6) A Participant's Elective Contributions Account shall be fully and immediately vested at all times. F. Rollovers; Direct Transfers; Certain Transfers Prohibited. Subject to Subparagraphs (3) and (4) of this Paragraph (F), but notwithstanding any contrary provisions of this Agreement, including but not limited to Articles V, VI and X, but only as and to the extent contemplated by Section 402(a)(5), (6) or (7), 403(a)(4), 408(d)(3) or 409(b)(3) of the Code, a Participant shall be entitled - (1) Subject to the last paragraph of Subparagraph (2) below (prohibiting certain transfers to this Plan), to transfer (or cause to be transferred) to the Trust to be held as part of his account (i) the redemption proceeds of a retirement bond and/or (ii) all or part of the cash and other property or the proceeds of the same received by him in one or more distributions together constituting a Lump Sum distribution from or under another tax qualified trust or tax qualified plan or an employee annuity or custodial account and/or (iii) an amount paid or distributed out of an individual retirement account or individual retirement annuity or retirement bond consisting of a prior rollover contribution from a tax qualified trust or annuity plan; provided, however, that no such transfer will be permitted unless the Committee determines that such transfer will meet the applicable requirements of the Plan and will not adversely affect the tax qualified status of the Plan; and/or (2) Upon at least 60 days' written notice to the Committee, to cause his entire account to the extent that it has Vested to be transferred in whole or in part on his behalf (or to him for retransfer), in the form of cash or other property or the proceeds of the same (in one or more distributions which, together with any distributions retained by him, constitute a Lump Sum distribution), to an individual retirement account, an individual retirement annuity (other than an endowment contract), a tax qualified trust, or an annuity plan. The amount so transferred to or from the Trust is herein called a "Rollover Contribution." Any Rollover Contribution to the Trust, together with the earnings thereon, shall be fully Vested but need not be segregated from the remainder of the Participant's account unless the Trustee otherwise elects or the Participant or Committee otherwise directs. In the case of a transfer described in (2) above, made to the Participant for retransfer, he shall not retransfer the portion described in Section 402(e)(4)(D)(i) of the Code (constituting in effect his own nondeductible employee contributions). XI-3 91 A Participant also shall be entitled to directly transfer to the Trust any amount described in Subparagraph (1)(ii) above, provided the tax qualified plan referred to in said Subparagraph (1)(i) permits such transfer, and to directly transfer to another tax qualified plan which provides for the acceptance of direct transfers any amount described in Subparagraph (2) above; provided, however, that no such direct transfer to or from this Plan will be permitted unless the Committee makes the same determination with respect to such transfer as it must make under Subparagraph (1) above with respect to a Rollover Contribution. For purposes of this Paragraph (F), Participant shall include an Employee who is expected to become a Participant upon completion of the age and service requirements of Article II(A)(2) of this Agreement. Notwithstanding the foregoing provisions of this Paragraph (F), there shall not be transferred to this Plan, nor shall this Plan accept, a transfer of assets from (i) a tax qualified defined benefit plan, (ii) a tax qualified Defined Contribution Plan which is subject to the funding standards of Section 412 of the Code, including a target benefit plan, or (iii) any other plan to which clause (iii) of Section 401(a)(11)(B) of the Code applies with respect to a Participant, which transfer would cause this Plan to be a "direct or indirect transferee" of such a plan with respect to a Participant within the meaning of such term as defined in Section 401(a)(11)(B)(iii) of the Code. Moreover, no transfer or rollover shall be made to the ESOP portion of the Plan. (3) This Subparagraph (3) and Subparagraph (4) below apply to distributions made on or after January 1, 1993. Notwithstanding any provision of this Agreement to the contrary that would otherwise limit a distributee's election under this Subparagraph (3), a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (4) Definitions. (i) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net XI-4 92 unrealized appreciation with respect to employer securities). (ii) Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (iii) Distributee: A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (iv) Direct rollover: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. G. Spendthrift Provision. It is the intention and purpose of the parties to this Agreement to place the absolute title to the Trust Fund in the Trustee alone, with power and authority to pay out the same only as provided in this Agreement. Accordingly, the benefits provided by this Agreement may not be assigned or alienated, within the meaning of Section 206(d)(1) of ERISA and Section 401(a)(13) of the Code, except as provided in Paragraph (H) below. H. Exceptions to Spendthrift Provision. It is agreed that: (1) Paragraph (G) above shall not apply to a loan made under Article VI(F) to a Participant or Beneficiary if such loan is secured by the Participant's Accrued Vested Benefit (within the meaning of Section 401(a)(13) of the Code) and by reason of Section 4975(d) of the Code is exempt from the tax on prohibited transactions imposed by Section 4975 of the Code. (2) Paragraph (G) above shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, except that effective January 1, 1985 said Paragraph (G) shall not apply if the order is determined by the Committee to be a qualified domestic relations order (as defined in Section 414(p) of the Code), and shall not apply to any domestic relations order entered before January 1, 1985 if the Trust commenced to pay benefits pursuant to such order on or prior to such date, or if the Trust XI-5 93 had not then commenced to pay any such benefits the Committee determines that such order is valid and compliance with same will not violate any provision of the Code or adversely affect the tax qualified status of the Plan. Notwithstanding any restrictions in this Agreement regarding the payment of benefits prior to the date on which a Participant terminates employment with the Company, a qualified domestic relations order may provide for payment of benefits to any "alternate payee" (as defined in Section 414(p)(8) of the Code) on any date subsequent to the entry of such order and subsequent to a determination by the Committee that such order is a "qualified domestic relations order" pursuant to Section 414(p) of the Code, whether or not such payment would be made prior to the Participant's "earliest retirement age" (as defined in Section 414(p)(4)(B) of the Code). If a qualified domestic relations order so provides, the Trustee shall pay benefits to the alternate payee from the vested portion of a Participant's Account as required by the qualified domestic relations order. (3) If a Participant shall so direct the Committee or Trustee in writing, amounts may be withheld out of his benefits under the Plan (not in excess of 10% of any benefit payment) to pay for his chargeable portion of group medical, hospital, accident or life insurance premiums and other group programs, not necessarily related to insurance, maintained by the Company for the convenience or welfare of all or part of its active or retired Employees. I. Execution of Instruments. Except as in this Agreement otherwise expressly provided, any instrument or document to be delivered or furnished by the Company shall be sufficiently executed if executed in the name of the Company by any officer or officers thereof; or, where furnished or delivered by the Committee, if executed in the name of the Committee by any member thereof; or where furnished or delivered by the Trustee, if executed as follows: (1) If the Trustee consists of two or more Persons, if executed in the Trustee's name by any such Person, and (2) In the case of any corporate Trustee (whether or not the sole Trustee), if executed as Trustee in the name of such corporation by any officer or officers thereof; provided, further, that any Administrative Party shall be fully protected in relying upon any instrument or document so executed; and execution as aforesaid shall create a strong presumption that any signature so affixed is duly authorized and that any information contained in such instrument or document is true and correct. J. Successors, Etc. This Agreement shall be binding upon, and inure to the benefit of, the Company and (subject to Article X(A)) its successors, the Trustee and its successors, the Committee as from time to time constituted, and the Participants and Beneficiaries, their heirs, personal representatives, successors, XI-6 94 and assigns, all in accordance with and subject to the terms of this Agreement. K. [Reserved] L. Miscellaneous Protective Provisions. It is further agreed, that, except as otherwise provided in this Agreement or ERISA - (1) Any Administrative Party may request and rely upon an opinion of counsel, who may or may not be counsel for the Company, and shall be fully protected for any action taken, suffered or omitted in good faith reliance upon such opinion. (2) No recourse under this Agreement, or for any action or nonaction hereunder, or for any loss or diminution of the Trust Fund, or for any payment or nonpayment of benefits, or for any other reason whatsoever relating to the Plan, shall be had by any Person whomsoever against any individual in his capacity as stockholder, officer, director or employee of the Company, past, present or future. (3) Where the establishment of any fact is in question, any Administrative Party may in its discretion accept as evidence thereof any properly executed instrument or document furnished by any other Administrative Party or such other evidence as may seem reasonable in the circumstances. M. No Duress or Retaliation Against Participants, Etc. No Participant or Beneficiary shall be discharged, fined, suspended, expelled, disciplined, or discriminated against for exercising any right to which he is entitled under this Agreement, ERISA, or the federal Welfare and Pension Plan Disclosure Act, or for the purpose of interfering with the attainment of any right to which such Participant may become entitled thereunder; nor shall any Participant or Beneficiary (through the use of fraud, force, violence, or threat of such use) be restrained, coerced, or intimidated (nor shall there be any attempt so to do) for the purpose of interfering with or preventing the exercise of any right to which he is or may become entitled under this Agreement, ERISA, or said Disclosure Act; nor shall any Person be discharged, fined, suspended, expelled, or discriminated against because he has given information or has testified or is about to testify in any inquiry or proceeding relating to ERISA or said Disclosure Act. N. Record Keeping, Investigations, Etc. The Company and each Fiduciary, Committee member, and other appropriate Person shall maintain such books and records pertaining to the Plan and Trust, make them available for inspection, file such information, and submit to such investigations as are properly required by the Secretary of Labor or his delegate pursuant to Section 504 or 505 of ERISA. O. Distributions to Minors and Incompetent or Missing Individuals. If any individual to whom benefits shall be XI-7 95 distributable under the Plan shall be a minor, adjudged mentally incompetent or cannot reasonably be located, the Committee may direct the Trustee to distribute such benefits by one or more of the following methods, to be determined by the Committee: (1) directly to such minor or incompetent individual; (2) to the guardian of such individual; (3) to another Person for the use or benefit of such individual; (4) by the Trustee or Committee, or their agents, expending, or arranging for the expenditure of, such benefits for the education, health or maintenance of such individual; or (5) to a bank account established on behalf of such individual. Except as to (4) above, neither the Committee nor Trustee shall be required to see to the application of any such distributions. Distributions made pursuant to this Paragraph (O) shall operate as a complete discharge of the Trustee, the Committee and the Trust Fund. Also, if the Committee determines after reasonable efforts to locate an individual who is entitled to a distribution of all or part of an account balance under the Plan that such individual cannot be located, the amount payable to such individual may, if the Committee so determines, be forfeited as of the Anniversary Date falling within the Plan Year of such determination and be allocated among the accounts of the Participants in the same manner as a forfeiture under Article IV(Q)(1). However, in such event if the individual entitled to a distribution of the forfeited amount subsequently makes a claim for the same, it shall be reinstated out of forfeitures, if any, for the Plan Year in which the claim is made and/or an additional contribution to the Trust by the Company for such Plan Year and shall be paid to such individual in accordance with the Plan. P. Expenses and Compensation. Subject to Article IX - (1) Members of the Committee shall serve without compensation, but the Trustee shall be paid compensation in such amount and manner as may from time to time be mutually agreed between the Trustee and the Company. (2) The expenses of the Trustee and Committee, including but not limited to legal fees and the Trustee's compensation, shall be paid by the Company: (a) Although it is intended that expenses shall be paid by the Company, the Trust Fund guarantees that they shall in all events be paid in full when due, and a lien for such payment is hereby impressed upon the Trust Fund; provided that no individual Trustee who already receives full-time pay from the Company shall receive from the Trust Fund any compensation for his services as Trustee, excepting reimbursement of expenses properly and actually incurred. (b) Notwithstanding any provision to the contrary, any expenses which the Trustee or Committee may incur XI-8 96 with special reference to any Participant or his account (including any Fixed Account) shall first be charged against such account to the extent that the same is sufficient for such purpose. Any balance of said special expenses shall then be charged to the Company or the Trust Fund pursuant to (a) above but shall if possible be later reimbursed to the Company or the Trust Fund out of future credits to such Participant's account. Q. No Warranty of Company Stock Value or Dividends. Neither the Company nor any Related Company nor the Trustee nor the Committee nor the Investment Committee warrants or represents in any way to any Participant or Beneficiary that the value of Company Stock will increase or will not decrease or that dividends will continue to be paid on Company Stock, either at all or at any particular level. Each Participant assumes all risks in connection with changes in the value of Company Stock and all risks that dividends may not be paid or continued, either at all or at any particular level. XI-9 97 ARTICLE XII INSURANCE PROVISIONS A. No Life Insurance. No portion of the Trust Fund shall be invested in life insurance policies, and any reference to life insurance policies or contracts elsewhere in this Agreement shall be disregarded. XII-1 98 ARTICLE XIII TOP-HEAVY RULES A. Application; Top-Heavy Status. Notwithstanding any other provision of the Plan to the contrary, the provisions of Article XIII(B) shall apply for any Plan Year beginning after December 31, 1983 in which the Plan is determined to be Top-Heavy as of the Determination Date, in accordance with the following: (1) Required Aggregation of Plans. If the Company and any Related Companies maintain one or more tax qualified plans in addition to this Plan, then there shall be aggregated for purposes of this Article XIII(A) those of such plans - (a) in which a Key Employee is a participant, and (b) which enable any plan in which a Key Employee is a participant to meet the nondiscrimination requirements of Section 401(a)(4) of the Code or the minimum participation standards of Section 410 of the Code. All such plans shall be referred to in this Article XIII as the "Required Aggregation Group". There also must be aggregated with the aforesaid plans and considered as included in the Required Aggregation Group any other tax qualified plan which was maintained by the Company or a Related Company within the five Plan Years ending on the Determination Date and would be part of the Required Aggregation Group for the Plan Year but for the fact that such plan terminated before the Determination Date. (2) Permissive Aggregation of Plans. If the Company and any one or more Related Companies maintain one or more tax qualified plans in addition to this Plan and any other plan or plans in the Required Aggregation Group then there may be aggregated with this Plan, or with the plans in the Required Aggregation Group, any of such additional plans which, when so aggregated, continue to meet the requirements of Sections 401(a)(4) and 410 of the Code (the "Permissive Aggregation Group"). There also may be aggregated with the aforesaid plans and considered as included in the Permissive Aggregation Group any other tax qualified plan which was maintained by the Company or a Related Company within the five Plan Years ending on the Determination Date and could be part of the Permissive Aggregation Group for the Plan Year but for the fact that such plan terminated before the Determination Date. (3) Key Employees. Key Employees shall mean and include all employees and former employees (and the beneficiaries of all employees and former employees) who are or were one or more of the following during the five Plan Years ending on the Determination Date: (a) officers of the Company or any Related Company having annual compensation greater than 50 percent XIII-1 99 of the Adjusted Equivalent of the amount in effect under Section 415(b)(1)(A) of the Code for such Plan Year, provided that no more than 50 employees (or if lesser, the greater of (i) three or (ii) 10% of the employees) shall be treated as officers, and provided that employees described in Section 414(q)(8) of the Code shall be excluded; (b) one of the ten employees owning (or considered as owning within the meaning of Section 318 of the Code) both more than a one-half percent interest and the largest interests in the Company and any Related Company, as further defined in Section 416(i)(1)(A)(ii) of the Code and the Treasury Regulations thereunder, having annual compensation greater than the Adjusted Equivalent of $30,000, provided that if two or more employees own the same interest, the employee having greater annual Compensation shall be treated as owning the greater interest; (c) five percent owners of the Company; or (d) one percent owners of the Company having annual compensation from the Company and any Related Company of more than $150,000 per year. For purposes of (a), (b) and (d) above, compensation means Creditable Compensation as that term is defined in Article I(A)(16). For purposes of (c) and (d) above, "owner" shall have the same meaning as in Section 416(i)(1)(B) of the Code. Also, for purposes of determining ownership in the Company under (b), (c) and (d) above, the aggregation rules of subsections (b), (c) and (m) of Section 414 of the Code shall not apply. An employee who is identified as a Key Employee under more than one category shall nevertheless be counted as one Key Employee. A Non- Key Employee who is also the beneficiary of a Key Employee shall be counted as a Key Employee, but only the Accrued Benefit attributable to the Key Employee shall be counted in determining Top-Heavy status. (4) Accrued Benefits. For purposes of this Article XIII(A), Accrued Benefits for all defined benefit plans required or permitted to be aggregated under (1) and (2) above shall mean the Actuarial Equivalent (which shall be the same for all plans being aggregated) of the Accrued Benefit determined as of the actuarial valuation date preceding or coinciding with the Determination Date. If there is no method of computing Accrued Benefits that uniformly applies for all such plans, then solely for the purposes of this Article XIII(A), the Accrued Benefit of an employee other than a Key Employee shall be determined as if his benefits accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Section 411(b)(1)(C) of the Code. XIII-2 100 For all defined contribution plans required or permitted to be so aggregated, Accrued Benefits shall mean the balance in the employer and employee contribution accounts (excluding amounts attributable to deductible employee contributions) as of the Determination Date, and shall for all plans include: (a) distributions to any employee during the five Plan Years ending on the Determination Date; (b) unrelated rollovers (rollovers during the five Plan Years ending on the Determination Date which were initiated by the employee and transferred to a plan maintained by an employer other than the Company or any Related Company) made from this Plan, (or made to this Plan prior to December 31, 1983); and (c) related rollovers (rollovers to this Plan which were either not initiated by the employee or were made from another tax qualified plan maintained by the Company or any Related Company). (5) Top-Heavy Determination. There shall be computed, as of the Determination Date, the sum of all Accrued Benefits for all Key Employees and the sum of all Accrued Benefits of all employees. Such computation shall be made separately for each plan required or permitted to be aggregated with this Plan, as of the determination date (as defined in each such plan) which falls within the calendar year in which the Determination Date falls. If the following ratio -- the sum of all Accrued Benefits for all Key Employees the sum of all Accrued Benefits for all Employees for this Plan if it is the only tax qualified plan maintained by the Company and any Related Company, or for all plans in any Required Aggregation Group, is greater than sixty percent (60%), then this Plan and all plans in any Required Aggregation Group is (are) Top-Heavy, effective on the first day of the Plan Year. If such ratio for all tax qualified plans in any Permissive Aggregation Group is 60% or less, then neither this Plan (nor any other plan in such Permissive Aggregation Group) is (are) Top-Heavy for the Plan Year. For purposes of the foregoing computation, there shall be excluded the Accrued Benefits of: (a) former Key Employees, i.e., persons who were Key Employees but who have not fulfilled the definition of Key Employee at any time during the five Plan Years ending on the Determination Date), and (b) former employees who have not performed any service for the Company or a Related Company during the five Plan Years ending on the Determination Date. B. Effect of Top-Heavy Status. XIII-3 101 (1) Minimum Contribution. For any Plan Year in which the Plan is Top-Heavy the following shall apply: (a) The amount of Company Contributions and forfeitures allocated pursuant to Article IV to the account of each Participant who is a Non-Key Employee shall not, when expressed as a percentage of such Participant's Compensation for such Plan Year, be less than the lesser of: (i) three percent (3%), or (ii) the percentage for the Key Employee for whom such percentage is the highest minus the amount of Company (or Related Company) contributions plus forfeitures allocated to such Participant's account(s) under any other tax qualified Defined Contribution Plan(s) maintained by the Company or by a Related Company, if any. Notwithstanding the foregoing, neither Matching Company Contributions nor Elective Contributions allocated to the accounts of Non-Key Employees shall be treated as Company Contributions for purposes of meeting the above minimum contribution requirement. However, Elective Contributions allocated to the Accounts of Key Employees shall be treated as Company Contributions for purposes of meeting the above minimum contribution requirement. Subparagraph (ii) above shall not apply in any Plan Year in which this Plan is required to be aggregated with a tax qualified defined benefit plan in order to enable such plan to meet the requirements of Sections 401(a)(4) or 410 of the Code. (b) For purposes of this paragraph (1) -- (i) The minimum allocations under this paragraph shall be made to the account of each active and inactive Participant who is a Non-Key Employee who has not Separated from Service as of the Anniversary Date falling within such Plan Year; and (ii) This and any other tax qualified Defined Contribution Plan(s) maintained by the Company or by a Related Company shall be treated as a single plan. (2) Vesting. Commencing with the first day of the first Plan Year in which the plan is Top-Heavy, Article V(C) (1) shall be amended to read as follows: XIII-4 102 "(1) such Participant shall be entitled only to a percentage of the balance in his ESOP Account and the balance of his Matching Company Contributions Account based upon the number of his full Years of Service, as follows:
Full Years of Percentage Service Vesting ------------- ---------- less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100%
The foregoing vesting schedule shall apply to all Plan Years after the Plan first becomes Top-Heavy, whether or not the Plan is Top-Heavy for that Plan Year. Such vesting schedule shall not apply to any Participant who fails to perform an Hour of Service for his Employer on or after the day the Plan first becomes Top-Heavy. (3) Section 415 Fraction Reduced to 1.0 if Plan Becomes Super Top-Heavy. For any Plan Year in which the plan is Top-Heavy, the figure 1.0 shall replace the figure 1.25 in the definitions of Defined Benefit Plan Fraction and Defined Contribution Plan Fraction in Article IV(A)(3)(d) (and in Section 415(e)(2)(B) and (3)(B) of the Code), except for Plan Years as to which the Plan is not Super Top-Heavy. For purposes of this subparagraph (b), a plan is "Super Top-Heavy" if (and only if) it fails the ninety percent test mentioned in Section 416(h)(2)(B) of the Code, i.e., if (and only if) it would meet the "Top-Heavy" definition in Article XIII(A)(5) above if the phrase "sixty percent" therein were replaced by "ninety percent" wherever it appears. C. Definitions. For purposes of this Article XIII, the following definitions apply: (1) "Determination Date" means the last day of the preceding Plan Year or, for the first Plan Year, the last day of such Plan Year. (2) "Non-Key Employee" means any employee who is not a Key Employee and his or her beneficiary. XIII-5 EX-10.(K) 3 EXHIBIT 10(K) 1 EXHIBIT 10(k) SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT dated as of November 12, 1996 by and among SOURCE ONE MORTGAGE SERVICES CORPORATION and THE MORTGAGE AUTHORITY, INC. and CENTRAL PACIFIC MORTGAGE COMPANY and THE FIRST NATIONAL BANK OF CHICAGO, individually and as Administrative Agent and CERTAIN OTHER LENDERS 2 TABLE OF CONTENTS
PAGE ---- RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1.3 Accounting Terms and Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE II BORROWINGS . . . . . . . . . . . . . . . . . . . . . . 28 2.1 Availability and Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 2.2 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.3 Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.4 Discount Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.5 Swingline Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.6 Bid Loans and Approved GNMA Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.7 Rate after Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.8 Interest Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.9 Method of Selecting Rate Options and Interest Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.10 Maximum Number of Eurodollar Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.11 Funding Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2.12 Conversion and Continuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2.13 Optional Principal Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 2.14 Required Principal Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 2.15 Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 2.16 Notes; Telephonic Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.17 General Provisions as to Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.18 Notification of Advances, Interest Rates and Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 2.19 Lending Installations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 2.20 Non-Receipt of Funds by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE III CHANGE IN CIRCUMSTANCES . . . . . . . . . . . . . . . . . . . 45 3.1 Yield Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 3.2 Availability of Rate Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 3.3 Funding Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3.4 Lender Statements; Survival of Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3.5 Lender Tax Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE IV COLLATERAL AND BORROWING BASE . . . . . . . . . . . . . . . . . . 49 4.1 Eligible Collateral - Pledged Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 4.2 Eligible Collateral - Repurchased Agency Loans and Receivables . . . . . . . . . . . . . . . . . . . . . . . . 51 4.3 Eligible Collateral - Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 4.4 Eligible Collateral - Pledged Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
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PAGE ---- 4.5 Eligible Collateral - Servicing Sale Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 4.6 Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 4.7 Special Representations as to Pledged Warehouse Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . 58 4.8 Special Representations as to Pledged Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 4.9 Special Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 4.10 Release of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 4.11 Settlement Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 4.12 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 4.13 Abatement of Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 4.14 Transition from Original Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 ARTICLE V CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . 68 5.1 Initial Advance (Company and Borrowing Subsidiaries) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 5.2 Initial Advance (Lenders) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 5.3 All Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 ARTICLE VI REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . 71 6.1 Organization, Corporate Powers, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 6.2 Corporate Authority, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 6.3 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 6.4 Government Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 6.5 Valid and Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 6.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 6.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 6.8 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 6.9 Accuracy of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 6.10 Accuracy of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 6.11 Investment Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 6.12 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 6.13 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 6.14 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 6.15 GNMA, FHA, VA, FNMA, AND FHLMC Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 6.16 No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 ARTICLE VII AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . 75 7.1 Payment of Debts, Taxes, Etc.; Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 7.2 Preservation of Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 7.3 Compliance with Laws, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 7.4 Requested Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 7.5 Keeping of Records and Books of Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
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PAGE ---- 7.6 Maintenance of Approvals, Filings and Registrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 7.7 Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 7.8 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 7.9 Maintenance of Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 7.10 Federal Agency Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 7.11 Approved Investor Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 7.12 Borrowing Base Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 7.13 Further Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 7.14 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 7.15 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 ARTICLE VIII NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . 85 8.1 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 8.2 Compliance with Security Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 8.3 Mergers; Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 8.4 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 8.5 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 8.6 Ratably Secured Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 8.7 Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 8.8 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 8.9 Leverage Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 8.10 Recourse Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 8.11 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 8.12 Credit Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 8.13 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 8.14 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 8.15 FHA and other Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 8.16 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 8.17 Borrowing Subsidiary Liabilities and Secured Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 8.18 Funding of Borrowing Subsidiary Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 8.19 Subordinated Debt Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 8.20 Minimum Cash Flow Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 ARTICLE IX THE AGENT . . . . . . . . . . . . . . . . . . . . . . 97 9.1 Appointment and Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 9.2 Agent and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 9.3 Action by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 9.4 Consultation with Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 9.5 Liability of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 9.6 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 9.7 Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 9.8 Resignation or Removal and Appointment of Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . 100 9.9 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
-iii- 5 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 9.10 Release of Collateral Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 9.11 Knowledge of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 9.12 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 ARTICLE X DEFAULTS . . . . . . . . . . . . . . . . . . . . . . 101 10.1 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 10.3 Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 10.4 Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 10.5 Letter of Credit Collateral Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 ARTICLE XI BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS . . . . . . . . . . . . 108 11.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 11.2 Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 11.3 Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 11.4 Dissemination of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 11.5 Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 ARTICLE XII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 112 12.1 Immediately Available Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 12.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 12.3 Survival and Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 12.4 Fees and Expenses of the Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 12.5 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 12.6 Modification of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 12.7 Non-Waiver of Rights by the Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 12.8 Dealings with the Company and its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 12.9 Changes in GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 12.10 Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 115 12.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 116 12.12 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 116 12.13 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 116 12.14 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 117 12.15 Limitation on Recourse to Borrowing Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 117 12.16 Consent of Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 117 12.17 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 118 SCHEDULE 1 APPLICABLE MARGIN SCHEDULE 2 FEE RATES EXHIBIT A LIST OF APPROVED INVESTORS EXHIBIT B BORROWING BASE CERTIFICATE EXHIBIT C COMMITMENTS AND COMMITMENT PERCENTAGES
-iv- 6 TABLE OF CONTENTS (CONTINUED) PAGE EXHIBIT D FORM OF SECURITY AGREEMENT EXHIBIT E-1 FORM OF NOTE EXHIBIT E-2 FORM OF DISCOUNT NOTE EXHIBIT F METHOD OF DETERMINING WEIGHTED AVERAGE PURCHASE PRICES EXHIBIT G FORM OF BID LOAN NOTICE EXHIBIT H FORM OF NEW/MODIFIED COMMITMENT SUPPLEMENT EXHIBIT I FORM OF NON-LENDER BALANCE BANK SUPPLEMENT EXHIBIT J FORM OF AP NOTICE EXHIBIT K FORM OF OPINION LETTER EXHIBIT L MATERIAL LITIGATION NOT REFERENCED IN ANNUAL/QUARTERLY REPORTS EXHIBIT M FORM OF FUNDING AGREEMENT EXHIBIT N FORM OF TRANSITION MEMORANDUM -v- 7 SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT This SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT is dated as of November 12, 1996 by and among SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation (the "Company"), THE MORTGAGE AUTHORITY, INC., a Delaware corporation ("TMA"), CENTRAL PACIFIC MORTGAGE COMPANY, a California corporation ("CPM"), the lenders identified on the signature pages hereof, and THE FIRST NATIONAL BANK OF CHICAGO, a national banking association ("First Chicago"), individually as a Lender and as administrative agent for the Lenders. RECITALS This Second Amended and Restated Revolving Credit Agreement consolidates, amends and restates in its entirety that certain Amended and Restated Revolving Credit Agreement dated as of March 24, 1995 by and among the Company, TMA, First Chicago and certain other lenders, as amended by that certain First Amendment to Amended and Restated Revolving Credit Agreement dated as of September 27, 1995 (as so amended, the "Original Facility"). The revolving credit facility made available to the Company and the Borrowing Subsidiaries pursuant to this Agreement shall be used (i) for originating, acquiring, and/or holding residential mortgage loans, mortgage backed securities, and mortgage servicing rights, (ii) as liquidity backup for the Company's commercial paper program, and (iii) for general working capital and corporate purposes. The Company will request Advances hereunder for the purposes set forth in the preceding sentence, and the Company will distribute the proceeds of some of the Advances to one or more Borrowing Subsidiaries for purposes of mortgage loan originations by such Borrowing Subsidiaries. In addition, up to $1,000,000 of Swingline Advances may be requested directly by TMA, and up to $10,000,000 of Swingline Advances may be requested directly by CPM, in each case to the extent available, subject to all of the terms and conditions contained herein. Accordingly, the Borrowing Subsidiaries shall be co-makers (with the Company) of the Notes executed in connection herewith and shall pledge certain of the Collateral securing the Loans made pursuant to this Agreement. In consideration of the foregoing and for other good and valuable consideration, the parties hereto agree as follows: 8 ARTICLE I DEFINITIONS 1.1 Definitions. Capitalized terms used in this Agreement shall have the following meanings: Acknowledgment Agreements: means, as of any date, acknowledgment agreements executed by the Collateral Agent, the Company and FNMA, FHLMC and any other Federal Agency which is a party to any Servicing Agreement included in Collateral hereunder and which is then issuing such agreements in the form required by such Federal Agency, recognizing and consenting to the security interest created under the Security Agreement. Additional Required Mortgage Documents: means the instruments and documents described in Schedule B to the Security Agreement. Adjusted Consolidated Tangible Net Worth: means, as of any date of determination thereof, the net worth of the Company and its consolidated Subsidiaries on a consolidated basis as determined in accordance with GAAP; less the sum (without duplication) of (a) any assets of the Company and its consolidated Subsidiaries which would be treated as intangibles under GAAP including, without limitation, any write-up of assets, good-will, research and development costs, trade-marks, trade names, copyrights, patents and unamortized debt discount and expenses, and (b) loans or other extensions of credit to officers of the Company or of any of its consolidated Subsidiaries other than Mortgage Loans made to such Persons in the ordinary course of business; plus one percent (1%) of the then-current aggregate outstanding principal balance of all Mortgage Loans then being serviced by the Company either for its own account with respect to Pledged Items or for others under Servicing Agreements (excluding Subservicing Agreements) to the extent the servicing rights relating to such Mortgage Loans have not been capitalized and are thus not accounted for in the Company's net worth as computed in accordance with GAAP. Adjusted Commitment Percentage: means, for each Lender as of any date, the quotient of (i) such Lender's General Commitment divided by (ii) the Aggregate Commitment minus the Swingline Commitment, which Adjusted Commitment Percentage shall initially be as set forth on Exhibit C for each Lender. Advance: means a borrowing hereunder consisting of the aggregate amount of Loans made to the Company or any Borrowing -2- 9 Subsidiary by one or more of the Lenders hereunder pursuant to Article II on any given Advance Date. Advance Date: means a date on which an Advance is made hereunder. Advance Notice: is defined in Section 2.9. Affiliate: means, as to any Person, any other Person directly or indirectly Controlling, Controlled by or under direct or indirect common Control with such Person. Agent: means The First National Bank of Chicago in its capacity as administrative agent for the Lenders hereunder, and any successor Agent appointed pursuant to Article IX. Aggregate Borrowing Base: is defined in Section 4.6. Aggregate Commitment: means, as of any date, the aggregate of the Lenders' then-current General Commitments and Swingline Commitments. Agreement: means this Second Amended and Restated Revolving Credit Agreement, as the same from time to time may be extended, amended, supplemented, waived or modified. Alternate Base Rate: means, on any day, a fluctuating rate of interest per annum equal to the higher of (a) the Published Federal Funds Effective Rate for such day plus the Applicable Margin, and (b) the Corporate Base Rate for such day. Alternate Base Rate Advance: means an Advance which bears interest at the Alternate Base Rate. Alternate Base Rate Loan: means a Loan which bears interest at the Alternate Base Rate. AP Mortgage: means, on any date, any Pledged Mortgage which has been identified in an AP Notice and for which the Collateral Agent has not received the Required Mortgage Documents by such date. AP Notice: means a written pledge substantially in the form of Exhibit J to this Agreement executed by the Company or a Borrowing Subsidiary and delivered by facsimile to the Collateral Agent, specifically identifying all Mortgage Loans with respect to which the Required Mortgage Documents are not being delivered on or before the Pledge Date of such Mortgage Loan. Applicable Margin: means, with respect to each Rate Option as of any date, the applicable percentage per annum as set forth on Schedule 1 attached hereto which is in effect on such date, -3- 10 changing as and when the Company's then-current unsecured long-term debt rating by either S & P or Moody's changes as described therein. Approved GNMA Letter of Credit: means a letter of credit issued by an Issuing Lender in favor of GNMA as a result of the failure by the Company or any Borrowing Subsidiary to satisfy all document submission requirements of GNMA in connection with the certification or re- certification by GNMA of a pool of Mortgage Loans, which letter of credit (and related reimbursement agreement and other documentation) has been approved by the Agent pursuant to Section 2.6(b). Approved GNMA Letter of Credit Obligations: means, as of any date, all liabilities, whether actual or contingent, as of such date of the Company and the Borrowing Subsidiaries with respect to Approved GNMA Letters of Credit, including, without limitation, the undrawn face amount of the then outstanding Approved GNMA Letters of Credit and the sum of all drawn amounts for which the Issuing Lenders have not yet been reimbursed. Approved Investor: means, as of any time, any of the institutions listed on Exhibit A attached hereto and any other institution approved by the Agent, provided that any such institutions listed on Exhibit A or previously approved by the Agent may be eliminated as an Approved Investor by notice to the Company from the Agent. Approved Investor Commitment: means a commitment issued by an Approved Investor to purchase Mortgage Loans, to exchange Securities for Mortgage Loans or to purchase Securities. Approved MBS Custodian: is defined in Paragraph 7(b)(2)(iii) of the Security Agreement. Assignment: means a duly executed assignment for the benefit of the Secured Parties of a Mortgage, of the indebtedness secured thereby, and of all documents and rights related to the related Mortgage Loan secured by such Mortgage in accordance with the requirements of the Security Agreement. Authorized Officer: means, with respect to the Company or a Borrowing Subsidiary, the president, chairman, chief financial officer, or other officer of the Company or the Borrowing Subsidiary, as applicable, authorized in writing to execute any particular statement, certificate or agreement on behalf of the Company or the Borrowing Subsidiary. Bailee Letter: means a Bailee Letter substantially in the form of Exhibit 4 to the Security Agreement. -4- 11 Balance Bank: means any Lender or Non-Lender Balance Bank which makes a Discount Advance. Balance Bank Agreement: means (i) an agreement between each Balance Bank and the Company which sets forth the fees, charges and other matters governing Discount Loans requested from such Balance Bank in accordance with Section 2.4 herein, or (ii) an agreement between the Company and the Swingline Lender which sets forth the fees, charges and other matters governing Swingline Buydown Advances requested from the Swingline Lender in accordance with Section 2.5(b). Bid Lender: is defined in Section 2.6(a). Bid Loan: is defined in Section 2.6(a). Bid Loan Notice: means, with respect to each Bid Loan, a notice executed by the Company and the Bid Lender for such Bid Loan and delivered to the Agent in the form of Exhibit G hereto. Bid Rate: means the interest rate applicable to a Bid Loan which is to be agreed upon by the Company and a Bid Lender and communicated to the Agent in the Bid Loan Notice for such Bid Loan. Borrowing Base Certificate: means a certificate executed by the Chief Financial Officer or Treasurer of the Company or other employees of the Company so authorized in writing, an original of which shall be delivered to the Agent, by such Chief Financial Officer or Treasurer in substantially the form attached hereto as Exhibit B. Borrowing Base Sublimits: is defined in Section 4.6. Borrowing Subsidiary: means either of The Mortgage Authority, Inc. or Central Pacific Mortgage Company, each a wholly owned Subsidiary of the Company in the business of originating, purchasing and selling Mortgage Loans. Business Day: means (i) with respect to any borrowing, payment or rate selection regarding a Eurodollar Advance or a Discount Advance, a day (other than a Saturday or Sunday) on which banks are open for business in Chicago, Los Angeles and New York and on which dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks are open for business in Chicago, Los Angeles, New York and Louisville, Kentucky. Capital Securities: means liquid and readily marketable securities contributed to the capital of the Company after the date hereof and investments acquired with the income therefrom or -5- 12 the proceeds from any disposition thereof in the form of cash or Cash Equivalents or liquid and marketable securities listed on the New York Stock Exchange, the American Stock Exchange or NASDAQ to the extent such investments are held in a separate trust, custodial or investment account and income therefrom is accounted for separately as investment income and not consolidated as income from operations. Cash Equivalents: means (i) marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof, (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's, (iii) commercial paper maturing no more than 90 days from the date of creation thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's, (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by commercial banks organized under the laws of the United States or any state thereof or the District of Columbia, each having combined capital and surplus of not less than $500,000,000, and (v) reverse repurchase obligations having terms not exceeding seven days entered into with any financial institution meeting the qualifications specified in clause (iv) above or with any securities dealer approved by the Agent, provided that there is an investment agreement in effect pursuant to which the underlying securities are held by a sub-agent for the Collateral Agent and all cash proceeds are payable directly to the Settlement Account. Change in Control: means the acquisition by any Person, or two or more Persons (other than the Parent) acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of outstanding shares of voting stock of the Company at any time if after giving effect to such acquisition (i) such Person or Persons owns twenty percent (20%) or more of such outstanding voting stock, and (ii) the Parent does not own more than fifty percent (50%) of such outstanding shares of voting stock. Code: means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. Collateral: means all right, title and interest of the Company or the Borrowing Subsidiaries, as applicable, of every kind and nature, in and to all of the following property, assets -6- 13 and rights of the Company or the Borrowing Subsidiaries wherever located, whether now existing or hereafter arising, and whether now or hereafter owned, acquired by or accruing or owing to the Company or any Borrowing Subsidiary, and all proceeds and products thereof: (i) all Pledged Mortgages; (ii) all Pledged Securities; (iii) any commitments or other agreements issued by any private mortgage insurer or by the FHA or VA to insure or guarantee any Pledged Mortgage; (iv) all commitments of FNMA, FHLMC or other Persons to purchase Pledged Items from the Company or any Borrowing Subsidiary or exchange Securities with the Company or any Borrowing Subsidiary for Pledged Items; (v) any options to sell or purchase Securities, future contracts, or any other interest rate protection products which directly or indirectly protect the Company or any Borrowing Subsidiary against reductions in value of such Pledged Items due to changes in mortgage interest rates; (vi) the Settlement Account and any Custodian Settlement Accounts and any amounts standing to the credit of the Settlement Account and any Custodian Settlement Accounts then in existence with Approved MBS Custodians, as described in Paragraph 7(c) of the Security Agreement; (vii) all VA Mortgage Loans or FHA Mortgage Loans (plus any REO or accounts receivable from FHA or VA resulting therefrom, including guaranty claims against VA and insurance claims against FHA or HUD) which are repurchased by the Company from Security holders and pledged to the Collateral Agent as security for the Secured Debt; (viii) Pledged Servicing; (ix) Pledged Servicing Sale Receivables; (x) cash and Cash Equivalents held by the Agent or Collateral Agent as security for the Secured Debt; and (xi) all property and proceeds related to the foregoing, including without limitation, the right to service Pledged Mortgages while owned by the Company or any Borrowing Subsidiary, all accounts and general intangibles of whatsoever kind so related and all documents or instruments delivered to the Agent or the Collateral Agent in respect of any Pledged Item, including, without limitation, the right to -7- 14 receive all insurance proceeds and condemnation awards which may be payable in respect of the premises encumbered by any Pledged Mortgage. Collateral Agent: means National City Bank of Kentucky or its successor, as Collateral Agent under the Security Agreement. Collateral Agent Review Procedure: means the required review steps set forth in Exhibit 1 to the Security Agreement. Collateral Transmittal: means a transmittal from the Pledgor to the Collateral Agent in electronic form and, if required by the Collateral Agent, written form of the following information for the following submissions or special treatment of different types of Collateral: (i) the information described on Exhibit 7 to the Security Agreement for each AP Mortgage covered by any AP Notice, (ii) the information described on Exhibit 7 to the Security Agreement (other than the "AP Code") for each Pledged Mortgage not covered by an AP Notice, or (iii) such information as may be required from time to time by the Collateral Agent for the different types of Securities for any Pledged Security. Commitment: means either a General Commitment or a Swingline Commitment. Commitment Percentage: means, for each Lender as of any date, the quotient of (i) the sum of such Lender's General Commitment and its Swingline Commitment (if any), divided by (ii) the Aggregate Commitment, which Commitment Percentage shall initially be as set forth on Exhibit C for each Lender. Company: means Source One Mortgage Services Corporation, a Delaware corporation. Company Trust Receipt: means a trust receipt substantially in the form of Exhibit 2 to the Security Agreement. Conforming Mortgage Loan: means a Residential Mortgage Loan that meets all applicable requirements for sale to FNMA or FHLMC or for guaranty by GNMA. Consolidated Interest and Dividend Expense: means, for any period, the sum of all "interest expense" (as reported on the Company's consolidated financial statements) for such period (i) plus all interest credited to the Company on escrow balances, (ii) minus amounts paid by the Company to Security holders or mortgage pool investors for Mortgage Loan interest which is not collected by the Company from the borrower of a Mortgage Loan due to early payoff of such Mortgage Loan, (iii) plus all dividends paid on common or preferred stock of the Company during such period other than dividends paid pursuant to and in compliance with Section 8.16(b)(ii) below. -8- 15 Consolidated Operating Cash Flow: means, for any period, (i) the sum of the following items for the Company and its consolidated Subsidiaries for such period (with terms in quotes having the meanings given such terms in the Company's consolidated financial statements): "net income", "amortization of capitalized servicing" (including impairment expense), net losses on interest rate contracts and other similar hedging instruments, "provision for loan losses", "depreciation and amortization of good will", the increase in deferred (but not current) taxes, Consolidated Interest and Dividend Expense, and other non-cash losses or deductions included in the computation of net income; minus (ii) the sum of the following items for the Company and its consolidated Subsidiaries for such period (with terms in quotes having the meanings given such terms in the Company's consolidated financial statements): "capitalized excess servicing income", "originated mortgage servicing rights income", "gains on the sale of servicing", net gains on interest rate contracts and other similar hedging instruments, "amortization of deferred gain on sale of servicing", the decrease in deferred (but not current) taxes, and other non-cash gains included in the computation of "net income". Control: means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of another entity, whether through the ownership of voting securities, by contract or otherwise. Controlled Group: means all members of a controlled group of corporations and all trades or business (whether or not incorporated) under common control which, together with the Company, are treated as a single employer under Section 414(b) or 414(c) of the Code. Conversion/Continuation Notice: is defined in Section 2.12(iii). Corporate Base Rate: means a rate per annum equal to the corporate base rate of interest announced by First Chicago from time to time, changing when and as such corporate base rate changes. Credit Documents: means this Agreement, the Security Agreement, the Notes, the Balance Bank Agreements, any Approved GNMA Letters of Credit and any related reimbursement agreements, and all other documents and instruments now or hereafter delivered to the Agent or the Lenders pursuant to or in connection with the transactions contemplated hereby, and any amendments, supplements, modifications, renewals, replacements, consolidations, substitutions and extensions of any of the foregoing. -9- 16 Credit Indebtedness: means, as of any date, the sum of (i) all amounts owing under any of the Credit Documents (other than the Balance Bank Agreements) to any of the Lenders, the Agent, or the Collateral Agent, plus (ii) to the extent such fees have accrued within the three calendar months immediately preceding such date, all deficiency fees owing to the Balance Banks under the Balance Bank Agreements due to the Company's failure to maintain sufficient deposits with such Balance Banks. Credit Requirement: means, as of any date, the sum of (A) the aggregate unpaid principal balance of all Loans then outstanding hereunder plus (B) the aggregate principal amount of the outstanding Ratable Medium-Term Notes, plus (C) the aggregate face amount of all Outstanding CPNs, plus (D) the then current amount of Approved GNMA Letter of Credit Obligations. Custodian Settlement Accounts: is defined in Paragraph 7(c) of the Security Agreement. Debt: means, with respect to any Person, as of any date of determination thereof, without duplication, (i) all obligations of such Person for borrowed money, including but not limited to money borrowed from any parent, subsidiary or affiliate of such Person, whether or not evidenced by a promissory note, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, including without limitation the obligation of such Person to pay any deferred purchase price for Servicing Agreements acquired, (iv) all obligations of such Person as lessee under capital leases, (v) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, (vi) all Debt of others Guaranteed by such Person, and (vii) all on-balance-sheet obligations of such Person under repurchase agreements covering Securities or pools of Mortgage Loans; provided that Debt shall not include Mortgage Related Indebtedness. Debt Threshold: is defined in Section 8.5. Default: means an Event of Default or any event or condition that with the giving of notice or the passage of time or both would constitute an Event of Default. Discount Advance: means an Advance made on a discounted basis by a Balance Bank, a portion of which (or all of which, in the case of Discount Advances made by Non-Lender Balance Banks) shall be simultaneously sold to the other Lenders, all pursuant to Section 2.4 hereof, and to be repaid at the end of the applicable Discount Loan Period. -10- 17 Discount Loan: means any Loan constituting a portion of a Discount Advance. Discount Loan Period: means, with respect to a Discount Loan, a period of one month commencing on the Advance Date for such Discount Loan and ending on the corresponding day in the next month. If a Discount Loan Period would otherwise end on a day which is not a Business Day, such Discount Loan Period shall end on the next succeeding Business Day, provided, however, (i) if said next succeeding Business Day falls in a new calendar month, such Discount Loan Period shall end on the immediately preceding Business Day, and (ii) no Discount Loan Period shall extend beyond the Termination Date. Discount Note: means, a Note executed and delivered by the Company and the Borrowing Subsidiaries to each Lender in the form of Exhibit E-2 hereof which shall evidence the Discount Loans described in Section 2.4 hereof. Discount Rate: means, with respect to any Discount Loan Period, a fixed rate of interest equal to the Applicable Margin for Eurodollar Advances in effect at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Discount Loan Period. Eligible AP Mortgage: is defined in Section 4.1(c). Eligible Collateral: means, as of any date without duplication, (i) Eligible Delivered Mortgages, (ii) Eligible AP Mortgages, (iii) Eligible Pledged Securities, (iv) Eligible Pledged Servicing, (v) Eligible Servicing Sale Receivables, (vi) Eligible Repurchased Agency Loans and Receivables, (vii) the balance to the credit of the Company in the Settlement Account, and (viii) cash and Cash Equivalents held by the Agent or Collateral Agent as security for the Secured Debt. Eligible Delivered Mortgage: is defined in Section 4.1(b). Eligible Mortgage Loan: is defined in Section 4.1(a). Eligible Pledged Security: is defined in Section 4.3. Eligible Pledged Servicing: is defined in Section 4.4. Eligible Repurchased Agency Loans and Receivables: is defined in Section 4.2. Eligible Servicing Sale Receivables: is defined in Section 4.5. ERISA: means the Employment Retirement Income Security Act of 1974, as amended from time to time. -11- 18 ERISA Affiliate: means any corporation or trade or business which is a member of the same Controlled Group as the Company. Eurodollar Advance: means an Advance which bears interest at the Eurodollar Rate. Eurodollar Base Rate: means, with respect to a Eurodollar Interest Period or a Discount Loan Period, the rate determined by the Agent to be the rate at which deposits in U.S. dollars are offered by First Chicago to first-class banks in the London interbank market at approximately 11 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period or Discount Loan Period, in the approximate amount of (i) the amount of the Eurodollar Advance or Discount Advance divided by (ii) the number of Lenders making Loans in connection with such Advance, and having a maturity approximately equal to such Eurodollar Interest Period or Discount Loan Period. Eurodollar Interest Period: means, with respect to a Eurodollar Advance, a period of one, two or three months, as selected by the Company, commencing on a Business Day selected by the Company pursuant to this Agreement. Such Eurodollar Interest Period shall end on (but exclude) the day which corresponds numerically to such date one, two or three months thereafter, as applicable; provided, however, that if there is no such numerically corresponding day in such next month, such Eurodollar Interest Period shall end on the last Business Day of such next month. If a Eurodollar Interest Period would otherwise end on a day which is not a Business Day, such Eurodollar Interest Period shall end on the next succeeding Business Day, provided, however, that (i) if said next succeeding Business Day falls in a new calendar month, such Eurodollar Interest Period shall end on the immediately preceding Business Day, and (ii) no Eurodollar Interest Period shall extend beyond the Termination Date. Eurodollar Loan: means a Loan which bears interest at a Eurodollar Rate. Eurodollar Rate: means, with respect to a Eurodollar Advance and Eurodollar Loan for the relevant Eurodollar Interest Period, and with respect to the calculation of the Purchase Price with respect to any Discount Loan Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to such Eurodollar Interest Period or Discount Loan Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to that Eurodollar Interest Period or Discount Loan Period, plus (ii) the Applicable Margin in effect two Business Days prior to the first day of such Eurodollar Interest Period or Discount Loan Period. Event of Default: means any of the events described in Section 10.1. -12- 19 Facility: means the facility comprised of the Commitments made available to the Company and (to the extent permitted hereunder) the Borrowing Subsidiaries pursuant to this Agreement, which facility has an original term of three years and an initial Aggregate Commitment of $750,000,000. Facility Fee Rate: means, as of any date, the percentage per annum set forth on Schedule 2 attached hereto which is in effect on such date, changing as and when the Company's long-term unsecured debt rating by either S&P or Moody's changes as described therein. Federal Agency: means FHLMC, FNMA, GNMA, FHA or VA. Federal Funds Advance: means an Advance bearing interest at the Federal Funds Rate. Federal Funds Funding Rate: means, with respect to any Federal Funds Loan for any day, the rate per annum equal to the consensus (or if no consensus exists, the arithmetic average) of the rates at which reserves are offered by first-class banks to other first-class banks (at approximately the time at which the applicable Advance Notice or Conversion/Continuation Notice is received or the time at which an automatic continuation is deemed to have occurred) on such day (or if such day is not a Business Day, on the immediately preceding Business Day) on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, based on quotes received by the Agent from three federal funds brokers of recognized standing selected by the Agent in its sole discretion; provided, however, that in lieu of determining the rate in the foregoing manner, the Agent may substitute therefor the consensus (or if no consensus exists, the arithmetic average) of the rates at which reserves are offered by first-class banks to other first-class banks at 10:00 a.m. (Chicago time) on such day (or if such day is not a Business Day, on the immediately preceding Business Day) on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, received by the Agent from three federal funds brokers of recognized standing selected by the Agent in its sole discretion. Federal Funds Loan: means any Loan constituting a portion of a Federal Funds Advance. Federal Funds Rate: means, for any day, an interest rate per annum equal to (i) the Federal Funds Funding Rate for such day, plus (ii) 0.125% per annum, plus (iii) the Applicable Margin. Fees: is defined in Section 2.2. -13- 20 FHA: means the Federal Housing Administration or other agency, corporation or instrumentality of the United States to which the powers and duties of the Federal Housing Administration have been transferred. FHA-Approved Mortgagee: means an institution that is approved by the FHA to act as a servicer and mortgagee of record with respect to a Mortgage Loan insured by the FHA. FHA Mortgage Loan: means a Mortgage Loan that is secured by a first lien on land and the Single Family Residence constructed thereon and is insured by FHA. FHLMC: means the Federal Home Loan Mortgage Corporation or other agency, corporation or instrumentality of the United States to which the powers and duties of the Federal Home Loan Mortgage Corporation have been transferred. FHLMC-Approved Lender: means an institution that is approved by the FHLMC to act as a lender in connection with the origination of any Mortgage Loan purchased by the FHLMC. FHLMC Security: means a security representing an undivided fractional interest in a pool of Mortgage Loans, which security is issued and guaranteed as to full and timely payment of interest and full collection of principal by FHLMC. First Chicago: means The First National Bank of Chicago, in its corporate capacity and not as Agent, and its successors and assigns. FNMA: means the Federal National Mortgage Association or other agency, corporation or instrumentality of the United States to which the powers and duties of the Federal National Mortgage Association have been transferred. FNMA-Approved Lender: means an institution that is approved by the FNMA to act as a lender in connection with the origination of any Mortgage Loan purchased by the FNMA. FNMA Security: means a security representing an undivided fractional interest in a pool of Mortgage Loans, which security is issued and guaranteed as to full and timely payment of principal and interest by FNMA. Fundamental Change: is defined in Section 8.4. Fundamental Change/Investment Calculation Period: means, in respect of any Fundamental Change or Investment, the period ending on the date of consummation of such Fundamental Change or Investment and including the four most recent consecutive fiscal -14- 21 quarters ending on or prior to the date of consummation of such Fundamental Change or Investment. Funded Debt: means as of any date of determination thereof, all Debt of the Company and its consolidated Subsidiaries (including without limitation all amounts payable by the Company in connection with the acquisition of any Servicing Agreements and the amount of all checks, drafts or other items issued by the Company or any of its consolidated Subsidiaries to fund Mortgage Loans to the extent such checks, drafts or other items have not been collected upon and paid), minus (i) all Debt of others Guaranteed by the Company or any of its consolidated Subsidiaries and (ii) all Debt of others secured by a Lien on any asset of the Company or any of its consolidated Subsidiaries, unless such Debt is assumed by the Company or any of its consolidated Subsidiaries. Funding Agreement: means an agreement by and between the Company and a Borrowing Subsidiary relating to the methods by which the Company directly funds certain Mortgage Loans made in such Borrowing Subsidiary's name, the form of which is attached hereto as Exhibit M. GAAP: means generally accepted accounting principles as in effect from time to time. General Commitment: means, for each Lender as of any date, the obligation of such Lender to make Loans not exceeding the amount set forth as its total commitment (excluding any Swingline Commitment) on Exhibit C attached hereto, as such amount may be modified from time to time pursuant to the terms hereof, or the amount established in any assignment to a new Lender pursuant to the terms hereof. GNMA: means the Government National Mortgage Association or other agency, corporation or instrumentality of the United States as to which the powers and duties of the Governmental National Mortgage Association have been transferred. GNMA Security: means a security representing an undivided fractional interest in a pool of Mortgage Loans, which security is issued by the Company and guaranteed as to full and timely payment of principal and interest by GNMA without regard as to whether the Company collects any payments on such Mortgage Loans. Guaranty: means, with respect to any Person, any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person (a "primary obligor") or in any manner providing for the payment of any Debt of any primary obligor or otherwise protecting the holder of such Debt against loss (whether by agreement to keep-well, to purchase assets, goods, securities or services, to advance or supply funds -15- 22 to the primary obligor to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, to take-or-pay or otherwise), provided that the term "Guarantee" shall not include (i) endorsements for collection or deposit in the ordinary course of business, (ii) obligations of the Company pursuant to Recourse Servicing, (iii) commitments by the Company or any Borrowing Subsidiary to purchase Mortgage Loans in the ordinary course of business, and (iv) obligations in the Company's capacity as servicer of Mortgage Loans. The term "Guarantee" used as a verb has a correlative meaning. Hazardous Substance: means any hazardous, toxic or dangerous waste, substance or material subject to regulation under the Comprehensive Environmental Response, Compensation and Liability Act, as amended, and federal, state or local so-called "Superfund" or "Superlien" laws, or any other federal, state or local laws, ordinances, rules or regulations governing or regulating hazardous materials, pollution, the environment or public health, as now or at any time hereafter in effect. HUD: means the United States Department of Housing and Urban Development or other agency, corporation or instrumentality of the United States to which the powers and duties of the United States Department of Housing and Urban Development have been transferred. Investment: means, as applied to any Person, any direct or indirect purchase or other acquisition by that Person of, or a beneficial interest in, stock or other securities of any other Person or any option, contract, certificate or other financial product (including, but not limited to, interest rate swaps and other hedging instruments), or any direct or indirect loan, advance or capital contribution by that Person to any other Person, including all indebtedness and accounts receivable from that other Person which are not current assets or did not arise from sales to that other Person in the ordinary course of business. The amount of any Investment shall be determined in accordance with GAAP. Issuing Lender: is defined in Section 2.6(b). Jumbo Mortgage Loan: means a Residential Mortgage Loan that (i) meets all applicable requirements for sale to FNMA or FHLMC or for guaranty by GNMA except that the amount of such Mortgage Loan exceeds the amounts permitted by such requirements, (ii) at the time of origination had a principal balance that did not exceed 80% of the appraised value of the real estate and improvements securing such Mortgage Loan, unless private mortgage insurance was obtained covering such Mortgage Loan, in which case it may have an original principal balance in excess of 80% but not in excess of 95% of such appraised value, (iii) has a term of -16- 23 not more than 30 years, (iv) meets all of the then-current requirements for sale to an Approved Investor purchasing such type of Mortgage Loan from the Company or Borrowing Subsidiary, and (v) has an outstanding principal balance on the Pledge Date thereof of less than $1,000,000 in any event. Lender: means, at any time, any party having a Commitment hereunder and its successors and permitted assigns. Lending Installation: means, with respect to a Lender, any office, branch, subsidiary or affiliate of any Lender. Lending Sublimits: is defined in Section 2.1(a). Lien: means, with respect to any asset of any Person, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, such Person shall be deemed to hold subject to a Lien any asset that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sales agreement, capital lease or other title retention agreement relating to such asset. Loan: means a loan of money in any amount to the Company or any Borrowing Subsidiary by a Lender pursuant to this Agreement. MBS Value: means, with respect to any Security, the lowest of (a) the face amount of such Security, (b) the weighted average purchase price committed to under those Approved Investor Commitments which could cover such Security, determined in the manner set forth in Exhibit F, and (c) if so required from time to time by the Agent, the then-current market value of such Security as conclusively determined by a third party broker of nationally recognized standing selected by the Collateral Agent. Moody's: means Moody's Investors Service, Inc. or any successor to its business. Mortgage: means a mortgage, deed of trust, security deed or similar instrument purporting to create a first lien or similar interest in real estate and improvements thereon. Mortgage Collateral Value: means, with respect to any Mortgage Loan, the lowest of (A) the unpaid principal balance of such Mortgage Loan on the Pledge Date therefor, (B) the net acquisition cost of such Mortgage Loan, if acquired by the Pledgor, (C) the weighted average purchase price (determined on a weekly basis and expressed as a percentage of par) committed to under those Approved Investor Commitments which could cover such Mortgage Loan applied to the unpaid principal balance (as of the Pledge Date) of such Mortgage Loan determined in the manner set forth in Exhibit F, and (D) the then-current market value of such -17- 24 Mortgage Loan as conclusively determined by a third party broker of nationally recognized standing selected by the Collateral Agent. Mortgage Loan: means a loan of money evidenced by a Mortgage Note and secured by a Mortgage. Mortgage Note: means a note evidencing the indebtedness secured by a Mortgage. Mortgage-Related Indebtedness: means, with respect to the Company and its Subsidiaries, any amount arising out of the issuance in the ordinary course of the mortgage banking business of the Company and its Subsidiaries of (i) mortgage pools, pass-throughs, participation certificates and other mortgage-related securities to the extent that such amount would not, in accordance with GAAP, be shown as indebtedness on a consolidated balance sheet of the Company and its Subsidiaries as at such date and (ii) collateralized mortgage obligations and other mortgage-related securities issued by a Subsidiary of the Company, the payment of principal and interest in respect of which is secured by a Lien on mortgage loans or other mortgage-related securities (or other securities in which the Company invests in the ordinary course of its mortgage banking business) conveyed to such Subsidiary in an amount reasonably anticipated by the Company to approximate the amount required to pay the principal and interest in respect of such collateralized mortgage obligations or other mortgage-related securities (whether or not such amount would, in accordance with GAAP, be shown as indebtedness on a consolidated balance sheet of the Company and its Subsidiaries as at such date). Negative Security Event: means any date following a Positive Security Event on which any of the following events occurs: (i) the Company's long term unsecured debt ratings decrease to a level below "A-", as rated by S&P, or a level below "A3", as rated by Moody's, or (ii) the Company's long-term unsecured debt is no longer rated by both S&P and Moody's, or (iii) an Event of Default occurs hereunder, or (iv) any of the Positive Security Conditions shall cease to be satisfied. Nonconforming Mortgage Loan: means a Residential Mortgage Loan that (i) is neither a Conforming Mortgage Loan nor a Jumbo Mortgage Loan, (ii) at the time of origination had a principal balance that did not exceed 80% of the appraised value of the real estate and improvements securing such Mortgage Loan, unless private mortgage insurance was obtained covering such Mortgage Loan, in which case it may have an original principal balance in excess of 80% but not in excess of 95% of such appraised value, (iii) has a term of not more than 30 years, (iv) meets all of the then-current requirements for sale to an Approved Investor purchasing such type of Mortgage Loan from the Company or any -18- 25 Borrowing Subsidiary, and (v) has an original principal balance of less than $200,000 in any event. Non-Lender Balance Bank: means any bank or other financial institution approved in advance by the Agent and the Company which is not a Lender hereunder but which is an Affiliate of a Lender and which has executed a Balance Bank Agreement pursuant to which it has agreed to make Discount Advances hereunder and sell such Discount Advances to the Lenders pursuant to Section 2.4. Note: means promissory notes evidencing amounts that may be advanced from time to time under this Agreement, (i) in substantially the form of Exhibit E-1 attached hereto with respect to Loans other than Discount Loans and Bid Loans, (ii) in substantially the form of Exhibit E-2 attached hereto with respect to Discount Loans, and (iii) in a form mutually agreed to between the Company and each Bid Lender with respect to Bid Loans, each duly executed by the Company and each Borrowing Subsidiary and payable to the order of a Lender, including any amendment, modification, renewal or replacement of such promissory notes. Notice Address: means, as to any Person, the address of such Person specified in or pursuant to Section 12.2. Obligations: means any and all amounts due from the Company or any Borrowing Subsidiary to any of the Lenders, the Agent or the Collateral Agent hereunder or under the Notes, the Security Agreement or any other Credit Document. Original Facility: is defined in the first recital of this Agreement. Outstanding CPN: means, as of any date, each commercial paper note issued by the Company which has not been presented for payment or for which payment has not been made in full; provided, however, that as long as there has not occurred an Event of Default, which Event of Default has not been waived by the Required Lenders, "Outstanding CPN" shall not include on any date any such commercial paper note which matures on such date but shall include all such commercial paper notes to be issued on such date. Overnight Transaction Advance: means a Swingline Advance which bears interest at the Overnight Transaction Rate. Overnight Transaction Effective Rate: means, as of any day for any Overnight Transaction Advance, a rate of interest per annum determined by First Chicago in its sole discretion as its overnight transaction loan rate (at approximately the time at which the applicable Advance Notice or Conversion/Continuation -19- 26 Notice is received or the time at which an automatic continuation is deemed to have occurred) for such day (or if such day is not a Business Day, on the immediately preceding Business Day) for advances in such amount. Overnight Transaction Rate: means, with respect to an Overnight Transaction Advance, a per annum interest rate equal to the sum of the Overnight Transaction Effective Rate plus the Applicable Margin plus one quarter of one percent (0.25%). Parent: means Fund American Enterprises, Inc. Participants: is defined in Section 11.2(a). PBGC: means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. Person: means an individual, corporation, limited liability company, partnership, joint venture, trust or unincorporated organization, or a government or any agency or political subdivision thereof. Plan: means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Company or any member of the Controlled Group may have any liability. Pledge Date: means the date on which a Mortgage Loan or a Security is first delivered in pledge to the Collateral Agent, provided that (i) the date of delivery of a Mortgage Loan covered by an AP Notice shall be deemed to be the date of delivery of such AP Notice even after subsequent delivery of the related Required Mortgage Documents, and (ii) the "Pledge Date" for all Collateral previously held by the Collateral Agent under the Original Facility shall be deemed to be the date on which such Collateral was first delivered to the Collateral Agent under the Original Facility even though such date is prior to the date of this Agreement. Pledged Item: means any Pledged Mortgage or Pledged Security. Pledged Mortgages: means Mortgage Loans that are from time to time designated by the Company or any Borrowing Subsidiary and the Required Mortgage Documents in respect of which are required to be delivered to the Collateral Agent pursuant to any of this Agreement or the Security Agreement, including all Required Mortgage Documents related thereto. Pledged Securities: means Securities that are from time to time designated by the Company or any Borrowing Subsidiary and required to be delivered to the Collateral Agent pursuant to -20- 27 either this Agreement or the Security Agreement, whether or not such Pledged Securities are Eligible Pledged Securities. Pledged Servicing: means, as of any date of determination thereof, all right, title and interest of the Company, of every kind and nature, whether now existing or hereafter arising, in and to all Servicing Agreements, together with all accounts receivable arising therefrom, now or hereafter existing, including without limitation all rights of the Company to sell or assign its interest therein and all amounts payable to the Company thereunder arising out of any termination thereof, and all files, surveys, certificates, correspondence, appraisals, computer programs, tapes, disks, cards, accounting records and other records and data of the Company related to the Mortgage Loans covered by such Servicing Agreements and all proceeds and products thereof. Pledged Servicing Sale Receivables: means Servicing Sale Receivables which are from time to time designated by the Company and pledged to the Collateral Agent in accordance with this Agreement and the Security Agreement. Pledgor: is defined in Section 4.7. Positive Security Conditions: is defined in Section 4.13(a). Positive Security Event: means any date on which the Agent has acknowledged in writing that (i) the Company's long-term unsecured debt ratings are at a level equal to or above "A-", as rated by S&P, and a level equal to or above "A3", as rated by Moody's, when either such ratings were previously below such respective level, and (ii) the Positive Security Conditions are satisfied, after which date the Lenders' security interest in the Collateral may be abated at the Company's request pursuant to Section 4.13. Published Federal Funds Effective Rate: means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion. Purchase Price: is defined in Section 2.4(d). -21- 28 Ratable Medium-Term Notes: means those certain notes issued by the Company which are required to be ratably secured with any other secured debt of the Company pursuant to the terms of (i) an Indenture, dated as of September 15, 1986, between Fireman's Fund Mortgage Corporation (predecessor in interest to the Company) and National Bank of Detroit, as trustee, as supplemented by certain supplemental indentures and (ii) an Indenture, dated as of November 21, 1988, between Fireman's Fund Mortgage Corporation and The First National Bank of Chicago, as trustee, as supplemented by certain supplemental indentures. The current trustee under each of the indentures relating to the Ratable Medium-Term Notes is Norwest Bank Minnesota, N.A., a national banking association. Rate Option: means the Eurodollar Rate, the Overnight Transaction Rate, the Federal Funds Rate, the Discount Rate, the Alternate Base Rate, the Swingline Buydown Rate, or, if available, any Bid Rate. Recourse Servicing: means any servicing rights under a Servicing Agreement (other than any Servicing Agreement with GNMA) which obligates the Company to repurchase Mortgage Loans upon default by the borrower thereunder or indemnify any party having an interest in such Mortgage Loans against any principal loss arising from such a default, unless (i) the Company has obtained and maintains in effect insurance with coverages satisfactory to Agent from an insurance company having a AAA rating covering the risk of being required to so indemnify any such party, or (ii) the Company's obligation to indemnify any party against any principal loss is limited to 10% or less of any such loss. Regulation D: means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. Regulation U: means Regulation U of the Board of Governors of the Federal Reserve System from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. Reinstated Repurchased Agency Loans and Receivables: means Eligible Repurchased Agency Loans and Receivables which have been reinstated and as to which (i) the Company shall have delivered to the Collateral Agent the Required Mortgage Documents and a copy of the insurance or guaranty certificate (and, if requested by the Agent or Collateral Agent, an original of such certificate and any other Additional Required Mortgage Documents) related -22- 29 thereto and (ii) no more than two installments of principal or interest are past due since the reinstatement of the Mortgage Loan. REO: means any interest in real property and the improvements thereon owned by the Company as a result of the foreclosure or transfer in lieu of foreclosure of a Mortgage Loan. Reportable Event: means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation waived the requirement of Section 4043(a) of ERISA that it be notified of the occurrence of such event, provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. Repurchased Agency Loans and Receivables: means all VA Mortgage Loans or FHA Mortgage Loans (plus any REO or accounts receivable from FHA or VA resulting therefrom, including guaranty claims against VA and insurance claims against FHA or HUD) which were originally repurchased by the Company from Security holders. In each case such Mortgage Loans (and the REO or accounts receivable resulting therefrom) shall be valued based solely on (i) the amount of principal last due under such Mortgage Loan, even after conversion of such Mortgage Loan to REO, plus (ii) the amount of past-due interest advanced by the Company on account of such Loan which is guaranteed by VA or insured by FHA; provided, however, that 90 days after written notice to the Company that the Required Lenders have elected to exclude past-due interest from such valuation, such valuation shall cease to include the past-due interest described under clause (ii). Required Lenders: means (i) the lenders having two-thirds of the Aggregate Commitment then in effect, or (ii) if the Commitments have been terminated, Lenders having at least two-thirds of the aggregate Loans then outstanding. Required Mortgage Documents: means the instruments and documents described in Schedule A to the Security Agreement, as applicable to the particular Mortgage Loan, which are required to be delivered to the Collateral Agent and such other instruments and documents described therein as the Agent or Collateral Agent may request. Required Servicing Collateral Amount: means, on any date, the positive amount, if any, equal to (1) the lesser of (a) the amount by which the Credit Requirement on such date exceeds the Warehouse Borrowing Base on such date and (b) the principal -23- 30 amount of all Loans other than Bid Loans outstanding on such date, multiplied by (2) a fraction having a numerator equal to the principal amount of all Loans other than Bid Loans outstanding on such date and a denominator equal to the sum of the principal amount of all Loans other than Bid Loans outstanding on such date plus the unpaid principal amount of the Ratable Medium-Term Notes on such date. Reserve Requirement: means, with respect to the Eurodollar Rate applicable to a Discount Loan Period or a Eurodollar Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on eurocurrency liabilities on the date of determination of such Eurodollar Rate. Residential Mortgage Loan: means a Mortgage Loan secured by a Mortgage on a Single Family Residence. Restricted Payment: means: (i) with respect to the Company, any payment of any dividends upon any shares of the Company's stock now or hereafter outstanding, except dividends payable in the stock of the Company, and any other distribution of assets to its stockholders, as such, (including any repurchase of the Company's stock) whether in cash, property, or securities, other than the exchange of Subordinated Debt for Series A Preferred Stock; and (ii) any payment of principal of or interest on the Subordinated Debt, and any amounts deposited with the trustee under the Subordinated Debt Indenture or otherwise irrevocably set aside for the benefit of the holders of the Subordinated Debt for the purpose of defeasance of the Subordinated Debt. Resulting Entity: means the Company and its consolidated Subsidiaries after giving effect to any Fundamental Change or Investment. S&P: means Standard & Poor's Ratings Group or any successor to its business. SEC: means the Securities and Exchange Commission (or any successor entity). Secured Debt: means the sum of the Credit Indebtedness and all amounts outstanding under the Ratable Medium-Term Notes. Secured Parties: means, collectively, the Lenders, the Non-Lender Balance Banks (to the extent of any Credit Indebtedness owed to such Non-Lender Balance Banks), the Agent, the Collateral Agent and the holders of the Ratable Medium-Term Notes. Security: means any FHLMC Security, FNMA Security or GNMA Security. -24- 31 Security Agreement: means the Second Amended and Restated Security and Collateral Agency Agreement as of even date herewith, substantially in the form of Exhibit D attached hereto, by and among the Company, each Borrowing Subsidiary, the Agent, the trustee under the indentures relating to the Ratable Medium-Term Notes, and the Collateral Agent, pursuant to which a security interest is created in favor of the Collateral Agent for the Secured Parties in certain Collateral to be pledged pursuant to this Agreement, as the same may, from time to time, be further supplemented, modified or amended. Series A Preferred Stock: means the Company's 8.42% Cumulative Preferred Stock, Series A. Servicing Agreement: means a written contract of the Company with another Person to act on behalf of such other Person to, among other things, receive payments in respect of Mortgage Loans and to service Mortgage Loans, but shall not include the servicing rights related to (i) any Residential Mortgage Loans while they constitute Collateral, (ii) any commercial Mortgage Loans, or (iii) any other Mortgage Loans held for investment by the Company, Parent or any of their respective Subsidiaries. Servicing Collateral Fee Rate: means, as of any date the percentage per annum set forth on Schedule 2 attached hereto which is in effect on such date, changing as and when the Company's long-term unsecured debt rating by either S&P or Moody's changes as described therein. Servicing Purchaser: means a Person which has purchased Servicing Agreements from the Company. Servicing Sale Receivables: means funds due to the Company from a Servicing Purchaser in connection with a sale of Servicing Agreements from the Company to such Servicing Purchaser. Settlement Account: means the account established pursuant to Section 4.11. Single Family Residence: means a one to four family dwelling unit, which may be a condominium unit but which shall not be a mobile home (unless qualified under a Federal Agency program) or a dwelling unit in a cooperative apartment building. Subordinated Debt: means the principal amount of (but not any interest on) the unsecured subordinated Debt of the Company outstanding from time to time (which amount shall not exceed $100,000,000) evidenced by the Quarterly Income Capital Securities (Subordinated Interest Deferrable Debentures, Due 2025) of the Company issued in exchange for certain of the Series A Preferred Stock, the terms of which unsecured subordinated Debt are set forth in the Subordinated Debt Indenture; but shall not -25- 32 include any such unsecured subordinated Debt with respect to which any amounts shall have been deposited with the trustee under the Subordinated Debt Indenture or otherwise irrevocably set aside for the benefit of the holders of such Debt for the purpose of defeasance of such Debt. Subordinated Debt Indenture: means that certain Subordinated Indenture, dated as of December 1, 1995, as amended or supplemented from time to time, by and between the Company and IBJ Schroeder, as trustee, pursuant to which the Company has issued or will issue the Subordinated Debt. Subservicing Agreement: means a Servicing Agreement between the Company and a Person which does not own the Mortgage Loans being serviced thereunder but only has servicing or other non-ownership rights with respect thereto. Subsidiary: of a Person means (i) any corporation more than 50% of the outstanding voting securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Company. Swingline Advances: means all Advances made by the Swingline Lender which are designated by the Company or a Borrowing Subsidiary as Swingline Advances in the applicable Advance Notice, which Advances may be Overnight Transaction Advances, Alternate Base Rate Advances or Swingline Buydown Advances. Swingline Buydown Advance: means a Loan made pursuant to Section 2.5(b) by the Swingline Lender at the Swingline Buydown Rate. Swingline Buydown Rate: means a rate to be agreed upon by the Company and the Swingline Lender to apply to Swingline Buydown Advances pursuant to a Balance Bank Agreement between the Swingline Lender and the Company. Swingline Commitment: means, the obligation of the Swingline Lender to make Swingline Advances hereunder not exceeding $10,000,000. Swingline Lender: means First Chicago. Termination Date: means November 11, 1999, or if any such day is not a Business Day, the next preceding Business Day. -26- 33 Transferee: is defined in Section 11.4. Unsecured Leverage Ratio: means as of any date, the applicable maximum leverage ratio (which changes as and when the Aggregate Commitment changes) set forth in Section 8.9(b). VA: means the Veterans Administration or other agency, corporation or instrumentality of the United States as to which the powers and duties of the Veterans Administration have been transferred. VA-Approved Lender: means an institution that is approved by the VA to act as a lender in connection with the origination of any Mortgage Loan guaranteed by the VA. VA Mortgage Loan: means a Mortgage Loan that is secured by a first lien on land and the Single Family Residence constructed thereon and is guaranteed by the VA. Warehouse Borrowing Base: means, for any date, that portion of the Aggregate Borrowing Base on such date attributable to Eligible Collateral other than Eligible Pledged Servicing. 1.2 Interpretation. (a) Words of the masculine gender include correlative words of the feminine and neuter genders. (b) Unless the context shall otherwise indicate, words importing the singular include the plural and vice versa. (c) Articles and Sections referred to by number mean the corresponding Articles and Sections of this Agreement. (d) The terms "hereby," "hereof," "hereto," "herein," "hereunder" and any similar terms as used in this Agreement, refer to this Agreement as a whole unless otherwise expressly stated. 1.3 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent (except for changes concurred in by the Company's independent public accountants) with the most recent audited consolidated financial statements of the Company delivered to the Lenders. To enable the ready and consistent determination of compliance with the covenants set forth herein, neither the Company nor any Borrowing Subsidiary will change its fiscal year from a calendar year without (i) advance written -27- 34 notice to the Lenders, (ii) providing interim financial reports certified by the Company, by the dates that such reports would have been required prior to such change, and (iii) providing an interim audited financial statement if more than fifteen (15) months will have elapsed between annual audited financial statements as a result of such change. ARTICLE II BORROWINGS 2.1 Availability and Adjustments. (a) Agreement to Lend. Subject to subparagraphs (1) through (4) below (the "Lending Sublimits"), each Lender severally agrees to make Loans to the Company and participate in purchases of Discount Advances (and, to the extent and not to exceed the amounts provided in the second Recital of this Agreement, the Swingline Lender agrees to make Swingline Advances to the Borrowing Subsidiaries) on the terms and conditions set forth in this Agreement from time to time through the Business Day immediately preceding the Termination Date, provided that, on any date, after giving effect to such Loans and all other Loans that the Company or any Borrowing Subsidiary has requested be made on such date: (1) the aggregate principal balance then outstanding under all Loans made by any Lender under this Agreement (excluding the aggregate principal balance then outstanding of any Bid Loans made by such Lender and any portion of Discount Advances made by such Lender which have been sold or, will on such date be simultaneously sold, to the other Lenders under Section 2.4) shall not at any time exceed the sum of (i) such Lender's then-current General Commitment, and (ii) such Lender's then-current Swingline Commitment, if any; (2) the aggregate principal balance of all Loans outstanding under this Agreement plus the aggregate face amount of all Outstanding CPNs plus the amount of all outstanding (whether currently due or contingent) Approved GNMA Letter of Credit Obligations shall not at any time exceed the then-current Aggregate Commitment; (3) the Credit Requirement shall not exceed the Aggregate Borrowing Base; (4) except as otherwise set forth in Section 2.5(c), the aggregate principal balance of all Swingline Advances outstanding under this Agreement at any time shall not exceed the Swingline Commitment. -28- 35 Subject to the terms hereof, the Company and the Borrowing Subsidiaries may borrow, repay and reborrow amounts hereunder. (b) Optional Increases in Aggregate Commitments. The Company shall have the right to increase the Aggregate Commitment, but not to an amount in excess of $1,250,000,000, by obtaining additional Commitments, either from one or more of the Lenders or another lending institution provided that (A) the Agent has approved the identity of any such new Lender, (B) any such new Lender assumes all of the rights and obligations of a "Lender" hereunder, and (C) the Agent has received a "New/Modified Commitment Supplement" in the form of Exhibit H attached hereto, which supplement shall be executed by the Company, each Borrowing Subsidiary, the Agent and any Lender modifying its Commitment thereby. Each New/Modified Commitment Supplement shall be deemed to amend Exhibit C to the extent necessary to reflect any changes in the Commitments hereunder, and the Agent shall promptly deliver a copy of such supplement to each Lender whose Commitment Percentage is affected thereby. (c) Optional Reductions in Aggregate Commitments. The Company shall have the right to reduce the Aggregate Commitment upon ten Business Days' prior written notice to the Agent, provided that such voluntary reductions shall be made only in multiples of $10,000,000. Upon a reduction of the Aggregate Commitment pursuant to the preceding sentence, each Lender's General Commitment shall be decreased pro rata in accordance with such Lender's Adjusted Commitment Percentage. On or before the effective date of any such reduction, the Company shall, if necessary, repay sufficient Loans to prevent the remaining outstanding Loans hereunder, after giving effect to such permanent reduction, from exceeding the Lending Sublimits. 2.2 Fees. The Company shall pay the following fees (the "Fees"): (a) Facility Fee. A facility fee based on the Aggregate Commitment from time to time, calculated at the Facility Fee Rate, changing when and as such rate changes, expressed as a per diem rate on the actual Aggregate Commitment for each day during the preceding full or partial calendar quarter, payable in arrears, on or before the fifth Business Day of each calendar quarter and on the Termination Date. This fee shall be allocated among the Lenders on a pro rata basis in accordance with their respective Commitments (including any Swingline Commitment) on each day during such quarter. -29- 36 (b) Servicing Margin/Servicing Collateral Fee. A servicing collateral fee based on the Required Servicing Collateral Amount, which fee shall be calculated at the Servicing Collateral Fee Rate, changing as and when such rate changes, expressed as a per diem rate on the actual Required Servicing Collateral Amount for each day during the preceding full or partial calendar quarter, payable in arrears on or before the fifth business day of each calendar quarter and on the Termination Date. This fee shall be allocated among the Lenders on a pro rata basis in accordance with the principal balance of their respective outstanding Loans other than Bid Loans on those days during such quarter on which there was a Required Servicing Collateral Amount. (c) Amendment Fee. An amendment fee of $1,000 to each Lender for each amendment to this Agreement requested solely by the Company in excess of two (2) amendments during any calendar year. (d) Other Fees Payable to Agent. Any fees payable to the Agent pursuant to the Company's prior letter agreement with the Agent. (e) Up Front Fees Payable to Lenders. Up-front fees payable to the Lenders, based on each Lender's accepted allocated Commitment, in the amounts set forth on the schedule of up-front fees dated October 2, 1996 previously delivered to the Lenders by the Agent. (f) Collateral Agent Fees. Collateral Agent fees payable to Collateral Agent for its services rendered pursuant to the Security Agreement as agreed to by the Company and the Collateral Agent from time to time. (g) Fees Payable in Connection with Discount Loans or Swingline Buydown Advances. Any deficiency fees owing to the Balance Banks or the Swingline Lender under the Balance Bank Agreements due to the Company's failure to maintain sufficient deposits with such Balance Banks or the Swingline Lender and any other fees owing under the Balance Bank Agreements. 2.3 Advances. (a) Types of Advances. Each Advance hereunder shall consist of Loans made from one or more of the Lenders and requested by the Company or a Borrowing Subsidiary in accordance with Section 2.9. Subject to the terms and conditions herein, Eurodollar Advances, Alternate Base Rate Advances and Federal Funds Advances shall be generally available as permitted by the Lending Sublimits. Discount Advances shall be available only as provided in Section 2.4. Swingline Advances shall be available -30- 37 as provided in Section 2.5. Bid Loans shall be available as provided in Section 2.6. Notwithstanding anything to the contrary contained in this Agreement, at any time during the continuance of a Default the Agent may (and at the direction of the Required Lenders shall) declare by notice to the Company that no Advance may be made as, converted into or continued as a Eurodollar Advance or a Discount Advance, and each such Advance shall automatically be converted into a Federal Funds Advance at the expiration of the interest period applicable thereto. (b) Rate Options. Eurodollar Advances, Alternate Base Rate Advances, Federal Funds Advances, Swingline Buydown Advances and Overnight Transaction Advances shall accrue interest at the Eurodollar Rate, the Alternate Base Rate, the Federal Funds Rate, the Swingline Buydown Rate and the Overnight Transaction Rate, respectively. Discount Advances shall not bear interest but shall be made on a discounted basis by one or more Balance Banks and shall be sold to the other Lenders in accordance with Section 2.4. (c) Funding of Advances. Discount Advances, Swingline Advances and Bid Loans shall be funded by the Lenders as provided in Sections 2.4, 2.5 and 2.6, respectively. All other Advances shall be funded on a pro rata basis among all Lenders in accordance with each Lender's Adjusted Commitment Percentage. (d) Reallocation of Swingline Advances. Upon the election of the Swingline Lender at any time, all outstanding Swingline Advances (including Swingline Advances made pursuant to Section 2.5(c) below) designated by the Swingline Lender shall be reallocated among all Lenders in accordance with each Lender's Adjusted Commitment Percentage, and each such Swingline Advance shall thereafter be deemed for all purposes a Federal Funds Advance. Notwithstanding the preceding sentence or any other provision of this Agreement, no portion of any Swingline Advance shall be reallocated to any Lender to the extent such reallocation would cause such Lender's share of the aggregate unpaid principal amount of all Loans (other than Bid Loans) then outstanding under this Agreement to exceed its General Commitment hereunder. (e) Reallocation Upon Default. Automatically after the occurrence of an Event of Default described in Section 10.1(k) and upon the request of any Lender during the continuance of any other Event of Default, (i) all Swingline Advances made in accordance with this Agreement, Federal Funds Advances and Alternate Base Rate Advances (excluding Bid Loans) shall be immediately reallocated among all Lenders in accordance with each Lender's Commitment Percentage, and each Swingline Advance shall thereafter be deemed for all purposes a Federal Funds Advance, and (ii) each Eurodollar Advance and Discount Advance shall, upon the expiration of the interest period applicable thereto, -31- 38 automatically be converted into a Federal Funds Advance and reallocated among all Lenders in accordance with each Lender's Commitment Percentage. Each Lender holding less than its Commitment Percentage of all Advances (excluding Bid Loans) shall at the times set forth for reallocations in the preceding sentence immediately purchase for cash and at face value such participations in the Notes held by other Lenders, and make such other adjustments, as may be needed to cause each Lender to hold its Commitment Percentage of the Advances hereunder (other than Bid Loans made by such Lender). Notwithstanding the preceding provisions of this Section 2.3(e) or any other provision of this Agreement, no Lender shall be required to so purchase such participations to the extent that such purchase would cause such Lender's share of the aggregate unpaid principal amount of all Loans (other than Bid Loans) then outstanding under this Agreement to exceed its Commitment hereunder. 2.4 Discount Advances. (a) Funding of Discount Loans. Subject to the terms and conditions herein (including the Lending Sublimits) and the terms and conditions of any Balance Bank Agreement, the Company may request a Discount Advance from any Balance Bank; provided that Discount Advances shall be made only on the tenth day of each calendar month or, if such tenth day is not a Business Day, on the next succeeding Business Day thereafter. (b) Discounted Advance. Each Discount Loan made available hereunder shall not bear interest but shall instead be funded to the Company at a discount ("Balance Bank Discount") from the principal amount repayable by the Company at the end of the applicable Discount Loan Period (the "Face Amount") calculated to yield to the Balance Bank, when the Face Amount is repaid in full at the end of the applicable Discount Loan Period, a per annum return on the amount advanced equal to the Discount Rate for the applicable Discount Loan Period. The full Face Amount of each Discount Advance shall then be repaid by the Company at the expiration of the applicable Discount Loan Period. Accordingly, each Discount Advance shall bear no interest prior to the expiration of the applicable Discount Loan Period. The amount of the Discount Advance actually disbursed to the Company on the Advance Date therefor (which amount shall necessarily be less than the Face Amount) shall be equal to the amount requested by the Company in the Advance Notice requesting such Discount Advance, and the Face Amount shall be determined by the Agent based on the Balance Bank Discount. From and after the expiration of such Discount Loan Period, each Discount Loan constituting a portion of such Discount Advance not repaid shall bear interest on its Face Amount at the rate set forth in Section 2.7. -32- 39 (c) Balance Bank Agreement. Discount Advances are based upon the expectation that the Company will maintain average daily qualifying balances with the applicable Balance Bank during the applicable Discount Loan Period. The Agent will collect and disburse the Discount Advances, but shall not be obligated to confirm any matters with respect to balances maintained with Balance Banks or to collect any fees or amounts charged by Balance Banks with regard to such balances. Each Balance Bank shall with the Company's agreement impose its own requirements upon the Company in dealing with deviations in actual balances from projected balances. All such matters shall be governed by separate Balance Bank Agreements between each such Balance Bank and the Company, and the Agent shall have no responsibility therefor. No Discount Advance shall be available from a particular Balance Bank until (i) the Company and such Balance Bank have executed and delivered a Balance Bank Agreement and so advised the Agent in writing, and (ii) in the case of a Non-Lender Balance Bank, such Non-Lender Balance Bank shall have executed either this Agreement or a Non-Lender Balance Bank Supplement in the form of Exhibit I hereto agreeing to be bound by the terms of this Section 2.4. (d) Ratable Purchase by All Lenders. A portion of each Discount Advance (or, in the case of Non-Lender Balance Banks, the entire Discount Advance made in accordance with the terms of this Agreement), shall be sold simultaneously with the funding by the Balance Bank to the other Lenders (each a "Purchasing Lender") on a pro rata basis in accordance with each such Lender's Adjusted Commitment Percentage. Each Purchasing Lender hereby agrees to purchase and acquire, prior to funding, for cash at the Purchase Price and without recourse to the Balance Bank, its Adjusted Commitment Percentage share of such Discount Advance (as to each Purchasing Lender, such amount shall be a Discount Loan by such Lender). The purchase price ("Purchase Price") payable by each Purchasing Lender shall be calculated to yield such Lender upon payment at the end of the applicable Discount Loan Period of its Discount Loan a per annum return on the Purchase Price equal to the Eurodollar Rate which would have been applicable for a one month Eurodollar Interest Period ending on the same date as such Discount Loan Period. Each Balance Bank hereby irrevocably agrees to sell and assign, without recourse, such portion of every Discount Advance made by such Balance Bank (or, in the case of Non-Lender Balance Banks, the entire amount of each such Discount Advance) to each Purchasing Lender at the applicable Purchase Price. Each Balance Bank (other than Non-Lender Balance Banks) shall retain its Adjusted Commitment Percentage share of the Face Amount of each Discount Advance, which shall constitute a Discount Loan owing to the Balance Bank. (e) Minimum Amounts; Funding. Each Discount Advance shall be requested by the Company in accordance with Section 2.9. On the Advance Date for each such Discount Advance, subject to -33- 40 the other provisions hereof and upon receipt by the Agent for the account of the Balance Bank from each of the Purchasing Lenders of the aggregate Purchase Price required to be made available by such Lenders, the Balance Bank will make the full Discount Advance available to the Agent for the account of the Company in the manner specified in Section 2.11. On the Advance Date for each such Discount Advance, each Purchasing Lender will make available to the Agent for the account of the Balance Bank in immediately available funds an amount equal to the Purchase Price for the share of such Discount Advance being purchased by such Lender from the Balance Bank. (f) Consent to Assignment. The Company hereby acknowledges and consents to the assignment of Discount Loans by each Balance Bank to the other Lenders, as contemplated by this Section 2.4. The Company and the Agent shall treat each Purchasing Lender with respect to its share of each Discount Advance as if such share of such Discount Advance had originally been made by such Purchasing Lender directly to the Company as a Discount Loan. (g) Discount Notes. The Discount Loans owing to each Lender shall be evidenced by a single master promissory note of the Company in the full amount of such Lender's Commitment, substantially in the form of Exhibit E-2 (a "Discount Note") executed and delivered prior to the initial Discount Advance, payable to the order of such Lender and representing from time to time the obligation of the Company to pay the aggregate Face Amount of all Discount Loans then owed to such Lender. 2.5 Swingline Advances. (a) In General. Subject to the terms and conditions herein, the Company and each Borrowing Subsidiary may request Swingline Advances from the Swingline Lender on a non-pro rata basis, and such Swingline Advance shall be funded to the Company or a Borrowing Subsidiary, as applicable, by the Swingline Lender on the Advance Date therefor. As set forth in, but subject to the provisions of, Sections 2.3(d) and (e), Swingline Advances shall be reallocated among the Lenders (i) automatically after the occurrence of an Event of Default described in Section 10.1(k), (ii) upon the request of any Lender during the continuance of any other Event of Default, and (iii) upon the election of the Swingline Lender made at any time. (b) Swingline Buydown Advances. Swingline Buydown Advances are based upon the expectation that the Company will maintain average daily qualifying balances with the Swingline Lender while any Swingline Buydown Advance is outstanding. The Swingline Lender shall with the Company's agreement impose its own requirements upon the Company in dealing with deviations in actual balances from projected balances. All such matters shall -34- 41 be governed by a Balance Bank Agreement between the Swingline Lender and the Company. (c) Swingline Advances to Pay Amounts Due to Swingline Lender. If any amounts are advanced by the Swingline Lender to cover checks or wire transfers from Company or Borrowing Subsidiary accounts maintained with the Swingline Lender when there are insufficient funds in such accounts to cover the applicable check or wire transfer and sufficient funds are not deposited in the applicable account before the close of business on the day on which the applicable check or wire transfer request is honored, then the Company shall be deemed to have requested, and the Swingline Lender may (but shall not be obligated to) elect to make, a Swingline Advance at the Alternate Base Rate to pay such overdraft amount (even if such a Swingline Advance would cause the aggregate amount of all outstanding Swingline Advances to exceed the Swingline Commitment); provided however, that (i) the Swingline Lender shall not make any such Swingline Advance to the extent such Advance would cause the Credit Requirement to exceed the Aggregate Borrowing Base, and (ii) the reallocations of any such Swingline Advances among the Lenders shall be as set forth in, but subject to the provisions of, Sections 2.3(d) and (e). 2.6 Bid Loans and Approved GNMA Letters of Credit. (a) Special Bids. The Company may, at any time, solicit a bid from any Lender on a non-pro rata basis for a loan (a "Bid Loan") in such amount and accruing interest at such rate as may be bid to the Company by such Lender for interest periods of 1 to 45 days. Such Lender, in its sole discretion, may make such a bid for a Bid Loan. The Company will be under no obligation to accept any such bid, but may accept any one, or more than one, of such bids. A Lender whose bid has been accepted by the Company shall be referred to as a "Bid Lender". The Company and each Bid Lender shall execute and submit a Bid Loan Notice in the form of Exhibit G hereto to the Agent concurrently with the Advance Notice for such Bid Loan. (b) Approved GNMA Letters of Credit. The Company may, at any time, request that any Lender issue a letter of credit in favor of GNMA as a result of the failure by the Company or any Borrowing Subsidiary to satisfy all document submission requirements of GNMA in connection with the certification or re-certification by GNMA of a pool of Mortgage Loans. If a Lender agrees to issue such a letter of credit and desires that such letter of credit be ratably secured (along with the other Credit Indebtedness) by the Collateral, such Lender shall submit to the Agent a copy of the proposed letter of credit and copies of any related reimbursement agreement or other related documentation. If (i) the Agent approves such letter of credit and other documentation (which approval shall not be unreasonably -35- 42 withheld), and (ii) the letter of credit expires by its terms on a date which is prior to the Termination Date, then such letter of credit shall constitute an Approved GNMA Letter of Credit and such Lender shall constitute an "Issuing Lender". No such letter of credit shall be considered an Approved GNMA Letter of Credit if its inclusion as an Approved GNMA Letter of Credit would, at the time of issuance, cause any Lending Sublimit to be exceeded. The Company and the applicable Issuing Lender shall promptly notify the Agent upon (i) the expiration, cancellation or honoring of any Approved GNMA Letter of Credit, and (ii) the payment by the Company or the applicable Borrowing Subsidiary of any amounts due to the Issuing Lender in respect of any Approved GNMA Letter of Credit Obligations. No Issuing Lender nor the Company shall amend or renew any Approved GNMA Letter of Credit or any related reimbursement agreement or other related document without the prior written consent of the Agent (which consent shall not be unreasonably withheld). (c) Additional Commitment. Each Bid Lender's commitment under an accepted special bid and each Issuing Lender's issuance of an Approved GNMA Letter of Credit shall be in addition to such Lender's Commitment and shall not reduce such Lender's obligation to continue to fund its Adjusted Commitment Percentage of any other Advance. (d) Notes. Each Bid Loan owing to each Bid Lender shall not be evidenced by the Notes executed and delivered in the form of Exhibit E-1 and E-2, but shall instead be evidenced by an additional promissory note or notes in a form mutually agreed to by the Company and such Bid Lender. The Agent shall have no responsibility to confirm the existence or substance of such additional promissory notes. 2.7 Rate after Maturity. Any Advance not paid at maturity, whether by acceleration or otherwise, and any other amount not paid when due hereunder shall bear interest until paid in full at a rate per annum equal to the Alternate Base Rate plus two percent (2.0%) per annum; provided, however, that such interest rate after maturity shall in no event be less than the interest rate that was in effect with respect to such Advance prior to maturity. 2.8 Interest Payment Dates. Interest shall accrue at the relevant rate for each day from the day on which the proceeds of such Advance are made available to the Company or a Borrowing Subsidiary. Interest accrued on each Advance other than a Eurodollar Advance or a Discount Loan (which does not accrue interest prior to maturity) shall be payable on the first to occur of (i) the first Business Day of the immediately following calendar month, commencing with -36- 43 the first such date to occur after the date hereof, or (ii) at maturity, whether due to acceleration or otherwise. Interest accrued on each Eurodollar Advance shall be payable on the first to occur of (i) the last day of each Eurodollar Interest Period, or (ii) any date on which any such Eurodollar Advance is prepaid, whether due to acceleration or otherwise, or (iii) the Termination Date. Interest and Fees shall be calculated for actual days elapsed on the basis of a 360-day year. Interest shall be payable for the day an Advance is made. Interest shall not be payable for the day of any payment on the amount paid if payment is received prior to noon (Chicago time) at the place of payment. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. 2.9 Method of Selecting Rate Options and Interest Periods. Subject to the terms hereof, for each Advance hereunder the Company (or a Borrowing Subsidiary or the Company on behalf of a Borrowing Subsidiary in the case of Swingline Advances to be borrowed by a Borrowing Subsidiary) shall give the Agent irrevocable notice (an "Advance Notice") not later than (i) 10:00 a.m. (Chicago time) on the proposed Advance Date for each Bid Loan or Federal Funds Advance, (ii) noon (Chicago time) on the proposed Advance Date for each Alternate Base Rate Advance (other than Swingline Advances), (iii) 3:00 p.m. (Chicago time) on the proposed Advance Date for each Overnight Transaction Advance, (iv) 4:00 p.m. (Chicago time) on the proposed Advance Date for each Swingline Advance which is an Alternate Base Rate Advance or a Swingline Buydown Advance, and (v) 11:00 a.m. (Chicago time) three (3) Business Days before the Advance Date for each Eurodollar Advance and each Discount Advance, specifying: (a) the Advance Date, which shall be a Business Day, of such Advance, (b) the aggregate amount of such Advance, which shall be in an amount equal to $5,000,000 or a whole multiple of $1,000,000 in excess thereof, except that (i) Swingline Advances other than Overnight Transaction Advances shall have no minimum amount and need not be in multiples of $1,000,000, and (ii) Overnight Transaction Advances shall be in a minimum amount equal to $100,000 but need not be in multiples of $1,000,000. (c) the type of such Advance, -37- 44 (d) the interest period applicable to such Advance, if applicable, (e) if such Advance is a Discount Advance, the Balance Bank or Balance Banks for such Advance and, if applicable, the portion of such Discount Advance allocated to each such Balance Bank, (f) if such Advance is a Bid Loan, the Bid Lender for such Bid Loan, (g) if such Advance is a Swingline Advance, which entity (i.e. the Company or a particular Borrowing Subsidiary) is the borrower of such Advance, and (h) what portion, if any, of such Advance is to be used solely for the purpose of repaying maturing commercial paper. Notwithstanding the foregoing, the Agent may also agree, in its sole discretion, to accept (A) an Advance Notice requesting a Swingline Advance which is an Alternate Base Rate Advance or Swingline Buydown Advance or (B) a Bid Loan Notice at any time up until the close of the Agent's business day. Delivery of an Advance Notice, whether by telephone or in writing, shall constitute a representation and warranty that, after giving effect to the amount of the Advance being requested, (i) the then-current Aggregate Borrowing Base is equal to or greater than the Credit Requirement, and (ii) no Lending Sublimit shall be exceeded. Changes in the rate of interest on that portion of any Advance maintained as an Alternate Base Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. The interest rate on each Overnight Transaction Advance or Federal Funds Advance shall be recalculated daily for each day that such Overnight Transaction Advance or Federal Funds Advance is continued under Section 2.12(ii). Each Eurodollar Advance shall bear interest for each day from and including the first day of the Eurodollar Interest Period applicable thereto to (but not including) the last day of such Eurodollar Interest Period at the interest rate determined as applicable to such Advance. The Company shall select Eurodollar Interest Periods and Discount Loan Periods with respect to Eurodollar Advances and Discount Loans so that it is not necessary to pay a Eurodollar Advance or Discount Loan prior to the last day of the applicable Eurodollar Interest Period or Discount Loan Period, as the case may be, in order to make the mandatory repayment on the Termination Date. Any change in the Applicable Margin shall be effective immediately with respect to the interest rates on any Loans outstanding other than Discount Loans. Changes in the Applicable Margin relating to Discount Loans shall not affect Discount Loans outstanding at the time of any such change but shall be effective -38- 45 with respect to any Discount Loans made after the date of any such change. 2.10 Maximum Number of Eurodollar Loans. The Company may not request an additional Eurodollar Advance if the making of such Advance would result in any Lender holding Eurodollar Loans having more than six (6) different Eurodollar Interest Periods at any given time. 2.11 Funding Procedures. Not later than 2:00 p.m. (Chicago time) on each Advance Date, each Lender shall make available its Loan or Loans (including Bid Loans), in funds immediately available in Chicago to the Agent at its address specified pursuant to Article XII, provided that Swingline Advances may be funded at any time up to (i) the close of the Swingline Lender's business day so long as First Chicago is both the Agent and the sole Swingline Lender, or (ii) 4:00 p.m. (Chicago time) if First Chicago is not both the Agent and the sole Swingline Lender. The Agent will make the funds so received from the Lenders available to the Company or a Borrowing Subsidiary, as applicable, at the Agent's aforesaid address, subject to the provisions of Article V. Notwithstanding the foregoing, the Agent may also agree, in its sole discretion, to accept delivery of Bid Loan funds and to make such funds available to the Company at any time up to the close of the Agent's business day. 2.12 Conversion and Continuation. (i) The Company may elect from time to time, subject to the provisions of Sections 2.3(a), 2.9 and 2.10 and the Lending Sublimits to convert all or any part of any Advance (other than a Bid Loan or Discount Advance) into a different type of Advance, provided that any conversion of any such Eurodollar Advance shall be made on, and only on, the last day of the applicable Eurodollar Interest Period. Discount Advances and Bid Loans are payable on the last day of the applicable Discount Loan Period or Bid Loan period and may be repaid out of new Advances hereunder but may not be converted directly to a different type of Advance. (ii) Alternate Base Rate Advances shall continue as the same type of Advances unless and until such Advances are converted into a different form of Advance in accordance with the terms hereof. Federal Funds Advances shall continue as Federal Funds Advances unless and until (a) such Advances are converted into a different form of Advance in accordance with the terms hereof or (b) the Company has paid any such Federal Funds Advance prior to 10:00 a.m. (Chicago time) on any Business Day or given the Agent written notice before 10:00 -39- 46 a.m. (Chicago time) on any Business Day that such Federal Funds Advance will be repaid on such Business Day. Overnight Transaction Advances and Swingline Buydown Advances shall continue as Overnight Transaction Advances and Swingline Buydown Advances, respectively, unless and until (a) such Advances are converted into a different form of Advance in accordance with the terms hereof or (b) the Company or a Borrowing Subsidiary, as applicable, has paid any such Overnight Transaction Advance or Swingline Buydown Advance prior to 3:00 p.m. (Chicago time) on any Business Day or given the Agent written notice before 3:00 p.m. (Chicago time) on any Business Day that such Overnight Transaction Advance or Swingline Buydown Advance will be repaid on such Business Day. If the Company so notifies the Agent that it will be paying a Federal Funds Advance, Overnight Transaction Advance or Swingline Buydown Advance on any Business Day and fails to do so, such Advance shall be converted into an Alternate Base Rate Advance. Eurodollar Advances shall continue until the end of the then-applicable Eurodollar Interest Period therefor, at which time each such Advance shall be automatically converted to a Federal Funds Advance, unless the Company shall have given the Agent notice in accordance with Section 2.12(iii) requesting that, at the end of such Eurodollar Interest Period, such Advance continue as a Eurodollar Advance for a specified Eurodollar Interest Period or be converted to a different type of Advance. (iii) The Company shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of an Alternate Base Rate Advance, a Federal Funds Advance, a Swingline Buydown Advance or an Overnight Transaction Advance or conversion or continuation of a Eurodollar Advance not later than (i) 10:00 a.m. (Chicago time) on the date of the requested conversion or continuation, in the case of a conversion into a Federal Funds Advance, Alternate Base Rate Advance, Overnight Transaction Advance or Swingline Buydown Advance, or (ii) 11:00 a.m. (Chicago time) at least three Business Days prior to the date of the requested conversion into or continuation of a Eurodollar Loan, specifying: (1) the requested date (which shall be a Business Day) of such conversion or continuation; (2) the amount and type of the Advance to be converted or continued; (3) the amount and type(s) of Advance(s) into which such Advance is to be converted or continued; and (4) in the case of a conversion into or continuation of a Eurodollar Advance, the duration of the Eurodollar Interest Period applicable thereto. 2.13 Optional Principal Payments. All or any portion of Alternate Base Rate Advances, Overnight Transaction Advances, Swingline Buydown Advances and -40- 47 Federal Funds Advances may be paid without penalty or premium on any Business Day provided that such repayments are made by (i) 10:00 a.m. (Chicago time) with respect to Federal Funds Advances, (ii) noon (Chicago time) with respect to Alternate Base Rate Advances, or (iii) 3:00 p.m. (Chicago time) with respect to Overnight Transaction Advances and Swingline Buydown Advances. A Eurodollar Advance or Discount Loan may not be paid prior to the last day of the applicable Eurodollar Interest Period or Discount Loan Period, as the case may be; provided, however, that the Company shall compensate the Lenders for any funding losses and/or loss of profits incurred as a result of any voluntary prepayment (if accepted) or involuntary prepayment of any such Advance prior to the last day of the applicable Eurodollar Interest Period or Discount Loan Period. Bid Loans may not be prepaid unless the applicable Bid Lender has agreed otherwise and notified the Agent of such agreement. All optional principal payments shall be applied to the type of Advance designated by the Company when making such payment, provided that any payments received during the continuance of an Event of Default shall be applied on a pro rata basis to all Advances then outstanding (with the portion applicable to Eurodollar Loans or Discount Loans to be applied to such Loans either immediately or at the end of the relevant Eurodollar Interest Period or Discount Loan Period at the option of the Company). 2.14 Required Principal Payments. (a) Payments Related to Aggregate Borrowing Base. On any date that the Credit Requirement is in excess of the then-current Aggregate Borrowing Base, the Company shall make a mandatory payment to the Agent for the benefit of the Lenders in the amount of such excess. Such payment shall be allocated pro rata among the Lenders in accordance with the amounts of their outstanding Loans hereunder. (b) Final Payment on Termination Date. The outstanding principal balance of all Advances not repaid earlier, together with any accrued and unpaid interest and Fees, unless required to be paid earlier pursuant to the terms hereof, shall be due and payable on the Termination Date. 2.15 Method of Payment. All payments of principal, interest, and Fees hereunder (including any payments related to Bid Loans) shall be made in immediately available funds to the Agent at the Agent's address specified pursuant to Article XII, or at any other Lending Installation of the Agent specified in writing by the Agent to the Company on the date due by 1:00 p.m. (Chicago time) with respect to all Advances other than Swingline Advances and by 3:00 p.m. (Chicago time) with respect to Swingline Advances. Notwithstanding the foregoing, if the Company or a Borrowing -41- 48 Subsidiary fails to repay or give the Agent notice of repayment of a Federal Funds Advance before 10:00 a.m. (Chicago time) or an Overnight Transaction Advance before 3:00 p.m. (Chicago time) on the Business Day that the Company or the Borrowing Subsidiary intends to repay such Advance, any payment of such Advance received by the Agent on such Business Day after the time required for payment or notice shall be deemed to have been received by the Agent at the opening of business on the following Business Day. Each payment delivered to the Agent for the account of any Lender shall be delivered promptly by the Agent to such Lender in the same type of funds which the Agent received at its address specified pursuant to Article XII or at any Lending Installation specified in a notice received by the Agent from such Lender. The Agent is hereby authorized to charge the account of the Company maintained with First Chicago for each payment of principal, interest and fees as it becomes due hereunder. 2.16 Notes; Telephonic Notices. Each Lender is hereby authorized to record the principal amount of each of its Loans and each repayment on the schedules attached to its Notes provided, however, that the failure to so record or any error in such recording shall not affect the Company's or any Borrowing Subsidiary's obligations hereunder or under such Notes. The Company and each Borrowing Subsidiary each hereby authorizes the Lenders and the Agent to extend, continue or convert Advances, effect Rate Option selections and to transfer funds to or for the account of the Company or the applicable Borrowing Subsidiary based on telephonic notices (confirmed promptly thereafter by facsimile) made by any person or persons the Agent or any Lender in good faith believes to be acting on behalf of the Company or the applicable Borrowing Subsidiary. The Company and each Borrowing Subsidiary each agrees to deliver promptly to the Agent a written confirmation, if such confirmation is requested by the Agent or any Lender, of each telephonic notice signed by an officer of the Company or the Borrowing Subsidiary, as applicable, authorized in writing to do so. If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders, the records of the Agent and the Lenders shall govern absent manifest error. 2.17 General Provisions as to Payments. (a) The Company (or the applicable Borrowing Subsidiary with respect to Loans borrowed by a Borrowing Subsidiary) shall make each payment of principal or interest on the Loans and shall pay all Fees not later than the times stated in Section 2.15. The Agent shall promptly distribute to each Lender its share of each payment of principal or interest or fees received by the Agent for the account of such Lender. -42- 49 (b) Amounts paid to or held by the Agent for the payment of Loans shall not be deemed paid to a Lender until received by such Lender by the later of 3:00 p.m. (Chicago time) or the close of business on such date. If amounts are received by the Agent from the Company or a Borrowing Subsidiary prior to the applicable times stated in Section 2.15 and the Agent fails to make a Lender's portion of such amount available to such Lender by close of business on such date, neither the Company nor such Borrowing Subsidiary shall have any obligation to pay any further interest on such payment and the Agent shall pay to such Lender interest on such payment to the date paid to such Lender by the Agent at a rate per annum equal to the then-current Published Federal Funds Effective Rate. 2.18 Notification of Advances, Interest Rates and Prepayments. Promptly after receipt thereof, the Agent will notify each Lender by facsimile of the contents of each Advance Notice, Conversion/Continuation Notice, and repayment notice received by it hereunder. Not later than one Business Day prior to the Advance Date for each Eurodollar Advance or Discount Loan, the Agent will notify by facsimile each Lender and the Company of the interest rate applicable to each Eurodollar Advance, the Face Amount of each Discount Advance and the Purchase Price to be paid by each Lender for its share of such Discount Advance promptly upon determination of such interest rate, Face Amount and Purchase Price. When any Advances are outstanding or have been requested at the Federal Funds Rate or the Alternate Base Rate the Agent will give each Lender and the Company prompt notice by facsimile of each change in such rate. 2.19 Lending Installations. Each Lender may book its Loans at any Lending Installation selected by such Lender and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Notes shall be deemed held by each Lender for the benefit of such Lending Installation. Each Lender may, by facsimile or written notice to the Agent and the Company, designate a Lending Installation through which Loans will be made by it and for whose account Loan payments are to be made. Notwithstanding the foregoing, no Lender may transfer its Loans to another Lending Installation if such transfer would cause the Company to incur additional indemnification costs under Section 3.1 hereof, and if after a Lender transfers its Loans to another Lending Installation the Company incurs additional indemnification costs under Section 3.1 hereof as a result of such transfer, such Loans shall be transferred back to the original Lending Installation. -43- 50 2.20 Non-Receipt of Funds by Agent. (a) Unless the Company, a Borrowing Subsidiary or a Lender, as the case may be, notifies the Agent prior to the close of business on the Business Day immediately preceding the date on which it is required to make payment to the Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Company or a Borrowing Subsidiary, a payment of principal, interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made or will be made on the date required. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender, the Company or the Borrowing Subsidiary, as the case may be, has not in fact made or does not make when due such payment to the Agent, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (i) in the case of repayment by a Lender, the Published Federal Funds Effective Rate for such day or (ii) in the case of repayment by the Company or a Borrowing Subsidiary, the interest rate applicable to the relevant Loan. If a Lender fails to pay the Agent as provided in the preceding sentence, the Company shall pay such amount to the Agent upon demand plus interest (at the rate applicable to the applicable Advance) to the date of repayment (but not including such date if payment is received prior to the deadlines established in Section 2.15). (b) Neither the Agent nor any Lender shall incur any liability to the Company or any Borrowing Subsidiary in acting upon any telephonic notice referred to in this Agreement which the Agent or such Lender believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Company or the Borrowing Subsidiary or for otherwise acting in good faith under this Section 2.20. Upon the funding of Loans by the Lenders in accordance with this Agreement (including satisfaction of all conditions thereto) pursuant to any telephonic notice (with confirmation promptly thereafter by facsimile), the Company (or the applicable Borrowing Subsidiary with respect to Advances borrowed by a Borrowing Subsidiary) shall have effected a borrowing hereunder. An Advance Notice (or telephonic notice in lieu thereof) shall be irrevocable and the Company or the Borrowing Subsidiary, as applicable, shall be bound to effect a borrowing in accordance therewith. (c) If the Agent fails to make any Loan funds received from a Lender available to the Company for any reason and does not return such Loan funds to such Lender on the same Business Day such funds were received by the Agent, the Agent shall pay to -44- 51 such Lender, upon demand, interest from the date such funds are received by the Agent from such Lender, provided such funds were received prior to the deadlines for receipt set forth in Section 2.11 until the date such corresponding amount is either made available by the Agent to the Company within the time limits of Section 2.11 or so returned to such Lender, at the rate per annum equal to the then-current Published Federal Funds Effective Rate and the Company shall have no responsibility to such Lender with respect to such funds until they are so made available to the Company by the Agent. (d) Nothing in this Section 2.20 shall relieve any Lender from its obligation to fund its share of any Advance, prejudice any rights the Company may have against any Lender as a result of such Lender's failure to make the amount of its Loan available to the Company or obligate any Lender to fund any other Lender's share of any Advance. ARTICLE III CHANGE IN CIRCUMSTANCES 3.1 Yield Protection. If, after the date of this Agreement, the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change in any existing or future law, rule, regulation, policy, guideline or directive or the interpretation or administration thereof, or the compliance of any Lender therewith, (i) subjects any Lender or any applicable Lending Installation to any tax, duty, charge or withholding on or from payments due from the Company or any Borrowing Subsidiary, or changes the basis of taxation of payments to any Lender in respect of its Loans or other amounts due it hereunder (excluding any tax imposed with respect to the overall net income of any Lender or its Lending Installation, any franchise taxes imposed on any such Lender or Lending Installation to the extent such franchise taxes are in lieu of net income taxes), or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Advances or Discount Loans), or -45- 52 (iii) affects the amount of capital required or expected to be maintained by any Lender or Lending Installation or any corporation controlling any Lender or Lending Installation and such Lender determines the amount of capital required is increased by or based upon the existence of this Agreement or its obligation to make or maintain Loans hereunder or of commitments of this type, or (iv) imposes any other condition which requires any Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of loans held or interest received by it in an amount deemed material by such Lender, and the result of any of the foregoing is to increase the cost to such Lender or Lending Installation of making, renewing or maintaining its Commitment or any Loan or to reduce any amount receivable in respect thereof or to reduce the rate of return on the capital of such Lender or Lending Installation or any Person controlling such Lender or Lending Installation as it relates to credit facilities in the nature of that evidenced by this Agreement, then the Company shall pay such Lender that portion of such increased expense incurred (including, in the case of Section 3.1(iii), any reduction in the rate of return on capital to an amount below that which it could have achieved but for such law, rule, regulation, policy, guideline or directive and after taking into account such Lender's policies as to capital adequacy) or reduction in an amount received which such Lender determines is attributable to making, funding and maintaining its Loans and its Commitment to the extent such expenses or reductions arise from and after the date which is 90 days before receipt by the Company of demand for payment by such Lender. Notwithstanding the foregoing, if any of the foregoing circumstances otherwise giving rise to the yield protection provisions of this Section are imposed solely against a single Lender as a result of circumstances or conditions which apply solely to that Lender and not generally to lenders domiciled in the jurisdiction of such Lender's domicile, then the yield protection provisions of this Section shall not apply with respect to such circumstances. 3.2 Availability of Rate Options. If any Lender determines that maintenance of any of its Eurodollar Loans or Discount Loans at a suitable Lending Installation would violate any applicable law, rule, regulation or directive, whether or not having the force of law, the Agent shall suspend the availability of the affected Rate Option and require any Eurodollar Advances or Discount Loans outstanding at the affected Rate Option to be repaid immediately upon demand; or if the Required Lenders determine that deposits of a type or maturity appropriate to match fund Eurodollar Advances or -46- 53 Discount Loans are not available, the Agent shall suspend the availability of the affected Rate Option with respect to any such Loans or Advances made after the date of any such determination. If the Required Lenders determine that the Eurodollar Rate or the Discount Rate does not accurately reflect the cost of making a Eurodollar Advance or Discount Loan at such Rate Option, then, if for any reason whatsoever the provisions of Section 3.1 are inapplicable, the Agent shall suspend the availability of the affected Rate Option with respect to any Eurodollar Advance or Discount Loan made after the date of any such determination. 3.3 Funding Indemnification. If any payment of a Eurodollar Advance or Discount Loan occurs on a date which is not the last day of the applicable Eurodollar Interest Period or Discount Loan Period, whether because of acceleration, prepayment or otherwise, or if a Eurodollar Advance, Overnight Transaction Advance, Federal Funds Advance, Swingline Buydown Advance or Discount Loan is not made, continued or established by conversion on the date specified by the Company or a Borrowing Subsidiary for any reason other than default by the Lenders, the Company will indemnify each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain such Eurodollar Advance or Discount Loan. 3.4 Lender Statements; Survival of Indemnity. To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Advances and Discount Loans to reduce any liability of the Company to such Lender under Section 3.1 or to avoid the unavailability of a Rate Option under Section 3.2, so long as such designation is not to the economic detriment of such Lender and does not impose any increased regulatory burdens on such Lender. Each Lender shall deliver to the Agent and the Company a written statement of such Lender as to the amount due, if any, under Section 3.1 or 3.3. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Company in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Advance or Discount Loan shall be calculated as though each Lender funded its related Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate or Discount Rate applicable to such Loan, whether in fact that is the case or not. The amount specified in the written statement shall be payable within 15 days after receipt by the Company of the written statement. The obligations of the Company under Sections 3.1 and 3.3 shall survive payment of the Obligations and -47- 54 termination of this Agreement. In the event any Lender is affected by any of the events described in Section 3.1 or 3.2 the Company shall have the right, if no Default then exists, to repay in full all Credit Indebtedness owed to such Lender provided that the Company has, with the approval of the Agent (not to be unreasonably withheld), arranged to substitute a replacement lender for the full amount of such Lender's Commitment. 3.5 Lender Tax Agreement. Each Lender that is not incorporated under the laws of the United States of America or a state thereof shall: (i) deliver to the Company and the Agent (A) two duly completed copies of the United States Internal Revenue Service Form 1001 or 4224, or successor applicable form, as the case may be, and (B) an Internal Revenue Service Form W-8 or W-9, or successor applicable form, as the case may be; (ii) deliver to the Company and the Agent two further copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Company; and (iii) obtain such extension of time for filing and complete such forms or certifications as may reasonably be requested by the Company or the Agent; unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms or any certifications required hereby inapplicable or which would prevent such Lender from duly completing and delivering any such form or making such certification with respect to it and such Lender so advises the Company and the Agent. Such Lender shall certify (i) in the case of Form 1001 or 4224 delivered in accordance with this Section 3.5, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (ii) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States backup withholding tax. Each Person that shall become a Lender or a Participant pursuant to Article XI shall, upon the effectiveness of the related transfer, be required to provide all of the forms and statements required pursuant to this Section, provided that in the case of a Participant such Participant shall also furnish all such required forms and statements to the Lender from which the related participation shall have been purchased as well as to the Company and the Agent. -48- 55 ARTICLE IV COLLATERAL AND BORROWING BASE 4.1 Eligible Collateral - Pledged Mortgages. (a) "Eligible Mortgage Loan" means a Pledged Mortgage which: (i) has been originated less than 360 days prior to inclusion in the Aggregate Borrowing Base; (ii) is a Conforming Mortgage Loan, a Jumbo Mortgage Loan or a Nonconforming Mortgage Loan; (iii) has been included in the Aggregate Borrowing Base for 180 days or less after the Pledge Date thereof; (iv) is not financed under an agreement to repurchase or otherwise pledged to secure any Debt other than the Credit Indebtedness and the Ratable Medium-Term Notes pursuant to the Security Agreement; (v) has been duly executed and delivered by the parties thereto at a closing; (vi) is valid and enforceable in accordance with its terms, without defense or offset; (vii) has not been modified or amended and has not had any requirements thereof waived except as permitted by Federal Agency requirements; (viii) is subject to and complies with the delivery requirements of an Approved Investor Commitment to purchase such Pledged Mortgage; (ix) has been correctly described in the Collateral Transmittal submitted to the Collateral Agent in respect of such Pledged Mortgage; and (x) has been fully funded to the mortgagor or to an escrow or closing agent by wire transfer, transmittal through the "Automated Clearing House" or any similar private clearing house for interbank transfers of funds, cashier's check or a cleared check or draft; and as to which the representations and warranties contained in Section 4.7 relating thereto are true and correct as of the Pledge Date of such Mortgage Loan and as of each day thereafter as if made on each such date. 49 56 (b) "Eligible Delivered Mortgage" means an Eligible Mortgage Loan as to which: (i) the Collateral Agent has received and continues to hold the Required Mortgage Documents and, if requested by the Agent or the Collateral Agent, the Additional Required Mortgage Documents for such Pledged Mortgage, other than those documents and instruments which are in the possession of a Person to whom delivery was made pursuant to a Bailee Letter or a Company Trust Receipt; (ii) not more than 45 days have passed after the day on which the Mortgage Note for such Pledged Mortgage was delivered, pursuant to a Bailee Letter, to an Approved Investor other than one created under a government housing program which is not a Federal Agency for examination and purchase without such Mortgage Note being returned to the Collateral Agent; and not more than 75 days have passed after the day on which the Mortgage Note for such Pledged Mortgage was delivered, pursuant to a Bailee Letter, to an Approved Investor created under a government housing program which is not a Federal Agency for examination and purchase without such Mortgage Note being returned to the Collateral Agent; (iii) no Approved Investor has paid the purchase price or delivered the Securities due to the Company on account of such Pledged Mortgage; (iv) not more than 15 days have passed after the date on which any document relating to such Pledged Mortgage was sent, pursuant to a Company Trust Receipt, to the Company or a Borrowing Subsidiary for correction of clerical or other non-substantial documentation problems in preparation of such document without such documentation being returned to the Collateral Agent properly corrected; (v) no installment of principal or interest on such Pledged Mortgage is more than one payment past due; and (vi) such Mortgage Loan constitutes a first lien on the premises described therein. (c) "Eligible AP Mortgage" means an AP Mortgage which is an Eligible Mortgage Loan and as to which: (i) the information described on Exhibit 7 to the Security Agreement regarding such AP Mortgage was contained in a Collateral Transmittal submitted to the Collateral Agent on the same date as the applicable AP Notice; (ii) the proceeds thereof have been funded (or, on the date of the Advance supported by the applicable AP Notice, -50- 57 are being funded) by wire transfer or cashier's check, cleared check or draft or other form of immediately available funds to the escrow or closing agent for such AP Mortgage; (iii) the Pledgor expects such AP Mortgage to close and become a valid lien securing actual indebtedness by funding to the order of the mortgagor thereunder; (iv) not more than ten (10) Business Days have passed since the delivery of the AP Notice therefor (and if more than five (5) Business Days have passed since the delivery of such AP Notice, the Borrowing Base Sublimit set forth in Section 4.6(x) has been satisfied); (v) neither the Company nor the applicable Borrowing Subsidiary has delivered to the Collateral Agent any documents which purport to be Required Mortgage Documents for such AP Mortgage; (vi) the proceeds thereof have not been returned to the Company or a Borrowing Subsidiary from the escrow or closing agent for such Pledged Mortgage; (vii) neither the Company nor any Borrowing Subsidiary has learned that such AP Mortgage will not be closed and funded to the order of the mortgagor; and (viii) upon recordation such Mortgage Loan will constitute a first lien on the premises described therein. 4.2 Eligible Collateral - Repurchased Agency Loans and Receivables. "Eligible Repurchased Agency Loans and Receivables" means Repurchased Agency Loans and Receivables as to which: (i) payments are more than 90 days past due when repurchased by the Company; (ii) no notice or other indication has been given by FHA or VA challenging the obligation of FHA or VA to pay the full amount due on any insurance or guaranty certificate in connection with such Mortgage Loans (and in the good-faith estimation of the Company, no such challenge is forthcoming); (iii) the repurchased Mortgage Loan does not have any payments more than 720 days past due (unless the borrower of such repurchased Mortgage Loan filed a voluntary bankruptcy petition or had an involuntary bankruptcy petition filed against it while the payments on such Mortgage Loan were past due, in which case such 720 day period shall be extended to 1080 days); -51- 58 (iv) not more than 120 days have passed since the foreclosure sale or transfer in lieu of foreclosure with respect to the repurchased Mortgage Loan; (v) not more than 180 days have passed since the reinstatement of the repurchased Mortgage Loan; and (vi) the repurchased Mortgage Loan shall not be a Mortgage Loan which in the good faith estimation of the Company is deemed to be a "no bid" candidate under the current VA practice, provided that such estimation by the Company may take into account the amount of any buy down of the principal balance of such Mortgage Loan which (i) has actually been made by the Company, or (ii) is anticipated to be made by the Company, provided that the amount of any such anticipated buy down shall be deducted from the Mortgage Collateral Value of such Repurchased Agency Loan and Receivable for determining the portion of the Aggregate Borrowing Base attributable to such Repurchased Agency Loans and Receivables. 4.3 Eligible Collateral - Securities. "Eligible Pledged Security" means a Pledged Security: (i) which is covered by an Approved Investor Commitment; (ii) as to which the Collateral Agent has received such evidence as may be required under the Security Agreement to confirm the existence of the security interest in favor of the Collateral Agent for the benefit of the Lenders in such Pledged Security; and (iii) which has been included in Collateral for 90 days or less after the Pledge Date therefor. 4.4 Eligible Collateral - Pledged Servicing. "Eligible Pledged Servicing" means Pledged Servicing as to which: (i) the applicable Servicing Agreement is between the Company and a Federal Agency; (ii) the Company has delivered to the Collateral Agent fully executed copies of an Acknowledgment Agreement related to such Pledged Servicing (unless the Pledged Servicing is with GNMA, in which case receipt of an Acknowledgment Agreement related thereto shall be required only in the event the Agent or the Required Lenders request that such an Acknowledgment Agreement be obtained); -52- 59 (iii) the representations contained in Section 4.8 as to the applicable Servicing Agreement are true and correct as of the date such Servicing Agreement becomes Collateral hereunder and as of each day thereafter as if made on that date; (iv) the Mortgage Loans covered by the applicable Servicing Agreement shall be Conforming Mortgage Loans, Jumbo Mortgage Loans or Nonconforming Mortgage Loans; (v) the applicable Servicing Agreement is not a Subservicing Agreement; and (vi) the applicable Servicing Agreement does not constitute Recourse Servicing. 4.5 Eligible Collateral - Servicing Sale Receivables. "Eligible Servicing Sale Receivables" means Pledged Servicing Sale Receivables as to which: (i) the Agent and Collateral Agent have received a complete executed copy of the related purchase agreement and written confirmation from the Servicing Purchaser as to the amount of such Servicing Sale Receivable; (ii) the Servicing Purchaser of the applicable sold Servicing Agreements either (A) has a long term unsecured debt rating of at least A- from S&P or A3 from Moody's, or (B) has been approved by the Required Lenders; (iii) the Agent has reasonably determined that the counterparties to the sold Servicing Agreements have or will consent to the sale of such Servicing Agreements to the Servicing Purchaser, if such consent is required; (iv) the Company has assigned its rights to such Servicing Sale Receivables to the Collateral Agent for the benefit of the Secured Parties pursuant to an assignment in form and content satisfactory to the Required Lenders; (v) the Servicing Purchaser of the applicable sold Servicing Agreements has executed an agreement in form and content satisfactory to the Required Lenders pursuant to which the Servicing Purchaser has agreed to (A) pay such Servicing Sale Receivables directly to the Collateral Agent for the benefit of the Secured Parties, and (B) provide simultaneous written notice to the Agent and the Collateral Agent of any claims made against or notices given to the Company which would constitute an offset to or reduction in the amount of such Servicing Sale Receivable; and -53- 60 (vi) the Servicing Sale Receivables have been included in Eligible Collateral for 120 days or less; provided, however, that (1) Eligible Servicing Sale Receivables shall not include any "holdback" amounts or deferred installments of the purchase price payable by such Servicing Purchaser which are not payable to the Company within 120 days after the initial payment to the Company for the sale of such Servicing Agreements to such Servicing Purchaser, (2) Eligible Servicing Sale Receivables shall not include any "holdback" amounts or deferred installments of the purchase price payable by such Servicing Purchaser which are subject to withholding or offset on account of the performance of the servicing being sold or any failure, breach or other deficiency in the performance of the Company after the date of such sale other than any such deferred payments which are conditioned only on (x) the Company obtaining consents from the counterparty to the sold Servicing Agreements approving the sale of such Servicing Agreements to the Servicing Purchaser or (y) the Company's continuing to take customary ordinary-course actions relating to origination and servicing of Mortgage Loans (e.g. obtaining pool certifications, refraining from defaulting under Servicing Agreements, etc.), and (3) any offset to or reduction in the amount of such Servicing Sale Receivable claimed by the Servicing Purchaser (to the extent not already deducted from Eligible Servicing Sale Receivables pursuant to the preceding provisions) shall, at the election of the Agent, the Collateral Agent or the Required Lenders, reduce the amount of such Servicing Sale Receivable which qualifies as an Eligible Servicing Sale Receivable, with such reduction to be effective immediately unless the Company in good faith contests the amount or validity of such offset or reduction, and with such reduction to be effective 30 days after the claim of offset or reduction with respect to any amount which is contested in good faith by the Company. 4.6 Borrowing Base. The term "Aggregate Borrowing Base" means, as of any date, the sum of the amounts determined by applying the percentages set forth below to the respective values of the categories of Collateral described in subparagraphs (a) - (h) below (without duplication as any asset is converted from one category to another): (a) one hundred percent (100%) of the balance to the credit of the Company in the Settlement Account; (b) one hundred percent (100%) of the value of the cash and Cash Equivalents held by the Collateral Agent (or a sub-agent of the Collateral Agent) and in which the Collateral Agent has a perfected first priority security interest as security for the Secured Debt, as conclusively -54- 61 determined by the Collateral Agent and reported to the Agent daily based on the value of such cash and Cash Equivalents as of the close of trading on the preceding Business Day; (c) ninety-eight percent (98%) of the Mortgage Collateral Value of each Eligible Delivered Mortgage; (d) ninety-eight percent (98%) of the Mortgage Collateral Value of each Eligible AP Mortgage; (e) ninety-eight percent (98%) of the MBS Value of each Eligible Pledged Security; (f) ninety percent (90%) of the value of Eligible Repurchased Agency Loans and Receivables (as determined in accordance with the definition of Repurchased Agency Loans and Receivables) as determined pursuant to information provided by the Company to the Collateral Agent on the first Business Day of each week based on the value of such Eligible Repurchased Agency Loans and Receivables as of the close of trading on the preceding Business Day; (g) seventy-five percent (75%) of the amount of Eligible Servicing Sale Receivables; and (h) the lesser of: (1) fifty percent (50%) of the sum of (A) for Eligible Pledged Servicing not covered by the then most recent appraisal of the Company's Pledged Servicing pursuant to clause (B) immediately below, the lesser of acquisition price or the appraised market value (which shall be as set forth in an appraisal dated no more than 30 days prior to acquisition of such Eligible Pledged Servicing by a qualified third-party appraiser approved by the Agent, with such appraisal to be obtained and paid for by the Company and delivered to the Agent) of such Eligible Pledged Servicing (i.e. such Pledged Servicing shall be valued at zero unless such an appraisal was obtained), and (B) for all other Eligible Pledged Servicing, the appraised market value (which shall be determined every three months (or more frequently at the request of the Company, or if reasonably deemed advisable by the Agent, the Agent) by a qualified third-party appraiser approved by the Agent, with such appraisals to be obtained and paid for by the Company and delivered to the Agent) of such Eligible Pledged Servicing (provided that if any Eligible Pledged Servicing has been sold by the Company since the date of the most recent appraisal, then the appraised value of the Company's Eligible Pledged Servicing shall be deemed reduced by an amount obtained by multiplying (i) the -55- 62 appraised market value of all Eligible Pledged Servicing prior to such servicing sale by (ii) a fraction having a numerator equal to the aggregate principal outstanding balance of the Mortgage Loans serviced under the sold Servicing Agreements as of the date of sale and a denominator equal to the aggregate principal outstanding balance of the Mortgage Loans serviced pursuant to all of the Servicing Agreements (including the sold Servicing Agreements) covered by the most recent servicing appraisal as of the date of sale); or (2) the sum of (A) three quarters of one percent (0.75%) of the aggregate principal outstanding balance of the Mortgage Loans serviced by the Company pursuant to Servicing Agreements with FNMA or FHLMC constituting Eligible Pledged Servicing and (B) one percent (1.00%) of the aggregate principal outstanding balance of the Mortgage Loans serviced by the Company pursuant to Servicing Agreements with GNMA constituting Eligible Pledged Servicing. The maximum amount that can be credited toward the Aggregate Borrowing Base from certain categories of assets shall be limited as follows (collectively, the "Borrowing Base Sublimits") so that the portion of the Aggregate Borrowing Base: (i) attributable to Jumbo Mortgage Loans shall not exceed twenty-five percent (25%) of the Aggregate Commitment; (ii) attributable to Nonconforming Mortgage Loans shall not exceed five percent (5%) of the Aggregate Commitment; (iii) attributable to Jumbo Mortgage Loans with Mortgage Collateral Values on the Pledge Date therefor in excess of $600,000 shall not exceed two percent (2%) of the Aggregate Commitment; (iv) attributable to Repurchased Agency Loans and Receivables other than Reinstated Repurchased Agency Loans and Receivables shall not exceed at any time the lesser of (A) $200,000,000, and (B) twenty-seven percent (27%) of the Aggregate Commitment; (v) attributable to Reinstated Repurchased Agency Loans and Receivables shall not exceed at any time three percent (3%) of the Aggregate Commitment; (vi) attributable to REO and accounts receivable (including proceeds of FHA insurance or VA guaranties) acquired in connection with a foreclosure sale or a transfer in lieu of foreclosure of Repurchased Agency Loans and -56- 63 Receivables shall not exceed five percent (5%) of the Aggregate Commitment; (vii) for the first five and last five Business Days in any calendar month, attributable to AP Mortgages shall not exceed thirty-five percent (35%) of the Aggregate Commitment; (viii) for any day other than the first five and last five Business Days of any calendar month, attributable to AP Mortgages shall not exceed twenty-five percent (25%) of the Aggregate Commitment; (ix) attributable to Eligible Delivered Mortgages which were sent, pursuant to a Company Trust Receipt, to the Company or a Borrowing Subsidiary for correction of clerical or other non-substantial documentation problems in preparation of such document without such documentation being returned to the Collateral Agent properly corrected shall not exceed two percent (2%) of the Aggregate Commitment; (x) attributable to AP Mortgages as to which the Collateral Agent has not received the Required Mortgage Documents within five Business Days of the Pledge Date therefor shall not exceed one percent (1%) of the Aggregate Commitment; (xi) attributable to Eligible Mortgage Loans which have been included in the Aggregate Borrowing Base for more than 90 days shall not exceed five percent (5%) of the Aggregate Commitment; (xii) attributable to Eligible Mortgage Loans which were originated more than 180 days prior to the Pledge Date therefor shall not exceed five percent (5%) of the Aggregate Commitment; (xiii) attributable to Eligible Pledged Servicing shall not exceed the lesser of (1) $250,000,000 and (2) thirty-three and one-third percent (33 - 1/3%) of the Aggregate Commitment; and (xiv) attributable, as of any date, to any Eligible Servicing Sale Receivable which is payable only upon the obtaining of a consent to the transfer of the subject Servicing Agreements shall not exceed the amount credited toward the Aggregate Borrowing Base on account of such Servicing Agreements immediately prior to their transfer less any portion of the purchase price for such Servicing Agreements received by the Company prior to such date. -57- 64 4.7 Special Representations as to Pledged Warehouse Collateral. By delivering or causing the delivery of any Mortgage Loan, Security or AP Notice to the Collateral Agent in pledge under the Security Agreement the Company or the applicable Borrowing Subsidiary, as applicable (each such entity, with respect to any Pledged Item delivered or caused to be delivered by such entity, is referred to herein as the "Pledgor"), shall be deemed to have represented and warranted with respect to such Pledged Item, that: (1) Such Pledged Item constitutes Eligible Collateral; (2) The Pledgor is the legal and equitable owner and holder of such Pledged Item and has full power and authority to pledge such Pledged Item. Such Pledged Item constitutes Eligible Collateral, has been duly and validly pledged to the Collateral Agent, is subject to no contractual restriction on the creation of a Lien thereon (other than the provisions of the indentures relating to the Ratable Medium-Term Notes which require such notes to be ratably secured), and is subject to no Lien other than the lien of the Security Agreement in favor of the Secured Parties. Each commitment of a Person to purchase Pledged Items from the Pledgor (including Approved Investor Commitments) has been duly and validly issued to the Pledgor, has been duly and validly pledged to the Collateral Agent and is subject to no Lien other than the lien of the Security Agreement in favor of the Secured Parties. (3) Each Pledged Mortgage has been or will be promptly duly recorded where necessary and complies with all applicable state or local recording, registration and filing laws and regulations. (4) There are no defenses, counterclaims or offsets of any nature whatsoever with respect to such Pledged Mortgage or the indebtedness evidenced and secured thereby or with respect to any Required Mortgage Document and, other than the related Required Mortgage Documents and Additional Required Mortgage Documents, there are no instruments or documents evidencing, securing or guaranteeing payment of the indebtedness constituting such Pledged Mortgage. (5) Each requirement of any federal, state or local law including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws (including environmental disclosure laws imposing obligations on mortgagees) applicable to such Pledged Item has been complied with in all material respects. -58- 65 (6) The Company is the servicer for each such Pledged Mortgage (unless the Agent has been advised to the contrary in writing and the Agent approved such other arrangement). (7) The representation set forth in Section 6.15 is reaffirmed as of the Pledge Date. (8) Each Assignment (i) has been duly authorized by all necessary corporate action by the Pledgor, duly executed and delivered by the Pledgor and is the legal, valid and binding obligation of the Pledgor enforceable in accordance with its terms and (ii) complies with all applicable laws including all applicable recording, filing and registration laws and regulations and is adequate and legally sufficient for the purpose intended to be accomplished thereby, including, without limitation, the assignment of all of the rights, powers and benefits of the Pledgor as mortgagee. (9) So long as the Collateral Agent complies with the procedures set forth in the Security Agreement relating to possession of Collateral (and assuming recordation of Assignments in states in which such recordation is necessary for the perfection of the Collateral Agent's security interest in the applicable Mortgage Loans) and, in the case of book-entry Securities, notations of ownership related thereto, the Collateral Agent, for the benefit of the Secured Parties, will have a valid and perfected first priority security interest in such Pledged Item and all proceeds, products and profits derived therefrom, including, without limitation, all moneys, goods, insurance proceeds and other tangible or intangible property received upon liquidation thereof. (10) The Pledgor has complied with all laws, rules and regulations in respect of such Pledged Mortgage if it is insured by FHA or guaranteed by VA and the related insurance or guarantee is in full force and effect. All such Mortgage Loans comply in all respects with all applicable requirements for purchase under the FNMA standard form of selling contract for FHA insured and VA guaranteed loans and any supplement thereto then in effect. (11) To the extent that any applicable requirements of any law or any governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof, including, without limitation, the provisions of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended, reformed or otherwise modified from time to time, and any rules promulgated to implement such provisions (collectively, "Appraisal Regulations") require Pledgor to have received (or require that the Lenders require Pledgor to receive) an appraisal on the property underlying such Pledged Mortgage, such an appraisal has been be obtained and such -59- 66 appraisal meets the requirements of all such Appraisal Regulations. (12) All fire and casualty policies covering the premises encumbered by each Pledged Mortgage (i) name the Pledgor as the insured under a standard mortgagee clause not less favorable in coverage to the mortgagee than is customarily used in the state where such premises is located, (ii) are in full force and effect, and (iii) afford insurance against fire and such other risks as are usually insured against in the broad form of extended coverage insurance from time to time available, as well as insurance against flood hazards as required by FHA or VA. (13) To the best of the Pledgor's knowledge without investigation, no Person has transported, released, emitted, discharged, leached, dumped or disposed of any Hazardous Substance onto or into any portion of the premises encumbered by a Pledged Mortgage except in material compliance with all applicable federal, state, foreign and local laws, rules, regulations and orders. (14) If a Borrowing Subsidiary is the Pledgor, the Pledged Item was funded by the Company and is shown on the Company's (rather than the Borrowing Subsidiary's) balance sheet pursuant to the Funding Agreement. By pledging any Repurchased Agency Loans and Receivables to the Collateral Agent under the Security Agreement the Company shall be deemed to have represented and warranted that such Repurchased Agency Loans and Receivables were purchased by the Company in compliance with all regulations of the Federal Agency which issued or guaranteed the Security relating to the pool from which the Repurchased Agency Loans and Receivables were repurchased. If any representation or warranty contained in this Section is inaccurate or shall cease to be true with respect to any Pledged Item to which such representation and warranty applies, such Pledged Item shall not constitute an Eligible Mortgage Loan or an Eligible Pledged Security, but the breach of such representation and warranty shall not constitute an Event of Default. 4.8 Special Representations as to Pledged Servicing. By granting a security interest to the Collateral Agent in the Collateral under the Security Agreement, the Company shall be deemed to have represented and warranted with respect to each Servicing Agreement included in the Pledged Servicing, that: -60- 67 (1) The Company is the legal and equitable owner and holder of such Servicing Agreement and the rights thereunder and has full power and authority to grant a security interest in such Collateral. Such Servicing Agreement has been duly and validly made subject to the lien of the Security Agreement and is subject to no Lien other than the liens created pursuant to this Agreement and any lien of the applicable Investor as described in the Acknowledgement Agreement related thereto. (2) Such Servicing Agreement has been duly executed and delivered by the parties thereto and is valid and enforceable in accordance with its terms, without defense or offset. (3) No default, nor any event which with notice or lapse of time or both would become a default, has occurred and is continuing under such Servicing Agreement and no action has been taken to terminate such Servicing Agreement. (4) The Company has complied, and will continue to comply, with all laws, rules and regulations, including but not limited to all applicable Federal Agency requirements, in respect of such Servicing Agreement. (5) Such Servicing Agreement is subject to, and will continue to be subject to, no liens other than the liens created pursuant to the Credit Documents (including the lien in favor of the Secured Parties created by the Security Agreement) or described in the Acknowledgement Agreement related thereto. (6) Such Servicing Agreement does not, and will continue to not, contain any restrictions on the pledging of such Servicing Agreement or the rights thereunder to any other Person (or if the Servicing Agreement contains any restrictions requiring the consent of any Person, such consent has been obtained), and such Servicing Agreement will continue to be in substantially the same form as the Company's now-existing Servicing Agreements, with such material changes as are approved in advance by the Required Lenders. If any representation or warranty contained in this Section is inaccurate or shall cease to be true with respect to any Pledged Servicing, such Pledged Servicing shall not constitute Eligible Pledged Servicing, but the breach of such representation and warranty shall not constitute an Event of Default. -61- 68 4.9 Special Covenants. (a) The Pledgor warrants and will defend the right, title and interest of the Agent and the Collateral Agent in and to all Pledged Items, Pledged Servicing and all other items of Collateral against the claims and demands of all other Persons. (b) The Pledgor shall not materially amend or modify, or waive any of the material terms and conditions of, or settle or compromise any material claim in respect of, any Collateral or any rights related to any of the foregoing. (c) The Pledgor shall not sell, assign, transfer or otherwise dispose of, or grant any option with respect to, or pledge or otherwise encumber (except pursuant to this Agreement or the Security Agreement), any of the Collateral or any interest therein, except as provided in Section 4.10 with respect to releases of Collateral. (d) The Pledgor shall service all Pledged Mortgages which are the subject of Approved Investor Commitments in accordance with the standard requirements of the issuers of such Approved Investor Commitments and all applicable FHA and VA requirements. The Pledgor shall service all Mortgage Loans which are the subject of Pledged Securities in accordance with the standard requirements of the Federal Agency issuing or guaranteeing such Securities and all applicable FHA and VA requirements. The Company shall service all Mortgage Loans which are the subject of any Servicing Agreements in accordance with the standard requirements of the other party to such Servicing Agreements and all applicable FHA and VA requirements. (e) The Company shall promptly notify the Agent and the Collateral Agent of any material default under any Servicing Agreement, and in its normal daily reporting to the Collateral Agent, the Company will include information identifying to the best knowledge of the Company defaults under any Pledged Mortgages. (f) The Company shall, at the request of the Agent or the Required Lenders, promptly deliver to the Collateral Agent fully executed copies of Acknowledgement Agreements with GNMA covering all Pledged Servicing with GNMA. (g) The Pledgor shall hold all escrow funds collected in respect of Pledged Mortgages and Mortgage Loans which are the subject of Pledged Securities in trust, in accordance with all Federal Agency requirements and standards relating thereto, and apply the same for the purposes for which such funds were collected. -62- 69 (h) The Pledgor shall observe and perform all of its obligations in connection with each Approved Investor Commitment related to any Pledged Item. Within forty-eight (48) hours after a request therefor by the Collateral Agent or Agent, a copy of each Approved Investor Commitment certified by the Pledgor, or if requested by the Collateral Agent or Agent at any time after an Event of Default has occurred, the originals of such Approved Investor Commitments shall be delivered to the Collateral Agent or Agent. (i) The Company or the applicable Borrowing Subsidiary, as applicable, shall promptly notify the Agent and the Collateral Agent if and when the Company or the applicable Borrowing Subsidiary receives any prepayment arising from or relating to any Pledged Mortgage and hold the same in trust, as security for the Secured Parties, until such Mortgage Loan is removed from the Aggregate Borrowing Base in accordance with this Agreement or, if an Event of Default has occurred and is continuing under this Agreement, then immediately remit to the Collateral Agent such prepayments (and all interest and earnings thereon or with respect thereto). (j) The Pledgor shall not withdraw or seek to withdraw or substitute or seek to substitute any Pledged Item or Pledged Servicing except as provided herein and in the Security Agreement. (k) The Pledgor shall cooperate with the Agent, the Lenders and the Collateral Agent and any of their respective representatives in any review or inspection of the Pledged Mortgages, the property subject to any Pledged Mortgage or the Servicing Agreements constituting Pledged Servicing, and make available to such person any books and records relating to such Collateral as well as the appropriate employees of the Pledgor for the purpose of discussing the same, all at such time during business hours as may be reasonably requested by the Agent, any Lender or the Collateral Agent. (l) The Pledgor shall not cease to have the approval of any Federal Agency or any private mortgage insurer (unless, in the case of a private mortgage insurer, such failure to maintain such approval shall not cause any Eligible Collateral which is required for the Company to be in compliance with Section 8.12 to cease to qualify as Eligible Collateral) which it has on the date hereof or become ineligible as a FHA-Approved Mortgagee, FHLMC-Approved Lender, FNMA-Approved Lender or VA-Approved Lender. (m) The Pledgor shall not waive or otherwise modify any material term of, or fail to perform its material obligations under, any Required Mortgage Document or Pledged Mortgage or release any security or obligor, or, through any activity or -63- 70 inactivity, cause any Pledged Mortgage which shall have been eligible for FHA insurance to become ineligible for FHA insurance or for purchase in accordance with an Approved Investor Commitment related to such Pledge Mortgage. (n) The Pledgor shall do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all such other acts, instruments and transfers (including, without limitation, Assignments) as the Agent or the Collateral Agent may reasonably request from time to time in order to create and maintain a perfected first priority security interest in the Collateral in favor of the Secured Parties and to create, maintain and preserve the security and benefits intended to be afforded by this Agreement and the Security Agreement, subject to no prior or equal security interest, lien, charge or encumbrance, or agreement purporting to grant to any Person a security interest in the Collateral (provided, however, that unless an Event of Default is continuing or the Required Lenders have requested otherwise, consents to assignments of options, futures contracts or other interest rate protection products in favor of the Lenders from the counterparties thereto shall not be required to be obtained). (o) With respect to Repurchased Agency Loans and Receivables, upon the request of the Collateral Agent or Agent the Company shall have executed and provided any and all documentation required by the Collateral Agent or Agent (including, but not limited to, all Required Mortgage Documents, the insurance or guaranty certificate applicable to such Mortgage Loan, and evidence satisfactory to the Collateral Agent and Agent of the amounts advanced by the Company in connection with such Mortgage Loan) to perfect the Lenders' security interest in such Repurchased Agency Loans and Receivables. (p) Upon the request of the Required Lenders, the Company and each Borrowing Subsidiary agree that the Company and each Borrowing Subsidiary shall require the closing agents for AP Mortgages to enter into escrow or other agreements regarding the monies used to fund such AP Mortgages. (q) If the Collateral Agent releases any Pledged Servicing in connection with a sale of Servicing Agreements to a Servicing Purchaser and for any reason such sale does not close or the Company is obligated to repurchase any such Servicing Agreements (whether because the requisite consents to such sale are not obtained or otherwise), then the Company shall execute such UCC financing statements and other documents as the Agent or Collateral Agent may request in -64- 71 order to re-perfect the Collateral Agent's security interest in such Servicing Agreements. 4.10 Release of Collateral. In addition to the releases of Collateral provided for in Sections 7(a)-(e) of the Security Agreement, upon the request of the Company delivered from time to time to the Agent and the Collateral Agent, the Agent shall authorize the Collateral Agent to release Collateral specified in such notice from the lien of this Agreement, if, but only if, (i) at the time of such release no Event of Default exists and no notice of a Default has been issued that has not been cured, (ii) any payment under Section 2.14(a) which may be required (based on information relating to the Aggregate Borrowing Base supplied to the Agent by the Collateral Agent) as a result of such release has been made (or contemporaneously with such release shall be made) so that the release of such Collateral will not create a violation of any Lending Sublimit or Borrowing Base Sublimit, and (iii) if the Collateral to be released is Pledged Servicing, such release is made in connection with the sale of such Pledged Servicing by the Company. Notwithstanding the foregoing, following an Event of Default pledged Cash Equivalents which are the subject of reverse repurchase obligations can be released in connection with the terms of the applicable reverse repurchase agreement, and Pledged Items can be released in connection with the sale of such Pledged Items pursuant to an Approved Investor Commitment existing at the time of occurrence of the Event of Default if, in either case, the proceeds of such sale are deposited into the Settlement Account. 4.11 Settlement Account. There has been established with the Agent, for the benefit of the Secured Parties, a "cash collateral" account of the Company #19-19210 ("Settlement Account") into which shall be deposited all cash proceeds from the sale of any Pledged Item and any payments made by a Servicing Purchaser in connection with Pledged Servicing Sale Receivables. Only the Agent shall have access to the Settlement Account. Prior to the occurrence of a Default, to the extent that, as determined by the Agent, the amounts in the Settlement Account are not needed to keep the Aggregate Borrowing Base equal to or greater than the Credit Requirement, the Company may request that the Agent release funds from the Settlement Account, which funds shall be applied by the Agent as directed by the Company. Upon the occurrence of an Event of Default (and during the continuance thereof) all amounts then on deposit in the Settlement Account, and any deposits made in the Settlement Account during the continuance of such Event of Default, shall be withdrawn by the Agent from the Settlement -65- 72 Account and shall be applied to the Credit Indebtedness in accordance with the provisions of Paragraph 18 of the Security Agreement and Section 10.4 of this Agreement. 4.12 Termination. If all Commitments shall have expired or been terminated pursuant to the express terms hereof and no Credit Indebtedness shall be outstanding, the Agent shall promptly deliver or cause to be delivered all cash in the Settlement Account and all other Collateral to the Company. The receipt by the Company of any cash in the Settlement Account and of all Pledged Items and Pledged Servicing returned or delivered to the Company pursuant to any provision of this Agreement shall be a complete and full acquittance for the Pledged Items and Pledged Servicing so delivered, and the Agent, Collateral Agent and the Lenders shall thereafter be discharged from any liability or responsibility therefor. 4.13 Abatement of Security Interest. (a) Positive Security Event. If a Positive Security Event occurs prior to the Termination Date and no Event of Default has occurred and is continuing, the security interest created under the Security Agreement and this Agreement in the Collateral shall be abated at the request of the Company and shall not be effective so long as no Event of Default exists and each of the following conditions exist: (i) the Company shall have and maintain a ratio of (1) Funded Debt less Subordinated Debt to (2) Adjusted Consolidated Tangible Net Worth plus Subordinated Debt, calculated monthly on a three-month rolling average basis, of not more than the applicable Unsecured Leverage Ratio; (ii) the total Debt of the Company, excluding Subordinated Debt, shall not exceed the Debt Threshold; and (iii) neither the Company nor either Borrowing Subsidiary shall have, or permit to occur, any Lien upon their assets other than as permitted under Section 8.11 (other than Section 8.11(o)). The conditions under clauses (i) - (iii) of the preceding sentence are referred to herein collectively as the "Positive Security Conditions". The Collateral Agent shall, at the request of the Company and after the Agent has confirmed to the Collateral Agent that a Positive Security Event has occurred and all Positive Security Conditions are satisfied, execute and deliver such UCC-3 financing statements as may be required to evidence the abatement of any security interest that shall previously have been perfected by means of the filing of financing statements. As a condition to such abatement, the Company and each Borrowing Subsidiary shall execute such UCC-1 financing statements and other documentation as the Collateral Agent may request to permit the security interest in the Collateral to be reinstated and perfected by the Collateral Agent without further action by the Company or any Borrowing Subsidiary if a Negative Security Event should occur -66- 73 thereafter. Although the Company and Borrowing Subsidiaries shall continue to deliver Mortgage Loan files and other information and documents to the Collateral Agent (in a custodial capacity) as set forth in the Security Agreement even while the security interest is abated, so long as the security interest is abated the Company shall perform all of the obligations of the Collateral Agent as set forth in the Security Agreement with respect to determining the Aggregate Borrowing Base and the Warehouse Borrowing Base. If any of the Positive Security Conditions shall cease to exist at any time after a Positive Security Event, such occurrence shall constitute a Negative Security Event. (b) Negative Security Event. If, following a Positive Security Event, a Negative Security Event occurs, the Facility shall again be secured in accordance with the terms herein unless and until the Required Lenders agree to the contrary. If the Facility again becomes secured pursuant to the preceding sentence, the Company (with respect to Collateral owned by the Company) and each Borrowing Subsidiary (with respect to Collateral owned by such Borrowing Subsidiary) shall be deemed to have automatically (i) re-pledged and re-granted to the Collateral Agent for the benefit of the Secured Parties a first priority security interest in the Collateral to secure payment of the Secured Debt, (ii) consented to the Collateral Agent's filing of the UCC-1 financing statements and dating and otherwise completing, filing and/or recording, if necessary, any other documentation previously provided by the Company or such Borrowing Subsidiary pursuant to the provisions of Section 4.13(a) above, and (iii) reaffirmed its appointment of the Collateral Agent to act as its bailee pursuant to the provisions of Section 9-305 of the Uniform Commercial Code of any applicable state, and the Collateral Agent (upon receipt of notice from the Credit Agent that a Negative Security Event has occurred) shall be deemed to have been informed of and accepted such appointment. Notwithstanding the foregoing, the Company may, in accordance with the terms of the succeeding sentence, request that the Required Lenders consent to the Facility again becoming unsecured despite the occurrence of a Negative Security Event. If the Company so desires that the Facility again become unsecured following a Negative Security Event (even though no Positive Security Event has occurred since the occurrence of the Negative Security Event), it shall notify each Lender in writing of such desire within thirty days after the occurrence of the Negative Security Event (which notice shall identify the facts giving rise to the Negative Security Event), and the Facility shall again become unsecured (A) if and only if the Required Lenders so consent within thirty days after such notification from the Company (a "Negative Event Waiver") and (B) only so long as no further Negative Security Event (i.e. no Negative Security Event other than the event referred to in the Company's notice) has occurred and is continuing. If the Company's long term unsecured -67- 74 debt ratings decline further below "A-" as rated by S&P or "A3" as rated by Moody's, or if any other Negative Security Event occurs after the Company has obtained a Negative Event Waiver, the Facility shall again become secured in accordance with this Section unless the Company obtains another Negative Event Waiver in accordance with the terms of the preceding sentence. Finally, if a Positive Security Event occurs subsequent to the occurrence of a Negative Security Event, the Facility shall become unsecured at the request of the Company, subject to and in accordance with the terms and conditions set forth in Section 4.13(a) above. (c) Lending Restrictions. If and during such time as the Credit Indebtedness hereunder may be unsecured in accordance with Section 4.13(a), all Advances requested by the Company or any Borrowing Subsidiary shall continue to meet the Lending Sublimits and shall be subject to the conditions precedent set forth in Article V (other than conditions precedent requiring the Collateral Agent to have a perfected security interest in the Collateral). 4.14 Transition from Original Facility. The Pledge Date and all other relevant delivery dates and time periods with respect to the determination of Eligible Collateral shall be calculated to include any delivery dates or holding periods prior to the date hereof during which Collateral was being held by the Collateral Agent (or was the subject of an AP Notice), had been delivered to an Approved Investor or had been redelivered to the Company under the Original Facility. ARTICLE V CONDITIONS PRECEDENT Each Advance may be made only if the following conditions precedent are met: 5.1 Initial Advance (Company and Borrowing Subsidiaries). Prior to the initial Advance hereunder, the Company and each Borrowing Subsidiary shall have delivered, or caused to be delivered, to the Agent: (a) Copies of this Agreement duly executed by the Company and each Borrowing Subsidiary for each Lender and the Agent. (b) A Security Agreement duly executed by the Company and each Borrowing Subsidiary in the form attached hereto as Exhibit D. -68- 75 (c) Notes payable to the order of each Lender duly executed by the Company and each Borrowing Subsidiary in the form attached hereto as Exhibits E-1 and E-2, respectively plus, in the case of a Bid Lender, in the form approved by such Lender. (d) Certificates of the Secretaries of the Company and each Borrowing Subsidiary dated such date, (i) accompanied by and certifying true and correct copies of the Articles of Incorporation and By-laws of the Company and each Borrowing Subsidiary and resolutions of their Boards of Directors authorizing the Company and the Borrowing Subsidiaries to execute, deliver and perform this Agreement, the Security Agreement and all other documents executed by the Company or any Borrowing Subsidiary in connection herewith and (ii) confirming the incumbency and signatures of those officers of the Company and each Borrowing Subsidiary authorized to execute this Agreement, the Security Agreement and the Notes and otherwise act on behalf of the Company or any Borrowing Subsidiary hereunder or under the Security Agreement. (e) The opinion of counsel to the Company and the Borrowing Subsidiaries, in substantially the same form and substance as the opinion letter attached hereto as Exhibit K attached hereto and covering such other matters as the Agent may reasonable request, together with appropriate good standing certificates for the Company and each Borrowing Subsidiary. (f) Executed UCC-1 and UCC-3 Financing Statements as the Agent may reasonably request. (g) A letter from the Company to each lender under the Original Facility which is not a Lender hereunder providing for the terms of payment of the loans outstanding under the Original Facility payable to such lenders. (h) If there are any Advances outstanding under the Original Facility on the date hereof, an agreement in substantially the form of Exhibit N hereto between the Company and the Agent on behalf of the lenders under the Original Facility and the Lenders under this Agreement as to the repayment or conversion of loans outstanding to the Company under the Original Facility, the treatment of any interest and fees accrued thereon, and the cancellation of all commitments under the Original Facility. (i) Evidence that the Company and each Borrowing Subsidiary have paid all fees required to be paid hereunder and under the Security Agreement on or before the date of the first Advance. -69- 76 (j) Such other documents as the Agent may reasonably request. Within thirty (30) days after the date hereof, the Company shall also deliver to the Agent copies of such amendments to existing Acknowledgement Agreements as the Agent may request to account for or recognize the amendment and restatement of the Original Facility. 5.2 Initial Advance (Lenders). On or before the date of the initial Advance hereunder, the Lenders shall have delivered, or caused to be delivered, to the Agent and the Agent shall in turn, have delivered, or caused to be delivered, to the Company and each Borrowing Subsidiary one or more counterparts of this Agreement executed by the Lenders. 5.3 All Advances. On the date of each Advance, the Company and each Borrowing Subsidiary shall be in compliance with all the terms and provisions set forth herein and in the Security Agreement on their part to be observed or performed; the representations and warranties of the Company and the Borrowing Subsidiaries set forth in Articles IV and VI shall be true and correct in all material respects on such date as if made on and as of such date (provided, however that the representation and warranty contained in Section 6.6(c) shall not apply to (i) conversions or continuations of Advances pursuant to Section 2.12, or (ii) Advances requested by the Company solely for the purpose of repaying maturing commercial paper); and no Default shall have occurred and be continuing on such date. On each Advance Date the Company and each Borrowing Subsidiary shall be deemed to have represented and warranted to the Lenders that no violation of the requirements set forth in the preceding sentence exists on such date after giving effect to the requested Advance. Prior to making an Advance (including any Bid Loan) available to the Company or any Borrowing Subsidiary under Section 2.11 on any day, the Agent shall have (i) received notice from the Collateral Agent of the amount of the Aggregate Borrowing Base for such day, (ii) received notice from the issuing and paying agent for the Outstanding CPNs as described in Section 7.7(p) confirming the aggregate face amount of Outstanding CPNs for such day, and (iii) confirmed, based solely upon the information contained in such notices, the amount of Advances then-outstanding, and the Company's and the Borrowing Subsidiaries' certifications contained in the preceding sentence as to all other facts, that the Aggregate Borrowing Base will be greater than or equal to the Credit Requirement on such date after giving effect to such Advance. -70- 77 ARTICLE VI REPRESENTATIONS AND WARRANTIES The Company and each Borrowing Subsidiary represents and warrants to the Lenders that: 6.1 Organization, Corporate Powers, Etc. The Company and each Borrowing Subsidiary is a corporation duly incorporated, validly existing, in good standing and authorized to exercise its corporate powers, rights and privileges under the laws of the jurisdiction in which it is incorporated, is qualified to do business and is in good standing in all jurisdictions where failure to be so qualified and in good standing would have a material adverse effect upon its business, operations or financial condition, and has all requisite corporate power and authority, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, this Agreement, the Security Agreement and the Notes; and each Borrowing Subsidiary is a wholly-owned Subsidiary of the Company. 6.2 Corporate Authority, Etc. The execution, delivery and performance by the Company and each Borrowing Subsidiary of this Agreement, the Security Agreement and the Notes have been duly authorized by all necessary corporate action and do not and will not (i) violate any existing provision of any law, rule, regulation (including, without limitation, Regulation U or X of the Board of Governors of the Federal Reserve System or the rules and regulations of the SEC or any regulatory commission of any jurisdiction), order, writ, judgment, injunction, decree, determination or award currently in effect having applicability to the Company or any of its Affiliates or of the charter or by-laws of the Company or of any of its Affiliates, (ii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Company or any of its Affiliates is a party or by which the Company or any of its Affiliates or any of their respective properties may be bound or affected, or (iii) result in, or require, the creation or imposition of any mortgage, deed of trust, assignment, pledge, lien, security interest or other charge or encumbrance of any nature upon or with respect to any of the respective properties of the Company or any of its Affiliates (other than that arising hereunder or under the Security Agreement or the Ratable Medium-Term Notes with respect to the Collateral); and neither the Company nor any of its Affiliates is in material default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument. -71- 78 6.3 Compliance with Laws. The Company and each of its Affiliates are in compliance with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, non-compliance with which would, singly or in the aggregate, materially and adversely affect their respective business or credits including but not limited to financial condition and operations. 6.4 Government Approvals. No authorization, consent, approval, license, exemption of or filing or registration with any existing court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary for the valid execution, delivery and performance by the Company and each Borrowing Subsidiary of, or the enforceability of, this Agreement, the Security Agreement and the Notes. 6.5 Valid and Binding Obligations. This Agreement, the Security Agreement and the Notes constitute legal, valid and binding obligations of the Company and each Borrowing Subsidiary enforceable against the Company and each Borrowing Subsidiary in accordance with their respective terms, subject to bankruptcy and similar laws and other general restrictions on creditor's rights and equitable principles (whether applied in an action at law or a suit in equity). 6.6 Financial Statements. (a) The balance sheet of the Company and its Subsidiaries as of December 31, 1995 (which is presented in the Company's annual report) and the related statements of income and changes in financial position for the fiscal year then ended, copies of which have been heretofore furnished to each of the Lenders, fairly present, in conformity with GAAP, the financial condition of the Company and its Subsidiaries as of such date and the results of the operations and changes in financial position of the Company and its Subsidiaries for such fiscal year. (b) The quarterly financial statements of the Company and its Subsidiaries submitted to the SEC or the Agent since the date of the December 31, 1995 annual financial statements referred to in clause (a) above fairly present, in conformity with GAAP, the financial condition of the Company and its Subsidiaries as of the applicable dates of such statements and the results of the operations and changes in financial position of the Company and its Subsidiaries for the periods to which such statements relate. -72- 79 (c) Since the date of the December 31, 1995 statements there has been no material adverse change, taken as a whole, in the business, financial position, or operations of either the Company or any Subsidiary. 6.7 Litigation. Except as disclosed on Exhibit L attached hereto and as otherwise set forth in the Company's annual report referred to in Section 6.6(a), there are no actions, suits or proceedings pending or, to the knowledge of the Company or any Borrowing Subsidiary after reasonable investigation, threatened against or affecting the Company or any of its Affiliates or any of their respective properties before any court, arbitrator or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign (including, without limitation, the SEC or any regulatory commission of any jurisdiction), which, if determined adversely to the Company or any Affiliate, as the case may be, would be reasonably likely to, singly or in the aggregate, have a material adverse effect on the financial condition, or on the respective properties or operations, of the Company and its Affiliates or the transactions contemplated by this Agreement, the Security Agreement and the Notes. 6.8 Use of Proceeds. The Company and the Borrowing Subsidiaries will use the proceeds of the Loans solely for (i) the purposes described in the recitals hereto, (ii) the funding or purchasing of Mortgage Loans, (iii) the payment of principal, interest, fees, expenses, and other obligations described in or contemplated by this Agreement, (iv) payment of Debt of the Company existing on the date hereof, and (v) such other purposes as may be permitted under this Agreement. No part of the proceeds of any Loan will be used to purchase or carry, or to reduce or retire, any indebtedness incurred to purchase or carry, any margin stock (within the meaning of Regulations U and X of the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying any margin stock and neither the Company nor any Borrowing Subsidiary is engaged in purchasing or carrying margin stock. 6.9 Accuracy of Information. All written information supplied by the Company or any Borrowing Subsidiary to the Lenders relating to the Company and its Affiliates was true, complete and accurate in all material respects when made, and there has been no material adverse change in the financial condition of the Company and its Affiliates from the time such information was provided to the Lenders. -73- 80 6.10 Accuracy of Representations and Warranties. The representations and warranties of the Company and the Borrowing Subsidiaries contained in each other document delivered in connection with this Agreement are, or when such document is delivered will be, true and correct in all material respects when made. 6.11 Investment Company. Neither the Company nor any Borrowing Subsidiary is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or an "investment adviser" within the meaning of the Investment Advisers' Act of 1940, as amended. 6.12 ERISA. Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and any other applicable Federal or state law; and to the best of its knowledge no event or condition is occurring or exists with respect to any Plan concerning which the Company or any Borrowing Subsidiary would be under an obligation to furnish a report to the Lenders in accordance with Section 7.7(i). 6.13 Tax Returns. The Company and each of its Affiliates has filed or caused to be filed all material federal, state and local tax returns which, to its knowledge, are required to be filed and has paid or caused to be paid all material taxes as shown on such returns or on any assessment received by it, to the extent that such taxes have become due, except taxes the validity of which is being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books. 6.14 Full Disclosure. No event has occurred and no circumstance exists as a result of which any information, statement, or representation concerning the Company or any Borrowing Subsidiary that has been provided to the Lender by the Company or any Borrowing Subsidiary in connection herewith would include an untrue statement of a material fact or omit to state any material fact or any fact necessary to make the information, statements or representation contained therein, in the light of the circumstances under which they were made, not misleading. -74- 81 6.15 GNMA, FHA, VA, FNMA, AND FHLMC Eligibility. (a) The Company is: (i) an FHA-Approved Mortgagee in good standing, a VA-Approved Lender, a FHLMC-Approved Lender and a FNMA-Approved Lender and meets all eligible requirements of law and governmental regulation so as to be eligible to originate, purchase, hold and service Mortgage Loans insured by FHA and to issue any Security; (ii) an approved seller and servicer in good standing of Mortgage Loans to each Federal Agency; and (iii) an approved issuer and servicer in good standing of FHLMC, FNMA and GNMA Securities and meets all FHLMC, FNMA and GNMA requirements, requirements of law and governmental regulations so as to be able to issue FHLMC, FNMA and GNMA Securities and to service the Mortgage Loans that secure such Securities. (b) Each Borrowing Subsidiary is: (i) an FHA-Approved Mortgagee in good standing, a VA-Approved Lender, a FHLMC-Approved Lender and a FNMA-Approved Lender and meets all eligible requirements of law and governmental regulation so as to be eligible to originate, purchase and hold Mortgage Loans insured by FHA and to issue any Security; (ii) an approved seller in good standing of Mortgage Loans to each Federal Agency; and (iii) an approved issuer in good standing of FHLMC, FNMA and GNMA Securities and meets all FHLMC, FNMA and GNMA requirements, requirements of law and governmental regulations so as to be able to issue FHLMC, FNMA and GNMA Securities. 6.16 No Defaults. No Default has occurred and is continuing. ARTICLE VII AFFIRMATIVE COVENANTS The Company and the Borrowing Subsidiaries covenant and agree with the Lenders that, so long as this Agreement shall remain in effect and so long as any amounts are outstanding under the Notes or this Agreement, unless the Required Lenders shall otherwise consent in writing, the Company will, and the Borrowing Subsidiaries (except with respect to the covenants set forth in Sections 7.7 (other than subsections (a), (f), (h), (q) and (r) of Section 7.7), 7.9 and 7.12, which shall apply only to the Company) will: 7.1 Payment of Debts, Taxes, Etc.; Maintenance of Insurance. (a) Pay all debts and perform all obligations, and cause each of its Subsidiaries to pay all debts and perform all obligations, promptly and in accordance with the terms -75- 82 thereof and pay and discharge, and cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims, which, if unpaid, might become a lien or charge upon any properties of the Company, a Borrowing Subsidiary or of such other Subsidiary, provided that none of the Company, any Borrowing Subsidiary or any other Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by appropriate proceedings and such contest shall operate to stay any material adverse effect of such lien or charge; (b) Use its best efforts to adhere to customary practices and standards in the industry insofar as adherence to such practices and standards would require the Company or a Borrowing Subsidiary, as applicable, to cause obligors whose indebtedness is secured by Pledged Mortgages to comply with the provisions of such Pledged Mortgages with respect to the payment of real estate taxes and insurance premiums in connection with the real estate securing such indebtedness; and (c) Maintain, and cause each of its Subsidiaries to maintain, insurance on its properties and other insurance in amounts and types and with provisions and insurers as shall be satisfactory to the Required Lenders, and at all times furnish to any Lender (upon written request by such Lender) copies of its, and each of its Subsidiaries', current Mortgage Bankers Blanket Bond and of its, and each of its Subsidiaries', insurance policy containing errors and omissions coverage or mortgage impairment coverage, and providing, in the case of Mortgage Bankers Blanket Bonds, to the extent possible, that they are not cancelable without thirty days' prior written notice to the Agent. 7.2 Preservation of Corporate Existence. Preserve and maintain, and cause each of its Subsidiaries which is a material part of the Company's overall business operations to preserve and maintain, its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary in view of its business operations or the ownership of its properties. -76- 83 7.3 Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, non-compliance with which would be reasonably likely to, singly or in the aggregate, materially adversely affect its business or credit, unless the same shall be contested by the Company, a Borrowing Subsidiary or such other Subsidiary, as the case may be, in good faith and by appropriate proceedings and such contest shall operate to stay the material adverse effect of any such non-compliance. 7.4 Requested Information. At any reasonable time and from time to time, on reasonable prior notice furnish to the Agent, any requesting Lender or any agents or representatives thereof, or permit such agents or representatives to examine and make copies of, the records and books of account of, and visit the properties of, the Company, the Borrowing Subsidiaries or any of their Subsidiaries and, so long as representatives of the Company (as chosen by senior management of the Company) accompany the Agent or any such other Lender, the Company's Affiliates, and to discuss the affairs, finances and accounts of the Company, its Subsidiaries and such Affiliates with any of its officers. 7.5 Keeping of Records and Books of Account. Keep or cause to be kept adequate records and books of account in which complete entries will be made in accordance with generally accepted accounting principles, consistently applied (except for changes concurred in by the Company's independent auditors) reflecting all financial transactions of the Company and its Subsidiaries. 7.6 Maintenance of Approvals, Filings and Registrations. At all times maintain in effect, renew and comply with, and cause each of its Subsidiaries to effect, renew and comply with all the terms and conditions of all consents, licenses, approvals and authorizations as may be necessary under any applicable law or regulation for the execution, delivery and performance of this Agreement, the Security Agreement and the Notes and to make this Agreement and such other documents legal, valid, binding and enforceable. 7.7 Reporting Requirements. Furnish to the Agent for distribution to each Lender: (a) As soon as possible after becoming aware (i) of the occurrence of any Default, or (ii) that any of the representations and warranties contained in Article IV or Article VI has ceased to be true and correct at any time -77- 84 since the last Advance hereunder (or, if no Advance has taken place, the execution and delivery of this Agreement), telephone advice confirmed in writing within three (3) Business Days by a statement of the president or other Authorized Officer of the Company setting forth the details thereof and the action which the Company proposes to take with respect thereto. (b) As soon as available and in any event within ninety (90) days after the end of each fiscal year of the Company, a consolidating and consolidated balance sheet of the Company and its Subsidiaries as of the end of such fiscal year and the related statements of income and changes in financial position of the Company and its Subsidiaries including cash flow statements for such fiscal year on a consolidating and consolidated basis, setting forth in each case in comparative form the figures for the previous fiscal year, all reported in accordance with GAAP and audited and unqualified by Ernst & Young or other independent public accountants of nationally recognized standing. (c) As soon as available and in any event within forty-five (45) days after the end of each fiscal quarter of the Company, a consolidating and consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related statements of income for such quarter and for the portion of the Company's fiscal year ended at the end of such quarter, all certified (subject to normal quarter-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer of the Company. (d) Simultaneously with the delivery of each set of financial statements referred to in clauses (b) and (c) above, a certificate of the chief financial officer of the Company (A) setting forth in reasonable detail the calculations required to establish whether the Company was in compliance with the requirements of Sections 7.9, 8.5, 8.6, 8.9, 8.10, 8.16, 8.17 and 8.20 and, if then applicable, the Positive Security Conditions and (B) stating whether there exists on the date of such certificate any Default and, if any Default then exists, setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto. (e) Within forty-five (45) days after the end of each fiscal quarter of the Company (or more frequently if reasonably deemed advisable by the Agent), an appraisal of the value of the Company's rights under its Servicing Agreements, which appraisal shall (i) be performed by a third-party appraiser approved by Agent and which shall itemize the value of such Servicing Agreements in such a -78- 85 manner as to allow the computation of the value of the Eligible Pledged Servicing as set forth in Section 4.6(h)(1), and (ii) be concurrently sent by the Company to the Collateral Agent. (f) Promptly after the commencement thereof, notice of (i) any action or proceeding which has more than a remote possibility of a determination adverse to the Company or its Subsidiaries (a "Non-Frivolous Action") instituted by or against the Company or any of its Subsidiaries in any Federal or state court or before any commission or other regulatory body (Federal, state or local, domestic or foreign), or any such Non-Frivolous Action threatened against the Company or any of its Subsidiaries in writing, which, if adversely determined, would have a material adverse effect upon the business, assets or financial condition of the Company, any Borrowing Subsidiary or any other mortgage banking affiliate of the Company, and (ii) any other action, event or condition of any nature which may lead to or result in a material adverse effect upon the business, assets or financial condition of the Company or any Borrowing Subsidiary or which, with or without notice or lapse of time or both, would constitute a default under any other material contract, instrument or agreement to which the Company or any Borrowing Subsidiary is a party or by which the Company, any Borrowing Subsidiary or their properties or assets may be bound or subject. (g) As soon as possible after becoming aware of any change in the Company's long-term unsecured debt ratings as rated by S&P or Moody's, a copy of the S&P or Moody's publication of such ratings or other written confirmation of such ratings. (h) Such other information, financial or otherwise, respecting the Collateral and the Company's or any Borrowing Subsidiary's financial statements and condition as the Agent or any Lender may from time to time reasonably request. (i) As soon as possible, and in any event within thirty (30) days after the Company knows or has reason to know that any of the events or conditions enumerated below with respect to any Plan have occurred or exist, a statement signed by an Authorized Officer of the Company setting forth details respecting such event or condition and the action, if any, which the Company or, to the best knowledge of the Company, any ERISA Affiliate proposes to take with respect thereto; provided, however, that if such event or condition is required to be reported or notice thereof given to PBGC, such statement, together with a copy of the relevant report or notice to PBGC, shall be furnished to the Agent within ten -79- 86 (10) days after it is reported or notice thereof given to PBGC: (i) the occurrence of any Reportable Event; (ii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; or (iv) the complete or partial withdrawal by the Company, any Subsidiary or any ERISA Affiliate from a Plan, or the receipt by the Company, any Subsidiary or any ERISA Affiliate of notice from a Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA, if such withdrawal, reorganization, insolvency or termination has resulted or may reasonably be expected to result in any liability of the Company, any Subsidiary or any ERISA Affiliate to the PBGC in connection with such Plan or to such Plan. (j) Promptly after the request of the Agent, copies of each annual report filed pursuant to Section 104 of ERISA with respect to each Plan (including, to the extent required by Section 104 of ERISA, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information referred to in Section 103 of ERISA) and each annual report filed with respect to each Plan under Section 4065 of ERISA. (k) As soon as available but in any event within thirty (30) days after the end of each calendar quarter, a servicing report and analysis which shall show the status of all mortgages serviced by the Company or any Borrowing Subsidiary including those which are delinquent, all in such form and detail and including such additional information as the Agent may reasonably request. Such servicing report shall show separately information concerning any mortgages or securities with respect to which there is recourse to the Company or any Borrowing Subsidiary. (l) As soon as available but in any event within thirty (30) days after the end of each calendar quarter, a production information report and a secondary marketing report for such quarter satisfactory to the Agent. -80- 87 (m) Promptly upon receipt, a copy of any notice from any Federal Agency or any private mortgage insurer to the effect that it is or is contemplating withdrawing its approval of the Company or any Borrowing Subsidiary as a FHA-Approved Mortgagee, FHLMC-Approved Lender, FNMA-Approved Lender or VA-Approved Lender or as an approved seller and servicer for FNMA, FHLMC and GNMA. (n) Promptly after the Company's or any Subsidiary's acquisition or creation of a new Subsidiary, written notice of such event, which notice shall set forth the details of such event, the percentage of capital stock owned by the Company or any other Subsidiary, and the jurisdiction of incorporation of such new Subsidiary. (o) Promptly after the sending or filing thereof, copies of all such proxy statements, financial statements and reports which the Company sends to its stockholders, and copies of all regular, periodic and special reports (other than Form 8-K reports containing only the distribution reports relating to the Fireman's Fund Mortgage Corporation Agency MBS Multi-Class Pass-Through Certificates, which the Company need send to the Agent only and which the Agent shall make available to the other Lenders upon request) and all final prospectuses which the Company files with the SEC (if applicable), or any governmental authority which may be substituted therefor, any Federal Agency, or any other governmental agency. (p) On each Business Day, a statement from the issuing and paying agent for the Outstanding CPNs setting forth the aggregate face amount of the Outstanding CPNs being issued on such Business Day, being repaid on such Business Day and remaining outstanding at the end of such Business Day, all in a form satisfactory to the Agent, which statement need be transmitted to the Agent only. (q) As soon as available and in any event within forty-five (45) days after the end of each fiscal quarter of the Company and each Borrowing Subsidiary, a list showing (i) each individual Guaranty in excess of $1,000,000 of the Company or any Borrowing Subsidiary then in effect (and the amounts thereof) and (ii) the aggregate amount of all other Guarantees of the Company or any Borrowing Subsidiary then in effect, certified as true and correct by Authorized Officers of the Company and Borrowing Subsidiary. (r) Such other information respecting the business, properties or the condition or operation of the Company or its Subsidiaries, financial or otherwise, as the Agent or any Lender may from time to time reasonably request. -81- 88 (s) Notice of the occurrence of any of the following events, immediately upon the Company's acquisition of knowledge thereof: (i) the occurrence of an "Event of Default" (as defined in Article Five of the Subordinated Debt Indenture), (ii) the deferral by the Company of any quarterly installment of interest on the Subordinated Debt, (iii) the acceleration of the entire principal amount of any series of securities issued under the Subordinated Debt Indenture, (iv) the execution of any amendment or supplement to the Subordinated Debt Indenture, or (v) the resignation or removal of the trustee under the Subordinated Debt Indenture, or any change in the notice address of such trustee. 7.8 Indemnification. Pay, and protect, indemnify and save harmless, the Agent, the Collateral Agent, each of the Lenders and the Affiliates of each of the foregoing and, in their capacity as such, their respective officers, directors, shareholders, controlling persons, employees, agents and servants from and against all liabilities, losses, claims, damages, penalties, causes of action, suits, costs and expenses (including, without limitation, attorneys' fees and expenses) or judgments of any nature arising from the default of the Company or any Borrowing Subsidiary in the performance of their respective agreements, rights or obligations contained in this Agreement, the Security Agreement, the Notes or any other instrument or agreement entered into by the Company or any Borrowing Subsidiary in connection herewith or therewith or arising out of this Agreement or the transactions contemplated herein; provided, that neither the Company nor any Borrowing Subsidiary shall have any obligation hereunder to the Agent, the Collateral Agent or any Lender or any other Person indemnified pursuant to this Section 7.8 with respect to indemnified liabilities arising from (1) the gross negligence or willful misconduct of such Person indemnified pursuant to this Section 7.8, or (2) legal proceedings commenced against the Agent, the Collateral Agent or any Lender by any other Lender or any Participant. If any action, suit or proceeding arising from any of the foregoing is brought against the Agent, the Collateral Agent or any Lender or any other person indemnified pursuant to this Section 7.8, the Company and each Borrowing Subsidiary will, if within a reasonable time requested in writing to do so and at its expense, resist and defend such action, suit or proceeding or cause the same to be resisted and defended by counsel designated by the Company or Borrowing Subsidiary (which counsel shall be satisfactory to the party being indemnified). The obligations of the Company and the Borrowing Subsidiaries under this Section 7.8 shall survive any termination of this Agreement. -82- 89 7.9 Maintenance of Net Worth. At all times, maintain the sum of (x) Adjusted Consolidated Tangible Net Worth plus (y) Subordinated Debt in an amount at least equal to the sum of: (i) $280,000,000, plus (ii) fifty percent (50%) of the positive cumulative quarterly increases, if any, in Adjusted Consolidated Tangible Net Worth of the Company after July 1, 1996 (computed without regard to any increase or decrease resulting from (1) the contribution or distribution of Capital Securities, (2) cash equity contributions to the Company, (3) the receipt of proceeds of issuances of stock of the Company, (4) the exchange of Subordinated Debt for Series A Preferred Stock, (5) the payment of Restricted Payments) for each calendar quarter beginning with calendar quarter beginning July 1, 1996. 7.10 Federal Agency Approvals. Maintain its status as a FHA-Approved Mortgagee, remain eligible to obtain VA guaranties of Mortgage Loans and remain approved by each Federal Agency as a seller/servicer. 7.11 Approved Investor Commitments. Maintain all of its Mortgage Loans included in Collateral and all other Mortgage Loans owned by the Company or any Borrowing Subsidiary, as applicable, which satisfy the delivery requirements of any then-current Approved Investor Commitments to purchase Mortgage Loans or to exchange Securities for Mortgage Loans held by the Company or any Borrowing Subsidiary (in each case, other than any Mortgage Loans held by the Company or a Borrowing Subsidiary solely for investment) in compliance with such Approved Investor Commitments and perform all of its obligations in connection with such commitments. 7.12 Borrowing Base Certificate. Within the first ten (10) days of each month, and within three Business Days after any request therefor by the Agent, deliver to the Agent a Borrowing Base Certificate (which shall include the Company's reconciliation of any discrepancies from the Collateral Agent's reports on the status of Eligible Collateral at the end of the preceding month), together with a certificate of the chief financial officer or other Authorized Officer of the Company confirming compliance with Sections 7.9, 8.5, 8.9, 8.12 and 8.20 and, if then applicable, with the Positive Security Conditions. Each regular monthly Borrowing Base Certificate shall contain information as of the close of -83- 90 business on the final Business Day of the preceding month. Any Borrowing Base Certificate delivered pursuant to the request of the Agent shall contain information as of the close of business on the day on which the Agent requested such Borrowing Base Certificate. Notwithstanding the two preceding sentences, information contained in such Borrowing Base Certificates relating to Eligible Repurchased Agency Loans and Receivables or Eligible Pledged Servicing may be as of the latest dates on which the Company calculated the value of Eligible Repurchased Agency Loans and Receivables and Eligible Pledged Servicing; provided that such calculations shall be made (A) at least once per week with respect to Repurchased Agency Loans and Receivables, and (B) at least once per month and also immediately after any purchase or sale of any Servicing Agreements with an aggregate unpaid principal balance of $1,000,000,000 or more with respect to Eligible Pledged Servicing. An Authorized Officer of each Borrowing Subsidiary shall certify as to the accuracy of each Borrowing Base Certificate with respect to Collateral reflected therein which is owned by such Borrowing Subsidiary. 7.13 Further Assurance. As from time to time requested by the Agent and agreed upon by the Required Lenders, at the cost and expense of the Company, execute and deliver to the Agent all such documents and instruments and do all such other acts and things as may be reasonably required to enable the Lenders to exercise and enforce their rights under this Agreement and to realize thereon, and as may be necessary to validate, preserve and protect the position of the Lenders under this Agreement. With respect to those elements of Collateral as to which the Lenders' security interest may not be perfected by delivery to the Collateral Agent with the Security Agreement or the filing of a UCC-1 financing statement, including but not limited to the Approved Investor Commitments and any options, futures contracts or other interest rate protection products, the Company and/or the applicable Borrowing Subsidiary, as requested by the Agent at the direction of the Required Lenders, shall execute and deliver possession of such elements of the Collateral to the Agent, have the interest of the Lenders therein recorded on the books of any institution holding such assets for the Company or the applicable Borrowing Subsidiary, obtain consents to assignment in favor of the Lenders from the counterparties thereto or take such other actions as may be necessary to perfect the security interest of the Lenders therein (provided, however, that unless an Event of Default is continuing or the Required Lenders have requested otherwise, consents to assignments of options, futures contracts or other interest rate protection products in favor of the Lenders from the counterparties thereto shall not be required). -84- 91 7.14 Maintenance of Properties. Do all things necessary to maintain, preserve, protect and keep its properties in good repair, working order and condition, and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times. 7.15 Payment of Taxes. On demand pay, or reimburse the Agent and Lenders for, all stamp, documentation, intangible, or similar taxes, and all penalties or interest that may be due with respect thereto, that may be imposed or asserted by the State of Florida or any other jurisdiction in connection with the execution and delivery of the Credit Documents or the making of the Loans contemplated by this Agreement. ARTICLE VIII NEGATIVE COVENANTS The Company covenants and agrees (and each Borrowing Subsidiary covenants and agrees with respect to Sections 8.1, 8.2, 8.3, 8.4, 8.6, 8.7, 8.8, 8.11, 8.13, 8.14, 8.15, 8.17 and 8.18) with the Lenders that so long as this Agreement shall remain in effect or any amounts are outstanding under the Notes or this Agreement, unless the Required Lenders (or all Lenders, if expressly required) shall otherwise consent in writing, the Company (or the Borrowing Subsidiaries where applicable) (on a consolidated basis with its Subsidiaries) shall not, directly or indirectly: 8.1 Use of Proceeds. Use the amounts obtained under this Agreement for any purposes other than (i) the purposes described in the recitals hereto, (ii) the funding or purchasing of Mortgage Loans, (iii) the payment of principal, interest, fees, expenses and other obligations described in or contemplated by this Agreement, (iv) payment of Debt of the Company existing on the date hereof, and (v) such other purposes permitted under this Agreement. Neither the Company nor any Borrowing Subsidiary is engaged, nor will they engage, principally or materially in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" (within the meanings of each of the quoted terms under Regulation U). If requested by a Lender, the Company and each Borrowing Subsidiary shall each furnish to the Agent for the benefit of the Lenders a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U. No part of the proceeds of any Loan will be used for any purpose which violates, or which would be inconsistent -85- 92 with, the provisions of the Regulations of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. 8.2 Compliance with Security Agreement. Enter into any collateral custodial agreement similar to the Security Agreement for Mortgage Loans not included in Collateral with any entity other than the Collateral Agent or fail to duly perform any of its obligations under the Security Agreement; provided, however, that this Section shall not prohibit the Company or any Borrowing Subsidiary from entering into other custodial agreements relating to the possession of Mortgage Loans not included in Collateral so long as such agreements are not made for the purpose of or in connection with the granting of a security interest in such Mortgage Loans. Security interests in Mortgage Loans given for confirmatory purposes in connection with the sale of such Mortgage Loans by the Company or a Borrowing Subsidiary to investors shall not be considered agreements "made for the purpose of or in connection with the granting of a security interest in such Mortgage Loans" within the meaning of the preceding sentence. 8.3 Mergers; Subsidiaries. Merge or consolidate with any Person, or sell or otherwise dispose of (whether in one transaction or in a series of transactions) the shares of any of its Subsidiaries to any Person, provided that the Company may, after prior written notice to the Agent and Lenders, (i) undertake such a merger or consolidation so long as the Company shall be the surviving or resulting company and (ii) take such action with respect to any Subsidiary which is not a material part of the Company's overall business operations. 8.4 Sales. Sell, assign, lease or otherwise dispose of (collectively, "Transfer"), whether in one transaction or a series of transactions, all or substantially all of its assets (whether now owned or hereafter acquired) to any Person, or allow any Subsidiary to Transfer substantially all of its assets to any Person (other than another Subsidiary or a Parent), provided that the Company may after prior written notice to the Agent and Lenders allow such action with respect to any Subsidiary which is not a material part of the Company's overall business operations. Transfers described in this Section 8.4 and the mergers, consolidations and dispositions described in Section 8.3 (whether or not permitted by the provisions of such Sections) are referred to herein as "Fundamental Changes." -86- 93 8.5 Debt. Allow the total Debt (excluding Subordinated Debt) of the Company and its Subsidiaries (on a consolidated basis) to exceed the sum of the following (the "Debt Threshold"): (a) one hundred percent (100%) of the value of the Company's cash and "short-term investments"; (b) ninety-eight percent (98%) of the value of the Company's "mortgage loans receivable"; (c) ninety percent (90%) of the value of the Company's "pool loan purchases" and "mortgage claims receivable", to the extent such assets represent VA Mortgage Loans and FHA Mortgage Loans repurchased by the Company from GNMA Security holders; (d) seventy-five percent (75%) of the amount of Servicing Sale Receivables which would qualify as Eligible Pledged Servicing Sale Receivables if such Servicing Sale Receivables were pledged as Collateral; (e) seventy-five percent (75%) of "loans held for investment"; and (f) the lesser of: (1) sixty-five percent (65%) of the sum of (A) for Servicing Agreements not covered by the then most recent appraisal of the value of the Company's Servicing Agreements pursuant to clause (B) immediately below, the lesser of acquisition price or the appraised market value (which shall be as set forth in an appraisal dated no more than 30 days prior to acquisition of such Servicing Agreements by a qualified third-party appraiser approved by the Agent, with such appraisal to be obtained and paid for by the Company and delivered to the Agent) of such Servicing Agreements (i.e. such Servicing Agreements shall be valued at zero unless such an appraisal has been obtained), and (B) for all other Servicing Agreements, the appraised market value (which shall be determined every three months (or more frequently at the request of the Company, or if reasonably deemed advisable by the Agent, the Agent) by a qualified third-party appraiser approved by the Agent, with such appraisals to be obtained and paid for by the Company and delivered to the Agent) of such Servicing Agreements (provided that if any Servicing Agreements have been sold by the Company since the date of the most recent appraisal, then the appraised value of the Company's Servicing Agreements shall be deemed reduced by an amount obtained by multiplying (i) the appraised market value of all Servicing Agreements prior to such -87- 94 servicing sale by (ii) a fraction having a numerator equal to the aggregate principal outstanding balance of the Mortgage Loans serviced under the sold Servicing Agreements as of the date of sale and a denominator equal to the aggregate principal outstanding balance of the Mortgage Loans serviced pursuant to all of the Servicing Agreements (including the sold Servicing Agreements) covered by the most recent servicing appraisal as of the date of sale); and (2) the sum of (A) one percent (1.00%) of the aggregate outstanding principal balance of the Mortgage Loans serviced by the Company pursuant to Servicing Agreements with FNMA, FHLMC or any other Person other than GNMA, FHA or VA and (B) one and one-quarter percent (1.25%) of the aggregate outstanding principal balance of the Mortgage Loans serviced by the Company pursuant to Servicing Agreements with GNMA, FHA or VA. Terms set forth in quotes in this Section shall have the meanings given such terms in the Company's consolidated financial statements. 8.6 Ratably Secured Debt. Increase the amount of or extend the maturity of the Ratable Medium-Term Notes or incur any other Debt which may be entitled to a security interest in any of the Collateral which would be equal or superior to the security interest of Collateral Agent as agent for the Secured Parties. 8.7 Guarantees. Create, incur, assume or suffer to exist any Guarantee of the Company or a Borrowing Subsidiary except Guarantees in an aggregate combined amount for the Company and the Borrowing Subsidiaries not to exceed $25,000,000 at any one time outstanding. 8.8 Investments. Make or own any Investment in any Person, except: (a) Investments in the ordinary course of its mortgage banking business in connection with mortgage loans, collateralized mortgage obligations and other mortgage-related securities; (b) Investments in the ordinary course of its mortgage banking business in connection with puts, calls, swaps and other interest rate hedging products, options and futures contracts to provide protection from interest rate fluctuation; -88- 95 (c) Investments in the ordinary course of its mortgage banking business in connection with real estate acquired by foreclosure; (d) Investments in the ordinary course of the Company's mortgage banking business in connection with servicing rights; (e) Investments in the ordinary course of its mortgage banking business in connection with commitments from investors to purchase Mortgage Loans or mortgage-related securities; (f) the acquisition of the Mortgage Loans, Securities and mortgage servicing contracts of another Person engaged in mortgage-related businesses; (h) Investments in Cash Equivalents; (i) those Investments in existence on the date hereof and disclosed in the financial statements referred to in Section 6.6; (j) loans to officers of the Company in an aggregate principal amount at any time outstanding not to exceed $5,000,000; (k) loans and advances to employees of the Company, or its Subsidiaries for (i) travel and entertainment in the ordinary course of business in an aggregate amount for the Company and its Subsidiaries not to exceed $100,000 at any one time outstanding and (ii) relocation expenses in the ordinary course of business in an aggregate amount for the Company and its Subsidiaries not to exceed $1,000,000 at any one time outstanding; (l) Investments of up to 10% of the Company's net worth (as determined in accordance with GAAP) by the Company in its Subsidiaries and investments by such Subsidiaries in the Company and in other Subsidiaries; (m) Investments made by any Subsidiary in the ordinary course of its business; (n) Investments in equity securities which (1) are traded on the New York Stock Exchange, the American Stock Exchange or NASDAQ, (2) are subject to no transfer restrictions, and (3) have a readily determinable market value, in an aggregate market value amount not to exceed $25,000,000 (which market value shall be determined by the Company and reported to the Agent on a monthly basis, or more frequently at the request of the Agent); -89- 96 (o) repurchase and reverse repurchase contracts incidental to the mortgage-related businesses of the Company and its Subsidiaries in an aggregate dollar amount not to exceed $250,000,000 and 25,000,000 respectively; and (p) other Investments if, after giving effect to any such Investment, the consolidated net revenues (determined in accordance with GAAP) of all business segments that constitute mortgage-related businesses of the Resulting Entity for the Fundamental Change/Investment Calculation Period are at least 75 percent of the total net revenues (determined in accordance with GAAP) of the Resulting Entity for the Fundamental Change/Investment Calculation Period. 8.9 Leverage Ratios. Permit the ratio of (1) Funded Debt less Subordinated Debt to (2) Adjusted Consolidated Tangible Net Worth plus Subordinated Debt to exceed the following: (a) while the Facility is secured:
Level of Aggregate Commitment Maximum Leverage Ratio ----------------------------- ---------------------- 0 - $750,000,000 5.0 to 1 $750,000,001 - $850,000,000 5.5 to 1 $850,000,001 - $950,000,000 6.0 to 1 $950,000,001 - $1,050,000,000 6.5 to 1 $1,050,000,001 - $1,150,000,000 7.0 to 1 $1,150,000,001 - $1,250,000,000 7.5 to 1
(b) while the Facility is unsecured pursuant to Section 4.13(a):
Level of Aggregate Commitment Maximum Leverage Ratio ----------------------------- ---------------------- 0 - $750,000,000 4.0 to 1 $750,000,001 - $850,000,000 4.5 to 1 $850,000,001 - $950,000,000 5.0 to 1 $950,000,001 - $1,050,000,000 5.5 to 1 $1,050,000,001 - $1,150,000,000 6.0 to 1 $1,150,000,001 - $1,250,000,000 6.5 to 1
8.10 Recourse Servicing. Permit the principal balance of Mortgage Loans covered by Recourse Servicing to exceed the lesser of: (i) the sum of (A) the aggregate principal balance of all Mortgage Loans covered by Recourse Servicing owned by the Company as of September 30, 1996 plus (B) the aggregate principal balance of all Mortgage Loans covered by Recourse -90- 97 Servicing acquired by the Company from and after October 1, 1996 as a part of a larger acquisition of Servicing Agreements, but not in excess of an additional $100,000,000 in principal balance of Mortgage Loans covered by Recourse Servicing less (C) all reductions in such aggregate principal balances, whether by reason of prepayment or amortization from and after October 1, 1996 (or the date of later acquisition, as the case may be) and less (D) the aggregate principal balance of any Mortgage Loans covered by any such Recourse Servicing sold by the Company after September 30, 1996; or (ii) eleven and one-half percent (11.5%) of the aggregate outstanding principal balance of all Mortgage Loans covered by the Company's Servicing Agreements other than Subservicing Agreements, whether or not such Servicing Agreements qualify as Eligible Pledged Servicing; except that from and after the date that the principal balance of Mortgage Loans covered by Recourse Servicing first falls below an amount equal to (a) ten percent (10%) of the aggregate outstanding principal balance of all Mortgage Loans then covered by the Company's Servicing Agreements other than Subservicing Agreements minus (b) $100,000,000, the principal balance of Mortgage Loans covered by Recourse Servicing shall not exceed ten percent (10%) of the aggregate outstanding principal balance of all Mortgage Loans then covered by the Company's Servicing Agreements other than Subservicing Agreements. 8.11 Liens. Permit, or permit any Subsidiary to permit, any Lien to exist on any of its property or assets (including, without limitation, the Company's rights under any contracts relating to mortgage sales and under any Servicing Agreements) other than: (a) Liens for taxes, assessments and other governmental impositions not yet due or which are being contested in good faith by appropriate proceedings, provided, that adequate reserves with respect thereto are maintained on the books of the Company or its Subsidiaries, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business and securing obligations which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings, provided, that adequate reserves with respect thereto are maintained on the books of the Company or its Subsidiaries, as the case may be, in accordance with GAAP; -91- 98 (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Company or such Subsidiary; (f) Liens of landlords, arising solely by operation of law and which are not avoidable as a matter of law, on fixtures and moveable property located on premises leased in the ordinary course of business, provided, that the rental payments secured thereby are not yet due; (g) Liens arising out of judgments or awards against the Company or any Subsidiary with respect to which the Company or such Subsidiary is prosecuting an appeal or proceeding for review and the Company or such Subsidiary is maintaining adequate reserves in accordance with GAAP; (h) Liens which were in existence on December 31, 1995 and which secured obligations reflected in the financial statements referred to in Section 6.6; (i) Liens upon real and/or tangible personal property, which property was acquired after December 31, 1995 (by purchase, construction or otherwise) by the Company or its Subsidiaries, each of which Liens either (A) existed on such property before the time of its acquisition and was not created in anticipation thereof at the request or direction of the Company, or (B) was created solely for the purpose of securing Debt representing, or incurred to finance, refinance or refund, the cost (including the cost of construction) of the respective property; provided, that no such Lien shall extend to or cover any property of the Company or such Subsidiary other than the respective property so acquired and improvements thereon; (j) Liens incidental to the conduct of the Company's or a Borrowing Subsidiary's mortgage-related businesses or the ownership of its property or arising out of transactions entered in the ordinary course of the Company's or a -92- 99 Borrowing Subsidiary's mortgage-related businesses which do not secure Debt and do not, in the aggregate, materially detract from the value of its properties in the aggregate or materially impair the use thereof in the ordinary course of the Company's or such Borrowing Subsidiary's business; (k) Liens on assets of corporations which become Subsidiaries after the date of this Agreement; provided, that (i) such Liens existed at the time such corporation became a Subsidiary and were not created in anticipation thereof, (ii) any such Lien is not spread to cover any property or assets of such corporation after the time such corporation becomes a Subsidiary (other than any such spreading resulting from "after-acquired property" clauses in existence on the date such corporation became a Subsidiary) and (iii) the amount of Debt secured thereby is not increased; (l) any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Lien referred to in the foregoing clauses; provided, that the principal amount of Debt secured thereby shall not exceed the principal amount of Debt so secured immediately prior to the time of such extension, renewal or replacement, and that such extension, renewal, or replacement Lien shall be limited to all or a part of the property which secured the Lien so extended, renewed or replaced (plus improvements on such property); (m) Liens (not otherwise permitted hereunder) which secure obligations not exceeding (as to the Company and all Subsidiaries) $15,000,000 in an aggregate principal amount at any one time outstanding; (n) Liens (not otherwise permitted hereunder) which secure obligations (as to the Company and all Subsidiaries) (1) incidental to forward delivery contracts or repurchase agreements in the ordinary course of the Company's or a Borrowing Subsidiary's mortgage-related businesses or (2) incidental to Investments by the Company in the ordinary course of its mortgage banking business in connection with puts, calls, swaps and other interest rate hedging products, options and futures contracts to provide protection from interest rate fluctuation; and (o) the Liens arising under the Security Agreement (including the Liens in favor of the holders of the Ratable Medium-Term Debt as Secured Parties) or any other Credit Document; provided, however, that so long as no Event of Default has occurred and is continuing and the security interest in favor of the Collateral Agent is in effect and is not abated pursuant to -93- 100 Section 4.13(a), the Company may also permit Liens on Securities and Mortgage Loans owned by the Company (other than Securities or Mortgage Loans constituting Collateral) to secure Debt incurred from sources other than the Secured Parties for the purpose of originating or purchasing such Securities or Mortgage Loans. 8.12 Credit Requirement. Permit the Aggregate Borrowing Base to be less than the Credit Requirement. 8.13 Affiliate Transactions. Enter, or permit any Subsidiary to enter, into any transactions with the Company's Parent or Affiliates that is not an arm's-length transaction or that in any material respect is less advantageous to the Company or such Subsidiary than a similar typical transaction with an unrelated third-party; make any loans or advances to the Parent or any Affiliates with financial terms more advantageous to the Parent or Affiliate than the terms of loans and advances made to the Company from any such Parent or Affiliate; or make any net loans or advances to the Parent or any Affiliates which would cause any violation of Sections 7.9 or 8.9. 8.14 Conduct of Business. Except as permitted under Section 8.8: (a) enter into any material line of new business other than businesses related to its current businesses, materially change the nature of its business, cease to carry on its business as now conducted, or (b) fail to maintain its corporate existence, licenses, franchises and privileges. 8.15 FHA and other Approvals. Cause any Federal Agency which insures any material portion of the Mortgage Loans owned or serviced by the Company or any Borrowing Subsidiary to withdraw its approval of the Company or any Borrowing Subsidiary, or become ineligible or allow any Borrowing Subsidiary to become ineligible as a lender under the VA loan guaranty program. 8.16 Restricted Payments. Make any Restricted Payments; provided, however, so long as no Default arising from the Company's failure to comply with Section 7.9 has occurred and is continuing (or would result from any such payment) and no Event of Default has occurred and is -94- 101 continuing (or would result from any such payment), the Company may make Restricted Payments as expressly permitted by subparagraphs (a) and (b) below: (a) The Company may make Restricted Payments: (i) through June 30, 1997, in an amount which, when added to all other Restricted Payments (including Restricted Payments made pursuant to Section 8.16(b)(i) below) made subsequent to June 30, 1996, does not exceed fifty percent (50%) of the increase, if any, in Adjusted Consolidated Tangible Net Worth from June 30, 1996 through the completed calendar quarter preceding any such Restricted Payment; and (ii) from and after July 1, 1997, in an amount which, when added to all other Restricted Payments made in the calendar quarter when any such Restricted Payment is made and all Restricted Payments made during the prior three completed calendar quarters, does not exceed fifty percent (50%) of the increase, if any, in Adjusted Consolidated Tangible Net Worth during the most recent four consecutive calendar quarters completed prior to any such Restricted Payment. The increase in Adjusted Consolidated Tangible Net Worth referenced in this Subsection (a) shall be computed without regard to any increase or decrease resulting from the following activities: (1) the contribution or distribution of Capital Securities, (2) cash equity contributions to the Company, (3) the receipt of proceeds of issuances of stock of the Company, (4) increases or decreases in the amount of Subordinated Debt, or (5) the payment of permitted Restricted Payments. (b) The Company may, without regard to the maximum limit on Restricted Payments established by Subsection (a) above: (i) pay dividends required to be paid on its Series A Preferred Stock and pay interest that is due and payable on the Subordinated Debt, provided that all payments made pursuant to this clause (i) shall still be included for purposes of determining the maximum amount of dividends and distributions payable under Subsection (a); (ii) make additional Restricted Payments during the fourth calendar quarter of 1996 not to exceed $60,000,000 in value in the aggregate, which additional Restricted Payments made pursuant to this clause (ii) -95- 102 shall not be included in determining the maximum amount of Restricted Payments made under Subsection (a); (iii) distribute Capital Securities; and (iv) distribute the proceeds (whether cash or non-cash proceeds) of issuances of stock (whether in connection with a public offering, a merger or otherwise) of the Company made after the date hereof. At the time the Company pays or makes any such Restricted Payment, it shall notify the Agent in writing of the amount of such payment, which notice shall (1) specify under which subparagraph and clause above the Restricted Payment is being made and (2) contain such information as is necessary to demonstrate that such dividend is permissible under the applicable subparagraph and clause. 8.17 Borrowing Subsidiary Liabilities and Secured Debt. Allow (i) TMA's total liabilities (as defined by GAAP), other than liabilities to the Company or its Affiliates, to exceed at any time $5,000,000, (ii) CPM's total liabilities for borrowed money other than money borrowed by CPM under this Agreement or borrowed from the Company or its Affiliates to exceed at any time $10,000,000, or (iii) any Borrowing Subsidiary to create or suffer any Liens on any of its assets to secure the repayment of borrowed money. 8.18 Funding of Borrowing Subsidiary Mortgage Loans. Discontinue the method by which the Company directly funds Mortgage Loans pledged by the Borrowing Subsidiaries as Collateral or amend or terminate any Funding Agreement without the prior written consent of the Required Lenders, which consent shall not be unreasonably withheld. 8.19 Subordinated Debt Indenture. (a) Enter into, without the prior written consent of the Required Lenders, any amendment or modification of the Subordinated Debt Indenture or other documents evidencing or governing the terms of the Subordinated Debt if such amendment or modification would change (i) the principal amount of or rate of interest on the Subordinated Debt, (ii) the terms of repayment of the Subordinated Debt, (iii) the provisions relating to the deferral of interest on the Subordinated Debt, (iv) any terms or provisions of Article 12 (Subordination) of the Subordinated Debt Indenture, (v) the definition of "Event of Default" in the Subordinated Debt Indenture, or (vi) the provision of the Subordinated Debt Indenture which requires the trustee to give certain holders of senior indebtedness notices of defaults, accelerations and certain other events; provided, however, that the Lenders -96- 103 hereby consent to that certain First Supplemental Indenture dated December 1, 1995; or (b) Enter into, without the prior written consent of the Agent, any material amendment or modification of the Subordinated Debt Indenture or other documents evidencing or governing the terms of the Subordinated Debt other than the amendments or modifications requiring the consent of the Required Lenders pursuant to clause (a) above; or (c) Consent, without prior written notice to the Agent, to any change in the trustee under the Subordinated Debt Indenture. 8.20 Minimum Cash Flow Coverage Ratio. Permit the ratio of (1) Consolidated Operating Cash Flow for any four consecutive calendar quarters to (2) Consolidated Interest and Dividend Expense for such four consecutive calendar quarters, to be less than 1.75 to 1.00. Such ratio shall be calculated at the end of each calendar quarter beginning with the calendar quarter ending December 31, 1996 using Consolidated Operating Cash Flow and Consolidated Interest and Dividend Expense for the four most recently completed calendar quarters. ARTICLE IX THE AGENT 9.1 Appointment and Authorization. (a) Each Lender irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof together with all such powers as are reasonably incidental thereto. (b) The Agent is hereby authorized to enter into the Security Agreement on behalf of the Lenders and all obligations of the Lenders thereunder shall be binding upon each Lender as if such Lender had executed the Security Agreement. Each Lender hereby appoints and authorizes the Collateral Agent to act on its behalf in the capacity described in the Security Agreement and authorizes the Collateral Agent to act on such Lender's behalf in all respects with regard to performance under the Security Agreement. (c) Unless and until the Agent shall have received the directions of the Required Lenders as provided in Section 10.2(1) or (2) or of all Lenders, if expressly required hereunder, the Agent may (but shall not be obligated to) take or refrain from taking such action, or direct the -97- 104 Collateral Agent to take or refrain from taking such action with respect to an Event of Default as it shall deem advisable in the best interests of the Lenders. (d) The Agent shall not be required to take any action hereunder if it shall reasonably determine that by so doing it may incur criminal or civil liability. 9.2 Agent and Affiliates. The Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise or refrain from exercising the same as though it were not the Agent, and the Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with, the Company, any Subsidiary or Affiliate of the Company as if it were not the Agent hereunder. 9.3 Action by Agent. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in this Article IX or in Article X. 9.4 Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for the Company), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. 9.5 Liability of Agent. (a) Neither the Agent nor any of its directors, officers, agents, or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Lenders or of all Lenders, if required or (ii) in the absence of its own gross negligence or willful misconduct. (b) Neither the Agent (except as otherwise provided in this Agreement) nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any Advance hereunder; -98- 105 (ii) the performance or observance of any of the covenants or agreements of the Company or any Borrowing Subsidiary; (iii) the satisfaction of any condition specified in Article V, except receipt of items required to be delivered to the Agent and the determination of the amount of the Credit Requirement; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. (c) The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) or telephone communication believed by it to be genuine or, in the case of a writing, to be signed by the proper party or parties. 9.6 Indemnification. (a) Each Lender shall, ratably in accordance with its share of the Aggregate Commitment (or, if the Commitments have been terminated, then in accordance with its share of aggregate Loans then outstanding) at the time the Agent or the Collateral Agent incurred such liability, indemnify the Agent and the Collateral Agent (to the extent not reimbursed by the Company or a Borrowing Subsidiary or from any portion of the Collateral proceeds allocated to the holders of the Ratable Medium-Term Notes) against any cost, expense (including reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the indemnified party's gross negligence or willful misconduct) that the Agent or the Collateral Agent may suffer or incur in connection with this Agreement or the Security Agreement or any action taken or omitted by the Agent or the Collateral Agent hereunder or thereunder. (b) For the purposes of this Section, the amount of any Commitment of any Lender shall be the highest amount of such Commitment of such Lender during the course of any event for which indemnity is sought. (c) The provisions of this Section shall survive the termination of this Agreement. 9.7 Credit Decision. Each Lender acknowledges that it has itself been and will continue to be, independently and without reliance upon the Agent or any other Lender, solely responsible for making its own -99- 106 independent appraisal of and investigations into the financial condition, creditworthiness, condition, affairs, status and nature of the Company and the Borrowing Subsidiaries. Accordingly, each Lender confirms to the Agent that it has not relied, and will not hereafter rely, on the Agent or any other Lender (i) except as otherwise provided in this Agreement, to check or inquire on such Lender's behalf into the adequacy, accuracy or completeness of any information provided by the Company or any Borrowing Subsidiary under or in connection with this Agreement or the transactions herein contemplated (whether or not such information has been or is hereafter distributed to such Lender by the Agent) or (ii) to assess or keep under review on such Lender's behalf the financial condition, creditworthiness, condition, affairs, status or nature of the Company, any Borrowing Subsidiary or any Approved Investor. 9.8 Resignation or Removal and Appointment of Successor Agent. The Agent may resign at any time by giving 90 days prior written notice thereof to the Lenders and the Company. The Agent may be removed at any time upon ninety (90) days prior written notice from the Required Lenders. Upon any such resignation or removal notice the Required Lenders shall have the right to appoint a successor Agent; provided that such appointment, unless made after the occurrence of a Default and during the continuance thereof, shall be subject to the consent of the Company, which consent shall not be unreasonably withheld. If the Company and/or Required Lenders, as applicable, are unable to agree on the appointment of a successor agent within such 90 day period, the retiring agent shall appoint one of the Lenders as a successor agent for the Lenders. Upon the appointment of a successor Agent, that successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement; provided, however, that the resigning Agent shall not be discharged from any liability as a result of its or its directors', officers', agents' or employees' gross negligence or willful misconduct in connection with the performance of its duties and obligations under this Agreement prior to the effective date of its resignation. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. 9.9 Compensation. Compensation of the Agent for its services hereunder and reimbursement for any expenses incurred by it in the performance of its duties hereunder shall be paid by the Company pursuant to a separate written agreement between the Agent and the Company. -100- 107 9.10 Release of Collateral Documents. The Collateral Agent shall not release any Pledged Items or Pledged Servicing except as provided herein or in connection with the enforcement of any remedies hereunder. 9.11 Knowledge of Defaults. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default unless the Agent has received notice from a Lender or the Company referring to this Agreement, describing such Event of Default and stating that such notice is a "Notice of Default." The Agent shall notify the Lenders within a reasonable time after the Agent has notice of the occurrence of an Event of Default, which notice shall describe the Event of Default. 9.12 Reports. The Agent may, at its option with the approval of the Company, alter the format of any report required hereunder, provided such modified report contains the same information previously furnished in the unmodified report. ARTICLE X DEFAULTS 10.1 Defaults. In case of the happening of any of the following events (herein called "Events of Default"): (a) Any principal amount of any Loan made under this Agreement (other than principal payments required to be made pursuant to Sections 2.14(a)) shall not be paid when due and payable; or (b) Any principal payment required to be made pursuant to Sections 2.14(a) shall not be paid when due and payable, and shall remain unpaid for one Business Day; (c) Any interest or Fees due under this Agreement shall not be paid when due and payable, and shall remain unpaid for five (5) days; or (d) Any amount, other than principal or interest or Fees, payable under this Agreement shall not be paid when due and payable and shall remain unpaid for five (5) days after written notice to the Company or a Borrowing Subsidiary (as applicable) of such nonpayment; or -101- 108 (e) Any representation or warranty made or deemed made by the Company or any Borrowing Subsidiary (or any of their officers) herein (other than the representations and warranties contained in Sections 4.7 and 4.8, the inaccuracies of which shall only cause the Collateral affected thereby to cease to qualify as Eligible Collateral) in the Security Agreement or in any certificate, agreement, instrument or statement contemplated by or made or delivered pursuant to or in connection herewith or therewith shall prove to have been incorrect when made or deemed made in any material respect; provided however that if the facts resulting in the breach of any such representation or warranty are susceptible of correction, such breach shall not constitute an Event of Default if such facts are corrected within 30 days after such inaccurate representation or warranty was made or deemed made; or (f) The Company or any Borrowing Subsidiary, as applicable, shall fail to perform or observe any term, covenant or agreement contained in Sections 7.10, 8.1, 8.3, 8.4, 8.6, 8.7, 8.9, 8.14(a), 8.15, 8.17, 8.18, 8.19 or 8.20 (or, while the security interest in favor of the Collateral Agent is abated, Section 8.11); or (g) The Company shall (i) fail to comply with the covenant contained in Section 8.12 and such failure remains unremedied for one Business Day, or (ii) fail to perform any term, covenant or agreement contained in Sections 7.7(a), 7.9, 8.5, 8.8 or 8.16, and such failure shall remain unremedied for more than 30 days; (h) The Company or any Borrowing Subsidiary shall fail to perform or observe any other term, covenant or agreement contained herein (including Section 8.11 while the security interest in favor of the Collateral Agent is not abated) or in the Security Agreement on its part to be performed or observed and any such failure remains unremedied for thirty (30) days after written notice thereof shall have been given to the Company or such Borrowing Subsidiary (as applicable) by the Agent or the Collateral Agent; or (i) An Event of Default shall exist under any other Credit Document; or (j) Either this Agreement, the Notes or the Security Agreement shall, at any time after its execution and delivery, for any reason cease to be in full force and effect (unless such occurrence is in accordance with its terms or after payment thereof) or shall be declared to be null and void, or the validity or enforceability thereof shall be contested by the Company, any Borrowing Subsidiary or the Collateral Agent, or the Company, any Borrowing Subsidiary or -102- 109 the Collateral Agent shall deny that it has any further liability or obligation thereunder; or (k) The Company, its Parent, Fund American Enterprises Holdings, Inc., any Borrowing Subsidiary or any of the Company's other material Subsidiaries shall (i) be adjudicated bankrupt or insolvent, (ii) admit in writing its inability to pay its debts as they mature, (iii) make an assignment for the benefit of creditors, (iv) fail generally to pay its debts as such debts become due and payable, (v) apply for or consent to the appointment of any receiver, trustee, custodian or similar officer for it or for all or any substantial part of its property; or such receiver, trustee, custodian or similar officer shall be appointed without the application or consent of the Company or of such Subsidiary, as the case may be, and such appointment shall continue undischarged for a period of 60 days, (vi) institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction, (vii) have any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding (by petition, application or otherwise) instituted against it and remain undismissed for a period of 60 days, or (viii) have any judgment, writ, warrant of attachment or execution or similar process issued or levied in respect of any of its obligations (alleged or otherwise) against any of its property involving any amount in excess of $5,000,000 and such judgment, writ or similar process shall not be released, vacated, stayed or fully bonded within 30 days after its issue or levy; or (l) The Company, any Borrowing Subsidiary or any of the Company's other material Subsidiaries shall (i) default in the payment when due (after giving effect to any available cure period) of any principal of or interest on any of its Debt other than the Credit Indebtedness in excess of $25,000,000 in the aggregate or (ii) any event specified in any note, agreement, indenture or other document evidencing or relating to any such Debt in excess of $25,000,000 shall occur if the effect of such event is to cause, or to permit the holder or holders of such Debt (or a trustee or agent on behalf of such holder or holders) to cause, such Debt to become due, or to be prepaid in full, prior to its stated maturity, and in either case any notice or cure period has expired and such default has not been waived in writing by the holder of such Debt; or (m) An event or condition occurs or exists with respect to any Plan concerning which the Company is under an obligation to furnish a report to the Lenders in accordance -103- 110 with Section 7.7(i) and as a result of such event or condition, together with all other such events or conditions, the Company or any ERISA Affiliate has incurred a liability to a Plan or the PBGC (or any combination of the foregoing) which is material in relation to the financial position of the Company; or (n) A Change in Control shall occur with respect to the Company; or (o) Except in connection with a Positive Security Event, the lien against the Collateral created under the Security Agreement for the benefit of the Secured Parties shall cease to be a perfected, first priority security interest; provided, however, that if the Secured Parties shall cease to have a perfected, first priority interest in a portion of the Collateral, such cessation shall not constitute an Event of Default so long as the Collateral in which the Secured Parties have a perfected, first priority interest is sufficient to cause the Aggregate Borrowing Base to exceed the Credit Requirement; or (p) An event of default exists under the terms of an indenture pursuant to which any Ratable Medium Term Note is issued and such event of default has not been waived in writing; then, and in every such event and at any time thereafter during the continuance of such event, the Agent and the Lenders shall have the rights described in the following Sections of this Article X. 10.2 Remedies. (1) Upon the occurrence of any Event of Default the Agent may, and at the direction of the Required Lenders shall, at the same or different times, take one or more of the following actions: (i) by notice to the Company terminate the Commitments and they shall thereupon terminate, (ii) by notice to the Company declare the Obligations to be, and the Obligations shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company and the Borrowing Subsidiaries, provided that in the case of any of the Events of Default specified in subparagraph (k) of Section 10.1, without any notice to the Company or any Borrowing Subsidiary or any other act by the Agent or the Lenders, the Commitments shall thereupon terminate and the Obligations shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company and the Borrowing Subsidiaries. Following the -104- 111 occurrence and during the continuance of a Default, no Lender shall be obligated to fund any Loan hereunder. (2) Following the occurrence and during the continuance of an Event of Default, the Company and the Borrowing Subsidiaries agree that the Company, the Borrowing Subsidiaries and the Agent shall, at the request of the Required Lenders, implement certain procedures with respect to the Company's and the Borrowing Subsidiaries' funding of AP Mortgages, all at the Company's sole expense. Such procedures may include, but are not limited to: (i) reducing the advance rate against AP Mortgages for purposes of determining the Mortgage Collateral Value component of the Aggregate Borrowing Base, (ii) requiring that if (A) AP Mortgages are funded with wire transfers, such wire transfers originate from accounts located at a lending office of a Lender, (B) AP Mortgages are funded from accounts which are not located at a lending office of a Lender, the financial institution which holds such account enter into an agreement with the Company or the applicable Borrowing Subsidiary (as applicable) and the Agent which shall provide that the Agent shall have exclusive dominion and control over the funds in such account, and (iii) requiring the Company and the Borrowing Subsidiaries to provide the Agent and the Lenders with such information regarding the funding of such AP Mortgages as the Required Lenders may reasonably request. The Company and the Borrowing Subsidiaries, at their expense, shall from time to time execute and deliver to the Agent or the Collateral Agent all such assignments, certificates, supplemental documents, and financing statements, and shall do all other acts or things, as the Agent may reasonably request in order to more fully implement such procedures. (3) Upon the occurrence of any Event of Default, the Agent and the Collateral Agent, on behalf of the Secured Parties, shall be entitled to all rights and remedies hereunder and under the Security Agreement and all other rights and remedies at law or in equity existing in or conferred upon the Secured Parties by other jurisdictions or other applicable law. (4) The Company and the Borrowing Subsidiaries waive any right to require the Agent, the Collateral Agent or any Lender to (i) proceed against or exhaust any of its remedies against the Company, any Borrowing Subsidiary or any other Person in any particular order, (ii) proceed against or exhaust any of the Collateral or pursue its rights and remedies as against the Collateral in any particular order or (iii) pursue any other remedy in its power. (5) The Agent on behalf of the Lenders may, but shall not be obligated to, advance any sums or do any act or thing -105- 112 necessary to uphold and enforce the lien and priority of, or the security intended to be afforded by, any Pledged Mortgage, including, without limitation, payment of delinquent taxes or assessments and insurance premiums. The Company and the Borrowing Subsidiaries shall provide any and all information required by the Agent or the Collateral Agent to administer this Agreement or collect on the Collateral. All advances, charges, costs and expenses, including reasonable attorneys fees, incurred or paid by the Agent in exercising any right, power or remedy conferred by this Agreement, or in the enforcement hereof (or by any Lender acting on instruction of the Required Lenders in the enforcement hereof), together with interest thereon at the rate per annum of two percent (2%) plus the Alternate Base Rate from the time of payment until repaid, shall become a part of the Credit Indebtedness. (6) No failure on the part of the Agent or any Lender to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Agent or any Lender of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein provided are cumulative and are not exclusive of any remedies provided by law. 10.3 Notice of Default. The Agent may, and at the direction of the Required Lenders shall, give notice to the Company under Section 10.1(d), 10.1(h) or 10.2 and shall thereupon notify all Lenders thereof. 10.4 Application of Proceeds. (a) After the occurrence of an Event of Default, the portion of the proceeds of any sale or enforcement of all or any part of the Collateral which is delivered to the Agent by the Collateral Agent pursuant to the provisions of the Security Agreement shall be applied by the Agent, after taking into account any adjustments made pursuant to Section 2.3(e): First, to the extent that any such proceeds arise from a sale of any of the Pledged Servicing, to the payment of any amounts due by the Company to any Approved Investor as a condition to the transfer of the Company's interest in any Servicing Agreements constituting Pledged Servicing pursuant to the terms of such Servicing Agreements, including without limitation all amounts described in the Acknowledgement Agreements; Second, to the extent not already paid from the Collateral proceeds by the Collateral Agent, to payment of -106- 113 all costs and expenses of such sale or enforcement, including reasonable compensation to the Agent's agents and counsel, and all expenses, liabilities and advances made or incurred by the Agent or any Lender acting on instructions of the Required Lenders in connection therewith; Third, to the extent not already paid from the Collateral proceeds by the Collateral Agent, to the payment of all costs and expenses incurred by the Collateral Agent under the Security Agreement; Fourth, to the payment of accrued and unpaid interest on the Credit Indebtedness (including the accrued and unpaid interest portion, if any, of the Approved GNMA Letter of Credit Obligations), fees due hereunder and all other unpaid Credit Indebtedness other than the principal amount of Loans and the face amount (whether drawn or undrawn) of Approved GNMA Letters of Credit, ratably according to the respective amounts owing or due each Lender or Non-Lender Balance Bank until such amounts are paid in full; Fifth, to the total unpaid principal amount of all Loans and to the unpaid face amount (whether drawn or undrawn) of Approved GNMA Letters of Credit, ratably according to the amount due each Lender (provided, however, that proceeds applicable to the undrawn face amount of Approved GNMA Letters of Credit shall be distributed in accordance with Section 10.5 below) until such amounts are paid in full; and Sixth, to the payment to the Company, or to its successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. (b) The Agent shall have absolute discretion as to the time of application of any such proceeds, moneys or balances in accordance with this Agreement. (c) If the proceeds of any such sale are insufficient to cover the costs and expenses of such sale, as aforesaid, and the payment in full of the Credit Indebtedness, the Company and each Borrowing Subsidiary shall remain liable for any deficiency. 10.5 Letter of Credit Cash Collateral Accounts. (a) Upon the Agent's receipt of any Collateral proceeds to be applied to the undrawn face amount of any Approved GNMA Letters of Credit pursuant to Section 10.4(a), a separate cash collateral account (each a "Letter of Credit Account") shall be established with the Agent for each outstanding Approved GNMA Letter of Credit. Each Letter of Credit -107- 114 Account shall be established in the name of the Company but shall be under the sole dominion and control of the Agent, for the benefit of the Lenders, and the Company shall have no interest therein. All funds deposited into the Letter of Credit Accounts from time to time shall be invested by the Agent at its discretion in certificates of deposit of First Chicago having a maturity not exceeding 30 days, and all amounts earned thereon shall also be held in the Letter of Credit Account to be disbursed in accordance with Section 10.5(b). In addition to the foregoing, the Company hereby grants to the Agent, for the benefit of the Lenders, a properly perfected security interest in and to each Letter of Credit Account and any funds that may hereafter be on deposit in such account and the proceeds thereof. (b) Upon the Agent's receipt of any Collateral proceeds to be applied to the undrawn face amount of any particular Approved GNMA Letter of Credit pursuant to Section 10.4, such proceeds shall be deposited by the Agent into the Letter of Credit Account applicable to that particular Approved GNMA Letter of Credit. Such funds shall be promptly disbursed from the applicable Letter of Credit Account to reimburse the applicable Issuing Bank for drafts drawn from time to time under the applicable Approved GNMA Letter of Credit. If an Approved GNMA Letter of Credit is drawn upon and the funds held in the Letter of Credit Account applicable to that Approved GNMA Letter of Credit are insufficient to reimburse the Issuing Bank in full for all Approved GNMA Letter of Credit Obligations applicable thereto, such unreimbursed obligations shall, for purposes of Section 10.4, thereafter be considered unpaid Loan principal due and owing to the Issuing Lender. If (i) an Approved GNMA Letter of Credit is fully drawn upon and all Approved GNMA Letter of Credit Obligations relating thereto are paid in full or (ii) an Approved GNMA Letter of Credit expires or is otherwise terminated (and thus no further Approved GNMA Letter of Credit Obligations exist with respect to such Approved GNMA Letter of Credit), then any funds then held in the Letter of Credit Account relating to such Approved GNMA Letter of Credit shall be considered Collateral proceeds which shall again be distributed to the Agent to be disbursed in accordance with Section 10.4. ARTICLE XI BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 11.1 Successors and Assigns. The terms and provisions of the Credit Documents shall be binding upon and inure to the benefit of the Company, the Borrowing Subsidiaries and the Lenders and their respective -108- 115 successors and assigns, except that neither the Company nor any Borrowing Subsidiary shall have the right to assign its rights or obligations under the Credit Documents without the consent of all the Lenders and any assignment by any Lender must be made in compliance with Section 11.3. The Agent may treat the payee of any Note as the owner thereof for all purposes hereof unless and until such payee complies with Section 11.3 in the case of an assignment thereof or, in the case of any other transfer, a written notice of the transfer is filed with the Agent. Any assignee or transferee of a Note agrees by acceptance thereof to be bound by all the terms and provisions of the Credit Documents. Any request, authority or consent of any person, who at the time of making such request or giving such authority or consent is the holder of any Note, shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. 11.2 Participations. (a) Permitted Participants; Effect. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Credit Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Credit Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the holder of any such Note for all purposes under the Credit Documents, all amounts payable by the Company or any Borrowing Subsidiary under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Company, each Borrowing Subsidiary and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Credit Documents. (b) Voting Rights. Except as otherwise expressly provided in the Credit Documents, each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Credit Documents other than any amendment, modification or waiver with respect to any Loan or Commitment in which such Participant has an interest which (i) forgives principal, interest or Fees or reduces the interest rate or Fees payable with respect to any such Loan or Commitment, (ii) postpones any date fixed for any regularly-scheduled payment of principal of, or interest on, any such Loan or Fees on any such Commitment, (iii) releases Collateral beyond -109- 116 the releases expressly provided for herein, or (iv) extends the Termination Date. (c) Benefit of Set-Off. The Company and the Borrowing Subsidiaries agree that each Participant shall be deemed to have the right of set-off provided pursuant to Section 12.10(a) in respect of its participating interest in amounts owing under the Credit Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Credit Documents, provided that each Lender shall retain the right of set-off provided in Section 12.10(a) with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of set-off provided in Section 12.10(a), agrees to share with each Lender, any amount received pursuant to the exercise of its right of set-off, such amounts to be shared in accordance with Section 12.10(b) as if each Participant were a Lender. Neither the Company nor any Borrowing Subsidiary is a party to the agreement among the Lenders and Participants set forth in the immediately preceding sentence, and such sentence may be amended without the consent of either the Company or any Borrowing Subsidiary. 11.3 Assignments. (a) Permitted Assignments. Any Lender may, with the prior written consent of Agent (which consent shall not be unreasonably withheld or delayed), in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or other entities ("Purchasers") all or any part of its rights and obligations under the Credit Documents, provided that, unless an Event of Default has occurred and is then continuing, the prior written consent of the Company to the identity of any such Purchaser shall be required, and the Company agrees that such consent shall not be unreasonably withheld or delayed, except that no consent of the Agent or the Company shall ever be required for (i) any assignment to a Person directly or indirectly controlling, controlled by or under direct or indirect common control with the assigning Lender or (ii) the pledge or assignment by a Lender of such Lender's Note and other rights under the Loan Documents to any Federal Reserve Bank in accordance with applicable law. Notwithstanding the foregoing, no assignment of Loans or Commitments which requires the consent of the Agent or the Company may be made if the assignment would result in either the assigning Lender or the Purchaser (which may be an existing Lender) holding a Commitment of less than $15,000,000; provided, however, that if (due to reductions in the Aggregate Commitment) a Lender's Commitment is less than $15,000,000, such Lender may assign -110- 117 all (but not less than all) of its Commitment in accordance with the terms of this Section notwithstanding the fact that such Commitment is less than $15,000,000. (b) Effect; Effective Date. Upon delivery to the Agent of a New/Modified Commitment Supplement in the form of Exhibit H hereto executed by the assigning Lender and the Purchaser and payment to the Agent of an assignment fee of $3,500, such assignment shall become effective on the effective date specified in such notice of assignment. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Credit Document executed by the Lenders and shall have all the rights and obligations of a Lender under the Credit Documents, to the same extent as if it were an original party hereto, and no further consent or action by the Company, the Lenders or the Agent shall be required to release the transferor Lender with respect to the percentage of the Commitments and Loans assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this Section, the transferor Lender, the Agent, the Company and the Borrowing Subsidiaries shall make appropriate arrangements so that replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments, as adjusted pursuant to such assignment. 11.4 Dissemination of Information. The Company and the Borrowing Subsidiaries authorize each Lender to disclose to any Participant or any other Person acquiring an interest in the Credit Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Company and its Subsidiaries, provided that the transferor shall obtain from any such Transferee or prospective Transferee, prior to disclosing any such information, a confidentiality agreement executed by the Transferee or prospective Transferee agreeing to be bound by any confidentiality requirements with respect to such information which are imposed upon the Lenders under the terms of the Credit Documents. 11.5 Tax Treatment. If any interest in any Credit Document is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with all -111- 118 applicable provisions of the Code with respect to withholding and other tax matters. ARTICLE XII MISCELLANEOUS 12.1 Immediately Available Funds. All payments and other transfers of funds under this Agreement shall be made in funds immediately available at the place of payment unless the recipient thereof shall otherwise agree. 12.2 Notices. Except where instructions or notices are expressly authorized elsewhere in this Agreement to be given by telephone or by other means of transmission, all instructions, notices and other communications to be given to any party hereto shall be in writing and shall be personally delivered or sent by certified mail, postage prepaid, private delivery service or by facsimile, and shall be deemed to be given for purposes of this Agreement on the day (or at the time of day, if applicable) when actually received by the intended party at its address or facsimile or telephone number as set forth below (or as such party may specify to the other parties in writing). Any requirement that notice be given to any person under this Agreement shall be deemed to require notice to the Agent, the Company and each Lender, unless otherwise expressly provided herein. Whenever the giving of notice by telephone is permitted by this Agreement, such notice shall be confirmed in writing within three days. The addresses for notices to the parties are as set forth below their signatures on the signature pages hereto or on any assignment. 12.3 Survival and Termination of Agreement. All covenants, agreements, representations and warranties made herein and in the certificates and other documents delivered pursuant hereto shall survive the funding of the Notes and shall continue in full force and effect to the Termination Date or so long as any amount payable to the Lenders in connection with this Agreement is unpaid, whichever is later, at which time this Agreement shall terminate, it being expressly understood that the obligations of the Company under Sections 3.1, 3.3 and 7.8 shall survive any termination of this Agreement. Whenever in this Agreement any party is referred to, such reference shall be deemed to include the successors and assigns of such party, but no assignment or transfer (by operation of law or otherwise) of this Agreement by the Company -112- 119 or any Borrowing Subsidiary or any of their rights or duties hereunder may be made without the prior written consent of all of the Lenders; and all covenants, promises and agreements by or on behalf of the Company or any Borrowing Subsidiary which are contained in this Agreement shall inure to the benefit of the successors and assigns of the Lenders. 12.4 Fees and Expenses of the Lenders. The Company will pay (a) all reasonable out-of-pocket costs and expenses incurred by the Agent or by the Collateral Agent (including the fees, out-of-pocket expenses and other reasonable expenses of counsel to the Agent or the Collateral Agent) in connection with the preparation, execution and delivery of this Agreement, the Notes, the Security Agreement and any other agreements or documents referred to herein or therein and any amendments thereto, and (b) all reasonable out-of-pocket costs and expenses incurred by the Agent, the Collateral Agent and the Lenders (including the fees, out-of-pocket expenses and other reasonable expenses of counsel to the Lenders) in connection with the enforcement and protection of the rights of the Lenders under this Agreement, the Notes, the Security Agreement or any other agreement or document referred to herein or therein. 12.5 Applicable Law. This Agreement shall be construed in accordance with and governed by the law of the State of Illinois. 12.6 Modification of Agreement. Except for certain changes in a Lender's Commitment or admission of a new Lender which (pursuant to Section 2.1) do not require any consents or approvals from the other Lenders but which require a New/Modified Commitment Supplement executed by the Agent, the Company, the Borrowing Subsidiaries and the Lender(s) being added or modifying their Commitment, no provisions of this Agreement may be amended or waived unless such amendment or waiver is in writing and is signed by the Company, and the Agent if the rights or duties of the Agent are affected thereby, and (1) each Lender if such amendment or waiver (i) reduces or forgives any principal of any unpaid Loan or any interest thereon or any Fees due to such Lender hereunder; or (ii) postpones the date fixed for any payment of principal of or interest on any unpaid Loan or any Fees payable to such Lenders; or -113- 120 (iii) changes the amount of payment of principal of or interest on any unpaid Loan or any Fees payable to the Lenders hereunder; or (iv) changes or waives any of the conditions precedent to the initial Advance hereunder or any subsequent Advance; or (v) changes the amount of any such Lender's Commitment, except as expressly provided for herein; or (vi) would amend or waive the method of calculating the Aggregate Borrowing Base; or (vii) would amend or waive the provisions of Section 2.14; or (viii) extends the Termination Date; or (ix) releases any Collateral beyond the releases expressly provided for herein or in the Security Agreement; or (x) changes the definitions of Positive Security Event, Negative Security Event or Positive Security Conditions or waives compliance with any Positive Security Condition; or (xi) changes or waives any restriction on the Company's or any Borrowing Subsidiary's ability to assign its rights or obligations under any of the Credit Documents; or (xii) changes or waives any funding requirement, including, without limitation, any Lending Sublimits; or (xiii) changes or waives any yield protection; or (xiv) changes or waives any provision herein regarding the indemnification of the Agent, the Collateral Agent or such Lender; or (xv) changes the definition of Required Lenders or modifies any requirement for consent by all of the Lenders; or (xvi) changes or waives any provision herein regarding the allocation among the Lenders of any payments or proceeds received by the Agent hereunder; or (2) the Required Lenders in the case of all other waivers or amendments. -114- 121 12.7 Non-Waiver of Rights by the Lenders. Neither any failure nor any delay on the part of the Agent or the Lenders in exercising any right, power or privilege hereunder or under the Security Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 12.8 Dealings with the Company and its Affiliates. The Lenders and their Affiliates may accept deposits from, extend credit to and generally engage in any kind of banking, trust or other business with the Company and any of its Affiliates regardless of the capacity of the Lenders hereunder. 12.9 Changes in GAAP. The parties agree that if there are any changes in GAAP in the future which result in material changes to the presentation of the Company's financial condition in accordance with GAAP in such a way as to alter the material intent of this Agreement, then the parties will negotiate in good faith to attempt to agree on such modifications to this Agreement as may be necessary to preserve the original intent of this Agreement in light of such revised GAAP rules, provided that unless and until a written agreement is entered into by all parties hereto, no changes to this Agreement shall be effective and all calculations required to be made in accordance with GAAP hereunder shall continue to be made as if GAAP had not changed. 12.10 Set-Off. (a) If an Event of Default shall have occurred, each Lender shall have the right, at any time and from time to time without notice to the Company or any Borrowing Subsidiary, any such notice being hereby expressly waived, to set-off and to appropriate or apply any and all deposits of money or property or any other indebtedness at any time held or owing by such Lender to or for the credit or the account of the Company or any Borrowing Subsidiary against and on account of all outstanding Credit Indebtedness and all Credit Indebtedness which from time to time may become due hereunder and all other obligations and liabilities of the Company or any Borrowing Subsidiary under this Agreement, regardless of the adequacy of any Collateral and irrespective of whether or not such Lender shall have made any demand hereunder and whether or not said obligations and liabilities shall have matured. (b) Each Lender agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive -115- 122 payment of a proportion of the aggregate amount of principal, interest or Fees due with respect to this Agreement and the Notes held by it which is greater than the proportion received by any other Lender in respect of the aggregate amount of principal, interest or Fees due with respect to this Agreement and the Notes held by such other Lender, the Lender receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Lenders and such other adjustments shall be made, as may be required so that all such payments of principal, interest or Fees shall be shared by the Lenders hereunder pro rata according to their respective shares of the Credit Indebtedness. Each Lender agrees to exercise any and all rights of set-off, counterclaim or bankers' lien relating to the Credit Indebtedness first fully against the Credit Indebtedness and only then to any other Debt of the Company or any Borrowing Subsidiary to such Lender. Neither the Company nor any Borrowing Subsidiary is a party to the agreement among the Lenders set forth in this Section 12.10(b), and such Section may be amended without the consent of either the Company or any Borrowing Subsidiary. (c) The Company and the Borrowing Subsidiaries agree that funds received and held by the Company or any Borrowing Subsidiary as custodian for FNMA, GNMA or other mortgage pools which are deposited into accounts with any Lender shall be clearly identified as custodial accounts, and each Lender agrees that each provision of the foregoing paragraphs of this Section 12.10 shall not apply to such custodial accounts. Neither the Company nor any Borrowing Subsidiary shall deposit any of its general funds in any custodial accounts or otherwise commingle funds in any custodial accounts. 12.11 Counterparts. This Agreement may be executed in counterparts which, taken together, shall constitute a single document. 12.12 Severability. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 12.13 Headings. Section headings in the Credit Documents are for convenience of reference only and shall not govern the interpretation of any of the provisions of the Credit Documents. -116- 123 12.14 Entire Agreement. The Credit Documents embody the entire agreement and understanding among the Company, the Borrowing Subsidiaries, the Agent and the Lenders and supersede all prior agreements and understandings among the Company, the Borrowing Subsidiaries, the Agent and the Lenders relating to the subject matter thereof. 12.15 Limitation on Recourse to Borrowing Subsidiaries. Each Borrowing Subsidiary and the Company shall be jointly and severally liable for the payment of the Obligations; provided, however, that recourse to any particular Borrowing Subsidiary hereunder shall be limited to (i) such Borrowing Subsidiary's interest in the Collateral pledged by such Borrowing Subsidiary to the Agent or the Collateral Agent under the Credit Documents and the proceeds thereof, plus (ii) an amount equal to the capital investment by the Company in such Borrowing Subsidiary, plus (iii) an amount equal to the total of all Debt owed by such Borrowing Subsidiary to the Company. 12.16 Consent of Jurisdiction. THE COMPANY AND EACH BORROWING SUBSIDIARY EACH HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY CREDIT DOCUMENTS AND THE COMPANY AND EACH BORROWING SUBSIDIARY HEREBY EACH IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE COMPANY OR ANY BORROWING SUBSIDIARY IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE COMPANY OR ANY BORROWING SUBSIDIARY AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY CREDIT DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS. -117- 124 12.17 Waiver of Jury Trial. THE COMPANY, EACH BORROWING SUBSIDIARY, THE AGENT AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY CREDIT DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. IN WITNESS WHEREOF, the Company, the Borrowing Subsidiaries and the Lenders have caused this Agreement to be duly executed by their duly authorized officers, all as of the day and year first above written: SOURCE ONE MORTGAGE SERVICES CORPORATION By:________________________________ Name: Michael C. Allemang Title: Executive Vice President and Chief Financial Officer Address for Notices: 27555 Farmington Road Farmington Hills, MI 48334-3357 Attn: Chief Financial Officer Telephone No.: (810) 488-8639 Facsimile No.: (810) 488-7300 and Attn: Vice President/Treasury Telephone No.: (810) 488-7338 Facsimile No.: (810) 488-7812 -118- 125 THE MORTGAGE AUTHORITY, INC. By:________________________________ Name: Larry N. Ciofu Title: Vice President/Treasury Address for Notices: 27555 Farmington Road Farmington Hills, MI 48334-3357 Attn: Controller Telephone No.: (810) 488-7338 Facsimile No.: (810) 488-7812 CENTRAL PACIFIC MORTGAGE COMPANY By:________________________________ Name: John Cassell Title: Chief Financial Officer Address for Notices: 5750 Sunrise Boulevard Citrus Heights, CA 95610 Attn: Chief Financial Officer Telephone No.: (916) 537-2603 Facsimile No.: (916) 966-7327 -119- 126 THE FIRST NATIONAL BANK OF CHICAGO, as Agent By:________________________________ Name:___________________________ Title:__________________________ Address for Notices Regarding Fundings: One First National Plaza Chicago, Illinois 60670 Attn: Denise Lee Telephone No.: (312) 732-6455 Facsimile No.: (312) 732-3852 Address for Other Notices: One First National Plaza Chicago, Illinois 60670 Attn: William A. Sholten, III First Vice President Telephone No.: (312) 732-4600 Facsimile No.: (312) 732-6222 THE FIRST NATIONAL BANK OF CHICAGO By:________________________________ Name:___________________________ Title:__________________________ Address for Notices: One First National Plaza Chicago, Illinois 60670 Attn: William A. Sholten, III First Vice President Telephone No.: (312) 732-4600 Facsimile No.: (312) 732-6222 -120- 127 ABN AMRO BANK, N.V. By:________________________________ Name:___________________________ Title:__________________________ By:________________________________ Name:___________________________ Title:__________________________ Address for Notices: 135 S. LaSalle Street Suite 625 Chicago, Illinois 60603 Attn: David Shapiro, Vice President Telephone No.: (312) 904-2654 Facsimile No.: (312) 606-8425 BANK OF AMERICA NT & SA By:_________________________________ Thomas A. Pizurie Vice President Address for Notices: 24022 Calle de la Plata, Suite 405 Laguna Hills, California 92653 Attn: Thomas A. Pizurie, Vice President Telephone No.: (714) 951-4169 Facsimile No.: (714) 951-4046 -121- 128 THE BANK OF NEW YORK By:________________________________ Patricia M. Dominus Vice President Address for Notices: One Wall Street, 17th Floor New York City, New York 10286 Attn: Patricia M. Dominus, Vice President Telephone No.: (212) 635-6467 Facsimile No.: (212) 635-6468 THE BANK OF TOKYO-MITSUBISHI, LTD. By:_________________________________ Noburu Kobayashi Deputy General Manager Address for Notices: 227 West Monroe, Suite 2300 Chicago, Illinois 60606 Attn: Michael Kempel Telephone No.: (312) 696-4682 Facsimile No.: (312) 696-4535 -122- 129 BANKERS TRUST COMPANY By:________________________________ John O'Rourke Vice President Address for Notices: 280 Park Avenue, 23W New York, New York 10017 Attn: John O'Rourke, Vice President Telephone No.: (212) 454-3760 Facsimile No.: (212) 454-3821 BANQUE PARIBAS By:_________________________________ Name:____________________________ Title:___________________________ By:_________________________________ Name:____________________________ Title:___________________________ Address for Notices: The Equitable Tower 787 Seventh Avenue New York, New York 10019 Attn: Victor Brown Telephone No.: (212) 841-2117 Facsimile No.: (212) 841-2689 -123- 130 BARCLAYS BANK PLC By:________________________________ Tina Swartz Associate Director Address for Notices: 222 Broadway, 12th Floor New York, New York 10038 Attn: Tina Swartz, Associate Director Telephone No.: (212) 412-7637 Facsimile No.: (212) 412-5610 CAISSE NATIONALE DE CREDIT AGRICOLE By:_________________________________ David Bouhl First Vice President Head of Corporate Banking Chicago Address for Notices: 55 E. Monroe, Suite 4700 Chicago, Illinois 60603-5702 Attn: Richard Drennan, Vice President Telephone No.: (312) 917-7441 Facsimile No.: (312) 372-3724 -124- 131 CIBC, INC. By:________________________________ Stephen D. Reynolds Director CIBC Wood Gundy Securities Corp., As Agent for CIBC, Inc. Address for Notices: 425 Lexington Avenue, 8th Floor New York, New York 10017 Attn: Stephen D. Reynolds, Director CIBC Wood Gundy Securities Corp., As Agent for CIBC, Inc. Telephone No.: (212) 856-3566 Facsimile No.: (212) 856-3613 COMERICA BANK By:________________________________ James R. Grossett Vice President Address for Notices: One Detroit Center 500 Woodward Avenue, 9th Floor Detroit, Michigan 48226-3265 Attn: James R. Grossett, Vice President Telephone No.: (313) 222-5502 Facsimile No.: (313) 222-3776 -125- 132 CREDIT LYONNAIS NEW YORK BRANCH By:___________________________ Renaud d'Herbes Senior Vice President Address for Notices: 1301 Avenue of the Americas New York, New York 10019 Attn: Kathleen Deacy Bowers, Asst. Vice President Telephone No.: (212) 261-7367 Facsimile No.: (212) 261-3401 CREDIT SUISSE By:________________________________ Name:___________________________ Title:__________________________ By:________________________________ Name:___________________________ Title:__________________________ Address for Notices: 12 East 49th Street, 41st Floor New York, New York 10017 Attn: Hazel Leslie Telephone No.: (212) 238-5218 Facsimile No.: (212) 238-5246 and Attn: Mr. Kristinn Kristinsson Telephone No.: (212) 238-5206 Facsimile No.: (212) 238-5245 Copies to: 227 W. Monroe Street, 40th Floor Chicago, Illinois 60606 Attn: John Bordes Telephone No.: (312) 630-0086 Facsimile No.: (312) 630-0359 -126- 133 THE DAI-ICHI KANGYO BANK, LTD., CHICAGO BRANCH By:________________________________ Name:___________________________ Title:__________________________ Address for Notices: 10 South Wacker Drive, 26th Floor Chicago, Illinois 60606 Attn: Michael D. Pleasants, Assistant Vice President Telephone No.: (312) 715-6361 Facsimile No.: (312) 876-2011 FLEET BANK N.A. By:_________________________________ Robert Pierson Vice President Address for Notices: 175 Water Street, 28th Floor New York, New York 10038 Attn: Robert Pierson Telephone No.: (212) 602-3631 Facsimile No.: (212) 602-3704 THE FUJI BANK, LIMITED By:_________________________________ Peter L. Chinnici Joint General Manager Address for Notices: 225 West Wacker Drive, Suite 2000 Chicago, Illinois 60606 Attn: Philip Langheim, Vice President Telephone No.: (312) 621-0518 Facsimile No.: (312) 621-0539 -127- 134 GUARANTY FEDERAL BANK, F.S.B. By:_________________________________ Gregory Jackson Vice President Address for Notices: 8333 Douglas Avenue Dallas, Texas 75225 Attn: Chad Patton, Banking Officer Telephone No.: (214) 360-1675 Facsimile No.: (214) 360-1660 THE LONG-TERM CREDIT BANK OF JAPAN, LTD. By:_________________________________ Name:____________________________ Title:___________________________ Address for Notices: 190 S. LaSalle Street, Suite 800 Chicago, Illinois 60603 Attn: Mark Thompson Telephone No.: (312) 704-5459 Facsimile No.: (312) 704-8505 or Attn: Scott Place Telephone No.: (312) 704-5499 Facsimile No.: (312) 704-8505 -128- 135 THE MITSUBISHI TRUST AND BANKING CORPORATION, LOS ANGELES AGENCY By:_________________________________ Name:____________________________ Title:___________________________ Address for Notices: 801 South Figueroa Street Suite 500 Los Angeles, California 90017 Attn: Troy S. Akagi, Vice President for Credit Telephone: (213) 896-4653 Facsimile: (213) 687-4631 and Attn: Yvonne Yoon, Operations Telephone: (213) 896-4737 Facsimile: (213) 629-2571 NATIONAL CITY BANK OF KENTUCKY By:________________________________ Gary Sieveking Vice President Address for Notices: 421 W. Market Street Louisville, Kentucky 40202 Attn: Gary Sieveking, Vice President Telephone No.: (502) 581-7660 Facsimile No.: (502) 581-4154 -129- 136 PNC BANK, NATIONAL ASSOCIATION By:________________________________ Peter Stack Assistant Vice President Address for Notices: 500 West Madison, Suite 3140 Chicago, Illinois 60606 Attn: Peter Stack, Assistant Vice President Telephone No.: (312) 906-3426 Facsimile No.: (312) 906-3420 THE SANWA BANK, LIMITED, CHICAGO BRANCH By:_________________________________ Richard H. Ault Vice President Address for Notices: 10 South Wacker Drive, 31st Floor Chicago, Illinois 60606 Attn: Michael McBride, Credit Analyst Telephone No.: (312) 368-3048 Facsimile No.: (312) 346-6677 THE SUMITOMO BANK, LTD. By:_________________________________ Hiroyuki Iwami Joint General Manager Address for Notices: 233 South Wacker Drive, Suite 4800 Chicago, Illinois 60606 Attn: James Beckett, Vice President Telephone No.: (312) 876-6454 Facsimile No.: (312) 876-6436 -130- 137 WELLS FARGO BANK, NA By:_________________________________ Name:____________________________ Title:___________________________ By:_________________________________ Name:____________________________ Title:___________________________ Address for Notices: 707 Wilshire, 16 Floor Los Angeles, California 90017 Attn: Pat McCormick, Senior Vice President Telephone No.: (213) 614-4933 Facsimile No.: (213) 614-2569 and Attn: Jonathan David Telephone No.: (213) 614-4128 Facsimile No.: (213) 614-2569 WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH By:________________________________ Name:___________________________ Title:__________________________ By:________________________________ Name:___________________________ Title:__________________________ Address for Notices: 1211 Avenue of the Americas New York, New York 10036 Attn: Kenneth R. Crespo, Vice President Telephone No.: (212) 852-6044 Facsimile No.: (212) 852-6148 -131- 138 SCHEDULE 1 APPLICABLE MARGIN
========================================================================================================================== Ratings: S&P and Moody's At Least A- or AT LEAST BBB+ At Least BBB At Least BBB- Below either A3* OR Baa1* or Baa2* and Baa3 BBB- or Baa3 - -------------------------------------------------------------------------------------------------------------------------- Applicable Margin 0.35% 0.40% 0.45% 0.50% 0.75% ==========================================================================================================================
The Applicable Margin for each Rate Option shall be the applicable percentage per annum set forth above, which is based on the Company's long term unsecured debt ratings, changing as and when such ratings change. Each rating classification sets forth the S&P rating and the Moody's rating, respectively. For the three columns noted with an asterisk (*), if on any day the ratings of S&P and Moody's are not both at the required level, the higher rating will be the applicable rating for purposes of determining the classification unless the lower rating is more than one rating category below the minimum rating for such rating agency under such column, in which event the higher rating will be disregarded, the lower rating will be deemed to have been one rating category higher than the actual reported lower rating, and the column applicable using such deemed lower rating shall apply. If for any reason the Company's unsecured long term debt is not rated by both S&P and Moody's, the column headed "Below either BBB- or Baa3" shall be used. -132- 139 SCHEDULE 2 FEE RATES
=========================================================================================================================== Ratings: S&P and Moody's At Least A- or AT LEAST BBB+ At Least BBB At Least BBB- Below either A3* OR Baa1* or Baa2* and Baa3 BBB- or Baa3 - --------------------------------------------------------------------------------------------------------------------------- Facility Fee Rate .125% .15% .175% .20% .25% - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Servicing Collateral .25% .275% .30% .35% .50% Fee Rate ===========================================================================================================================
The various Fee Rates for this Facility shall be the applicable percentage per annum set forth above, which is based on the Company's long term unsecured debt ratings, changing as and when such ratings change. Each rating classification sets forth the S&P rating and the Moody's rating, respectively. For the three columns noted with an asterisk (*), if on any day the ratings of S&P and Moody's are not both at the required level, the higher rating will be the applicable rating for purposes of determining the classification unless the lower rating is more than one rating category below the minimum rating for such rating agency under such column, in which event the higher rating will be disregarded, the lower rating will be deemed to have been one rating category higher than the actual reported lower rating, and another column will be applicable using such deemed lower rating. If for any reason the Company's unsecured long term debt is not rated by both S&P and Moody's, the column headed "Below either BBB- or Baa3" shall be used. -133- 140 EXHIBIT A LIST OF APPROVED INVESTORS -134- 141 EXHIBIT B FORM OF BORROWING BASE CERTIFICATE Dated as of: _______________ Reference is made to that certain Second Amended and Restated Revolving Credit Agreement among the Company, the Borrowing Subsidiaries, The First National Bank of Chicago, individually and as administrative agent, and the lenders named therein, dated as of November 12, 1996 (the "Credit Agreement"). Capitalized terms not otherwise defined herein are used with the same meanings as in the Credit Agreement. 1. AGGREGATE BORROWING BASE: Eligible Mortgage Loans (Mortgage Collateral Value): Eligible Delivered Mortgages $______________ Eligible AP Mortgages $______________ Eligible Pledged Securities (MBS Value) $______________ Total Pledged Items $______________ Percentage Factor 98% (A) AGGREGATE BORROWING BASE FROM PLEDGED ITEMS $______________ Eligible Repurchased Agency Loans and Receivables $______________ Percentage Factor 90% (B) AGGREGATE BORROWING BASE FROM REPURCHASED AGENCY LOANS AND RECEIVABLES $______________
-135- 142 (C) AGGREGATE BORROWING BASE FROM ELIGIBLE PLEDGED SERVICING(1) $______________ Eligible Servicing Sale Receivables $______________ Percentage Factor 75% (D) AGGREGATE BORROWING BASE FROM ELIGIBLE SERVICING SALE RECEIVABLES $______________ (E) BALANCE IN SETTLEMENT ACCOUNT $______________ (F) CASH AND CASH EQUIVALENTS $______________ SUM OF (A) - (F) ABOVE $______________ Reconciling Items: Timing Difference $______________ Loan Detail Difference $______________ AGGREGATE BORROWING BASE $______________ Credit Requirement: Facility Advances $______________ Face Amount of Outstanding Ratable Medium Term Notes $______________ Outstanding CPNs $______________ Approved GNMA Letter of Credit Obligations $______________ SUM OF CREDIT REQUIREMENT $______________ EXCESS OF AGGREGATE BORROWING BASE OVER CREDIT REQUIREMENT $______________
2. CERTIFICATION: To the best of the knowledge and belief (after reasonable investigation) of the officer of the Company executing this Certificate, the Company hereby certifies to The First National Bank of Chicago for the benefit of lenders under the Credit Agreement that: (a) the above information is, and the computations are accurate and complete and in accordance with the requirements of the Credit Agreement, and (b) as __________________________________ (1) Based on either market value or principal balance of loans serviced as described in Section 4.6(h) of the Credit Agreement -136- 143 of the date hereof, (1) all representations and warranties of the Company set forth in the Credit Agreement are accurate and complete, (2) there does not exist an Event of Default under the Credit Agreement, and (3) the Company has given written notice to The First National Bank of Chicago of any Default which now exists under the Credit Agreement. IN WITNESS WHEREOF, the Company has caused this Borrowing Base Certificate to be executed and delivered by its duly authorized officer this ___ day of __________, 199_. SOURCE ONE MORTGAGE SERVICES CORPORATION By:_____________________________________ Name:___________________________________ Title:__________________________________ -137- 144 EXHIBIT C COMMITMENTS AND COMMITMENT PERCENTAGES
==================================================================================================================== Commitment Commitment Adj. Commit. Bank Name Amount Percentage Percentage - -------------------------------------------------------------------------------------------------------------------- First Chicago SWING $10,000,000 - -------------------------------------------------------------------------------------------------------------------- 1. First Chicago $32,500,000 5.66666667% 4.391891892% - -------------------------------------------------------------------------------------------------------------------- 2. Bank of New York $40,000,000 5.33333333% 5.405405405% - -------------------------------------------------------------------------------------------------------------------- 3. Bankers Trust $40,000,000 5.33333333% 5.405405405% - -------------------------------------------------------------------------------------------------------------------- 4. Comerica $40,000,000 5.33333333% 5.405405405% - -------------------------------------------------------------------------------------------------------------------- 5. Credit Lyonnais $40,000,000 5.33333333% 5.405405405% - -------------------------------------------------------------------------------------------------------------------- 6. Credit Suisse $40,000,000 5.33333333% 5.405405405% - -------------------------------------------------------------------------------------------------------------------- 7. PNC $40,000,000 5.33333333% 5.405405405% - -------------------------------------------------------------------------------------------------------------------- 8. Westdeutsche $40,000,000 5.33333333% 5.405405405% - -------------------------------------------------------------------------------------------------------------------- 9. ABN-AMRO $27,000,000 3.60000000% 3.648648649% - -------------------------------------------------------------------------------------------------------------------- 10. Bank of America $27,000,000 3.60000000% 3.648648649% - -------------------------------------------------------------------------------------------------------------------- 11. Banque Paribas $27,000,000 3.60000000% 3.648648649% - -------------------------------------------------------------------------------------------------------------------- 12. Barclays $27,000,000 3.60000000% 3.648648649% - -------------------------------------------------------------------------------------------------------------------- 13. Fleet Bank $27,000,000 3.60000000% 3.648648649% - -------------------------------------------------------------------------------------------------------------------- 14. Guaranty $27,000,000 3.60000000% 3.648648649% - -------------------------------------------------------------------------------------------------------------------- 15. National City $27,000,000 3.60000000% 3.648648649% - -------------------------------------------------------------------------------------------------------------------- 16. Bank of Tokyo $27,000,000 3.60000000% 3.648648649% - -------------------------------------------------------------------------------------------------------------------- 17. CIBC $27,000,000 3.60000000% 3.648648649% - -------------------------------------------------------------------------------------------------------------------- 18. Long Term $27,000,000 3.60000000% 3.648648649% - -------------------------------------------------------------------------------------------------------------------- 19. Credit Agricole $22,500,000 3.00000000% 3.040540541% - -------------------------------------------------------------------------------------------------------------------- 20. Fuji $22,500,000 3.00000000% 3.040540541% - -------------------------------------------------------------------------------------------------------------------- 21. Mitsubishi $22,500,000 3.00000000% 3.040540541% - -------------------------------------------------------------------------------------------------------------------- 22. Sumitomo $22,500,000 3.00000000% 3.040540541% - -------------------------------------------------------------------------------------------------------------------- 23. DKB $22,500,000 3.00000000% 3.040540541% - -------------------------------------------------------------------------------------------------------------------- 24. Sanwa $22,500,000 3.00000000% 3.040540541% - -------------------------------------------------------------------------------------------------------------------- 25. Wells Fargo $22,500,000 3.00000000% 3.040540541% - -------------------------------------------------------------------------------------------------------------------- Total $750,000,000 100.000000% 100.000000% ====================================================================================================================
-138- 145 EXHIBIT D SECURITY AGREEMENT -139- 146 EXHIBIT E-1 FORM OF AMENDED AND RESTATED NOTE (FOR LOANS OTHER THAN DISCOUNT LOANS AND BID LOANS) Date of Note: November 12, 1996 FOR VALUE RECEIVED, the undersigned (the "Makers") do hereby jointly and severally covenant and promise to pay to the order of ____________________ (the "Lender") or its successors or assigns (collectively, the "Payee"), on the Termination Date, the aggregate unpaid principal amount of all Loans made by Lender pursuant to the Credit Agreement other than Discount Loans and Bid Loans held from time to time by the Lender (the "Principal Amount") and to pay interest on the unpaid Principal Amount at the applicable interest rate or rates per annum determined in accordance with the terms of the Credit Agreement. All payments of principal of and interest on this Note shall be made in legal tender of the United States. All payments of principal of and interest on this Note shall be made in immediately available funds at the principal office of The First National Bank of Chicago (the "Agent"), One First National Plaza, Chicago, Illinois. Interest on this Note shall be computed on the basis of actual number of days elapsed in a 360 day year. This Note is one of the Notes referred to in the Second Amended and Restated Revolving Credit Agreement, bearing even date herewith, among the Company, the Borrowing Subsidiaries, the Lender and the other lenders listed on the signature pages thereof and the Agent (as the same may be amended and supplemented from time to time, the "Credit Agreement") and is entitled to the benefits thereof. Reference is made to the Credit Agreement for (i) provisions for the prepayment hereof, (ii) acceleration of the maturity hereof, (iii) the obligation of the Makers to pay certain expenses (including attorney's fees) incurred in the enforcement thereof and hereof and (iv) a description of the security for this Note. Capitalized terms used herein without definition have the respective meanings ascribed to them in the Credit Agreement. All Loans made by the Lender and all repayments of the principal thereof shall be recorded by the Lender in its books and records; provided, however, that the Lender's failure to so record or any error in such recording shall not affect the Makers' liability hereunder or under the Credit Agreement. Upon any transfer hereof, the Lender shall endorse on the schedule attached hereto or on a schedule accompanying the transfer of this Note, the unpaid principal balance of this Note. -140- 147 If an Event of Default shall occur under the Credit Agreement, the unpaid Principal Amount hereunder shall become due and payable (i) automatically in the case of any of the Events of Default specified in paragraph (k) of Section 10.1 of the Credit Agreement, or (ii) at the option of the Required Lenders with respect to all other Events of Default and shall bear interest at the rate provided for in Section 2.7 of the Credit Agreement from and after such date. The foregoing provision shall not be construed as a waiver by the Payee of its right to pursue any other remedies available to it under this Note, the Credit Agreement or any other instrument evidencing or securing the Principal Amount. This Note may not be changed orally but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Written notices required to be given hereunder shall be given as provided in the Credit Agreement to the Payee and Makers at the respective addresses specified or provided for therein. Should the indebtedness evidenced by this Note or any part thereof be collected at law or in equity, or in bankruptcy, receivership or any other court proceeding (whether at the trial or appellate level), or should this Note be placed in the hands of attorneys for collection upon default, the Makers agree to pay, in addition to the principal, interest and other sums due and payable hereon, all costs of collecting or attempting to collect on this Note, including reasonable attorneys' fees and expenses. Notwithstanding the foregoing, recourse to any particular Borrowing Subsidiary hereunder shall be limited to (i) such Borrowing Subsidiary's interest in the Collateral pledged by such Borrowing Subsidiary to the Agent or the Collateral Agent under the Credit Documents and the proceeds thereof plus (ii) an amount equal to the capital investment by the Company in such Borrowing Subsidiary, plus (iii) an amount equal to the total of all Debt owed by such Borrowing Subsidiary to the Company. Anything herein to the contrary notwithstanding, the obligations of the Makers under this Note shall be subject to the limitation that payments of interest shall not be required to the extent that receipt of any such payment by the Payee would be contrary to provisions of law applicable to Payee which limit the maximum rate of interest that may be charged or collected by Payee. The undersigned and all endorsers, guarantors and sureties of this Note and all other persons liable or to become liable on this Note severally waive presentment for payment, demand, notice of demand and of dishonor and nonpayment of this Note, notice of intention to accelerate the maturity of this Note, notice of -141- 148 acceleration of the maturity of this Note, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party, and agree to all renewals, extensions, modifications, partial payments, releases or substitutions of security, in whole or in part, with or without notice, before or after maturity. Notwithstanding the foregoing paragraphs and all other provisions of this Note and the Credit Agreement, none of the terms and provisions of this Note or the Credit Agreement shall ever be construed to create a contract to pay to the Payee, for the use, forbearance or detention of money, interest in excess of the maximum amount of interest permitted to be charged by the Payee to the undersigned under applicable state or federal law from time to time in effect, and the undersigned shall never be required to pay interest in excess of such maximum amount. If, for any reason interest is paid hereon in excess of such maximum amount, then promptly upon any determination that such excess has been paid the Payee will, at its option, either refund such excess to the undersigned or apply such excess to the principal owing hereunder. This Note is to be construed and enforced in accordance with the laws of the State of Illinois. IN WITNESS WHEREOF, Makers have executed and delivered this Note on the day and year first above written. SOURCE ONE MORTGAGE SERVICES CORPORATION By:________________________________ Name: Michael C. Allemang Title: Executive Vice President and Chief Financial Officer Address: 27555 Farmington Road Farmington Hills, MI 48334-3357 Attn: Chief Financial Officer Telephone No.: (810) 488-8639 Facsimile No.: (810) 488-7300 and Attn: Vice President/Treasury Telephone No.: (810) 488-7338 Facsimile No.: (810) 488-7812 -142- 149 THE MORTGAGE AUTHORITY, INC. By:________________________________ Name: Larry N. Ciofu Title: Chief Financial Officer Address: 27555 Farmington Road Farmington Hills, MI 48334-3357 Attn: Controller Telephone No.: (810) 488-7338 Facsimile No.: (810) 488-7812 CENTRAL PACIFIC MORTGAGE COMPANY By:________________________________ Name: John Cassell Title: Chief Financial Officer Address: 5750 Sunrise Boulevard Citrus Heights, CA 95610 Attn: Chief Financial Officer Telephone No.: (916) 537-2603 Facsimile No.: (916) 966-7327 -143- 150 PAYMENTS OF PRINCIPAL Unpaid Principal Notation Date Balance Made by - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- -144- 151 EXHIBIT E-2 FORM OF AMENDED AND RESTATED DISCOUNT NOTE Date of Note: November 12, 1996 FOR VALUE RECEIVED, the undersigned (the "Makers") do hereby jointly and severally covenant and promise to pay to the order of ____________________ (the "Lender") or its successors or assigns (collectively, the "Payee") the unpaid principal amount of each Discount Loan made and retained by the Lender (if the holder hereof is the Balance Bank initially making such discount Loan) or, in all other cases, made by a Balance Bank and purchased by the holder hereof (or its predecessor in interest) under the Credit Agreement (the "Principal Amount"), on the last day of the Discount Loan Period applicable to each such Discount Loan with a final payment of any such amounts not previously due on the Termination Date. Each Discount Loan evidenced by this Note was funded to the Company at a discount as provided in the Credit Agreement; accordingly, the unpaid principal amount of each Discount Loan evidenced by this Note will bear no interest hereunder until the last day of the Discount Loan Period applicable thereto, and if such unpaid principal amount of such Discount Loan is not paid in full on such day, such unpaid principal amount shall from and after such day bear interest at the rate of interest set forth in Section 2.7 of the Credit Agreement. All payments of principal of and interest, if any, on this Note shall be made in legal tender of the United States. All payments of principal of and interest on this Note shall be made in immediately available funds at the principal office of The First National Bank of Chicago (the "Agent"), One First National Plaza, Chicago, Illinois. Interest on this Note, if any, shall accrue, shall be computed on the basis of actual number of days elapsed in a 360 day year. This Note is one of the Discount Notes referred to in the Second Amended and Restated Revolving Credit Agreement, bearing even date herewith, among the Company, the Borrowing Subsidiaries, the Lender and the other lenders listed on the signature pages thereof and the Agent (as the same may be amended and supplemented from time to time, the "Credit Agreement") and is entitled to the benefits thereof. Reference is made to the Credit Agreement for (i) provisions for the prepayment hereof, (ii) acceleration of the maturity hereof, (iii) the obligation of the Makers to pay certain expenses (including attorney's fees) incurred in the enforcement thereof and hereof and (iv) a -145- 152 description of the security for this Note. Capitalized terms used herein without definition have the respective meanings ascribed to them in the Credit Agreement. All Discount Loans made by the Lender and all repayments of the principal thereof shall be recorded by the Lender in its books and records; provided, however, that the Lender's failure to so record or any error in such recording shall not affect the Makers' liability hereunder or under the Credit Agreement. Upon any transfer hereof, the Lender shall endorse on the schedule attached hereto or on a schedule accompanying the transfer of this Note, the unpaid principal balance of this Note. If an Event of Default shall occur under the Credit Agreement, the unpaid Principal Amount hereunder shall become due and payable (i) automatically in the case of any of the Events of Default specified in paragraph (k) of Section 10.1 of the Credit Agreement, or (ii) at the option of the Required Lenders with respect to all other Events of Default and shall bear interest at the rate provided for in Section 2.7 of the Credit Agreement from and after such date. The foregoing provision shall not be construed as a waiver by the Payee of its right to pursue any other remedies available to it under this Note, the Credit Agreement or any other instrument evidencing or securing the Principal Amount. This Note may not be changed orally but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Written notices required to be given hereunder shall be given as provided in the Credit Agreement to the Payee and Makers at the respective addresses specified or provided for therein. Should the indebtedness evidenced by this Note or any part thereof be collected at law or in equity, or in bankruptcy, receivership or any other court proceeding (whether at the trial or appellate level), or should this Note be placed in the hands of attorneys for collection upon default, the Makers agree to pay, in addition to the principal, interest and other sums due and payable hereon, all costs of collecting or attempting to collect on this Note, including reasonable attorneys' fees and expenses. Notwithstanding the foregoing, recourse to any particular Borrowing Subsidiary hereunder shall be limited to (i) such Borrowing Subsidiary's interest in the Collateral pledged by such Borrowing Subsidiary to the Agent or the Collateral Agent under the Credit Documents and the proceeds thereof plus (ii) an amount equal to the capital investment by the Company in such Borrowing Subsidiary, plus (iii) an amount equal to the total of all Debt owed by such Borrowing Subsidiary to the Company. -146- 153 Anything herein to the contrary notwithstanding, the obligations of the Makers under this Note shall be subject to the limitation that payments of interest shall not be required to the extent that receipt of any such payment by the Payee would be contrary to provisions of law applicable to Payee which limit the maximum rate of interest that may be charged or collected by Payee. The undersigned and all endorsers, guarantors and sureties of this Note and all other persons liable or to become liable on this Note severally waive presentment for payment, demand, notice of demand and of dishonor and nonpayment of this Note, notice of intention to accelerate the maturity of this Note, notice of acceleration of the maturity of this Note, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party, and agree to all renewals, extensions, modifications, partial payments, releases or substitutions of security, in whole or in part, with or without notice, before or after maturity. Notwithstanding the foregoing paragraphs and all other provisions of this Note and the Credit Agreement, none of the terms and provisions of this Note or the Credit Agreement shall ever be construed to create a contract to pay to the Payee, for the use, forbearance or detention of money, interest in excess of the maximum amount of interest permitted to be charged by the Payee to the undersigned under applicable state or federal law from time to time in effect, and the undersigned shall never be required to pay interest in excess of such maximum amount. If, for any reason interest is paid hereon in excess of such maximum amount, then promptly upon any determination that such excess has been paid the Payee will, at its option, either refund such excess to the undersigned or apply such excess to the principal owing hereunder. This Note is to be construed and enforced in accordance with the laws of the State of Illinois. IN WITNESS WHEREOF, Makers have executed and delivered this Note on the day and year first above written. SOURCE ONE MORTGAGE SERVICES CORPORATION By:________________________________ Name: Michael C. Allemang Title: Executive Vice President and Chief Financial Officer Address: -147- 154 27555 Farmington Road Farmington Hills, MI 48334-3357 Attn: Chief Financial Officer Telephone No.: (810) 488-8639 Facsimile No.: (810) 488-7300 and Attn: Vice President/Treasury Telephone No.: (810) 488-7338 Facsimile No.: (810) 488-7812 THE MORTGAGE AUTHORITY, INC. By:________________________________ Name: Larry N. Ciofu Title: Chief Financial Officer Address: 27555 Farmington Road Farmington Hills, MI 48334-3357 Attn: Controller Telephone No.: (810) 488-7338 Facsimile No.: (810) 488-7812 CENTRAL PACIFIC MORTGAGE COMPANY By:________________________________ Name: John Cassell Title: Chief Financial Officer Address: 5750 Sunrise Boulevard Citrus Heights, CA 95610 Attn: Chief Financial Officer Telephone No.: (916) 537-2603 Facsimile No.: (916) 966-7327 -148- 155 PAYMENTS OF PRINCIPAL Unpaid Principal Notation Date Balance Made by - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- -149- 156 EXHIBIT F METHOD OF DETERMINING WEIGHTED AVERAGE PURCHASE PRICES STEP ONE Group Mortgage Loans or Securities into the following categories (or such other categories as are agreed upon among the Company, the Agent and the Collateral Agent): GNMA 15 FNMA/FHLMC 15 Private GNMA 30 FNMA/FHLMC 30 Investors GNMA ARM FNMA/FHLMC ARM FNMA/FHLMC Balloon Non-Conforming Jumbo STEP TWO - WEEKLY Allocate Approved Investor Commitments (other than those allocated to repos) under which the applicable Mortgage Loans or Securities could be settled to each mortgage-type category on a FIFO basis. The dollar amount of Approved Investor Commitments allocated should cover the maximum amount of Mortgage Loans or Securities for which the Company expects to borrow in the following week. If the mortgage balances exceed the allocated Approved Investor Commitments on any day, a re-allocation should be calculated. After allocating Approved Investor Commitments, compute the weighted average price of the Approved Investor Commitments. This is the price to be allocated to Securities or the unpaid principal balance of Mortgage Loans, as applicable, in each category for any borrowing in the next week. Approved Investor Commitments may not be allocated to Mortgage Loans unless the related coupons net of servicing and guaranty fees equal or exceed the contract coupon requirement. AT THE REQUEST OF THE CREDIT AGENT, THE FOLLOWING FURTHER STEPS SHALL BE TAKEN WHEN COMPUTING THE WEIGHTED AVERAGE PURCHASE PRICES. STEP THREE - MARK TO MARKET FORWARD PURCHASE CONTRACTS Calculate the value of all unallocated mandatory delivery forward purchase contracts. Compute a net negative or positive amount to be added to or subtracted from the aggregate market value of all collateral. Use the following method: -150- 157 AGENCY SECURITY CONTRACT Find the Telerate (or other recognized electronic service) purchase (offer) price for same coupon, type, and delivery date as stated on the Company's forward purchase contract. Subtract the Company's contract price from the Telerate price and multiply by the dollar amount of the contract. A positive number is a deduction, and a negative number is an addition to aggregate market value. OTHER CONTRACTS Unallocated Whole Loan Contracts: Use the above method but use the weighted average posted prices of two nationally recognized private mortgage conduits mutually acceptable to the Collateral Agent and the Company for similar mortgages, coupon (net of servicing fees) and delivery date. Private Label Securities Forward Purchase Contracts: Use the same method but the current contract price should be based on quotes of two nationally recognized dealers in private label mortgage-backed securities for the same forward delivery date as the contract. If no Telerate price is posted for a particular agency or whole loan coupon, the posted price associated with the nearest lower coupon should be used. If the contract coupon is below the lowest Telerate coupon then the price should be based on quotes of two nationally recognized dealers in mortgage-backed securities for the same forward delivery date as the contract. -151- 158 EXHIBIT G FORM OF BID LOAN NOTICE TO: The First National Bank of Chicago, as Agent FROM: Source One Mortgage Services Corporation, and _______________, as a Bid Lender Reference is made to that certain Second Amended and Restated Revolving Credit Agreement (the "Agreement") dated November 12, 1996 by and among Source One Mortgage Services Corporation (the "Company"), the Borrowing Subsidiaries, the Agent and certain other lenders. All capitalized terms not otherwise defined in this notice shall have the meaning given to them in the Agreement. The Company (on behalf of itself and the Borrowing Subsidiaries) and the Bid Lender hereby inform you that the Company has accepted a bid from the Bid Lender for one or more Bid Loans having the following terms: Principal Amount of Loan: $_______________ Rate of Interest: _______________% Advance Date: _______________, 199_ Interest Period (1 to 45 days): _______________ Proposed Due Date*: _______________, ____ [BID LENDER] SOURCE ONE MORTGAGE SERVICES CORPORATION By:______________________ By:____________________________ Its:_____________________ Its:___________________________ * If other than Termination Date. -152- 159 EXHIBIT H FORM OF NEW/MODIFIED COMMITMENT SUPPLEMENT This New/Modified Commitment Supplement ("Supplement") is made as of _________________, 199_ (the "Effective Date") by and among Source One Mortgage Services Corporation (the "Company"), The Mortgage Authority, Inc., Central Pacific Mortgage Company, The First National Bank of Chicago, in its capacity as agent ("Agent"), and _______________________ ("New Lender"), [and ____________________________ ("Assignor")][BRACKETED LANGUAGE IS APPLICABLE IF AN EXISTING LENDER IS ASSIGNING A PORTION OF ITS COMMITMENT]. The Company, the Borrowing Subsidiaries, [Assignor] and Agent are parties to a certain Second Amended and Restated Revolving Credit Agreement dated as of November 12, 1996 (the "Credit Agreement") pursuant to which Agent and certain other Lenders agreed to provide a revolving credit facility to the Company and the Borrowing Subsidiaries on the terms and conditions set forth in the Credit Agreement. Any capitalized term not expressly defined herein shall have the meaning ascribed to such term in the Credit Agreement. The New Lender has agreed to become a Lender under the Credit Agreement with a Commitment in the amount of ______________________ Dollars ($______________). [The Company and Assignor have agreed to reduce Assignor's Commitment under the Credit Agreement to ____________________ Dollars ($___________).] The parties hereto desire to amend the Credit Agreement pursuant to Section 2.1(b) thereof to reflect the New Lender's Commitment [and Assignor's reduced Commitment]. NOW, THEREFORE, the parties hereto agree as follows: 1. From and after the Effective Date, the New Lender shall be considered a "Lender" under the Credit Agreement and the Company, the Borrowing Subsidiaries and Agent hereby consent to the addition of the New Lender. 2. From and after the Effective Date, the New Lender's Commitment under the Credit Agreement shall be ________________________ Dollars ($______________) or such other amount as may be stated in any subsequent modification to the Credit Agreement. The Company and the Borrowing Subsidiaries shall execute and deliver to the New Lender simultaneously herewith Notes in the form attached as Exhibits E-1 and E-2 to the Credit Agreement. The Aggregate Commitment of the Lenders under the Credit Agreement, after giving effect to such -153- 160 Commitment by the New Lender [and the reduced Commitment of Assignor described in the following Section] shall be $_______________. [3. From and after the Effective Date, Assignor's Commitment under the Credit Agreement shall be _________________________________ Dollars ($______________) or such other amount as may be stated in any subsequent modification to the Credit Agreement.] [4. The New Lender, promptly after receipt of its Notes, agrees to purchase from Assignor, and Assignor hereby agrees to sell to the New Lender, without recourse, a portion of the outstanding Loans made by Assignor equal to _________ percent (__%) of the outstanding principal balance of each such Loan. Such purchase shall be effected by wire transfer of immediately available funds to Assignor on the Effective Date. The Company and each Borrowing Subsidiary each irrevocably and unconditionally agrees that from and after the Effective Date the portion of Loans so funded by Assignor shall be evidenced by and shall be deemed to be Loans made by the New Lender under the New Lender's Note as of the Effective Date and shall be treated as such for purposes of calculating interest and fees accruing from and after the Effective Date under the Credit Agreement. All interest and fees accruing on such portion of the Loans prior to the Effective Date shall be paid when due to Assignor.] 5. For purposes of Section 12.2 of the Credit Agreement (Notices), the New Lender's address and telecopy number shall be as specified below its signature in this Supplement. 6. All references in the Credit Agreement and the other Credit Documents shall be deemed to refer to the Credit Agreement as modified by this Supplement. Pursuant to Section 2.1(b) of the Credit Agreement, Exhibit C to the Credit Agreement is hereby replaced by Exhibit C to this Supplement. 7. In all other respects, the Credit Agreement is and remains unmodified and in full force and effect and is hereby ratified and confirmed. 8. This Supplement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Supplement by signing any such counterpart. -154- 161 IN WITNESS WHEREOF, the Company, the Borrowing Subsidiaries, the New Lender, [Assignor] and Agent have executed this Supplement as of the date first above written. COMPANY: SOURCE ONE MORTGAGE SERVICES CORPORATION By:________________________________ Name:___________________________ Title:__________________________ TMA: THE MORTGAGE AUTHORITY, INC. By:________________________________ Name:___________________________ Title:__________________________ CPM: CENTRAL PACIFIC MORTGAGE COMPANY By:________________________________ Name:___________________________ Title:__________________________ NEW LENDER: ___________________________________ By:________________________________ Name:___________________________ Title:__________________________ Address for Notices: ___________________________________ ___________________________________ Attn: ____________________________ Telephone No.: ___________________ Facsimile No.: ___________________ -155- 162 AGENT: THE FIRST NATIONAL BANK OF CHICAGO, as Agent By:________________________________ Name:___________________________ Title:__________________________ [ASSIGNOR: ___________________________________ By:________________________________ Name:___________________________ Title:__________________________] -156- 163 EXHIBIT I FORM OF NON-LENDER BALANCE BANK SUPPLEMENT THIS NON-LENDER BALANCE SUPPLEMENT (the "Supplement") is entered into as of _________________, 199_, by and among SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation (the "Company"), THE MORTGAGE AUTHORITY, INC., a Delaware corporation, CENTRAL PACIFIC MORTGAGE COMPANY, a California corporation, THE FIRST NATIONAL BANK OF CHICAGO, a national banking association, as administrative agent for the Lenders ("Agent"), and ____________________________, a _____________________ (the "Bank"), an Affiliate of one of the Lenders. A. The Company, the Borrowing Subsidiaries, and Agent are parties to that certain Second Amended and Restated Revolving Credit Agreement dated as of November 12, 1996 (the "Credit Agreement") pursuant to which Agent and certain other Lenders agreed to provide a revolving credit facility to the Company and the Borrowing Subsidiaries on the terms and conditions set forth in the Credit Agreement. Any capitalized term not expressly defined herein shall have the meaning ascribed to such term in the Credit Agreement. B. The Bank has agreed to become a Non-Lender Balance Bank under the Credit Agreement and to make Discount Advances and to sell its interest in such Discount Advances to the Lenders in accordance with Section 2.4 of the Credit Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. The Bank hereby agrees to become and is hereby designated as a "Non-Lender Balance Bank" under the Credit Agreement, but is not and shall not be considered a "Lender" under the Credit Agreement. The Bank hereby agrees to (i) enter into a Balance Bank Agreement with the Company, (ii) make Discount Advances to the Company, (iii) sell its interest in such Discount Advances to the Lenders, and (iv) otherwise accede to all obligations of a Non-Lender Balance Bank under Section 2.4 of the Credit Agreement. The Bank shall be entitled to all rights of a Non-Lender Balance Bank under the Credit Agreement. 2. None of the Borrowing Subsidiaries, the Company or the Agent shall consent to any amendment of the provisions of Section 2.4 of the Credit Agreement affecting the Bank without the prior written consent of the Bank. 3. The Bank's address for any notices to be sent in connection with the Credit Agreement shall be as specified below its signature in this Supplement. -157- 164 4. This Supplement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Supplement by signing any such counterpart. IN WITNESS WHEREOF, the Company, the Borrowing Subsidiaries, Agent and the Bank have executed this Supplement as of the date first above written. COMPANY: SOURCE ONE MORTGAGE SERVICES CORPORATION By:________________________________ Name:___________________________ Title:__________________________ TMA: THE MORTGAGE AUTHORITY, INC. By:________________________________ Name:___________________________ Title:__________________________ CPM: CENTRAL PACIFIC MORTGAGE COMPANY By:________________________________ Name:___________________________ Title:__________________________ AGENT: THE FIRST NATIONAL BANK OF CHICAGO, as Agent By:________________________________ Name:___________________________ Title:__________________________ BANK: ___________________________________ By:________________________________ Name:___________________________ Title:__________________________ Address for Notices: -158- 165 ___________________________________ ___________________________________ Attn: ____________________________ Telephone No.: ___________________ Facsimile No.: ___________________ -159- 166 EXHIBIT J FORM OF AP NOTICE [SOURCE ONE MORTGAGE SERVICES CORPORATION (the "Company")][OR THE APPLICABLE BORROWING SUBSIDIARY] ("Borrowing Subsidiary")] pursuant to that certain Second Amended and Restated Revolving Credit Agreement, dated as of November 12, 1996 (as amended, extended and replaced from time to time, collectively, the "Credit Agreement") among the Company, the Borrowing Subsidiaries, The First National Bank of Chicago, individually and as agent (the "Credit Agent"), and certain other lenders, and (ii) that certain Second Amended and Restated Security and Collateral Agency Agreement dated as of November 12, 1996 by and among the Company, the Borrowing Subsidiaries, the Credit Agent and National City Bank of Kentucky (the "Collateral Agent") as collateral agent for the Secured Parties (as defined in the Credit Agreement), for new value this day received, and as security for the payment of any and all indebtedness and obligations of the Company and Borrowing Subsidiaries under the Credit Agreement, hereby creates and grants to the Collateral Agent for the benefit of the Secured Parties a security interest in and to the mortgage loans identified as "AP Mortgages" on the Company's "Collateral Transmittals" (as such term is defined in the Credit Agreement) on the date indicated below which provide the information concerning the AP Mortgages required by the Credit Agreement. [SOURCE ONE MORTGAGE SERVICES CORPORATION] [APPLICABLE BORROWING SUBSIDIARY] By:_____________________________________ Dated:_______________, 199_. -160- 167 EXHIBIT K FORM OF OPINION LETTER -161- 168 EXHIBIT L MATERIAL LITIGATION NOT REFERENCED IN ANNUAL/QUARTERLY REPORTS NONE. -162- 169 EXHIBIT M FORM OF FUNDING AGREEMENTS -163- 170 EXHIBIT N FORM OF TRANSITION MEMORANDUM This TRANSITION MEMORANDUM is dated as of November 12, 1996, by and between Source One Mortgage Services Corporation, a Delaware corporation (the "Company"), The Mortgage Authority, a Delaware corporation ("TMA"), Central Pacific Mortgage Company, a ____________ and The First National Bank of Chicago, as agent ("Agent") for the Existing Lenders and for the Continuing Lenders (as such terms are hereinafter defined). The Company and the Borrowing Subsidiaries have entered into a certain Second Amended and Restated Revolving Credit Agreement dated as of November 12, 1996 (the "Credit Agreement") with the lenders named therein and the Agent. The lenders under the Credit Agreement are hereinafter referred to collectively as the "Continuing Lenders". Pursuant to the Credit Agreement the Continuing Lenders will agree to extend credit to the Company and the Borrowing Subsidiaries through a revolving credit facility (the "New Facility") on the terms and subject to the conditions set forth therein. Capitalized terms not otherwise defined herein are used with the same meanings as in the Credit Agreement. The New Facility amends and restates the Company's and TMA's existing revolving credit facility (the "Existing Facility") made available pursuant to that certain Amended and Restated Revolving Credit Agreement dated as of March 24, 1995 (as amended, the "Existing Agreement"), by and among the Company, TMA, the Agent and the lenders participating therein (each an "Existing Lender"). Certain of the Existing Lenders are not Continuing Lenders under the New Facility (the "Exiting Lenders"). In addition, pursuant to the Credit Agreement (i) certain of the Existing Lenders will have a percentage of the Aggregate Commitment under the New Facility that differs from their percentage under the Existing Facility, and (ii) certain Continuing Lenders joining the New Facility are not Existing Lenders. The purpose of this Transition Memorandum is to set forth an understanding of certain matters concerning the transition by the Company from the Existing Facility to the New Facility, such matters including, without limitation, (i) the payment of all the outstanding Loans (as defined in the Existing Agreement and hereinafter referred to as the "Existing Loans") to the Exiting Lenders, (ii) the changes necessary in the percentage of the Advances under the Credit Agreement held by the Continuing Lenders, and (iii) the initial fundings of Advances by the Continuing Lenders which are not Existing Lenders. -164- 171 1. Summary of Existing Loans. The initial Advance under the New Facility shall be used to pay any Existing Loans held by the Exiting Lenders. Prior to the date the conditions precedent set forth in Article 5 of the Credit Agreement are satisfied (such date being the "Effective Date"), the Agent shall identify the Existing Loans payable by the Company under the Existing Agreements to each Exiting Lender and advise the Continuing Lenders of such amount. The aggregate outstanding balance of the Existing Loans held by the Exiting Lenders on the Effective Date shall be hereinafter referred to as the "Exiting Lender Pay-Off Amount". 2. Initial Advance. Subject to the terms and conditions set forth in the Credit Agreement, including, without limitation, satisfaction of the conditions precedent set forth in Article 5 therein, the Continuing Lenders will make an initial Advance to the Company on the Effective Date in an amount equal to the Exiting Lender Pay-Off Amount. The initial Advance shall be based upon an Advance Notice and shall consist of such types of Advances specified in such Advance Notice. Each Continuing Lender will agree to make its share of such Advance available to the Agent at such time and in such amount as provided in the Credit Agreement as modified by Paragraphs 3 and 4 below. 3. Conversion of Loans. With respect to each Continuing Lender, to the extent that such lender has an Existing Loan outstanding on the date of the initial Advance, such Continuing Lender shall only be required to fund to the Agent an amount (the "Net Funding Amount") equal to the excess, if any, of that amount by which the aggregate amount of its Loans to be outstanding under the New Facility on the Effective Date exceeds the aggregate amount of its Existing Loans (excluding any accrued and unpaid interest, Fees and other charges or expenses thereon). After making its Net Funding Amount available to the Agent, such Continuing Lender shall be deemed to have made available all of its Loans under the New Facility and shall be deemed to have converted its Existing Loans (excluding any accrued and unpaid interest and other charges or expenses thereon). To the extent that a Continuing Lender has Existing Loans in an amount which exceeds the amount of its Loans to be outstanding under the New Facility on the Effective Date, such Lender shall be deemed to have made available all of its Loans under the New Facility required to be made on the Effective Date and shall be repaid a portion of its Existing Loans equal to such excess amount, if any, as provided in Paragraph 4. All Existing Loans held by Continuing Lenders which are outstanding on the Effective Date and not repaid shall continue as the same type of Loan under the New Facility until repaid or converted in accordance with the terms of the Credit Agreement; provided that from and after the Effective Date such Existing Loans shall bear interest at the interest rates applicable under the Credit Agreement rather than the rates applicable under the Existing Agreements. -165- 172 4. Percentage Reconciliation. If any Continuing Lender holds Existing Loans (other than Bid Loans) on the Effective Date which are in excess of such Continuing Lender's Adjusted Commitment Percentage of the Loans (other than Bid Loans and Swingline Loans) to be outstanding under the New Facility (an "Overfunded Lender") on the Effective Date, such Overfunded Lender shall be repaid from the additional funding under the following sentence an amount of Existing Loans sufficient to eliminate such excess. Each Continuing Lender (including any Continuing Lender which is not an Existing Lender) that holds Existing Loans in an amount less than such Continuing Lender's Adjusted Commitment Percentage of the Loans (other than Bid Loans and Swingline Loans) to be outstanding under the New Facility on the Effective Date (an "Underfunded Lender") shall make an additional funding as a Federal Funds Loan in connection with the initial Advance in an amount sufficient to eliminate such shortfall (such additional funding being collectively referred to as "Percentage Reconciliation Funding Amount"). 5. Distribution of Initial Advance. After each Continuing Lender has funded its Loan (or so much of such Loan as may be required pursuant to Paragraphs 3 and 4 above), the Agent shall (i) distribute to each Exiting Lender its Exiting Lender Pay-Off Amount in accordance with the Existing Agreements and (ii) distribute to each Overfunded Lender its share of the aggregate Percentage Reconciliation Funding Amount. 6. Payment of Accrued Interest and Fees; Indemnification. On the Effective Date the Company shall pay to the Agent for distribution to each Exiting Lender all accrued interest and Fees owing to such Lender for its Existing Loans. To the extent of its obligations under the Existing Agreement, the Company shall pay each Exiting Lender for all reasonable losses, costs and expenses incurred by such Exiting Lender in connection with any prepayment of its Existing Loans in accordance with the terms of the Existing Agreement. 7. Termination of Commitments under Existing Facility. On the Effective Date the commitments of the Lenders (as defined in the Existing Agreement) under the Existing Facility shall terminate and the Lenders therein shall have no further obligation to make any further Loans (as defined in the Existing Agreement) under the Existing Facility. 8. No Modification. It is understood and agreed to by the parties hereto that, except as expressly set forth above, nothing in this memorandum shall modify or amend the covenants, terms and agreements set forth in the Existing Agreement or the documents related thereto or in the Credit Agreement and the other Credit Documents, or discharge the obligations of (a) the Company, TMA, the Existing Lenders and the Agent under the Existing Agreement, -166- 173 and (b) the Company, the Borrowing Subsidiaries, the Continuing Lenders and the Agent under the Credit Agreement. SOURCE ONE MORTGAGE SERVICES CORPORATION By:_____________________________________ Name:________________________________ Title:_____________________________)_ THE MORTGAGE AUTHORITY, INC. By:_____________________________________ Name:________________________________ Title:______________________________ CENTRAL PACIFIC MORTGAGE COMPANY By:_____________________________________ Name:________________________________ Title:_______________________________ THE FIRST NATIONAL BANK OF CHICAGO, as Agent for the Existing Lenders and the Continuing Lenders By:_____________________________________ Name:________________________________ Title:_______________________________ -167- EX-10.(L) 4 EXHIBIT 10.(L) 1 EXHIBIT 10(l) SECOND AMENDED AND RESTATED SECURITY AND COLLATERAL AGENCY AGREEMENT THIS SECOND AMENDED AND RESTATED SECURITY AND COLLATERAL AGENCY AGREEMENT (the "Security Agreement") is made and dated as of November 12, 1996, by and among SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation (the "Company"), THE MORTGAGE AUTHORITY, a Delaware corporation ("TMA"), CENTRAL PACIFIC MORTGAGE COMPANY, a California corporation ("CPM"), THE FIRST NATIONAL BANK OF CHICAGO, a national banking association, acting in its capacity as administrative agent for the lenders from time to time participating in the Credit Agreement (as defined below) (in such capacity, the "Credit Agent"), NORWEST BANK MINNESOTA, N.A., as the successor trustee under the Indentures (as defined below) (the "Note Trustee") and NATIONAL CITY BANK OF KENTUCKY, a national banking association, as collateral agent for the Secured Parties (as defined below) (in such capacity, the "Collateral Agent"). RECITALS A. This Second Amended and Restated Security and Collateral Agency Agreement amends and restates in its entirety that certain Amended and Restated Security and Collateral Agency Agreement dated as of March 24, 1995 by and among the parties hereto (other than CPM). Pursuant to Section 22 of such March 24, 1995 Agreement, execution of this Second Amended and Restated Security and Collateral Agency Agreement by the Note Trustee is not required. B. Pursuant to that certain Second Amended and Restated Revolving Credit Agreement of even date herewith (the "Credit Agreement"), the Lenders agreed to extend credit to the Company, TMA and CPM on the terms and subject to the conditions set forth therein. The Credit Agreement amends and restates in its entirety that certain Amended and Restated Revolving Credit Agreement dated as of March 24, 1995 by and among the Company, TMA, First Chicago and certain of the other Lenders. Capitalized terms not otherwise defined herein are used with the same meanings as in the Credit Agreement. C. TMA and CPM (each a "Borrowing Subsidiary") are wholly-owned subsidiaries of the Company. Up to $1,000,000 of the Aggregate Commitment is available to TMA and up to $10,000,000 of Swingline Advances are available to CPM. Also, portions of the funds loaned to the Company under the Credit Agreement may also be distributed by the Company to the Borrowing Subsidiaries to enable the Borrowing Subsidiaries to originate or acquire Mortgage Loans, which Mortgage Loans may constitute a portion of the Collateral. D. The Note Trustee is the current trustee for the holders of the Ratable-Medium Term Notes (the "Noteholders"), which notes are required to be ratably secured with certain other secured debt of the Company pursuant to (i) an Indenture, dated as of September 2 15, 1986, between Fireman's Fund Mortgage Corporation (predecessor in interest to the Company) and National Bank of Detroit, as trustee, as supplemented by certain supplemental indentures and (ii) an Indenture, dated as of November 21, 1988, between Fireman's Fund Mortgage Corporation and The First National Bank of Chicago, as trustee, as supplemented by certain supplemental indentures (collectively, as supplemented, the "Indentures"). E. As a condition precedent to the effectiveness of the Credit Agreement, the Credit Agent has required the execution and delivery of this Security Agreement in order to, among other things, create a first priority perfected security interest in the Collateral in favor of the Lenders, the Non-Lender Balance Banks (to the extent of any Credit Indebtedness owed to such Non-Lender Balance Banks), the Credit Agent, the Collateral Agent, the Note Trustee and the Noteholders (collectively, the "Secured Parties") to secure payment of the Credit Indebtedness and all amounts outstanding under the Ratable Medium-Term Notes or otherwise due under the terms of the Indentures (collectively, the "Secured Debt"). NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: AGREEMENTS 1. Appointment of Collateral Agent. The Note Trustee hereby appoints, and each Lender and Non-Lender Balance Bank has, pursuant to the terms of the Credit Agreement, appointed the Collateral Agent to act as secured party, agent, bailee and custodian for the exclusive benefit of the Secured Parties with respect to the Collateral. The Collateral Agent hereby accepts such appointment and agrees to maintain and hold, or cause to be maintained and held, all Collateral at any time delivered to it or any of its subagents as secured party, agent, bailee and custodian for the exclusive benefit of the Secured Parties. The Collateral Agent, the Borrowing Subsidiaries and the Company agree that the Collateral Agent is acting and will act with respect to the Collateral for the exclusive benefit of the Secured Parties and is not, and shall not at any time in the future be, subject, with respect to the Collateral, in any manner or to any extent, to the direction or control of the Company or any Borrowing Subsidiary except as expressly permitted hereunder and under the other Credit Documents. The Collateral Agent agrees to act in accordance with this Security Agreement and in accordance with any written instructions properly delivered pursuant hereto. Under no circumstances shall the Collateral Agent deliver, or cause to be delivered, possession of Collateral to the Company or any Borrowing Subsidiary except in accordance with the express terms of this Security Agreement or the other Credit Documents. -2- 3 2. Delivery and Categorization of Collateral. (a) Mortgage Loans. The Company and each Borrowing Subsidiary (each such entity, with respect to any Pledged Item owned by such entity, is referred to herein as the "Pledgor") shall deliver Collateral Transmittals to the Collateral Agent from time to time identifying Mortgage Loans that the Pledgor intends to include in Collateral by delivering to the Collateral Agent the Required Mortgage Documents (as described on Schedule A attached hereto) for such Mortgage Loans. Such delivery shall be made prior to inclusion of such Mortgage Loans in Collateral, other than for AP Mortgages identified in the Collateral Transmittal and covered by an AP Notice. The Collateral Agent shall review the Required Mortgage Documents in accordance with the review steps described on Exhibit 1 hereto. (b) AP Notices. The Collateral Agent, upon receipt of a Collateral Transmittal describing the AP Mortgages to be covered by an AP Notice and an AP Notice as of that date, shall (subject to the eligibility requirements set forth in the Credit Agreement) include such AP Mortgages as Eligible Collateral in the Collateral Value Determination (as defined Paragraph 6(a) below). The Pledgor shall deliver the Required Mortgage Documents for each such AP Mortgage not later than the tenth (10th) Business Day after the date such AP Mortgage is first so included as an Eligible AP Mortgage. If the Required Mortgage Documents for any AP Mortgage are not delivered by such 10th Business Day, the Credit Agent or the Collateral Agent may request that the Pledgor advise the Collateral Agent and the Credit Agent in writing of the specific reason that such Required Mortgage Documents were not delivered, and the Pledgor shall so advise the Collateral Agent and the Credit Agent within 30 days after such request. (c) Securities. The Pledgor may, from time to time, deliver Securities to the Collateral Agent or an Approved MBS Custodian and shall provide such evidence that such Securities are either (a) in a certificated form, with the certificates evidencing such Securities being delivered to the Collateral Agent or such Approved MBS Custodian, or (b) in book entry or uncertificated form with evidence that the Collateral Agent or such Approved MBS Custodian has been identified as the nominal owner of such Securities in the records of a Federal Reserve Bank or other institution authorized by the applicable Federal Agency to maintain ownership records in respect of such Securities. (d) Repurchased Agency Loans and Receivables. The Company shall identify Repurchased Agency Loans and Receivables from time to time by providing a list of such items to the Collateral Agent. Such list shall include statements indicating (i) the identification number of each such Mortgage Loan, (ii) its unpaid principal balance, (iii) the "paid-to" date for such -3- 4 Mortgage Loan, (iv) the date on which such Mortgage Loan was purchased by the Company out of the applicable pool, (v) whether or not such Mortgage Loan has been reinstated and the payment defaults thereunder cured by the mortgagor, (vi) the date on which any foreclosure sale with respect to such Mortgage Loan has occurred, (vii) the status of the related claim against the VA or FHA or HUD, and (viii) whether the borrower of the Mortgage Loan filed a voluntary bankruptcy petition or had an involuntary bankruptcy petition filed against it while the payments on such Mortgage Loan were past due. The Company shall provide a weekly update of such information to the Collateral Agent by 9:00 a.m. (Chicago time) on the first Business Day of each week with regard to any Repurchased Agency Loans and Receivables previously identified as being included in Collateral. The Collateral Agent shall have the right at any time at the direction of the Aggregate Required Lenders, to require the Company to submit all Required Mortgage Documents and item number 4 from the Additional Required Mortgage Documents for any Repurchased Agency Loan and Receivable then being included in Collateral, and the Collateral Agent shall request the submission of such documents at the direction of the Credit Agent. In addition, the Company shall provide, at the request of the Collateral Agent or the Credit Agent, claim forms to FHA or VA or HUD for each such Repurchased Agency Loan and Receivable, identifying the Collateral Agent as the "investor" thereunder so that any payments made by FHA or VA or HUD with respect to such Mortgage Loan shall be paid to the Collateral Agent rather than the Company. In addition, with respect to those Repurchased Agency Loans and Receivables for which there has been a foreclosure sale of the underlying property, the Credit Agent shall have the right to require the Company to provide a new mortgage in favor of the Collateral Agent on the real estate and improvements that previously secured such Repurchased Agency Loan and Receivable, all in form satisfactory to the Credit Agent and Collateral Agent and at the Company's sole cost and expense, including the cost of recording such mortgage if required by the Credit Agent. (e) Pledged Servicing. The Company shall deliver to the Collateral Agent fully executed copies of (i) the Acknowledgment Agreements with FNMA and FHLMC, and (ii) Acknowledgment Agreements with all other Federal Agencies (excluding GNMA unless and until the Agent or Required Lenders require that an Acknowledgement Agreement with GNMA be obtained) covering all other Servicing Agreements constituting Eligible Pledged Servicing. In the event the Agent or the Required Lenders request that Acknowledgement Agreements with GNMA be obtained, the Company shall deliver to the Collateral Agent fully executed copies of Acknowledgement Agreements with GNMA covering all Pledged Servicing with GNMA. (f) Servicing Sale Receivables. The Company may, in connection with a sale of Servicing Agreements from the Company to a Servicing Purchaser, pledge the Servicing Sale Receivables due in -4- 5 connection with such sale to the Collateral Agent as Collateral. If the Company so pledges Servicing Sale Receivables to the Collateral Agent, the Company shall (i) deliver to the Credit Agent and the Collateral Agent a complete executed copy of the related purchase agreement and written confirmation from the Servicing Purchaser as to the amount of such Pledged Servicing Sale Receivables, (ii) assign its rights to such Pledged Servicing Sale Receivables to the Collateral Agent for the benefit of the Secured Parties pursuant to an assignment in form and content satisfactory to the Required Lenders, and (iii) cause the Servicing Purchaser of the applicable sold Servicing Agreements to execute an agreement in form and content satisfactory to the Required Lenders pursuant to which the Servicing Purchaser shall agree to (A) pay such Pledged Servicing Sale Receivables directly to the Collateral Agent for the benefit of the Secured Parties, and (B) provide simultaneous written notice to the Credit Agent and the Collateral Agent of any claims made against or notices given to the Company which would constitute an offset to or reduction in the amount of such Pledged Servicing Sale Receivables. (g) Identification of Collateral. All Mortgage Loans and Securities at any time delivered to the Collateral Agent hereunder shall be held by the Collateral Agent in a fire resistant vault, drawer or other suitable depositary maintained in accordance with Federal Agency standards and controlled solely by the Collateral Agent, conspicuously marked to show the respective interests of the Secured Parties therein and not commingled with any other assets or property of, or held by, the Collateral Agent. Accordingly, if (pursuant to Paragraph 7(b) below) the Collateral Agent receives a shipping request pursuant to which National City Bank of Kentucky is to retain physical possession of the applicable Mortgage Loans or Securities as an agent for any Person other than the Secured Parties, the Collateral Agent shall physically separate such Mortgage Loans or Securities from the remainder of the Collateral and shall execute any transmittal letters required under Paragraph 7(b) below. 3. Grant of Security Interest. The Company, with respect to Collateral owned by the Company, and each Borrowing Subsidiary, with respect to Collateral owned by the applicable Borrowing Subsidiary, hereby pledges, assigns and grants to the Collateral Agent for the benefit of the Secured Parties, a first priority security interest in the property described in Paragraph 4 below (collectively and severally, the "Collateral"), to secure payment of the Secured Debt. Furthermore, each AP Notice shall create a security interest in favor of the Collateral Agent for the benefit of the Secured Parties in the AP Mortgages identified therein. By delivering an AP Notice, the Company represents and warrants that each AP Mortgage identified therein constitutes an Eligible AP Mortgage. The Company agrees that while it is in possession of any Required Mortgage Documents for an AP Mortgage, it will hold same -5- 6 in trust and as agent and bailee for the Collateral Agent for the benefit of the Secured Parties, without authority to make any other disposition thereof, or of the proceeds thereof. The Company assumes the responsibility for loss or destruction of any such Required Mortgage Documents until the same are delivered to the Collateral Agent. Unless so directed by the Credit Agent when an Event of Default has occurred and is continuing, the Collateral Agent shall not record the assignment of mortgage or deed of trust delivered in connection with any Pledged Mortgage. 4. Collateral. The Collateral shall consist of all right, title and interest of the Company and the Borrowing Subsidiaries, as applicable, of every kind and nature, in and to all of the following property, assets and rights of the Company and the Borrowing Subsidiaries wherever located, whether now existing or hereafter arising, and whether now or hereafter owned or acquired by or accruing or owing to the Company or a Borrowing Subsidiary, and all proceeds and products thereof (including all proceeds in the Settlement Account and Custodian Settlement Accounts from time to time): (a) all Pledged Mortgages; (b) all Pledged Securities; (c) any commitments or other agreements issued by any private mortgage insurer or by the FHA or VA to insure or guarantee any Pledged Mortgage; (d) all commitments of FNMA, FHLMC or other Persons to purchase Pledged Items from the Company or any Borrowing Subsidiary or exchange Securities with the Company or any Borrowing Subsidiary for Pledged Items; (e) any options to sell or purchase Securities, future contracts, or any other interest rate protection products which directly or indirectly protect the Company or any Borrowing Subsidiary against reductions in value of such Pledged Items due to changes in mortgage interest rates; (f) the Settlement Account and any Custodian Settlement Accounts and any amounts standing to the credit of the Settlement Account and any Custodian Settlement Accounts then in existence with Approved MBS Custodians, as described in Paragraph 7(c) of this Security Agreement; (g) all VA Mortgage Loans or FHA Mortgage Loans (plus any REO or accounts receivable from FHA or VA resulting therefrom, including guaranty claims against VA and insurance claims against -6- 7 FHA or HUD) which are repurchased by the Company from Security holders and pledged to the Collateral Agent as security for the Secured Debt; (h) all cash and Cash Equivalents held by the Credit Agent or Collateral Agent as security for the Secured Debt; (i) all right, title and interest of the Company, of every kind and nature, whether now existing or hereafter arising, in and to all Servicing Agreements now or hereafter existing, including without limitation all rights of the Company to sell or assign its interest therein and all amounts payable to the Company thereunder arising out of any termination thereof, and all files, surveys, certificates, correspondence, appraisals, computer programs, tapes, disks, cards, accounting records and other records and data of the Company related to the Mortgage Loans covered by such Servicing Agreements and all proceeds and products thereof; (j) all Pledged Servicing Sale Receivables; and (k) all property and proceeds related to the foregoing, including without limitation, the right to service Pledged Mortgages while owned by the Company or any Borrowing Subsidiary, all accounts and general intangibles of whatsoever kind so related and all documents or instruments delivered to the Credit Agent or the Collateral Agent in respect of any Pledged Item, including, without limitation, the right to receive all insurance proceeds and condemnation awards which may be payable in respect of the premises encumbered by any Pledged Mortgage. 5. Collateral Agent's Review of Collateral. Upon any receipt of Required Mortgage Documents for any Mortgage Loan, the Collateral Agent shall review the same and verify that: (a) All Required Mortgage Documents relating to such Mortgage Loan appear regular on their face (as determined by the Collateral Agent in its reasonable discretion) and are in the Collateral Agent's possession; and (b) The statements set forth on Exhibit 1 hereto are accurate and complete in all material respects. If the Collateral Agent notes any exception in the review described in subparagraph (a) or (b) above or questions, in its reasonable discretion, the genuineness, regularity, propriety, or accuracy of any item of Collateral, the Collateral Agent shall not include such item as Eligible Collateral in its next Collateral Value Determination (as defined in Paragraph 6(a) below) delivered to the Credit Agent. In the event that the Pledgor has been requested by the Credit Agent or the Collateral Agent to deliver the "Additional Required Mortgage Documents" (as described on Schedule B attached -7- 8 hereto) with respect to any Mortgage Loan, the Collateral Agent shall review and verify such Additional Required Mortgage Documents consistent with the obligations of the Collateral Agent above. 6. Collateral Value Determination; Determination Assumptions. (a) On each Business Day the Collateral Agent shall compute the value of the Aggregate Borrowing Base and the Warehouse Borrowing Base (collectively, the "Borrowing Bases") and notify the Credit Agent thereof (a "Collateral Value Determination") by telephone and by sending a facsimile copy of a report ("Borrowing Base Report") in the form of Schedule C hereto (or such other form as may be mutually agreed to by the Collateral Agent and the Credit Agent) prior to 11:00 a.m. (Chicago time). With respect to any Required Mortgage Documents delivered to the Collateral Agent by 10:00 a.m. (Chicago time) on any Business Day, the Collateral Agent shall review such Required Mortgage Documents in the manner set forth in Paragraph 5 above in time to include the related Mortgage Loans (to the extent they constitute Eligible Collateral) in the Borrowing Base Report delivered at 11:00 a.m. (Chicago time) on such Business Day. If the Company or the Credit Agent reasonably believes that the value of the Borrowing Bases has changed since the 11:00 Borrowing Base Report, the Collateral Agent shall, at the request of the Company or the Credit Agent made by facsimile prior to 2:00 p.m. (Chicago time) on any Business Day, recompute the Borrowing Bases and notify the Credit Agent thereof by telephone and by a facsimile transmission of a Borrowing Base Report. Notwithstanding the foregoing, so long as the security interest in the Collateral is abated as described in Paragraph 8, the Company shall perform all of the obligations of the Collateral Agent with respect to determining the Borrowing Bases, and the Collateral Agent shall have no duty to compute the Borrowing Bases or submit Borrowing Base Reports. (b) In making any Collateral Value Determination or other calculation involving a determination of the value of the Borrowing Bases, the Collateral Agent shall be permitted to rely, without independent investigation of the correctness thereof, on: (1) The information supplied by the Company to the Collateral Agent with respect to (i) the aggregate principal balance of the Mortgage Loans serviced by the Company pursuant to Servicing Agreements constituting Eligible Pledged Servicing, which information shall be provided by the Company within the first five days of each month and (ii) the acquisition price paid by the Company to acquire any Pledged Servicing; (2) The information supplied by the Pledgor to the Collateral Agent on the related Collateral Transmittal, with -8- 9 respect to the net acquisition cost (including any discounts and excluding any servicing released premium) of any Mortgage Loan, the unpaid principal balance of any Mortgage Loan as of the Pledge Date therefor, and the weighted average purchase price (expressed as a percentage of par) committed to under those Approved Investor Commitments which could cover such Mortgage Loan; (3) The most recent information supplied by the Company to the Collateral Agent with respect to (i) the number of days by which payments on any Mortgage Loan constituting Collateral are past due, (ii) the date of any foreclosure sale or transfer in lieu of foreclosure with respect to a repurchased Mortgage Loan constituting a Repurchased Agency Loan and Receivable, (iii) the date of any reinstatement of any Repurchased Agency Loans and Receivables, (iv) the value of any REO and accounts receivable (including proceeds of FHA insurance or VA guaranties) acquired in connection with a foreclosure sale or a transfer in lieu of foreclosure of Eligible Repurchased Agency Loans and Receivables, and (v) whether the borrower of any Mortgage Loan which is included in Repurchased Agency Loans and Receivables filed a voluntary bankruptcy petition or had an involuntary bankruptcy petition filed against it while the payments on such Mortgage Loan were past due; (4) The information supplied by the Company to the Collateral Agent, whether written or in any other form acceptable to the Collateral Agent, with respect to a determination as to whether amounts received in the Settlement Account represent the purchase price paid for a specific Mortgage Loan or Security and, consequently, whether the Mortgage Collateral Value of such Mortgage Loan or MBS Value of such Security should be removed from such calculation; (5) The most recent information supplied by the Credit Agent to the Collateral Agent with respect to (i) the amount of the then current Aggregate Commitment, and (ii) the current balance in the Settlement Account; (6) The most recent information supplied by the Company and the Servicing Purchaser(s) to the Collateral Agent with respect to the amount of Servicing Sale Receivables; and (7) Any information supplied by the Credit Agent, the Company, or any other custodian of any of the Collateral, to the Collateral Agent unless the Collateral Agent has actual knowledge that such information is untrue or unreliable. Furthermore, the Collateral Agent may rely on information supplied by the Company with respect to the effect of the Borrowing -9- 10 Base Sublimits on the value of the Borrowing Bases attributable to Repurchased Agency Loans and Receivables, which information shall be supplied by the Company on the first Business Day of each week with respect to the value of the Borrowing Bases attributable to Repurchased Agency Loans and Receivables as of the close of the last Business Day of the preceding week; provided, however, that the Collateral Agent shall (on the last Business Day of each month) verify the accuracy of the information supplied by the Company in the most recent report of such information and report to the Credit Agent any discrepancies between such information as supplied by the Company and such information as calculated by the Collateral Agent. The information as calculated by the Collateral Agent shall be included in each daily Borrowing Base Report until the Company again provides its next weekly report of the value of the Borrowing Bases attributable to Repurchased Agency Loans and Receivables. (c) The Collateral Agent is hereby authorized by the Credit Agent to grant temporary waivers of strict compliance by the Company with the eligibility requirements regarding qualification of any item of Collateral as Eligible Collateral or with the Borrowing Base Sublimits when the Collateral Agent deems it appropriate, in its sole discretion, (i) up to any amount for up to three (3) Business Days, if the satisfaction of such eligibility requirements or sublimits cannot be independently determined because of events beyond the reasonable control of the Company (e.g. natural disasters, transmission failures, etc.), provided that, if such determination cannot be made for more than one (1) Business Day, the Company certifies in writing that all such eligibility requirements and sublimits are in fact satisfied, or (ii) if the aggregate amount of the portion of the Aggregate Borrowing Base attributable thereto does not exceed the lesser of (A) $25,000,000 or (B) five percent (5%) of the Aggregate Commitment at any time; provided that the waivers permitted under this clause (ii) shall be limited to waivers of Borrowing Base Sublimits and time limitations set forth in the eligibility requirements (e.g. number of days eligible in the Aggregate Borrowing Base, number of days out on Company Trust Receipts, etc.); and further provided that in no event shall any Pledged Mortgage be included as Eligible Collateral while such Pledged Mortgage is held by the Company under a Company Trust Receipt if the Company has held such Pledged Mortgage under a Company Trust Receipt for more than 21 days. 7. Handling of Collateral; Settlement Account. (a) From time to time until otherwise notified in writing by the Required Lenders, the Collateral Agent is hereby authorized to release documentation relating to Mortgage Loans to the Company against a trust receipt executed by the Company in the form of Exhibit 2 hereto. The Collateral Agent will maintain all original trust receipts in a vault, drawer or other suitable -10- 11 depositary with a one hour fire rating maintained in accordance with Federal Agency requirements and controlled solely by Collateral Agent. The Company hereby represents and warrants that any request by the Company for release of Collateral under this subparagraph (a) shall be solely for the purposes of correcting clerical or other non-substantial documentation problems in preparation of returning such Collateral to the Collateral Agent for ultimate sale or exchange and that the Company has requested such release in compliance with all terms and conditions of such release set forth herein and in the Credit Agreement, including, without limitation, Section 4.1(b)(iv) thereof. (b) Prior to the occurrence of an Event of Default, upon delivery by the Company to the Collateral Agent of a shipping request substantially in the form of that attached hereto as Exhibit 3, the Collateral Agent will transmit, or cause to be transmitted, Mortgage Loans and Securities held by it or any Approved MBS Custodian as directed by the Company as follows: (1) If the transmittal is of documentation for Mortgage Loans or Securities in the possession of the Collateral Agent or an Approved MBS Custodian in connection with the sale thereof to an Approved Investor, such transmittal will be under cover of a transmittal letter substantially in the form of that attached hereto as Exhibit 4 (or such other form as may be approved by the Credit Agent or required under any Federal Agency program pursuant to which the relevant Mortgage Loans or Securities are being shipped), subject to modification of such Exhibit 4 pursuant to Paragraph 7(g) hereof at the request of the Agent. (2) If the transmittal is of documentation for Mortgage Loans or Securities in connection with the shipment to a custodian or trustee in connection with the formation of a mortgage pool supporting a Security (any such Security secured or otherwise supported by any such Mortgage Loan or Security being referred to herein as a "Warehouse-Related Security"), such transmittal will be under cover of a transmittal letter substantially in the form of that attached hereto as Exhibit 5 (or such other form as may be approved by the Credit Agent or required if the Security is being issued under any Federal Agency program), subject to modification of such Exhibit 5 pursuant to Paragraph 7(g) hereof at the request of the Agent, and, in addition, will be conditioned upon the facts that: (i) If the Warehouse-Related Security is being issued under a Federal Agency program, there has been delivered for the Warehouse-Related Security such form as may be required under the Federal Agency program pursuant to which such Warehouse-Related Security is -11- 12 being issued (which form shall name the Collateral Agent or an Approved MBS Custodian (as defined below) as the subscriber and the Person to whom the Warehouse-Related Security is to be delivered); (ii) If the Warehouse-Related Security is being issued pursuant to a program other than a Federal Agency program, there has been delivered to and acknowledged by the trustee and collateral agent or custodian for the underlying mortgage pool a letter in form acceptable to the Collateral Agent; (iii) The Person to whom such Warehouse-Related Security is to be delivered upon issuance in exchange for the Mortgage Loans or Securities being shipped is either (a) a Person approved by the Collateral Agent and the Credit Agent which has agreed to hold such Warehouse-Related Security and the proceeds of any sale or other disposition thereof as custodian, agent and bailee for the benefit of the Secured Parties pursuant to a custodial agreement substantially in the form of that attached hereto as Exhibit 6 (a "Custodial Agreement"), (b) the Collateral Agent or an Affiliate thereof or (c) such other Person as is approved by the Collateral Agent and the Credit Agent (any Person acting in such capacity being referred to herein as an "Approved MBS Custodian"); (iv) There has been delivered to the Approved MBS Custodian a letter in the form attached to the Custodial Agreement (Exhibit A to Exhibit 6 hereto); and (v) At the request of the Agent pursuant to Paragraph 7(g) hereof, any Warehouse Related Security delivered to the Collateral Agent or an Approved MBS Custodian pursuant to subparagraphs (i) through (iv) shall be in a face amount of not less than the amount of the Aggregate Borrowing Base which is attributable to the Mortgage Loans so delivered in exchange for such Warehouse Related Security. In no event shall the Collateral Agent have any obligation to obtain written acknowledgement of receipt from the addressee of any transmittal letter or other communication sent by the Collateral Agent hereunder. (c) All amounts payable on account of the sale of Pledged Items (including, but not limited to, a sale pursuant to a repurchase agreement) will be instructed to be paid directly by the purchaser to the Settlement Account or, in the case of Pledged Securities delivered to an Approved MBS Custodian, to a demand -12- 13 deposit account maintained with such Approved MBS Custodian (a "Custodian Settlement Account") and, thereafter, to the Settlement Account as provided in the applicable Custodial Agreement. Pursuant to Paragraph 3 above the Company has granted a security interest in and lien upon the Settlement Account and in all Custodian Settlement Accounts and in any and all amounts at any time held therein as collateral security for the benefit of the Secured Parties. This Paragraph 7(c) shall constitute notice to the Collateral Agent and any Approved MBS Custodian of such security interest pursuant to the Uniform Commercial Code of all relevant jurisdictions and any other law or regulation requiring such notice. This Paragraph 7(c) shall further constitute irrevocable notice to the Collateral Agent and any Approved MBS Custodian that the accounts referred to in Paragraph 4(f) above are "no access" accounts to the Company and the Collateral Agent except to the extent expressly permitted hereunder. The Collateral Agent shall hold such security interest in and lien upon the accounts referred to in Paragraph 4(f) above and all funds at any time held therein for the benefit of the Secured Parties with all rights of a secured party under the Uniform Commercial Code of all relevant jurisdictions. (d) Prior to the occurrence of an Event of Default, the Collateral Agent and any Approved MBS Custodian shall take such steps as they may be reasonably directed from time to time by the Company in writing which are not inconsistent with the provisions of this Security Agreement and the other Credit Documents and which the Company deems necessary to enable the Company to perform and comply with Approved Investor Commitments and with other agreements for the sale or other disposition in whole or in part of Mortgage Loans and Securities. (e) The Collateral Agent may deliver any item of Collateral to the Company or any other Person in accordance with the provisions of the Credit Documents; provided, however, that the Collateral Agent shall not deliver and shall incur no liability to the Company or any other Person for refusing to deliver any item of Collateral to the Company or any other Person (other than under existing Approved Investor Commitments) while an Event of Default exists if the Collateral Agent has been directed to refrain from so delivering Collateral by (i) the holders of more than 50% of the Secured Debt then outstanding (the "Majority Debtholders") voting through the Credit Agent or the Note Trustee, as applicable, as agents for the holders of the Secured Debt as set forth in Paragraph 23 hereof, or (ii) the Required Lenders. (f) In addition to the releases of Collateral provided for in subparagraphs (a)-(e) of this Paragraph 7, upon the request of the Company delivered from time to time to the Credit Agent and the Collateral Agent, the Collateral Agent shall, with the prior written approval of the Credit Agent, release Collateral specified -13- 14 in such notice from the lien of this Security Agreement. The Credit Agent shall give its approval of such release if, but only if, (i) at the time of such release no Event of Default exists and no notice of a Default has been issued that has not been cured, (ii) any payment under Section 2.14(a) of the Credit Agreement which may be required as a result of such release has been made (or contemporaneously with such release shall be made) so that the release of such Collateral will not create a violation of any Lending Sublimit or Borrowing Base Sublimit, and (iii) if the Collateral to be released is Pledged Servicing, such release is made in connection with the sale of such Pledged Servicing by the Company; provided, however that, while an Event of Default exists or while a notice of Default has been issued but not cured, the Collateral Agent may (A) release pledged Cash Equivalents which are the subject of reverse repurchase obligations in connection with the applicable reverse repurchase agreement, and (B) release Pledged Items in connection with the sale of Pledged Items pursuant to an existing Approved Investor Commitment if, in either case, the proceeds of such repurchase or sale are deposited in the Settlement Account. The Collateral Agent is authorized to execute and deliver to the Company, on behalf of the Secured Parties, such UCC-3 partial release forms or other evidence as may be required of any release permitted hereunder. (g) Notwithstanding the provisions of Paragraph 7(b) above, at the request of the Agent: (i) The second sentence of the second full paragraph of the form of whole loan sale transmittal letter attached hereto as Exhibit 4 shall be deleted and replaced with the following sentence: "Each of the Mortgage Loans is subject to a security interest in favor of National City Bank of Kentucky (the "Collateral Agent") on behalf of the Secured Parties, which security interest shall be automatically released upon your remittance of an amount equal to the greater of (1) the purchase price for such Mortgage Loan (as set forth on the schedule attached hereto), and (2) $__________, which is the mortgage collateral value assigned by the Collateral Agent to such Mortgage Loan. Such amount shall be remitted by wire transfer to the following account:", in which case the amount to be inserted in the blank in clause two of such revised provision shall be an amount equal to the amount of the Aggregate Borrowing Base which is attributable to the Mortgage Loans being delivered pursuant to the transmittal letter; -14- 15 (ii) The second sentence of the second full paragraph of the form of warehouse related security transmittal letter attached hereto as Exhibit 5 shall be deleted and replaced with the following sentence: "Each of the Mortgage Loans is subject to a security interest in favor of National City Bank of Kentucky (the "Collateral Agent") for the benefit of the Secured Parties, which security interest shall be automatically released upon the issuance of the Warehouse-Related Security in accordance with the terms of the prescribed GNMA, FNMA or FHLMC form enclosed herewith, which form shall name either the Collateral Agent or another person designated by the Collateral Agent as the person to whom the Warehouse-Related Security is to be delivered and require that the principal amount of the Warehouse Related Security be in an amount not less than $__________, which is the mortgage collateral value assigned by the Collateral Agent to such Mortgage Loan.", in which case the amount to be inserted in the blank in such revised provision shall be an amount equal to the amount of the Aggregate Borrowing Base which is attributable to the Mortgage Loans being delivered pursuant to the transmittal letter. The Agent may require that the above described modifications be made to all such transmittal letters or only to transmittal letters to certain Approved Investors designated by the Agent. 8. Abatement of Security Interest. Upon the occurrence of a Positive Security Event and so long as each of the Positive Security Conditions is satisfied and no other Negative Security Event has occurred, the security interest granted to the Secured Parties pursuant to Paragraph 3 herein shall abate. The Credit Agent shall advise the Collateral Agent when such abatement is in effect promptly after the Company notifies the Credit Agent that such a Positive Security Event has occurred and shall advise the Collateral Agent if such abatement expires under the terms of the Credit Agreement. The Collateral Agent shall, at the request of the Company and after the Credit Agent has confirmed to the Collateral Agent that a Positive Security Event has occurred and all Positive Security Conditions are satisfied, execute and deliver such UCC-3 financing statements as may be required to evidence the abatement of any security interest that shall previously have been perfected by means of the filing of financing statements. As a condition to such abatement, the Company and each Borrowing Subsidiary shall execute such UCC-1 financing statements and other documentation as the Collateral Agent may request to permit the -15- 16 security interest in the Collateral to be reinstated and perfected by the Collateral Agent without further action by the Company or any Borrowing Subsidiary if a Negative Security Event should occur thereafter. Although the Company and the Borrowing Subsidiaries shall continue to deliver Mortgage Loan files and other information and documents to the Collateral Agent (in a custodial capacity) even while the security interest is abated, so long as the security interest is abated the Company shall perform all of the obligations of the Collateral Agent as set forth herein with respect to determining the Borrowing Bases and delivering Borrowing Base Reports. During such abatement period, (i) the remedies pertaining to the Collateral available to the Collateral Agent, the Secured Parties and the Credit Agent under Paragraphs 16 and 17 or applicable law shall not be available, (ii) the Company shall perform all of the obligations of the Collateral Agent with respect to determining the Borrowing Bases, (iii) the Collateral Agent will not be required to sell the Collateral or otherwise take any action at the direction of the Credit Agent to realize upon the Collateral, (iv) the Collateral Agent shall be required to sell the Collateral or otherwise take any action with regard to the disposition of the Collateral at the direction of the Company, and (v) the Collateral shall be deemed not to constitute security unless and until a Negative Security Event occurs thereafter. Upon the occurrence of a Negative Security Event, the Company (with respect to Collateral owned by the Company) and each Borrowing Subsidiary (with respect to Collateral owned by the Borrowing Subsidiaries) shall be deemed to have (i) automatically re-pledged and re-granted to the Collateral Agent for the benefit of the Secured Parties a first priority security interest in the Collateral to secure payment of the Secured Debt, (ii) consented to the Collateral Agent's filing of the UCC-1 financing statements and dating and otherwise completing, filing and/or recording, if necessary, any other documentation previously provided by the Company or any Borrowing Subsidiary to the Collateral Agent, and (iii) reaffirmed its appointment of the Collateral Agent to act as its bailee pursuant to the provisions of Section 9-305 of the Uniform Commercial Code of any applicable state. Upon notice from the Credit Agent that a Negative Security Event has occurred, the Collateral Agent shall be deemed to have been informed of and accepted such appointment and shall file UCC-1 financing statements executed by the Company and the Borrowing Subsidiaries and other documentation as the Collateral Agent may request to permit the security interest in the Collateral to be reinstated. The Company shall pay or shall reimburse the Collateral Agent for the payment of any filing costs incurred in connection with the filing of any UCC-1 or UCC-3 statements pursuant to this Paragraph 8. 9. Reports. The Collateral Agent shall (a) deliver the Borrowing Base Report at the times and in the manner set forth in Paragraph 6(a) above and (b) deliver to the Credit Agent, the -16- 17 Company and any Lender which makes a written request therefor, such other reports and information as any Lender may from time to time reasonably request. In preparing any such reports the Collateral Agent shall be entitled to rely, without independent investigation (other than the review steps described on Exhibit 1 hereto), on information supplied to the Collateral Agent by the Company. 10. No Reliance. The Collateral Agent shall not be responsible to any Secured Party for any recitals, statements, representations or warranties contained herein or in any other Credit Document; or for the execution, effectiveness, genuineness, validity, enforceability, collectability, accuracy, completeness or sufficiency of this Security Agreement or any other Credit Document or instruments executed and delivered, or which could have been executed or delivered, in connection with this Security Agreement or the other Credit Documents, including, without limitation, the attachment, creation, effectiveness or perfection of the security interests granted or purported to be granted hereunder in and to the Collateral. 11. Costs and Expenses. The Collateral Agent shall notify the Company of all extraordinary costs and expenses of the Collateral Agent directly relating to the Collateral Agent's performance of this Security Agreement, and such extraordinary costs and expenses shall be paid promptly by the Company or, if already paid by the Collateral Agent, the Company promptly shall reimburse the Collateral Agent therefor. For the purposes of this provision, extraordinary costs and expenses shall include all costs and expenses incurred by the Collateral Agent in performance of this Security Agreement which have not been factored into the computation of the Collateral Agent's fee (as agreed upon between the Company and the Collateral Agent pursuant to a separate agreement), including, without limitation, reasonable expenses of legal counsel to the Collateral Agent to enforce the rights of the Collateral Agent hereunder. 12. Availability of Documents. The Secured Parties and their agents, accountants, attorneys and auditors (each an "Inspecting Party") will be permitted from time to time upon reasonable notice to the Collateral Agent and the Company, and at such time as may be mutually acceptable to such Inspecting Party, the Collateral Agent and the Company to examine (to the extent permitted by applicable law) the files, documents, records and other papers in the possession or under the control of the Collateral Agent relating to any or all Collateral and to make copies thereof. Any such activity will be at the cost and expense of the Secured Party requesting such access, except that following the occurrence of an Event of Default, all reasonable out-of-pocket costs and expenses associated with the exercise by the Credit Agent or the Note Trustee of its rights under this Paragraph 12 shall be promptly paid by the Company upon demand of the Credit Agent or the Note -17- 18 Trustee, as applicable. 13. Representations and Warranties. The Company, with respect to Collateral pledged hereunder by the Company, and each Borrowing Subsidiary, with respect to Collateral pledged hereunder by any such Borrowing Subsidiary, hereby represents and warrants that: (a) the Company or the Borrowing Subsidiary, as applicable, is the sole owner of the Collateral (or, in the case of after-acquired Collateral, at the time the Company acquires rights in the Collateral, will be the sole owner thereof), subject only to the rights of Approved Investors under the Approved Investor Commitments; (b) except for security interests in favor of the Collateral Agent for the benefit of the Secured Parties hereunder, no Person has (or, in the case of after-acquired Collateral, at the time the Company acquires rights therein, will have) any right, title, claim or interest in, against or to the Collateral and, in any event, so long as the Collateral Agent complies with the procedures relating to possession of Collateral set forth in this Security Agreement, the Collateral Agent shall have a perfected, first priority security interest therein for the benefit of the Secured Parties; (c) no consent of any Person is required that has not been obtained for the granting of the security interests provided for herein, nor will any consent be required for the Collateral Agent to exercise its rights under this Security Agreement in accordance with the terms of this Security Agreement (except for consents to assignments of options, futures contracts or other interest rate protection products in favor of the Secured Parties from the counterparties thereto, which consents shall not be required to be obtained unless an Event of Default is continuing or the Required Lenders request otherwise); (d) to the best of the Company's and the Borrowing Subsidiary's knowledge, all information heretofore, herein or hereafter supplied to the Collateral Agent or to any Lender by or on behalf of the Company with respect to the Collateral is or will be accurate and complete; (e) the Approved Investor Commitments covering such Collateral may be collaterally assigned to the Collateral Agent as described herein; and (f) each Mortgage Loan and Security is, at all dates included in the computation of the value of the Borrowing Bases, Eligible Collateral. 14. Covenants of the Company and Borrowing Subsidiaries. The Company and the Borrowing Subsidiaries hereby agree: (a) to procure, execute and deliver from time to time (unless a Positive Security Event has occurred and is continuing) any endorsements, assignments, financing statements and other writings deemed necessary or appropriate by the Collateral Agent or the Credit Agent to perfect, maintain and protect the Collateral Agent's security interest hereunder and the priority thereof and to deliver promptly to the Collateral Agent all originals of any Collateral or proceeds thereof consisting of chattel paper or instruments; (b) not to surrender or lose possession of (other than to the -18- 19 Collateral Agent), sell, encumber, or otherwise dispose of or transfer, any Collateral or right or interest therein other than shipment of Mortgage Loans and Securities under Approved Investor Commitments and as otherwise permitted under Paragraph 7 above and as otherwise permitted by the Credit Agreement; (c) except as otherwise contemplated in any Custodial Agreement, not to grant to any Federal Agency or Approved Investor any other security interest in any Collateral, or otherwise acknowledge the creation of any ownership rights of any Federal Agency or Approved Investor with respect to any Collateral unless and until the Collateral Agent has received the proceeds of such Collateral as described herein; (d) at all times to account fully for and promptly to deliver to the Collateral Agent, in the form received, all Collateral or proceeds thereof received, endorsed to the Collateral Agent or in blank as appropriate and accompanied by such assignments and powers, duly executed, as the Collateral Agent or the Credit Agent shall request, and until so delivered all Collateral and proceeds thereof shall be held in trust for the Collateral Agent for the benefit of the Secured Parties, separate from all other property of the Company and the Borrowing Subsidiaries and identified as the property of the Collateral Agent for the benefit of the Secured Parties; (e) to keep accurate and complete records of the Collateral and at any reasonable time and at the Company's expense, upon demand by the Collateral Agent or the Credit Agent, to exhibit to and allow inspection of the Collateral and the records, reports and information concerning the Collateral by the Collateral Agent or Credit Agent (or Persons designated by the Collateral Agent or Credit Agent); (f) to keep the records concerning the Collateral at the location(s) set forth in Paragraph 27 below and not to remove the records from such location(s) without the prior written consent of the Collateral Agent and the Credit Agent; (g) not to materially modify, compromise, extend, rescind or cancel any deed of trust, mortgage, note or other document, instrument or agreement connected with any Mortgage Loan pledged under this Security Agreement or any document relating thereto or connected therewith or consent to a postponement of strict compliance on the part of any party thereto with any term or provision thereof in any material respect; (h) to keep the Collateral insured against loss, damage, theft, and other risks customarily covered by insurance, and such other risks as the Collateral Agent or the Credit Agent may request; (i) to do all acts that a prudent investor would deem necessary or desirable to maintain, preserve and protect the Collateral; (j) not knowingly to use or permit any Collateral to be used unlawfully or in violation of any provision of this Security Agreement, the Credit Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (k) to pay (or require to be paid) prior to their becoming delinquent all taxes, assessments, insurance premiums, charges, encumbrances and liens now or hereafter imposed upon or affecting any Collateral except as otherwise permitted in the Credit Agreement; (l) to notify the Collateral Agent and the Credit Agent before any such change shall -19- 20 occur of any change in the Company's name, identity or structure through merger, consolidation or otherwise; (m) to appear in and defend, at the Company's cost and expense, any action or proceeding which may affect its title to or the Collateral Agent's interest for the benefit of the Secured Parties in the Collateral; and (n) to comply in all material respects with all laws, regulations and ordinances relating to the possession, operation, maintenance and control of the Collateral. Notwithstanding the foregoing, (1) the requirements of clauses (g), (k) and (m) shall not apply to any Collateral which is not required to be included in the computation of the value of any of the Borrowing Bases in order for the Company to be in compliance with the requirements of the Credit Agreement unless failure to comply with the requirements of said subparagraphs would have an adverse effect on the Collateral which is included in such computation, and (2) the failure of the Company or any Borrowing Subsidiary to comply with its obligations under this Paragraph 14 with respect to any Pledged Item shall cause such Pledged Item to cease to qualify as Eligible Collateral. 15. Collection of Collateral Payments. (a) The Company or the applicable Borrowing Subsidiary shall, at its sole cost and expense, use its best efforts to obtain payment, when due and payable, of all sums due or to become due with respect to any Collateral ("Collateral Payments" or a "Collateral Payment"), consistent with all requirements of law and contractual obligations binding upon the Company or the applicable Borrowing Subsidiary. Upon the request of the Collateral Agent while an Event of Default exists, the Company or the applicable Borrowing Subsidiary will notify and direct any party who is or might become obligated to make any Collateral Payment, to make payment thereof to the Collateral Agent (or to the Company or the applicable Borrowing Subsidiary in care of the Collateral Agent) at such address as the Collateral Agent may designate. The Company will reimburse the Collateral Agent promptly upon demand for all out-of-pocket costs and expenses, including reasonable attorneys' fees and litigation expenses, incurred by the Collateral Agent in seeking to collect any Collateral Payment. (b) The Collateral Agent shall, promptly upon receipt of any funds delivered from any Servicing Purchaser as full or partial payment of any Pledged Servicing Sale Receivable, deposit such funds into the Collateral Agent's Settlement Account and notify the Company of the receipt of such funds. If the Collateral Agent receives any check from a Servicing Purchaser in payment of Servicing Sale Receivables and such check contains a restrictive endorsement, the Collateral Agent shall obtain the consent of the Company and the Credit Agent before cashing any such check. (c) Following the occurrence of an Event of Default, upon the request of the Collateral Agent the Company and each -20- 21 Borrowing Subsidiary will transmit and deliver to the Collateral Agent, forthwith upon receipt and in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed where required so that such items may be collected by the Collateral Agent) which may be received by the Company or any Borrowing Subsidiary at any time as payment on account of any Collateral Payment and if such request shall be made, until delivery to the Collateral Agent, such items will be held in trust for the Collateral Agent for the benefit of the Secured Parties and will not be commingled by the Company or any Borrowing Subsidiary with any of their other funds or property. Thereafter, the Collateral Agent is hereby authorized and empowered to endorse the name of the Company or the applicable Borrowing Subsidiary on any check, draft or other instrument for the payment of money received by the Collateral Agent on account of any Collateral Payment if the Collateral Agent believes such endorsement is necessary or desirable for purposes of collection. (d) The Company hereby agrees to indemnify, defend and save harmless the Collateral Agent and its agents, officers, employees and representatives from and against all reasonable liabilities and expenses on account of any adverse claim asserted against the Collateral Agent relating to any moneys received by the Collateral Agent on account of any Collateral Payment (other than as a direct result of the gross negligence or willful misconduct of the Collateral Agent) and such obligation of the Company shall continue in effect after and notwithstanding the discharge of the Credit Indebtedness and/or the release of the security interest granted in Paragraph 3 above. 16. Authorized Action by Collateral Agent. The Company and each Borrowing Subsidiary each hereby irrevocably appoints the Collateral Agent as its attorney-in-fact to do (but the Collateral Agent shall not be obligated to and shall incur no liability to the Company, any Borrowing Subsidiary or any Secured Party or any other third party for failure so to do) at any time and from time to time at the written request and direction, given while an Event of Default exists, of the Required Lenders or the Majority Debtholders, any act which the Company or any Borrowing Subsidiary is obligated by this Security Agreement to do, and to exercise such rights and powers as the Company or any Borrowing Subsidiary might exercise with respect to the Collateral, including, without limitation, the right to (a) collect by legal proceedings or otherwise and endorse, receive and receipt for all dividends, interest, payments, proceeds and other sums and property now or hereafter payable on or on account of the Collateral; (b) insure, process, service and preserve the Collateral; (c) transfer the Collateral to the Collateral Agent's own or its nominee's name; and (d) make any compromise or settlement, and take any other action it deems advisable with respect to the Collateral. Notwithstanding the preceding sentence, the Collateral Agent shall endeavor to take -21- 22 only such actions with respect to the Collateral as are consistent with general servicing of such Collateral and in compliance with Federal Agency requirements; provided, however, that the Collateral Agent shall not be liable to the Company or any Borrowing Subsidiary for any actions taken by the Collateral Agent absent gross negligence or willful misconduct. Notwithstanding anything contained herein, in no event shall the Collateral Agent be required to make any presentment, demand or protest, or give any notice, and the Collateral Agent need not take any action to preserve any rights against any prior party or any other person in connection with the Secured Debt or with respect to the Collateral. 17. Default and Remedies. (a) While an Event of Default exists under any Credit Document or the Indentures, the Collateral Agent shall at the written request and direction of the Majority Debtholders, without notice to or demand upon the Company: (a) foreclose or otherwise enforce the Collateral Agent's security interest for the benefit of the Secured Parties in the Collateral in any manner permitted by law or provided for hereunder; (b) sell or otherwise dispose of the Collateral or any part thereof at one or more public or private sales or at any broker's board or on any securities exchange, whether or not such Collateral is present at the place of sale, for cash or credit or future delivery and without assumption of any credit risk, on such terms and in such manner as the Collateral Agent may determine; (c) require the Company to assemble the Collateral and/or books and records relating thereto and make such available to the Collateral Agent at a place to be designated by the Collateral Agent; (d) enter into property where any Collateral or books and records relating thereto are located and take possession thereof with or without judicial process; and (e) prior to the disposition of the Collateral, prepare it for disposition in any manner and to the extent the Collateral Agent deems appropriate. Whether or not the Collateral Agent exercises any right given pursuant to this Paragraph 17, upon the occurrence of any Event of Default, the Collateral Agent on behalf of the Secured Parties shall have as to any Collateral all other rights and remedies provided for herein and all rights and remedies of a secured party under the Illinois Uniform Commercial Code and, in addition thereto and not in lieu thereof, all other rights or remedies at law or in equity existing or conferred upon the Collateral Agent on behalf of the Secured Parties by other jurisdictions or other applicable law or given to the Collateral Agent on behalf of the Secured Parties pursuant to any security agreement, other instrument or agreement heretofore, now, or hereafter given as security for the Company's obligations hereunder. (b) The Collateral Agent is authorized, at any such sale, if it deems it advisable so to do, to restrict the -22- 23 prospective bidders or purchasers to Persons who will represent and agree that they are purchasing for their own account, for investment, and not with a view to the distribution or sale of any of the Collateral. Upon any sale or other disposition pursuant to this Security Agreement, the Collateral Agent shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral or portion thereof so sold or disposed of and all proceeds thereof shall be promptly distributed as set forth in Paragraph 18 hereof. Each purchaser at any such sale or other disposition shall hold the Collateral free from any claim or right of whatever kind, including any equity or right of redemption of the Company or any Borrowing Subsidiary, and the Company and the Borrowing Subsidiaries specifically waive (to the extent permitted by law) all rights of redemption, stay or appraisal which they have or may have under any rule of law or statute now existing or hereafter adopted. The Collateral Agent shall give the Company or the applicable Borrowing Subsidiary only such notice and shall publish such notice as may be required by the Illinois Uniform Commercial Code or the Kentucky Commercial Code or by other applicable law of the intention to make any such public or private sale or sale at broker's board or on a securities exchange. Any such public sale shall be held at such time or times within the ordinary business hours and at such place or places permitted by the Illinois Uniform Commercial Code or the Kentucky Commercial Code. At any such sale the Collateral may be sold in one lot as an entirety or in separate parcels, as the Collateral Agent may determine. The Collateral Agent may adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral on credit or for future delivery, (i) the Collateral so sold may be retained by the Collateral Agent until the selling price is paid by the purchaser thereof, (ii) none of the Secured Parties shall incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold, and (iii) in case of any such failure, such Collateral may again be sold as provided herein. Nothing contained in this Security Agreement shall prohibit any Lender or Lenders from purchasing the Collateral at such sale. (c) Notwithstanding anything herein to the contrary, with respect to any Collateral covered by an executed Acknowledgement Agreement, the Collateral Agent is authorized to carry out and comply with, and the Company approves and acknowledges, all requirements regarding such a sale set forth therein or as may otherwise be imposed by any Approved Investor which is a party to such an Acknowledgement Agreement and agrees that such a sale in accordance with the requirements of an Acknowledgement Agreement is commercially reasonable. -23- 24 18. Disposition of Proceeds. (a) General. "Net Proceeds" shall mean the proceeds realized upon the sale or other disposition of any Collateral after deducting therefrom the payment of the costs and expenses of such sale or disposition, including (i) reasonable compensation to the Collateral Agent's and Credit Agent's agents and counsel, and all expenses, liabilities and advances made or incurred by any Secured Party acting on instructions of the Majority Debtholders or the Required Lenders, and (ii) with respect to the Pledged Servicing, the payment of any amounts due by the Company to FNMA or FHLMC, as the case may be, as a condition to the transfer of the Company's interest in any such Servicing Agreements pursuant to the terms of such Servicing Agreements, including without limitation all amounts described in the Acknowledgement Agreements. All such costs and expenses shall be deducted from the proceeds directly related thereto or, in the absence of any such direct relationship, on a pro rata basis from all types of proceeds recovered by the Collateral Agent. The total of all Net Proceeds for all categories of Collateral is referred to as "Aggregate Net Proceeds." To the extent the Credit Agent is holding any Net Proceeds (e.g. amounts held in the Settlement Account), the Credit Agent shall notify the Collateral Agent of the amount of such Net Proceeds in order to enable the Collateral Agent to calculate the Aggregate Net Proceeds. The Collateral Agent shall distribute the Aggregate Net Proceeds as set forth in the following subparagraphs of this paragraph. Each of the Credit Agent and the Note Trustee shall notify the Collateral Agent in writing of the manner in which Aggregate Net Proceeds shall be delivered to each such party (e.g. by providing wire transfer instructions). (b) Distributions of Exempted Debt Proceeds. To the extent that the amount of the Aggregate Net Proceeds actually in the possession of the Collateral Agent are sufficient, the Collateral Agent shall first distribute to the Credit Agent for the benefit of the Lenders an amount equal to the Exempted Amount. "Exempted Amount" shall mean an amount equal to the lesser of (A) the Credit Indebtedness and (B) sum of (i) 10% of the Company's Consolidated Tangible Net Worth (as defined in the Indentures) as of June 30, 1994, and (ii) the portion of the Credit Indebtedness constituting purchase money borrowings by the Company or a Borrowing Subsidiary. The parties hereto acknowledge that 10% of the Company's Consolidated Tangible Net Worth equals $50,300,000 as of June 30, 1994. The Collateral Agent shall be entitled to rely without independent investigation upon the Credit Agent's determination of the amount of Credit Indebtedness which constitutes purchase money borrowings. The Aggregate Net Proceeds minus the Exempted Amount is hereinafter referred to as the "Ratable Net Proceeds". After the Collateral Agent has distributed the Exempted Amount to the Credit Agent, the Collateral Agent shall distribute the Ratable Net Proceeds as set forth in the following -24- 25 subparagraphs. (c) Distributions to the Note Trustee. The Collateral Agent shall then distribute to the Note Trustee for the benefit of the Noteholders an amount equal to the lesser of (A) the sum of the outstanding principal balance of the Ratable Medium-Term Notes plus the accrued unpaid interest thereon and (B) (i) the Ratable Net Proceeds from the disposition of the Collateral multiplied by (ii) the quotient of (1) the sum of the outstanding principal balance of the Ratable Medium-Term Notes plus the accrued unpaid interest thereon, divided by (2) the Secured Debt minus the Exempted Amount. The Collateral Agent shall be entitled to rely without independent investigation upon (A) the Note Trustee's determination of the outstanding principal balance of the Ratable Medium-Term Notes plus the accrued unpaid interest thereon and (B) the Credit Agent's determination of the amount of Credit Indebtedness. If the Credit Agent has retained more Net Proceeds than the Lenders and the Company are entitled to (e.g. the proceeds in the Settlement Account exceed the amount of Net Proceeds due to the Lenders and the Company), the Credit Agent shall deliver such excess retained amount to the Collateral Agent for distribution to the Note Trustee for the benefit of the Noteholders. (d) Distributions to the Credit Agent. The Collateral Agent shall then distribute to the Credit Agent for the benefit of the Lenders an amount equal to the remainder of any Aggregate Net Proceeds held by the Collateral Agent. 19. Waiver. No Secured Party shall incur any liability as a result of the sale of the Collateral, or any part thereof, at any public or private sale. The Company and each Borrowing Subsidiary each hereby waives any claims it may have against any Secured Party arising by reason of the fact that the price at which the Collateral may have been sold at such private sale was less than the price which might have been obtained at a public sale or was less than the aggregate amount of the Secured Debt then outstanding. 20. The Collateral Agent (a) Collateral Agent's Fee. Compensation of the Collateral Agent for its services hereunder and reimbursement for any expenses incurred by it in the performance of its duties hereunder shall be paid by the Company pursuant to a separate written agreement between the Collateral Agent and the Company. (b) Actions by the Collateral Agent. The obligations of the Collateral Agent hereunder are only those expressly set forth herein. The Collateral Agent shall be entitled to (but shall not be obligated to) take or refrain from taking any discretionary powers or actions under this Security Agreement or any other Credit -25- 26 Document or the Indentures unless and until the Collateral Agent shall have received the written direction to take or refrain from taking such action from (i) the Required Lenders while no Event of Default exists, or (ii) the Majority Debtholders while an Event of Default exists. The Collateral Agent shall not be required to take any action hereunder if it shall reasonably determine that by so doing it may incur criminal or civil liability. (c) Consultation with Experts. The Collateral Agent may consult with legal counsel (who may be counsel for the Company), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. (d) Liability of Collateral Agent. (1) Neither the Collateral Agent nor any of its directors, officers, agents, or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Majority Debtholders or Required Lenders, as applicable, or (ii) in the absence of its own gross negligence or willful misconduct. (2) The Collateral Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) or telephone communication believed by it to be genuine or, in the case of a writing, to be signed by the proper party or parties. (e) Indemnification. Subject to the limitations set forth below, the Lenders and the Noteholders shall indemnify the Collateral Agent (to the extent not reimbursed by the Company) against any cost, expense (including reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Collateral Agent's gross negligence or willful misconduct) that the Collateral Agent may suffer or incur in connection with this Security Agreement or any action taken or omitted by the Collateral Agent hereunder (the "Indemnified Amount"). Any Indemnified Amount due to the Collateral Agent shall be paid by the Lenders and the Noteholders pro rata in accordance with their respective shares of the Secured Debt at the time the Collateral Agent incurred such liability (i.e. the portion paid by the Noteholders shall equal the total Indemnified Amount multiplied by the quotient of (i) the outstanding principal balance of the Ratable Medium-Term Notes plus the accrued unpaid interest thereon at such time divided by (ii) the total Secured Debt at such time); provided, however recourse to the Noteholders for any amounts due from the Noteholders under this Paragraph shall be paid solely from the portion of the Ratable Net Proceeds due but not yet distributed -26- 27 to the Noteholders under Paragraph 18(c) above and the remainder of any Indemnified Amount shall be paid by the Lenders. Each Lender shall, ratably in accordance with its share of the Aggregate Commitment at the time the Collateral Agent incurred such liability, pay its portion of the Indemnified Amount due from the Lenders. For the purposes of this Paragraph, the amounts of (1) any Commitment of any Lender, (2) the outstanding principal balance of the Ratable Medium-Term Notes plus the accrued unpaid interest thereon and (3) the Credit Indebtedness shall be the highest amounts of such Commitments or components of the Secured Debt during the course of any event for which indemnity is sought. The provisions of this Paragraph shall survive the termination of this Security Agreement. (f) Knowledge of Defaults. The Collateral Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default unless the Collateral Agent has received notice from a Secured Party or the Company referring to the Credit Agreement, this Security Agreement or the Indentures describing such Event of Default and stating that such notice is a "Notice of Default." Following receipt of a Notice of Default, the Collateral Agent shall assume that the Event of Default is continuing until the Collateral Agent receives written information to the contrary from the Credit Agent. (g) Reports. The Collateral Agent may, at its option with the approval of the Company and the Credit Agent, alter the format of any report required hereunder, provided such modified report contains the same information previously furnished in the unmodified report. (h) Other Transactions with Company. The Collateral Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with, the Company or any Subsidiary or Affiliate of the Company as if it were not the Collateral Agent hereunder. (i) Resignation/Removal. The Collateral Agent may resign at any time by giving 90 days prior written notice thereof to the Credit Agent and the Company. The Collateral Agent agrees to resign within 60 days after written notice by the Company requesting the resignation of the Collateral Agent provided that no Event of Default has occurred and is continuing at the time of such request. In addition, in the event the Collateral Agent fails to perform its obligations under this Security Agreement in any material manner and fails to correct its performance within 30 days of receipt of written notice of such failure given by the Credit Agent at the request of not less than the Required Lenders, then the Collateral Agent may be removed upon 30 days written notice given by the Credit Agent at the direction of not less than the Required Lenders. Upon any such resignation or removal: (i) so -27- 28 long as there has not occurred and is continuing an Event of Default, the Company shall appoint from among the Lenders (which appointment shall be subject to the approval of the Required Lenders, such approval not to be unreasonably withheld or delayed), a successor agent for such Collateral Agent, and (ii) following the occurrence and during the continuance of an Event of Default, the Required Lenders shall appoint from among the Lenders, a successor agent for such Collateral Agent. Following the appointment and acceptance of a successor Collateral Agent the Credit Agent shall notify the Collateral Agent as to who the successor Collateral Agent is and the Collateral shall be transferred to the new Collateral Agent within 30 days after such acceptance. If the Company and/or the Required Lenders, as applicable, are unable to agree on the appointment of a successor agent prior to the expiration of any of the time periods set forth above, the Credit Agent (or an Affiliate thereof designated by the Credit Agent) shall be deemed a successor Collateral Agent until the appointment of and acceptance by a different successor Collateral Agent, and the Collateral Agent shall be permitted to transfer all the Collateral held by the Collateral Agent to the Credit Agent (or an Affiliate thereof designated by the Credit Agent) within 30 days after the applicable time period set forth above. Within 30 days after the appointment of a successor Collateral Agent and the successor's acceptance of such appointment, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Collateral Agent, and the retiring Collateral Agent shall be discharged from its duties and obligations under this Security Agreement; provided, however, that the retiring Collateral Agent shall not be discharged from any liability as a result of its or its directors', officers', agents' or employees' gross negligence or willful misconduct in connection with the performance of its duties and obligations under this Security Agreement prior to the effective date of its resignation or removal. Notwithstanding the foregoing, the Collateral Agent shall continue to hold the Pledged Items and the security interest created hereunder for the benefit of the Secured Parties until such Pledged Items and security interest have been effectively transferred to the successor agent. After the resignation or removal of any Collateral Agent hereunder, the provisions of this Security Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Collateral Agent under this Security Agreement. (j) Representations and Warranties. The Collateral Agent hereby represents and warrants: (1) The Collateral Agent is a national banking association validly existing, in good standing and authorized to exercise its powers, rights and privileges and is qualified to do business in all jurisdictions where necessary, and has all requisite power and -28- 29 authority to perform all of its obligations under this Security Agreement; (2) The execution, delivery and performance by the Collateral Agent of this Security Agreement and all documents required hereby to be executed by the Collateral Agent have been duly authorized by all necessary corporate action and do not and will not violate any existing provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award currently in effect having applicability to the Collateral Agent; and (3) This Security Agreement and all documents required hereby to be executed by the Collateral Agent have been duly executed and delivered by the Collateral Agent. 21. Confidentiality. The Collateral Agent agrees to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all non-public information provided to it by the Company or any Borrowing Subsidiary or by any other party on the Company's behalf in connection with this Security Agreement or the Credit Documents and agrees and undertakes that neither it nor any of its Affiliates shall disclose any such information for any purpose or in any manner other than pursuant to the terms contemplated by this Security Agreement or the Credit Documents. The Collateral Agent may disclose such information (1) to any Secured Party, (2) at the request of any regulatory authority or in connection with an examination of the Collateral Agent or any of its Affiliates by any such authority, (3) pursuant to subpoena or other court process, (4) when required to do so in accordance with the provisions of any applicable law, (5) at the express direction of any other governmental authority of any State of the United States of America or of any other jurisdiction in which the Collateral Agent or any of its Affiliates conducts its business, (6) to the Collateral Agent's or any of its Affiliates' independent auditors, attorneys and other professional advisors, (7) if such information has become public other than through disclosure by the Collateral Agent or any of its Affiliates or any Lender, and (8) in connection with any litigation involving the Collateral Agent or any of its Affiliates. Notwithstanding the foregoing, the Company authorizes the Collateral Agent to disclose to any lending institution proposed by the Company to become a Lender under the Credit Agreement or any prospective or actual Participants such financial and other information in its possession (i) which has been delivered to the Collateral Agent pursuant to the Credit Documents or which has been delivered to the Collateral Agent by the Company prior to entering into the Credit Documents or (ii) which is reasonably necessary to effectuate the purposes of the Credit Agreement and this Security Agreement, provided that unless otherwise agreed by the Company, such lending institution or -29- 30 Participant shall agree in writing to keep such information confidential to the same extent required of the Collateral Agent hereunder. 22. Limited Rights of Noteholders. It is expressly acknowledged and agreed by the Note Trustee on behalf of the Noteholders, that the Ratable Medium-Term Notes are entitled to the benefits of this Security Agreement and the Collateral hereunder, that this Security Agreement and the Credit Agreement may be amended and otherwise modified and/or provisions waived from time to time as permitted hereunder and thereunder without consultation with the Note Trustee or any Noteholder and without the consent of the Note Trustee or any such Noteholder (other than amendments or modifications which are made prior to the occurrence of a Positive Security Event or after the occurrence of a Negative Security Event and which would (i) eliminate the Noteholders as a "Secured Parties" hereunder (ii) materially reduce the rights of the Noteholders in the proceeds of the Collateral created hereunder, or (iii) amend the definition of "Majority Debtholders" or any provision hereof regarding the consent or voting of the Majority Debtholders, which amendments or modifications shall require the prior written consent of the Note Trustee). 23. Voting of Debtholders. (a) Required Lenders. In all cases in which this Security Agreement requires the consent, approval or direction of the Required Lenders or all of the Lenders with respect to any action, the Credit Agent shall be responsible for determining whether the Required Lenders has given such consent, approval or direction and shall notify the Collateral Agent thereof in writing. The Collateral Agent shall be entitled to rely without independent verification upon the information supplied by the Credit Agent with respect to any consent, approval or direction of the Required Lenders (or all of the Lenders with respect to actions which require unanimous approval of the Lenders). (b) Majority Debtholders. In all cases in which this Security Agreement requires the consent, approval or direction of the Majority Debtholders with respect to any action, any of the Credit Agent, the Note Trustee or the Collateral Agent may call for the approval of such action by the Majority Debtholders by giving written notice (a "Voting Request") to the other two of such Persons. Following delivery of the Voting Requests, the Note Trustee shall be responsible for determining the vote on behalf of the Noteholders and the Credit Agent shall be responsible for determining the vote on behalf of the Lenders. The Credit Agent or the Note Trustee may request that the other party distribute to the Noteholders or Lenders, as the case may be, a statement setting forth the sender's reasons for recommending or opposing that a particular action be taken. Within ten Business Days after the -30- 31 delivery of a Voting Request, each of the Credit Agent and the Note Trustee shall notify the Collateral Agent in writing of (i) whether the Lenders or the Noteholders (or the Trustee on behalf of the Noteholders), respectively, approve of the proposed action, and (ii) the amount of Secured Debt then held by the Lenders or the Noteholders, respectively. Both the Credit Agent and the Note Trustee may approve of the proposed action on behalf of a portion of the Lenders or Noteholders, respectively, and disapprove of the action on behalf of the remainder of the Lenders or Noteholders, in which case the Credit Agent or the Note Trustee shall also notify the Collateral Agent of the amount of Secured Debt held by the Lenders or Noteholders approving the proposed action and the amount of Secured Debt held by those opposing the action. If the Credit Agent or the Note Trustee fails to respond to the Voting Request within the ten Business Day period set forth above, all of the Lenders or Noteholders, as applicable, shall be deemed to have approved the proposed action. As soon as the Collateral Agent has received the approval (through the Credit Agent or the Note Trustee) of the holders of more than 50% of the outstanding Secured Debt with respect to a proposed action, the action shall be deemed approved by the Majority Debtholders even if less than all of the holders (through the Credit Agent or the Note Trustee) shall have responded to the Voting Request at such time. The Credit Agent and the Note Trustee shall, within one Business Day after a request from the Collateral Agent given at any time, notify the Collateral Agent of the amount of Secured Debt then held by the Lenders or Noteholders, respectively. 24. Binding Upon Successors. All rights of the Collateral Agent and the Secured Parties under this Security Agreement shall inure to the benefit of the Collateral Agent and the Secured Parties and their successors and assigns (including any successors to or assigns of the Note Trustee), and all obligations of the Company and the Borrowing Subsidiaries shall bind their successors and assigns; provided that neither the Company nor any Borrowing Subsidiary shall have the right to assign its rights or obligations under this Security Agreement without the consent of all the Lenders. The parties hereto acknowledge that the various series of Ratable Medium-Term Notes may require representation by separate trustees following the occurrence of an Event of Default, and the term "Note Trustee" when used herein shall be deemed to refer to each such trustee. 25. Entire Agreement; Severability. This Security Agreement contains the entire security agreement and collateral agency agreement with respect to the Collateral among Secured Parties, the Company and the Borrowing Subsidiaries and supersedes all prior written or oral agreements and understandings relating thereto. All waivers by the Company or any Borrowing Subsidiary provided for in this Security Agreement have been specifically negotiated by the -31- 32 parties with full cognizance and understanding of their rights. If any of the provisions of this Security Agreement shall be held invalid or unenforceable, this Security Agreement shall be construed as if not containing such provisions, and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 26. Choice of Law. This Security Agreement shall be construed in accordance with and governed by the laws of the State of Illinois and, where applicable and except as otherwise defined herein, terms used herein shall have the meanings given them in the Illinois Uniform Commercial Code. 27. Place of Business; Records. The Company and each Borrowing Subsidiary represents and warrants that its principal place of business and chief executive office is at the address set forth beneath its signature below, and that its books and records concerning the Collateral are kept at its principal place of business and chief executive office. Neither the Company nor any Borrowing Subsidiary shall change its principal place of business and chief executive office without 30 days' prior written notice to the Credit Agent and the Collateral Agent. 28. Notice. Except where instructions or notices are expressly authorized elsewhere in this Security Agreement to be given by telephone or by other means of transmission, all instructions, notices and other communications to be given to any party hereto shall be in writing and shall be personally delivered or sent by certified mail, postage prepaid, private delivery service or by facsimile, and shall be deemed to be given for purposes of this Security Agreement on the day (or at the time of day, if applicable) when actually received by the intended party at its address or facsimile or telephone number as set forth following its signature below (or as such party may specify to the other parties in writing). 29. Modification of Agreement. No provisions of this Agreement may be amended or waived (except for waivers expressly provided for hereunder) unless such amendment or waiver is in writing and is signed by the Company, the Collateral Agent if the rights or duties of the Collateral Agent are affected thereby, the Note Trustee on behalf of the Noteholders if the Note Trustee's consent is expressly required under Paragraph 22, and the Credit Agent on behalf of the Lenders. The Credit Agent shall not consent to any such amendment or waiver without the prior written consent of (i) each Lender if such amendment or waiver (1) would amend or waive the method of calculating the Aggregate Borrowing Base; or -32- 33 (2) releases any Collateral beyond the releases expressly provided for herein or in the Credit Agreement; or (3) changes or waives any restriction on the Company's or any Borrowing Subsidiary's ability to assign its rights or obligations under any of the Credit Documents; or (4) changes or waives any provision herein regarding the indemnification of the Credit Agent, the Collateral Agent or such Lender; or (5) changes the definition of Required Lenders or Majority Debtholders or modifies any requirement for consent by all of the Lenders; or (6) changes or waives any provision herein regarding the allocation among the Secured Parties of any payments or proceeds received by the Collateral Agent hereunder; or (ii) the Required Lenders in the case of all other waivers or amendments. 30. Consent of Jurisdiction. THE COMPANY, EACH BORROWING SUBSIDIARY, THE NOTE TRUSTEE AND THE COLLATERAL AGENT EACH HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY CREDIT DOCUMENTS AND EACH HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION THEY MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE CREDIT AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE COMPANY, ANY BORROWING SUBSIDIARY, THE NOTE TRUSTEE OR THE COLLATERAL AGENT IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE COMPANY, ANY BORROWING SUBSIDIARY, THE NOTE TRUSTEE OR THE COLLATERAL AGENT AGAINST THE CREDIT AGENT OR ANY LENDER OR ANY AFFILIATE OF THE CREDIT AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY CREDIT DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS. 31. Waiver of Jury Trial. EACH PARTY TO THIS SECURITY AGREEMENT HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY CREDIT DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. -33- 34 EXECUTED the day and year first above written. SOURCE ONE MORTGAGE SERVICES CORPORATION By:________________________________ Name: Michael C. Allemang Title: Executive Vice President and Chief Financial Officer Address for Notices: 27555 Farmington Road Farmington Hills, MI 48334-3357 Attn: Chief Financial Officer Telephone No.: (810) 488-8639 Facsimile No.: (810) 488-7300 and Attn: Vice President/Treasury Telephone No.: (810) 488-7338 Facsimile No.: (810) 488-7812 -34- 35 THE MORTGAGE AUTHORITY, INC. By:________________________________ Name: Larry N. Ciofu Title: Vice President/Treasury Address for Notices: 27555 Farmington Road Farmington Hills, MI 48334-3357 Attn: Vice President/Treasury Telephone No.: (810) 488-7338 Facsimile No.: (810) 488-7812 CENTRAL PACIFIC MORTGAGE COMPANY By:________________________________ Name: John Cassell Title: Chief Financial Officer Address for Notices: 5750 Sunrise Boulevard Citrus Heights, CA 95610 Attn: Chief Financial Officer Telephone No.: (916) 537-2603 Facsimile No.: (916) 966-7327 THE FIRST NATIONAL BANK OF CHICAGO, a national banking association, as Credit Agent By:_________________________________ Name:_______________________________ Title:______________________________ Address for notices: One First National Plaza Chicago, IL 60670 Attn: William A. Sholten, III, First Vice President Telephone No.: (312) 732-4600 Facsimile No.: (312) 732-6222 -35- 36 NATIONAL CITY BANK OF KENTUCKY, a national banking association, as Collateral Agent By:_________________________________ Name:_______________________________ Title:______________________________ Address for notices: 421 West Market Street Louisville, Kentucky 40202 Attn: Ms. Wilma Kuerzi Telephone No.: (502) 581-4354 Facsimile No.: (502) 581-4154 NORWEST BANK MINNESOTA, N.A., as Note Trustee PURSUANT TO SECTION 22 HEREOF, SIGNATURE OF NOTE TRUSTEE NOT REQUIRED FOR THIS AMENDED AND RESTATED SECURITY AGREEMENT Address for notices: Norwest Center Sixth and Marquette Minneapolis, Minnesota 55479-0069 Attn: Mr. Ray Haverstock Telephone No.: (612) 667-7364 Facsimile No.: (612) 667-9825 -36- 37 EXHIBITS AND SCHEDULES TO SECURITY AGREEMENT SCHEDULE DOCUMENT -------- -------- A Required Mortgage Documents B Additional Required Mortgage Documents C Form of Borrowing Base Report EXHIBIT DOCUMENT ------- -------- 1 Required Review Steps 2 Form of Company Trust Receipt 3 Form of Shipping Request 4 Form of Whole Loan Sale Transmittal Letter 5 Form of Warehouse-Related MBS Transmittal 6 Form of Custodial Agreement 7 Form of Collateral Transmittal - Initial Mortgage Information -37- 38 SCHEDULE A TO SECURITY AGREEMENT REQUIRED MORTGAGE DOCUMENTS 1. Original of mortgage note executed in favor of the Company or the applicable Borrowing Subsidiary (with a complete series of endorsements from the original payee thereof, through any subsequent holders to the Company or Borrowing Subsidiary if purchased by the Company or Borrowing Subsidiary) and endorsed by an authorized signatory of the Company or the applicable Borrowing Subsidiary in blank. 2. Recorded Mortgage or deed of trust securing the above mortgage note. In lieu of a recorded document, the Collateral Agent may accept a copy certified as being out for recordation by the escrow company, title insurance company or closing agent, or in the case of refinanced transactions, a copy of such mortgage or deed of trust certified by an authorized signatory of the Company. 3. Assignment of the mortgage or deed of trust by an authorized signatory of the Company or the applicable Borrowing Subsidiary in blank, in recordable form and the original or a copy, certified as being out for recordation by the records office or escrow or title insurance company or the Company, of a proper assignment or assignments of the related mortgage or deed of trust from the original holder, through any subsequent transferees, to the Company or the applicable Borrowing Subsidiary. 4. A copy, certified by the title insurance company or the closing agent, of all applicable and necessary powers-of-attorney and assumed name certificates. -38- 39 SCHEDULE B TO SECURITY AGREEMENT ADDITIONAL REQUIRED MORTGAGE DOCUMENTS 1. The original recorded mortgage or deed of trust securing the mortgage note. 2. Evidence of fire and extended coverage insurance in an amount not less than the highest of the following: (a) the amount of the Mortgage Loan, (b) 90% of the insurable value of the improvements, and (c) an amount sufficient to prevent co-insurance. The Collateral Agent reserves the right to obtain a loss payable endorsement in its favor if it so desires. 3. Evidence of Notice to Customer required by the federal Truth-in-Lending Law and Federal Reserve Regulation Z. 4. In the case of an FHA mortgage note, an FHA insurance certificate or a commitment to deliver such; in the case of a VA mortgage note; a VA guaranty certificate or a commitment to deliver such and in the case of a conventional mortgage note, an appraisal. 5. In the case of a conventional mortgage note with a loan-to-value ratio in excess of 80%, the applicable private mortgage insurance policy. 6. A certified copy of the preliminary policy of or commitment for title insurance insuring the mortgage or deed of trust as a first lien on the property subject thereto written by a title company and in amount and containing exceptions satisfactory to the Collateral Agent. 7. Evidence of certificate of completion, as appropriate under the circumstances. 8. Other documentation as the Collateral Agent may reasonably deem appropriate, as well as documentation necessary to fulfill requirements of the Approved Investor Commitments. 9. Such additional documents as may be necessary in the opinion of the Collateral Agent to transfer to the Collateral Agent, for the benefit of the Secured Parties, the title to any Collateral pledged and/or hypothecated pursuant to the Security Agreement. -39- 40 SCHEDULE C TO SECURITY AGREEMENT FORM OF BORROWING BASE REPORT Date: _______________ Reference is made to that certain Second Amended and Restated Revolving Credit Agreement among the Company, Borrowing Subsidiaries, The First National Bank of Chicago, individually and as administrative agent, and the lenders named therein, dated as of November 12, 1996 (the "Credit Agreement"). Capitalized terms not otherwise defined herein are used with the same meanings as in the Credit Agreement. 1. AGGREGATE BORROWING BASE: Eligible Mortgage Loans (Mortgage Collateral Value): Eligible Delivered Mortgages $______________ Eligible AP Mortgages $______________ Eligible Pledged Securities (MBS Value) $______________ Total Pledged Items $______________ Percentage Factor 98% (A) AGGREGATE BORROWING BASE FROM PLEDGED ITEMS $______________ Eligible Repurchased Agency Loans and Receivables $______________ Percentage Factor 90% (B) AGGREGATE BORROWING BASE FROM REPURCHASED AGENCY LOANS AND RECEIVABLES $______________ (C) AGGREGATE BORROWING BASE FROM ELIGIBLE PLEDGED SERVICING $______________ ____________________ 1 Based on either market value or principal balance of loans serviced as described in Section 4.6(h) of the Credit Agreement -40- 41 Eligible Servicing Sale Receivables $______________ Percentage Factor 75% (d) AGGREGATE BORROWING BASE FROM ELIGIBLE SERVICING SALE RECEIVABLES $______________ (e) BALANCE IN SETTLEMENT ACCOUNT $______________ (f) CASH AND CASH EQUIVALENTS $______________ SUM OF (a) - (f) ABOVE $______________ Reconciling Items: Timing Difference $______________ Loan Detail Difference $______________ AGGREGATE BORROWING BASE $______________ 2. WAREHOUSE BORROWING BASE: (a) AGGREGATE BORROWING BASE $______________ LESS (b) AGGREGATE BORROWING BASE FROM ELIGIBLE PLEDGED SERVICING $______________ LESS (c) AGGREGATE BORROWING BASE FROM ELIGIBLE SERVICING SALE RECEIVABLES $______________ WAREHOUSE BORROWING BASE $______________ -41- 42 EXHIBIT 1 TO SECURITY AGREEMENT REQUIRED REVIEW STEPS 1. All submitted documents, are consistent with the related Collateral Transmittal as to borrower name, loan face amount, loan type and the Company's or Borrowing Subsidiary's loan number. 2. The note and mortgage/deed of trust each bears an original signature or signatures which appear to be those of the person or persons named as the maker and mortgagor/trustor, or, in the case of a certified copy of the mortgage/deed of trust, such copy bears what appears to be a reproduction of such signature or signatures. 3. Except for (a) the endorsement to the Company or applicable Borrowing Subsidiary of the note in the event such loan was purchased by the Company or a Borrowing Subsidiary and (b) the endorsement in blank of the note by an authorized signatory of the Company or the applicable Borrowing Subsidiary, neither the note, the mortgage/deed of trust, nor the assignment(s) of the mortgage/deed of trust contain any irregular writings which appear on their face to affect the validity of any such endorsement or to restrict the enforceability of the document on which they appear. 4. The note is endorsed in blank by an authorized signatory of the Company or the applicable Borrowing Subsidiary. 5. The assignment of the mortgage/deed of trust bears an original signature of an authorized signatory of the Company or the applicable Borrowing Subsidiary. 6. Such other review steps as the Collateral Agent, in its sole discretion, deems appropriate. -42- 43 EXHIBIT 2 TO SECURITY AGREEMENT FORM OF COMPANY TRUST RECEIPT _______________, 19__ The undersigned, SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation (the "Company"), acknowledges receipt from NATIONAL CITY BANK OF KENTUCKY, acting as agent, bailee and custodian (in such capacity "Collateral Agent") for the exclusive benefit of the Secured Parties pursuant to the Security Agreement (as those terms and capitalized terms not otherwise defined herein are defined in that certain Second Amended and Restated Revolving Credit Agreement dated as of November 12, 1996, among the Lenders, the Company, the Borrowing Subsidiaries and The First National Bank of Chicago, as Agent) of the following described documentation for the identified Mortgage Loans (the "Collateral Documents"), possession of which is herewith entrusted to the Company solely for the purpose of correcting documentary defects relating thereto: Loan Document Borrower Name Loan Number Note Amount Delivered - ------------- ----------- ----------- ------------- It is hereby acknowledged that a security interest pursuant to the Illinois Uniform Commercial Code and the Kentucky Commercial Code in the Collateral hereinabove described and in the proceeds of said Collateral has been granted to Collateral Agent for the benefit of the Secured Parties pursuant to the Security Agreement. In consideration of the aforesaid delivery by Collateral Agent, the Company hereby agrees to hold said Collateral in trust for Collateral Agent on behalf of the Secured Parties as provided under and in accordance with all provisions of the Security Agreement and to return said Collateral to Collateral Agent no later than the close of business on the fifteenth calendar day following the date hereof or, if such day is not a Business Day, on the immediately succeeding Business Day. The Company represents and warrants that the aforesaid delivery by the Collateral Agent shall not cause any violation of any of the Borrowing Bases or any other provision of the Credit Agreement. SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation By:________________________________ Name:______________________________ Title:_____________________________ -43- 44 EXHIBIT 3 TO SECURITY AGREEMENT FORM OF SHIPPING REQUEST Date:_______________ National City Bank of Kentucky, as Collateral Agent 421 West Market Street Louisville, Kentucky 40202 Attention: ________________ This letter is to serve as authorization for you to endorse and ship the following loans: Loan Number Borrower Name Note Amount to the following address under Commitment #__________ (the "Commitment") from an Approved Investor as follows: NAME: ADDRESS: ATTENTION: Please endorse the notes as follows: Please ship the loan documents either by ____________________ or by such other courier service as we have designated to you as "approved". The courier shall act as an independent contractor bailee acting solely on your behalf as Collateral Agent for the Secured Parties (as defined in that certain Second Amended and Restated Security and Collateral Agency Agreement dated as of November 12, 1996, as the same may be amended, extended or replaced from time to time), but we acknowledge and agree that you are not responsible for any delays in shipment caused by courier or any other actions or inactions of the courier, including, without limitation, any loss of any loan documents; however, because the Commitment expires on _______________, 199_, we ask that you deliver the loan documents to the courier no later than _______________, 199_. Please have the courier bill us by using our acct #__________. If you should have any questions, or should feel the need for additional documentation, please do not hesitate to call -44- 45 _______________. [SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation] [THE MORTGAGE AUTHORITY, a Delaware corporation] [CENTRAL PACIFIC MORTGAGE COMPANY, a California corporation] By:________________________________ Name:______________________________ Title:_____________________________ -45- 46 EXHIBIT 4 TO SECURITY AGREEMENT (Direct Investor) Date:____________ Name of Delivery Service:____________________________________ Airbill No.:____________________ FORM OF WHOLE LOAN SALE TRANSMITTAL LETTER [LETTERHEAD OF COLLATERAL AGENT] [Approved Investor] _________________________ _________________________ Re: Source One Mortgage Services Corporation; Sale of Mortgage Loans Attached please find those Mortgage Loans listed separately on the attached schedule, which Mortgage Loans are owned by SOURCE ONE MORTGAGE SERVICES CORPORATION (the "Company"), THE MORTGAGE AUTHORITY, ("TMA"), a wholly-owned subsidiary of the Company, or CENTRAL PACIFIC MORTGAGE COMPANY ("CPM"), a wholly-owned subsidiary of the Company, and are being delivered to you for purchase. The Mortgage Loans comprise a portion of the Collateral under (and as the term "Collateral" and capitalized terms not otherwise defined herein are defined in) that certain Second Amended and Restated Revolving Credit Agreement dated as of November __, 1996 by and among the Company, TMA, CPM, The First National Bank of Chicago, as Agent, and the Lenders thereunder. Each of the Mortgage Loans is subject to a security interest in favor of National City Bank of Kentucky (the "Collateral Agent") on behalf of the Secured Parties which security interest shall be automatically released upon your remittance of the full amount of the purchase price of such Mortgage Loan (as set forth on the schedule attached hereto) by wire transfer to the following account: WIRE INSTRUCTIONS TO SETTLEMENT ACCOUNT: _________________________ _________________________ _________________________ Pending your purchase of each Mortgage Loan and until payment therefor is received, the aforesaid security interest therein will remain in full force and effect, and you shall hold possession of such Collateral and the documentation evidencing same as custodian, agent and bailee for and on behalf of the Secured Parties. In the -46- 47 event any Mortgage Loan is unacceptable for purchase, return the rejected item directly to the Collateral Agent at the address set forth below. The Mortgage Loan must be so returned or sales proceeds remitted in full no later than [forty-five (45) days][UNLESS DELIVERED TO A GOVERNMENT HOUSING PROGRAM WHICH IS NOT A FEDERAL AGENCY] [seventy-five (75) days][IN THE CASE OF DELIVERY TO A GOVERNMENT HOUSING WHICH IS NOT A FEDERAL AGENCY] from the date hereof. In no event shall any Mortgage Loan be returned or sales proceeds remitted to the Company, TMA or CPM. If you are unable to comply with the above instructions, please so advise the undersigned immediately. NOTE: BY ACCEPTING THE MORTGAGE LOANS DELIVERED TO YOU WITH THIS LETTER, YOU CONSENT TO BE THE CUSTODIAN, AGENT AND BAILEE FOR THE SECURED PARTIES ON THE TERMS DESCRIBED IN THIS LETTER. THE UNDERSIGNED, AS COLLATERAL AGENT, REQUESTS THAT YOU ACKNOWLEDGE RECEIPT OF THE ENCLOSED MORTGAGE LOANS AND THIS LETTER BY SIGNING AND RETURNING THE ENCLOSED COPY OF THIS LETTER TO THE UNDERSIGNED; HOWEVER, YOUR FAILURE TO DO SO DOES NOT NULLIFY SUCH CONSENT. Sincerely, NATIONAL CITY BANK of KENTUCKY, as Collateral Agent By:________________________________ Title:_____________________________ Address: __________________________ __________________________ __________________________ The undersigned Company agrees to and acknowledges the terms of this letter and, notwithstanding any contrary understanding with or instructions to you, the addressee of this letter, the Company instructs you to act according to the instructions set forth in this letter. These instructions cannot be altered except by written instructions executed by Collateral Agent. The Company and the Collateral Agent agree that a counterpart facsimile of this letter executed by the Company shall suffice as an original of the Company's agreement to and acknowledgment of the terms of this letter. SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation By:________________________________ Name:______________________________ -47- 48 Title:_____________________________ ACKNOWLEDGEMENT OF RECEIPT [Approved Investor] By:_______________________________ Name:_____________________________ Title:____________________________ Date:_____________________________ -48- 49 EXHIBIT 5 TO SECURITY AGREEMENT (Pool Formation) FORM OF WAREHOUSE-RELATED SECURITY TRANSMITTAL LETTER [COLLATERAL AGENT LETTERHEAD] Date:___________________ [Certificating Custodian] _________________________ _________________________ Re: Source One Mortgage Services Corporation; Shipment of Mortgage Loans for Pool Formation Attached please find those Mortgage Loans listed separately on the attached schedule, which are owned by SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation (the "Company"), THE MORTGAGE AUTHORITY, ("TMA") a wholly-owned Subsidiary of the Company or CENTRAL PACIFIC MORTGAGE COMPANY, ("CPM") a wholly-owned Subsidiary of the Company, and are being delivered to you, as custodian/trustee (the "Certificating Custodian"), for certification in connection with the formation of a mortgage pool supporting the issuance of a mortgage-backed security (the "Warehouse-Related Security") described as follows: ______________________________. The Mortgage Loans comprise a portion of the Collateral under (and as the term "Collateral" and capitalized terms not otherwise defined herein are defined in) that certain Second Amended and Restated Revolving Credit Agreement dated as of November 12, 1996, by and among the Company, TMA, CPM, The First National Bank of Chicago, as Agent, and the Lenders. Each of the Mortgage Loans is subject to a security interest in favor of National City Bank of Kentucky ("Collateral Agent") for the benefit of the Secured Parties, which security interest shall be automatically released upon the issuance of the Warehouse-Related Security in accordance with the terms of the prescribed GNMA, FNMA or FHLMC form enclosed herewith. Pending issuance of the Warehouse-Related Security, the aforesaid security interest in each Mortgage Loan will remain in full force and effect, and you shall hold such Collateral as custodian, agent and bailee for and on behalf of the Secured Parties. In the event any Mortgage Loan is unacceptable for pool formation, return the rejected item directly to the undersigned, as Collateral Agent, at the address set forth below. Each Mortgage Loan must be so returned or the Warehouse-Related Security issued no later than [forty-five (45) days][UNLESS DELIVERED TO A -49- 50 GOVERNMENT HOUSING PROGRAM WHICH IS NOT A FEDERAL AGENCY] [seventy-five (75) days][IN THE CASE OF DELIVERY TO A GOVERNMENT HOUSING WHICH IS NOT A FEDERAL AGENCY] from the date hereof. In no event shall any Mortgage Loan be returned or proceeds relating thereto be remitted to the Company, TMA or CPM. If you are unable to comply with the above instructions, please so advise the undersigned immediately. NOTE: BY ACCEPTING THE MORTGAGE LOANS DELIVERED TO YOU WITH THIS LETTER, YOU CONSENT TO BE THE CUSTODIAN, AGENT AND BAILEE FOR THE SECURED PARTIES ON THE TERMS DESCRIBED IN THIS LETTER. THE UNDERSIGNED, AS COLLATERAL AGENT, REQUESTS THAT YOU ACKNOWLEDGE RECEIPT OF THE ENCLOSED MORTGAGE LOANS AND THIS LETTER BY SIGNING AND RETURNING THE ENCLOSED COPY OF THIS LETTER TO THE UNDERSIGNED; HOWEVER, YOUR FAILURE TO DO SO DOES NOT NULLIFY SUCH CONSENT. Sincerely, NATIONAL CITY BANK OF KENTUCKY, as Collateral Agent By:________________________________ Title:_____________________________ Address: __________________________ __________________________ __________________________ ACKNOWLEDGEMENT OF RECEIPT [Certificating Custodian] By:_______________________________ Name:_____________________________ Title_____________________________ Date:_____________________________ -50- 51 EXHIBIT 6 TO SECURITY AGREEMENT FORM OF CUSTODIAL AGREEMENT (With Operating Instructions Attached) _______________, 199_ _________________________ _________________________ _________________________ Re: Source One Mortgage Services Corporation Ladies and Gentlemen: The undersigned, National City Bank of Kentucky (the "Collateral Agent") acts in the capacity as Collateral Agent pursuant to: (1) that certain Second Amended and Restated Revolving Credit Agreement dated as of November 12, 1996 (as amended from time to time, the "Credit Agreement", and as capitalized terms not otherwise defined herein are used with the same meaning as in the Credit Agreement) by and among SOURCE ONE MORTGAGE SERVICES CORPORATION (the "Company"), THE MORTGAGE AUTHORITY, ("TMA"), CENTRAL PACIFIC MORTGAGE COMPANY ("CPM"), the lenders participating therein (collectively, the "Lenders"), and the FIRST NATIONAL BANK OF CHICAGO, as agent for the Lenders (the "Credit Agent"), and (2) that certain Second Amended and Restated Security and Collateral Agency Agreement (as amended from time to time, the "Security Agreement") dated concurrently therewith among the Collateral Agent, the Note Trustee, the Company, TMA, CPM and the Credit Agent. TMA and CPM are each referred to herein as a "Borrowing Subsidiary". The Collateral Agent represents and confirms that it has the power and authority under the Credit Agreement and the Security Agreement to execute this Custodial Agreement. The Collateral Agent may execute any of its duties hereunder by or through agents or attorneys-in-fact of whose appointment you have been notified in writing. The Collateral Agent hereby appoints you and you hereby accept appointment to act as agent, custodian and bailee for the benefit of the Secured Parties (as defined in the Security Agreement) (in such capacity, the "Approved MBS Custodian"). In such capacity, you agree to accept delivery only on a free basis of certain mortgage-backed securities delivered to you from time to time identified in a letter in the form attached hereto as Exhibit A -51- 52 (all such mortgage-backed securities delivered to you and so identified being referred to herein as "Subject Securities"). This Custodial Agreement governs your rights and responsibilities as Approved MBS Custodian with respect to all Subject Securities. From time to time the security interest of the Collateral Agent may be abated upon a "Positive Security Event" under the terms of the Credit Agreement and the Security Agreement. The Collateral Agent will promptly advise you of any such abatement and issue directions to you regarding the effect of such event on your duties and obligations hereunder. The Collateral Agent hereby directs you, as Approved MBS Custodian, to hold or dispose of Subject Securities deposited with you only in accordance with the instructions of a person described as an "Authorized Collateral Agent Representative" on a schedule from time to time delivered to you by the Collateral Agent (the initial list of such persons being attached hereto as Schedule I) or otherwise as expressly permitted hereunder, including without limitation the Company's or any Borrowing Subsidiary's right to direct the sale or disposition of the Subject Securities as described in the following paragraph. You are authorized, directed and instructed to act upon all instructions from persons reasonably believed by you to be genuine and authorized. Any instruction given hereunder may, in your discretion, be by telegraph, cable, facsimile or electronic communication which is received by you. All Subject Securities are to be held by you in a custodial account (Account No. __________) maintained with you (the "MBS Custodial Account"). Unless and until you have received written notice to the contrary from the Collateral Agent at the direction of the Majority Debtholders (which notice may be by facsimile transmission) following an Event of Default, you may from time to time deliver Subject Securities at the direction of the Company, to, but only to, Approved Investors (as listed on a schedule of "Approved Investors" delivered to you from time to time by an Authorized Collateral Agent Representative) against payment of the purchase price therefor. Notwithstanding the preceding sentence, even after your receipt of notice from the Collateral Agent that an Event of Default exists, you may deliver Subject Securities at the direction of the Company, but only to Approved Investors pursuant to then-existing Approved Investor Commitments. The proceeds of the sale or other disposition of all Subject Securities are to be held by you in an account (Account No. __________) maintained with you (the "Custodian Settlement Account") and transferred by the end of each Business Day to Account No. 19-19210 maintained in the Credit Agent's name at The First National Bank of Chicago (the "Settlement Account") as follows: _________________________ _________________________ -52- 53 ______________________________ By executing this Custodial Agreement the Company and the Borrowing Subsidiaries confirm and the Collateral Agent, the Company and the Borrowing Subsidiaries notify you that the Company and the Borrowing Subsidiaries have assigned and granted to the Collateral Agent a security interest in and lien upon all now existing and hereafter arising right, title and interest of the Company and the Borrowing Subsidiaries in the MBS Custodial Account, the Custodian Settlement Account and the Settlement Account and in any and all investments and proceeds at any time held therein. Unless and until you have received written notice from an Authorized Collateral Agent Representative (which notice may be by facsimile transmission) that there has occurred an Event of Default or Default, you may, at your election, elect to make advances against Subject Securities held by you in the MBS Custodial Account pending their sale and delivery to a purchaser thereof, in accordance with a repo line of credit established between you and the Company; provided, however, that: (1) any such repo line of credit shall be on terms and conditions customary for similar lines of credit which you provide to customers, including, without limitation, as to advance rate and interest charge; (2) all advances to the Company under such repo line of credit (each, a "Repo Advance") shall be transferred to the Custodian Settlement Account; and (3) you hereby waive any and all rights of offset, counterclaim or other recoupment rights which you may have with respect to any Repo Advance against the MBS Custodial Account, the Custodian Settlement Account and any Subject Securities or proceeds thereof at any time held therein (other than the Subject Securities which are the subject of the Repo Advance). If, but only if and only to the extent there has been transferred to the Custodian Settlement Account the proceeds of a given Repo Advance, the rights of the Collateral Agent in the Subject Securities which are the subject of the Repo Advance are hereby automatically subordinated to your rights therein as collateral security for the repayment of such Repo Advance, and upon receipt of such proceeds in the Settlement Account, such rights of the Collateral Agent shall be automatically released. You shall be under no duty to take or omit to take any action with respect to Subject Securities, except as specifically set forth in this Agreement and the Operating Instructions attached hereto as Exhibit B, unless specifically otherwise directed by the Collateral Agent and agreed to by you in writing. In the event that you shall be uncertain as to your duties or rights hereunder, you shall be entitled to refrain from taking any action until you shall be directed otherwise by an order of a court of competent jurisdiction. In case you should agree to our request and on our behalf to appear in, prosecute or defend any legal or equitable -53- 54 proceeding either in your own name or in the name of your nominee, you shall first be indemnified to your satisfaction (other than against your gross negligence and willful misconduct). By accepting delivery of any Subject Security, you shall be deemed to have agreed to hold such Subject Security as Approved MBS Custodian hereunder, free and clear of all liens, claims, interests and rights of offset in your favor or in favor of persons claiming through you, subject only to the rights with respect to Repo Advances described above. Until you have been notified in writing (including by telecopier) by an Authorized Collateral Agent Representative of the occurrence of an Event of Default, you are hereby authorized to return Subject Securities to the issuer/transfer agent therefor at the Company's written request in connection with the reissuance thereof in smaller denominations; provided, however, that any delivery of Subject Securities for reissuance shall be covered by a transmittal letter or other written agreement instructing that the reissued securities be returned directly to you. In this connection, we acknowledge familiarity with the current securities industry practice of delivering physical securities against later payment on the delivery date. Notwithstanding our instructions to deliver Subject Securities against payment, you are authorized to make delivery of such physical securities against a temporary receipt (sometimes called a "window ticket") in lieu of payment. You agree to use your best efforts to obtain payment therefor during the same business day, but we confirm our assumption of all risks of payment for such deliveries. You may accept certified checks in payment for Subject Securities delivered on the Company's instruction and you shall not be responsible for the risks of collectability of any such checks. YOU ARE HEREBY IRREVOCABLY INSTRUCTED BY THE COMPANY, EACH BORROWING SUBSIDIARY AND THE COLLATERAL AGENT THAT ALL PROCEEDS RECEIVED FROM THE SALE OR OTHER DISPOSITION OF SUBJECT SECURITIES AND ALL REPO ADVANCES, UNTIL OTHERWISE NOTIFIED IN WRITING BY THE COLLATERAL AGENT, SHALL BE WIRED TO THE SETTLEMENT ACCOUNT AS PROVIDED ABOVE. You will provide to the Collateral Agent on a daily basis at or before 9:30 a.m. (Chicago time) a report of the prior day's activity with respect to the MBS Custodial Account, the Custodian Settlement Account and Repo Advances made by you hereunder. You shall not be liable or accountable for any act or omission of brokers, dealers or agents in connection with this Custodial Agreement. In carrying out your duties hereunder, you may use such methods or agencies as you determine in your sole discretion, including your own facilities. You shall maintain regular business records documenting all instructions transmitted to you through any authorized means and any response by you. You are authorized to electronically record -54- 55 any telephone communications with the Company, any Borrowing Subsidiary or the Collateral Agent arising out of this Custodial Agreement. Your records shall be determinative of the form, content and time of all the Company's, the Borrowing Subsidiaries' and Collateral Agent's instructions and any response from you. The record of each instruction and any response thereto shall be retained by you for at least ninety (90) days following the date of the instruction. Any claim against you for failure to properly follow an instruction transmitted by the Company, any Borrowing Subsidiary or the Collateral Agent must be made in writing and received by you within sixty (60) days after the date such instruction was received by you. You shall give the Subject Securities that come into your possession under this Custodial Agreement the same physical care and safeguards as are afforded similar property owned by you; provided, however, your responsibility hereunder is limited to losses occasioned directly by the gross negligence or willful misconduct of your employees, to the extent of the market value of the Subject Securities at the date of the discovery of such loss. With respect to any Subject Securities which you deliver for us to a third party, and with respect to such delivery, you shall be deemed no more than an "intermediary" as referenced in Section 8-306(3) of the New York Uniform Commercial Code, and the only warranty given by you shall be the warranty provided in said Section 8-306(3). In no event shall you be liable for any indirect, special or consequential loss, even if you have been advised of the possibility of such loss. You may, at your option, make arrangements for insuring yourselves against loss from any cause, but you shall not be under any obligation to insure for our benefit. Except as expressly set forth above with respect to advances made by you in connection with "late deliveries" and Repo Advances, none of the Subject Securities held in the MBS Custodial Account, the funds held at any time in the Custodian Settlement Account, the Subject Securities or any proceeds of the sale or other disposition thereof will be subject to any right, charge, security interest, lien, encumbrance or claim of any kind in your or your creditors' favor. Any claims for the payment of fees with respect to the safe custody or administration of Subject Securities or for compensation, expenses, commitments made by you upon instructions of the Collateral Agent, reimbursement of taxes incurred by you for the account of the Collateral Agent, any penalties incurred by or levied or assessed against you resulting from the Collateral Agent's improper or incorrect instructions, or other liabilities of the Collateral Agent to you, and for indemnity against any claim or liability to which you are subjected by reason of any registration of Subject Securities shall be enforceable solely against the Company and none of the Collateral Agent, the Credit Agent or any Secured Party shall have any responsibility therefor (except to the -55- 56 extent any of the foregoing are due to the gross negligence or willful misconduct of the Collateral Agent, the Credit Agent or any Secured Party, as applicable). The Collateral Agent, the Borrowing Subsidiaries and the Company agree to make no claim against you except for any such claims or liabilities arising, or claimed to have arisen, as a result of your gross negligence or willful misconduct. The Operating Instructions attached hereto are hereby made part hereof and any and all capitalized terms defined herein shall have the same meaning when used therein. This Custodial Agreement contains the whole of the understanding between you and the Collateral Agent concerning the subject matter hereof and no provision hereof shall be modified or altered except in a writing signed by both you and the Collateral Agent. This Custodial Agreement shall be governed by the laws of the State of New York and shall be binding upon the Collateral Agent and upon its successors and assigns and shall inure to your benefit and your successors and assigns and shall be deemed continuing until terminated by either the Collateral Agent or you upon at least sixty (60) days prior written notice to the other. This letter is made in triplicate and will become an agreement between you and the Collateral Agent upon your acceptance hereof in the space provided below at your offices in the State of New York. NATIONAL CITY BANK OF KENTUCKY, as Collateral Agent By:________________________________ Title:_____________________________ AGREED TO AND ACCEPTED: ________________________________, as Approved MBS Custodian By:_________________________________ Name:______________________________ Title:_______________________________ -56- 57 ACKNOWLEDGEMENT AND AUTHORIZATION The Company and the Borrowing Subsidiaries approve the foregoing Custodial Agreement and authorize the Approved MBS Custodian to act in accordance with the terms thereof. The Company and the Borrowing Subsidiaries agree to be bound by the terms of the Custodial Agreement (including all Exhibits thereto) to the same extent as if a party thereto. The Company and the Borrowing Subsidiaries each agree to indemnify the Approved MBS Custodian for, and hold the Approved MBS Custodian harmless against, any loss, liability or expense in connection with, arising out of or in any way related to the transaction contemplated and relationship established by the Custodial Agreement, or any action or omission by the Approved MBS Custodian in connection with the Custodial Agreement, or any agent, broker or dealer employed by the Approved MBS Custodian hereunder, including the reasonable costs and expenses incurred in defending any such claim of liability, except that neither the Company nor any Borrowing Subsidiary shall be liable for (i) any loss, liability or expense that is determined by a judgment of a court of competent jurisdiction that is binding on the Approved MBS Custodian, final and not subject to review on appeal, to be the direct result of acts or omissions on the Approved MBS Custodian's part constituting gross negligence or willful misconduct, or (ii) any claim that is based on the Approved MBS Custodian's warranty as provided in Section 8-306(3) of the New York Uniform Commercial Code. SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation By:________________________________ Name:______________________________ Title:_____________________________ THE MORTGAGE AUTHORITY, a Delaware corporation By:________________________________ Name:______________________________ Title:_____________________________ CENTRAL PACIFIC MORTGAGE COMPANY, a California corporation By:________________________________ Name:______________________________ Title:_____________________________ -57- 58 EXHIBIT A TO CUSTODIAL AGREEMENT FORM OF LETTER TO APPROVED MBS CUSTODIAN To: _________________________, as Approved MBS Custodian Re: Source One Mortgage Services Corporation; Custodial and Collateral Agency Instructions Ladies and Gentlemen: Reference is made to the attached schedule relating to a letter/certification to a transfer agent/trustee for the issuance of the Security described more particularly therein, which Security is supported by a pool of residential mortgage loans and/or mortgage-backed securities including mortgage loans and/or mortgage-backed securities in which the undersigned as collateral agent (in such capacity, the "Collateral Agent"), acting under that certain Second Amended and Restated Security and Collateral Agency Agreement dated as of November 12, 1996, as amended, extended or replaced from time to time, holds a first priority perfected security interest. The attached schedule is (i) Delivery Schedule Form 11705 in the case of GNMA Securities, (ii) Delivery Schedule Form 996 in the case of FHLMC Securities, (iii) Delivery Schedule Form 2014 in the case of FNMA Securities, or (iv) a form containing substantially similar information in the case of any other Securities. Pursuant to the letter/certification, the transfer agent/trustee has been instructed to deliver such Security to you. You are hereby notified that the Collateral Agent and the Secured Parties named therein have a first perfected security interest in the Security and in all proceeds of the sale or other disposition thereof and in all accounts into which said proceeds may be deposited. This letter will confirm your agreement to hold such Security as a "Subject Security" under and on terms and conditions set forth more particularly in that certain Custodial Agreement, dated as of _______________, 199_ between you and the Collateral Agent. Very truly yours, NATIONAL CITY BANK OF KENTUCKY, as Collateral Agent By:________________________________ -58- 59 The undersigned agree to and acknowledge the terms of this letter and, notwithstanding any contrary understanding with or instructions to you, the addressee of this letter, the undersigned instruct you to act according to the instructions set forth in this letter. These instructions cannot be altered except by written instructions executed by Collateral Agent. SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation By:________________________________ Name:______________________________ Title:_____________________________ THE MORTGAGE AUTHORITY, a Delaware corporation By:________________________________ Name:______________________________ Title:_____________________________ CENTRAL PACIFIC MORTGAGE COMPANY, a ______________ corporation By:________________________________ Name:______________________________ Title:_____________________________ -59- 60 EXHIBIT B TO CUSTODIAL AGREEMENT OPERATING INSTRUCTIONS These Operating Instructions are attached to and made a part of the Custodial Agreement between National City Bank of Kentucky and ___________________, dated as of _______________, 199_ (as amended from time to time, the "Custodial Agreement"). Terms defined therein shall have their same meanings when used herein. 1. From time to time GNMA, FNMA and FHLMC Subject Securities will be issued at the request of the Company or a Borrowing Subsidiary and credited to your account with the Federal Reserve Bank of New York ("FRBNY") (in the case of FNMA and FHLMC Subject Securities) or your account with the Participants Trust Company ("PTC") (in the case of GNMA Subject Securities) (in each case, to be held by you for the account of the Collateral Agent) in accordance with the Code of Federal Regulations (in the case of FNMA and FHLMC Subject Securities) or the rules of PTC (in the case of GNMA Subject Securities). Upon your receipt of confirmation that such Subject Securities have been deposited into your account with FRBNY (in the case of FNMA and FHLMC Subject Securities) or your account with PTC (in the case of GNMA Subject Securities), you shall promptly issue to the Collateral Agent and the Company your confirmation that (1) you have received such confirmation of the Fedwire (in the case of FNMA and FHLMC Subject Securities, which confirmation will include the number of Subject Securities deposited into your account with FRBNY) or from PTC (in the case of GNMA Subject Securities), (2) you have made appropriate entries on your books reflecting the interests of the Company or the applicable Borrowing Subsidiary as beneficial owner and the Collateral Agent as secured party with respect to such Subject Securities, and (3) there are no security interests or any rights or claims of any third party in such Subject Securities in your favor or known to you which have priority over the security interest of the Collateral Agent in such Subject Securities. You shall be under no obligation to ensure or verify that Securities identified in transmittal letters (in the form of Exhibit A to the Custodial Agreement) are in fact credited to your account(s), but you shall be obligated only to report your actual receipt of Subject Securities to the Collateral Agent and the Company in accordance with the provision of this Instruction 1. 2. With respect to the delivery or transfer of Subject Securities which you hold for the account of the Collateral Agent, you are hereby authorized to act only upon instructions from the Collateral Agent or, to the extent permitted by the Custodial Agreement, by the Company. Upon notification to you by the -60- 61 Collateral Agent at the direction of the Majority Debtholders following an "Event of Default" under the Credit Agreement, no third party, including without limitation the Company and the Borrowing Subsidiaries, may direct you to make any delivery or transfer of such Subject Securities other than Subject Securities to be delivered pursuant to then-existing Approved Investor Commitments. 3. The proceeds of redemptions, collections and other receipts, including dividend and interest income, shall be credited to the Custodial Settlement Account upon collection or payment. 4. You are to notify the Collateral Agent and the Company upon receipt of notice by you of any call for conversion, redemption, subscription rights or similar proceeding affecting the Subject Securities held in the relevant account (any of the foregoing being referred to herein as "Account Proceedings"), and shall take such action in respect thereof as you may be directed in writing by the Collateral Agent; provided, however, that you shall have no duty or responsibility to notify the Company or the Collateral Agent of any Account Proceedings which do not appear in The Wall Street Journal (New York Edition), The Standard & Poor's Called Bond Record for Preferred Stocks, Financial Daily Called Bond Service, The Kenney Services or official notifications from the Depository Trust Company or such other publications which you may deem reasonable from time to time. All solicitation fees payable to you as agent in connection with such event will be retained by you unless specifically agreed to the contrary by you. 5. You are authorized and empowered in the name and on behalf of the Collateral Agent and the Company to execute any certificates of ownership or other reports which you are or may hereafter be required to execute and furnish under any regulation of the Internal Revenue Service, or other authority of the United States, insofar as the same are required in connection with any property which is now or may hereafter be in your possession by virtue of the Custodial Agreement and these Operating Instructions, claiming no exemptions on behalf of the Collateral Agent or the Company. In the preparation of such reports, the status of the Collateral Agent is to be described as a bank, trust company or financial institution, as the case may be, domiciled in the United States. The Collateral Agent agrees to notify you immediately in writing of any change in such status. 6. All mail communications which are to be furnished or forwarded hereunder to the Collateral Agent or the Company shall be addressed to such party at the last address on your records, provided that in case you in your sole discretion shall determine that an emergency exists, you may use such other means of communication as you shall deem advisable. -61- 62 7. You are under no duty to supervise, recommend or advise the Collateral Agent relative to the investment, purchase, sale, retention or other disposition of any property held hereunder unless specifically provided for by the Custodial Agreement. 8. With respect to any direction to receive securities in transactions not placed through you, you shall have no duty or responsibility to advise the Company of non-receipt, or to take any steps to obtain delivery of securities from any brokers or dealers. All dealer concessions made to you will be retained by you unless specifically agreed to the contrary by you. 9. Notwithstanding anything herein to the contrary, unless instructions are received from the Collateral Agent, specifying a different destination than the address listed on your records for the Collateral Agent, within ten (10) days of the receipt of any termination notice, you shall have the right to transfer all securities and other property held by you or any depositary in connection with the Custodial Agreement or registered in your name to the Collateral Agent at the address listed on your records. -62- 63 SCHEDULE I TO CUSTODIAL AGREEMENT AUTHORIZED COLLATERAL AGENT REPRESENTATIVES -63- 64 EXHIBIT 7 TO SECURITY AGREEMENT COLLATERAL TRANSMITTAL -- INITIAL MORTGAGE INFORMATION 1. CUSTOMER NAME ______________________________ 2. LOAN NUMBER _________________________________ 3. MORTGAGOR ___________________________________ SURNAME ONLY 4. AP STATUS CODE _______________________________ 5. DEPOSIT DATE _________________________________ 6. ORIGINAL NOTE AMOUNT $_____________________ 7. ACQUISITION COST $____________________________ 8. TAKE-OUT VALUE $_____________________________ 9. NOTE DATE OR CONVERSION DATE _____________ 10. NOTE RATE ____________________________________ 11. LOAN TYPE (i.e. a group category (e.g. GNMA 15, FNMA/FHLMC 30, etc.) set forth on Exhibit F to the Credit Agreement) _________________________________ -64- EX-10.(M) 5 EXHIBIT 10(M) 1 EXHIBIT 10(m) FUND AMERICAN ENTERPRISES HOLDINGS, INC. _____________________________________________ FEDERAL TAX SHARING AGREEMENT Dated as of January 1, 1991 And Effective For Taxable Years Beginning After December 31, 1990 _____________________________________________ SOURCE ONE MORTGAGE SERVICES CORPORATION 2 FEDERAL TAX SHARING AGREEMENT Federal Tax Sharing Agreement ("Agreement"), dated as of January 1, 1991, and effective for taxable years beginning after December 31, 1990, by and among Fund American Enterprises Holdings, Inc., a Delaware corporation ("FAEH"), and Source One Mortgage Services Corporation, a Delaware corporation ("Source One"). Whereas, the parties to this Agreement are part of the FAEH affiliated group (the "FAEH Group") as defined in 1504(a) of the Internal Revenue Code of 1986, as amended (the "Code"); Whereas, the FAEH Group files consolidated Federal income tax returns; Whereas, Source One is a wholly-owned subsidiary of FAEH and, as a member of the FAEH Group, is included in the consolidated Federal income tax return filed by FAEH on behalf of the FAEH Group; and Whereas, the parties to this Agreement have determined that execution of this Agreement setting forth the methodology and procedures for allocating the FAEH Group's consolidated Federal tax liability (or benefit) to and amongst FAEH and its affiliates is in the interest of each party to this Agreement; Now therefore, in consideration of the mutual covenants and promises contained herein, the parties hereto agree as follows: 1. Source One Subsidiaries Incorporated Into This Agreement: Source One, by entering into this Agreement, agrees to bind each of its current subsidiaries (together with Source One, the "Source One Group"), jointly and severally, to all the terms of this Agreement. If at any time any member of the Source One Group acquires or creates one or more subsidiary corporations which would be an includible corporation or corporations, as defined in Code 1504, in an affiliated group of which Source One (or its successor) is a common parent, this Agreement and all references to the Source One Group shall thereafter be interpreted to include such subsidiary corporations. 2. FAEH Responsibility for Filing U.S. Federal Income Tax Return: A Form 1120, U.S. Federal Income Tax Return ("Return") shall be filed with the Internal Revenue Service ("IRS") by FAEH on behalf of the FAEH Group on a consolidated basis. Such Return will be filed by FAEH for each taxable year during which this Agreement is in effect and for which Source One and the other members of the Source One Group remain members of the FAEH Group, provided such members are required to file such a Return. FAEH shall execute and file such Returns, as well as all consents, elections, and other documents which may be required or appropriate, and each member of the Source One Group shall be bound by such consents, elections, and the terms of such other documents. FAEH shall promptly notify Source One of all such consents, elections, and other terms as they relate to the Source One Group prior to either the inclusion in the filed Return and/or separate mailing to the IRS, as the case may be. 3 If any penalties, including interest, for failure to file are imposed on the FAEH Group by the IRS pursuant to Code 6651(a) as a result of FAEH's failure to file in a timely manner, FAEH shall bear the entire cost of all such penalties and interest, provided such penalties and interest were incurred solely by reason of FAEH's failure in this regard and not due to any failure on the part of Source One or the Source One Group. 3. FAEH Responsibility for Paying Federal Income Taxes to IRS: On behalf of the FAEH Group, FAEH shall be responsible to make all required estimated payments to the IRS required under Code 6655. Consequently, FAEH shall bear the entire cost of any underpayment penalties, plus interest, if such penalties and interest were incurred solely by reason of FAEH's failure in this regard and not due to any failure on the part of Source One or the Source One Group. In addition to the responsibility for making estimated payments on behalf of the FAEH Group, FAEH shall bear the entire cost of any penalties and interest which may be imposed by the IRS pursuant to Code 6651(b) for failure to pay in a timely manner, provided such penalties are solely as a result of FAEH's failure to make required payments in a timely manner and not due to any failure on the part of Source One or the Source One Group. 4. Calculation of Source One Group Amounts to Appear in FAEH Group Return: Source One shall, on behalf of the Source One Group, compute for each calendar quarter each item of Federal taxable income, deduction, gain, loss, credit, carryforward, carryback and tax liability or benefit (collectively, "Tax Items") for the Source One Group as if the Source One Group itself is a separate affiliated group as defined in Code 1504(a), totally unrelated to any other members of the FAEH Group. All calculations of such Tax Items shall be made pursuant to the provisions of the Code and Treasury Regulations in effect for the taxable period to which the calculations relate, and shall be consistent with all Federal tax elections made or expected to be made by FAEH in the Return incorporating such quarterly period. Source One acknowledges that FAEH shall have the right to make any and all Federal tax elections which may be necessary or appropriate for calculating the Federal taxable income of the FAEH Group, including elections which affect the Tax Items of any member of the Source One Group. Any question regarding the interpretation or applicability of any provision of the Code and/or Treasury Regulations regarding the entitlement to make such elections shall be left to reasonable resolution by FAEH, taking into consideration elections normally made in the respective member's industry or industries, as the case may be. Source One shall provide to FAEH, within fifteen days following each calendar quarter-end, schedules which present the calculation of the Source One Group's Tax Items for the current year-to-date period, as such amounts would be actually included in the Return to be filed by FAEH. 5. Calculation of Source One Group Amounts Due To/From FAEH: Source One shall be liable to pay to FAEH or receive from FAEH, as the case may be, the Source One Group's share of the FAEH Group's consolidated Federal income tax liability (or benefit). Notwithstanding the provisions of Section 4 above, when calculating the amount of Federal tax due to or from FAEH for a taxable period, the Source One Group shall be entitled to make, solely on a hypothetical basis, any elections it would have been entitled to make had it been a separate affiliated group as defined in Code 1504(a), totally unrelated to any other members of the FAEH Group. In the event Source One chooses to make a hypothetical election(s), different than the actual election(s) made by FAEH, Source One shall provide to FAEH within fifteen days following each calendar quarter-end: 4 (i) Schedules which present the calculation of the Source One Group's Tax Items for the current year-to-date period, as such amounts would be included in a hypothetical Form 1120, U.S. Federal Income Tax Return the "Source One Group Return"), which would be completed by Source One on behalf of the Source One Group if Source One was not a member of the FAEH Group. Such Source One Group Returns will utilize the hypothetical elections made by the Source One Group described above in this Section 5. (ii) Schedules reconciling the differences between the Source One Group's Tax Items for the current year-to-date period, as such amounts would be included in (a) the actual Return to be filed by FAEH and (b) the Source One Group Return. All calculations of such Tax Items included in the Source One Group Return shall be made pursuant to the provisions of the Code and Treasury Regulations in effect for the taxable period to which the calculations relate. 6. Tax Payments/Refunds: Payments of the Source One Group's periodic Federal tax liability (or benefit) calculated pursuant to Section 5 shall be made to FAEH (or to Source One, as the case may be) at the time, and in the amounts, such payments would be required to be made to (or received from) the IRS as if Source One is a separate affiliated group filing its own tax return(s). Underpayment (if any) of those amounts due FAEH shall be treated as an underpayment of tax and shall bear penalties and interest at the rate(s) prescribed in the relevant provisions of the Code, Treasury Regulations or IRS pronouncements. Payments due Source One (if any) from FAEH will likewise bear interest unless paid within 45 days after the relevant Source One filing/notice date making demand for such refund. Source One and FAEH acknowledge that the payments Source One may be required to make to FAEH (or receive from FAEH) in any particular taxable year pursuant to this Agreement might be greater or less than the tax liability which would be allocated to it under one or more of the Federal tax allocation methods prescribed under Code 1552 and Treasury Regulation 1.1552-1 used for purposes of determining a separate member's earnings and profits ("E&P"). Source One shall furnish to FAEH in a timely manner a calculation of Source One's annual E&P calculated in accordance with the rules of Treasury Regulation 1.1502-33 and 1.1502-33T. 7. Adjustments Resulting from Tax Audits: FAEH, as agent for all members of the FAEH Group, shall have absolute authority to enter into settlement agreements, make offers in compromise, file protest letters, make appeals, pursue litigation and take what other remedial actions are available to FAEH and deemed appropriate in defending any and all Federal tax controversies affecting any member(s) of the FAEH Group. Notwithstanding the above, FAEH shall inform Source One in a timely manner of the commencement of any audit by the IRS and shall, when feasible, consult with Source One concerning the appropriate actions or positions to be taken throughout the course of any audits as they relate to tax issues attributable solely to the operations and financial results of Source One included in a Return. In the event such adjustments are made to any Source One Group Tax Items by reason of an amended return, claim for refund, or audit conducted by the IRS, the appropriate Source One Group Returns shall be redetermined to give effect to such adjustments. In the event the adjustments require payment(s) from Source One on a hypothetical basis, to FAEH, Source One shall make such payments to FAEH no later than the time FAEH is, or would be, required to make such payment(s) to the IRS. Any payment Source One must make to 5 FAEH shall include an amount equal to interest and any other addition to tax imposed on account of such adjustment. However, nothing in thisAgreement prohibits Source One from paying FAEH an amount constituting full payment of an asserted tax deficiency - which is solely attributable to Source One - but which FAEH is not in turn remitting to the IRS due to FAEH's decision to protest such proposed deficiency either at the IRS Appeals Division or Tax Court, as the case may be. Such prepayment (if any) by Source One shall not be treated as a deposit in the nature ofa bond but shall be a payment of a tax deficiency which tolls the further accrual of interest on such proposed tax deficiency attributable to the Source One Group. Conversely, in the event the adjustments require payment(s) from FAEH to Source One, any payments due hereunder shall be made by FAEH as required to be made by the IRS. Such payment to Source One shall include any interest owed by FAEH on account of said IRS adjustment attributable to Source One. 8. Interpretations and Dispute Resolution: Interpretations and resolutions of disputes arising from this policy shall be settled by the Chief Financial Officer of FAEH. 9. Liability; Indemnification: Each party to this Agreement shall be liable to the other(s) for any liability, damages or expenses of the other arising out of the gross negligence or willful malfeasance of the party or any of its directors, officers, employees or affiliates in fulfilling the obligations of this Agreement. 10. Termination: This Agreement will continue to remain in effect until such time as the Agreement is terminated. The Agreement may be terminated by either party upon 30 days notice. 11. Notices: All notices and other communications hereunder shall be in writing and shall be deemed given when delivered personally or sent by first class mail to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Source One: Source One Mortgage Services Corporation 27555 Farmington Road Farmington Hills, MI 48334-3357 Attention: Chief Financial Officer (b) if to FAEH: Fund American Enterprises Holdings, Inc. 80 South Main Street Hanover, NH 03755 Attention: Chief Financial Officer 12. Sole Agreement: This Agreement constitutes the sole and only agreement of the parties hereto relating to its subject and correctly sets forth the rights, duties and obligations of each party to the other(s) as of its date. Any prior agreements, promises, negotiations or representations not expressly set forth in this Agreement are of no force or effect. 13. Waiver or Modification: No waiver or modification of this Agreement shall be effective unless reduced to a written document signed by a duly authorized representative of each party hereto. 6 14. Law of New Hampshire: This Agreement shall be governed by and construed in accordance with the laws of the State of New Hampshire, without regard to principles of conflicts of law. 15. Assignment and Delegation: FAEH shall not have the right to sell, transfer, delegate or assign this Agreement or its rights or duties to any person, firm or corporation at any time and any proposed assignee shall not acquire any rights nor assume any obligations unless the written consent of the other party(ies) to this Agreement is given before such assignment or delegation takes place. Subject to this Section, this Agreement binds and inures to the benefit of the parties and their successors and assigns. Any attempted assignment not in compliance with this Section shall be null and void. 16. Confidentiality of Reports and Records: Except as expressly authorized in this Agreement or directed by the other party in writing, Source One and FAEH shall keep confidential the records and other information obtained by reason of this Agreement. 17. Calendar Days: All references in this Agreement to "days" shall mean calendar, not business, days. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. FUND AMERICAN ENTERPRISES HOLDINGS, INC. By:_______________________ Name: Allan L. Waters Title: Senior Vice President & Chief Financial Officer SOURCE ONE MORTGAGE SERVICES CORPORATION By: _______________________ Name: Melinda F. Cain Title: Vice President EX-10.(BB) 6 EXHIBIT 10(BB) 1 EXHIBIT 10(bb) ================================================================== LOAN AGREEMENT BY AND BETWEEN SOURCE ONE MORTGAGE SERVICES CORPORATION AND COMERICA BANK ================================================================== 2 THIS AGREEMENT is made as of this 10th day of August, 1995, by and between SOURCE ONE MORTGAGE SERVICES CORPORATION of Farmington Hills, Michigan (herein called "Company"), and COMERICA BANK, a Michigan banking corporation, of Detroit, Michigan (herein called "Bank"); WITNESSETH: ARTICLE 1. THE INDEBTEDNESS: Revolving Credit 1.1 Subject to the terms and conditions of this Agreement, Bank agrees to lend to Company at any time and from time to time from the effective date hereof until the earliest of (i) demand, (ii) the tenth day of the next month following the occurrence of a Refunding Event, (iii) July 10, 1996, or, (iv) upon an Event of Default (the "Maturity Date") sums not to exceed the Commitment Amount. The borrowings hereunder shall be evidenced by a Revolving Credit Note (herein called "Note") in form similar to that annexed hereto as Exhibit "A" under which advances, repayments and readvances may be made, subject to the terms and conditions of this Agreement, provided that Bank shall only be required to make advances hereunder on the tenth (10th) day of a month or if Bank is not open for commercial banking business on that day then on the next day Bank is open for commercial banking business (each a "Business Day") or on any other date agreed to by Company and Bank (each such date being referred to herein as "Borrowing Date"). 1.2 The principal indebtedness represented by the Note shall be payable on or before the Maturity Date. Company agrees to pay interest on the unpaid principal balance of the Note from time to time outstanding at a per annum rate equal to the sum of one half of one percent (0.50%) and the Interest Rate Margin (as defined below). After the Maturity Date, interest shall accrue on the unpaid principal balance at the per annum rate of three and one-half percent (3 1/2%) above Bank's Prime Rate. Interest shall be payable monthly commencing on September 10, 1995 and on the tenth day of each month thereafter until the Maturity Date, when the entire unpaid principal balance of the Note and interest thereon shall be due and payable. Interest shall be computed on a daily basis using a year of 360 days and assessed for the actual number of days elapsed and in such computation effect shall be given to any change in the interest rate resulting from a change in the Prime Rate or Interest Rate Margin on the date of such change in the Prime Rate or Interest Rate Margin. "Prime Rate" shall mean the rate of interest established by Bank as its prime rate for its borrowers as the same may be changed from time to time, which may not necessarily be Bank's lowest rate for loans. For purposes of this Agreement, "Interest Rate Margin" shall mean a margin which varies based on the rating of Company's commercial paper ("CP") by Standard & Poor's Corporation or its successors ("S&P") and Moody's Investor Services, Inc. or its successors ("Moody's") and is determined as follows: 3 (a) If (i) the CP is rated A1 by S&P and P1 by Moody's, (ii)the CP is rated A2 by S&P and Pl by Moody's, or (iii) the CP is rated A1 by S&P and P2 by Moody's, the Interest Rate Margin shall be zero. (b) If the CP is rated A2 by S&P and P2 by Moody's, the Interest Rate Margin shall be one tenth of one percent (0.10%). Changes in the Interest Rate Margin shall be effective as of the date of any change in the rating of the CP by either S&P or Moody's. 1.3 On the tenth day of each month or if such day is not a Business Day, on the next succeeding Business Day, Company shall deliver to Bank a forecast of its anticipated average daily Escrow Balances (as defined below) for the following month (the amount set forth in such forecast being referred to as the "Availability Amount"); provided however, in no event shall the Availability Amount exceed $60,000,000. "Escrow Balances" means collected funds in non-interest bearing accounts maintained by Company with Bank net of any reserve requirement imposed from time to time by the Board of Governors of the Federal Reserve Board ("FRB"), which funds represent escrow moneys arising in connection with Company's mortgage servicing business. For purposes of this Agreement, reserve requirements shall be determined on the amount of collected deposits held each day by Bank in each type of escrow deposit account maintained by Company with Bank at the applicable rate imposed by the FRB. Bank shall not be obligated to lend to Company under the Note on any Borrowing Date an amount which exceeds the Availability Amount as set forth in the forecast delivered to Bank by Company on such date. Bank and Company will consult from time to time with a view toward allowing Company to maintain its deposit balances at Bank in types of deposit accounts bearing the lowest legally permissible reserve requirements practicable consistent with the flexibility required by the Company to make frequent withdrawals and deposits. In addition, Bank shall not be obligated to lend under the Note unless Company shall have first filed with Bank a Request for Draw and Certificate of Compliance (as of the date of the borrowing) in form similar to that annexed hereto as Exhibit "B", executed by an authorized officer of Company. Bank may, at its option, lend under the Note upon the telephone request of an authorized officer of Company and, in the event Bank makes any such advance upon a telephone request, the requesting officer shall immediately fax and then promptly mail to Bank, an executed Request for Draw and Certificate of Compliance in the form attached as Exhibit "B". Advances upon telephone request are for the convenience of Company and Bank shall have no liability to Company in connection with making any advance based upon the telephone 2 4 request of a person Bank in good faith believes to be a person authorized to request advances hereunder. 1.4 (a) If the average daily Escrow Balances for any Loan Period (as defined below) shall be less than the average daily balance of the principal outstanding under this Agreement and the Note for such period (an "Escrow Balance Shortage"), then the Availability Amount as of the next succeeding Borrowing Date shall be reduced by the amount of the Escrow Balance Shortage. For purposes of this Section 1.4(a), "Loan Period" shall mean that period of time beginning on the day the first advance hereunder is made and ending on the day next preceding the applicable Borrowing Date. (b) If the average daily Escrow Balances for any Escrow Balance Measuring Period (as defined below) shall exceed the sum of (i) the average daily balance of the principal outstanding under this Agreement and the Note for such period and (ii) the amount of the Escrow Balance Shortage determined on the first day preceding such Escrow Balance Measuring Period ("Escrow Balance Overage"), then the Availability Amount as of the next succeeding Borrowing Date shall be increased by the amount of the Escrow Balance Overage; provided however, in no event shall the Availability Amount exceed $60,000,000. "Escrow Balance Measuring Period" shall mean the period of time beginning on a Borrowing Date and ending on the first day prior to the next succeeding Borrowing Date. 1.5 On each Settlement Date (as defined below), Company shall pay to Bank as additional interest, an amount equal to the product of the daily average Federal Funds Rate for the period beginning with the last Settlement Date (or if no Settlement Date has occurred, beginning with the date of the first advance under this Agreement and the Note) and ending on such Settlement Date (each a "Settlement Period") multiplied by an amount determined by subtracting from the average daily balance of the principal outstanding under this Agreement and the Note for the applicable Settlement Period an amount equal to average daily Escrow Balances for the applicable Settlement Period. "Settlement Date" shall mean the Maturity Date and any other date or dates selected by Bank following the date on which all outstanding indebtedness hereunder and under the Note shall become due and payable (whether by acceleration, mandatory prepayment or otherwise). "Federal Funds Rate" shall mean, for any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Bank from three Federal funds brokers of recognized 3 5 standing selected by it. Following any Settlement Date, the Availability Amount shall no longer be affected by any Escrow Balance Shortage existing prior to such Settlement Date. 1.6 Company acknowledges and agrees that the principal amount outstanding under this Agreement and the Note as of any date shall never exceed an amount equal to One Hundred Ten percent (110%) of aggregate Escrow Balances on such date. Company agrees upon request of Bank promptly to make all payments necessary to comply with this provision. 1.7 Company may prepay the Note in whole or in part without penalty or premium on the tenth (10th) day of each month or if that day is not a Business Day on the next succeeding Business Day; provided, however, each such prepayment shall be in an amount not less than $250,000. In addition, in the event the aggregate Escrow Balances shall be less than $20,000,000 for ninety (90) consecutive Business Days, Company shall, not later than (1) Business day following demand therefor by Bank, prepay the indebtedness outstanding hereunder and the Note in full and effective on the date of such demand, Bank's commitments under this Agreement shall terminate. ARTICLE 2. CONDITIONS. Company agrees to furnish Bank, prior to the initial borrowing hereunder, in form to be satisfactory to Bank, with (i) an opinion of Company's counsel; (ii) certified copies of resolutions of the Board of Directors of Company evidencing approval of the borrowings hereunder, (iii) certified copies of Company's Articles of Incorporation and Bylaws, and (iv) a certificate of good standing from the State of Company's incorporation and from each jurisdiction in which it is required to be qualified to do business. ARTICLE 3. REPRESENTATIONS AND WARRANTIES Company represents and warrants and such representations and warranties shall be deemed to be continuing representations and warranties during the entire life of this Agreement: 3.1 Company is a corporation duly organized and existing in good standing under the laws of the State of Delaware; Company is in good standing in each jurisdiction in which it is required to be qualified to do business; execution, delivery and performance of this Agreement and other documents and instruments required under this Agreement, and the issuance of the Note by Company are within its corporate powers, have been duly authorized, are not in contravention of law or the terms of Company's Certificate of Incorporation or Bylaws, and do not require the consent or approval of any governmental body, agency or authority; and this Agreement and other documents and instruments required 4 6 under this Agreement and Note, when issued, and delivered, will be valid and binding on Company and enforceable against Company in accordance with their terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement or creditors' rights in general. 3.2 The execution, delivery and performance of this Agreement and any other documents and instruments required under this Agreement, and the issuance of the Note by Company are not in contravention of the unwaived terms of any indenture, agreement or undertaking to which Company is a party or by which it is bound. 3.3 No litigation or other proceeding before any court or administrative agency is pending, or to the knowledge of the officers of Company is threatened against Company, the outcome of which could materially impair the financial condition of Company or business of Company. 3.4 Company has fulfilled its obligations under the minimum funding standards of the Employment Retirement Income Security Act of 1974, as amended ("ERISA") and the Internal Revenue Code of 1986, as amended, (the "Code") with respect to each of its employee pension benefit plans subject to ERISA (the "Pension Plans"), and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code with respect to each of its Pension Plans, and has not incurred any liability to the Pension Guaranty Corporation. As of the date of this Agreement, the Company does not have any obligation or liability with respect to any multiemployer Plan. 3.5 The balance sheet of Company dated March 31, 1995, previously furnished Bank, is materially complete and correct and fairly presents the financial condition of Company as of the date thereof; since said date there has been no material adverse change in the financial condition of Company; to the best of the knowledge of Company's officers, Company does not have any contingent obligations (including any liability for taxes) not disclosed by or reserved against in said balance sheet, and at the present time there are not material unrealized or anticipated losses from any present commitment of Company. 3.6 All tax returns and tax reports of Company required by law to be filed have been duly filed or extensions obtained, and all taxes, assessments and other governmental charges or levies (other than those presently payable without penalty and those currently being contested in good faith for which adequate reserves have been established) upon Company (or any of its properties) which are due and payable have been paid. The charges, accruals and reserves on the books of Company in respect of the Federal income tax for all periods are adequate in the opinion of Company. 5 7 3.7 Company is, in the conduct of its business, in compliance in all material respects with all federal, state or local laws, statutes, ordinances and regulations applicable to it, the enforcement of which, if Company were not in compliance, would have a material adverse effect on the business or financial condition of Company. Company has all approvals, authorizations, consents, licenses, orders and other permits of all governmental agencies and authorities, whether federal, state or local, required to permit the operation of its business as presently conducted, except such approvals, authorizations, consents, licenses, orders and other permits with respect to which the failure to have can be cured without having an adverse effect on the operation of such business. 3.8 No representation or warranty by Company in this Agreement, or in the Revolving Credit Agreement nor any statement or certificate (including financial statements) furnished or to be furnished to Bank pursuant hereto contains or will contain any untrue statement of any material fact or omits or will omit to state any material fact necessary to make such representation, warranty, statement or certificate not misleading. 3.9 Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. No part of the proceeds of any loan hereunder will be used for any purpose which violates the provisions of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System as now or from time to time hereafter in effect. ARTICLE 4. AFFIRMATIVE COVENANTS Company hereby agrees that, so long as Bank is committed to make any advance under this Agreement and thereafter so long as any indebtedness remains outstanding under this Agreement, Company shall and (except in the case of delivery of financial information, reports and notices) shall cause each of its Subsidiaries to: 4.1 Financial Statements. Furnish to Bank: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of Company, a copy of the consolidated balance sheet of Company and its consolidated Subsidiaries as at the end of such year and the related consolidated statements of common stockholders' equity and cash flows and the consolidated statements of income and retained earnings of Company and its consolidated Subsidiaries for such year, setting forth in each case in comparative form the figures for the previous year, reported on, without a "going concern" or like qualification or exception, or qualification indicating that the scope of the audit was inadequate to permit such independent certified public accountants to certify such financial statements without such qualification, by Ernst & Young or other firm of 6 8 independent certified public accountants of nationally recognized standing; (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of Company, the unaudited consolidated balance sheet of Company and its consolidated Subsidiaries as at the end of each such quarter and the related unaudited consolidated statements of common stockholders' equity and cash flows and the unaudited consolidated statements of income and retained earnings of Company and its consolidated Subsidiaries for such quarter and the portion of the fiscal year through such date, setting forth in each case, commencing with the quarterly period ending on June 30, 1995, in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects when considered in relation to the consolidated financial statements of Company and its consolidated Subsidiaries (subject to normal year-end audit adjustments); and (c) all financial statements required to be delivered by Company under the Revolving Credit Agreement, all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or Responsible Officer, as the case may be, and disclosed therein). 4.2 Certificates; Other Information. Furnish to Bank: (a) concurrently with the delivery of the financial statements referred to in Section 4.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in Sections 4.1(a) and 4.1(b), a certificate of a Responsible Officer (i) stating that, to the best of such Responsible Officer's knowledge, Company during such period has observed or performed all of its covenants and other agreements, and satisfied every condition contained in this Agreement and in the Note to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate, and (ii) in the case of the financial statements of Company referred to in Sections 4.1(a) and (b), showing in detail the calculations supporting such statements in Sections 5.2, 5.3 and 5.5; 7 9 (c) within fifteen days after the same are filed, copies of all financial statements and reports relating to Company, FAC or FAE in general which Company, FAC or FAE may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; and (d) promptly, such additional financial and other information as Bank, may from time to time reasonably request. 4.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all of its obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of Company or its Subsidiaries, as the case may be. 4.4 Conduct of Business and Maintenance of Existence. (i) Continue to engage in business of the same general type as now conducted by it, (ii) take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its businesses, including preservation and maintenance of Company's and such Subsidiary's status and eligibility under the regulations of each of the Agencies, (iii) preserve, renew and keep in full force and effect its corporate existence, and (iv) comply with all Contractual Obligations and Requirements of Law applicable to it (except, with respect solely to clauses (iii) and (iv), (a) to the extent that failure to do so would not, in the aggregate, have a Material Adverse Effect, and (b) to the extent contested in good faith by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of Company or such Subsidiary, as the case may be, in accordance with GAAP). 4.5 Maintenance of Property; Insurance. Keep all property useful and necessary in its businesses in good working order and condition; and maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies engaged in the same or a similar business (except, in each case, to the extent that failure to do so would not, in the aggregate, have a Material Adverse Effect; provided, that Company and its Subsidiaries may (so long as Company deems it prudent in its business judgment to do so) maintain programs of self-insurance to the same extent and in the same manner as in effect on the date of this Agreement. 4.6 Inspection of Property; Books and Records; Discussions. Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of Bank to 8 10 visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired (subject to reasonable requests for confidential treatment), and to discuss the business, operations, property, condition (financial or otherwise) or prospects of Company and its Subsidiaries with officers and employees of Company and its Subsidiaries and with its independent certified public accountants. 4.7 Notices. Promptly give notice to Bank of: (a) the occurrence of any Refunding Event, Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of Company or any of its Subsidiaries which, if not cured, would reasonably be expected to have a Material Adverse Effect, or (ii) litigation, investigation or proceeding which may exist at any time between Company or any of its Subsidiaries and any Governmental Authority which, if adversely determined, would reasonably be expected to have a Material Adverse Effect; (c) any litigation, investigation or proceeding of or before any arbitrator or Governmental Authority affecting Company or any of its Subsidiaries or any of its or their respective properties or revenues (i) with respect to this Agreement or the Notes or any of the transactions contemplated hereby, or (ii) which, if adversely determined, would have a Material Adverse Effect, other than any such litigation, investigation or proceeding in respect of which Company has determined in good faith, after advice from or consultation with its counsel, that the likelihood that such litigation, investigation or proceeding will be resolved in a manner which would have a Material Adverse Effect is remote; (d) the following events, as soon as practicable, and in any event within 30 days, after it knows or has reason to know of the following events: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC, Company or any Commonly Controlled Entity, or any Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Single Employer Plan or Multiemployer Plan, and in addition to such notice, shall deliver to Bank a certificate of its chief financial officer setting forth the details thereof and the action that Company or the Commonly Controlled Entity proposes to take with respect thereto; and (e) any development or event that would reasonably be expected to have a Material Adverse Effect. 9 11 Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action Company proposes to take with respect thereto. 4.8 Maintenance of Forward Commitments. Maintain at all times in accordance with Company's practices on the date hereof, hedging contracts, forward purchase contracts or other forward commitments in an aggregate amount at least equal to the amount of mortgage loans receivable held by Company and its Subsidiaries at such time. ARTICLE 5. NEGATIVE COVENANTS Company hereby agrees that, so long as Bank is committed to make any advance under this Agreement and thereafter so long as any indebtedness remains outstanding under this Agreement shall not, nor shall it permit any of its Subsidiaries to, directly or indirectly: 5.1 Breach any covenant under the Revolving Credit Agreement, if such breach results in the occurrence of an Event of Default under the Revolving Credit Agreement. 5.2 Consolidated Tangible Net Worth. Permit Consolidated Tangible Net Worth at any time to be less than $180,000,000. 5.3 Leverage. Permit the ratio of Consolidated Indebtedness to Consolidated Tangible Net Worth at the end of any month to be greater than 4 to 1. 5.4 Margin Stock. Permit more than 25 percent of the value of the assets either of Company only or of Company and its Subsidiaries on a consolidated basis subject to any restriction under this Agreement to consist of "margin stock" (within the meaning of Regulations G, T, U and X of the Board of Governors of the Federal Reserve System). 5.5 Permit Debt (as defined in the Revolving Credit Agreement) to exceed an amount which is $10,000,000 less than the sum of values as set forth in section 8.5(a) through (f) of the Revolving Credit Agreement (assuming that Facility is unsecured). ARTICLE 6. DEFINITIONS. For the purposes of Article 4 of this Agreement entitled "Affirmative Covenants" and Article 5 entitled "Negative Covenants" the following terms shall have the definitions set forth in this Article 6. "Affiliate": as to any Person, (a) any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, 10 12 is controlled by, or is under common control with, such Person or (b) any Person who is a director, officer, shareholder or partner (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person described in the preceding clause (a). For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (i) vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (ii) direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Agencies": collectively, the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Government National Mortgage Association. "Code": The Internal Revenue Code of 1986, as amended from time to time. "Commitment Amount": The lesser of (i) $60,000,000, or (ii) an amount equal to the amount then available to be drawn by Company under the Revolving Credit Agreement. "Commonly Controlled Entity": an entity, whether or not incorporated, which is under common control with Company within the meaning of Section 4001 of ERISA or is part of a group which includes Company and which is treated as a single employer under Section 414 of the Code. "Consolidated Indebtedness": at a particular date, all amounts which would, in conformity with GAAP, be included as Indebtedness on a consolidated balance sheet of Company and its Subsidiaries as at such date; provided, that Consolidated Indebtedness shall in any event exclude Non-Recourse and Defeased Debt. "Consolidated Intangibles": at a particular date, all assets of Company and its Subsidiaries, determined on a consolidated basis, that would, in conformity with GAAP, be classified as intangible assets, including, without limitation, unamortized debt discount and expense in respect of debt issued by Company and its Subsidiaries net of unamortized premiums in respect of debt issued by Company and its Subsidiaries, unamortized organization and reorganization expense, patents, trade or service marks, franchises, trade names and goodwill, but Consolidated Intangibles shall not include the amount capitalized as mortgage purchase servicing costs. "Consolidated Net Income": for a particular period, the amount set forth as consolidated net income on the consolidated statement of income of Company and its Subsidiaries calculated in accordance with GAAP. "Consolidated Net Worth": at a particular date, all amounts which would, in conformity with GAAP, be included under 11 13 shareholders' equity on a consolidated balance sheet of Company and its Subsidiaries as at such date, including up to $50,000,000 of redeemable common stock of Company owned by the management or any employee stock ownership plan of Company. "Consolidated Tangible Net Worth": at a particular date, the excess, if any, of (a) Consolidated Net Worth as at such date, over (b) Consolidated Intangibles as at such date. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Default": any of the events specified in Article 7 of this Agreement whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "Event of Default": any of the events specified in Article 7 of this Agreement provided, that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "FAC": The Fund American Companies, Inc., a Delaware corporation. "FAE": Fund American Enterprises, Inc., a Delaware corporation. "GAAP": generally accepted accounting principles in the United States of America in effect from time to time. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including without limitation, the Agencies. "Indebtedness": of a Person, at a particular date, the sum (without duplication) at such date of (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices) or which is evidenced by a note, bond, debenture or similar instrument, (b) all obligations of such Person under Financing Leases, (c) all obligations of such Person in respect of acceptances issued or created for the account of such Person, and (d) all liabilities secured by any Lien on any property 12 14 owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof; provided, that Indebtedness of Company and its Subsidiaries shall in any event exclude Mortgage-Related Indebtedness. "Insolvency": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Financing Lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing). "Long-Term Liabilities": that portion of Total Liabilities which are determined to be long term in accordance with GAAP. "Material Adverse Effect": a material adverse effect on (a) the business, operations, property or condition (financial or otherwise) of Company and its Subsidiaries taken as a whole, (b) the ability of Company to perform its obligations under this Agreement or the Note, or (c) the validity or enforceability of this Agreement or the Note or of the rights or remedies of Bank hereunder or thereunder. "Maturity Date": as defined in Section 1.1 of this Agreement. "Moody's": Moody's Investors Services, Inc. "Multiemployer Plan": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) or ERISA. "Note": as defined in Section 1.1 of this Agreement. "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "Person": an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "Plan": at a particular time, any employee benefit plan which is covered by ERISA and in respect of which Company or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an `employer' as defined in Section 3(5) of ERISA. 13 15 "Refunding Event" shall mean that Company shall breach a covenant contained in sections 5.2, 5.3 or 5.5 of this Agreement. "Regulation U": Regulation U of the Board of Governors of the Federal Reserve System. "Regulations": the regulations of the Board of Governors of the Federal Reserve System. "Reorganization": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event": any of the events set forth in Section 4043(b) of ERISA, other than those events as to which the thirty-day notice period is waived under subsection .13, .14, .16, .18, .19 or .20 of PBGC Reg. S 2615. "Requirement of Law": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each cased applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer": with respect to Company, the Chairman, the President, the Chief Financial Officer or any Executive Vice President of Company. "Revolving Credit Agreement" shall mean that Amended and Restated Revolving Credit Agreement dated March 24, 1995, to which Company is a party, as amended from time to time. "S&P": Standard & Poor's Corporation. "Single Employer Plan": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Subsidiary": as to any Person, (i) a corporation of which shares of stock having ordinary voting power (other than stock having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person and (ii) any partnership of which such Person or any Subsidiary is a general partner or any partnership more than 50% of the equity interests of which are owned, directly or indirectly, by such Person or by one or more other Subsidiaries, or by such Person and one or more other Subsidiaries. Notwithstanding the foregoing, except as applied to Section 4.1 of this Agreement, the term "Subsidiary" shall not be 14 16 deemed to include any special purpose corporation, partnership or trust created for the purpose of, and the sole business and activities of which (other than activities incidental to its organization and normal operations) relate to, the issuance of Mortgage-Related Indebtedness. "Total Liabilities": at any date, the total liabilities of Company and its consolidated Subsidiaries as at such date, determined in accordance with GAAP. ARTICLE 7. EVENTS OF DEFAULT 7.1 Upon non-payment of any installment of the principal or interest on the Note when due in accordance with the terms thereof, or upon non-payment of any other outstanding indebtedness of Company to Bank hereunder or under any other instrument or evidence of indebtedness when due in accordance with the terms thereof, the Note shall automatically become immediately due and payable and Bank shall not be obligated to make any further advances hereunder. 7.2 Upon occurrence of any of the following events of default: (a) default in the observance or performance of any of the conditions, covenants or agreements of Company set forth in Articles 4 or 5 herein (except for the covenants in sections 5.2, 5.3 and 5.5); (b) default in observance or performance of any of the other conditions, covenants (except for the covenants in sections 5.2, 5.3 and 5.5) or agreements of Company herein set forth, and continuance thereof for thirty (30) days after notice to Company by Bank; (c) any representation or warranty made or deemed made by Company herein or which is contained in any certificate, document or financial or other statement furnished at any time under this Agreement shall prove to have been incorrect, false or misleading in any respect material to Company or its ability to perform its obligations under this Agreement on or as of the date made or deemed made unless Company shall have caused the facts or circumstances in respect of which such representation or warranty was incorrect, false or misleading to be changed to conform to such representation or warranty so that such representation or warranty ceases to be incorrect, false or misleading; (d) default in the observance or performance of any of the conditions, covenants or agreements of Company set forth in any document related to or connected with this Agreement or the indebtedness hereunder, and continuation of such default beyond any period of grace specified in any such document; 15 17 (e) Company shall (i) default in any payment of principal of or interest on any indebtedness (other than the Note) in an aggregate principal amount of $25,000,000 or in the payment of any matured contingent obligation in an aggregate principal amount outstanding of at least $25,000,000 beyond the period of grace, if any, and after the giving of required notice, if any, provided that the instrument or agreement under which such indebtedness or contingent obligation of at least $25,000,000 was created; or (ii) default in the observance of performance of any other agreement or condition relating to any such indebtedness or contingent obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such indebtedness or beneficiary or beneficiaries of such contingent obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such indebtedness to become due prior to its stated maturity or such contingent obligation to become payable; (f) one or more judgments or decrees shall be entered against Company involving in the aggregate a liability (not covered by insurance and not paid) of $25,000,000 or more and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; (g) the occurrence of any "reportable event", as defined in the Employee Retirement Income Security Act of 1974 and any amendments thereto, which is determined to constitute grounds for termination by the Pension Benefit Guaranty Corporation of any employee pension benefit plan maintained by or on behalf of Company for the benefit of any of its employees or for the appointment by the appropriate United States District Court of a trustee to administer such plan and such reportable event is not corrected and such determination is not revoked within thirty (30) days after notice thereof has been given to the plan administrator or Company; or the institution of proceedings by the Pension Benefit Guaranty Corporation to terminate any such employee benefit pension plan or to appoint a trustee to administer such plan; or the appointment of a trustee by the appropriate United States District Court to administer any such employee benefit pension plan; then, or at any time thereafter, unless such default is remedied, Bank may give notice to Company declaring all outstanding indebtedness hereunder and under the Note to be due and payable, whereupon all indebtedness then outstanding hereunder and under the Note shall immediately become due and payable without further notice and demand, and Bank shall not be obligated to make further advances hereunder. 16 18 7.3 If a creditors' committee shall have been appointed for the business of Company; or if Company shall have made a general assignment for the benefit of creditors or shall have been adjudicated bankrupt, or shall have filed a voluntary petition in bankruptcy or for reorganization or to effect a plan or arrangement with creditors; or shall file an answer to a creditor's petition or other petition filed against it, admitting the material allegations thereof for an adjudication in bankruptcy or for reorganization; or shall have applied for or permitted the appointment of a receiver, or trustee or custodian for any of its property or assets; or such receiver, trustee or custodian shall have been appointed for any of its property or assets (otherwise than upon application or consent of Company) and such receiver, trustee or custodian so appointed shall not have been discharged within forty-five (45) days after the date of his appointment or if an order shall be entered and shall not be dismissed or stayed within forty-five (45) days from its entry, approving any petition for reorganization of Company; then the Note and all indebtedness then outstanding hereunder shall automatically become immediately due and payable and Bank shall not be obligated to make further advances under this Agreement. ARTICLE 8. INDEMNITY Company agrees to release, hold harmless and indemnify Bank from and against any and all claims of any kind which may at any time be brought by any private party, administrative agency or any other person with respect to the deposit by Company with Bank of any escrow funds, the non-interest bearing nature of any deposits, and/or the use of the deposits by Company as compensating balances. This indemnification extends not only to any judgments or settlements against Bank, but also to full recovery of Bank's associated legal expenses (whether out-of-pocket or incurred internally) and costs and expenses including without limitation all costs and expenses incurred by Bank in complying with any discovery requests or orders, administrative or other, received in connection with such deposits. It is expressly agreed and understood that the provisions of this Section 8 shall and are intended to be continuing and shall survive the repayment of any indebtedness of Company to Bank under this Agreement and the Note and the termination of this Agreement. ARTICLE 9. MISCELLANEOUS 9.1 This Agreement shall be binding upon and shall inure to the benefit of Company and Bank and their respective successors and assigns. 9.2 No delay or failure of Bank in exercising any right, power or privilege hereunder shall affect such right, power or privilege, nor shall any single or partial exercise thereof preclude any further exercise thereof, or the exercise of any other 17 19 power, right or privilege. The rights of Bank under this Agreement are cumulative and not exclusive of any right or remedies which Bank would otherwise have. 9.3 Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidated or other accounting computation is required to be made for the purposes of this Agreement, it shall be done in accordance with generally accepted accounting principles consistently applied. 9.4 All notices to Company with respect to this Agreement shall be deemed to be completed upon mailing by certified mail as follows: To Company: Source One Mortgage Services Corporation 27555 Farmington Road Farmington Hills, Michigan 48018 Attention: Larry Ciofu, Vice President To Bank: Comerica Bank One Detroit Center P.O. Box 75000 Detroit, Michigan 48275-3268 Attention: Michigan Corporate Division I 9.5 Company agrees to reimburse Bank for all reasonable out-of-pocket expenses (including reasonable fees, time charges and expenses of attorneys for Bank, which may be employees of the Bank) incurred in connection with the preparation, negotiation and execution of this Agreement and any other documentation contemplated hereby and the consummation and closing of the transactions contemplated by this Agreement and such other documentation; provided, however that the maximum amount of fees, time charges and expenses of attorneys for Bank payable by Company pursuant to this sentence be twenty-five thousand dollars ($25,000.00) plus the amount of disbursements actually incurred by such attorneys. All reasonable costs, including reasonable attorney fees, actually incurred by Bank in reviewing, revising, protecting or enforcing any of its rights against Company or defending Bank from any claims or liabilities by any party or otherwise incurred by Bank in connection with an event of default or the enforcement of this Agreement or the related documents shall also by paid by Company. 9.6 This Agreement shall become effective upon the execution hereof by Bank and Company. 9.7 No amendments or waiver of any provision of this Agreement nor consent to any departure by Company therefrom shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such amendment, waiver or consent shall be effective only in the specific instance and for the 18 20 specific purpose for which given. No amendment, waiver or consent with respect to any provision of this Agreement shall affect any other provision of this Agreement. 9.8 This Agreement shall be governed by and interpreted in accordance with the laws of the State of Michigan. WITNESS the due execution hereof as of the day and year first above written. COMERICA BANK SOURCE ONE MORTGAGE SERVICES CORPORATION By:___________________________ By:____________________________ Its:__________________________ Its:___________________________ 19 21 EXHIBIT "A" REVOLVING CREDIT NOTE $60,000,000 Detroit, Michigan As of August 10, 1995 On or before the Maturity Date, FOR VALUE RECEIVED, the undersigned, Source One Mortgage Services Corporation, a Michigan corporation (herein called "Company") promises to pay to the order of COMERICA BANK (herein called "Bank") at: One Detroit Center, Detroit, MI 48226, or such other place as Bank may designate, the indebtedness or so much of the sum of Sixty Million Dollars ($60,000,000) as may from time to time have been advanced and then be outstanding hereunder and under a certain Loan Agreement by and between Company and Bank dated as of August 10, 1995 (herein called the Loan Agreement"). The indebtedness outstanding under this Note from time to time shall bear interest as set forth in the Loan Agreement. This Note may be prepaid as set forth in the Loan Agreement. This Note evidences borrowing under, is subject to, shall be prepaid in accordance with, and may be matured under the terms of the Loan Agreement, to which reference is hereby made. All agreements between Company and Bank pertaining to the indebtedness described herein are expressly limited so that in no event whatsoever shall the amount of interest paid or agreed to be paid to Bank exceed the highest rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of the Loan Agreement, this Note or any other instrument securing this Note or all or any part of the indebtedness secured thereby, at the time performance of such provision shall be due, shall involve exceeding the interest limitation validly prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, the obligation to be fulfilled shall be reduced to an amount computed at the highest rate of interest permissible under such applicable law, and if, for any reason whatsoever, Bank shall ever receive as interest an amount which would be deemed unlawful under such applicable law, such interest shall be automatically applied to the payment of the principal amount described herein or otherwise owed by Company to Bank, (whether or not then due and payable) and not to the payment of interest. Notwithstanding anything herein to the contrary, nothing shall limit any rights granted Bank by other instruments or by law. 22 This Note shall be governed by and interpreted in accordance with the laws of the State of Michigan. SOURCE ONE MORTGAGE SERVICES CORPORATION By: ___________________________ Its: ___________________________ 2 23 EXHIBIT "B" REQUEST FOR DRAW AND CERTIFICATE OF COMPLIANCE TO: COMERICA BANK (the "Bank") The undersigned hereby request(s) an advance in the amount of _____________________________________ DOLLARS ($_______________) against the Revolving Credit Note dated ________________, 1995, of undersigned to the Bank in the face amount of Sixty Million Dollars ($60,000,000). The proceeds of this advance shall be deposited to the Account No. ____ of the undersigned with the Bank or as follows: ________________________________ Undersigned warrants and certifies to the Bank that (i) the amount of the advance requested herein does not exceed the amount which the undersigned estimates to be its anticipated average daily escrow balances for the month following the date of such advance under that certain Loan Agreement (the "Loan Agreement") dated as of August 10, 1995, by and between undersigned and the Bank and (ii) no condition exists or event has occurred which constitutes or, with the running of time would constitute a default under the Loan Agreement. Dated this ___ day of _______________, 19__. SOURCE ONE MORTGAGE SERVICES CORPORATION By: ____________________________ Its:____________________________ 24 AMENDMENT NO. 1 TO LOAN AGREEMENT This Amendment No. 1 is made as of ____________, 1995 by Source One Mortgage Services Corporation, Farmington Hills, Michigan ("Company") and Comerica Bank, a Michigan banking corporation, of Detroit, Michigan ("Bank"). Company and Bank entered into a loan agreement dated August 10, 1995 (the "Loan Agreement") in connection with a $60,000,000 revolving credit facility as described therein. Company has requested and Bank has agreed to amend the Loan Agreement in certain respects to (i) allow for the exchange of certain newly issued subordinated debt securities of the Company for certain existing preferred stock of the Company, and (ii) modify certain provisions of the Loan Agreement in order to treat such newly issued subordinated debt as equity in certain instances. Wherefore, Company and Bank agree as follows: 1. This Amendment No. 1 shall be effective from and after the date on which Company first exchanges Subordinated Debt (as defined below) for Company's 8.42% cumulative preferred stock, Series A. 2. The following definitions are hereby added to Article 6 of the Loan Agreement: "Subordinated Debt: means the principal amount of (but not any interest on) the unsecured subordinated Indebtedness of the Company outstanding from time to time (which amount shall not exceed $100,000,000) evidenced by the Quarterly Income Capital Securities (Subordinated Interest Deferrable Debentures, Due 2025) of the Company issued (or to be issued) in exchange for certain of the Company's Series A Preferred Stock, the terms of which unsecured subordinated Indebtedness are set forth in the Subordinated Debt Indenture; but shall not include any such unsecured subordinated Indebtedness with respect to which any amounts shall have been deposited with the trustee under the Subordinated Debt Indenture or otherwise irrevocably set aside for the benefit of the holders of such Indebtedness for the purpose of defeasance of such Indebtedness." "Subordinated Debt Indenture: means that certain Subordinated Indenture, dated as of December 1, 1995, as amended or supplemented from time to time, by and between the Company and IBJ Schroeder, as trustee, pursuant to which the Company has issued or will issue the Subordinated Debt." 25 3. Section 5.1 of the Loan Agreement is amended to read as follows: "Breach any covenant under (i) the Revolving Credit Agreement, or (ii) the Subordinated Debt Indenture, as they may be amended from time to time pursuant to their terms, if such breach results in the occurrence of an Event of Default under the Revolving Credit Agreement or the Subordinated Debt Indenture, as the case may be." 4. Section 5.2 of the Loan Agreement is amended to read as follows: "Permit Consolidated Tangible Net Worth plus Subordinated Debt at any time to be less than $180,000,000." 5. Section 5.3 of the Loan Agreement is amended to read as follows: "Permit the ratio of (i) Consolidated Indebtedness (excluding Subordinated Debt) to Consolidated Tangible Net Worth (including Subordinated Debt) at the end of any month to be greater than 4 to 1." 6. Section 5.5 of the Loan Agreement is amended to read as follows: "Permit Debt (as defined in the Revolving Credit Agreement, but excluding Subordinated Debt) to exceed an amount which is $10,000,000 less than the sum of values as set forth in section 8.5(a) through (f) of the Revolving Credit Agreement (assuming that Facility is unsecured). 7. Except as amended hereby, the Loan Agreement shall remain in full force and effect. This Amendment No. 1 may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Amendment No. 1 by signing any such counterpart. SOURCE ONE MORTGAGE SERVICES CORPORATION By:____________________________________ Its:___________________________________ COMERICA BANK By:____________________________________ Its:___________________________________ 26 AMENDMENT NO. 2 TO LOAN AGREEMENT This Amendment No. 2 is made as of July 10, 1996 by Source One Mortgage Services Corporation, Farmington Hills, Michigan ("Company") and Comerica Bank, a Michigan banking corporation, of Detroit, Michigan ("Bank"). Company and Bank entered into a loan agreement dated as of August 10, 1995 (the "Loan Agreement") in connection with a $60,000,000 revolving credit facility as described therein. Company has requested and Bank has agreed to amend the Loan Agreement to extend the maturity date. Wherefore, Company and Bank agree as follows: 1. The date "July 10, 1996" in section 1.1 of the Loan Agreement hereby is amended to read "July 10, 1997." 2. Except as amended hereby, the Loan Agreement shall remain in full force and effect. This Amendment No. 2 may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Amendment No. 2 by signing any such counterpart. SOURCE ONE MORTGAGE SERVICES CORPORATION By:____________________________________ Its:____________________________________ COMERICA BANK By:____________________________________ Its:____________________________________ EX-10.(CC) 7 EXHIBIT 10(CC) 1 EXHIBIT 10(cc) FIRST AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT This First Amendment to Second Amended and Restated Revolving Credit Agreement (the "First Amendment") is made as of January 6, 1997 by and among SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation (the "Company"), THE MORTGAGE AUTHORITY, INC., a Delaware corporation ("TMA"), CENTRAL PACIFIC MORTGAGE COMPANY, a California corporation ("CPM"), the lenders identified on the signature pages hereof, and THE FIRST NATIONAL BANK OF CHICAGO, a national banking association ("First Chicago"), individually as a Lender and as administrative agent for the Lenders. RECITALS The Company, TMA, CPM, the Agent and the Lenders are parties to a certain Second Amended and Restated Revolving Credit Agreement, dated as of November 12, 1996 (the "Credit Agreement"), pursuant to which the Lenders have agreed to provide a revolving credit facility to the Company, TMA and CPM on the terms and conditions set forth in the Credit Agreement. Any capitalized term not expressly defined herein shall have the meaning ascribed to such term in the Credit Agreement. Pursuant to Section 12.6 of the Credit Agreement the Agent, the Lenders, the Company, TMA and CPM may make certain amendments to the Loan Documents. The Company, TMA, CPM, the Agent and the Lenders desire to amend the Credit Agreement to (i) modify the covenant which limits the Recourse Servicing, and (ii) extend the date by which the Company shall be entitled to make a special dividend of up to $60,000,000. AGREEMENTS NOW, THEREFORE, the parties hereto agree as follows: 1. Recourse Servicing. Section 8.10 of the Credit Agreement is hereby deleted and replaced with the following: "8.10 Recourse Servicing. Permit the principal balance of Mortgage Loans covered by Recourse Servicing to exceed the sum of (A) the aggregate principal balance of all Mortgage Loans covered by Recourse Servicing owned by the Company as of December 31, 1996 plus (B) the aggregate principal balance of all Mortgage Loans covered by Recourse Servicing acquired by the Company from and after January 1, 1997 as a part of one or more larger acquisitions of Servicing Agreements, provided that the principal balance of Mortgage Loans covered by Recourse Servicing acquired in any single larger acquisition shall not exceed the lesser of (i) $100,000,000 or (ii) 10% of the principal balance of all Mortgage Loans covered by the 2 Servicing Agreements acquired in such acquisition less (C) all reductions in such aggregate principal balances, whether by reason of prepayment or amortization from and after January 1, 1997 (or the date of later acquisition, as the case may be) and less (D) the aggregate principal balance of any Mortgage Loans covered by any such Recourse Servicing sold by the Company after December 31, 1996." 2. Extension of Date for $60,000,000 Special Dividend. The phrase "the fourth calendar quarter of 1996" in Section 8.16(b)(ii) of the Credit Agreement is hereby deleted and replaced with the phrase "the first six calendar months of 1997". 3. Miscellaneous. (a) All references to the Credit Agreement in the Credit Agreement and the other Credit Documents shall be deemed to refer to the Credit Agreement as amended by this First Amendment. (b) The Company, TMA and CPM each hereby represents and warrants to the Lenders that on the date of execution hereof, both prior to and after giving effect to this First Amendment, (i) the representations and warranties of the Company, TMA and CPM contained in the Credit Documents are accurate and complete in all respects, and (ii) no Default or event which with the giving of notice and/or the passage of time would constitute a Default has occurred and is continuing. (c) In all other respects, the Credit Agreement is and remains unmodified and in full force and effect and is hereby ratified and confirmed. This First Amendment may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this First Amendment by signing any such counterpart. (d) This First Amendment shall be construed in accordance with and governed by the laws of the State of Illinois. IN WITNESS WHEREOF, the Company, TMA, CPM, the Required Lenders and the Agent have executed this First Amendment as of the date first above written to be effective as of the date this First Amendment is executed by the Company, TMA, CPM, the Agent and the Required Lenders. SOURCE ONE MORTGAGE SERVICES CORPORATION By:________________________________ Name: Michael C. Allemang Title: Executive Vice President and Chief Financial Officer -2- 3 THE MORTGAGE AUTHORITY, INC. By:________________________________ Name: Larry N. Ciofu Title: Vice President/Treasury CENTRAL PACIFIC MORTGAGE COMPANY By:________________________________ Name: John Cassell Title: Chief Financial Officer THE FIRST NATIONAL BANK OF CHICAGO, as Agent By:________________________________ Name:___________________________ Title:__________________________ THE FIRST NATIONAL BANK OF CHICAGO By:________________________________ Name:___________________________ Title:__________________________ ABN AMRO BANK, N.V. By:________________________________ Name:___________________________ Title:__________________________ By:________________________________ Name:___________________________ Title:__________________________ -3- 4 BANK OF AMERICA NT & SA By:_________________________________ Thomas A. Pizurie Vice President THE BANK OF NEW YORK By:________________________________ Patricia M. Dominus Vice President THE BANK OF TOKYO-MITSUBISHI, LTD. By:_________________________________ Noburu Kobayashi Deputy General Manager BANKERS TRUST COMPANY By:________________________________ John O'Rourke Vice President BANQUE PARIBAS By:_________________________________ Name:____________________________ Title:___________________________ By:_________________________________ Name:____________________________ Title:___________________________ BARCLAYS BANK PLC By:________________________________ Tina Swartz Associate Director -4- 5 CAISSE NATIONALE DE CREDIT AGRICOLE By:_________________________________ David Bouhl First Vice President Head of Corporate Banking Chicago CIBC, INC. By:________________________________ Stephen D. Reynolds Director CIBC Wood Gundy Securities Corp., As Agent for CIBC, Inc. COMERICA BANK By:________________________________ James R. Grossett Vice President CREDIT LYONNAIS NEW YORK BRANCH By:___________________________ Renaud d'Herbes Senior Vice President CREDIT SUISSE By:________________________________ Name:___________________________ Title:__________________________ By:________________________________ Name:___________________________ Title:__________________________ -5- 6 THE DAI-ICHI KANGYO BANK, LTD., CHICAGO BRANCH By:________________________________ Name:___________________________ Title:__________________________ FLEET BANK N.A. By:_________________________________ Robert Pierson Vice President THE FUJI BANK, LIMITED By:_________________________________ Peter L. Chinnici Joint General Manager GUARANTY FEDERAL BANK, F.S.B. By:_________________________________ Gregory Jackson Vice President THE LONG-TERM CREDIT BANK OF JAPAN, LTD. By:_________________________________ Name:____________________________ Title:___________________________ -6- 7 THE MITSUBISHI TRUST AND BANKING CORPORATION, LOS ANGELES AGENCY By:_________________________________ Name:____________________________ Title:___________________________ NATIONAL CITY BANK OF KENTUCKY By:________________________________ Gary Sieveking Vice President PNC BANK, NATIONAL ASSOCIATION By:________________________________ Peter Stack Assistant Vice President THE SANWA BANK, LIMITED, CHICAGO BRANCH By:_________________________________ Richard H. Ault Vice President THE SUMITOMO BANK, LTD. By:_________________________________ Hiroyuki Iwami Joint General Manager -7- 8 WELLS FARGO BANK, NA By:_________________________________ Name:____________________________ Title:___________________________ By:_________________________________ Name:____________________________ Title:___________________________ WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH By:________________________________ Name:___________________________ Title:__________________________ By:________________________________ Name:___________________________ Title:__________________________ -8- EX-10.(DD) 8 EXHIBIT 10(DD) 1 EXHIBIT 10(dd) FNMA/FHLMC/GNMA MORTGAGE SERVICING PURCHASE AND SALE AGREEMENT THIS FNMA/FHLMC/GNMA MORTGAGE SERVICING PURCHASE AND SALE AGREEMENT (the "Sale Agreement") is dated as of February 28, 1997, by and between SOURCE ONE MORTGAGE SERVICES CORPORATION, with offices located at 27555 Farmington Road, Farmington Hills, Michigan 48334-3357 (the "Seller") and CHEMICAL MORTGAGE COMPANY, an Ohio corporation, with offices at 200 Old Wilson Bridge Road, Worthington, Ohio 43085-8500 (the "Purchaser"). W I T N E S S E T H: WHEREAS, Seller owns the servicing rights to a mortgage portfolio consisting of residential mortgage loans with an aggregate outstanding balance of approximately $18 Billion Dollars as of August 31, 1996, as described more particularly in the offering materials, copies of which are attached hereto and incorporated by reference herein as Exhibit A (individually the "Mortgage Loan" or collectively the "Mortgage Loans"), which Mortgage Loans are either whole loans owned by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), or are pledged to secure participation certificates issued by FHLMC or mortgage backed securities issued by FNMA or the Government National Mortgage Association ("GNMA"), as more particularly set forth in Exhibit A; WHEREAS, Purchaser desires to purchase and Seller desires to sell all right, title and interest in and to the Servicing (as defined herein below) of the Mortgage Loans in accordance with the terms and conditions of this Sale Agreement; WHEREAS, it is contemplated that FNMA, FHLMC and GNMA will consent to the assumption of the Servicing by Purchaser and to Seller's transfer and assignment of the Servicing to Purchaser as provided herein; NOW, THEREFORE, in consideration of the mutual covenants made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS As used in this Sale Agreement, the words and phrases set forth below shall have the following meanings: 1.1. "ADVANCE(S)": All customary and necessary out-of-pocket costs and expenses incurred in accordance with Agency Requirements and the Mortgage Loan documents with regard to performance by a servicer of its servicing obligations, including, but not limited 2 to, advances of principal, interest (excluding Shortfall Interest), taxes, insurance, foreclosure and bankruptcy expenses and guarantee fees. 1.2. "AGENCY(IES)": FNMA, FHLMC and/or GNMA (collectively, or individually, may be referred to as the "Agency"). 1.3. "AGENCY LOAN COMMITMENT[S]": The Agency loan sale commitment[s] and/or agreement[s], including any related exhibits, together with any amendments or supplements, whereby the Mortgage Loans were sold and/or relating to the servicing thereof or otherwise affecting the Servicing. 1.4. "AGENCY REQUIREMENTS": The applicable rules, regulations, announcements, notices, directives and instructions of an Agency, including, without limitation, the applicable requirements of the Agency Selling and Servicing Guides, as amended from time to time, and the Agency Loan Commitments. 1.5. "ANCILLARY FEES": Reasonable and customary fees acceptable to the Agencies and collected by servicers as income incidental to the servicing of the Mortgage Loans such as late fees, insurance administration fees and commissions, processing fees and assumption fees, which Ancillary Fees shall not, during the Interim Subservicing Period or the Subservicing Period, without the consent of Purchaser (which consent shall not be unreasonably withheld as to inflationary increases in fee amount or as to an additional fee type dictated by the Agencies), exceed, in fee amount or type, the fees charged by Seller as of November 28, 1996. 1.6. "APPROVAL DATE": The date on which approval for the transfer of ownership of the Servicing and the subservicing, all as contemplated by this Sale Agreement, the Interim Subservicing Agreement and the Subservicing Agreement, shall have been obtained from each of FNMA, FHLMC, GNMA and any other regulatory agency whose approval is required, which date shall be no later than May 31, 1997, provided however, that GNMA approval need not be obtained by this Approval Date for the Mortgage Loans contained within the Uncertified Pools. 1.7. "BANKRUPTCY LOAN": A Mortgage Loan that is affected by a bankruptcy which has been filed, except for Mortgage Loans for which the borrowers have filed Chapter 7 liquidations and which are otherwise not in default. 1.8. "BI-WEEKLY MORTGAGE LOAN": A Mortgage Loan which as of the Sale Date is the subject of an agreement relating to payment processing on a bi-weekly basis under the Bi-Saver Program. 1.9. "BORROWER": The obligors on a Note. 1.10. "BUSINESS DAY": A day or a portion thereof during which both Purchaser and Seller are open for business, other than Saturday or Sunday, or any legal holiday. 1.11. "CUSTODIAN LEGAL FILE": Those files identified in Exhibits H through K. -2- 3 1.12. "CUT-OFF DATE": Close of business on the Business Day immediately prior to the applicable Transfer Date, or as otherwise agreed by the parties. 1.13. "DEPOSIT": As defined in Section 3.2(a) hereof. 1.14. "DOCUMENT HOLDBACK": That amount to be held by Purchaser from the Purchase Price, or so much of such amount as is then remaining, in accordance with Section 3.2(d). 1.15. "ESCROW/IMPOUND FUNDS": The tax/insurance/buydown/construction completion escrows and suspense balances (but exclusive of Ancillary Fees assessed by Seller). 1.16. "FHA": Federal Housing Administration. 1.17. "FHLMC": As defined in the recitals hereof. 1.18. "FHLMC PAYMENT DATE": A date mutually agreeable to the parties which is no later than five Business Days after the FHLMC Transfer Date. 1.19. "FHLMC SERVICING": That portion of the Servicing which pertains to FHLMC Mortgage Loans (whole or securitized). 1.20. "FHLMC TRANSFER DATE": March 17, 1998, the date on which FHLMC Servicing Responsibility transfers to Purchaser, or such other date mutually agreeable to the parties. 1.21. "FNMA": As defined in the recitals hereof. 1.22. "FNMA PAYMENT DATE": A date mutually agreeable to the parties which is no later than five Business Days after the FNMA Transfer Date. 1.23. "FNMA SERVICING": That portion of the Servicing which pertains to FNMA Mortgage Loans (whole or securitized). 1.24. "FNMA TRANSFER DATE": August 3, 1998, the date on which FNMA Servicing Responsibility transfers to Purchaser, or such other date mutually agreeable to the parties. 1.25. "FORECLOSURE LOAN": A Mortgage Loan on which (i) a foreclosure has been completed or commenced or which has been forwarded to an attorney to commence foreclosure; or (ii) a deed-in-lieu of foreclosure has been accepted or is pending. 1.26. "GNMA": As defined in the recitals hereof. 1.27. "GNMA PAYMENT DATE": A date mutually agreeable to the parties which is no later than five Business Days after the GNMA Transfer Date. -3- 4 1.28. "GNMA SERVICING": That portion of the Servicing which pertains to GNMA Mortgage Loans (whole or securitized). 1.29. "GNMA TRANSFER DATE": June 1, 1998, the date on which GNMA Servicing Responsibility transfers to Purchaser, or such other date mutually agreeable to the parties. 1.30. "GUARANTY AGREEMENT": That certain Guaranty Agreement executed by Fund American Enterprises, Holdings, Inc. in favor of Purchaser, its successors and assigns, dated of even date herewith, a copy of which is attached hereto as Exhibit F. 1.31. "INTERIM SUBSERVICING PERIOD": The period from the Sale Date up to the Approval Date during which Subservicer shall subservice the Mortgage Loans on behalf of Purchaser. 1.32. "INTERIM SUBSERVICING AGREEMENT": That certain agreement, a copy of which is attached hereto as Exhibit C-1, setting forth the terms and provisions pursuant to which Seller will subservice the Mortgage Loans, on behalf of Purchaser, during the Interim Subservicing Period. 1.33. "LGC": Loan Guaranty Certificate issued by the VA. 1.34. "LITIGATION LOAN": A Mortgage Loan which is in any stage of litigation, or which is the subject of an injunction or settlement requiring Seller to take action or affecting the origination or servicing of the Mortgage Loan[s], and which has a material adverse effect on the Mortgage Loan or the Servicing associated with such Mortgage Loan. 1.35. "MIC": Mortgage Insurance Certificate issued by the FHA. 1.36. "MORTGAGE": The security instrument, mortgage, deed of trust or other instrument securing a Note, which creates a first position lien on an estate in fee simple or leasehold estate, if permitted by the relevant Agency, in real property securing the Note, unless such Mortgage is granted in connection with a cooperative lien, in which case the first lien position is in the stock of the subject cooperative association and in the tenant's rights in the cooperative lease relating to such stock. 1.37. "MORTGAGE LOAN[S]": As defined in the recitals hereof. The term "Mortgage Loan[s]" shall not include property management functions in connection with REO properties, or the properties themselves. 1.38. "MORTGAGE LOAN REPURCHASE PRICE": Unless otherwise specified by the Agency, shall mean, as of the date of repurchase, the current unpaid principal balance of a Mortgage Loan, together with interest then due, plus outstanding Advances as well as reasonable and substantiated re-transfer out-of-pocket expenses incurred by Purchaser. 1.39. "MORTGAGE LOAN SCHEDULE": The mortgage loan schedule in the form attached hereto as Exhibit B, setting forth specific information with respect to each Mortgage Loan. -4- 5 1.40. "MORTGAGED PROPERTY": The property described in the Mortgage, securing repayment of the debt evidenced by the Note. 1. 41. "NON-ELIGIBLE MORTGAGE LOAN": A Mortgage Loan that, on the Sale Date: (i) is sixty (60) days or more delinquent (and two (2) or more monthly installments remain unpaid); (ii) is a Bankruptcy Loan; (iii) is a Foreclosure Loan; (iv) is a Litigation Loan; or (v) is an FHA 235 loan for which the subsidy has not been terminated. 1. 42. "NOTE": The note or other evidence of the indebtedness of a Borrower secured by a Mortgage. 1.43. "PAYMENT DATE(S)": The FNMA Payment Date, the FHLMC Payment Date, or the GNMA Payment Date, as applicable. 1.44. "PURCHASER": As defined in the recitals hereof. 1.45. "PURCHASE PRICE": As defined in Paragraph 3.1 hereof. 1.46. "PURCHASE PRICE PERCENTAGE": As defined in Paragraph 3.1 hereof. 1.47. "REAL ESTATE OWNED" ("REO"): Property acquired by the Seller on behalf of FNMA, FHLMC or GNMA, as applicable, through foreclosure or by acceptance of a deed-in-lieu of foreclosure. 1.48. "REQUIRED DOCUMENT" OR "REQUIRED DOCUMENTATION" : Those documents identified in Exhibit G. 1.49. "SALE AGREEMENT": This FNMA/FHLMC/GNMA Mortgage Servicing Purchase and Sale Agreement as defined in the first paragraph of this agreement, and as used herein shall also be deemed to refer to and incorporate all exhibits attached hereto. 1.50. "SALE DATE": A date not later than February 28, 1997, as agreed by the parties. 1.51. "SELLER": As defined in the first paragraph of this Sale Agreement. 1.52. "SERVICER RESPONSIBILITY": With the exception of the Servicing Income Rights, the rights and responsibilities associated with the Mortgage Loans, including without limitation, servicer responsibility as defined in the Servicing Agreements. 1.53. "SERVICING": The Servicing Income Rights and the Servicer Responsibility. 1.54. "SERVICING AGREEMENT[S]": The Agency servicing agreements, FNMA or FHLMC contracts or commitments (which contracts or commitments incorporate by reference either the FNMA Selling Guide and/or FNMA Servicing Guide or the FHLMC Sellers' and Servicers' Guide, as applicable) or GNMA contracts or commitments (which contracts or -5- 6 commitments incorporate by reference the underlying FHA and/or VA rules, regulations and requirements, as applicable) with respect to the Mortgage Loans, and any revisions to same. 1.55. "SERVICING FILE": Those files identified in Exhibits H through K, including the items noted in such Exhibits together with any additional items as may be required by Agency Requirements. 1.56. "SERVICING INCOME RIGHTS": The right to receive the servicing fee income, including, but not limited to any and all Ancillary Fees and escrow account benefits arising from or connected to any Mortgage Loan (note that the owner of the Servicing Income Rights must provide funds to pay guarantee fees to the applicable Agency). 1.57. "SERVICING REPURCHASE PRICE": Shall mean, with respect to any Mortgage Loan for which a Purchase Price has been paid by Purchaser, an amount equal to the Purchase Price Percentage multiplied by the then outstanding unpaid principal balance of the Mortgage Loan, as well as reasonable and substantiated re-transfer out-of-pocket expenses incurred by Purchaser. 1.58. "SHORTFALL INTEREST": The Mortgage Loan curtailment or payoff interest which is required to be paid to the Agency but which the Borrower is not obligated to pay. 1.59. "SUBSERVICER": The party named in the Interim Subservicing Agreement and the Subservicing Agreement, or any assignee permitted under the terms of the Interim Subservicing Agreement and the Subservicing Agreement, who is to subservice the Mortgage Loans on behalf of Purchaser during the Interim Subservicing Period and the Subservicing Period. 1.60. "SUBSERVICER DEFAULT": An event of default by the Subservicer during the Interim Subservicing Period or the Subservicing Period which shall enable the Purchaser to terminate the Subservicer's right to subservice the Mortgage Loans. 1.61. "SUBSERVICING AGREEMENT": That certain agreement, a copy of which is attached hereto as Exhibit C-2, setting forth the terms and provisions pursuant to which Seller will subservice the Mortgage Loans, on behalf of Purchaser, during the Subservicing Period. 1.62. "SUBSERVICING PERIOD": The period from the Approval Date up to the final Transfer Date during which Subservicer shall subservice the Mortgage Loans on behalf of Purchaser. 1.63. "TRANSFER DATE(S)": The FNMA Transfer Date, the FHLMC Transfer Date, or the GNMA Transfer Date, as applicable. 1.64. "UNCERTIFIED POOLS": Those certain pools which are identified in Exhibit N, and which, as of the Approval Date, the Servicing on such pools is unable to transfer to Purchaser because the pool has: (i) not been finally certified, and the time permitted by GNMA for such final certification has expired; or (ii) not been recertified. -6- 7 1.65. "VA": Department of Veteran's Affairs. ARTICLE II SALE AND TRANSFER OF SERVICING 2.1. SALE DATE. On the Sale Date, Seller shall, as hereinafter provided, sell, transfer and assign to Purchaser the Servicing. 2.2. SERVICING DUTIES PRIOR TO TRANSFER DATE. All Servicing Income Rights (with the exception of the right to retain Ancillary Fees collected by Seller as subservicer during the Interim Subservicing Period or the Subservicing Period) shall be paid to Purchaser after the Sale Date. During the Interim Subservicing Period and the Subservicing Period, Seller shall: (a) Subservice the Mortgage Loans pursuant to the terms of the Interim Subservicing Agreement or the Subservicing Agreement, as applicable; (b) Not assign or attempt to assign the responsibilities for servicing or subservicing the Mortgage Loans prior to the Transfer Date, except in accordance with the terms of this Agreement, the Interim Subservicing Agreement and the Subservicing Agreement, and, in the event of any assignment, Seller's liability for proper servicing of the Mortgage Loans shall continue in effect; 2.3. SERVICING DUTIES POST TRANSFER. On the Transfer Date, Purchaser shall assume all Servicer Responsibilities related to the Mortgage Loans. Purchaser shall make all payments to the Agencies and file with the Agencies all reports due on or after the Transfer Date. Seller shall make the first remittance payment to the Agencies due after the Transfer Date, and shall file with the Agencies all required reports for the month preceding the Transfer Date. Before such remittance date, Purchaser shall remit to Seller, in readily available funds and from the minimum cash transferred to Purchaser per Section 7.5, the amount owed to the Agencies so that Seller can make such first remittance payment. 2.4. ACTIONS REQUIRED PRIOR TO THE TRANSFER DATE. (a) At least 20 days prior to the Transfer Date, Seller shall resolve any outstanding Agency repurchase request, and shall repurchase from the appropriate pools, Mortgage Loans, and the related Servicing, having defects, if any. With the written approval of Purchaser, which approval shall not be unreasonably withheld, Seller may resolve outstanding agency repurchase requests as required by this Section 2.4(a) after such referenced date, but before the Transfer Date. (b) No later than ninety (90) calendar days after the Approval Date, Seller shall assign to Purchaser, or its designee, by appropriate endorsements and assignments (including UCC-3 notifications in reference to cooperative loans), all of Seller's right, title and interest in and to the Servicing, and the pools, Notes and Mortgages related to the Servicing, as required by -7- 8 applicable law and Agency Requirements; provided however that all Note endorsements to Purchaser shall be completed on or before the Approval Date. Seller shall record such assignments, when required pursuant to Agency Requirements and applicable law. Within ninety (90) calendar days after the Approval Date, Seller shall provide Purchaser with: (i) certified copies of such executed assignments for all FHLMC loans; (ii) proof of payment of recording fees; and (iii) a certification that such assignments (and UCC-3s) have been sent for recording. In addition, Seller, or Seller's agent, shall maintain a permanent database, which can, as of the Transfer Date, be transferred to Purchaser. Seller shall also prepare assignments of Mortgages from Purchaser to the Agency in blank, as may be required, and then send the assignments of Mortgages to Purchaser's custodian for filing. In connection with Mortgage Loans where Seller does not record an assignment of Mortgage from Seller to Purchaser, where required by Agency Requirements or applicable law, Seller shall provide an opinion of counsel opining as to the fact that recording is not necessary in order to properly transfer the Servicing associated with the Mortgage Loan. In addition, whether or not required by Agency Requirements or applicable law, Seller shall provide any such opinions currently in Seller's possession. In addition, Seller shall deliver such other appropriately executed and authenticated instruments of sale, assignment, transfer and conveyance to Purchaser or its designee, including limited powers of attorney, as described on Exhibit D, as Purchaser or its counsel may reasonably request in order to accomplish the transfer to Purchaser of all of Seller's rights related to the Servicing. Such instruments provided by Seller shall be in accordance with Agency and industry standards. Purchaser shall grant to Subservicer limited corporate authority to allow Subservicer to execute satisfactions and bankruptcy and foreclosure documentation on Purchaser's behalf. (c) No later than the Approval Date, Seller shall have obtained, and provided to Purchaser sufficient evidence of, insurance protecting Purchaser against any losses occurring to any of the Custodian Legal Files prior to their delivery to Purchaser, and Seller shall cause its document custodian to deliver to Purchaser's document custodian a complete Custodian Legal File for each Mortgage Loan as specified in Exhibits H through K. (d) Seller will pay all costs associated with transporting and documenting Mortgage Loans, in accordance with the reasonable requirements set by Purchaser and the Agency to a document custodian of Purchaser's choice. The costs imposed by Purchaser's custodian for final certifying or recertifying pools or Mortgage Loans will be paid by Seller. Purchaser's custodian shall complete its review of the delivered documentation on or before a date one hundred twenty (120) days after the Approval Date. 2.5. AGENCY APPROVALS. Processing of the request for any required Agency or participant approval shall take place as follows: (a) At Seller's expense, Seller shall be responsible for obtaining any required Agency or participant written approvals of the transfer of Servicing, no later than the Approval Date -8- 9 (with the exception of the approval of GNMA as to the Mortgage Loans contained within the Uncertified Pools, which approval shall be obtained as soon as possible thereafter). (b) Seller shall prepare all forms, documents and other information requested by an Agency or participant in connection with the transfer of the Servicing and shall submit such forms, documents and other information no later than a date sixty (60) days after the Sale Date (with the exception of forms, documentation and information in connection with the approval of GNMA as to the Mortgage Loans contained within the Uncertified Pools, which forms, documentation and information will be submitted as soon as possible thereafter). 2.6. COOPERATION. To the extent reasonably possible, the parties hereto shall cooperate with and assist each other, as requested, in carrying out the other's covenants, agreements, duties and responsibilities under this Sale Agreement and in connection herewith shall execute and deliver all such documents and instruments as shall be necessary and appropriate in the furtherance thereof. ARTICLE III CONSIDERATION 3.1. PURCHASE PRICE. (a) In full consideration for the sale of the Servicing upon the terms and conditions of this Sale Agreement, Purchaser shall pay to Seller the purchase price calculated as follows: One and Six Hundred and Ten Thousandths percent (1.610%) (the "Purchase Price Percentage") of the aggregate unpaid principal balance of all Mortgage Loans as of the Sale Date, excluding Non-Eligible Mortgage Loans (the "Purchase Price"), and minus the amounts to be withheld by Purchaser from the Purchase Price pursuant to Section 3.3 of this Sale Agreement. (b) It is understood and agreed that if the Purchase Price or Shortfall Interest or Advance netting shall be found, within one hundred twenty (120) days after the final Payment Date, to be incorrectly computed, the Purchase Price shall be promptly and appropriately adjusted, and payment shall be promptly made by the appropriate party. (c) It is understood and agreed that if the Advances reimbursed to Seller by Purchaser pursuant to Section 3.4 shall be found to be nonreimbursable by the applicable Agency, insurer (FHA, VA or private mortgage carrier as applicable), taxing authority or the Borrowers, or to have been incorrectly computed, there shall be an appropriate adjustment, and any payment due as a result of such adjustment shall be promptly made by the appropriate party. With reference to any individual Mortgage Loan, in considering whether or not an Advance has been reimbursed, Purchaser shall consider that any reimbursement of a particular type of fee or expense shall be credited first against the amount outstanding for the longest period of time, unless there is evidence that such outstanding amount is disputed by a party. -9- 10 3.2. PAYMENT. The Purchase Price shall be paid by Purchaser to Seller by wire transfer of immediately available funds, in accordance with the Seller's wiring instructions set forth in Section 3.2(e), as follows: (a) Thirty Percent (30%) of the estimated Purchase Price will be paid on the Sale Date. (b) Ninety Percent (90%) of the Purchase Price (including the amount paid in accordance with Section 3.2(a)), will be paid within five (5) Business Days after the Approval Date. (c) Ninety-Five Percent (95%) of the Purchase Price (including the amount paid according to Sections 3.2(a) and 3.2(b)), will be paid on the Payment Date. Interest on the unpaid Purchase Price from the Sale Date to the Payment Date will be paid to Seller at the 30-day LIBOR rate. In the event the actual Purchase Price is different from the estimated Purchase Price, an adjustment shall be made in favor of the appropriate party. (d) Five Percent (5%) of the Purchase Price will be withheld (the "Document Holdback") until receipt by Purchaser of all Required Documentation. Such Document Holdback will be released as follows: (i) Fifteen Percent (15%) of the Document Holdback will be released when Purchaser has received: (1) all Required Documentation (original or Agency approved and in legally sufficient form), with the exception of recorded assignments from Seller to Purchaser (or Purchaser's designee), on 75% of the Mortgage Loans; and substantially all Required Documentation, on the remaining 25% of the Mortgage Loans; (2) copies of 75% of all assignments from Seller to Purchaser sent for recording, or a database satisfactory to Purchaser of information used to prepare assignments in recordable form; (3) all assignments from Purchaser to FNMA, FHLMC and GNMA in executable form; and (4) evidence, in the form of machine readable assignment vendor database updates disclosing loan number, date sent for recording, state and county, and summary reports, that 75% of all assignments from Seller to Purchaser have been sent for recording. (ii) An additional thirty percent (30%) of the Document Holdback will be released when Purchaser has received seventy-five percent (75%) of the recorded assignments (or Agency approved, legally sufficient replacements) from Seller to Purchaser (or Purchaser's designee). (iii) The remainder of the Document Holdback, with the exception of One Million Dollars ($1,000,000), will be released prorata monthly, in proportion to the number of Mortgage Loans completed, as the Purchaser receives the remaining recorded assignments and other Required Documentation from Seller to Purchaser. The remaining One Million Dollars ($1,000,000) of the Document Holdback will be released upon receipt by Purchaser of all Required Documentation, including recorded assignments and the final certification and/or recertification of all Mortgage Loans. Seller shall have the option of either recreating missing or defective documents in -10- 11 Agency approved and legally sufficient form, or repurchasing the Mortgage Loans which are the subject of missing defective documentation. (e) The wiring instructions of the Seller and Purchaser are as follows: (i) Seller's Wiring Instructions: First National Bank of Chicago, Chicago, IL Account No.: 19-19210 Account Name: S.O.M.S.C. Cash and Collateral Account ABA No.: 071000013 (ii) Purchaser's Wiring Instructions: Banc One Columbus, Ohio ABA No. 044000037 Credit Account No. 980116070 For: Chase Manhattan Mortgage Corporation Attention: Ed Reik 614-842-7210 3.3. PURCHASE PRICE ADJUSTMENT FOR MORTGAGE PAYOFFS. Purchaser shall not be obligated to purchase the Servicing for any Mortgage Loan that is paid off as of the Sale Date, or pays off within sixty (60) days after the Sale Date. In the event any Mortgage Loan, the principal of which was included in the calculation of the Purchase Price, is paid off within sixty (60) days after the Sale Date, upon notice of such event from Purchaser, Seller shall, within seven (7) calendar days of such notice, remit to Purchaser the Servicing Repurchase Price applicable to such Mortgage Loan. Subservicer shall provide a report of the Mortgage Loans which have paid off within such sixty (60) day period to Purchaser within sixty seven (67) calendar days after the Sale Date. 3.4. PAYMENT FOR ADVANCES. On the Sale Date, Purchaser shall pay Seller an amount equal to the sum of all Advances for all Mortgage Loans, which Advances are reimbursable pursuant to Agency guidelines and/or the applicable Servicing Agreement and prudent mortgage banking practices. 3.5. PAYMENT FOR BI-WEEKLY MORTGAGE LOANS. In connection with each Bi-Weekly Mortgage Loan that transfers to Purchaser on the Transfer Date: (i) Seller shall, on the Transfer Date, pay Purchaser an amount equal to sixty dollars ($60.00); (ii) Purchaser shall pay any sum required to be paid for the post Transfer Date administration of the bi-weekly payment feature of any Bi-Weekly Mortgage Loan that transfers to Purchaser on the Transfer Date (including any cancellation fees due Borrowers as a result of transfer or modification of the Bi-Saver -11- 12 Program), but excepting therefrom any sums resulting from administration of the biweekly payment feature of any such Bi-Weekly Mortgage Loan on or before the Transfer Date; and (iii) Purchaser shall pay any sum required to be paid to any bi-weekly payment processing or marketing vendor employed by Purchaser for the set-up or performance of any payment processing or marketing functions in connection with the bi-weekly payment feature. ARTICLE IV GENERAL REPRESENTATIONS AND WARRANTIES OF SELLER As an inducement to Purchaser to enter into this Sale Agreement, Seller represents and warrants that the following are true as of the execution of this Sale Agreement and further represents and warrants that the following will continue to be true through and including the final Transfer Date, unless another date is specified: 4.1. DUE INCORPORATION AND GOOD STANDING. Seller is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction during the time of its activities with respect to the Mortgage Loans and the Servicing. Seller is properly licensed, qualified and in good standing to transact business in all appropriate jurisdictions and to conduct all activities performed with respect to origination and servicing of the Mortgage Loans. 4.2. AUTHORITY AND CAPACITY. Seller has all requisite corporate power, authority and capacity to enter into this Sale Agreement and to perform the obligations required of it hereunder. The execution and delivery of this Sale Agreement, and the consummation of the transactions contemplated hereby, have each been duly and validly authorized by all necessary corporate action. This Sale Agreement constitutes a valid and legally binding agreement of Seller enforceable in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency and similar laws and equitable principles affecting the enforceability of the rights of creditors generally. 4.3. EFFECTIVE AGREEMENT. The execution, delivery and performance of this Sale Agreement by Seller, its compliance with the terms hereof and consummation of the transactions contemplated hereby (assuming receipt of the approvals required pursuant to this Sale Agreement) will not violate, conflict with, result in a breach of, constitute a default under, be prohibited by or require any additional approval under its charter, bylaws, or any instrument or agreement to which it is a party or by which it is bound or which affects the Servicing, including but not limited to the Servicing Agreements, or any state or federal law, rule, or regulation or any judicial or administrative decree, order, ruling or regulation applicable to it or to the Servicing. 4.4. COMPLIANCE WITH CONTRACTS AND REGULATIONS. Seller has complied with all material obligations under all contracts to which it is or was a party, and with all applicable -12- 13 federal, state and local laws and regulations with respect to and which affect any of the Servicing being purchased by Purchaser hereunder, including the origination of the Mortgage Loans. The laws and regulations which Seller has complied with include but are not limited to all applicable Agency Requirements. Seller has done, and will do, no act or thing which will materially adversely affect the Servicing or the Mortgage Loans. 4.5. TITLE TO THE SERVICING AND RELATED ESCROW ACCOUNTS. As of the Sale Date, and through and including the Approval Date, Seller is and shall remain the custodian of the related escrow accounts. As of the Sale Date, the Seller is the lawful owner of the Servicing, has the sole right and authority, subject to Agency approval, to transfer the Servicing as contemplated hereby, and is not contractually obligated to sell the Servicing to any other party. The transfer, assignment and delivery of the Servicing in accordance with the terms and conditions of this Sale Agreement shall vest in Purchaser all rights as servicer free and clear of any and all claims, charges, defenses, offsets and encumbrances, except for those of the Agency, including but not limited to those of Seller. Neither Seller nor any other servicer of the Mortgage Loans has entered into a settlement agreement with any party or with any state attorney general relative to the handling or administration of tax and insurance escrows, except as has been disclosed to Purchaser in writing. 4.6. RELATED ESCROW ACCOUNT MAINTENANCE. All related escrow accounts are being maintained in accordance with applicable law and Agency Requirements, and in accordance with the Servicing Agreements and the terms of the Mortgages related thereto. Except as to payments which are past due under the Notes, all escrow balances required by the Mortgages and paid to Seller for the account of the Borrowers and Seller are on deposit in the appropriate escrow/impound accounts. All funds received by the Seller in connection with the Mortgage Loans, including, without limitation, foreclosure proceeds, hazard insurance proceeds, condemnation proceeds and principal reductions, have promptly been deposited in the appropriate account, and all such funds have been applied to reduce the principal balance of the Mortgage Loans in question, or for reimbursement or repairs to the Mortgaged Property or as otherwise required by applicable law and the Agency Requirements. There are no pledged accounts in lieu of escrow deposits. 4.7. LITIGATION; COMPLIANCE WITH LAWS. As of the Sale Date, and through and including the Approval Date, there is and shall be no litigation, proceeding or governmental investigation existing or pending or to the knowledge of Seller threatened, or any order, injunction, decree or settlement agreement outstanding against or relating to Seller or the Servicing or Mortgage Loans, which may have a material adverse effect upon the business, operations, assets or financial condition of Seller or which may draw into question the validity of this Sale Agreement or which may impair the ability of Seller to perform its obligations under this Sale Agreement, nor does Seller know of any basis for any such litigation, proceeding or governmental investigation. As of the Sale Date, and through and including the Approval Date, Seller has not violated and will not violate any applicable law, regulation, ordinance, order, injunction, decree or settlement agreement, nor any other requirement of any governmental body or court, which may materially affect any of the Mortgage Loans or the Servicing. For purposes of this Section 4.7, "litigation" shall include a suit for damages alone and shall not require that a specific performance remedy or injunction impacting the transfer of the Servicing be pending. -13- 14 4.8. ABILITY TO PERFORM. 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 Sale Agreement nor does Seller have any actual knowledge of any intent on the part of any Agency not to consent to the transfers contemplated hereby. 4.9. STATEMENTS MADE. As of the Sale Date, no representation, warranty or written statement made by Seller, in connection with this Sale Agreement, or any exhibit, schedule, data tape, statement or certificate furnished to Purchaser by Seller or Seller's broker, Cohane Rafferty Securities, Inc., in connection with the transactions contemplated hereby by Seller contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. 4.10. INSOLVENCY. Seller has not (i) admitted in writing its inability to pay its debts generally as they become due, (ii) filed a petition to take advantage of any applicable insolvency or reorganization statute, (iii) made an assignment for the benefit of its creditors or (iv) voluntarily suspended payment of any of its obligations. 4.11. NO ACCRUED LIABILITIES. As of the Sale Date, there are no accrued liabilities of Seller with respect to the Mortgage Loans or the Servicing or circumstances under which such accrued liabilities will arise against Purchaser as successor to the Servicing, with respect to occurrences prior to the Sale Date. 4.12. AGENCY REQUIREMENTS. Seller has performed all material obligations to be performed under Agency Requirements, and no event has occurred and is continuing which, but for the passage of time or the giving of notice or both, would constitute an event of default thereunder. The Mortgage Loans have been underwritten, originated, sold and serviced, and complete and accurate books and records have been kept and maintained in connection therewith, all in accordance with Agency Requirements and generally accepted accounting principles. Seller is an approved seller/servicer/issuer in good standing with FNMA, FHLMC and GNMA. 4.13. AUDITS. Seller has not, as of the Sale Date, been the subject of allegations of material failure to comply with applicable loan origination, servicing or claims procedures, in its most recent Agency or PMI policy provider audits (if any) nor have any such audits resulted in a request for repurchase of Mortgage Loans or indemnification in connection with the Mortgage Loans, other than has been disclosed to Purchaser. Such disclosure shall not affect any rights or remedies which Purchaser may have against Seller as a result of an Agency repurchase demand or any indemnity or other remedy of Purchaser hereunder. 4.14. COMPLIANCE WITH INSURANCE CONTRACTS. Seller has complied with all material obligations under all applicable insurance contracts, including hazard, flood and private mortgage insurance contracts, with respect to, and which affect any of the Servicing. Seller has not taken any action or failed to take any action which might cause the cancellation of or otherwise affect any of the insurance contracts, other than cancellation of PMI policies in compliance with Agency Requirements. -14- 15 4.15. ACCURACY OF SERVICING INFORMATION. As of the Sale Date, the information provided by Seller to Purchaser is true and correct, in all material respects. 4.16. ERRORS AND OMISSIONS POLICY. Seller has in full force and effect an adequate errors and omissions policy or policies satisfying all Agency Requirements with respect to its servicing operations and a standard mortgage bankers blanket bond. 4.17. FINANCIAL CONDITION OF SELLER/REGULATORY APPROVAL. Seller is not in receivership, conservatorship or bankruptcy, nor are any of its subsidiaries or affiliates. Seller is not operating pursuant to any restrictive operating agreement or order mandated by the OTS, the FDIC or any federal or state regulatory body. Except for Agency approval, the approval of OTS, FDIC or any other federal or state regulatory body having jurisdiction over Seller is not necessary for Seller's execution and consummation of this Sale Agreement or, if necessary, timely approval, reasonably acceptable to Purchaser, including any approval or filing required of Purchaser or Seller pursuant to the Hart-Scott-Rodino Antitrust Improvements Act, shall be obtained by Seller, at its expense but with the assistance of Purchaser, and written evidence of same shall be provided to Purchaser by Seller on or before the Approval Date. ARTICLE V REPRESENTATIONS AND WARRANTIES AS TO MORTGAGE LOANS As further inducement to Purchaser to enter into this Sale Agreement, Seller represents and warrants to Purchaser, with respect to each Mortgage Loan, that the following are true as of the execution of this Sale Agreement and further represents and warrants that the following will continue to be true through and including the final Transfer Date, unless another date is specified: 5.1. MORTGAGE DOCUMENTS. With respect to each Mortgage Loan, the Seller has in its possession all Required Documents or any miscellaneous items (except for those Required Documents disclosed to Purchaser by Seller as outstanding). All Required Documents and miscellaneous items shall be delivered to Purchaser or its custodian within the time frames set forth in this Agreement. The Mortgage, the Note, and each of the other documents executed in conjunction therewith are genuine, were duly executed by a Borrower of legal capacity, and all loan documents have been correctly completed and are valid and legally binding documents. Neither the operation of any of the terms of any Mortgage or Note, nor the exercise of any right thereunder, will render the Mortgage or Note unenforceable, in whole or in part, or subject to any right of rescission, setoff, counterclaim or defense, and no such right of rescission, setoff, counterclaim or defense has been asserted with respect thereto. 5.2. VALIDITY/PROVISIONS. The security interest granted by the Borrower in the Mortgaged Property is a valid first lien. Seller has no knowledge of any facts which would impair the validity or value of the Note, the Mortgage, any other loan document or the -15- 16 Mortgaged Property. The 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 material benefits of the security provided thereby, including (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. Except as may be permitted by Agency Requirements or related to bankruptcy and other similar laws affecting creditors' rights, there is no homestead or other exemption available to a Borrower that would interfere with the right to sell the Mortgaged Property by trustee's sale or the right to foreclose the Mortgage. 5.3. NO DEFAULTS. As of the Sale Date, all payments required to be made up to and including the Sale Date for each Mortgage Loan under the terms of the related Note have been made, except as otherwise disclosed on the Mortgage Loan Schedule, and there are no other defaults in complying with the terms of the Mortgages. As of the Sale Date, 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 under a Mortgage Loan has occurred, and neither the Seller nor its predecessors have waived any default, breach, violation or event of acceleration. Other than with respect to Advances, the Seller has not advanced funds, nor has the Seller induced, solicited or knowingly received any advance of funds from a party other than the Borrower, directly or indirectly, for the payment of any amount required by the Mortgage Loan. 5.4. COMPLIANCE WITH LAW. Each Mortgage Loan transaction complies in all material respects with each of the federal or state laws or regulations and Agency Requirements which pertain to the origination, closing, sale and servicing of the Mortgage Loan. 5.5. MORTGAGE MODIFICATION. As of the Sale Date, the terms of each Mortgage have not been modified, no party thereto has been released in whole or in part, and no part of the Mortgaged Property has been released, except as was approved by the applicable Agency, or was allowed by Agency Requirements. As of the Sale Date, the full original principal amount of each Mortgage has been advanced as provided for in the Mortgage Loan documents, and there is no requirement for any future advances. 5.6.PAYMENT TERMS. Except as otherwise disclosed in writing to Purchaser, there is no provision for negative amortization within any Mortgage Note with respect to any Mortgage Loan. To the best of Seller's knowledge, each Mortgage Note is payable in monthly installments of principal and interest, sufficient to amortize the Mortgage Loan fully by the maturity date stated in the Note, over a remaining term of not more than thirty years, within a tolerance of one hundred dollars ($100). Purchaser shall be entitled to the remedies set out in this Sale Agreement for breach of representation or warranty as if the forgoing representation and warranty shall have been given without any reference to a tolerance. Interest on each Mortgage Loan is calculated and payable in arrears. 5.7. LOANS AS DESCRIBED. As of the Sale Date, the information set forth in the Mortgage Loan Schedule is complete, true and correct, and the Servicing conforms to the description in Exhibit A. Except as identified in the Mortgage Loan Schedule, none of the Mortgage Loans are VA vendee loans. As of the Sale Date, none of the Mortgage Loans are -16- 17 the subject of nonstandard escrow arrangements. Except as set forth on the Mortgage Loan Schedule none of the Mortgage Loans will contain provisions for graduated payment mortgages, shared appreciation or contingent interest features, or interest rate buydowns wherein monthly payments are paid or partially paid with funds deposited in a separate account established by the Seller, the Borrower or anyone on behalf of the Borrower, or paid by any source other than the Borrower. Any Mortgage Loan identified as a buydown loan on the Mortgage Loan Schedule is subject to a buydown agreement which complies with the provisions of the applicable Agency Requirements and such buydown account is fully funded. Except as set forth in Exhibit A, FNMA MBS Servicing operates under standard FNMA MBS remittance procedures as set forth in the FNMA Seller/Servicer Guide, and is not FNMA Express or RPM. Except as set forth in Exhibit A, FHLMC ARC Servicing operates under standard FHLMC ARC remittance procedures as set forth in the FHLMC Seller/Servicer Guide, and is not FHLMC Super ARC. 5.8. USURY. As of the Sale Date, each Mortgage Loan meets, or is exempt from, applicable state or federal laws, regulations and other requirements pertaining to usury. 5.9. AGENCY LOAN COMMITMENT PROVISIONS. Each of the Agency Loan Commitments delivered to the Purchaser represents an executed original or is a certified (by Seller) true and correct copy of the original and in either case represents true and correct copies of the same. Each of the Agency Loan Commitments was in full force and effect during the term of such Agency Loan Commitments. To the best of Seller's knowledge, none of the Agency Loan Commitments provide for indemnification for losses (i.e. recourse servicing), including repurchase obligations. Purchaser, and any future successor or assignee of Purchaser, is and shall be, able to take full advantage of the benefits of any waivers affecting any Mortgage Loan for so long as such Mortgage Loan is outstanding. 5.10. NON-RECOURSE SERVICING. None of the Servicing is subject to recourse against the servicer for losses in connection with the liquidation of a Mortgage Loan, borrower defaults or repurchase obligations upon the occurrence of nonpayment or other events, except as disclosed on the Mortgage Loan Schedule. 5.11. POOLS. The Mortgage Loan Schedule sets forth a true and complete list of all pools. Each Mortgage Loan included in a pool meets all eligibility requirements for inclusion in such pool, in accordance with all Agency Requirements. All of the pools have been, or will as of the Transfer Date, be, finally and properly certified or recertified in accordance with Agency Requirements. The Servicing in respect of each Pool is, or will as of the Transfer Date, be, eligible under Agency Requirements to be transferred to the Purchaser. No Mortgage Loan has been bought out of a Pool without prior written approval of the applicable Agency to the extent required. The Mortgage Loan File to be delivered to the Purchaser will include all documents necessary in order for the appropriate custodian to certify and/or recertify the pools in accordance with Agency Requirements, except for those documents disclosed to Purchaser by Seller as outstanding, which documents shall be delivered to Purchaser or its custodian within the time frames set forth in this Agreement. With regard to the pools, the principal balance outstanding and owing on the Mortgage Loans in each pool is equal to or exceeds the amounts owing to the security holders of each pool. There is no pool insurance for the Mortgage Loans. -17- 18 5.12. EFFECTIVE INSURANCE. All required insurance policies, of whatever type, remain in full force and effect. The Seller has not engaged in, and has no knowledge of the mortgagor's having engaged in, any act or omission which would impair the coverage validity or binding effect of any such policies. There is in force with respect to each Mortgage Loan, as required by the applicable Agency, a hazard insurance policy that provides, at a minimum, for fire, windstorm, earthquake and extended coverage in an amount not less than the outstanding principal balance of the Mortgage Loan or the full insurable value of improvements, whichever is less. If required by the Flood Disaster Protection Act, each Mortgage Loan is covered by a flood insurance policy in an amount not less than the lesser of (i) the outstanding principal balance of the applicable Mortgage Loan or (ii) the maximum amount of insurance that is available under such Act. All individual insurance policies contain a standard mortgagee clause naming the Seller or the applicable Agency, and its successors and assigns, as mortgagee, and all premiums due and payable thereon have been paid. The Mortgage obligates the mortgagor thereunder to maintain hazard and/or flood insurance policies at the mortgagor's cost and expense, and on the mortgagor's failure to do so, authorizes the holder of the Mortgage to obtain and maintain such insurance at such mortgagor's cost and expense, and to seek reimbursement therefor from the mortgagor, if reimbursement is permitted under applicable law, Agency Requirements and the Mortgage Loan documents. 5.13. PAYMENT OF TAXES, INSURANCE PREMIUMS, ETC. All applicable taxes, special assessments and ground rents (i) have been paid prior to any "economic loss" dates or discount dates (or if payments were made after any "economic loss" date or discount date, then Seller has paid any penalty or reimbursed any discount out of Seller's corporate funds) and (ii) will continue to be paid as set forth in (i), if due within thirty (30) days after the Transfer Date, if Seller, or its tax service provider, has received notice that such payment is due at least five (5) Business Days prior to the Transfer Date. All flood and hazard insurance premiums and mortgage insurance premiums (i) which are due, have been paid without loss or penalty to the Borrower and (ii) will continue to be paid without loss or penalty to the Borrower, and if due within thirty (30) days after the Transfer Date and notice of such payment has been received at least five (5) Business Days prior to the Transfer Date will be paid prior to the Transfer Date, except as noted in Section 7.28. All Mortgage Loans required to carry escrows under applicable law, Agency Requirements or the Mortgage Loan documents, provide for tax and insurance escrows. All Mortgage Loans for which Seller has advanced funds for payment of all or part of the escrowed items have established escrows in amounts sufficient to reimburse such advances, if not prohibited by applicable law. 5.14. PRIVATE MORTGAGE INSURANCE CONTRACTS. All Mortgage Loans required to have private mortgage insurance shall have current, transferrable, private mortgage insurance policies, the provisions of which have been and are being complied with. Such private mortgage insurance policies are in full force and effect, comply with applicable law and regulation, and any policy premiums due have been paid without loss or penalty to the Borrower. Except as disclosed by Seller in writing to Purchaser, there are no Mortgage Loans for which Seller funds the premium. Except as disclosed by Seller in writing to Purchaser, any Mortgage Loan subject to a private mortgage insurance policy obligates the Borrower thereunder to maintain the policy in full force and effect and to pay all premiums and charges in connection therewith. -18- 19 5.15. TAX SERVICE/FLOOD SERVICE. All of the Mortgage Loans have, or will have by the Transfer Date, been setup for transferrable, verified, life-of-loan, tax services by contract with Transamerica. All of the Mortgage Loans are, or will be by the Transfer Date, setup on transferable, verified, life-of-loan MapTrak flood tracking services by contract with FDSI. 5.16. TAX IDENTIFICATION. All tax identifications for both individual mortgagors and the Mortgage Loan pools, have been certified as required by law and Agency Requirements. Seller has complied with all IRS requirements regarding the obtainment and solicitation of taxpayer identification numbers and the taxpayer identification numbers provided to Purchaser as reflected on the system are correct. 5.17. IRS FORMS. All IRS forms, including, but not limited to, forms 1099, 1099A and 1098, as appropriate, which are required to be filed with respect to the Servicing for activity occurring on or before year end 1996 have been filed or will be filed in accordance with applicable law. 5.18. CASUALTY LOSS/CONDEMNATION. As of the Sale Date, there are no uninsured casualty losses or casualty losses where coinsurance has been, or Seller has reason to believe will be, claimed by the insurance company or where the loss, exclusive of contents, is, or will be, greater than the recovery (less actual costs and expenses incurred in connection with such recovery) from the insurance carrier. No casualty insurance proceeds have been used to reduce Mortgage Loan balances or for any other purpose except to make repairs to the mortgaged premises, except as allowed pursuant to Agency Requirements, applicable law and the Mortgage Loan documents. All damage with respect to which casualty insurance proceeds have been received by or through Seller has been properly repaired or is in the process of being repaired using such proceeds. As of the Sale Date, there is no damage to the Mortgaged Property from fire, windstorm, flood, earthquake, other casualty, or any other property related circumstances or conditions that would adversely affect the value or marketability of any Mortgage Loan or Mortgaged Property. As of the Sale Date, there is no proceeding pending or to the best of Seller's knowledge, threatened for the partial or total condemnation of the Mortgaged Property that would adversely affect the Mortgage Loan, except as disclosed in writing to Purchaser. 5.19. INTEREST ON ESCROWS. As of the Sale Date, Seller has credited to the account of Borrowers under the Mortgage Loans all interest required to be paid by law or by the terms of the related Note on any escrow/impound account. Evidence of such credit shall be provided to Purchaser upon request. 5.20. OPTIONAL INSURANCE. All Mortgage Loans for which mortgage/credit life, accidental death, disability, unemployment, or any similar insurance is collected as part of the Borrower's monthly payment are identified in the Mortgage Loan Schedule. Any Mortgage Loan involved with any type of optional insurance has been properly serviced, including, without limitation, the proper application and collection of premiums, the maintenance of complete and accurate records, processing and payment of claims and the handling of correspondence. 5.21. TITLE INSURANCE. As of the Sale Date, unless waived by the applicable Agency pursuant to a written waiver, a title policy, an abstract or an attorney opinion of title, acceptable -19- 20 in all respects under applicable Agency Requirements currently in effect, has been issued for each Mortgage Loan in an amount not less than the original amount secured by the Mortgage insuring, or opining in the case of an attorney opinion of title, that the Mortgage relating thereto is a valid first lien on the Mortgaged Property therein described and that the Mortgaged Property is free and clear of all encumbrances and liens having priority over the first lien of the Mortgage, except for liens for real estate taxes and special assessments not yet due and payable and except for covenants, easements, restrictions and other matters of public record identified in the title policy or legal opinion which are reasonably acceptable to the Purchaser and acceptable to the applicable Agency, and all premiums with respect to each such policy have been paid. 5.22. CUSTODIAN LEGAL FILES. As of the Approval Date, the Custodian Legal Files shall be as described in Exhibits H and K. The Custodian Legal Files contain all intervening assignments required by the applicable Agency. All pools held by custodians have been, or will by the Transfer Date be, certified and/or recertified as required by the Agencies. 5.23. ESCROW ANALYSIS. Seller has conducted an escrow analysis for each escrowed Mortgage Loan in accordance with applicable law and Agency Requirements. All books and records with respect to each Mortgage Loan comply with applicable law and regulation and Agency Requirements, and have been adjusted to reflect the results of the escrow analyses. Except as allowed by applicable law and Agency Requirements, there is no inflation factor used in the escrow analysis. Seller has delivered notification to the Borrower(s) under each Mortgage Loan of all adjustments resulting from such escrow analyses. 5.24. LOCATION AND TYPE OF MORTGAGED PROPERTY. The Mortgaged Property is located in the state identified in the Mortgage Loan Schedule and in connection with Mortgage Loans that are not secured by cooperative units, consists of one or more parcels of real property with a detached single family residence erected thereon, or a two-to-four family dwelling, or an individual condominium unit in a condominium project which has received Agency approval, or an individual unit in a planned unit development, provided, however, that any condominium project or planned unit development conforms with the applicable Agency Requirements regarding such dwellings. 5.25. COMPLETION ESCROWS. As of the Sale Date, except as disclosed in writing by Seller to Purchaser, there are no Mortgage Loans subject to outstanding completion escrows. 5.26. ADJUSTABLE RATE LOANS. Adjustable rate Mortgage Loans have been adjusted in accordance with the terms of the Mortgage Loan documents and Agency Requirements. The conversion features of any adjustable rate Mortgage Loans which are convertible to fixed rate Mortgage Loans are reasonable and customary, and upon conversion, are redeliverable to the Agencies. The Servicing fee for adjustable rate Mortgage Loans, as stated in Exhibit A, is a minimum fee and shall not be reduced in the event of an interest rate change. 5.27. ELECTRONIC DRAFTING OF PAYMENTS. Concerning Mortgage Loans for which the Seller drafts monthly payments electronically from the Borrower's bank account, such drafting -20- 21 occurs in compliance with Agency Requirements, and the applicable agreement with the Borrower. 5.28. NOTICE OF RELIEF REQUESTED PURSUANT TO THE SOLDIERS AND SAILORS RELIEF ACT OF 1940 OR SIMILAR LAWS. Except as currently active and previously disclosed in writing by Seller to Purchaser, as of the Sale Date and periodically thereafter throughout the Interim Subservicing Period and the Subservicing Period, the Seller has not received notice from any Borrower or other party with respect to any Mortgage Loan of a request for relief pursuant to or invoking any of the provisions of the Soldiers and Sailors Civil Relief Act of 1940 or similar state or federal law suspending payments of amounts due under the Note or the commencement of foreclosure proceedings. 5.29. REIMBURSEMENT FOR ADVANCES. As of the Sale Date, any monies paid by Purchaser to Seller representing Advances made by Seller to the Agencies for payments due them, are either fully recoverable from the Borrowers or the Agency, and Seller has not by neglect or otherwise prejudiced or adversely affected the rights of Purchaser to recover such Advances from the Borrowers and/or the Agencies. Seller has not been reimbursed by the Borrowers or the Agencies for any such costs or expenses advanced which will be paid to Seller by Purchaser pursuant to the provisions hereof. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PURCHASER As an inducement to Seller to enter into this Sale Agreement, Purchaser represents and warrants that the following are true as of the execution of this Sale Agreement and further represents and warrants that the following will continue to be true through and including the Transfer Date: 6.1. DUE INCORPORATION AND GOOD STANDING. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Purchaser is qualified to transact business in each jurisdiction in which such qualification is necessary, except where the failure to be so qualified will not have a material adverse effect on the Seller, the Purchaser or the Servicing. 6.2. AUTHORITY AND CAPACITY. Purchaser has all requisite corporate power, authority and capacity to enter into this Sale Agreement and to perform the obligations required of it hereunder. The execution and delivery of this Sale Agreement and the consummation of the transactions contemplated hereby have each been duly and validly authorized by all necessary corporate action. This Sale Agreement constitutes a valid and legally binding agreement of Purchaser enforceable in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization and similar laws, and by equitable principles, affecting the enforceability of the rights of creditors. -21- 22 6.3. EFFECTIVE AGREEMENT. The execution, delivery and performance of this Sale Agreement by Purchaser, its compliance with the terms hereof and the consummation of the transactions contemplated hereby (assuming receipt of the approvals required pursuant to this Sale Agreement) will not violate, conflict with, result in a breach of, constitute a default under, be prohibited by or require any additional approval under the certificate of incorporation, bylaws, or any instrument or agreement to which it is a party or by which it is bound or which affects the Servicing, or any state or federal law, rule or regulation or any judicial or administrative decree, order, ruling or regulation applicable to it or to the Servicing. 6.4. COMPLIANCE WITH REGULATIONS. After the Transfer Date, Purchaser shall comply with all material obligations under all contracts to which it is a party, and with all applicable federal, state and local laws and regulations, with respect to and which affect any of the Servicing being purchased by Purchaser hereunder. The laws and regulations which Purchaser shall comply with include but are not limited to all applicable Agency Requirements. Purchaser will do no act or thing which will materially adversely affect the Servicing or the Mortgage Loans. 6.5. GOOD STANDING. Purchaser is a mortgage lender and servicer in good standing with all appropriate regulatory authorities, including, without limitation, the Agencies. 6.6. LITIGATION; COMPLIANCE WITH LAWS. As of the Sale Date and through and including the Approval Date, there is and shall be no litigation, proceeding or governmental investigation pending, or any order, injunction, settlement or decree outstanding against or involving Purchaser which materially adversely affects any of the Servicing. Additionally, as of the Sale Date and through and including the Approval Date, there is and shall be no litigation, proceeding or governmental investigation existing or pending or to the knowledge of Purchaser threatened, or any order, injunction or decree outstanding against or relating to Purchaser that has not been disclosed by Purchaser to Seller in writing which could have a material adverse effect upon the Servicing, nor does Purchaser know of any basis for any such litigation, proceeding, or governmental investigation. As of the Sale Date and through and including the Approval Date, Purchaser has not violated and will not violate any applicable law, regulation, ordinance, order, injunction or decree, or any other requirement of any governmental body or court, which may materially adversely affect any of the Servicing. For purposes of this Section 6.6, "litigation" shall include a suit for damages alone and shall not require that a specific performance remedy or injunction impacting the transfer of the Servicing be pending. -22- 23 ARTICLE VII COVENANTS 7.1. NOTICE TO BORROWERS. At Seller's expense, Seller shall mail to the Borrower of each Mortgage Loan, no later than fifteen (15) days prior to the Transfer Date, a letter advising the Borrower of the transfer of Servicing to Purchaser; provided, however, the content, format and timing of the letter shall be mutually agreed upon by Purchaser and Seller and shall comply with applicable law. Seller shall provide Purchaser with a copy of a sample notice at least five (5) Business Days before the mailing of same; and once notices are mailed, an officer's certification that all notices have been sent as required. 7.2. NOTICE TO TAXING AUTHORITIES AND INSURANCE COMPANIES. No later than a date ten (10) days prior to the Transfer Date, at Seller's expense, Seller shall transmit to the applicable taxing authorities (notice to such taxing authorities may be accomplished by notice to Seller's current tax service provider) and (mortgage/hazard/flood) insurance companies and/or agents, notification of the assignment of the Servicing to Purchaser and instructions to deliver all notices, tax bills and insurance statements, as the case may be, to Purchaser from and after the Transfer Date. For all such notices not accomplished by tape transmission, Seller shall provide Purchaser with a copy of a sample notice and an officer's certification that all notices have been sent as required. On the Transfer Date, Seller shall provide Purchaser with a list of all applicable taxes, assessments and ground rents to be paid within ninety (90) days after the Transfer Date. 7.3. DELIVERY OF LOAN DOCUMENTS. No later than five (5) Business Days after the Transfer Date, Seller shall deliver to Purchaser, the Servicing Files and miscellaneous servicing lists listed in Exhibits H through K; provided, however, Purchaser and Seller may agree on a staggered delivery timetable which commences on an earlier date. Files will be boxed, labelled, inventoried and shipped in accordance with Purchaser's reasonable instructions. 7.4. DELIVERY OF SERVICING RECORDS. No later than five (5) Business Days after the Transfer Date, Seller shall forward to Purchaser all servicing records outlined in Exhibit L in accordance with the procedures described in Exhibit L. 7.5. ESCROW/IMPOUND BALANCES/UNREMITTED PRINCIPAL AND INTEREST. No later than five (5) Business Days after the Approval Date, Seller shall provide Purchaser with immediately available funds in the amount of the Escrow/Impound Funds associated with the Mortgage Loans. No later than five (5) Business Days after the Approval Date and again no later than five (5) Business Days after the Transfer Date, Seller shall provide Purchaser with an accounting statement of the Escrow/Impound Funds sufficient to enable Purchaser to reconcile same with the accounts of the Mortgage Loans. Additionally, no later than five (5) Business Days after the Approval Date, Seller shall provide Purchaser with immediately available funds in the amount of the minimum cash per Paragraph 7.10. No later than five (5) Business Days after the Approval Date, Seller shall provide Purchaser with immediately available funds in the amount of the unremitted principal and interest -23- 24 associated with the Mortgage Loans which has not been deposited into Purchaser's custodial accounts. No later than five (5) Business Days after the Approval Date and again no later than five (5) Business Days after the Transfer Date, Seller shall provide Purchaser with an accounting statement of the unremitted principal and interest sufficient to enable Purchaser to reconcile same with the accounts of the Mortgage Loans. 7.6. MORTGAGE LOAN PAYMENTS RECEIVED PRIOR TO TRANSFER DATE. Prior to the Transfer Date, all payments received by Seller on each Mortgage Loan shall be properly applied by Seller to the account of the particular Borrower. 7.7. MORTGAGE LOAN PAYMENTS RECEIVED AFTER TRANSFER DATE. The amount of any Mortgage Loan payments received by Seller after the Transfer Date shall be forwarded to Purchaser for a period of sixty (60) days after the Transfer Date, at Seller's expense by overnight mail within 24 hours of the date of receipt; provided, however, Seller shall notify Purchaser of the particulars of the payment, which notification shall be satisfied if Seller forwards with its payment sufficient information to permit appropriate processing of the payment by Purchaser. To the extent that after the Transfer Date, Seller is reimbursed by the Borrowers, or the Agencies for any Advances for which Purchaser made payment to Seller, then such reimbursement shall be immediately forwarded to Purchaser. 7.8. MISAPPLIED PAYMENTS. Misapplied payments shall be processed as follows: (a) Both parties shall cooperate in correcting misapplication errors. (b) The party receiving notice of a misapplied payment occurring prior to the Transfer Date and discovered after the Transfer Date shall immediately notify the other party. (c) If a misapplied payment which occurred prior to the Transfer Date cannot be located by either party and said misapplied payment has resulted in a shortage in a Mortgage Loan account, Seller shall be liable for the amount of such shortage. Seller shall reimburse Purchaser for the amount of such shortage within thirty (30) days after receipt of written demand therefor from Purchaser. (d) If a misapplied payment has created an improper Purchase Price as the result of an inaccurate outstanding principal balance, a check shall be issued to the party shorted by the improper payment application within ten (10) Business Days after notice thereof by the other party. (e) Any check issued under the provisions of this Section 7.8 shall be accompanied by a statement indicating the purpose of the check, the Borrower and Mortgaged Property address involved, and the corresponding Seller and/or Purchaser account number. 7.9. BOOKS AND RECORDS. On the Transfer Date, the books, records and accounts of Seller with respect to the Mortgage Loans shall be in accordance with all applicable Agency Requirements, in all material respects (when considered individually and in the aggregate). -24- 25 7.10. MINIMUM CASH RECONCILIATION. Seller shall, on or before the Payment Date, reconcile control group and pool balances to investor's trial balances outstanding, principal and interest cash balances to minimum cash requirements, including any differences created by over/under collateralized pools. Seller shall document (applicable reports required to verify minimum cash shall be generated and sent to Purchaser via overnight mail on the fifth Business Day following the Approval Date, and again on the fifth Business Day following the Transfer Date), to Purchaser's reasonable satisfaction, differences to meet the Purchaser's balancing requirements. Any monetary adjustments made by Seller, allowed by the applicable Agency and necessary to bring all balances into agreement will be reimbursed by Purchaser to Seller via overnight mail on the fifth Business Day after each and every payment until Seller shall be made whole. 7.11. DATA RECONCILIATION. Seller shall forward to Purchaser, via overnight mail on the second Business Day following the Transfer Date, such additional reports as are described on Exhibit E to enable Purchaser to reconcile data conversion from Seller's computer system to Purchaser's computer system. 7.12. IRS FORMS. Seller shall mail, on or before the date required by law, all IRS required forms, including form numbers 1099, 1099A or 1098 (as appropriate) to all parties entitled to receive same for the period from January 1, 1997, until the Transfer Date. Seller shall provide copies of such forms to Purchaser upon request and shall reimburse Purchaser for any fines or penalties incurred by Purchaser due to Seller's failure to comply with this Section 7.12. Purchaser shall make such IRS filings pertaining to events after the Transfer Date. 7.13. RETURNED CHECKS. Purchaser shall reimburse Seller within seven (7) Business Days for all checks for mortgage payments received by the Seller prior to the Transfer Date and which are returned to Seller, unpaid, on or after the Transfer Date. Seller shall identify the check, show how the check was applied to the Borrower's account, and present the returned check to the Purchaser promptly after receipt. 7.14. INSURANCE POLICIES. After the Transfer Date, Seller shall deliver such insurance policies or renewals as it may receive to Purchaser within five (5) Business Days of its receipt of same. 7.15. PAYMENT OF PROPERTY INSURANCE PREMIUMS. Seller shall pay, prior to the Transfer Date, all property insurance premiums for which it receives bills five (5) Business Days prior to the Transfer Date that are due within thirty (30) days after the Transfer Date. Seller shall immediately deliver to the Purchaser all bills and correspondence related to the Mortgage Loans and received by it subsequent to the Transfer Date. On the Transfer Date, Seller shall forward to Purchaser a listing of all Mortgage Loans that have property insurance premiums due within thirty (30) days after the Transfer Date and for which Seller did not pay the bills prior to the Transfer Date. 7.16. ESCROW ANALYSIS. Prior to the Transfer Date, Seller shall perform an escrow analysis as of a date that is not more than twelve (12) months prior to the Transfer Date, of all Mortgage Loans and bring about any necessary changes in payment prior to the Transfer Date. -25- 26 There will be no inflation factor used in the escrow analysis. Refunds of escrow overages are to be made in accordance with applicable law and Agency Requirements. Escrow shortages are to be billed or prorated in the monthly payment over a period of not more than twelve (12) months (or up to twenty four (24) months in limited cases). Copies of the escrow analyses by month and in Mortgage Loan number order, are to be provided to Purchaser within five (5) Business Days of the Transfer Date on microfilm. 7.17. PROPERTY TAXES. Seller shall cause to be paid prior to the Transfer Date all tax bills (including interest, late charges, and penalties in connection therewith) that are issued by a taxing authority and relate to Mortgaged Property and that are received by Seller, or available to Seller's tax service provider in states where Seller utilizes a tax service provider, five (5) Business Days prior to the Transfer Date that are due within thirty (30) days after the Transfer Date. Seller or, on behalf of Seller, its tax service provider, shall immediately forward to Purchaser all tax bills received by Seller after the Transfer Date or received by Seller before the Transfer Date but which are due more than thirty (30) days after the Transfer Date. The foregoing shall in no way impose upon Seller an obligation to pay any taxes (including interest, late charges, and penalties associated therewith) for which (i) a title insurer has an obligation to pay by virtue of the terms of a mortgagee policy of title insurance which is issued in connection with the origination of the subject Mortgage Loans and which insures Purchaser subsequent to the Transfer Date or (ii) a taxing authority has billed the mortgagor directly rather than billing the Seller or the tax service provider directly. On the Transfer Date, Seller shall forward to Purchaser a listing of all Mortgage Loans that have property taxes due within thirty (30) days after the Transfer Date and for which Seller did not pay the bills prior to the Transfer Date. 7.18. SOLICITATION OF MORTGAGES: From and after November 28, 1996, neither Seller nor any affiliate or agent of Seller shall, during the remaining term of any of the Mortgage Loans, take any action to personally, by telephone, by mail or otherwise, directly or indirectly, solicit the prepayment or modification of the Mortgage Loans, in whole or in part, or offer any Borrower any other mortgage or non-mortgage related products. Notwithstanding the foregoing, it is understood and agreed that promotions which are directed to the general public, including, without limitation, mass mailings based on commercially acquired mailing lists, newspaper, radio and television advertisements, shall not constitute solicitations under this paragraph. 7.19. PURCHASE FROM POOLS. Prior to the Approval Date, Seller shall remove, with respect to the Non-Eligible Mortgage Loans, every Mortgage Loan for which a sale of the Mortgaged Property has been conducted following foreclosure, or for which a foreclosure sale has been scheduled. 7.20. AGENCY/REGULATORY APPROVALS. Seller shall, on or before the Approval Date, obtain any required Agency written approvals, and such approvals as may be needed from appropriate regulatory bodies, of the transfer of Servicing from Seller to Purchaser. Seller shall deliver to Purchaser, on or before such date, documentary proof of the receipt of such approvals. In addition, on or before the Approval Date, Seller, at its expense, shall obtain such approvals as may be needed from appropriate regulatory bodies. -26- 27 7.21. RECEIPT OF RECORDED DOCUMENTS. Seller shall diligently, but in no event later than eighteen (18) months following the Sale Date, obtain original recorded (i) security instruments, (ii) recorded assignments (in accordance with applicable law and Agency Requirements), and (iii) other documents of transfer, all of which are required to be delivered pursuant to this Agreement and which were not previously forwarded to Purchaser or its custodian. Seller shall forward same to Purchaser, at Seller's expense, and shall also provide Purchaser with a monthly status report regarding the outstanding assignments. In connection with Mortgage Loan satisfactions taking place prior to Purchaser's receipt of such recorded assignments, Seller shall cooperate with Purchaser in handling satisfactions and hold Purchaser harmless from expenses and penalties stemming from Purchaser's non-receipt of such recorded assignments. 7.22. AGENCY LOAN COMMITMENTS. Seller shall have provided to Purchaser, prior to the Sale Date certified (by Seller) true and correct copies of Agency Loan Commitments or special Agency or other agreements entered into by Seller and in Seller's possession, relating to the Servicing, which were executed or are effective on or after a date five (5) years prior to the Sale Date. Seller shall also promptly provide to Purchaser any related documents when requested by Purchaser. 7.23. UCC SECURITY INTEREST. Seller shall provide Purchaser with evidence, at Seller's expense, that there exists no security interest in the Servicing given by Seller to a third party, including an Agency, except for that certain security interest in favor of National City Bank of Kentucky, such evidence to consist of (i) a UCC search by Seller directly or a reputable third party vendor which shows to Purchaser's reasonable satisfaction that no such security interest exists as of the Sale Date, Seller to provide such evidence no later than the Approval Date, (ii) written acknowledgement that no such security interest exists from the applicable Agency investors, and (iii) at the request of Purchaser, an opinion letter of Seller's counsel, dated the Approval Date, which shall opine to Purchaser's reasonable satisfaction that no third-party security interest given by the Seller exists in the Servicing, except as disclosed in this Section 7.23. In the event that such a security interest is shown to exist per item (i) above, and in connection with the security interest which exists in favor of National City Bank of Kentucky, Seller shall immediately provide Purchaser with such documentation as is required by Purchaser to evidence removal of such security interest by the Sale Date, including any appropriate security interest waiver executed by the security holder. Purchaser agrees to execute, as of the Sale Date, an acknowledgement of a security interest in Seller's right to receive proceeds under the terms of this Sale Agreement in favor of National City Bank of Kentucky, in a form reasonably acceptable to Purchaser and Seller. 7.24. MORTGAGE LOAN MANAGEMENT FEE. On the Payment Date, Seller shall pay, with respect to any Mortgage Loan that transfers to Purchaser on the Transfer Date, and on the Sale Date: (i) is delinquent with respect to four (4) or more monthly installments; or (ii) is a Bankruptcy Loan; or (iii) is a Foreclosure Loan; or (iv) is a Litigation Loan; and (v) that was not removed from the mortgage pool; a fee equal to $1,000 for every such Mortgage Loan -27- 28 relating to Mortgaged Property outside New York and $1,500 for every such Mortgage Loan relating to Mortgaged Property inside New York. Such fee shall compensate Purchaser for its services in managing the default and foreclosure process, and shall be in addition to any indemnification in favor of Purchaser as provided for in Section 11.2(k). 7.25. DELIVERY OF ADJUSTABLE RATE DOCUMENTS. Upon Seller's performance of an interest rate adjustment on an adjustable rate Mortgage loan, Seller creates a separate file containing copies of loan history, the Note and any Note riders (the "Tickler File"). Seller shall separately deliver to Purchaser the Tickler File on or before the Transfer Date. This document delivery requirement is in addition to the file documentation requirements of Exhibits G through K. 7.26. DEFAULT MANAGEMENT. With respect to any Loan past due under the terms of the Note, or in any stage of bankruptcy, litigation or foreclosure, Seller shall, no earlier than a date fifteen (15) days prior to the Transfer Date or such earlier date as may be mutually agreed upon by Seller and Purchaser, provide Purchaser with written notice of all actions required to be performed by a servicer within thirty (30) days of the Transfer Date, which are known to Seller, or which should be known to Seller in the performance of its duties as a servicer under Agency Requirements, and which are required to assure compliance with any insurer or guarantor requirements. Seller shall cooperate with and assist Purchaser, as reasonably requested by Purchaser, in providing information and assistance in connection with the orderly transition of the default management function from Seller to Purchaser. 7.27. UNCERTIFIED POOLS. Seller shall diligently utilize best efforts to obtain the approval of GNMA to the transfer of Servicing for the Mortgage Loans contained within the Uncertified Pools on or before June 20, 1997. If such approval is not obtained on or before June 20, 1997, Seller shall continue to diligently utilize best efforts to obtain such approval prior to the GNMA Transfer Date. If such approval is ultimately obtained, in whole or in part, on or before a date sufficient to allow transfer of the Servicing on the Uncertified Pools on the GNMA Transfer Date, but after the initial Approval Date, Seller shall proceed to transfer the Servicing for the Mortgage Loans contained within such Uncertified Pools to Purchaser pursuant to the payment provisions and terms of this Sale Agreement, and the date on which such approval(s) is obtained shall be deemed the "Approval Date" for the Mortgage Loans contained within the Uncertified Pools. 7.28. FHA INSURANCE PAYMENTS. Within three (3) Business Days of each Transfer Date, Seller shall provide to Purchaser an electronic tape instructing Purchaser as to the FHA insurance premium payment status of each FHA insured Mortgage Loan. In lieu of such tape, Purchaser may, at least five (5) months prior to each Transfer Date, provide written instruction to Seller as to the payment of FHA insurance premiums due in the month of transfer. Provided that Seller follows such written instruction, Seller shall incur no liability for improper payment of such FHA insurance premiums. -28- 29 ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATION OF PURCHASER The obligation of Purchaser to consummate the transaction described in this Sale Agreement is subject to the material compliance with the following conditions: 8.1. DOCUMENTATION TO BE DELIVERED. No later than five (5) Business Days after the Approval Date, Purchaser, or its custodian, shall have received the Custodial Legal Files required to be delivered hereunder by such date. Within five (5) Business Days of the Transfer Date, the information which is described in Exhibits H through K shall have been transferred to Purchaser as described therein. Within three (3) Business Days of the Transfer Date, the information which is described in Exhibit L shall have been transferred to Purchaser as described therein. The books, records and accounts of Seller with respect to the Mortgage Loans being transferred shall be in order according to all applicable regulations. 8.2. CORRECTNESS OF REPRESENTATIONS AND WARRANTIES. The representations and warranties made by Seller in this Sale Agreement are true and correct on the date of execution of this Sale Agreement and through and including the Transfer Date. 8.3. COMPLIANCE WITH CONDITIONS. All of the terms, covenants and conditions of this Sale Agreement required to be complied with and performed by Seller shall have been duly complied with and performed. 8.4. CORPORATE CERTIFICATE. By the Sale Date, Purchaser shall have received from Seller a certified copy of its corporate resolution approving the execution and delivery of this Sale Agreement and the consummation of the transactions contemplated hereby, together with such other certificates of incumbency and other evidences of corporate authority as Purchaser or its counsel may reasonably request, and a current certificate of good standing from Seller's state of incorporation. 8.5. AGENCY/REGULATORY APPROVAL. No later than the Approval Date, Seller shall have obtained the approval of the Agencies and every other governmental agency or regulatory authority having jurisdiction with respect to the Mortgage Loans to the transfer and sale of the Servicing from the Seller to the Purchaser in accordance with the terms of this Sale Agreement including any approval required under the Hart- Scott-Rodino Antitrust Improvements Act, and if any such approval is conditioned in any way, such conditions shall be reasonably acceptable to the Purchaser. 8.6. OPINION OF COUNSEL. By the Sale Date, Purchaser shall have received from Seller an opinion of counsel for the Seller in a form acceptable to Purchaser. -29- 30 8.7. ADDITIONAL AGREEMENTS: By the Sale Date, Purchaser and Seller shall have executed the Interim Subservicing Agreement and the Subservicing Agreement and Fund American Enterprises Holdings, Inc. shall have executed the Guaranty Agreement. ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATION OF SELLER The obligation of Seller to consummate the transactions described in this Sale Agreement is subject to the satisfaction of the following conditions: 9.1. CORRECTNESS OF REPRESENTATIONS AND WARRANTIES. The representations and warranties made by Purchaser in this Sale Agreement are true and correct on the execution hereof and through and including the final Transfer Date. 9.2. COMPLIANCE WITH CONDITIONS. All of the material terms, conditions and covenants of this Sale Agreement required to be complied with and performed by Purchaser shall have been duly complied with and performed. 9.3. CORPORATE CERTIFICATE. By the Sale Date, Seller shall have received from Purchaser a certified copy of its corporate resolution approving the execution and delivery of this Sale Agreement and the consummation of the transactions contemplated hereby, together with such other certificates of incumbency and other evidences of corporate authority as Seller or its counsel may reasonably request, and a current certificate of good standing from Seller's state of incorporation. 9.4. AGENCY/REGULATORY APPROVALS: No later than the Approval Date, Seller shall have obtained the approval of the Agencies and every other governmental agency or regulatory authority having jurisdiction with respect to the Mortgage Loans to the transfer and sale of the Servicing from the Seller to the Purchaser in accordance with the terms of this Sale Agreement, including any approval required under the Hart-Scott-Rodino Antitrust Improvements Act, and if any such approval is conditioned in any way, such conditions shall be reasonably acceptable to the Seller. 9.5. OPINION OF COUNSEL. By the Sale Date, Seller shall have received from Purchaser an opinion of counsel for the Purchaser in a form acceptable to Seller. ARTICLE X TERMINATION This Sale Agreement may be terminated in whole or in part with respect to the Servicing on or before the Approval Date: -30- 31 i) By Purchaser, if any of the conditions in Article VIII of this Sale Agreement shall not have been met at the appointed time or waived; provided further, to the extent the Sale Agreement is terminated only in part, i.e., with respect to only the FNMA Servicing, the FHLMC Servicing or the GNMA Servicing, Purchaser shall have the right to revise the Purchase Price Percentage for the remaining portion of the Servicing based on Purchaser's reasonable re-evaluation of the characteristics of such remaining portion; provided, however, such revision shall be acceptable to Seller. If this Sale Agreement is terminated pursuant to this provision, as liquidated damages, and as sole remedy for Seller's default, Purchaser shall be entitled to $120,000 from Seller, provided, however, such amount shall not be payable if termination is based upon Section 8.5 and failure to obtain approval is not related to Seller's lack of compliance with Agency Requirements. ii) By Seller, if any of the conditions set forth in Article IX of this Sale Agreement shall not have been met at the appointed time or waived. If this Sale Agreement is terminated pursuant to this provision, as liquidated damages and as sole remedy for Purchaser to default, Seller shall be entitled to $120,000 from Purchaser, provided, however, such amount shall not be payable if termination is based upon Section 9.4 and failure to obtain approval is not related to Purchaser's lack of compliance with Agency Requirements. iii) By mutual consent of the Seller and Purchaser. If this Sale Agreement is terminated pursuant to this Article X, then, the Servicing shall be returned to Seller and: (i) the Deposit, plus accrued interest at the 30-day LIBOR rate from the date of deposit until return to Purchaser, shall be immediately returned to Purchaser by Seller; and (ii) the Servicing Income Rights actually collected by Purchaser (including the benefit of any interest accrual on the custodial accounts) from the Sale Date to the date of notice of termination, shall be immediately returned to Seller by Purchaser. ARTICLE XI MISCELLANEOUS 11.1. COSTS AND EXPENSES. Seller shall pay the costs of preparing and recording assignments (and/or other documents of transfer) from Seller to Purchaser, preparing, in recordable form, but not recording the assignment from Purchaser to the Agency, securing the approvals of the Agencies, and every other governmental agency or regulatory authority whose approval is required (including any approval required of Seller or Purchaser under the Hart-Scott-Rodino Antitrust Improvements Act), Agency transfer fees, tax service contract transfer fees, recertifying pools, Seller's custodial charges (including the cost of insurance coverage in effect during transportation of the Custodian Legal Files), and shipping Mortgage Loan files and Seller's custodial files to Purchaser and Purchaser's custodian. Purchaser shall pay setup fees, if any, associated with the transfer of the Mortgage Loans onto life-of-loan Transamerica Tax -31- 32 Service contracts. Seller shall pay transfer fees, if any, associated with the setup of the Mortgage Loans onto life-of-loan FDSI MapTrak flood tracking service contracts. 11.2. INDEMNIFICATION BY SELLER. In connection with the Mortgage Loans and the Servicing, Seller shall indemnify and hold Purchaser harmless from and shall reimburse Purchaser for any losses, damages, deficiencies, claims, causes of action or reasonable out-of-pocket expenses, of any nature (including reasonable attorneys' fees) incurred by Purchaser which: (a) Result from any error in the representations made by Seller in this Sale Agreement, or in any schedule, written statement or certificate furnished by Seller pursuant to this Sale Agreement; (b) Result from any breach of representation or warranty by Seller, or the non-fulfillment of any covenant or condition of Seller contained in this Sale Agreement, or in any schedule, written statement or certificate furnished by Seller pursuant to this Sale Agreement; (c) Result from any defect in any Mortgage Loan existing as of the Sale Date (including those defects subsequently discovered), or as a result of any act or omission of originator, servicer or Seller prior thereto; (d) Result from errors in originating, setting-up or servicing any of the Mortgage Loans (e.g., incorrect rates, misquoted payoffs, misapplied payments or other errors in payment collection and/or processing, failure to file timely notice of default, failure to pay taxes or other charges including penalties and interest) prior to the Sale Date, or as a result of Seller's or originator's or any prior servicer's act or omission prior thereto. Such errors may include improper action or failure to act when required to do so; (e) Result from litigation existing, settled or threatened involving the Servicing or any of the Mortgage Loans and relating to events occurring prior to the Sale Date; (f) Result from repurchase requirements in connection with the conversion of convertible/adjustable rate Mortgage Loans which converted as of a date prior to the Sale Date; (g) Result from the "with recourse" nature of the Mortgage Loans described on Exhibit M; (h) Result from VA No-Bids, including, without limitation, those resulting in Buydowns, for a period of two years following the anniversary of the Sale Date up to an amount not to exceed $3.3 Million Dollars. In this regard, Purchaser shall take all steps necessary to mitigate the VA No-Bid or Buydown loss and will notify Seller of such steps; (i) Result from administration of the Bi-Saver Program prior to the Transfer Date, as it relates to any Bi-Weekly Mortgage Loan; -32- 33 (j) Result from Purchaser's inability to certify or recertify pools within the time periods required by the Agency due to Seller's failure to deliver all Required Documentation necessary for certification; (k) Result from any Mortgage Loan which, as of the Sale Date, is a Foreclosure Loan, Bankruptcy Loan or Litigation Loan; (l) Result from failure to obtain full recovery on a guaranty for a Mortgage Loan which, as of the Sale Date is a VA vendee Mortgage Loan, due to the discount given to any prior holder of such VA vendee Mortgage Loan (net of any loss resulting from Purchaser's error in servicing such VA vendee Mortgage Loan); and (m) Result from any failure to have received from Seller, either directly or through its custodian, any Required Documents, disclosures required by state or federal law or regulation (including but not limited to disclosures required by the Truth-In-Lending Act or the Real Estate Settlement Procedures Act), or any items required to be in the possession of the Seller under applicable Agency Requirements. With respect to the representations and warranties set forth in this Sale Agreement, which were made to the best knowledge of the Seller (except for Section 7.26), if it is discovered that the substance of such representation or warranty is inaccurate, Purchaser is entitled to all remedies to which Purchaser would be entitled for breach of representation or warranty, including without limitation the repurchase requirements set forth in Section 11.5, notwithstanding Seller's lack of knowledge with respect to the inaccuracy of the representation or warranty. 11.3. INDEMNIFICATION BY PURCHASER. In connection with the Mortgage Loans and the Servicing, Purchaser shall indemnify and hold Seller harmless from and shall reimburse Seller for any losses, damages, deficiencies, claims, causes of action or reasonable out-of-pocket expenses, of any nature (including reasonable attorneys' fees) incurred by Seller which: (a) Result from any error in the representations made by Purchaser in this Sale Agreement, or in any schedule, written statement or certificate furnished by Purchaser pursuant to this Sale Agreement; (b) Result from any breach of representation or warranty by Purchaser, or the non-fulfillment of any covenant or condition of Purchaser contained in this Sale Agreement, or in any schedule, written statement or certificate furnished by Purchaser pursuant to this Sale Agreement; (c) Result from errors in servicing any of the Mortgage Loans (e.g., incorrect rates, misquoted payoffs, misapplied payments, failure to file timely notice of default or failure to pay taxes or other charges including penalties and interest) after the Transfer Date. Such errors may include improper action or failure to act when required to do so; and -33- 34 (d) Result from litigation existing, settled or threatened involving the Servicing or the Mortgage Loans which is based on Purchaser's wrongdoing following the Transfer Date; (e) Result from Purchaser's custodian's failure to complete its review of the delivered documentation on or before a date one hundred twenty (120) days after the Approval Date; (f) Result from the post Transfer Date administration of the bi-weekly payment feature of any Bi-Weekly Mortgage Loan that transfers to Purchaser on the Transfer Date (including any cancellation fees due Borrowers as a result of transfer or modification of the Bi-Saver Program), but excepting therefrom losses resulting from administration of the biweekly payment feature of any such Bi-Weekly Mortgage Loan on or before the Transfer Date; (g) Result from Seller's following the written instructions of Purchaser provided pursuant to Section 7.28. 11.4. NOTICE UNDER INDEMNIFICATION. If either party ("Indemnitee") asserts any rights of indemnification hereunder, it shall give written notice to the other party ("Indemnitor") prior to expiration of the Survival Period (as defined in Section 11.6). Indemnitor shall have thirty (30) calendar days from the receipt of such notice to pay any amounts owing the Indemnitee or to give written notice to Indemnitee of its intention to defend or dispute such claim or liability. If such defense or dispute notice is given by Indemnitor within said thirty (30) day period, Indemnitor shall have the right to compromise or defend any such claim or liability through counsel (including accountants and other agents and representatives) of its own choosing (but reasonably acceptable to the Indemnitee) and at its own expense; provided, however, that the Indemnitor shall not, in the defense of such claim or liability, or any litigation resulting therefrom, consent to entry of any judgment or enter into any settlement in any case without the prior written consent of Indemnitee which consent will not be unreasonably withheld. Indemnitee shall cooperate fully with the Indemnitor in such defense. If, within the said thirty (30) day period, Indemnitor fails to give written notice to Indemnitee of its intention to defend said claim or liability at its own expense, or if such notice is given but Indemnitor fails to defend such claim or liability diligently and continuously, Indemnitee shall have the right to compromise or defend such claim or liability through counsel (including accountants or other agents and representatives) of its own choosing, but at the expense of the Indemnitor. If any of the foregoing claims or liabilities are finally determined adversely to Indemnitee, or if the Indemnitee compromises the same as contemplated in the preceding sentence, or if the Indemnitor or Indemnitee otherwise compromises any such claim or liability, Indemnitor shall pay such claim or liability, together with costs, interest and reasonable attorneys' fees. 11.5. REPURCHASE OF SERVICING. In the event: (i) Purchaser discovers that any of the representations and warranties contained in Articles IV or V hereof were not materially accurate at the time they were made by Seller; and -34- 35 (ii) there is any demand for repurchase or indemnification in lieu of repurchase by an Agency or other unaffiliated third party investor who then has an ownership interest in the Mortgage Loan at issue (if such demand for repurchase or indemnification comes from an unaffiliated third party investor the breach upon which demand is made must have been cause for a breach if such Mortgage Loan was still owned by the Agency that owned the Mortgage Loan prior to sale to the unaffiliated third party investor); then, Purchaser may require that Seller repurchase the affected Servicing from Purchaser at the Servicing Repurchase Price; provided, however: (i) Seller is not required to pay the Servicing Repurchase Price if the affected Servicing was not included in the Purchase Price; and (ii) Seller shall have a sixty (60) day cure period from receipt of written notice of breach, unless Agency or unaffiliated third party investor guidelines provide otherwise; and (iii) Where the Agency or the unaffiliated third party investor will allow indemnification rather than repurchase, Seller may indemnify Purchaser or the Agency or unaffiliated third party investor rather than repurchase if the Agency or unaffiliated third party investor will accept such indemnification. In the event of a required Servicing repurchase, Seller shall also repurchase, at the Mortgage Loan Repurchase Price, the related Mortgage Loan out of the pool if so required by the applicable Agency or unaffiliated third party investor. Upon Seller's failure to cure within the sixty (60) days from receipt of written notice cure period, Seller shall, within ten (10) days thereafter, pay the Mortgage Loan Repurchase Price and the Servicing Repurchase Price, and Purchaser shall immediately thereafter deliver to Seller all documents and records in Purchaser's possession pertaining to the Mortgage Loans, including any related escrow account benefits, and shall execute and record assignments as may be appropriate, with such retransfer expenses to be at Seller's expense. Prior to expiration of the Survival Period (as defined in Section 11.6), Seller shall repurchase the Servicing at the Servicing Repurchase Price and the Mortgage Loan at the Mortgage Loan Repurchase Price (however, such Mortgage Loan must be repurchased only if the applicable Agency or the unaffiliated third party investor requires that the Mortgage Loan be repurchased together with the Servicing), for any Mortgage Loan for which there is either an outstanding demand by any Agency or an unaffiliated third party investor for repurchase or indemnification as of the expiration of the Survival Period, or for which there is an outstanding indemnification agreement between such Agency or unaffiliated third party investor and Purchaser. 11.6. SURVIVAL. The representations and warranties in this Sale Agreement, and in any document to be delivered pursuant hereto, shall survive until a date (10) years after the Sale -35- 36 Date ("the Survival Period"). The parties further agree that (i) the indemnifications provided for in Sections 11.2, 11.3 and 11.4 shall survive until expiration of the Survival Period; (ii) the Mortgage Loan and Servicing repurchase requirements provided for in Section 11.5 shall survive until expiration of the Survival Period; and (iii) any and all covenants, agreements and duties which contemplate performance after the Transfer Date shall also survive until expiration of the Survival Period. Purchaser and Seller may recover under Sections 11.2 and 11.3, provided that notice in accordance with Section 11.4, shall have been given prior to the expiration of the Survival Period. Notwithstanding anything to the contrary in this Section 11.6, in the event that, prior to the expiration of the Survival Period, notice of a claim for indemnification is given pursuant to Section 11.4 and either the loss which is indemnifiable pursuant to Section 11.2 or 11.3 has not yet been incurred or litigation in connection with the claim for indemnification has not yet commenced, such claim shall survive beyond the Survival Period only if the threat of litigation arose within six (6) months prior to the expiration of the Survival Period (which threat is evidenced by written correspondence from an attorney) and litigation commences within six (6) months after expiration of the Survival Period. 11.7. SUPPLEMENTARY INFORMATION. From time to time, upon reasonable notice, prior to and after the Transfer Date, Seller shall furnish Purchaser such incidental information, which is reasonably available to Seller, supplementary to the information contained in the documents and schedules delivered pursuant hereto, as Purchaser may reasonably request within ten (10) years of the Sale Date. Any request for information under this Section 11.7 which is in reference to information which was not required to have been provided under the terms of this Sale Agreement shall be fulfilled at the reasonable expense of Purchaser. 11.8. ACCESS TO INFORMATION. Seller shall give to Purchaser and its counsel, accountants and other representatives, upon seven (7) days advance written notice, reasonable access during normal business hours throughout the period prior to the Transfer Date, to all of Seller's files, books and records relating to the Servicing. 11.9. CONFIDENTIALITY OF INFORMATION. Except as otherwise required by law, Seller and Purchaser and their affiliates shall, and shall cause their respective directors, officers, employees and authorized representatives to, hold in strict confidence and not use or disclose to anyone without the prior written consent of the other party all information concerning customers or proprietary business procedures, servicing fees or prices, policies or plans of the other party or any of its affiliates received by them from the other party in connection with the transactions contemplated hereby. 11.10. BROKER'S FEES. Each party warrants and represents to the other that it has not had any dealings or negotiations in connection with the transaction contemplated by this Sale Agreement with any brokers or finders other than Seller's agreement with Cohane Rafferty Securities, Inc. Seller shall pay all broker fees of Cohane Rafferty Securities, Inc and Seller shall defend, indemnify and hold Purchaser harmless from and against any and all claims, actions, causes of action, losses, liabilities and expenses that may be asserted against or sustained by Purchaser by reason of any allegation by Cohane Rafferty Securities, Inc., that fees, -36- 37 commissions, or other payments of any kind are payable to it as a result of the transaction contemplated by this Sale Agreement. Each party shall defend, indemnify and hold the other harmless from and against any and all claims, actions, causes of action, losses, liabilities and expenses that may be asserted against or sustained by the indemnified party by reason of any allegation that any fees, commissions, or other payments of any kind are payable to a broker or other third party by the indemnified party as a result of any negotiations or dealings with such broker or third party by the indemnifying party contrary to the foregoing warranty and representation. 11.11. NOTICES. All notices, requests, demands and other communications which are required or may be given under this Sale Agreement shall be in writing, shall be given to the intended recipient at the address specified below and shall be effective upon personal delivery or upon transmission by facsimile or if sent by registered or certified mail, postage prepaid then five (5) days following the day placed in the mail or, if sent otherwise, then only upon receipt: (a) If to the Purchaser, to: Chemical Mortgage Company 200 Old Wilson Bridge Road, Worthington, Ohio 43085-8500 Attn: Gary Roos, Servicing Portfolio Manager With a copy to Molly Sheehan, General Counsel, at 343 Thornall, Edison New Jersey 08837. (b) If to the Seller, to: Source One Mortgage Services Corporation 27555 Farmington Road, Farmington Hills, Michigan 48334-3357 Attn: Gene Lavigne With a copy to Robert Schrader, General Counsel, at the above address. or to such other address or person as Purchaser or Seller shall have specified in writing to the other. 11.12. WAIVERS. Either Purchaser or Seller may, by written notice to the other: (a) Extend the time for the performance of any of the obligations or other transactions of the other; and (b) Waive compliance with any of the terms, conditions or covenants required to be complied with by the other hereunder. The waiver by any party hereto of a breach of any provision of this Sale Agreement shall not operate or be construed as a waiver of any other subsequent breach. -37- 38 11.13. ENTIRE AGREEMENT; AMENDMENT. This Sale Agreement constitutes the entire agreement between the parties with respect to the sale of the Servicing and supersedes all prior agreements with respect thereto. This Sale Agreement may be amended and any provision hereof waived, but only in writing signed by the party against whom such amendment or waiver is sought to be enforced. 11.14. BINDING EFFECT. This Sale Agreement shall inure to the benefit of and be binding upon the parties hereto and their successors and assigns. Nothing in this Sale Agreement, express or implied, is intended to confer on any person other than the parties hereto and their successors and assigns, any rights, obligations, remedies or liabilities. 11.15. HEADINGS. Headings on the Articles and Sections in this Sale Agreement are for reference purposes only and shall not be deemed to have any substantive effect. 11.16. APPLICABLE LAWS. This Sale Agreement shall be construed in accordance with the laws of the State of Ohio. 11.17. INCORPORATION OF EXHIBITS. All exhibits attached hereto shall be incorporated herein and shall be understood to be a part hereof as though included in the body of this Sale Agreement. 11.18. COUNTERPARTS. This Sale Agreement may be executed in counterparts, each of which, when so executed and delivered, shall be deemed to be in original and all of which, taken together, shall constitute one and the same agreement. 11.19. TRANSFER AND ASSIGNMENT. Seller does not have the right to sell, assign, delegate or otherwise transfer its rights or obligations under this Sale Agreement to a third party without obtaining the prior written consent of Purchaser, which consent shall not be unreasonably withheld; provided further, the financial condition of Seller's assignee shall be reasonably acceptable to Purchaser. The obligation to subservice the Mortgage Loans under the Subservicing Agreement may, within one year of the Sale Date, be assigned to one other party, which party must be reasonably acceptable to Purchaser. In determining the acceptability of such party, Purchaser may, in its reasonable discretion, consider the party's reputation in the industry, financial status, approval status with the Agencies as well as with private investors and regulators, status as a competitor and ability to service non-standard mortgage products. Should Purchaser resell portions of the portfolio, Seller shall reasonably cooperate with Purchaser and its assignee or designee to affect due diligence and transfer. Seller shall not be responsible for any out-of-pocket costs related to these sales that it would not have otherwise incurred in connection with transferring the Servicing to Purchaser. In no event, other than Subservicer Default or as mutually agreed by the parties, shall the Servicing be transferred before the Transfer Dates set forth in this Sale Agreement. The transfer dates associated with any such transfer shall be agreed upon in accordance with the terms of this Sale Agreement, the Interim Servicing Agreement and the Subservicing Agreement. -38- 39 11.20. GUARANTY. The performance of Seller under the terms of this Agreement is guaranteed by Fund American Enterprises Holdings, Inc. pursuant to the terms of the Guaranty Agreement. IN WITNESS WHEREOF, each of the undersigned parties to this Sale Agreement has caused this Sale Agreement to be duly executed in its corporate name by one of its duly authorized officers, all as of the date first above written. PURCHASER: CHEMICAL MORTGAGE COMPANY ATTEST: BY:_______________________________ _________________________ NAME:_____________________________ TITLE:____________________________ DATE:_____________________________ SELLER: SOURCE ONE MORTGAGE SERVICES CORPORATION ATTEST: BY:________________________________ _________________________ NAME:______________________________ TITLE:_____________________________ DATE:______________________________ -39- 40 LIST OF EXHIBITS Exhibit A - Offering Circular Exhibit B - Mortgage Loan Schedule Exhibit C-1 - Interim Subservicing Agreement Exhibit C-2 - Subservicing Agreement Exhibit D - Power of Attorney Exhibit E - Reconciliation Reports Exhibit F - Guaranty Agreement Exhibit G - Required Documentation Exhibit H - FHLMC Documentation Exhibit I - FNMA Documentation Exhibit J - FNMA MBS Documentation Exhibit K - GNMA Documentation Exhibit L - Transfer Information Exhibit M - Recourse Mortgage Loans Exhibit N - Uncertified Pools Exhibit O - Seller Funded PMI Mortgage Loans Exhibit P - Condemnation Mortgage Property Exhibit Q - Completion Escrow Mortgage Loans Exhibit R - Soldiers and Sailors Relief Act Mortgage Loans Exhibit S - Receivable Assignment and Acknowledgment Agreement Exhibit T - Active and Suspended Subsidized Mortgage Loans Exhibit U - Missing Documents -40- EX-10.(EE) 9 EXHIBIT 10(EE) 1 EXHIBIT 10(ee) MORTGAGE LOAN INTERIM SUBSERVICING AGREEMENT THIS MORTGAGE LOAN INTERIM SUBSERVICING AGREEMENT ("Agreement") is made as of March 1, 1997, by and between CHEMICAL MORTGAGE COMPANY, an Ohio corporation, with offices at 200 Old Wilson Bridge Road, Worthington, Ohio 43085-8500 ("Servicer") and SOURCE ONE MORTGAGE SERVICES CORPORATION, with offices located at 27555 Farmington Road, Farmington Hills, Michigan 48334-3357 ("Subservicer"). RECITALS A. WHEREAS, Subservicer is engaged as an independent contractor in the business of servicing loans and performs servicing functions for various investors; B. WHEREAS, Servicer has contracted with Subservicer to perform the administration and subservicing of certain mortgage loans ("Mortgage Loans") the servicing rights to which were purchased by Servicer from Subservicer pursuant to a FNMA/FHLMC/GNMA Mortgage Servicing Purchase and Sale Agreement between Servicer and Subservicer, dated as of February 28, 1997 ("Sale Agreement"); and C. WHEREAS, pursuant to the terms of such Sale Agreement, Subservicer shall perform the servicing obligations on the Mortgage Loans during the Interim Subservicing Period in accordance with the terms of this Agreement; and D. WHEREAS, such servicing obligations shall be performed under Subservicer's seller/servicer identification numbers; and E. WHEREAS, Servicer and Subservicer desire to formalize and state the terms and conditions which shall govern the subservicing and administration of such Mortgage Loans by Subservicer. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS The following terms shall have the meaning set forth after each: 1.1 Accepted Practices. Prudent mortgage banking practices for similar loans. 1.2 Advances. All customary and necessary out-of-pocket costs and expenses incurred in accordance with Agency Requirements and the Loan Documents with regard to performance by Subservicer of its subservicing obligations, including, but not limited to, advances of principal, interest (including Shortfall Interest), taxes, insurance, foreclosure and bankruptcy expenses and guarantee fees. 2 1.3 Agency: FNMA, FHLMC and/or GNMA, individually and collectively, as applicable. 1.4 Agency Requirements: The rules, regulations, announcements, notices, directives and instructions of the Agency, as applicable, including, without limitation, the Agency contracts or commitments (which contracts or commitments incorporate by reference all applicable Agency Selling and Servicing Guides and the underlying FHA and/or VA rules, regulations and requirements) with respect to the Mortgage Loans, and any revisions to same. 1.5 Ancillary Fees: Reasonable and customary fees acceptable to the Agencies and collected by servicers as income incidental to the servicing of the Mortgage Loans such as late fees, insurance administration fees and commissions, processing fees and assumption fees, which Ancillary Fees shall not, without the consent of Servicer (which consent shall not be unreasonably withheld as to inflationary increases in fee amount or as to an additional fee type dictated by the Agencies), exceed, in fee amount or type, the fees charged by Subservicer as of November 28, 1996. 1.6 Applicable Law: All federal, state and local laws, rules and regulations, as amended from time to time, applicable to the Mortgage Loans, the Servicing, Subservicer and/or the performance by Subservicer of its duties hereunder including but not limited to the Truth in Lending Act, the Real Estate Settlement Procedures Act ("RESPA" including the provisions set forth in the regulations enacted under the Cranston-Gonzalez amendment), The Fair Credit Reporting Act, The Equal Credit Opportunity Act, The Flood Disaster Protection Act and laws relative to escrow administration, usury, due on sale and loan servicing. 1.7 Borrower. Any person obligated under the promissory note or other instruments evidencing and securing a Mortgage Loan. 1.8 Business Day. A day or a portion thereof during which both Servicer and Subservicer are open for business, other than Saturday or Sunday, or any legal holiday. 1.9 Custodial Account[s]. The accounts maintained in accordance with Applicable Law and Agency Requirements for the deposit of principal and interest payments in respect of one or more Mortgage Loans. 1.13 Escrow Account[s]. Any amounts collected from a Borrower for the purpose of paying, on behalf of the Borrower, hazard insurance premiums, mortgage insurance premiums, taxes, assessments and other similar items as required or permitted under the Loan Documents. 1.10 FNMA. The Federal National Mortgage Association. 1.11 FHLMC. The Federal Home Loan Mortgage Corporation. 2 3 1.12 GNMA. The Government National Mortgage Association. 1.14 Investor. FNMA, FHLMC and/or GNMA, as applicable. 1.15 Mortgage Loan[s]. The conventional and government mortgage loans, the Servicing associated therewith being the subject of this Agreement and having been transferred from Subservicer to Servicer pursuant to the Sale Agreement, a listing of which is attached hereto as Exhibit A. 1.16 Loan Documents. Any promissory note, deed of trust, mortgage, assignment, guaranty, title insurance policy, mortgage insurance policy, or other instrument or document executed, issued or obtained in connection with a Mortgage Loan. 1.17 Mortgaged Property. The property which is the subject of each security agreement, mortgage or deed of trust securing repayment of the debt evidenced by the Loan Documents. 1.18 REO (Real Estate Owned). Properties acquired through foreclosure or by acceptance of a deed in lieu of foreclosure on behalf of Servicer or the Investor. 1.19 Sale Agreement. As defined in the recitals. 1.20 Servicing. As defined in the Sale Agreement. 1.21 Shortfall Interest. The Mortgage Loan curtailment or payoff interest which is required to be paid to the Agency but which the Borrower is not obligated to pay. 1.22 Subservicing Accounts: The Escrow Accounts and Custodial Accounts established pursuant to this Agreement. 1.23 Subservicing Fee: The compensation to be paid to Subservicer for subservicing performed under this Agreement which shall be equal to Five Dollars ($5.00) per each Mortgage Loan for which the Investor is or was FNMA or FHLMC, and Six Dollars ($6.00) per each Mortgage Loan for whom GNMA is or was the Investor, in existence on the first day of each month during the term of this Agreement. Defined terms used in this Agreement but not defined herein, shall have the meanings ascribed to such terms in the Sale Agreement. 2. SUBSERVICING DUTIES Subservicer shall have the following obligations with respect to all Mortgage Loans: 3 4 2.1 General Servicing Responsibilities. Subservicer shall undertake all actions, with regard to the servicing and administration of the Mortgage Loans, whether or not specifically outlined in this Agreement, including, but not limited to, the advancing of funds, all in accordance with the terms and conditions of the Loan Documents, Agency Requirements, Applicable Law and this Agreement. Such actions shall be undertaken in accordance with Accepted Practices. To the extent of any conflict between the terms and conditions of this Agreement and the Agency Requirements, the Agency Requirements shall control. As to vendors utilized by Subservicer in connection with the performance of its obligations hereunder, whose services earn fees in excess of $500,000 per year, Subservicer shall obtain the written approval of Servicer to any change from a vendor currently utilized by Subservicer, which approval shall not be unreasonably withheld. Servicer has approved all vendors utilized by Subservicer as of the date of execution of this Agreement. Attached hereto as Exhibit B is a list of such vendors which have been approved by Servicer. 2.2 Collections. Subservicer shall proceed diligently to collect all sums which become due under the Loan Documents as if Subservicer were servicing the Mortgage Loans for its own account, including without limitation principal, whether or not prepaid, interest, late charges, prepayment fees, private mortgage insurance premiums, fire, flood, earthquake and other hazard insurance premiums, and taxes, assessments and other similar charges, all in accordance with Agency Requirements. Concerning Mortgage Loans for which the Subservicer drafts monthly payments electronically from the Borrower's bank account, such drafting occurs in compliance with Agency Requirements, and the applicable agreement with the Borrower. 2.3 Insurance. A. Subservicer shall undertake all actions necessary to ensure that fire, flood, earthquake and other hazard insurance required by the Agency is maintained by each Borrower on the Mortgaged Property in accordance with Agency Requirements. Where any such required insurance coverage is allowed to lapse, whether or not due to Borrower's fault or negligence, Subservicer shall, immediately upon knowledge of such lapse, promptly obtain new insurance in accordance with Agency Requirements and the Loan Documents. Subservicer shall maintain records of all such insurance coverage in accordance with Agency Requirements. B. Upon receiving notice of any event which constitutes a loss under any policy of insurance relative to a Mortgage Loan, Subservicer shall undertake appropriate action, including the filing of all necessary claims, to permit full recovery of such loss under the policy of insurance. If a claim ("Claim") is made under a fire, flood, earthquake or other hazard insurance policy, Subservicer is authorized to settle such Claim, collect the insurance proceeds, 4 5 make any arrangements with respect to restoration or rehabilitation of the Mortgaged Property and disburse insurance proceeds in accordance with Agency Requirements, the Loan Documents and Applicable Law. Subservicer will cause an inspection(s) to be made so as to assure itself that the Mortgaged Property has been satisfactorily repaired in accordance with Agency Requirements and shall, if the loss is in excess of $5,000, secure a statement from the Borrower indicating satisfaction with the repairs. C. Any Mortgage Loan involved with any type of optional insurance has been properly serviced, including, without limitation, the proper application and collection of premiums, the maintenance of complete and accurate records, processing and payment of claims and the handling of correspondence. 2.4 Escrow Accounts. Subservicer shall take all actions necessary to ensure that each Mortgage Loan Escrow Account is maintained in an FDIC insured depository institution in accordance with Agency Requirements and Applicable Law. Subservicer shall be responsible for all matters relating to the administration of the Escrow Accounts, including without limitation: the deposit of funds to the Escrow Accounts no later than the next Business Day after receipt; the disbursement of funds to the proper parties when and if due in payment of the items for which such Escrow Accounts are established; payment of interest to Borrowers on funds deposited into such Escrow Accounts to the extent required by Applicable Law (and Subservicer shall receive reimbursement from the Servicer for its payment of interest to Borrowers on funds deposited into such Escrow Account in accordance with this Agreement); and maintenance of all books and records with respect to such Escrow Accounts, all in accordance with Applicable Law and Agency Requirements. If, on the effective date of this Agreement, Subservicer obtains sufficient Agency approval to transfer, and does transfer the Escrow Accounts from their current depository institution to Chase Manhattan Bank, USA, N.A., then Servicer shall have the right to all actual interest income and other benefits derived from the Escrow Accounts. In the event that Subservicer is unable to obtain sufficient Agency approval to transfer the Escrow Accounts from their current depository institution to Chase Manhattan Bank, USA, N.A. as of the effective date of this Agreement, then until such transfer is able to be accomplished, Subservicer shall have the right to all actual interest income derived from the Escrow Accounts, and shall pay Servicer monthly, together with the remittance of the servicing fee to Servicer, interest on the funds maintained in such accounts at a rate equal to the 30-day LIBOR rate less one quarter of one percent. Unless transferred as noted above, the Escrow Accounts shall be maintained in the accounts that exists as of the date of execution of this Agreement (unless otherwise moved with the prior approval of Servicer). Escrow Accounts shall be established in the name of Subservicer and titled as mutually agreed by the parties for the benefit of Servicer, the Agency and the Borrowers, as their interest appear. Servicer shall permit Subservicer to have access to such Escrow Accounts to make deposits and disbursements in accordance with the terms of this Agreement. Subservicer shall provide all statements with regard to such Escrow Accounts as required in compliance with Applicable Law, including but not limited to RESPA. 5 6 2.5 Mortgage, Insurance. Subservicer shall keep all records, provide all notices and undertake all other actions which may be required to preserve and enforce all rights of Servicer under any private mortgage insurance applicable to the Mortgage Loans in accordance with Agency Requirements and the applicable policy of private mortgage insurance. 2.6 Delinquencies, Bankruptcy and Foreclosure. Subservicer shall handle all Mortgage Loan delinquencies and bankruptcies and conduct all Mortgage Loan foreclosures in strict accordance with Agency Requirements, the Loan Documents, Applicable Law and Accepted Practices so as to minimize the exposure and losses of Servicer and/or the Investor on such Mortgage Loans. Subservicer's foreclosure responsibilities include timely mailing and recording of all required notices, procuring all necessary foreclosure guarantees, compliance with all Agency Requirements, including specifically, but not limited to, those related to loss mitigation and collection including referral to counselling; conducting the foreclosure sale and undertaking all necessary eviction proceedings to vacate the Mortgaged Property subject to the foreclosure and filing all appropriate claims with the applicable insurer or guarantor in a timely manner. Servicer shall grant to Subservicer limited corporate authority to allow Subservicer to execute satisfactions and bankruptcy and foreclosure documentation on Servicer's behalf. 2.7 REO's. At the option of Servicer and at Servicer's expense, Subservicer shall be responsible for the administration and maintenance of the Mortgaged Property following any foreclosure sale to the extent required by Agency Requirements; provided however that Subservicer shall pay, without reimbursement from Servicer, the first $1,000 of REO expense on REOs located outside of New York and the first $1,500 of REO expense on REOs located inside New York, for any REO which related to a Mortgage Loan for which a fee would have been due to Servicer as purchaser under the provisions of Section 7.24 of the Sale Agreement but for the fact that such Mortgage Loan did not transfer. All funds shall be held and remitted in accordance with Agency Requirements. In the event that the Agency or Servicer should require Subservicer to market the REO, Servicer agrees to pay Subservicer a fee for marketing the REO in an amount equal to one thousand five hundred dollars ($1,500) per REO or one percent (1%) of the REO sale price, whichever is greater. REO expense shall be reimbursed to Subservicer monthly, upon receipt of an invoice prepared by Subservicer. 2.8 Assumption and Other Modifications. Subservicer shall have full responsibility for processing applications for and documenting all assumptions and other modifications of the Mortgage Loans in accordance with Agency Requirements, Applicable Law and the Loan Documents. 2.9 Annual Statements. Subservicer shall annually prepare for each Borrower, without charge, written statements for each calendar year in compliance with the Internal Revenue Code of 1986, as amended, and any other Applicable Law. 6 7 2.10 Payoffs. Subservicer shall process all Mortgage Loan Payoffs and Loan Document satisfactions/reconveyances in compliance with Agency Requirements and Applicable Law. Subservicer shall not act or fail to act in any manner which may result in imposition of any penalty for late satisfaction/reconveyance of a Mortgage Loan. Servicer shall reimburse Subservicer for recording fees imposed for the recording of satisfactions/reconveyances required by applicable law to be recorded by the lender, and which cannot, under applicable law, be imposed upon the Borrower. 2.11 Reclassification of Delinquent Mortgage Loans: In the event that the Agency, or the Servicer, requires the Subservicer to reclassify a delinquent Mortgage Loan from a pool into the Servicer's actual portfolio, Subservicer shall: (i) at the direction of the Servicer and/or the Agency, effect any required repurchase; (ii) if not already established, establish a new investor number on its system; (iii) open the appropriate escrow and custodial accounts; and (iv) report the Mortgage Loan under the Servicer's actual portfolio. Subservicer and Servicer shall perform all duties in connection with such reclassified Mortgage Loans as defined in this Agreement. 2.12 Notice of Relief Requested Pursuant to the Soldiers and Sailors Relief Act of 1940 or Similar Laws. Throughout the term of this Agreement, Subservicer shall notify Servicer of any notification received from any Borrower or other party with respect to any Mortgage Loan of a request for relief pursuant to or invoking any of the provisions of the Soldiers and Sailors Civil Relief Act of 1940 or similar state or federal law suspending payments of amounts due under the Note or the commencement of foreclosure proceedings. 3. DEPOSIT AND REMITTANCE OF FUNDS 3.1 Custodial Account. All funds applicable to the payment of principal and interest on Mortgage Loans shall be held in trust for the Investors in accordance with Agency Requirements and Applicable Law. Such funds shall be deposited, no later than the next Business Day following receipt, in a Custodial Account at an FDIC insured depository institution meeting Agency Requirements. Unless transferred as noted below, the Custodial Account shall be maintained in the account that exists as of the date of execution of this Agreement (unless otherwise moved with the prior approval of Servicer). The Custodial Account shall be established in the name of Subservicer and titled as mutually agreed by the parties for the benefit of Servicer and the applicable investors, as their interest appear. Servicer shall permit Subservicer to have access to such Custodial Account to make deposits and disbursements in accordance with the terms of this Agreement and Agency Requirements. Subservicer shall provide all statements and reports relative to the Custodial Account in accordance with Agency Requirements. If, on the effective date of this Agreement, Subservicer obtains sufficient Agency approval to transfer, and does transfer the Custodial Account from its current depository institution to Chase Manhattan Bank, USA, N.A., then Servicer shall have the right to all actual interest income and other benefits derived from the Custodial Account. In the event that Subservicer is unable to obtain 7 8 sufficient Agency approval to transfer the Custodial Account from its current depository institution to Chase Manhattan Bank, USA, N.A. as of the effective date of this Agreement, then until such transfer is able to be accomplished, Subservicer shall have the right to all actual interest income derived from the Custodial Account, and shall pay Servicer monthly, together with the remittance of the servicing fee to Servicer, interest on the funds maintained in such accounts at a rate equal to the 30-day LIBOR rate less one quarter of one percent. 3.2 Remittance of Custodial Funds. Subservicer shall remit all payments applicable to principal and interest, including without limitation prepayments of principal, less the servicing fee calculated and deducted pursuant to Section 3.5 of this Agreement, in accordance with Agency Requirements and shall make all principal and interest advances to the Agency pursuant to Agency Requirements. 3.3 Escrow Accounts. Deposits and withdrawals from the Escrow Accounts shall be in accordance with Section 2.4. 3.4 Reimbursement of Subservicer. Servicer will reimburse Subservicer for Advances and Shortfall Interest within one (1) Business Day of its receipt, on a Business Day, from Subservicer of a billing along with supporting documentation and a reconciliation of the prior amount paid and the current amount due. Servicer shall reimburse Subservicer on a monthly basis for any interest on escrow funds paid in the preceding month, within one (1) Business Day of Servicer's receipt, on a Business Day, of an invoice substantiating such payments made. Servicer shall reimburse Subservicer for funds required in connection with repurchase and reclassification of a Mortgage Loan in accordance with Section 2.11, within one (1) Business Day of its receipt, on a Business Day, of an invoice substantiating such payments made. Servicer will wire the FNMA and GNMA guarantee fees to Subservicer within one (1) Business Day following its receipt, on a Business Day, of billing for the guarantee fees which will include the FNMA draft report. All requests for Advances or reimbursement hereunder shall be accompanied by a certification from an Assistant Vice President or high ranking or Servicer approved officer of Subservicer certifying that all such sums for which reimbursement of an advance is requested has or will be paid to the proper parties in accordance with Agency Requirements and Applicable Law and that all deposits and disbursements required to be made on or prior to the date of said certification have been made in accordance with Agency Requirements and Applicable Law. In the event of an improper payment to Subservicer, Subservicer shall make any appropriate payment back to Servicer within one (1) Business Day of its receipt, on a Business Day, of a demand for such payment together with supporting documentation. 3.5 Remittance to Servicer: Subservicer shall deduct monthly from each monthly payment received from a Borrower, an amount equal to one-twelfth of the annual servicing fee payable to Servicer pursuant to Agency Requirements. On or before the 10th Business Day of each month, Subservicer shall remit to Servicer the servicing fees pertaining to FNMA and GNMA servicing, net of the Subservicing Fee described in Section 4. On or before the 25th day of each month (or the next Business Day if the 25th day is not a Business 8 9 Day), Subservicer shall remit to Servicer the servicing fees pertaining to FHLMC servicing, net of the Subservicing Fee described in Section 4. Along with such remittances, Subservicer shall provide a report, reasonably acceptable to Servicer, substantiating the amount remitted. All funds remitted under this section shall be sent by wire transfer of immediately available federal funds to the following account: Banc One Columbus, Ohio ABA No. 044000037 Credit Account No. 980116070 For: Chase Manhattan Mortgage Corporation Attention: Ed Reik 614-842-7210 3.6 Ownership of Escrow Accounts and Custodial Accounts: Subservicer acknowledges that the Escrow Accounts, Custodial Accounts and any collections it receives on the Mortgage Loans during the term of this Agreement (except for Ancillary Fees) are for the account of Servicer, the Borrowers or the Agency, as their interests may appear. 4. COMPENSATION Subservicer shall receive as compensation, with respect to each Mortgage Loan serviced by it hereunder, the Subservicing Fee. Subservicer will also retain Ancillary Fees. 5. CUSTODY OF LOAN DOCUMENTS, BOOKS, RECORDS AND REPORTS 5.1 Documents, Books, Records. Subservicer shall either retain copies of all original Loan Documents required in connection with its subservicing obligations and delivered to Servicer or its designee pursuant to the Sale Agreement, or incur any expense in connection with obtaining such copies after delivery to Servicer or its designee. All Loan Documents shall be held and delivered by Subservicer to Servicer pursuant to the terms of the Sale Agreement. Subservicer acknowledges that Servicer alone owns the documents and records related to the Mortgage Loans and the Servicing, subject to the rights of the Agency, notwithstanding that the documents and/or the records may remain in the possession of Subservicer during the term hereof to facilitate the performance of subservicing activities described herein. Servicer shall instruct its custodian that certain authorized representatives of Subservicer may obtain release of Loan Documents, in accordance with Agency Requirements, directly from the custodian. Servicer shall reimburse Subservicer for the expense of obtaining any original document from a custodian in situations where the original is reasonably required (i.e. lien release or default proceedings when required by applicable law). Subservicer shall promptly provide the Servicer, on reasonable request, on a loan by loan basis, copies of all correspondence, reports, statements and other items regarding any Mortgage Loan. Subservicer shall maintain records with respect to each Mortgage Loan in 9 10 accordance with Agency Requirements and Applicable Law, which shall include, without limitation the application of payments as received from the Borrower and all sums paid into and disbursed from any Escrow Account. Subservicer shall also place copies of all relevant documentation received or sent by Subservicer (**except on-line letters for which records are kept on the system* *) during the term of this Agreement with regard to the Mortgage Loans in the Servicing File, as defined in the Sale Agreement, or in a separate foreclosure file, all of which will be delivered to Purchaser on the Transfer Date, as defined in the Sale Agreement. Servicer shall have the right at reasonable times and upon forty-eight (48) hours written notice, to inspect all books, records and practices of Subservicer which relate to the Mortgage Loans serviced under this Agreement. 5.2 Reports. On or before the 5th Business Day of each month through the month following termination of this Agreement, Subservicer shall forward to Servicer, Attn: Servicing Portfolio Management, 200 Old Wilson Bridge Road, Worthington, Ohio 43085, a copy of the month end delinquency report and loss mitigation report for the Mortgage Loans reflecting the current status for each Mortgage Loan including bankruptcy, foreclosure and collection status, and the month end delinquency report for all Agency Mortgage Loans subserviced by Subservicer for the preceding month. Upon reasonable request, Subservicer will provide Servicer with evidence substantiating its compliance with Agency Requirements including but not limited to those regarding Borrower counselling and bankruptcy and foreclosure monitoring requirements. On or before the 25th day (or the next Business Day if the 25th day is not a Business Day) of each month (unless an earlier date is required by Servicer to allow for combining of reports of Servicer and its other affiliates as required by GNMA, which date will be subsequently identified), through the month following termination of this Agreement, Subservicer shall provide Servicer, to Attn: Servicing Portfolio Management, Chase Manhattan Mortgage Corporation, 200 Old Wilson Bridge Road, Worthington, Ohio 43085, with copies of all required standard FNMA, FHLMC and GNMA month end cut-off reports and applicable copies of standard pool and loan level accounting and reconciliation reports, all relating to the preceding month. Subservicer shall, at Servicer's expense which expense shall not exceed fifty dollars ($50.00) per month, monthly, within five (5) Business Days of month end, provide to Servicer a servicing data tape in form approved by Servicer (a copy of such form is attached hereto as Exhibit C), for Servicer's use in valuation of the Servicing. Subservicer shall, upon reasonable request of Servicer, provide such other information or reports not previously agreed to in this Agreement as may be requested by Servicer. Such requests shall be reimbursed by Servicer in an amount previously approved by Servicer. 6. REPRESENTATIONS, WARRANTIES, AND COVENANTS 10 11 6.1 Subservicer's Representations, Warranties and Covenants. A. As an inducement to Servicer to enter into this Agreement, Subservicer represents and warrants that the following are true as of the execution of this Agreement and further represents and warrants that the following will continue to be true through and including the final Transfer Date, unless another date is specified: (1) Due Incorporation and Good Standing. Subservicer is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction during the time of its activities with respect to the Mortgage Loans. Subservicer is properly licensed, qualified and in good standing to transact business in all appropriate jurisdictions and to conduct all activities performed with respect to subservicing of the Mortgage Loans. (2) Authority and Capacity. Subservicer has all requisite corporate power, authority and capacity to enter into this Agreement and to perform the obligations required of it hereunder. This Agreement constitutes a valid and legally binding agreement of Subservicer enforceable in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency and similar laws and equitable principles affecting the enforceability of the rights of creditors generally. (3) Effective Agreement. The execution, delivery and performance of this Agreement by Subservicer, its compliance with the terms hereof and consummation of the transactions contemplated hereby will not violate, conflict with, result in a breach of, constitute a default under, be prohibited by or require any additional approval under its charter, bylaws, or any instrument or agreement to which it is a party or by which it is bound or which affects the Mortgage Loans, including but not limited to the servicing agreements related to the Mortgage Loans, or any state or federal law, rule, or regulation or any judicial or administrative decree, order, ruling or regulation applicable to it or to the servicing of the Mortgage Loans. (4) Compliance with Contracts and Regulations. Subservicer has complied with all material obligations under all contracts to which it is or was a party, and with all applicable federal, state and local laws and regulations with respect to and which affect the servicing of the Mortgage Loans. The laws and regulations which Subservicer has complied with include but are not limited to all applicable Agency Requirements. Subservicer has done, and will do, no act or thing which will materially adversely affect the servicing of the Mortgage Loans or the Mortgage Loans. 11 12 (5) Related Escrow Account Maintenance. All related escrow accounts are being maintained in accordance with applicable law and Agency Requirements, and in accordance with the Servicing Agreements and the terms of the Mortgages related thereto. Except as to payments which are past due under the Notes, all escrow balances required by the Mortgages and paid to Subservicer for the account of the Borrowers and Subservicer are on deposit in the appropriate escrow/impound accounts. All funds received by the Subservicer in connection with the Mortgage Loans, including, without limitation, foreclosure proceeds, hazard insurance proceeds, condemnation proceeds and principal reductions, have promptly been deposited in the appropriate account, and all such funds have been applied to reduce the principal balance of the Mortgage Loans in question, or for reimbursement or repairs to the Mortgaged Property or as otherwise required by applicable law and the Agency Requirements. There are no pledged accounts in lieu of escrow deposits. (6) Litigation; Compliance with Laws. There is and shall be no litigation, proceeding or governmental investigation existing or pending or to the knowledge of Subservicer threatened, or any order, injunction, decree or settlement agreement outstanding against or relating to Subservicer or the servicing of the Mortgage Loans or the Mortgage Loans, which may have a material adverse effect upon the business, operations, assets or financial condition of Subservicer or which may impair the ability of Subservicer to perform its obligations under this Agreement, nor does Subservicer know of any basis for any such litigation, proceeding or governmental investigation. Subservicer has not violated and will not violate any applicable law, regulation, ordinance, order, injunction, decree or settlement agreement, nor any other requirement of any governmental body or court, which may materially affect any of the Mortgage Loans or the servicing of the Mortgage Loans. For purposes of this Section 4.6, "litigation" shall include a suit for damages alone and shall not require that a specific performance remedy or injunction impacting the transfer of the servicing be pending. (7) Ability to Perform. Subservicer 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. (8) Statements Made. As of the date of execution of this Agreement, no representation, warranty or written statement made by Subservicer, in connection with this Agreement, or any exhibit, schedule, data tape, statement or certificate furnished to Servicer by Subservicer, in connection with the transactions contemplated hereby by Subservicer contains or will contain any untrue statement of a material fact or omits or will omit to 12 13 state a material fact necessary to make the statements contained herein or therein not misleading. (9) Insolvency. Subservicer has not (i) admitted in writing its inability to pay its debts generally as they become due, (ii) filed a petition to take advantage of any applicable insolvency or reorganization statute, (iii) made an assignment for the benefit of its creditors or (iv) voluntarily suspended payment of any of its obligations. (10) Agency Requirements. Subservicer has performed all material obligations to be performed under Agency Requirements, and no event has occurred and is continuing which, but for the passage of time or the giving of notice or both, would constitute an event of default thereunder. Subservicer is an approved seller/servicer/issuer in good standing with FNMA, FHLMC and GNMA. (11) Audits. Subservicer has not been the subject of allegations of material failure to comply with applicable servicing or claims procedures, in its most recent Agency or PMI policy provider audits (if any). (12) Compliance with Insurance Contracts. Subservicer has complied with all material obligations under all applicable insurance contracts, including hazard, flood and private mortgage insurance contracts, with respect to, and which affect any of the servicing of the Mortgage Loans. Subservicer has not taken any action or failed to take any action which might cause the cancellation of or otherwise affect any of the insurance contracts. (13) Accuracy of Servicing Information. The information provided by Subservicer to Servicer pursuant to this Agreement is true and correct, in all material respects. (14) Errors and Omissions Policy. Subservicer has in full force and effect an adequate errors and omissions policy or policies satisfying all Agency Requirements with respect to its servicing operations and a standard mortgage bankers blanket bond. (15) Financial Condition of Subservicer/Regulatory Approval. 13 14 Subservicer is not in receivership, conservatorship or bankruptcy. Subservicer is not operating pursuant to any restrictive operating agreement or order mandated by the OTS, the FDIC or any federal or state regulatory body. B. Subservicer covenants that it shall subservice the loans hereunder in accordance with the terms of this Agreement. Subservicer shall notify Servicer of all employees currently under employment agreements with Subservicer or who are entitled to receive any additional compensation conditioned on continued employment through a designated future date. In addition, Subservicer shall provide Servicer advance (i.e. with reasonable time to comment) notification of the granting of any employment agreement or additional compensation conditioned on continued employment through a designated future date. Subservicer further covenants that during the period of time that Subservicer is performing its services hereunder, it will not make any of the following significant changes in its operations, without the prior written consent of the Servicer, which consent shall not be unreasonably withheld: Any servicing system change to a system which is not generally accepted in the industry as customary and competent of handling large loan volume. Operational changes in lockbox operations, loan numbers, force placed insurance carriers, or which are associated with any change in a significant vendor (vendors whose services earn fees in excess of $500,000 per year). Operational changes which require a waiver of an Agency. The outsourcing of any servicing obligation done by Subservicer internally as of December 31, 1996. A change in the ownership structure of Subservicer. In addition, Subservicer shall timely notify Servicer of any operational changes which must be made by Subservicer at the request of any Agency. C. Subservicer covenants that as of the date indicated below, it will provide evidence to Servicer of the following: (1) That as of June 1, 1997, Subservicer will have in place a disaster recovery plan which will operate in accordance with Agency Requirements. 14 15 (2) That as of June 1, 1997, Subservicer's escrow analysis department will have procedures in place to adequately report on the placement and removal of stop analysis flags on Mortgage Loans. (3) That by the Transfer Date, as defined in the Sale Agreement, Subservicer will have ensured that the integrity of the Mortgage Loan data on its servicing system is acceptable under Agency Requirements. (4) That as of June 1, 1997, Subservicer's customer service department will be adequately staffed to meet the following customer service performance parameters: Phone call blockage cannot exceed 10%. A phone call abandonment rate of less than 6%. An eighty percent (80%) probability that a phone call will be answered within ninety (90) seconds. Phones must be available for Borrowers between 8:15 a.m. and 8 p.m. eastern time. (5) That as of June 1, 1997, Subservicer will have in place an active procedure to ensure that complaints of a discriminatory basis, or which have been made to regulators or to the Agencies and forwarded to Subservicer, are dealt with at a senior officer level. (6) That as of June 1, 1997, Subservicer's bankruptcy department will be performing escrow analyses, in accordance with Agency Requirements, on Mortgage Loans for which the Borrower has filed for protection under the Bankruptcy Code. (7) That as of June 1, 1997, Subservicer will have in place a proactive loss mitigation function which complies with Agency Requirements. (8) That by March 1, 1997, Subservicer's Assumptions Department will be reporting its mortgage record change notices to the FHA by electronic transmission, as required by HUD, and not by tape, unless such date is extended by HUD. Additionally, by June 1, 1997, Subservicer's Assumptions Department will have procedures in place to ensure compliance with Applicable Laws, including but not limited to such reporting as is required under the Home Mortgage Disclosure Act (HMDA) and such early disclosures as are required by the Real Estate Settlement Procedures Act and the Truth in Lending Act. 15 16 (9) That by June 1, 1997, Subservicer will have performed a full audit of the adjustable rate Mortgage Loans which Subservicer acquired as part of its acquisition from Empire. (10) That by June 1, 1997, Subservicer will have procedures in place to (i) properly report to HUD the total payment amount on the HUD 300 for Mortgage Loans with Escrow Account shortage spreads and (ii) ensure that unapplied HUD 235 subsidies are being reconciled timely each month to the HUD billings and to the loan level detail. Note: Items set forth above which must be completed by a date after the date on which this Agreement is, pursuant to the provisions of Section 7, scheduled to terminate, must be completed under the terms of this Agreement only if this Agreement is, by mutual consent, extended beyond its currently anticipated term. 6.2 Servicer's Representations, Warranties and Covenants A. Servicer hereby makes, as if fully restated herein, the representations and warranties of Purchaser set forth in Article VI of the Sale Agreement, which are hereby incorporated herein by this reference, as if they were fully restated. B. Servicer covenants that it will perform its duties hereunder in accordance with the terms of this Agreement. C. Servicer shall inform Subservicer in writing of any action that Servicer contracts for which requires any action on the part of Subservicer, and Servicer shall hold Subservicer harmless from and against any acts or omissions of Subservicer resulting from Servicer's failure to give such notice. 7. TERMINATION This Agreement shall terminate (i) as of close of business on the Approval Date, or if the approvals required by the Approval Date are not obtained by June 1, 1997, by June 1, 1997, unless extended by mutual agreement of the parties or (ii) by mutual consent of Servicer and Subservicer, in writing. This Agreement may be terminated by Servicer at an earlier time for cause, upon sixty (60) days written notice, if one or more of the following events of default by Subservicer shall occur and be continuing: (a) any failure by Subservicer to remit to the Agency and/or Servicer any material (individually or in the aggregate) payment required to be made by Subservicer under the terms of this Agreement or Agency Requirements which continues unremedied for a period of one (1) Business Day after the earlier of: (i) discovery by Subservicer of such non- 16 17 payment; or (ii) the date upon which written notice of such failure, requiring the same to be remedied, shall have been given to Subservicer by Servicer or the Agency, (b) failure on the part of Subservicer duly to observe or perform in any material respect any other of the covenants or agreements on the part of Subservicer set forth in this Agreement which continue unremedied for a period of thirty (30) days, or (with notice to Subservicer) such shorter cure period as may be permitted by the Agency after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to Subservicer by Servicer or the Agency; (c) a decree or order of a court or agency or supervisory authority having jurisdiction for the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against Subservicer and such decree or order shall have remained in force undischarged or unstated for a period of thirty (30) days; (d) Subservicer shall consent to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to Subservicer or relating to all or substantially all of its property; (e) Subservicer shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; or (f) Subservicer shall cease to be eligible to sell mortgage loans to or service mortgage loans for the Agency; then, and in each and every such case, so long as an event of default shall not have been remedied, Servicer by notice in writing to Subservicer may, in addition to whatever rights Servicer may have at law or in equity, to damages, including injunctive relief and specific performance, terminate all the rights and obligations of Subservicer without incurring any penalty or fee of any kind whatsoever in connection therewith. On or after the receipt by Subservicer of such written notice, all authority and power of Subservicer under this Agreement shall cease. Upon such termination, Subservicer shall promptly prepare, execute and deliver any and all documents and other instruments, all Servicing Files (as defined in the Sale Agreement), and do or accomplish all other acts or things, all in accordance with the servicing transfer instructions (as set forth in the Sale Agreement or as otherwise provided by Servicer), Agency Requirements and Applicable Law, necessary or appropriate to effect the purposes of such notice of termination at Subservicer's sole cost. Subservicer agrees to cooperate with Servicer in effecting the termination of Subservicer's responsibilities and rights hereunder, including, without limitation the transfer to Servicer or its designee, in 17 18 accordance with the terms of the servicing transfer instructions (as set forth in the Sale Agreement or as otherwise provided by Servicer), the Sale Agreement and Agency Requirements, for administration by it of all Subservicing Accounts which are at the time maintained by Subservicer relative to the Mortgage Loans. In the event this Agreement is terminated by Servicer for cause due to an event of default by Subservicer, then Subservicer shall reimburse Servicer for any losses, damages and reasonable out-of-pocket expenses that Servicer suffers as a result of termination prior to the Transfer Date which losses shall include, but not be limited to the following: (i) all costs incurred in transferring the Servicing to Servicer or its designee (including cost of transferring electronic data or transferring onto a different technological platform); (ii) any reasonable (given the circumstances that exist at the time) increase in amount over and above the Subservicing Fee which Servicer is required to pay to a third party subservicer to subservice the Mortgage Loans prior to the Transfer Date; (iii) any penalties which may be assessed by any party; and (iv) reasonable attorney fees and costs. 8. INDEMNITY; BONDING 8.1 Indemnification of Servicer. Subservicer agrees to indemnify and hold Servicer harmless from and against any and all claims, losses, damages and reasonable out-of-pocket expenses arising out of or in any way related to breach of any representation, warranty or covenant set forth in this Agreement. 8.2 Indemnification of Subservicer. Servicer agrees to indemnify and hold Subservicer harmless from any and all claims, losses, damages and reasonable out-of-pocket expenses arising out of or in any way related to breach of any representation, warranty or covenant set forth in this Agreement or any actions of Subservicer taken in compliance with written instruction from Servicer. 8.3 Survival. The indemnifications set forth in Sections 8.1 and 8.2 of this Agreement shall survive termination of this Agreement for a period of ten (10) years from the Sale Date (the "Survival Period"). Servicer may recover under this Section, provided that written notice of a claim shall have been given prior to the expiration of the Survival Period. Notwithstanding anything to the contrary in this Section 8.3, in the event that, prior to the expiration of the Survival Period, written notice of a claim for indemnification is given, and either the loss which is indemnifiable has not yet been incurred or litigation in connection with the claim for indemnification has not yet commenced, such claim shall survive beyond the Survival Period only if the threat of litigation arose within six (6) months prior to the expiration of the Survival Period (which threat is evidenced by written correspondence from an attorney) and litigation commences within six (6) months after expiration of the Survival Period. 8.4 Insurance. Subservicer shall maintain such insurance as may be required to maintain its status as an Agency approved Seller/Servicer. Subservicer shall maintain at Subsevicer's expense and keep in effect throughout the term hereof for itself, and for 18 19 Servicer as co-insured or loss payee, in accordance with Applicable Law and Agency Requirements, fidelity, theft and forgery bond coverage and errors and omissions insurance in amounts and with carriers satisfactory to the Agencies. Subservicer shall provide Servicer, upon written request, with evidence satisfactory to Servicer of its compliance with the requirements of this Subsection. In addition, Subservicer shall provide Servicer, or any person authorized by Servicer, full and complete access during reasonable business hours to copies of then-current policies of insurance required hereunder, given advance written notice of five (5) Business Days from Servicer to Subservicer. All such policies shall provide that they may not be canceled by the carrier without thirty (30) days' prior written notice to Servicer. 9. MISCELLANEOUS 9.1 No Joint Venture. Nothing herein shall be deemed or construed to create a co-partnership or joint venture between the parties hereto, and the services of Subservicer shall be rendered as an independent contractor. 9.2 Waiver. No delay, failure or discontinuance of either party in exercising any right, power or remedy under this Agreement, shall affect or operate as a waiver of such right, power or remedy, nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by either party of any breach or default under this Agreement must be in writing and shall be effective only to the extent set forth in such writing. 9.3 Successors; Assignment. Subservicer does not have the right to sell, assign, delegate or otherwise transfer its rights or obligations under this Agreement to a third party without obtaining the prior written consent of Servicer. Servicer reserves the right in its reasonable discretion to approve the new subservicer. In determining the acceptability of the new subservicer, Servicer may consider such subservicer's reputation in the industry, financial status, approval status with the Agencies, as well as with private investors and regulators, status as a competitor to Servicer, and ability to service non-standard mortgage products. Subject to the restrictions on assignment set forth in this Agreement and the Sale Agreement, this Agreement shall be binding on and inure to the benefit of the successors and assigns of the parties. Any assignment shall not release Subservicer from liability hereunder for acts or omissions of Subservicer prior to such assignment. Any assignee shall assume all of Subservicer's obligations hereunder, as well as assume the performance of all functions related to the transfer of the Servicing on the Transfer Date, as set forth in Exhibit D and Exhibit E. Additionally, any assignee shall, as of the date of assignment, make all of those representations and warranties required of Subservicer hereunder in reference to this Agreement. 19 20 Should Servicer choose to resell portions of the Servicing portfolio due to no fault of the Subservicer, Subservicer shall reasonably cooperate with Servicer and its assignee or designee to affect due diligence and transfer. In such event, Subservicer shall not be responsible for any out-of-pocket expenses related to such sale that it would not have otherwise incurred in connection with transferring the Mortgage Loans to Servicer. In no event, other than Subservicer Default or as mutually agreed by the parties, shall the Mortgage Loans be transferred before the Transfer Dates set forth in the Sale Agreement. The transfer dates associated with any such transfer shall be agreed upon in accordance with the terms of this Agreement and the Sale Agreement. 9.4 Entire Agreement; Amendment. This Agreement and the Sale Agreement and Exhibits and Schedules thereto constitute the entire agreement between Subservicer and Servicer with regard to subservicing the Mortgage Loans and supersedes all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof and may be amended or modified only by a written instrument executed by each party hereto. 9.5 Notices. All notices, requests and demands given to or made upon any party hereto must be in accordance with Section 11.11 of the Sale Agreement. 9.6 Time. Time is of the essence of each and every provision of this Agreement. 9.7 Severability of Provisions. If any provision of this Agreement shall be prohibited by or deemed invalid under Applicable Law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. 9.8 Ohio Law Applicable. This Agreement shall be governed by and construed in accordance with the law of the State of Ohio. 9.9 Solicitation of Mortgages. Neither Subservicer nor any affiliate or agent of Subservicer shall, during the remaining term of any of the Mortgage Loans, take any action to personally, by telephone, by mail or otherwise, directly or indirectly, solicit the prepayment or modification of the Mortgage Loans, in whole or in part, or offer any Borrower any other mortgage or non-mortgage related products. Notwithstanding the foregoing, it is understood and agreed that promotions which are directed to the general public, including, without limitation, mass mailings based on commercially acquired mailing lists, newspaper, radio and television advertisements, shall not constitute solicitations under this paragraph. 9.10 Cooperation. To the extent reasonably possible, the parties hereto shall cooperate with and assist each other, as requested, in carrying out the other's covenants, agreements, duties and responsibilities under this Agreement and in connection herewith shall 20 21 execute and deliver all such documents and instruments as shall be necessary and appropriate in the furtherance thereof. 9.11 Confidentiality of Information. Except as otherwise required law, Subservicer and Servicer and their affiliates shall, and shall cause their respective directors, officers, employees and authorized representatives to, hold in strict confidence and not use or disclose to anyone without the prior written consent of the other party all information concerning customers or proprietary business procedures, servicing fees or prices, policies or plans of the other party or any of its affiliates received by them from the other party in connection with the transactions contemplated hereby. 9.12 Supplementary Information. From time to time, upon reasonable notice, prior to and after the Transfer Date, Subservicer shall furnish Servicer such incidental information, which is reasonably available to Subservicer, supplementary to the information contained in the documents and schedules delivered pursuant hereto, as Purchaser may reasonably request within ten (10) years of the Sale Date. Any request for information under this Section which is in reference to information which was not required to have been provided under the terms of this Agreement shall be fulfilled at the reasonable expense of Purchaser. 9.13 Set-off. Servicer agrees that Subservicer may, at its option, deduct from any payment due Servicer under the terms of this Agreement, any monies due to Subservicer under the terms of this Agreement and based upon Servicer's failure to make payment to Subservicer as required under the terms of this Agreement. 21 22 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written. SERVICER: CHEMICAL MORTGAGE COMPANY ATTEST: BY:______________________________ _________________________ NAME:____________________________ TITLE:___________________________ DATE:____________________________ SUBSERVICER: SOURCE ONE MORTGAGE SERVICES CORPORATION ATTEST: BY:______________________________ _________________________ NAME:____________________________ TITLE:___________________________ DATE:____________________________ 22 23 Exhibit A - Mortgage Loan Listing Exhibit B - Approved Vendors Exhibit C - Tape Format Exhibit D - Transfer Obligations Exhibit E - Transfer Instructions 23 EX-10.(FF) 10 EXHIBIT 10(FF) 1 EXHIBIT 10(ff) MORTGAGE LOAN SUBSERVICING AGREEMENT THIS MORTGAGE LOAN SUBSERVICING AGREEMENT ("Agreement") is made as of close of business on the Approval Date, by and between CHEMICAL MORTGAGE COMPANY, an Ohio corporation, with offices at 200 Old Wilson Bridge Road, Worthington, Ohio 43085-8500 ("Servicer") and SOURCE ONE MORTGAGE SERVICES CORPORATION, with offices located at 27555 Farmington Road, Farmington Hills, Michigan 48334-3357 ("Subservicer"). RECITALS A. WHEREAS, Subservicer is engaged as an independent contractor in the business of servicing loans and performs servicing functions for various investors; B. WHEREAS, Servicer has contracted with Subservicer to perform the administration and subservicing of certain mortgage loans ("Mortgage Loans") the servicing rights to which were purchased by Servicer from Subservicer pursuant to a FNMA/FHLMC/GNMA Mortgage Servicing Purchase and Sale Agreement between Servicer and Subservicer, dated as of February 28, 1997 ("Sale Agreement"); and C. WHEREAS, pursuant to the terms of such Sale Agreement, Subservicer shall perform the servicing obligations on the Mortgage Loans during the Subservicing Period in accordance with the terms of this Agreement; and D. WHEREAS, such servicing obligations shall be performed under Servicer's seller/servicer identification numbers; and E. WHEREAS, Servicer and Subservicer desire to formalize and state the terms and conditions which shall govern the subservicing and administration of such Mortgage Loans by Subservicer. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS The following terms shall have the meaning set forth after each: 1.1 Accepted Practices. Prudent mortgage banking practices for similar loans. 1.2 Advances. All customary and necessary out-of-pocket costs and expenses incurred in accordance with Agency Requirements and the Loan Documents with regard to performance by Subservicer of its subservicing obligations, including, but not limited to, advances of principal, interest (including Shortfall Interest), taxes, insurance, foreclosure and bankruptcy expenses and guarantee fees. 2 1.3 Agency: FNMA, FHLMC and/or GNMA, individually and collectively, as applicable. 1.4 Agency Requirements: The rules, regulations, announcements, notices, directives and instructions of the Agency, as applicable, including, without limitation, the Agency contracts or commitments (which contracts or commitments incorporate by reference all applicable Agency Selling and Servicing Guides and the underlying FHA and/or VA rules, regulations and requirements) with respect to the Mortgage Loans, and any revisions to same. 1.5 Ancillary Fees: Reasonable and customary fees acceptable to the Agencies and collected by servicers as income incidental to the servicing of the Mortgage Loans such as late fees, insurance administration fees and commissions, processing fees and assumption fees, which Ancillary Fees shall not, without the consent of Servicer (which consent shall not be unreasonably withheld as to inflationary increases in fee amount or as to an additional fee type dictated by the Agencies), exceed, in fee amount or type, the fees charged by Subservicer as of November 28, 1996. 1.6 Applicable Law: All federal, state and local laws, rules and regulations, as amended from time to time, applicable to the Mortgage Loans, the Servicing, Subservicer and/or the performance by Subservicer of its duties hereunder including but not limited to the Truth in Lending Act, the Real Estate Settlement Procedures Act ("RESPA" including the provisions set forth in the regulations enacted under the Cranston-Gonzalez amendment), The Fair Credit Reporting Act, The Equal Credit Opportunity Act, The Flood Disaster Protection Act and laws relative to escrow administration, usury, due on sale and loan servicing. 1.7 Borrower. Any person obligated under the promissory note or other instruments evidencing and securing a Mortgage Loan. 1.8 Business Day. A day or a portion thereof during which both Servicer and Subservicer are open for business, other than Saturday or Sunday, or any legal holiday. 1.9 Custodial Account[s]. The accounts maintained in accordance with Applicable Law and Agency Requirements for the deposit of principal and interest payments in respect of one or more Mortgage Loans. 1.13 Escrow Account[s]. Any amounts collected from a Borrower for the purpose of paying, on behalf of the Borrower, hazard insurance premiums, mortgage insurance premiums, taxes, assessments and other similar items as required or permitted under the Loan Documents. 1.10 FNMA. The Federal National Mortgage Association. 1.11 FHLMC. The Federal Home Loan Mortgage Corporation. 2 3 1.12 GNMA. The Government National Mortgage Association. 1.14 Investor. FNMA, FHLMC and/or GNMA, as applicable. 1.15 Mortgage Loan[s]. The conventional and government mortgage loans, the Servicing associated therewith being the subject of this Agreement and having been transferred from Subservicer to Servicer pursuant to the Sale Agreement, a listing of which is attached hereto as Exhibit A. 1.16 Loan Documents. Any promissory note, deed of trust, mortgage, assignment, guaranty, title insurance policy, mortgage insurance policy, or other instrument or document executed, issued or obtained in connection with a Mortgage Loan. 1.17 Mortgaged Property. The property which is the subject of each security agreement, mortgage or deed of trust securing repayment of the debt evidenced by the Loan Documents. 1.18 REO (Real Estate Owned). Properties acquired through foreclosure or by acceptance of a deed in lieu of foreclosure on behalf of Servicer or the Investor. 1.19 Sale Agreement. As defined in the recitals. 1.20 Servicing. As defined in the Sale Agreement. 1.21 Shortfall Interest. The Mortgage Loan curtailment or payoff interest which is required to be paid to the Agency but which the Borrower is not obligated to pay. 1.22 Subservicing Accounts: The Escrow Accounts and Custodial Accounts established pursuant to this Agreement. 1.23 Subservicing Fee: The compensation to be paid to Subservicer for subservicing performed under this Agreement which shall be equal to Five Dollars ($5.00) per each Mortgage Loan for which the Investor is FNMA or FHLMC, and Six Dollars ($6.00) per each Mortgage Loan for whom GNMA is the Investor, in existence on the first day of each month during the term of this Agreement. Defined terms used in this Agreement but not defined herein, shall have the meanings ascribed to such terms in the Sale Agreement. 2. SUBSERVICING DUTIES Subservicer shall have the following obligations with respect to all Mortgage Loans: 3 4 2.1 General Servicing Responsibilities. Subservicer shall undertake all actions, with regard to the servicing and administration of the Mortgage Loans, whether or not specifically outlined in this Agreement, including, but not limited to, the advancing of funds, all in accordance with the terms and conditions of the Loan Documents, Agency Requirements, Applicable Law and this Agreement. Such actions shall be undertaken in accordance with Accepted Practices. To the extent of any conflict between the terms and conditions of this Agreement and the Agency Requirements, the Agency Requirements shall control. As to vendors utilized by Subservicer in connection with the performance of its obligations hereunder, whose services earn fees in excess of $500,000 per year, Subservicer shall obtain the written approval of Servicer to any change from a vendor currently utilized by Subservicer, which approval shall not be unreasonably withheld. Servicer has approved all vendors utilized by Subservicer as of the date of execution of this Agreement. Attached hereto as Exhibit B is a list of such vendors which have been approved by Servicer. 2.2 Collections. Subservicer shall proceed diligently to collect all sums which become due under the Loan Documents as if Subservicer were servicing the Mortgage Loans for its own account, including without limitation principal, whether or not prepaid, interest, late charges, prepayment fees, private mortgage insurance premiums, fire, flood, earthquake and other hazard insurance premiums, and taxes, assessments and other similar charges, all in accordance with Agency Requirements. Concerning Mortgage Loans for which the Subservicer drafts monthly payments electronically from the Borrower's bank account, such drafting occurs in compliance with Agency Requirements, and the applicable agreement with the Borrower. 2.3 Insurance. A. Subservicer shall undertake all actions necessary to ensure that fire, flood, earthquake and other hazard insurance required by the Agency is maintained by each Borrower on the Mortgaged Property in accordance with Agency Requirements. Where any such required insurance coverage is allowed to lapse, whether or not due to Borrower's fault or negligence, Subservicer shall, immediately upon knowledge of such lapse, promptly obtain new insurance in accordance with Agency Requirements and the Loan Documents. Subservicer shall maintain records of all such insurance coverage in accordance with Agency Requirements. B. Upon receiving notice of any event which constitutes a loss under any policy of insurance relative to a Mortgage Loan, Subservicer shall undertake appropriate action, including the filing of all necessary claims, to permit full recovery of such loss under the policy of insurance. If a claim ("Claim") is made under a fire, flood, earthquake or other hazard insurance policy, Subservicer is authorized to settle such Claim, collect the insurance proceeds, 4 5 make any arrangements with respect to restoration or rehabilitation of the Mortgaged Property and disburse insurance proceeds in accordance with Agency Requirements, the Loan Documents and Applicable Law. Subservicer will cause an inspection(s) to be made so as to assure itself that the Mortgaged Property has been satisfactorily repaired in accordance with Agency Requirements and shall, if the loss is in excess of $5,000, secure a statement from the Borrower indicating satisfaction with the repairs. C. Any Mortgage Loan involved with any type of optional insurance has been properly serviced, including, without limitation, the proper application and collection of premiums, the maintenance of complete and accurate records, processing and payment of claims and the handling of correspondence. 2.4 Escrow Accounts. Subservicer shall take all actions necessary to ensure that each Mortgage Loan Escrow Account is maintained in an FDIC insured depository institution in accordance with Agency Requirements and Applicable Law. Subservicer shall be responsible for all matters relating to the administration of the Escrow Accounts, including without limitation: the deposit of funds to the Escrow Accounts no later than the next Business Day after receipt; the disbursement of funds to the proper parties when and if due in payment of the items for which such Escrow Accounts are established; payment of interest to Borrowers on funds deposited into such Escrow Accounts to the extent required by Applicable Law (and Subservicer shall receive reimbursement from the Servicer for its payment of interest to Borrowers on funds deposited into such Escrow Account in accordance with this Agreement); and maintenance of all books and records with respect to such Escrow Accounts, all in accordance with Applicable Law and Agency Requirements. Servicer shall have the right to all income and other benefits derived from the Escrow Accounts. The Escrow Accounts shall be held in an institution designated by Servicer, established in the name of Servicer and titled as mutually agreed by the parties for the benefit of Servicer, the Agency and the Borrowers, as their interests appear. Servicer shall permit Subservicer to have access to such Escrow Accounts to make deposits and disbursements in accordance with the terms of this Agreement. Subservicer shall provide all statements with regard to such Escrow Accounts as required in compliance with Applicable Law, including but not limited to RESPA. 2.5 Mortgage, Insurance. Subservicer shall keep all records, provide all notices and undertake all other actions which may be required to preserve and enforce all rights of Servicer under any private mortgage insurance applicable to the Mortgage Loans in accordance with Agency Requirements and the applicable policy of private mortgage insurance. 2.6 Delinquencies, Bankruptcy and Foreclosure. Subservicer shall handle all Mortgage Loan delinquencies and bankruptcies and conduct all Mortgage Loan foreclosures in strict accordance with Agency Requirements, the Loan Documents, Applicable Law and Accepted Practices so as to minimize the exposure and losses of Servicer and/or the Investor 5 6 on such Mortgage Loans. Subservicer's foreclosure responsibilities include timely mailing and recording of all required notices, procuring all necessary foreclosure guarantees, compliance with all Agency Requirements, including specifically, but not limited to, those related to loss mitigation and collection including referral to counselling; conducting the foreclosure sale and undertaking all necessary eviction proceedings to vacate the Mortgaged Property subject to the foreclosure and filing all appropriate claims with the applicable insurer or guarantor in a timely manner. Servicer shall grant to Subservicer limited corporate authority to allow Subservicer to execute satisfactions and bankruptcy and foreclosure documentation on Servicer's behalf. 2.7 REO's. At the option of Servicer and at Servicer's expense, Subservicer shall be responsible for the administration and maintenance of the Mortgaged Property following any foreclosure sale to the extent required by Agency Requirements; provided however that Subservicer shall pay, without reimbursement from Servicer, the first $1,000 of REO expense on REOs located outside of New York and the first $1,500 of REO expense on REOs located inside New York, for any REO which related to a Mortgage Loan for which a fee would have been due to Servicer as purchaser under the provisions of Section 7.24 of the Sale Agreement but for the fact that such Mortgage Loan did not transfer. All funds shall be held and remitted in accordance with Agency Requirements. In the event that the Agency or Servicer should require Subservicer to market the REO, Servicer agrees to pay Subservicer a fee for marketing the REO in an amount equal to one thousand five hundred dollars ($1,500) per REO or one percent (1%) of the REO sale price, whichever is greater. REO expense shall be reimbursed to Subservicer monthly, upon receipt of an invoice prepared by Subservicer. 2.8 Assumption and Other Modifications. Subservicer shall have full responsibility for processing applications for and documenting all assumptions and other modifications of the Mortgage Loans in accordance with Agency Requirements, Applicable Law and the Loan Documents. 2.9 Annual Statements. Subservicer shall annually prepare for each Borrower, without charge, written statements for each calendar year in compliance with the Internal Revenue Code of 1986, as amended, and any other Applicable Law. 2.10 Payoffs. Subservicer shall process all Mortgage Loan Payoffs and Loan Document satisfactions/reconveyances in compliance with Agency Requirements and Applicable Law. Subservicer shall not act or fail to act in any manner which may result in imposition of any penalty for late satisfaction/reconveyance of a Mortgage Loan. Servicer shall reimburse Subservicer for recording fees imposed for the recording of satisfactions/reconveyances required by applicable law to be recorded by the lender, and which cannot, under applicable law, be imposed upon the Borrower. 2.11 Reclassification of Delinquent Mortgage Loans: In the event that the Agency, or the Servicer, requires the Subservicer to reclassify a delinquent Mortgage Loan from a 6 7 pool into the Servicer's actual portfolio, Subservicer shall: (i) at the direction of the Servicer and/or the Agency, effect any required repurchase; (ii) if not already established, establish a new investor number on its system; (iii) open the appropriate escrow and custodial accounts; and (iv) report the Mortgage Loan under the Servicer's actual portfolio. Subservicer and Servicer shall perform all duties in connection with such reclassified Mortgage Loans as defined in this Agreement. 2.12 Notice of Relief Requested Pursuant to the Soldiers and Sailors Relief Act of 1940 or Similar Laws. Throughout the term of this Agreement, Subservicer shall notify Servicer of any notification received from any Borrower or other party with respect to any Mortgage Loan of a request for relief pursuant to or invoking any of the provisions of the Soldiers and Sailors Civil Relief Act of 1940 or similar state or federal law suspending payments of amounts due under the Note or the commencement of foreclosure proceedings. 3. DEPOSIT AND REMITTANCE OF FUNDS 3.1 Custodial Account. All funds applicable to the payment of principal and interest on Mortgage Loans shall be held in trust for the Investors in accordance with Agency Requirements and Applicable Law. Such funds shall be deposited, no later than the next Business Day following receipt, in a Custodial Account at an FDIC insured depository institution meeting Agency Requirements. The Custodial Account shall be held in an institution designated by Servicer, established in the name of Servicer and titled as mutually agreed by the parties for the benefit of Servicer and the Agency, as their interests appear. Servicer shall permit Subservicer to have access to such Custodial Account to make deposits and disbursements in accordance with the terms of this Agreement and Agency Requirements. Subservicer shall provide all statements and reports relative to the Custodial Account in accordance with Agency Requirements. Servicer shall be entitled to all interest earned on said Custodial Accounts. 3.2 Remittance of Custodial Funds. Subservicer shall remit all payments applicable to principal and interest, including without limitation prepayments of principal, less the servicing fee calculated and deducted pursuant to Section 3.5 of this Agreement, in accordance with Agency Requirements and shall make all principal and interest advances to the Agency pursuant to Agency Requirements. 3.3 Escrow Accounts. Deposits and withdrawals from the Escrow Accounts shall be in accordance with Section 2.4. 3.4 Reimbursement of Subservicer. Servicer will reimburse Subservicer for Advances and Shortfall Interest within one (1) Business Day of its receipt, on a Business Day, from Subservicer of a billing along with supporting documentation and a reconciliation of the prior amount paid and the current amount due. Servicer shall reimburse Subservicer on a monthly basis for any interest on escrow funds paid in the preceding month, within one 7 8 (1) Business Day of its receipt, on a Business Day, of an invoice substantiating such payments made. Servicer shall reimburse Subservicer for funds required in connection with repurchase and reclassification of a Mortgage Loan in accordance with Section 2.11, within one (1) Business Day of Servicer's receipt, on a Business Day, of an invoice substantiating such payments made. Servicer will wire the FNMA and GNMA guarantee fees to Subservicer within one (1) Business Day following its receipt, on a Business Day, of billing for the guarantee fees which will include the FNMA draft report. All requests for Advances or reimbursement hereunder shall be accompanied by a certification from an Assistant Vice President or high ranking or Servicer approved officer of Subservicer certifying that all such sums for which reimbursement of an advance is requested has or will be paid to the proper parties in accordance with Agency Requirements and Applicable Law and that all deposits and disbursements required to be made on or prior to the date of said certification have been made in accordance with Agency Requirements and Applicable Law. In the event of an improper payment to Subservicer, Subservicer shall make any appropriate payment back to Servicer within one (1) Business Day of its receipt, on a Business Day, of a demand for such payment together with supporting documentation. 3.5 Remittance to Servicer: Subservicer shall deduct monthly from each monthly payment received from a Borrower, an amount equal to one-twelfth of the annual servicing fee payable to Servicer pursuant to Agency Requirements. On or before the 10th Business Day of each month, Subservicer shall remit to Servicer the servicing fees pertaining to FNMA and GNMA servicing, net of the Subservicing Fee described in Section 4. On or before the 25th day of each month (or the next Business Day if the 25th day is not a Business Day), Subservicer shall remit to Servicer the servicing fees pertaining to FHLMC servicing, net of the Subservicing Fee described in Section 4. Along with such remittances, Subservicer shall provide a report, reasonably acceptable to Servicer, substantiating the amount remitted. All funds remitted under this section shall be sent by wire transfer of immediately available federal funds to the following account: Banc One Columbus, Ohio ABA No. 044000037 Credit Account No. 980116070 For: Chase Manhattan Mortgage Corporation Attention: Ed Reik 614-842-7210 3.6 Ownership of Escrow Accounts and Custodial Accounts: Subservicer acknowledges that the Escrow Accounts, Custodial Accounts and any collections it receives on the Mortgage Loans during the term of this Agreement (except for Ancillary Fees) are for the account of Servicer, the Borrowers or the Agency, as their interests may appear. 4. COMPENSATION 8 9 Subservicer shall receive as compensation, with respect to each Mortgage Loan serviced by it hereunder, the Subservicing Fee. Subservicer will also retain Ancillary Fees. 5. CUSTODY OF LOAN DOCUMENTS, BOOKS, RECORDS AND REPORTS 5.1 Documents, Books, Records. Subservicer shall either retain copies of all original Loan Documents required in connection with its subservicing obligations and delivered to Servicer or its designee pursuant to the Sale Agreement, or incur any expense in connection with obtaining such copies after delivery to Servicer or its designee. All Loan Documents shall be held and delivered by Subservicer to Servicer pursuant to the terms of the Sale Agreement. Subservicer acknowledges that Servicer alone owns the documents and records related to the Mortgage Loans and the Servicing, subject to the rights of the Agency, notwithstanding that the documents and/or the records may remain in the possession of Subservicer during the term hereof to facilitate the performance of subservicing activities described herein. Servicer shall instruct its custodian that certain authorized representatives of Subservicer may obtain release of Loan Documents, in accordance with Agency Requirements, directly from the custodian. Servicer shall reimburse Subservicer for the expense of obtaining any original document from a custodian in situations where the original is reasonably required (i.e. lien release or default proceedings when required by applicable law). Subservicer shall promptly provide the Servicer, on reasonable request, on a loan by loan basis, copies of all correspondence, reports, statements and other items regarding any Mortgage Loan. Subservicer shall maintain records with respect to each Mortgage Loan in accordance with Agency Requirements and Applicable Law, which shall include, without limitation the application of payments as received from the Borrower and all sums paid into and disbursed from any Escrow Account. Subservicer shall also place copies of all relevant documentation received or sent by Subservicer (**except on-line letters for which records are kept on the system**) during the term of this Agreement with regard to the Mortgage Loans in the Servicing File, as defined in the Sale Agreement, or in a separate foreclosure file, all of which will be delivered to Purchaser on the Transfer Date, as defined in the Sale Agreement. Servicer shall have the right at reasonable times and upon forty-eight (48) hours written notice, to inspect all books, records and practices of Subservicer which relate to the Mortgage Loans serviced under this Agreement. 5.2 Reports. On or before the 5th Business Day of each month through the month following termination of this Agreement, Subservicer shall forward to Servicer, Attn: Servicing Portfolio Management, 200 Old Wilson Bridge Road, Worthington, Ohio 43085, a copy of the month end delinquency report and loss mitigation report for the Mortgage Loans reflecting the current status for each Mortgage Loan including bankruptcy, foreclosure and collection status, and the month end delinquency report for all Agency Mortgage Loans subserviced by Subservicer for the preceding month. Upon reasonable request, Subservicer 9 10 will provide Servicer with evidence substantiating its compliance with Agency Requirements including but not limited to those regarding Borrower counselling and bankruptcy and foreclosure monitoring requirements. On or before the 25th day (or the next Business Day if the 25th day is not a Business Day) of each month (unless an earlier date is required by Servicer to allow for combining of reports of Servicer and its other affiliates as required by GNMA, which date will be subsequently identified), through the month following termination of this Agreement, Subservicer shall provide Servicer, to Attn: Servicing Portfolio Management, Chase Manhattan Mortgage Corporation, 200 Old Wilson Bridge Road, Worthington, Ohio 43085, with copies of all required standard FNMA, FHLMC and GNMA month end cut-off reports and applicable copies of standard pool and loan level accounting and reconciliation reports, all relating to the preceding month. Subservicer shall, at Servicer's expense which expense shall not exceed fifty dollars ($50.00) per month, monthly, within five (5) Business Days of month end, provide to Servicer a servicing data tape in form approved by Servicer (a copy of such form is attached hereto as Exhibit C), for Servicer's use in valuation of the Servicing. Subservicer shall, upon reasonable request of Servicer, provide such other information or reports not previously agreed to in this Agreement as may be requested by Servicer. Such requests shall be reimbursed by Servicer in an amount previously approved by Servicer. 6. REPRESENTATIONS, WARRANTIES, AND COVENANTS 6.1 Subservicer's Representations, Warranties and Covenants. A. As an inducement to Servicer to enter into this Agreement, Seller represents and warrants that the following are true as of the execution of this Agreement and further represents and warrants that the following will continue to be true through and including the final Transfer Date, unless another date is specified: (1) Due Incorporation and Good Standing. Subservicer is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction during the time of its activities with respect to the Mortgage Loans. Subservicer is properly licensed, qualified and in good standing to transact business in all appropriate jurisdictions and to conduct all activities performed with respect to subservicing of the Mortgage Loans. (2) Authority and Capacity. Subservicer has all requisite corporate power, authority and capacity to enter into this Agreement and to perform the obligations required of it hereunder. This Agreement constitutes a valid and legally binding agreement of Subservicer enforceable in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency and similar laws and equitable principles affecting the enforceability of the rights of creditors generally. 10 11 (3) Effective Agreement. The execution, delivery and performance of this Agreement by Subservicer, its compliance with the terms hereof and consummation of the transactions contemplated hereby will not violate, conflict with, result in a breach of, constitute a default under, be prohibited by or require any additional approval under its charter, bylaws, or any instrument or agreement to which it is a party or by which it is bound or which affects the Mortgage Loans, including but not limited to the servicing agreements related to the Mortgage Loans, or any state or federal law, rule, or regulation or any judicial or administrative decree, order, ruling or regulation applicable to it or to the servicing of the Mortgage Loans. (4) Compliance with Contracts and Regulations. Subservicer has complied with all material obligations under all contracts to which it is or was a party, and with all applicable federal, state and local laws and regulations with respect to and which affect the servicing of the Mortgage Loans. The laws and regulations which Subservicer has complied with include but are not limited to all applicable Agency Requirements. Subservicer has done, and will do, no act or thing which will materially adversely affect the servicing of the Mortgage Loans or the Mortgage Loans. (5) Related Escrow Account Maintenance. All related escrow accounts are being maintained in accordance with applicable law and Agency Requirements, and in accordance with the Servicing Agreements and the terms of the Mortgages related thereto. Except as to payments which are past due under the Notes, all escrow balances required by the Mortgages and paid to Subservicer for the account of the Borrowers and Subservicer are on deposit in the appropriate escrow/impound accounts. All funds received by the Subservicer in connection with the Mortgage Loans, including, without limitation, foreclosure proceeds, hazard insurance proceeds, condemnation proceeds and principal reductions, have promptly been deposited in the appropriate account, and all such funds have been applied to reduce the principal balance of the Mortgage Loans in question, or for reimbursement or repairs to the Mortgaged Property or as otherwise required by applicable law and the Agency Requirements. There are no pledged accounts in lieu of escrow deposits. (6) Litigation; Compliance with Laws. There is and shall be no litigation, proceeding or governmental investigation existing or pending or to the knowledge of Subservicer threatened, or any order, injunction, decree or settlement agreement outstanding against or relating to Subservicer or the servicing of the Mortgage Loans or the Mortgage Loans, which may have a material adverse effect upon the business, operations, assets or financial condition of Subservicer or which may impair the ability of Subservicer to perform its obligations under this Agreement, nor does Subservicer know of 11 12 any basis for any such litigation, proceeding or governmental investigation. Subservicer has not violated and will not violate any applicable law, regulation, ordinance, order, injunction, decree or settlement agreement, nor any other requirement of any governmental body or court, which may materially affect any of the Mortgage Loans or the servicing of the Mortgage Loans. For purposes of this Section 4.6, "litigation" shall include a suit for damages alone and shall not require that a specific performance remedy or injunction impacting the transfer of the servicing be pending. (7) Ability to Perform. Subservicer 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. (8) Statements Made. As of the date of execution of this Agreement, no representation, warranty or written statement made by Subservicer, in connection with this Agreement, or any exhibit, schedule, data tape, statement or certificate furnished to Servicer by Subservicer, in connection with the transactions contemplated hereby by Subservicer contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. (9) Insolvency. Subservicer has not (i) admitted in writing its inability to pay its debts generally as they become due, (ii) filed a petition to take advantage of any applicable insolvency or reorganization statute, (iii) made an assignment for the benefit of its creditors or (iv) voluntarily suspended payment of any of its obligations. (10) Agency Requirements. Subservicer has performed all material obligations to be performed under Agency Requirements, and no event has occurred and is continuing which, but for the passage of time or the giving of notice or both, would constitute an event of default thereunder. Subservicer is an approved seller/servicer/issuer in good standing with FNMA, FHLMC and GNMA. (11) Audits. Subservicer has not, been the subject of allegations of material failure to comply with applicable servicing or claims procedures, in its most recent Agency or PMI policy provider audits (if any). (12) Compliance with Insurance Contracts. Subservicer has complied with all material obligations under all applicable insurance contracts, including hazard, flood and private mortgage insurance contracts, with respect to, and which affect any of the servicing of the Mortgage Loans. Subservicer 12 13 has not taken any action or failed to take any action which might cause the cancellation of or otherwise affect any of the insurance contracts. (13) Accuracy of Servicing Information. The information provided by Subservicer to Servicer pursuant to this Agreement is true and correct, in all material respects. (14) Errors and Omissions Policy. Subservicer has in full force and effect an adequate errors and omissions policy or policies satisfying all Agency Requirements with respect to its servicing operations and a standard mortgage bankers blanket bond. (15) Financial Condition of Subservicer/Regulatory Approval. Subservicer is not in receivership, conservatorship or bankruptcy. Subservicer is not operating pursuant to any restrictive operating agreement or order mandated by the OTS, the FDIC or any federal or state regulatory body. B. Subservicer covenants that it shall subservice the loans hereunder in accordance with the terms of this Agreement. Subservicer shall notify Servicer of all employees currently under employment agreements with Subservicer or who are entitled to receive any additional compensation conditioned on continued employment through a designated future date. In addition, Subservicer shall provide Servicer advance (i.e. with reasonable time to comment) notification of the granting of any employment agreement or additional compensation conditioned on continued employment through a designated future date. Subservicer further covenants that during the period of time that Subservicer is performing its services hereunder, it will not make any of the following significant changes in its operations, without the prior written consent of the Servicer, which consent shall not be unreasonably withheld: Any servicing system change to a system which is not generally accepted in the industry as customary and competent of handling large loan volume. Any system conversion occurring during the time period less than five (5) months prior to any Transfer Date. Operational changes in lockbox operations, loan numbers, force placed insurance carriers, or which are associated with any change in a significant vendor (vendors whose services earn fees in excess of $500,000 per year). Operational changes which require a waiver of an Agency. 13 14 The outsourcing of any servicing obligation done by Subservicer internally as of December 31, 1996. A change in the ownership structure of Subservicer. In addition, Subservicer shall timely notify Servicer of any operational changes which must be made by Subservicer at the request of any Agency. C. Subservicer covenants that as of the date indicated below, it will provide evidence to Servicer of the following: (1) That as of June 1, 1997, Subservicer will have in place a disaster recovery plan which will operate in accordance with Agency Requirements. (2) That as of June 1, 1997, Subservicer's escrow analysis department will have procedures in place to adequately report on the placement and removal of stop analysis flags on Mortgage Loans. (3) That by the Transfer Date, as defined in the Sale Agreement, Subservicer will have ensured that the integrity of the Mortgage Loan data on its servicing system is acceptable under Agency Requirements. (4) That as of June 1, 1997, Subservicer's customer service department will be adequately staffed to meet the following customer service performance parameters: Phone call blockage cannot exceed 10%. A phone call abandonment rate of less than 6%. An eighty percent (80%) probability that a phone call will be answered within ninety (90) seconds. Phones must be available for Borrowers between 8:15 a.m. and 8 p.m. eastern time. (5) That as of June 1, 1997, Subservicer will have in place an active procedure to ensure that complaints of a discriminatory basis, or which have been made to regulators or to the Agencies and forwarded to Subservicer, are dealt with at a senior officer level. (6) That as of June 1, 1997, Subservicer's bankruptcy department will be performing escrow analyses, in accordance with Agency Requirements, on Mortgage Loans for which the Borrower has filed for protection under the Bankruptcy Code. 14 15 (7) That as of June 1, 1997, Subservicer will have in place a proactive loss mitigation function which complies with Agency Requirements. (8) That by March 1, 1997, Subservicer's Assumptions Department will be reporting its mortgage record change notices to the FHA by electronic transmission, as required by HUD, and not by tape, unless such date is extended by HUD. Additionally, by June 1, 1997, Subservicer's Assumptions Department will have procedures in place to ensure compliance with Applicable Laws, including but not limited to such reporting as is required under the Home Mortgage Disclosure Act (HMDA) and such early disclosures as are required by the Real Estate Settlement Procedures Act and the Truth in Lending Act. (9) That by June 1, 1997, Subservicer will have performed a full audit of the adjustable rate Mortgage Loans which Subservicer acquired as part of its acquisition from Empire. (10) That by June 1, 1997, Subservicer will have procedures in place to (i) properly report to HUD the total payment amount on the HUD 300 for Mortgage Loans with Escrow Account shortage spreads and (ii) ensure that unapplied HUD 235 subsidies are being reconciled timely each month to the HUD billings and to the loan level detail. 6.2 Servicer's Representations, Warranties and Covenants A. Servicer hereby makes, as if fully restated herein, the representations and warranties of Purchaser set forth in Article VI of the Sale Agreement, which are hereby incorporated herein by this reference, as if they were fully restated. B. Servicer covenants that it will perform its duties hereunder in accordance with the terms of this Agreement. C. Servicer shall inform Subservicer in writing of any action that Servicer contracts for which requires any action on the part of Subservicer, and Servicer shall hold Subservicer harmless from and against any acts or omissions of Subservicer resulting from Servicer's failure to give such notice. 7. TERMINATION 15 16 This Agreement shall terminate (i) on each of Transfer Dates set forth in the Sale Agreement with respect to the Mortgage Loans transferred on each such Transfer Date, or (ii) by mutual consent of Servicer and Subservicer, in writing. Irrespective of what is contained in the prior sentence relating to termination, Servicer retains the option to extend the term of this Agreement, for all or part of the Servicing, for interim periods of no less than one hundred fifty (150) days, for up to another two (2) years (e.g., up to February 28, 2000) at the same Subservicing Fee and in accordance with the terms of this Agreement. This Agreement may be terminated by Servicer at an earlier time for cause, upon sixty (60) days written notice, if one or more of the following events of default by Subservicer shall occur and be continuing: (a) any failure by Subservicer to remit to the Agency and/or Servicer any material (individually or in the aggregate) payment required to be made by Subservicer under the terms of this Agreement or Agency Requirements which continues unremedied for a period of one (1) Business Day after the earlier of: (i) discovery by Subservicer of such non-payment; or (ii) the date upon which written notice of such failure, requiring the same to be remedied, shall have been given to Subservicer by Servicer or the Agency, (b) failure on the part of Subservicer duly to observe or perform in any material respect any other of the covenants or agreements on the part of Subservicer set forth in this Agreement which continue unremedied for a period of thirty (30) days, or (with notice to Subservicer) such shorter cure period as may be permitted by the Agency after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to Subservicer by Servicer or the Agency; (c) a decree or order of a court or agency or supervisory authority having jurisdiction for the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against Subservicer and such decree or order shall have remained in force undischarged or unstated for a period of thirty (30) days; (d) Subservicer shall consent to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to Subservicer or relating to all or substantially all of its property; (e) Subservicer shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; or (f) Subservicer shall cease to be eligible to sell mortgage loans to or service mortgage loans for the Agency; 16 17 then, and in each and every such case, so long as an event of default shall not have been remedied, Servicer by notice in writing to Subservicer may, in addition to whatever rights Servicer may have at law or in equity, to damages, including injunctive relief and specific performance, terminate all the rights and obligations of Subservicer without incurring any penalty or fee of any kind whatsoever in connection therewith. On or after the receipt by Subservicer of such written notice, all authority and power of Subservicer under this Agreement shall cease. Upon such termination, Subservicer shall promptly prepare, execute and deliver any and all documents and other instruments, all Servicing Files (as defined in the Sale Agreement), and do or accomplish all other acts or things, all in accordance with the servicing transfer instructions (as set forth in the Sale Agreement or as otherwise provided by Servicer), Agency Requirements and Applicable Law, necessary or appropriate to effect the purposes of such notice of termination at Subservicer's sole cost. Subservicer agrees to cooperate with Servicer in effecting the termination of Subservicer's responsibilities and rights hereunder, including, without limitation the transfer to Servicer or its designee, in accordance with the terms of the servicing transfer instructions (as set forth in the Sale Agreement or as otherwise provided by Servicer), the Sale Agreement and Agency Requirements, for administration by it of all Subservicing Accounts which are at the time maintained by Subservicer relative to the Mortgage Loans. In the event this Agreement is terminated by Servicer for cause due to an event of default by Subservicer, then Subservicer shall reimburse Servicer for any losses, damages and reasonable out-of-pocket expenses that Servicer suffers as a result of termination prior to the Transfer Date which losses shall include, but not be limited to the following: (i) all costs incurred in transferring the Servicing to Servicer or its designee (including cost of transferring electronic data or transferring onto a different technological platform); (ii) any reasonable (given the circumstances that exist at the time) increase in amount over and above the Subservicing Fee which Servicer is required to pay to a third party subservicer to subservice the Mortgage Loans prior to the Transfer Date; (iii) any penalties which may be assessed by any party; and (iv) reasonable attorney fees and costs. 8. INDEMNITY; BONDING 8.1 Indemnification of Servicer. Subservicer agrees to indemnify and hold Servicer harmless from and against any and all claims, losses, damages and reasonable out-of-pocket expenses arising out of or in any way related to breach of any representation, warranty or covenant set forth in this Agreement. 8.2 Indemnification of Subservicer. Servicer agrees to indemnify and hold Subservicer harmless from any and all claims, losses, damages and reasonable out-of-pocket expenses arising out of or in any way related to breach of any representation, warranty or covenant set forth in this Agreement or any actions of Subservicer taken in compliance with written instruction from Servicer. 8.3 Survival. The indemnifications set forth in Sections 8.1 and 8.2 of this Agreement shall survive termination of this Agreement for a period of ten (10) years from 17 18 the Sale Date (the "Survival Period"). Servicer may recover under this Section, provided that written notice of a claim shall have been given prior to the expiration of the Survival Period. Notwithstanding anything to the contrary in this Section 8.3, in the event that, prior to the expiration of the Survival Period, written notice of a claim for indemnification is given, and either the loss which is indemnifiable has not yet been incurred or litigation in connection with the claim for indemnification has not yet commenced, such claim shall survive beyond the Survival Period only if the threat of litigation arose within six (6) months prior to the expiration of the Survival Period (which threat is evidenced by written correspondence from an attorney) and litigation commences within six (6) months after expiration of the Survival Period. 8.4 Insurance. Subservicer shall maintain such insurance as may be required to maintain its status as an Agency approved Seller/Servicer. Subservicer shall maintain at Subservicer's expense and keep in effect throughout the term hereof for itself, and for Servicer as co-insured or loss payee, in accordance with Applicable Law and Agency Requirements, fidelity, theft and forgery bond coverage and errors and omissions insurance in amounts and with carriers satisfactory to the Agencies. Subservicer shall provide Servicer, upon written request, with evidence satisfactory to Servicer of its compliance with the requirements of this Subsection. In addition, Subservicer shall provide Servicer, or any person authorized by Servicer, full and complete access during reasonable business hours to copies of then-current policies of insurance required hereunder, given advance written notice of five (5) Business Days from Servicer to Subservicer. All such policies shall provide that they may not be canceled by the carrier without thirty (30) days' prior written notice to Servicer. 9. MISCELLANEOUS 9.1 No Joint Venture. Nothing herein shall be deemed or construed to create a co-partnership or joint venture between the parties hereto, and the services of Subservicer shall be rendered as an independent contractor. 9.2 Waiver. No delay, failure or discontinuance of either party in exercising any right, power or remedy under this Agreement, shall affect or operate as a waiver of such right, power or remedy, nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by either party of any breach or default under this Agreement must be in writing and shall be effective only to the extent set forth in such writing. 9.3 Successors; Assignment. Subservicer does not have the right to sell, assign, delegate or otherwise transfer its rights or obligations under this Agreement to a third party without obtaining the prior written consent of Servicer. Servicer reserves the right in its reasonable discretion to approve the new subservicer. In determining the acceptability of the new subservicer, Servicer may consider such subservicer's reputation in the industry, 18 19 financial status, approval status with the Agencies, as well as with private investors and regulators, status as a competitor to Servicer, and ability to service non-standard mortgage products. Subject to the restrictions on assignment set forth in this Agreement and the Sale Agreement, this Agreement shall be binding on and inure to the benefit of the successors and assigns of the parties. Any assignment shall not release Subservicer from liability hereunder for acts or omissions of Subservicer prior to such assignment. Any assignee shall assume all of Subservicer's obligations hereunder, as well as assume the performance of all functions related to the transfer of the Servicing on the Transfer Date, as set forth in Exhibit D and Exhibit E. Additionally, any assignee shall, as of the date of assignment, make all of those representations and warranties required of Subservicer hereunder in reference to this Agreement. Should Servicer choose to resell portions of the Servicing portfolio due to no fault of the Subservicer, Subservicer shall reasonably cooperate with Servicer and its assignee or designee to affect due diligence and transfer. In such event, Subservicer shall not be responsible for any out-of-pocket expenses related to such sale that it would not have otherwise incurred in connection with transferring the Mortgage Loans to Servicer. In no event, other than Subservicer Default or as mutually agreed by the parties, shall the Mortgage Loans be transferred before the Transfer Dates set forth in the Sale Agreement. The transfer dates associated with any such transfer shall be agreed upon in accordance with the terms of this Agreement and the Sale Agreement. 9.4 Entire Agreement; Amendment. This Agreement and the Sale Agreement and Exhibits and Schedules thereto constitute the entire agreement between Subservicer and Servicer with regard to subservicing the Mortgage Loans and supersedes all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof and may be amended or modified only by a written instrument executed by each party hereto. 9.5 Notices. All notices, requests and demands given to or made upon any party hereto must be in accordance with Section 11.11 of the Sale Agreement. 9.6 Time. Time is of the essence of each and every provision of this Agreement. 9.7 Severability of Provisions. If any provision of this Agreement shall be prohibited by or deemed invalid under Applicable Law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. 9.8 Ohio Law Applicable. This Agreement shall be governed by and construed in accordance with the law of the State of Ohio. 19 20 9.9 Solicitation of Mortgages. Neither Subservicer nor any affiliate or agent of Subservicer shall, during the remaining term of any of the Mortgage Loans, take any action to personally, by telephone, by mail or otherwise, directly or indirectly, solicit the prepayment or modification of the Mortgage Loans, in whole or in part, or offer any Borrower any other mortgage or non-mortgage related products. Notwithstanding the foregoing, it is understood and agreed that promotions which are directed to the general public, including, without limitation, mass mailings based on commercially acquired mailing lists, newspaper, radio and television advertisements, shall not constitute solicitations under this paragraph. 9.10 Cooperation. To the extent reasonably possible, the parties hereto shall cooperate with and assist each other, as requested, in carrying out the other's covenants, agreements, duties and responsibilities under this Agreement and in connection herewith shall execute and deliver all such documents and instruments as shall be necessary and appropriate in the furtherance thereof. 9.11 Confidentiality of Information. Except as otherwise required by law, Subservicer and Servicer and their affiliates shall, and shall cause their respective directors, officers, employees and authorized representatives to, hold in strict confidence and not use or disclose to anyone without the prior written consent of the other party all information concerning customers or proprietary business procedures, servicing fees or prices, policies or plans of the other party or any of its affiliates received by them from the other party in connection with the transactions contemplated hereby. 9.12 Supplementary Information. From time to time, upon reasonable notice, prior to and after the Transfer Date, Subservicer shall furnish Servicer such incidental information, which is reasonably available to Subservicer, supplementary to the information contained in the documents and schedules delivered pursuant hereto, as Purchaser may reasonably request within ten (10) years of the Sale Date. Any request for information under this Section which is in reference to information which was not required to have been provided under the terms of this Agreement shall be fulfilled at the reasonable expense of Purchaser. 9.13 Set-off. Servicer agrees that Subservicer may, at its option, deduct from any payment due Servicer under the terms of this Agreement, any monies due to Subservicer under the terms of this Agreement and based upon Servicer's failure to make payment to Subservicer as required under the terms of this Agreement. 20 21 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written. SERVICER: CHEMICAL MORTGAGE COMPANY ATTEST: BY:_____________________________ _________________________ NAME:___________________________ TITLE:__________________________ DATE:___________________________ SUBSERVICER: SOURCE ONE MORTGAGE SERVICES CORPORATION ATTEST: BY:_____________________________ _________________________ NAME:___________________________ TITLE:__________________________ DATE:___________________________ 21 22 Exhibit A - Mortgage Loan Listing Exhibit B - Approved Vendors Exhibit C - Tape Format Exhibit D - Transfer Obligations Exhibit E - Transfer Instructions 22 EX-10.(HH) 11 EXHIBIT 10(HH) 1 EXHIBIT 10(HH) AGREEMENT This Agreement ("Agreement") is between Source One Mortgage Services Corporation (the "Company") and Robert W. Richards (the "Employee"). The parties voluntarily agree as follows: 1. Employee hereby resigns from all his positions as a director, board or other committee member or officer of the Company or any of its affiliates effective on June 1, 1996 ("Termination Date"). In consideration of Employee's resignation, and in consideration of the promises and representations made in Paragraphs 2 through 7 below, the Company agrees to make supplemental payments (subject to applicable taxes and withholding) to Employee and his spouse, if she survives him, equal to the excess of (i) the benefit that would have been payable to him and his spouse, if she survives him, under the Source One Mortgage Services Corporation Retirement Plan ("Retirement Plan") and the related Source One Mortgage Services Corporation Supplemental Retirement Plan ("Supplemental Plan") commencing on the Termination Date had he attained age 58 on the Termination Date, had he been credited with benefit service until he attained age 58 (instead of his actual benefit service) and had he elected to have his benefits commence on the Termination Date over (ii) the amounts actually payable from the Retirement Plan and Supplemental Plan beginning as of the Termination Date. Payment of such benefits beyond the Employee's 55th birthday is contingent upon the Employee electing under Article IV, Section 4(a), of the Retirement Plan, within 90 days before he attains age 55 (if he is then living) to commence to receive his monthly benefit under the Retirement Plan on the first day of the month following his 55th birthday. Such benefits shall be paid in the same manner and form as benefits under the Retirement Plan are paid. Such benefits shall be paid from the general funds of the Company. Execution of this Agreement by Employee represents acknowledgment that the additional benefit described in this paragraph 1 represents valuable consideration and not benefits or compensation otherwise owed Employee by the Company. 2. By execution of this Agreement and in consideration of the additional benefit described in Paragraph 1, Employee agrees as follows: 2 a. Employee's resignation will be effective on the Termination Date. Employee acknowledges that effective as of such date, any right or authority on Employee's part to act as an agent or employee of the Company, in any manner whatsoever,shall be terminated. b. Employee agrees to release and discharge the Company, Fund American Enterprises Holdings, Inc. and any related company, and their respective agents, employees directors and officers ("Fund American Group") from any and all actions, causes of action, claims, awards, damages, demands or suits, at law or in equity, or liabilities of any kind or nature whatsoever, which Employee now has or hereafter may have against the Fund American Group at any time in the past and at any time through the Termination Date, excepting, however, any amounts payable to the Employee under paragraph 1 above and any amounts payable or benefits provided as described in the letter dated June 5, 1996 to you from John J. Byrne on behalf of the Company. This release and discharge is specifically understood to apply to, but is not limited to, claims of wrongful discharge, claims of discriminatory treatment based upon any one or combination of the factors of sex, race, religion, sexual orientation, handicap, national origin and any and all other claims arising under federal, state or local law, whether such claims arise due to common law (whether arising in tort or contract) or by constitution, statute or ordinance. This release and discharge also includes a waiver of any rights or claims which Employee may have under the Age Discrimination in Employment Act, as amended, arising on or prior to the date of execution of this Agreement but does not include any such rights or claims arising after the date of this Agreement. c. Employee agrees that he will hold in a fiduciary capacity for the benefit of the Fund American Group all Confidential Information as defined below and shall 3 not communicate or divulge any Confidential Information to, or use any Confidential Information for the benefit of, any person (including the Employee) or entity other than an entity in the Fund American Group. "Confidential Information" shall mean (i) information, not generally known, about the Fund American Group's clients, processes, services and products, whether written or not, including information relating to research, accounting, marketing, merchandising, selling and the identity of current and prospective customers and other client information and (ii) any confidential information entrusted to the Fund American Group by a client or customer thereof which to the Fund American Group is obligated to keep confidential. Employee agrees that he will return to the Company as soon as practicable after the Termination Date any documents or other written, recorded or graphic matter containing, relating or referring to any Confidential Information (and all copies thereof) in Employee's possession or control. d. Employee agrees that he will not make any statement to any third party disparaging or criticizing, or otherwise take action to cast aspersions on, the management, business, affairs or property of any of the Fund American Group. 3. Employee acknowledges that he is entering into this Agreement voluntarily and of his own free will. Employee also agrees that this Agreement contains the parties' complete understanding and that there are no other agreements, oral or written, pertaining to the subject matter of this Agreement. 4. The parties hereto agree that this Agreement shall be governed by and construed in accordance with the laws of the State of Michigan. The parties further agree that should any part or provision of this Agreement be held unenforceable or in conflict with controlling law, the validity of the remaining parts and provisions shall be unaffected. 4 5. The parties expressly agree that this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors and assigns. 6. Employee agrees that the terms of this Agreement shall be kept confidential and shall not be divulged by Employee to anyone including but not limited to any current or future employee of the Company. 7. Employee acknowledges that he was provided a copy of this Agreement on June 5, 1996 and that he has until June 26, 1996, to sign and return it to the Company. Employee shall have seven days from the date this Agreement is executed by the Employee to revoke this Agreement. It is agreed that this Agreement shall become effective and enforceable at end of the seven-day revocation period unless the Employee exercises his right to revoke this Agreement within such period. Employee is advised to consult with an attorney prior to executing this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year written below. SOURCE ONE MORTGAGE SERVICES CORPORATION ________________________ By:______________________ ROBERT W. RICHARDS John L. Jansen ________________________ ______________________ (Date) (Date) EX-13 12 EXHIBIT 13 1 EXHIBIT 13 [LOGO] SELECTED CONSOLIDATED FINANCIAL DATA & CORPORATE INFORMATION* Income Statement Data (in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- Total revenue $ 148,680 $ 148,595 $ 142,493 $ 173,564 $ 118,072 Total expenses 143,553 105,313 137,215 111,387 100,747 - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effect of accounting changes 5,127 43,282 5,278 62,177 17,325 Income tax expense 9,453 16,132 4,474 22,056 7,378 - --------------------------------------------------------------------------------------------------------------------------------- (Loss) income before extraordinary loss and cumulative effect of accounting changes (4,326) 27,150 804 40,121 9,947 Extraordinary loss on retirement of debt - (902) - - - Cumlative effect of accounting changes (a) - - (44,296) - (25,769) - --------------------------------------------------------------------------------------------------------------------------------- Net (loss) income $ (4,326) $ 26,248 $ (43,492) $ 40,121 $ (15,822) - --------------------------------------------------------------------------------------------------------------------------------- Net (loss) income per common share (b): Before extraordinary loss and cumulative effect of accounting changes $ (3.57) $ 7.55 $ (1.65) $ 9.48 $ 2.34 Net (loss) income per share $ (3.57) $ 7.20 $ (14.21) $ 9.48 $ (3.73) - --------------------------------------------------------------------------------------------------------------------------------- Cash dividends per common share (c) $ - $ - $ - $ 6.39 $ 2.40 Cash dividends declared on common shares $ - $ - $ - $ 26,616 $ 10,133 Payment for common shares repurchased $ - $ 120,000 $ 122,000 $ - $ - - --------------------------------------------------------------------------------------------------------------------------------- OPERATING DATA - --------------------------------------------------------------------------------------------------------------------------------- Servicing portfolio at end of year (d): Balance (in millions) $ 29,201 $ 31,831 $ 39,568 $ 38,403 $ 37,312 Number of loans serviced (e) 478,779 494,051 543,428 518,972 578,883 Weighted average interest rate (e) 8.48% 8.33% 8.14% 8.53% 9.34% Weighted average net servicing fee (e) (f) .422% .419% .410% .432% .462% Percent delinquent (e) 6.24% 5.28% 4.07% 4.44% 4.39% Percent in process of foreclosure .93% .80% .77% .92% .77% Total mortgage loan production (in millions) $ 3,831 $ 2,852 $ 4,586 $ 11,452 $ 7,591 Servicing rights acquisitions (in millions) $ 2,789 $ 4,674 $ 3,707 $ 6,368 $ 2,323 Sale of servicing rights (in millions) $ 3,302 $ 10,973 $ 3,868 $ - $ - Number of employees at end of year 1,682 1,680 2,055 3,060 2,145 - --------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA (in thousands) December 31, - --------------------------------------------------------------------------------------------------------------------------------- Mortgage loans receivable $ 314,937 $ 381,028 $ 210,472 $1,298,506 $1,116,113 Capitalized servicing (net) (g) 410,939 397,071 530,450 666,666 624,657 Total assets 1,131,054 1,135,029 1,210,012 2,647,153 2,456,898 Senior debt 643,262 661,846 647,251 1,959,643 1,835,909 Subordinated debt 54,535 54,786 - - - Total liabilities 816,297 812,785 733,925 2,095,153 1,924,773 Total stockholders' equity (h) 314,757 322,244 476,087 552,000 512,906 - ---------------------------------------------------------------------------------------------------------------------------------
*See accompanying notes to selected consolidated financial data. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 3 2 [LOGO] NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA & CORPORATE INFORMATION (a) The 1994 amount reflects the cumulative after tax effect, as of January 1, 1994, of a change in the methodology used to measure impairment of the purchased mortgage servicing rights asset. See Note 3 to the consolidated financial statements. The 1992 amount reflects the cumulative after tax effect, as of January 1, 1992, of adopting Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." (b) Net (loss) income per common share amounts for all years presented are based on the weighted average number of common shares outstanding. (c) Cash dividends per common share were computed based on the total number of common shares outstanding as of the dividend record dates. (d) Includes loans subserviced for others having a principal balance of $2.8 billion, $4.0 billion and $4.3 billion as of December 31, 1996, 1995 and 1994, respectively, except as noted. (e) Excludes interim servicing of loans having a principal balance of $1,651 million, $4,190 million and $75 million as of December 31, 1994, 1993 and 1992, respectively. (f) Excludes loans subserviced for others as noted in (d) above. (g) Reflects a $68.1 million cumulative pretax effect adjustment to the purchased mortgage servicing rights asset as of January 1, 1994 relating to a change in the methodology used to measure its impairment. See Note 3 to the consolidated financial statements. (h) Total stockholders' equity excludes amounts applicable to redeemable Class B common stock for years prior to 1993. In November 1993, all the shares of redeemable Class B common stock were redeemed at the option of the holders thereof. FORM 10-K The financial information contained in this report substantially conforms with the information required in the "Form 10-K" Annual Report filed by the Company with the Securities and Exchange Commission at the end of March 1997. Certain supplemental information appears in such Form 10-K that is not necessarily disclosed within this document. Copies of such Form 10-K (without exhibits) are available, without charge, upon request to the Corporate Secretary's Office, Source One Mortgage Services Corporation, 27555 Farmington Road, Farmington Hills, Michigan 48334-3357 (telephone: (810) 488-7000). BUSINESS The Company engages primarily in the business of producing, selling and servicing residential mortgage loans and subservicing residential mortgage loans for third parties. Its primary sources of revenue are net servicing revenue, net interest revenue, net gain on sale of mortgages, net gain on sale of servicing and other revenue (including underwriting and appraisal fees). The Company is also engaged, through certain of its subsidiaries, in the sale of credit-related insurance products (such as life, disability, health, accidental death and property and casualty insurance). MARKET FOR STOCK AND RELATED MATTERS There is no established public trading market for the Company's common stock. As of March 28, 1997, there were two holders of the 2,561,054 shares of the Company's issued and outstanding common stock. No cash dividends on common stock were declared for the years ended December 31, 1996, 1995 or 1994. The Company's secured credit agreement contains covenants which limit its ability to pay dividends or make distributions on its capital in excess of preferred stock dividend and subordinated debt interest requirements each year. In addition, the Company must comply with certain financial covenants provided in its secured and unsecured credit agreements, including restrictions relating to tangible net worth and leverage. The Company is currently in compliance with all such covenants. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 4 3 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995 The Company reported a net loss of $4.3 million for the year ended December 31, 1996 as compared to net income of $26.2 million for the year ended December 31, 1995. The 1996 net loss reflects a $29.1 million pretax charge for the write-off of the Company's goodwill and other intangible assets (refer to Note 7 to the consolidated financial statements for further discussion) and a $.9 million pretax charge for impairment of its capitalized servicing asset. These amounts were partially offset by a $10.1 million pretax gain on the sale of servicing to a third party and a $9.9 million pretax net gain on financial instruments. The 1995 net income includes a $28.0 million pretax charge for impairment of the Company's capitalized servicing asset, $40.0 million of pretax gains on the sale of servicing to third parties and a $.8 million pretax net gain on financial instruments. Net servicing revenue was $77.5 million and $61.3 million for the years ended December 31, 1996 and 1995, respectively. Mortgage servicing revenue decreased slightly in 1996 primarily as a result of a lower average servicing portfolio balance during 1996 as compared to 1995. This decrease was partially offset by the recognition of a portion of the Company's deferred gain on the 1994 sale of servicing rights to a third party subject to a subservicing agreement which related to loans sold by the third party in 1996. Amortization of the Company's capitalized servicing asset decreased in 1996 primarily as a result of a significantly lower impairment charge for valuation allowances for the underlying mortgage servicing rights. This charge totaled $.9 million in 1996 as compared to $28.0 million in 1995. This decrease, however, was partially offset by higher scheduled amortization expense due to higher market consensus prepayment rates as well as a higher average asset balance during 1996 as compared to 1995. The average prepayment rate of the Company's owned servicing portfolio was 11.2% for the year ended December 31, 1996 as compared to 8.3% for 1995. The Company's prepayment experience is significantly influenced by fluctuations in mortgage interest rates. A steady decline in market interest rates for mortgage loans during 1995 in addition to average lower interest rates in 1996 contributed to the increase in mortgage loan prepayments during 1996. Mortgage interest rates also affect the value of the Company's investment in mortgage servicing rights ("MSR"). As mentioned above, interest rates directly influence prepayment rates as well as other assumptions used in valuing the Company's MSR asset. In order to offset changes in the value of its MSR asset and to mitigate the effect on earnings of higher amortization and impairment of the asset which results from increased prepayment activity, the Company invests in various financial instruments. As interest rates decline, prepayment activity generally increases, thereby reducing the value of the MSR asset, while the value of the financial instruments increases. Conversely, as interest rates increase, the value of the MSR asset increases while the value of such financial instruments decreases. The financial instruments utilized by the Company include interest rate floor contracts ("floors") and principal-only ("P/O") swaps. The floors are derivative contracts which derive their value from a specified interest rate. The cash flow from the floors is equal to the difference between the floor rate and the prevailing interest rate applied to the notional amount. Payments are made to the Company only when the prevailing interest rates are below the floor rate. To the extent that prevailing interest rates decrease, the value of the floors increases, even if the interest rates do not fall below the floor rate. To the extent that prevailing interest rates increase, the value of the floors decreases. However, the Company is not exposed to losses in excess of its initial investment in the floors. The P/O swaps are derivative contracts, the value of which is determined by changes in the value of the referenced P/O strip security. The payments received by the Company under the P/O swaps relate to the cash flows of the referenced P/O security. The payments made by the Company are based upon a notional amount tied to the market price and the remaining balance of the referenced P/O security multiplied by a floating rate indexed to the London Interbank Offered Rates for U.S. dollar deposits ("LIBOR"). For the year ended December 31, 1996, the Company recognized a $9.9 million gain on its financial instruments as compared to a gain of $.8 million in 1995. The 1996 gain includes $8.1 million in realized gains from the sale of financial instruments and net cash flows received and $1.8 million in unrealized gains due to changes in the fair market value of SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 5 4 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995 (CONTINUED) the various financial instruments. The 1995 gain includes unrealized gains due to changes in the fair market value of the financial instruments. As of December 31, 1996 and 1995, the carrying value of the financial instruments was $8.0 million and $3.5 million, respectively, and is included in investments in the consolidated statements of condition. Refer to Note 10 to the consolidated financial statements for further discussion. The Company's total mortgage servicing portfolio decreased to $29.2 billion as of December 31, 1996 from $31.8 billion as of December 31, 1995. The Company is continuing to act on its corporate strategy to optimize returns on its owned servicing portfolio by buying and selling mortgage servicing rights based on the underlying risk and return characteristics. The Company purchased the rights to service $2.8 billion and $4.7 billion of mortgage loans from third parties during 1996 and 1995, respectively. During 1996, the Company sold the rights to service $3.3 billion of mortgage loans for net proceeds of $55.9 million and a pretax gain of $10.1 million. During 1995, the Company sold a total of $11.0 billion in servicing rights to third parties for net proceeds of $199.1 million and a pretax gain of $40.0 million. Loans being subserviced for others had principal balances totaling $2.8 billion and $4.0 billion as of December 31, 1996 and 1995, respectively. In 1994, the Company sold the rights to service $3.9 billion of mortgage loans to a third party and continues to service the majority of these loans pursuant to a subservicing agreement. The gain of $19.9 million was deferred and is being recognized over the five-year life of the subservicing agreement. In the fourth quarter of 1996, the third party sold the rights to service approximately $1.0 billion of these mortgage loans, representing approximately 25% of the total loans subserviced by the Company. Accordingly, the Company recognized an additional $2.4 million of the deferred gain in 1996, as mortgage servicing revenue, representing approximately 25% of the deferred balance at the time of sale. For the years ended 1996 and 1995, the Company has recognized $6.1 million and $4.2 million, respectively, of the deferred gain as part of net servicing revenue in the consolidated statements of income. During 1996, the Company forged a new strategy with respect to its servicing operations. A major focus of this strategy is reducing exposure to interest rate risk, which increases with the size of an owned servicing portfolio. To reduce the exposure, the Company is taking actions to contract its owned servicing portfolio and expand its subservicing business. Consistent with this corporate strategy, the Company sold, subject to regulatory and investor approvals, approximately $17 billion of its non-recourse mortgage servicing portfolio to a third party for estimated proceeds of $271.5 million in February of 1997. The transaction is expected to result in the recognition of an after tax loss of approximately $2.1 million in the first quarter of 1997. The portion of the Company's mortgage servicing portfolio that was sold consists of approximately 284,000 loans with a weighted average interest rate of 8.39%. The Company will continue to service these loans pursuant to a subservicing agreement for a minimum of one year and a maximum of three years, at the option of the purchaser. Refer to Note 22 to the consolidated financial statements for further discussion. Total mortgage production for the years ended December 31, 1996 and 1995 was $3.8 billion and $2.9 billion, respectively. Production related to refinancing activity made up 33% of total mortgage production for 1996 as compared to 23% for 1995. Mortgage loan payoffs for the years ended December 31, 1996 and 1995 were $3.0 billion and $2.3 billion, respectively. The increase in mortgage loan production and payoffs in 1996 reflects overall lower market interest rates during 1996 and a corresponding increase in refinancing activity from 1995 levels. Net interest revenue decreased for the year ending December 31, 1996 to $4.8 million from $10.3 million for the year ending December 31, 1995. The increase in interest income for the 1996 year from 1995 is indicative of the increase in production levels experienced in 1996 as compared to 1995. However, this was more than offset by the increase in interest expense due to the increase in short-term borrowings necessary to fund the production as well as the additional expense related to the $56 million in principal amount of subordinated debentures issued in December 1995. The Company had net realized losses on the sale and exchange of securities with affiliates of $.9 million and $2.2 million for the years ended December 31, 1996 and 1995, respectively. The 1996 loss was a result of the Company selling its remaining common equity securities to Fund American Enterprises, Inc. ("FAE"), the Company's parent. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 6 5 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995 (CONTINUED) The 1995 loss resulted from the transfer of $27.0 million of certain common equity securities to FAE in exchange for shares of the Company's common stock held by FAE, which were then retired by the Company. All of the equity securities involved in such transactions were actively traded, readily marketable, listed on a national exchange and, for purposes of such transactions, were valued at their closing prices on the day preceding the date of each transaction. The net realized investment gain of $.6 million for the year ended December 31, 1996 includes a $1.4 million gain on the return of a partnership investment, offset by the write-down of certain investments to realizable value. The net realized loss of $.5 million for the year ended December 31, 1995 primarily reflects net losses realized on the sale of the Company's common equity securities to third parties. Net gain on sale of mortgages increased to $38.3 million for the year ended December 31, 1996 from $24.0 million for 1995. The increase reflects increased production and related mortgage sales volumes in 1996. Other revenue was $18.1 million and $15.6 million for the years ended December 31, 1996 and 1995, respectively. The increase in other revenue, which consists primarily of loan processing fees, insurance commissions and brokerage fees, was directly related to the increase in production volumes. Salaries and employee benefits expense for the years ended December 31, 1996 and 1995 was $56.3 and $51.3 million, respectively. Generally accepted accounting principles ("GAAP") require loan origination revenues to be netted against direct loan origination costs. Since salaries and employee benefits expense is the largest component of loan origination costs, approximately 90% of loan origination fees are accounted for as a reduction to salaries and employee benefits expense as illustrated in the following table: ------------------------------------------------------------------------ Year ended December 31, (in thousands) 1996 1995 ------------------------------------------------------------------------ Unadjusted salaries and employee benefits expense $ 76,114 $ 68,807 GAAP net origination revenues (19,820) (17,550) ------------------------------------------------------------------------ GAAP salaries and employee benefits expense $ 56,294 $ 51,257 ------------------------------------------------------------------------ An increase in loan origination revenues, reflecting higher retail mortgage loan production in 1996, partially offsets the increase in unadjusted salaries and employee benefits expense. Excluding the effects of loan origination revenues, salaries and employee benefits expense increased 11% in 1996 as compared to 1995. This increase reflects the additional personnel expenses and loan officer commissions associated with the Company's increased mortgage loan production in 1996. Office occupancy and equipment expense decreased to $13.6 million in 1996 from $14.3 million in 1995. This decrease is primarily due to a decrease in depreciation expense resulting from certain assets of the Company becoming fully depreciated in 1995. The provision for loan losses increased to $10.3 million for the year ended December 31, 1996 from $7.0 million for the year ended December 31, 1995. This increase is attributable to higher average loss volumes relating to certain California residential mortgage loans, charge-offs of certain commercial real estate owned properties and increased losses due to servicing portfolios acquired by the Company during the fourth quarters of 1995 and 1996. The delinquency rates of these acquired portfolios were higher than the Company's historical average delinquency rate. The Company purchased these portfolios for prices which were reflective of these higher delinquency rates. In the fourth quarter of 1996, the Company wrote off the remaining carrying value of goodwill and other intangible assets totaling $29.1 million. Refer to Note 7 to the consolidated financial statements for further discussion. Other operating expenses, which consist primarily of loan processing expenses and general office expenses, increased to $34.3 million for the year ended December 31, 1996 from $32.8 million in 1995. Loan processing expenses tend to decrease or increase with mortgage loan production. Accordingly, the increase in other operating expenses in 1996 reflects higher mortgage loan production in 1996 as compared to 1995. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 7 6 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994 The Company reported net income of $26.2 million for the year ended December 31, 1995, compared to a net loss of $43.5 million for the year ended December 31, 1994. The 1995 net income reflects $40.0 million of pretax gains on sales of servicing to third parties. The 1994 net loss includes the effects of a $68.1 million pretax charge related to a change in accounting methodology for the purchased mortgage servicing rights ("PMSR") asset. Effective January 1, 1995, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights", an amendment of SFAS No. 65. SFAS No. 122 requires the total cost of acquiring mortgage loans, either through loan origination activities or purchase transactions, to be allocated to the mortgage servicing rights and the loans based on their relative fair values. The statement requires entities to measure impairment on a disaggregated basis by stratifying the mortgage servicing rights based on one or more predominant risk characteristics of the underlying loans. Impairment is recognized through a valuation allowance for each individual stratum. SFAS No. 122 prohibits retroactive application to prior years, therefore, the reported results for 1994 are in accordance with SFAS No. 65 and are not directly comparable to the 1995 results reported under SFAS No. 122. A major difference between SFAS No. 122 and SFAS No. 65 relates to the capitalization of originated mortgage servicing rights ("OMSR"). Under SFAS No. 65, the costs inherent in creating OMSR's could not be capitalized. Under SFAS No. 122, a portion of the total cost of an originated loan is allocated to the right to service the loan based on the relative fair value of the mortgage servicing right and the loan. The Company estimated the fair values of its mortgage servicing rights by calculating the present value of the expected future cash flows associated with such rights. In making those estimates, the Company incorporated assumptions that market participants would use in their estimates of future servicing income and expense and discounted those cash flows using current estimated market rates. To measure impairment of the mortgage servicing rights, the Company stratified the related mortgage loan servicing portfolio based on its predominant risk characteristics which were determined to be prepayment, default and operational risks. This resulted in stratification by interest rate, loan type (investor) and original term of maturity. The fair value of each stratum was computed and compared to its recorded book value to determine if a valuation allowance, or recovery of a previously established valuation allowance, was required. The adoption of SFAS No. 122 as it related to the capitalization of originated mortgage servicing rights resulted in the recognition of additional pretax gain on sale of mortgages of $27.2 million for the year ended December 31, 1995. The impairment provisions of SFAS No. 122 resulted in a pretax charge of $28.0 million for the year. The discount rate and prepayment assumptions are significant factors used in estimating the fair value of the Company's mortgage servicing rights and could be significantly impacted by changes in interest rates. Accordingly, it is likely that management's estimate of the fair value of the mortgage servicing rights could change in the near term due to changes in interest rates. Net servicing revenue was $61.3 million and $82.4 for the years ended December 31, 1995 and 1994, respectively. The decrease in 1995 was primarily due to the decrease in mortgage servicing revenue resulting from the sale of $11.0 billion of servicing rights to third parties during 1995. Amortization of capitalized servicing decreased in 1995 due to slower amortization of the capitalized mortgage servicing asset reflecting lower actual and anticipated prepayments and a smaller capitalized servicing asset due to the sale of servicing, partially offset by higher impairment charges related to the adoption of SFAS No. 122. The average prepayment rate of the Company's owned servicing portfolio was 8.3% for the year ended December 31, 1995 as compared to 13.5% for 1994. A steady rise in market interest rates for mortgage loans during 1994 resulted in a decrease in loan prepayments from the mortgage servicing portfolio during 1995. However, falling interest rates through most of 1995 resulted in increased prepayment activity later in 1995. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 8 7 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994 (CONTINUED) The Company's mortgage servicing portfolio decreased to $31.8 billion as of December 31, 1995 from $39.6 billion as of December 31, 1994. In 1995, a total of $11.0 billion in servicing rights were sold to third parties for net proceeds of $199.1 million and a pretax gain of $40.0 million. In 1994, the Company sold the rights to service $3.9 billion of mortgage loans to a third party for net proceeds of $70.2 million and continues to service the majority of these loans pursuant to a subservicing agreement. The gain of $19.9 million has been deferred and is being recognized over the five-year life of the subservicing agreement. For the years ended December 31, 1995 and 1994, the Company recognized $4.2 million and $2.7 million, respectively, of the deferred gain as part of net servicing revenue on the consolidated financial statements of income. Loans being subserviced for others had principal balances totaling $4.0 billion and $4.3 billion as of December 31, 1995 and 1994, respectively. Total mortgage production for the years ended December 31, 1995 and 1994 was $2.9 and $4.6 billion, respectively. Production related to refinancing activity made up 23% and 50% of total mortgage production for 1995 and 1994, respectively. Mortgage loan payoffs for the years December 31, 1995 and 1994 were $2.3 billion and $4.7 billion, respectively. The decrease in mortgage loan production and payoffs in 1995 reflects an increase in market interest rates during 1994 and a corresponding reduction in refinancing activity from 1994 levels. Although interest rates during 1995 steadily declined, particularly during the fourth quarter, the resulting increase in production during the second half of 1995 was not sufficient to offset the decrease in production volumes during the first half of 1995. Net interest revenue decreased for the year ending December 31, 1995 to $10.3 million from $12.1 million for the year ending December 31, 1994. The decrease in net interest revenue in 1995 as compared to 1994 is a reflection of lower average inventory balances associated with lower mortgage production levels, partially offset by decreased short-term borrowings. In addition, the Company used the proceeds from the 1995 sale of its servicing rights to repurchase and retire $82.3 million of long-term debt, which resulted in an extraordinary loss after tax of $.9 million. The Company had net realized losses on the sale and exchange of securities with affiliates of $2.2 million and $8.6 million for the years ended December 31, 1995 and 1994, respectively. The 1995 and 1994 losses resulted from the transfers of $27.0 million and $112.0 million, respectively, of certain common equity securities to FAE in exchange for shares of the Company's common stock held by FAE, which was then retired by the Company. All of the equity securities involved in such transactions were actively traded, readily marketable, listed on a national exchange and, for purposes of such transactions, were valued at their closing prices on the day preceding the date of each transaction. The net realized investment loss of $.5 million for the year ended December 31, 1995 primarily reflects net losses realized on the sale of certain common equity securities to third parties. The net realized gain of $3.3 million for the 1994 year is primarily due to net gains realized on the sale of the common equity securities to third parties offset by write-downs of certain long-term investments to estimated fair value. Net gain on sale of mortgages decreased to $24.0 million for the year ended December 31, 1995 from $29.5 million for 1994. The 1995 net gain amount includes a $27.2 million gain related to the adoption of SFAS No. 122. Intensive price competition during 1995 led to increased pricing subsidies on originated loans which correspondingly reduced gains on sales of mortgages into the secondary market. Other revenue, which consists primarily of loan processing fees, insurance commissions and brokerage fees decreased to $15.6 million for the year ended December 31, 1995 from $23.9 million for 1994. Loan processing fees, which generally represent approximately 80% of other revenue, tend to decrease or increase with mortgage loan production. Accordingly, the decrease in 1995 is directly related to the decrease in mortgage loan production in 1995 as compared to 1994. Salaries and employee benefits expense for the years ended December 31, 1995 and 1994 was $51.3 million and $61.6 million, respectively. Generally accepted accounting principles ("GAAP") require loan origination revenues to be netted against direct loan origination costs. Since salaries and employee benefits expense is the largest component of loan SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 9 8 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994 (CONTINUED) origination costs, approximately 90% of loan origination fees are accounted for as a reduction to salaries and employee benefits expense as illustrated in the following table: ------------------------------------------------------------------------ Year ended December 31, (in thousands) 1995 1994 ------------------------------------------------------------------------ Unadjusted salaries and employee benefits expense $ 68,807 $ 91,115 GAAP net origination revenues (17,550) (29,550) ------------------------------------------------------------------------ GAAP salaries and employee benefits expense $ 51,257 $ 61,565 ------------------------------------------------------------------------ A decline in loan origination revenues, reflecting lower retail mortgage loan production in 1995, partially offsets the decrease in unadjusted salaries and employee benefits expense. Excluding the effects of loan origination revenues, salaries and employee benefits expense decreased 25% in 1995 as compared to 1994. This decrease reflects headcount reductions due to the downsizing of the production network during 1994 and lower incentive compensation expenses due to lower mortgage loan production volumes in 1995. Office occupancy and equipment expense decreased to $14.3 million in 1995 from $18.2 million in 1994. The decrease reflects lower office lease and related expenses as a result of the restructuring plan implemented by the Company in 1994 to downsize its production network in response to a contracting mortgage loan origination market. The provision for loan losses decreased to $7.0 million for the year ended December 31, 1995 from $8.2 million for the year ended December 31, 1994. The 1994 amount includes charge-offs relating to certain commercial real estate owned properties. Other operating expenses, which consist primarily of loan processing expenses and general office expenses, decreased to $32.8 million for the year ended December 31, 1995 from $44.0 million in 1994. Loan processing expenses tend to decrease or increase with mortgage loan production. Accordingly, the decrease in other operating expenses in 1995 reflects lower mortgage loan production in 1995 as compared to 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash flow requirements relate to funding mortgage loan production and investments in mortgage servicing rights. To meet these financing needs, the Company relies on commercial paper borrowings, short-term credit facilities, medium and long-term debt, early funding programs and cash flow from operations. The Company also generates cash from the sale of servicing. In 1994, the Company generated cash through the issuance of preferred stock which was used to reduce medium and long-term debt and to repurchase its common stock from FAE. In August 1995, the Company entered into a $60.0 million unsecured revolving credit facility which was extended in 1996 and expires in July 1997. As of December 31, 1996 and 1995, the Company had $45.0 million and $60.0 million, respectively, outstanding under this borrowing facility. In November 1996, the Company amended and restated its secured revolving credit agreement which it entered into in March of 1995. The provisions of the amended agreement increased the Company's revolving credit facility from $500 million to $750 million and can be further increased, at the Company's option with bank concurrence, up to $1.25 billion. Borrowings under the facility are secured primarily by the Company's mortgage loans receivable and mortgage servicing portfolio. The revolving credit facility expires on November 12, 1999. As of December 31, 1996 and 1995, the Company had no outstanding borrowings under this facility or the previous facility. The Company must comply with certain financial covenants provided in its secured and unsecured revolving credit facilities, including restrictions relating to tangible net worth and leverage. In addition, the secured facility contains certain covenants which limit the Company's ability to pay dividends or make distributions of its capital in excess of preferred stock dividend and subordinated debt interest requirements each year. The Company is currently in compliance with all such covenants. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 10 9 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The Company has a $650.0 million domestic and Euro commercial paper program. The weighted average number of days to maturity of commercial paper outstanding as of December 31, 1996 was 23 days. As of December 31, 1996 and 1995, there was $362.2 million and $256.6 million of commercial paper outstanding, respectively. Central Pacific Mortgage Company, a wholly-owned subsidiary of the Company, has a revolving credit agreement under which it can borrow up to $10.0 million through June 30, 1997. Borrowings under the credit agreement are guaranteed by the Company. As of December 31, 1996 there were no borrowings outstanding under this agreement. As of December 31, 1995, there was $4.5 million outstanding under this agreement. Effective December 8, 1995, the Company exchanged and retired 2,239,061 shares of its 8.42% cumulative preferred stock, Series A, for $56.0 million principal amount of 9.375% subordinated interest deferrable debentures ("subordinated debentures"), due December 31, 2025. Interest on the subordinated debentures is paid quarterly in arrears at the annual rate of 9.375% on the last business day of each March, June, September and December. The first interest payment was made on December 29, 1995 for the period from November 1, 1995 (the last regular dividend payment date with respect to the preferred stock) through December 8, 1995 at the annual rate of 8.42% and from December 9, 1995 through December 31, 1995 at the annual rate of 9.375%. The purpose for the exchange was to improve the Company's after-tax cash flow since the interest payable on the subordinated debentures is deductible for federal income tax purposes, whereas dividends payable on the preferred stock are not. The subordinated debentures are redeemable at the option of the Company, in whole or in part, at any time on or after May 1, 1999. On or after such date, the subordinated debentures may be redeemed at the option of the Company at a price equal to 100% of the principal amount redeemed ($25 for each $25 principal amount of subordinated debenture), plus accrued and unpaid interest to the date fixed for redemption. In June 1992, the Company issued $100.0 million of 9% debentures due June 2012 under terms of a $250.0 million shelf registration statement filed with the Securities and Exchange Commission ("SEC") in April 1992. The proceeds were used for general corporate purposes. Under a $200.0 million shelf registration statement filed with the SEC in November 1988, the Company issued $40.0 million of medium-term notes in 1989, with a total weighted average interest rate of 9.65% due 1996, and in October 1991, the Company issued $160.0 million of 8.875% medium-term notes due October 2001. During 1995, the Company repurchased and retired $10.3 million of the medium-term notes that were due in 1996 and $21.6 million of the medium-term notes that were due in 2001. During 1996, the Company repaid the remaining $29.7 million of the medium-term notes due in 1996 on their maturity dates. In 1986, the Company issued $125.0 million of 8.25% debentures due November 1, 1996. The Company repurchased and retired $50.4 million of these debentures during 1995 and repaid the remaining $74.6 million on their maturity date in 1996. Management believes capital resources will be sufficient to meet the Company's operating needs as well as to fund maturing medium and long-term debt. In February 1994, the Company's certificate of incorporation was amended to change the number of authorized shares of preferred and common stock to 12 million and 8 million, respectively. In March 1994, the Company issued 4 million shares of 8.42% cumulative preferred stock, Series A, ("preferred stock"), with an aggregate liquidation preference of $25 per share for net proceeds to the Company of $96.8 million. In connection with the issuance of preferred stock, the Company transferred a total of $112.0 million of certain common equity securities to FAE in exchange for 838,826 shares of the Company's common stock held by FAE, which were retired by the Company. The Company recognized an $8.6 million pretax loss on these noncash transfers. The Company also repurchased and retired 85,248 shares of its common stock held by FAE for $10.0 million cash in 1994. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 11 10 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The Company has a dividend policy which may result in the payment of dividends on the Company's common stock, dependent upon the earnings, cash position and capital needs of the Company, limitations in credit agreements, general business conditions and other factors deemed relevant by the Company's Board of Directors. The Company did not declare any dividends on its common stock during 1996, 1995 or 1994. Quarterly cash dividends are paid on preferred stock at an annual rate of 8.42% or $2.105 per share, if declared by the Board of Directors, in arrears on the first day of each February, May, August and November. The first dividend payment was made on May 1, 1994 with respect to the period from the date of initial issuance of the preferred stock through April 30, 1994. The Company paid cash dividends totaling $3.7 million, $8.4 million and $5.2 million on its preferred stock for the years ended December 31, 1996, 1995 and 1994, respectively. The preferred stock is not redeemable prior to May 1, 1999. On or after such date, the preferred stock may be redeemed at the option of the Company at a price of $25 per share, plus accrued and unpaid dividends to the redemption date. During 1996, the Company sold the rights to service a total of $3.3 billion of mortgage loans to a third party for net proceeds of $55.9 million, which were used for general corporate purposes. During 1995, the Company sold the rights to service a total of $11.0 billion of mortgage loans to third parties for net proceeds of $199.1 million, which were used to repurchase and retire debt, repurchase common stock and for general corporate purposes. During 1995, the Company transferred a total of $27.0 million of common equity securities and $93.0 million in cash and money market investments to FAE in exchange for 959,049 shares of the Company's common stock held by FAE, which were retired by the Company. The Company recognized a $2.2 million pretax loss on these transfers. During 1995, the Company repurchased and retired a total of $82.3 million of public debt and recorded an extraordinary loss after tax of $.9 million. During 1994, the Company sold the rights to service $3.9 billion of mortgage loans to a third party for net proceeds of $70.2 million. The Company continues to service the majority of these loans pursuant to a subservicing agreement which ends in 1999. The proceeds from the sale were used to reduce short-term debt and for general corporate purposes. INFLATION Inflation affects the Company primarily in the area of mortgage loan originations. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, the Company's mortgage loan originations have increased in response to falling interest rates and have decreased during periods of rising interest rates. However, higher interest rate environments typically enhance the value of the Company's mortgage servicing portfolio due to less refinance activity. Lower interest rates generally result in higher payoffs and, therefore, typically reduce the value of the mortgage servicing portfolio. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 12 11 [LOGO] REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Source One Mortgage Services Corporation We have audited the accompanying consolidated statements of condition of Source One Mortgage Services Corporation and subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Source One Mortgage Services Corporation and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 3 to the consolidated financial statements, in 1995 the Company changed its method of accounting for mortgage servicing rights. As discussed in Note 3 to the consolidated financial statements, in 1994 the Company changed its method of accounting for its purchased mortgage servicing rights asset. /S/ Ernst & Young LLP Detroit, Michigan January 30, 1997, except for Notes 7 and 22, as to which the date is March 21, 1997 SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 13 12 [LOGO] CONSOLIDATED STATEMENTS OF CONDITION
- ------------------------------------------------------------------------------------------------------ December 31, (in thousands, except for share and per share amounts) 1996 1995 - ------------------------------------------------------------------------------------------------------ ASSETS - ------------------------------------------------------------------------------------------------------ Cash $ 923 $ 4,146 Investments 46,555 26,290 Mortgage loans receivable 314,937 381,028 Pool loan purchases 131,539 118,995 Loans held for investment 23,351 24,335 Capitalized servicing (net) 410,939 397,071 Common equity securities (net) 2,312 529 Mortgage claims receivable and real estate acquired (net of allowance for loan losses of $15,400 in 1996 and $13,500 in 1995) 51,501 45,416 Premises and equipment 28,054 31,014 Other assets 120,943 106,205 - ------------------------------------------------------------------------------------------------------ Total assets $1,131,054 $1,135,029 - ------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------ Liabilities: Senior debt $ 643,262 $ 661,846 Subordinated debt 54,535 54,786 Accounts payable and other liabilities 118,500 96,153 - ------------------------------------------------------------------------------------------------------ Total liabilities $ 816,297 $ 812,785 - ------------------------------------------------------------------------------------------------------ Stockholders' Equity: Preferred stock, $.01 par value, 12,000,000 shares authorized, 1,760,939 shares of 8.42% cumulative Series A (aggregate liquidation preference of $25 per share) issued and outstanding as of December 31, 1996 and 1995 18 18 Common stock, $.01 par value, 8,000,000 shares authorized, 2,247,000 shares issued and outstanding as of December 31, 1996 and 1995 22 22 Paid-in capital 346,088 346,088 Unrealized investment loss (net) - (546) Retained deficit (31,371) (23,338) - ------------------------------------------------------------------------------------------------------ Total stockholders' equity 314,757 322,244 - ------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $1,131,054 $1,135,029 - ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 14 13 [LOGO] CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (in thousands, except for per share amounts) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- REVENUE - ---------------------------------------------------------------------------------------------------------------------------- Mortgage servicing revenue $ 139,578 $ 141,883 $ 169,293 Amortization of capitalized servicing (71,936) (81,385) (86,943) Net gain on financial instruments 9,904 840 - - ---------------------------------------------------------------------------------------------------------------------------- Net servicing revenue 77,546 61,338 82,350 - ---------------------------------------------------------------------------------------------------------------------------- Interest income 40,826 37,669 72,031 Interest expense (36,018) (27,348) (59,954) - ---------------------------------------------------------------------------------------------------------------------------- Net interest revenue 4,808 10,321 12,077 - ---------------------------------------------------------------------------------------------------------------------------- Net realized investment loss on sale and exchange of securities with affiliates (855) (2,159) (8,596) Net realized investment gain (loss) 623 (544) 3,333 Net gain on sale of mortgages 38,346 24,015 29,471 Net gain on sale of servicing 10,080 40,041 - Other 18,132 15,583 23,858 - ---------------------------------------------------------------------------------------------------------------------------- Total revenue 148,680 148,595 142,493 - ---------------------------------------------------------------------------------------------------------------------------- EXPENSES - ---------------------------------------------------------------------------------------------------------------------------- Salaries and employee benefits 56,294 51,257 61,565 Office occupancy and equipment 13,619 14,326 18,241 Provision for loan losses 10,260 6,956 8,206 Write-off of goodwill and other intangible assets 29,128 - - Restructuring charges - - 5,154 Other operating expenses 34,252 32,774 44,049 - ---------------------------------------------------------------------------------------------------------------------------- Total expenses 143,553 105,313 137,215 - ---------------------------------------------------------------------------------------------------------------------------- Income before income taxes, extraordinary loss and cumulative effect of accounting change 5,127 43,282 5,278 Income tax expense 9,453 16,132 4,474 - ---------------------------------------------------------------------------------------------------------------------------- (Loss) income before extraordinary loss and cumulative effect of accounting change (4,326) 27,150 804 Extraordinary loss on repurchase of debt (net of $486 income tax benefit) - (902) - Cumulative effect of change in accounting for purchased mortgage servicing rights (net of $23,852 deferred income tax benefit) - - (44,296) - ---------------------------------------------------------------------------------------------------------------------------- Net (loss) income (4,326) 26,248 (43,492) Less dividends on preferred stock 3,707 7,634 6,642 - ---------------------------------------------------------------------------------------------------------------------------- Net (loss) income applicable to common stock $ (8,033) $ 18,614 $ (50,134) - ---------------------------------------------------------------------------------------------------------------------------- Net (loss) income per common share: Before extraordinary loss and cumulative effect of accounting change $ (3.57) $ 7.55 $ (1.65) Extraordinary loss - (.35) - Cumulative effect of accounting change - - (12.56) - ---------------------------------------------------------------------------------------------------------------------------- Net (loss) income per common share $ (3.57) $ 7.20 $ (14.21) - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 15 14 [LOGO] CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------- Years ended December 31, 1996, 1995 and 1994 (in thousands, except for share and per share amounts) - ---------------------------------------------------------------------------------------------------------------------------------- Unrealized Total Investment Retained Stock- Preferred Common Paid-in Gain Earnings holders' Stock Stock Capital (Loss) (Deficit) Equity - ---------------------------------------------------------------------------------------------------------------------------------- Balances at January 1, 1994 $ - $ 41 $ 544,063 $ (286) $ 8,182 $ 552,000 Net loss - - - - (43,492) (43,492) Unrealized investment loss (net) - - - (3,779) - (3,779) Issuance of 4,000,000 shares of 8.42% cumulative Series A preferred stock, $.01 par value (aggregate liquidation preference of $25 per share) 40 - 99,960 - - 100,000 Repurchase of 924,074 shares of common stock, $.01 par value, from parent - (9) (121,991) - - (122,000) Preferred dividends declared of $2.105 per share - - - - (6,642) (6,642) - ---------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1994 40 32 522,032 (4,065) (41,952) 476,087 Net income - - - - 26,248 26,248 Unrealized investment gain (net) - - - 3,519 - 3,519 Repurchase of 959,049 shares of common stock, $.01 par value, from parent - (10) (119,990) - - (120,000) Exchange of 2,239,061 shares of 8.42% cumulative Series A preferred stock, $.01 par value (aggregate liquidation preference of $25 per share) for 9.375% subordinated debentures (22) - (55,954) - - (55,976) Preferred dividends declared of $2.105 per share - - - - (7,634) (7,634) - ---------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1995 18 22 346,088 (546) (23,338) 322,244 Net loss - - - - (4,326) (4,326) Unrealized investment gain (net) - - - 546 - 546 Preferred dividends declared of $2.105 per share - - - - (3,707) (3,707) - ---------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1996 $ 18 $ 22 $ 346,088 $ - $ (31,371) $ 314,757 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 16 15 [LOGO] CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES - ---------------------------------------------------------------------------------------------------------------------------- Net (loss) income $ (4,326) $ 26,248 $ (43,492) Noncash items included in the determination of net (loss) income: Amortization of capitalized servicing 71,936 81,385 86,943 Write-off of goodwill and other intangible assets 29,128 - - Net unrealized gain on financial instruments (1,820) (840) - Provision for loan losses 10,260 6,956 8,206 Depreciation and amortization 8,825 7,347 10,450 Net realized loss on investments 232 2,703 5,263 Amortization of goodwill 2,090 2,090 2,090 Gain on sale of servicing (10,080) (40,041) - Amortization of deferred gain on sale of servicing (6,139) (4,188) (2,700) Net decrease (increase) in mortgage loans receivable 66,091 (170,556) 1,060,241 Net (decrease) increase in accounts payable and other liabilities (15,002) 18,749 (29,894) Net decrease in other assets 5,399 3,768 42,444 Net change in current and deferred income taxes receivable and payable (10,158) 16,849 (4,716) Extraordinary loss on repurchase of debt - 902 - Cumulative effect of change in accounting for purchased mortgage servicing rights - - 44,296 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 146,436 (48,628) 1,179,131 - ---------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES - ---------------------------------------------------------------------------------------------------------------------------- Collections on pool loan purchases, mortgage claims receivable and real estate acquired 160,936 192,697 254,136 Additions to pool loan purchases, mortgage claims receivable and real estate acquired (189,825) (150,420) (242,841) Capitalized excess servicing income (10,114) (7,442) (16,712) Additions to purchased mortgage servicing rights (40,449) (82,147) (90,049) Originated mortgage servicing rights (38,015) (31,197) - Net proceeds from sales of servicing 11,706 181,109 70,242 Net (increase) decrease in investments (20,134) 23,846 65,391 Purchase of common equity securities - - (122,101) Proceeds from sale of common equity securities to affiliates 514 - - Proceeds from sales of common equity securities - 21,390 129,679 Net (acquisition) disposition of premises and equipment (1,410) 185 (3,491) Net decrease (increase) in loans held for investment 984 (4,560) 3,836 - ---------------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by investing activities $(125,807) $ 143,461 $ 48,090 - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 17 16 [LOGO] CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES - -------------------------------------------------------------------------------------------------------------------------- Proceeds from issuance of commercial paper $ 5,140,110 $ 4,050,417 $ 1,778,950 Repayments on commercial paper (5,034,543) (3,819,904) (2,326,875) Net decrease in credit agreement and borrowings (20,497) (133,978) (765,673) Retirement of debt (104,350) (85,872) - Net proceeds from issuance of preferred stock - - 96,850 Repurchase of common stock from parent - (92,980) (10,000) Dividends paid on preferred stock (3,707) (8,420) (5,239) Other (865) (1,190) (948) - -------------------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (23,852) (91,927) (1,232,935) - -------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash (3,223) 2,906 (5,714) Cash at beginning of year 4,146 1,240 6,954 - -------------------------------------------------------------------------------------------------------------------------- Cash at end of year $ 923 $ 4,146 $ 1,240 - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 18 17 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES ORGANIZATION Source One Mortgage Services Corporation (together with its subsidiaries, the "Company") was incorporated in 1972 and is the successor to Citizens Mortgage Corporation which was organized in 1946. The Company is now an indirect wholly-owned subsidiary of Fund American Enterprises Holdings, Inc. ("Fund American"), a Delaware corporation organized in 1980, which was formerly known as The Fund American Companies, Inc. and Fireman's Fund Corporation. The Company is one of the largest mortgage banking companies in the United States. As of December 31, 1996, the Company had a mortgage loan servicing portfolio totaling $29.2 billion, including $2.8 billion of loans subserviced for others, which is serviced on behalf of approximately 320 institutional investors and numerous other security holders. As of December 31, 1996, the Company had 131 retail branch offices in 26 states and originated $3.8 billion in mortgage loans for the year then ended. As a mortgage banker, the Company engages primarily in the business of producing, selling and servicing residential mortgage loans and subservicing residential mortgage loans for third parties. Its sources of revenue are net servicing revenue, net interest revenue, net gain on sale of mortgages, net gain on sale of servicing and other revenue (including underwriting and appraisal fees). Through subsidiaries, the Company also provides credit-related insurance products (such as life, disability, health, accidental death and property and casualty insurance). BASIS OF PRESENTATION The accompanying consolidated financial statements of the Company include the accounts of Central Pacific Mortgage Company, a wholly-owned subsidiary of the Company, (together with its subsidiaries, "Central Pacific") and all other subsidiaries, and have been prepared in accordance with generally accepted accounting principles. Significant intercompany transactions have been eliminated in consolidation. The financial statements include all adjustments considered necessary by management to fairly present the financial position, results of operations and cash flows of the Company. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in prior year financial statements have been reclassified to conform with the current year presentation. Fund American acquired the stock of the Company in 1986. The acquisition resulted in a purchase price in excess of historical book value of the Company's net assets. The excess purchase price allocated to identifiable assets was amortized primarily over 5 to 20 years depending on asset type and the portion allocated to goodwill was amortized over 20 years. In the fourth quarter of 1996, the Company wrote off the remaining carrying value of goodwill and other intangible assets. Refer to Note 7 to the consolidated financial statements for further discussion. ACCOUNTING STANDARD RECENTLY ADOPTED As of January 1, 1995, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," an amendment of SFAS No. 65, which requires the total cost of acquiring mortgage loans, either through loan origination activities or purchase transactions, to be allocated to the mortgage servicing rights and the loans based on their relative fair values. The statement requires entities to measure impairment on a disaggregated basis by stratifying the mortgage servicing rights based on one or more predominant risk characteristics of the underlying loans. Impairment is recognized through a valuation allowance for each individual stratum. Pursuant to SFAS No. 122, consolidated financial statements prior to 1995 have not been restated. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 19 18 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED) INVESTMENTS Investments primarily consist of the following: short-term investments stated at fair value with unrealized gains and losses, if any, reported in income; real estate investment conduit ("REMIC") residuals considered held to maturity and carried at amortized cost using a method which approximates the effective yield method of amortization on a prospective basis; investment partnership interests reported using the equity method of accounting; and interest rate floor contracts ("floors") and principal-only ("P/O") swaps considered held for interest rate risk management purposes and carried at fair value with unrealized gains and losses reported in net gain on financial instruments. MORTGAGE LOANS RECEIVABLE Mortgage loans receivable are stated at the lower of aggregate cost or market value. Conventional mortgage loans are placed on a nonaccrual basis when delinquent ninety days or more as to interest or principal. Interest on delinquent Federal Housing Administration ("FHA") insured loans is accrued at the insured rate beginning on the sixty-first day of delinquency. Interest on delinquent Veterans Administration ("VA") guaranteed loans is accrued at the loan rate during the period of delinquency. RECOGNITION OF REVENUES RELATED TO MORTGAGE LOANS RECEIVABLE Discounts from the origination of mortgage loans receivable are deferred and recognized as adjustments to gain or loss on sale. Gains and losses from the sale of mortgage loans are recognized when proceeds are received. Loan origination fees, net of certain direct costs, have been deferred and are taken into income when mortgage loans receivable are sold. POOL LOAN PURCHASES Pool loan purchases, which are carried at cost, represent FHA insured, VA guaranteed and conventional loans which were either delinquent or in the process of foreclosure at the time they were purchased from Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC") mortgage-backed security pools that the Company services. Following the purchase of these loans, interest is accrued at a rate based on expected recoveries. LOANS HELD FOR INVESTMENT Loans held as permanent investments are stated at the lower of cost or market value determined at the time the permanent investment decisions were made. The amount of discount, if any, is amortized to income over the anticipated life of the investment. CAPITALIZED SERVICING Capitalized servicing includes certain costs incurred in the origination and acquisition of mortgage servicing rights ("originated and purchased servicing") which are deferred and amortized over the expected life of the loan. The total cost of acquiring mortgage loans either through origination activities or purchase transactions, is allocated between the mortgage servicing rights and the loans based on their relative fair values. The fair values of mortgage servicing rights are estimated by calculating the present value of the expected future cash flows associated with such rights, incorporating assumptions that market participants would use in their estimates of future servicing income and expense. A current market rate is used to discount estimated future cash flows. Impairment of mortgage servicing rights is measured on a disaggregated basis by stratifying the mortgage servicing rights based on one or more predominant risk characteristics of the underlying loans. Impairment is recognized through a valuation allowance for each individual stratum. Capitalized servicing also includes the present value of future servicing revenue in excess of normal servicing revenue on loans sold with servicing retained ("excess servicing") which is deferred and amortized using a method that relates the anticipated servicing revenue to total projected servicing revenue to be received over the expected life of the loan. Impairment tests for excess servicing are performed on a disaggregated basis. The original discount rate is used to discount excess servicing future cash flows. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 20 19 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED) RECOGNITION OF REVENUES RELATED TO SERVICING MORTGAGE LOANS Mortgage servicing revenue represents fees earned for servicing real estate mortgage loans owned by investors and late charge income. The servicing fees are calculated based on the outstanding principal balances of the loans serviced and are recognized together with late charge income when received. COMMON EQUITY SECURITIES Common equity securities are carried at fair value. Unrealized gains and losses, net of tax, are recorded as a separate component of stockholders' equity with no corresponding credit or charge to net income. Realized gains and losses from sales of common equity securities are based on the specific identification method. MORTGAGE CLAIMS RECEIVABLE AND REAL ESTATE ACQUIRED Mortgage claims receivable represent claims filed primarily with FHA and VA and are carried at cost less an estimated allowance for amounts which are not fully recoverable from claims filed with the underlying mortgage insuring agencies. Real estate acquired is stated at the lower of net realizable value or the recorded balance satisfied at the date of acquisition determined on an individual property basis. Costs relating to holding the properties are charged to expense as incurred. The allowance for loan losses is based upon an analysis of the mortgage loan servicing portfolio and reflects an amount which, in management's judgment, is adequate to provide for estimated losses. PREMISES AND EQUIPMENT Premises and equipment, including leasehold improvements and systems and programming software, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line method over the estimated useful lives of the related assets or over the lease terms, whichever period is shorter. NET INCOME PER SHARE Net income per share amounts were computed based on the weighted average total number of common shares outstanding. There were 2,247,000, 2,584,450 and 3,527,713 weighted average common shares outstanding for the years ended December 31, 1996, 1995 and 1994, respectively. DIVIDENDS PER SHARE Cash dividends per share were computed based on the total number of common shares outstanding as of the dividend record dates. NOTE 2. RECENTLY ISSUED ACCOUNTING STANDARD In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The adoption of this statement will eliminate the distinction between "normal" servicing rights and excess servicing receivables and will change the Company's method of measuring the value of its capitalized excess servicing asset. The statement is effective for transfers and servicing of financial assets beginning in fiscal year 1997. The Company has not yet determined what impact, if any, the adoption of this statement will have on its financial position or results of operations. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 21 20 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. CAPITALIZED SERVICING For the years ended December 31, 1996 and 1995, the Company estimated the fair values of its mortgage servicing rights by calculating the present value of the expected future cash flows associated with such rights. In making those estimates, the Company incorporated assumptions that market participants would use in their estimates of future servicing income and expense. As a result of the pending sale of approximately $17 billion in mortgage servicing rights (refer to Note 22 to the consolidated financial statements), the Company refined its calculation for measuring the impairment of its capitalized servicing asset during the fourth quarter of 1996. The $17 billion portfolio was valued as one stratum using the market price as determined by the third party purchaser. The Company evaluated the predominant risk characteristics (prepayment, default and operational) on the remaining owned servicing portfolio. The Company stratified the portfolio by interest rate, loan type (investor), original term to maturity and principal recourse. Consistent with its existing methodology, the Company measured impairment of its remaining owned servicing portfolio using assumptions that market participants would use to value their estimates of future net servicing revenue. In estimating fair value, the Company used market consensus prepayment rates and discounted the future cash flows using discount rates that approximate current market rates of 10.5% for conventional loans, 12% for insured loans and 21% for recourse loans. The fair value of each stratum was computed and compared to its recorded book value to determine if a valuation allowance, or recovery of a previously established allowance, was required. As a result of refining the calculation on its remaining owned servicing portfolio, the Company recognized $13.4 million of pretax impairment during the fourth quarter of 1996. The discount rate and prepayment assumptions are significant factors used in estimating the fair value of the Company's mortgage servicing rights and could be significantly impacted by changes in interest rates. Accordingly, it is likely that management's estimate of the fair value of the mortgage servicing rights could change in the near term due to changes in interest rates. The following table summarizes the fair value of mortgage servicing rights and certain characteristics of the Company's servicing portfolio related to those mortgage servicing rights as of December 31, 1996:
- ---------------------------------------------------------------------------------------- Fair Value Weighted Mortgage Principal Average Weighted Weighted Servicing Balance Interest Average Average Rights Serviced (a) Rate Maturity Service Fee Loan Type (in thousands) (in millions) (in percent) (in months) (in percent) - ---------------------------------------------------------------------------------------- Insured $207,303 $11,932 8.88% 264 .45% Conventional 124,257 7,856 8.44 215 .38 Recourse 26,452 2,188 8.72 214 .31 Adjustable Rate 16,219 997 7.97 301 .42 - ---------------------------------------------------------------------------------------- Total $374,231 $22,973 8.67% 244 .41% - ----------------------------------------------------------------------------------------
(a) Excludes $3.4 billion of mortgage servicing rights related to originations not capitalized prior to the adoption of SFAS No. 122. In 1995, to measure impairment of the mortgage servicing rights, the Company stratified the related mortgage loan servicing portfolio based on its predominant risk characteristics which were determined to be prepayment, default and operational risks. This resulted in stratification by interest rate, loan type (investor) and original term to maturity. In estimating fair value, the Company used market consensus prepayment rates and discounted the future cash flows using discount rates that approximated then current market rates of 10.5% for conventional loans and 12.0% for insured loans. The fair value of each stratum was computed and compared to its recorded book value to determine if a valuation allowance, or recovery of a previously established valuation allowance, was required. In 1994, the Company adopted an accounting methodology that measured impairment of purchased servicing by discounting the estimated future cash flows using a current market rate. Prior to 1994, the Company measured SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 22 21 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. CAPITALIZED SERVICING (CONTINUED) impairment of purchased servicing on a disaggregated basis including a cost of capital charge for estimating future cash flows. The adoption of the new accounting methodology, recorded as a cumulative adjustment as of January 1, 1994, resulted in a $68.1 million pretax, $44.3 million after tax, charge to income for 1994. The Company estimates the fair value of its capitalized excess servicing asset by discounting the anticipated future cash flows over the estimated life of the related loans. In making these estimates, the Company uses "interest only strip" interest rates as quoted by market participants to determine the appropriate discount rates and prepayment speed assumption rates that are based on interest rates, loan types and original term of maturity. The discount rate used to capitalize excess servicing ranged from 12.00% to 12.60% for 1996, was 12.00% for 1995 and ranged from 8.00% to 10.00% for 1994. For the years ended December 31, 1996, 1995 and 1994, the weighted average discount rates inherent in the carrying amount of the capitalized excess servicing asset were 10.36%, 10.03% and 9.12%, respectively. The following table summarizes changes in the Company's capitalized servicing asset:
- --------------------------------------------------------------------------------------------------------------------------------- Deferred Gain on Total Purchased Originated Excess Valuation Sale of Capitalized (in thousands) Servicing Servicing Servicing Allowance Servicing Servicing - --------------------------------------------------------------------------------------------------------------------------------- Balances at January 1, 1994 $ 570,208 $ - $ 96,458 $ - $ - $ 666,666 Cumulative effect of accounting change (68,147) - - - - (68,147) Additions 69,704 - 16,712 - (19,912) 66,504 Scheduled amortization (61,665) - (12,120) - - (73,785) Impairment/unscheduled amortization (12,818) - (340) - - (13,158) Amortization of deferred gain - - - - 2,700 2,700 Sales (21,706) - (28,624) - - (50,330) - --------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1994 475,576 - 72,086 - (17,212) 530,450 Additions 64,239 31,197 7,442 - - 102,878 Scheduled amortization (43,936) (1,364) (7,553) - - (52,853) Impairment/unscheduled amortization - - (564) (27,968) - (28,532) Amortization of deferred gain - - - - 4,188 4,188 Sales (132,371) - (26,689) - - (159,060) - --------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1995 363,508 29,833 44,722 (27,968) (13,024) 397,071 Additions 77,385 38,015 10,114 - - 125,514 Scheduled amortization (56,746) (6,262) (6,924) - - (69,932) Impairment/unscheduled amortization - - (1,076) (928) - (2,004) Amortization of deferred gain - - - - 6,139 6,139 Sales (37,685) - (8,164) - - (45,849) - --------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1996 $ 346,462 $61,586 $ 38,672 $(28,896) $ (6,885) $ 410,939 - ---------------------------------------------------------------------------------------------------------------------------------
During 1994, the Company sold the rights to service $3.9 billion of mortgage loans to a third party for net proceeds of $70.2 million and continues to service the majority of these loans pursuant to a subservicing agreement. Accordingly, the Company recorded a deferred gain on the sale which is being recognized as income over the five-year life of the subservicing agreement. In the fourth quarter of 1996, the third party sold the rights to service approximately $1.0 billion of these mortgage loans, representing approximately 25% of the total loans subserviced by the Company. Accordingly, the Company recognized an additional $2.4 million of the deferred gain in 1996 as mortgage servicing revenue, representing approximately 25% of the deferred balance at the time of the sale. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 23 22 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4. COMMON EQUITY SECURITIES AND INVESTMENTS In January 1996, the Company sold its remaining $1.4 million of common equity securities to Fund American Enterprises, Inc. ("FAE"), the Company's direct parent, for cash proceeds. In 1995, the Company transferred $27.0 million of certain common equity securities to FAE in exchange for shares of the Company's common stock held by FAE, which were retired by the Company. All of the equity securities involved in such transactions were actively traded, readily marketable, listed on a national exchange and, for purposes of such transactions, were valued at their reported closing prices on the day preceding the date of each transaction. The Company received proceeds on the sale of common equity securities of $.5 million and $21.4 million for the years ended December 31, 1996 and 1995, respectively, including the transactions with Fund American. Realized gains and losses from the sale of these securities were included in the determination of income. For the year ended December 31, 1996, the Company realized losses totaling $.9 million. For the year ended December 31, 1995, the Company realized gains totaling $2.8 million and losses totaling $5.6 million. In December 1996, the Company received shares of certain common equity securities with a market value of $2.3 million as a return of a partnership investment. The resulting gain of $1.4 million is included in the determination of income. In January 1997, the Company transferred these shares to FAE in exchange for shares of the Company's common stock held by FAE, which were retired by the Company. Refer to Note 22 to the consolidated financial statements for further discussion. The fair value of the portfolio of common equity securities is as follows:
- ------------------------------------------------------------------------------------------------------------------ December 31, (in thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Common equity securities at adjusted cost $ 2,312 $ 1,369 Gross unrealized losses - (840) - ------------------------------------------------------------------------------------------------------------------ Common equity securities at fair value $ 2,312 $ 529 - ------------------------------------------------------------------------------------------------------------------
The carrying value of debt securities, which is included in investments on the consolidated statements of condition, approximates fair value and is as follows:
- ------------------------------------------------------------------------------------------------------------------ December 31, (in thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Debt securities at fair value which approximates amortized cost $ 1,577 $ 2,735 - ------------------------------------------------------------------------------------------------------------------
The change in net unrealized investment loss on the portfolio of common equity securities has been charged to stockholders' equity as follows:
- ------------------------------------------------------------------------------------------------------------------ Year ended December 31, (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ Net unrealized investment loss at beginning of year $ (546) $ (4,065) $ (286) Decrease in gross unrealized gains - (1,068) (3,875) Decrease (increase) in gross unrealized losses 840 6,481 (1,938) (Decrease) increase in deferred income tax (expense) benefit (294) (1,894) 2,034 - ------------------------------------------------------------------------------------------------------------------ Net unrealized investment loss at end of year $ - $ (546) $(4,065) - ------------------------------------------------------------------------------------------------------------------
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 24 23 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. MORTGAGE LOANS RECEIVABLE The following table summarizes mortgage loans receivable:
- ------------------------------------------------------------------------------------------------------------------- December 31, (in thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Adjustable rate mortgage loans, weighted average interest rates of 6.60% and 6.55% as of December 31, 1996 and 1995, respectively $ 35,077 $ 17,605 Fixed rate 5 year through 20 year mortgage loans, weighted average interest rates of 7.73% and 7.47% as of December 31, 1996 and 1995, respectively 51,160 59,507 Fixed rate 30 year mortgage loans, weighted average interest rates of 8.19% and 7.89% as of December 31, 1996 and 1995, respectively 228,067 303,007 - ------------------------------------------------------------------------------------------------------------------- 314,304 380,119 Net premiums 633 909 - ------------------------------------------------------------------------------------------------------------------- Total mortgage loans receivable $314,937 $ 381,028 - -------------------------------------------------------------------------------------------------------------------
NOTE 6. POOL LOAN PURCHASES The following table summarizes pool loan purchases:
- ----------------------------------------------------------------------------------------------------------------- Principal Balance (in thousands) Number of Loans - ----------------------------------------------------------------------------------------------------------------- December 31, 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Loan Type:FHA $ 89,922 $ 77,644 1,621 1,433 VA 35,341 32,456 592 545 Conventional 6,276 8,895 75 106 - ----------------------------------------------------------------------------------------------------------------- Total pool loan purchases $131,539 $118,995 2,288 2,084 - -----------------------------------------------------------------------------------------------------------------
NOTE 7. OTHER ASSETS The following table summarizes other assets:
- ----------------------------------------------------------------------------------------------------------------- December 31, (in thousands) 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Goodwill $ - $ 21,978 Amount due from sale of servicing 46,823 14,672 Escrow advances 18,878 11,663 Deferred income tax benefit (Note 15) 18,210 10,533 Interest receivable-pool loan purchases 11,900 9,805 Branch network - 8,925 Note receivable from sale of servicing 7,000 7,000 Other 18,132 21,629 - ----------------------------------------------------------------------------------------------------------------- Total other assets $120,943 $ 106,205 - -----------------------------------------------------------------------------------------------------------------
In the fourth quarter of 1996, the Company wrote off the remaining carrying value of goodwill and other intangible assets totaling $29.1 million. It is the Company's policy to account for goodwill and other intangible assets at the lower of amortized cost or fair value. On an ongoing basis, management reviews the valuation and amortization of these assets. As a part of its ongoing review, management estimates the fair value of the Company's intangible assets, taking SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 25 24 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7. OTHER ASSETS (CONTINUED) into consideration any events and circumstances which might have diminished their value. During 1996, increased competition and industry consolidation had adversely impacted the value of both the mortgage loan production and servicing operations of the Company. In addition, the sale of approximately $17 billion in servicing to a third party at an after tax loss of approximately $2.1 million is described in Note 22 to the consolidated financial statements. The impact of this sale is dependent upon the length of the subservicing period, which will be at least one year from the date of the sale. The Company performed an evaluation of the recoverability of goodwill and other intangible assets taking into consideration the impact of the above factors and the reduction in interest rates in the fourth quarter of 1996 on its forecast of future operations. Based on such valuation, the Company had determined that its projected results would not support the future amortization of the Company's remaining goodwill and other intangible assets of $29.1 million at December 31, 1996 and, therefore, reduced the carrying amount of these assets accordingly. The Company's valuation assumes continued industry consolidation in mortgage servicing operations and intense competition in loan origination operations. NOTE 8. SENIOR AND SUBORDINATED DEBT Senior and Subordinated Debt consists of the following:
- ------------------------------------------------------------------------------------------------------------------- December 31, (in thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Commercial paper, weighted average interest rates of 5.69% and 6.14% as of December 31, 1996 and 1995, respectively $ 362,180 $256,613 Credit agreements, weighted average interest rates of 6.19% and 6.57% as of December 31, 1996 and 1995, respectively 45,000 64,485 Medium-term notes due 1996, weighted average interest rates of 9.60% as of December 31, 1995 - 29,700 8.25% debentures due November 1, 1996 - 74,650 8.875% medium-term notes due October 15, 2001 138,355 138,355 9.0% debentures due June 1, 2012 100,000 100,000 9.375% subordinated debentures, due December 31, 2025 55,976 55,976 Less unamortized discount, premium and issuance costs (net) (3,714) (3,147) - ------------------------------------------------------------------------------------------------------------------- Total senior and subordinated debt $697,797 $716,632 - -------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER The Company has a $650.0 million domestic and Euro commercial paper program backed by its secured credit agreement. The weighted average number of days to maturity of commercial paper outstanding as of December 31, 1996 and 1995 was 22.8 days and 19.0 days, respectively. CREDIT AGREEMENTS In November 1996, the Company amended and restated its secured revolving credit agreement. The provisions of the amended agreement increased the Company's revolving credit facility from $500 million to $750 million and can be further increased, at the Company's option with bank concurrence, up to $1.25 billion. Borrowings under the facility are secured primarily by the Company's mortgage loans receivable and mortgage servicing portfolio. The revolving credit facility expires on November 12, 1999. As of December 31, 1996 and 1995, the Company had no outstanding borrowings under this facility or the previous facility. The Company also has a $60 million unsecured revolving credit facility which expires in July 1997. As of December 31, 1996 and 1995, there was $45.0 million and $60.0 million outstanding under this agreement, respectively. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 26 25 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8. SENIOR AND SUBORDINATED DEBT (CONTINUED) The Company must comply with certain financial covenants provided in its secured and unsecured revolving credit facilities, including restrictions relating to tangible net worth and leverage. In addition, the secured facility contains certain covenants which limit the Company's ability to pay dividends or make distributions of its capital in excess of preferred stock dividend and subordinated debt interest requirements each year. The Company is currently in compliance with all such covenants. Under the credit agreements described above, the Company receives interest expense credits as a result of holding escrow and custodial funds in trust accounts at non-affiliated banks. Central Pacific Mortgage Company, a wholly-owned subsidiary of the Company, has a revolving credit agreement under which it can borrow up to $10.0 million through June 30, 1997. Borrowings under the credit agreement are guaranteed by the Company. As of December 31, 1996, there were no borrowings outstanding under this agreement. As of December 31, 1995, there was $4.5 million outstanding under this agreement. MEDIUM-TERM NOTES AND DEBENTURES In June 1992, the Company issued $100.0 million of 9% debentures due June 2012 under terms of a $250.0 million shelf registration statement filed with the Securities and Exchange Commission ("SEC") in April 1992. The proceeds were used for general corporate purposes. In October 1991, the Company issued $160.0 million of 8.875% medium-term notes due October 2001. During 1995, the Company repurchased and retired $21.6 million of these medium-term notes. SUBORDINATED DEBENTURES Effective December 8, 1995, the Company exchanged and retired 2,239,061 shares of its 8.42% cumulative preferred stock, Series A, for $56.0 million principal amount of 9.375% subordinated interest deferrable debentures ("subordinated debentures"), due December 31, 2025. Interest on the subordinated debentures is paid quarterly in arrears at the annual rate of 9.375% on the last business day of each March, June, September and December. The first interest payment was made on December 29, 1995 for the period from November 1, 1995 (the last regular dividend payment date with respect to the preferred stock) through December 8, 1995 at the annual rate of 8.42% and from December 9, 1995 through December 31, 1995 at the annual rate of 9.375%. The subordinated debentures are redeemable at the option of the Company, in whole or in part, at any time on or after May 1, 1999. On or after such date, the subordinated debentures may be redeemed at the option of the Company at a price equal to 100% of the principal amount redeemed ($25 for each $25 principal amount of subordinated debenture), plus accrued and unpaid interest to the date fixed for redemption. Aggregate maturities of medium-term notes, debentures and subordinated debentures, excluding discount, premium and issuance costs, for the five calendar years after December 31, 1996 are as follows:
- --------------------------------------------------------------------------------------------------- (in thousands) 1997 1998 1999 2000 2001 Thereafter Total - --------------------------------------------------------------------------------------------------- $ - $ - $ - $ - $138,355 $155,976 $ 294,331 - ---------------------------------------------------------------------------------------------------
NOTE 9. STOCKHOLDERS' EQUITY In March 1994, the Company issued 4 million shares of 8.42% cumulative preferred stock, Series A, ("preferred stock"), with an aggregate liquidation preference of $25 per share for net proceeds to the Company of $96.8 million. Effective December 8, 1995, the Company exchanged and retired 2,239,061 shares of its preferred stock for $56.0 million principal amount of 9.375% subordinated debentures, due December 31, 2025. The preferred stock is not redeemable prior to May 1, 1999. On or after such date, the preferred stock may be redeemed at the option of the Company at a price of $25 per share, plus accrued and unpaid dividends to the redemption date. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 27 26 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED) Quarterly cash dividends are paid on preferred stock at an annual rate of 8.42% or $2.105 per share, if declared by the Board of Directors, in arrears on the first day of each February, May, August and November. The first dividend payment was made on May 1, 1994 with respect to the period from the date of initial issuance of the preferred stock through April 30, 1994. In connection with sales of rights to service a total of $11.0 billion of mortgage loans to third parties during 1995, the Company transferred a total of $27.0 million of common equity securities and $93.0 million in cash and money market investments to FAE in exchange for 959,049 shares of the Company's common stock held by FAE, which were retired by the Company. In February 1994, the Company's certificate of incorporation was amended to change the number of authorized shares of preferred stock and common stock to 12 million and 8 million, respectively. In connection with the issuance of preferred stock in 1994, the Company transferred a total of $112.0 million of certain common equity securities to FAE in exchange for 838,826 shares of the Company's common stock held by FAE, which were retired by the Company. The Company also repurchased and retired 85,248 shares of its common stock held by FAE for $10.0 million cash in 1994. NOTE 10. FINANCIAL INSTRUMENTS Financial Instruments with Off-Balance-Sheet Risk The Company utilizes derivative financial instruments in the management of interest rate risk. The Company's use of derivative financial instruments is primarily limited to commitments to extend credit, mandatory forward commitments, interest rate floor contracts ("floors") and principal-only ("P/O") swaps. All of the Company's derivative financial instruments are held or issued for purposes other than trading. The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and reduce its own exposure to fluctuations in interest rates. These financial instruments primarily include commitments to extend credit and mandatory forward commitments. Those instruments involve, to varying degrees, elements of credit and market risk in excess of the amount recognized in the consolidated statements of condition. The contract or notional amounts of those instruments reflect the extent of risk the Company has in the instruments. The Company's exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit ("mortgage loan pipeline") is represented by the contractual notional amount of those instruments. The Company's locked mortgage loan pipeline that is expected to close totaled $175.7 million and $221.9 million as of December 31, 1996 and 1995, respectively. Fixed rate commitments result in the Company having market risk as well as credit risk. Variable rate commitments result only in credit risk. The amount of collateral required upon extension of credit is based on the Company's credit evaluation of the mortgagor and consists of the mortgagor's residential property. The Company obtains mandatory forward commitments of up to 120 days to sell mortgage-backed securities to hedge the market risk associated with a substantial portion of the mortgage loan pipeline that is expected to close and all mortgage loans receivable. As of December 31, 1996 and 1995, the Company had approximately $454.6 million and $561.0 million of mandatory forward commitments outstanding, respectively. If secondary market interest rates decline after the Company obtains a mandatory forward commitment for a loan, the loan may not close and the Company may incur a loss from the cost of covering its obligations under such commitment. If secondary market rates increase before the Company obtains a mandatory forward commitment for a loan and the loan closes, the Company may incur a loss when the loan is subsequently sold. The Company's risk management function closely monitors the mortgage loan pipeline to determine appropriate forward commitment coverage on a daily basis in order to manage the risk inherent in these off-balance-sheet SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 28 27 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. FINANCIAL INSTRUMENTS (CONTINUED) financial instruments. In addition, the risk management area seeks to reduce counterparty risk by committing to sell mortgage loans only to its nine approved dealers, with no dealer having in excess of 20% of current commitments. The Company sells loans either through mortgage-backed securities issued pursuant to programs of GNMA, FNMA, FHLMC or institutional investors. Most loans are aggregated in pools of $1.0 million or more, which are purchased by institutional investors after having been guaranteed by GNMA, FNMA or FHLMC. Substantially all GNMA securities are sold without recourse to the Company for loss of principal in the event of a subsequent default by the mortgage borrower due to underlying FHA or VA insurance. Prior to December 1992, substantially all conventional securities were sold with recourse to the Company to the extent of insufficient proceeds from private mortgage insurance, foreclosure and other recoveries. Since December 1992, conventional loans have been sold without recourse to the Company. Servicing agreements relating to mortgage-backed securities issued pursuant to the programs of GNMA, FNMA and FHLMC require the Company to advance funds to make the required payments to investors in the event of a delinquency by the borrower. The Company expects that it would recover most funds advanced upon default by the borrower or at foreclosure. However, in connection with VA partially guaranteed loans and certain conventional loans (which may be, at most, partially insured by private mortgage insurers), funds advanced may not cover losses due to potential declines in collateral value. The Company is subject to limited amounts of principal risk with respect to these loans since the insurer has the option to reimburse the servicer for the lower of fair market value of the property or the mortgage loan outstanding, in addition to the VA guarantee on the loan. In addition, most of the Company's servicing agreements for mortgage-backed securities typically require the payment to investors of a full month's interest on each loan although the loan may be paid off (by optional prepayment or foreclosure) other than on a month-end basis. In this instance, the Company is obligated to pay the investor interest at the note rate from the date of the loan payoff through the end of that calendar month without reimbursement. As of December 31, 1996, 1995 and 1994, the Company serviced approximately $13.5 billion, $10.7 billion and $11.9 billion of GNMA loans, respectively, and $2.9 billion, $3.5 billion and $3.7 billion of conventional loans with recourse, respectively. In order to cover loan losses that may result from these servicing arrangements and other losses, the Company has provided an allowance for loan losses of $15.4 million and $13.5 million as of December 31, 1996 and 1995, respectively, which management believes is adequate to cover unreimbursed foreclosure advances and principal losses. During 1995, the Company refined the estimates used to calculate the allowance for loan losses to more accurately reflect the Company's experience. This change reduced the amount of the allowance that would have been computed using the prior estimates. In order to offset changes in the value of its investment in mortgage servicing rights ("MSR") and to mitigate the effect on earnings of higher amortization and impairment of the MSR asset which results from increased prepayment activity, the Company invests in various financial instruments. As interest rates decline, prepayment activity generally increases, thereby reducing the value of the MSR asset, while the value of the financial instruments increases. Conversely, as interest rates increase, the value of the MSR asset increases while the value of such financial instruments decreases. The financial instruments utilized by the Company include interest rate floor contracts ("floors") and principal-only ("P/O") swaps. The floors derive their value from the 10 year constant maturity treasury yield index or the 10 year swap index, as applicable. The floor yields range from 5.47% to 6.24%. To the extent that market interest rates increase, the value of the floor declines. However, the Company is not exposed to losses in excess of its initial investment in the floors. The total notional principal amount of the floors was $1.0 billion and $.5 billion as of December 31, 1996 and December 31, 1995, respectively. As of December 31, 1996 and 1995, the carrying value of the Company's open floors was $4.8 million and $3.5 million, respectively. The floors have remaining terms ranging from 2 to 5 years. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 29 28 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. FINANCIAL INSTRUMENTS (CONTINUED) In July 1996, the Company entered into two P/O swap transactions with a total notional value of $150.0 million. The value of the P/O swaps is determined by changes in the value of the underlying P/O strip security. The payments received by the Company under the P/O swaps relate to the cash flows of the referenced P/O security. The payments made by the Company are based upon a notional amount tied to the market price and the remaining balance of the underlying P/O security, multiplied by a floating rate indexed to LIBOR. The Company's exposure to loss in the P/O swaps is related to changes in the market value of the underlying P/O security over the life of the contract. The remaining original notional value of the P/O swaps was $50.0 million as of December 31, 1996. The carrying value of the P/O swaps was $3.2 million as of December 31, 1996. The P/O swaps have a remaining term of 4.5 years. The floors and P/O swaps are carried at market value and are included in investments in the consolidated statements of condition. Realized and unrealized gains and losses are recorded in net gain on financial instruments in the consolidated statements of income. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company determines the estimated fair value of its financial instruments using appropriate market information and valuation methodologies. Considerable judgment is required to interpret the market information to develop the estimates of fair value. As a result, the estimates provided herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND INVESTMENTS For cash and short-term investments, the carrying amount equals fair value. For interest rate floor contracts and P/O swaps, fair value is estimated based on quoted market prices for those or similar investments and is equal to the carrying value. For investments in REMIC residuals, for which there are no quoted market prices, fair value is estimated based on discounted cash flow analyses, using interest only strip interest rates, prepayment speed assumptions and LIBOR rates, taking into consideration the characteristics of the related collateral. LOANS RECEIVABLE For mortgage loans receivable and loans held for investment, fair value is estimated using quoted market prices for securities backed by similar loans, adjusting for difference in loan characteristics. POOL LOAN PURCHASES For pool loan purchases, fair value is estimated based on discounted cash flow analyses, using the Company's short-term incremental borrowing rate or quoted market prices for securities backed by similar loans. CAPITALIZED EXCESS SERVICING For capitalized excess servicing, fair value is estimated by computing the anticipated revenue to be received over the life of the related loans based on market consensus prepayment rates, discounted using quoted interest only strip interest rates. COMMON EQUITY SECURITIES For common equity securities, fair value is based on quoted market prices and is equal to the carrying value. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 30 29 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. FINANCIAL INSTRUMENTS (CONTINUED) LOANS IN FORECLOSURE AND MORTGAGE CLAIMS RECEIVABLE For these financial instruments, fair value is estimated by discounting anticipated future cash flows using the Company's short-term incremental borrowing rate. DEBT For commercial paper and credit agreements, the carrying amount approximates fair value. For debentures and medium-term notes, fair value is estimated by discounting future cash flows using the Company's incremental borrowing rates for similar types of borrowing arrangements. For subordinated debentures, fair value is based on quoted market prices. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Fair value for commitments to sell mortgage loans is based on current settlement values for those commitments. Fair value for commitments to extend credit is based on current quoted market prices for securities backed by similar loans. The estimated fair values of the Company's financial instruments are as follows:
- --------------------------------------------------------------------------------------------------------- December 31, 1996 1995 - --------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - --------------------------------------------------------------------------------------------------------- Financial Assets: Cash $ 923 $ 923 $4,146 $4,146 Investments Interest rate floor contracts 4,825 4,825 3,455 3,455 Principal-only swaps 3,185 3,185 - - Other 38,545 38,545 22,835 22,835 Mortgage loans receivable 314,937 315,895 381,028 391,484 Pool loan purchases 131,539 135,841 118,995 122,260 Loans held for investment 23,351 23,289 24,335 24,956 Capitalized excess servicing 38,672 39,617 44,722 46,032 Common equity securities 2,312 2,312 529 529 Loans in foreclosure and mortgage claims receivable (net) (a) 38,387 37,714 29,630 29,018 - --------------------------------------------------------------------------------------------------------- Financial Liabilities: Short-term debt $406,205 $406,205 $424,661 $428,212 Long-term debt 291,592 322,715 291,971 332,220 Off-Balance-Sheet Financial Instruments: Mandatory forward commitments N/A 454,456 N/A 562,379 Commitments to extend credit expected to close (pipeline) N/A 176,757 N/A 226,572 - ---------------------------------------------------------------------------------------------------------
(a) Excludes $13.1 million and $15.8 million of real estate owned in 1996 and 1995, respectively. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 31 30 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. MORTGAGE SERVICING The Company's portfolio of mortgages serviced, including loans subserviced, interim servicing contracts and those under contract to acquire and excluding loans sold but not transferred, totaled $29.2 billion, $31.8 billion and $39.6 billion as of December 31, 1996, 1995 and 1994, respectively (refer to Note 22 to the consolidated financial statements). The Company's portfolio of mortgages serviced as of December 31, 1996 is summarized below:
Weighted Average --------------------------------------------------------------------------- Net Remaining Principal Loan Interest Servicing Contractual Balance Serviced Balance Rate Fee Rate Life Loan Type (in millions) (in thousands) (in percent) (in percent) (in months) - ------------------------------------------------------------------------------------------------------------------- Residential Conventional $12,266 $ 69 8.41% .409% 213 FHA 9,546 51 8.85 .434 271 VA 4,525 52 8.54 .434 260 Commercial 73 695 7.49 .154 166 - ------------------------------------------------------------------------------------------------------------------- $26,410 $ 58 8.59% .422% 242 Subservicing 2,791 - ------------------------------------------------------------------------------------------------------------------- Total mortgage servicing portfolio $29,201 - -------------------------------------------------------------------------------------------------------------------
The servicing fee rates in the table above are shown after deducting any guarantee fees. Guarantee fees, when applicable, range from six basis points for governmental loans up to approximately thirty basis points for certain conventional loans. Certain loans sold to private investors have no guarantee fees. The following table summarizes the Company's mortgage servicing portfolio by interest rate range:
- ------------------------------------------------------------------------------------------------------------------- December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Weighted Weighted Number Principal Average Number Principal Average of Balance Interest Rate of Balance Interest Rate Interest Rate Range Loans (in millions) (in percent) Loans (in millions) (in percent) - ------------------------------------------------------------------------------------------------------------------- 5.99% and lower 1,239 $ 87 5.49% 2,674 $ 114 5.51% 6.00%-6.49% 5,477 291 6.22 8,208 434 6.19 6.50%-6.99% 18,449 1,443 6.71 25,192 2,077 6.69 7.00%-7.49% 51,791 3,416 7.15 64,052 4,573 7.16 7.50%-7.99% 71,954 5,436 7.63 84,899 6,745 7.63 8.00%-8.49% 62,120 4,455 8.10 60,843 4,315 8.10 8.50%-8.99% 77,020 4,043 8.58 80,936 4,217 8.60 9.00%-9.49% 37,690 2,049 9.06 38,939 2,234 9.08 9.50%-9.99% 69,506 3,614 9.57 57,131 3,185 9.60 10.00% and above 83,533 4,367 10.49 71,177 3,937 10.55 - ------------------------------------------------------------------------------------------------------------------- Total 478,779 $29,201 8.48% 494,051 $31,831 8.33% - -------------------------------------------------------------------------------------------------------------------
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 32 31 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. MORTGAGE SERVICING (CONTINUED) The following table summarizes the Company's mortgage servicing portfolio by location of property:
- ----------------------------------------------------------------------------------------------------------------------- December 31, 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Percentage Percentage of Principal of Principal Number Principal Balance of Number Principal Balance of of Balance Servicing of Balance Servicing State Loans (in millions) Portfolio Loans (in millions) Portfolio - ----------------------------------------------------------------------------------------------------------------------- California 67,559 $5,811 19.9% 73,865 $ 6,668 20.9% New York 43,406 2,555 8.7 45,830 2,803 8.8 Washington 26,583 2,054 7.0 30,064 2,386 7.5 Texas 31,603 1,673 5.7 28,841 1,705 5.4 Florida 29,463 1,495 5.1 28,123 1,502 4.7 Illinois 17,836 1,157 4.0 18,486 1,291 4.1 Michigan 26,873 1,128 3.9 30,235 1,308 4.1 New Jersey 14,446 979 3.4 15,201 1,056 3.3 Arizona 15,657 899 3.1 15,751 949 3.0 Virginia 16,116 840 2.9 15,481 826 2.6 Other* 189,237 10,610 36.3 192,174 11,337 35.6 - ----------------------------------------------------------------------------------------------------------------------- Total 478,779 $29,201 100.0% 494,051 $31,831 100.0% - -----------------------------------------------------------------------------------------------------------------------
*No other state constitutes more than 2.9% of the Company's servicing portfolio as of December 31, 1996. The above tables include loans subserviced for others having a principal balance of $2,791 million and $4,039 million as of December 31, 1996 and 1995, respectively. Escrow funds of approximately $207.8 million, $236.0 million and $277.9 million as of December 31, 1996, 1995 and 1994, respectively, relating to mortgages serviced and subserviced, are held in non-interest bearing accounts at non-affiliated banks and are not included in the consolidated financial statements. The Company has in force an errors and omissions policy in the amount of $20 million. Primary fidelity coverage up to a limit of $35 million is provided under a Fund American master policy, for which the Company pays a portion of the premium. NOTE 12. RESTRUCTURING CHARGES As a result of a contracting mortgage loan origination market, the Company implemented a restructuring plan in 1994 to bring its mortgage loan production network in line with anticipated levels of mortgage loan production. As a result, the Company recorded a pretax restructuring charge totaling $5.2 million in 1994, which included $2.7 million for future lease expenses related to closed facilities, $1.2 million in asset writedowns and $1.3 million for employee termination and other costs. As of December 31, 1996 and 1995, $.5 million and $.9 million, respectively, remained accrued on the Company's consolidated statements of condition relating to future lease expenses on closed facilities. The restructuring actions resulted in improved efficiency of the mortgage loan production operations and slightly lower operating costs for 1995. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 33 32 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. LEASE COMMITMENTS The Company has entered into a number of noncancelable operating lease agreements with respect to premises and equipment. The minimum annual rental commitments under these leases as of December 31, 1996 are as follows:
- --------------------------------------------------------------------------------- (in thousands) 1997 1998 1999 2000 2001 Total - --------------------------------------------------------------------------------- $2,837 $1,841 $769 $379 $154 $ 5,980 - ---------------------------------------------------------------------------------
Leases for branches which were closed as a result of the Company's restructuring plan implemented in 1994 are included in the table above. As of December 31, 1996, $.5 million of future lease payments remained accrued on the Company's consolidated statement of condition, and therefore, do not represent future operating expenses. Total rental expense for the years ended December 31, 1996, 1995 and 1994 was $4.5 million, $4.6 million and $6.9 million, respectively. Some leases contain escalation clauses that correspond with increased real estate taxes, other operating expenses and/or renewal options that call for increased rents when the leases are renewed. NOTE 14. OTHER OPERATING EXPENSES The following table summarizes other operating expenses:
- --------------------------------------------------------------------------------- Year ended December 31, (in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------- Telephone $4,316 $4,015 $5,572 Professional services 3,376 1,649 3,045 Postage 2,119 1,985 2,325 Amortization of goodwill 2,090 2,090 2,090 Office supplies and printing 2,063 1,768 2,471 Travel and entertainment 1,885 1,808 2,636 Bank charges 1,618 1,948 2,901 Other 16,785 17,511 23,009 - -------------------------------------------------------------------------------- Total other operating expenses $34,252 $32,774 $44,049 - --------------------------------------------------------------------------------
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 34 33 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. INCOME TAXES The Company files a consolidated federal income tax return with Fund American. Federal income tax expense is provided substantially on a separate return basis except for the impact of a $.3 million credit to the deferred income tax asset in 1996, a $1.9 million credit to the deferred income tax asset in 1995 and a $2.0 million benefit to the deferred income tax asset in 1994, relating to unrealized losses and gains on the Company's portfolio of common equity securities. As of December 31, 1995, the Company had recorded $.3 million of deferred tax assets relating to accumulated unrealized losses on the portfolio of common equity securities. Pursuant to terms of a tax allocation agreement between the Company and Fund American, Fund American has agreed to compensate the Company for the use of these capital losses if such losses, when realized, can be utilized in Fund American's consolidated tax return. The following table summarizes income taxes due (to) or from Fund American:
- ---------------------------------------------------------------------------------------------------------- December 31, (in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------------------- Net current taxes $(5,746) $(6,766) Net deferred taxes 18,210 10,533 - ----------------------------------------------------------------------------------------------------------
Total income tax expense is as follows:
- ---------------------------------------------------------------------------------------------------------- Year ended December 31, (in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- Current income taxes: Federal $17,280 $11,847 $14,483 State and local 144 248 266 Deferred (benefit) expense (7,971) 4,037 (10,275) - ---------------------------------------------------------------------------------------------------------- Total income tax expense $9,453 $16,132 $4,474 - ----------------------------------------------------------------------------------------------------------
The current federal income tax expense for the year ended December 31, 1995 shown above excludes a $.5 million benefit relating to the extraordinary loss on the repurchase and retirement of debt which has been reported as a net amount in the consolidated statements of income. Deferred tax (benefit) expense for the years ended December 31, 1996, 1995 and 1994 represent the net change in the deferred tax asset or liability during the year. Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts on the consolidated financial statements. The net deferred tax (benefit) expense for the years ended December 31, 1996, 1995 and 1994, shown above exclude a $.3 million deferred tax expense, a $1.9 million deferred tax expense and a $2.0 million deferred tax benefit, respectively, associated with unrealized gains and losses on the common equity securities portfolio which were charged directly to stockholders' equity. The deferred tax benefit for the year ended December 31, 1994 shown above also excludes a $23.9 million benefit relating to the cumulative effect of the change in accounting for purchased mortgage servicing rights which has been reported as a net amount in the consolidated statements of income. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 35 34 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. INCOME TAXES (CONTINUED) The following table summarizes the types of temporary differences giving rise to the net deferred tax assets and net deferred tax liabilities. There were no valuation allowances recorded relating to the net deferred tax assets as of December 31, 1996 and 1995.
- --------------------------------------------------------------------------------------------------------------- December 31, (in thousands) 1996 1995 - --------------------------------------------------------------------------------------------------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities - --------------------------------------------------------------------------------------------------------------- Purchase accounting adjustments $ - $6,219 $ - $10,208 Accumulated unrealized losses on common equity securities - - 294 - Capitalized servicing 18,384 - 13,667 - Allowance for loan losses 4,838 - 4,774 - Depreciation - 2,583 - 2,352 Deferred bi-weekly income 1,351 - 1,353 - Accrued postretirement benefits 1,181 - 1,159 - Other, net 6,739 5,481 5,752 3,906 - --------------------------------------------------------------------------------------------------------------- Total $32,493 $14,283 $26,999 $16,466 - ---------------------------------------------------------------------------------------------------------------
A reconciliation of taxes calculated using the federal statutory rate of 35% to income tax expense follows:
- --------------------------------------------------------------------------------------------------------------- Year ended December 31, (in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- Tax expense at federal statutory rate $1,795 $ 15,149 $ 1,847 Write-off of goodwill 6,960 - - Purchase accounting adjustments 732 732 732 Dividends received deduction - (35) (263) State taxes 94 161 173 Other, net (128) 125 1,985 - --------------------------------------------------------------------------------------------------------------- Total income tax expense $9,453 $ 16,132 $ 4,474 - ---------------------------------------------------------------------------------------------------------------
NOTE 16. PENSION PLAN The Company has a defined benefit pension plan covering most of its employees. Benefits under the plan are based on years of service and the employees' highest average compensation over five consecutive years in their last ten years of employment. Funding of retirement costs complies with the minimum funding requirements specified by the Employee Retirement Income Security Act. Cash contributions received by the plan for the years ended December 31, 1996, 1995 and 1994 totaled $1.3 million, $1.7 million and $1.1 million, respectively. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 36 35 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. PENSION PLAN (CONTINUED) The following table sets forth the plan's funded status and amounts recognized on the Company's consolidated statements of condition:
- -------------------------------------------------------------------------------------------------------------------------------- December 31, (in thousands) 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligation: Accumulated benefit obligation, including vested benefits of $16,627 and $15,085 in 1996 and 1995, respectively $18,586 $17,232 Effect of future projected salary increases 5,138 6,738 - -------------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation 23,724 23,970 Plan assets at fair value, primarily long-term bonds (20,942) (18,117) - -------------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets 2,782 5,853 Unrecognized net loss (1,111) (5,061) Prior service cost not yet recognized in net periodic pension cost 871 1,001 Unrecognized net obligation at transition (11) (57) - -------------------------------------------------------------------------------------------------------------------------------- Accrued pension cost included in accounts payable and other liabilities $ 2,531 $ 1,736 - --------------------------------------------------------------------------------------------------------------------------------
A summary of the components of net periodic pension costs is as follows:
- -------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Service cost for benefits earned during the year $ 1,578 $ 1,354 $ 1,633 Interest cost on projected benefit obligation 1,633 1,388 1,308 Actual return on plan assets (1,998) (3,801) 985 Net amortization and deferral 892 2,613 (1,575) - -------------------------------------------------------------------------------------------------------------------------------- Net periodic pension cost $ 2,105 $ 1,554 $ 2,351 - --------------------------------------------------------------------------------------------------------------------------------
Assumptions used in the determination of the projected benefit obligation were:
- -------------------------------------------------------------------------------------------------------------------------------- December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Discount rate 7.25% 7.00% 8.00% Rate of increase in compensation levels 5.00% 6.00% 6.00% Expected long-term rate of return on assets 8.00% 8.00% 8.00% - --------------------------------------------------------------------------------------------------------------------------------
NOTE 17. POSTRETIREMENT BENEFITS The Company has an unfunded postretirement benefit plan which provides for postretirement health care and life insurance benefits. Postretirement life insurance benefits are provided to substantially all employees. Postretirement health care benefits are provided to substantially all employees hired prior to January 1, 1991. The Company provides for term life insurance coverage based on the employees' annual earnings and length of service. Postretirement health care benefits are contributory, whereby the Company provides for 87.5% of medical costs to retirees who retired prior to January 1, 1993. Effective January 1, 1993, the plan was amended to provide for a portion of monthly retiree medical costs, based on years of service, to retirees who retire on or after January 1, 1993. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 37 36 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. POSTRETIREMENT BENEFITS (CONTINUED) A summary of the components of net periodic postretirement benefit cost is as follows:
- ---------------------------------------------------------------------------------------------- Year ended December 31, (in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Service cost $ 110 $ 86 $ 105 Interest cost 239 250 240 Net amortization and deferral - - 7 - ---------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 349 $ 336 $ 352 - ----------------------------------------------------------------------------------------------
The following table sets forth the plan's funded status reconciled to the amount recognized on the Company's consolidated statements of condition:
- ---------------------------------------------------------------------------------------------- December 31, (in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retired participants $ 1,868 $ 2,141 Fully eligible active participants 533 474 Other active participants 1,009 1,043 - ---------------------------------------------------------------------------------------------- Total accumulated postretirement benefit obligation 3,410 3,658 Plan assets at fair value - - - ---------------------------------------------------------------------------------------------- Accrued postretirement benefit obligation in excess of plan assets 3,410 3,658 Unrecognized net gain (loss) 67 (338) - ---------------------------------------------------------------------------------------------- Accrued postretirement benefit cost included in accounts payable and other liabilities $ 3,477 $ 3,320 - ----------------------------------------------------------------------------------------------
A 9.66% annual rate of increase in the per capita costs of covered health care benefits was assumed for 1997, gradually decreasing to 5.0% by the year 2007 and remaining at that level thereafter. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by 3.94% and increase the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for 1996 by 2.56%. A discount rate of 7.25% and 7.0% was used to determine the accumulated postretirement benefit obligation as of December 31, 1996 and 1995, respectively. NOTE 18. STOCK PLANS In 1986, the Company established an Employee Stock Ownership Plan ("ESOP") to enable employees to have an equity interest in the Company. The Company redeemed all the shares of Class B common stock held by the ESOP in November 1993 for $4.6 million in cash. Management subsequently used that cash to invest in Fund American common stock. The assets currently held by the ESOP consist substantially of Fund American common stock. Effective in the fourth quarter of 1993, the ESOP was amended to allow employees who terminate their employment with the Company, and who are vested in the ESOP, to receive their distribution in cash or shares of Fund American common stock. Contributions to the ESOP are determined at the discretion of the Board of Directors. Effective October 1, 1996, the Company amended its ESOP to include employees of Fund American Enterprises, Inc., the Company's direct parent, as eligible employees and to add an employee savings plan feature under Section 401(k) of the Internal Revenue Code of 1986. Eligible employees may contribute to the plan up to 14% of their salary not to exceed the maximum allowable under Internal Revenue Service guidelines. Contributions are invested at the direction of the employee in one or more funds or can be directed to purchase common stock of Fund American at fair market value. The Company does not match employee contributions. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 38 37 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. STOCK PLANS (CONTINUED) In connection with the exchange of Class B common stock, the Company established a Stock Appreciation Rights ("SAR") plan under which certain officers of the Company received stock appreciation rights in exchange for their shares of Class B common stock. The SARs may be exercised any time at the option of the holders thereof. The value of each SAR is equal to the difference between $86.625 and the closing price of Fund American's common stock on the date preceding the exercise of the SAR multiplied by a factor of 1.223. The Company has a long-term incentive plan which provides for the granting of stock-based and cash incentive awards to key senior management employees of the Company. Awards under the plan are payable upon the achievement of specified financial goals covering four overlapping three-year periods beginning January 1, 1994, 1995, 1996 and 1997. NOTE 19. CONTINGENCIES Various claims have been made against the Company in the ordinary course of business. Management believes that any liabilities which could result would not materially affect the Company's financial position. NOTE 20. RELATED-PARTY TRANSACTIONS As discussed in Notes 4 and 9, the Company had various stock transactions with FAE. The Company also has a tax allocation agreement with Fund American as discussed in Note 15. The Company believes that all of the above transactions were on terms that were reasonable and competitive. Additional transactions of this nature may be expected to take place in the ordinary course of business in the future. NOTE 21. SUPPLEMENTAL CASH FLOW INFORMATION For purposes of reporting cash flows, cash includes cash on hand and amounts on deposit at banks, excluding custodial bank accounts. The following table provides additional cash and noncash information not presented elsewhere on the consolidated financial statements:
- --------------------------------------------------------------------------------------------------- Year ended December 31, (in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------- Interest paid $ 57,172 $ 48,975 $ 42,951 - --------------------------------------------------------------------------------------------------- Income taxes paid $ 18,650 $ 345 $ 9,328 - --------------------------------------------------------------------------------------------------- Noncash investing and financing activities: Acquisition of common equity securities as a return of partnership investment, net (Note 4) $ 2,312 $ - $ - Exchange of common equity securities for shares of common stock from parent (Note 4) - 27,020 112,000 Exchange of 2,239,061 shares of 8.42% cumulative Series A preferred stock for 9.375% subordinated debentures (Note 9) - 55,976 - - ---------------------------------------------------------------------------------------------------
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 39 38 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 22. SUBSEQUENT EVENTS In January 1997, the Company transferred its common equity securities with a market value of $2.6 million to FAE in exchange for 21,239 shares of the Company's common stock held by FAE, which were retired by the Company. The Company realized a pretax gain of $.3 million from the transfer in the first quarter of 1997. In February 1997, the Company sold, subject to regulatory and investor approvals, approximately $17 billion of its non-recourse mortgage servicing portfolio to a third party for estimated proceeds of $271.5 million. The transaction is expected to result in the recognition of an after tax loss of approximately $2.1 million in the first quarter of 1997. Source One will retain subservicing on the portfolio for a minimum of one year and a maximum of three years, at the option of the purchaser. The Company is currently evaluating its options as to how it will utilize the proceeds from the sale. These options include: (i) purchasing additional mortgage servicing rights from third parties; (ii) reducing its outstanding indebtedness; (iii) reducing its outstanding preferred or common shareholders' equity; or (iv) a combination of any of the foregoing. As a result of the 1997 servicing sale, the Company expects that its mortgage servicing revenue and its related amortization for 1997 and thereafter will be significantly less than its mortgage servicing revenue and related amortization in 1996. The Company is currently analyzing its cost structure to identify expenses that may be reduced as a result of the sale. In mid-March 1997, the Boards of Directors of Fund American Enterprises Holdings, Inc. ("Fund American") and several of its subsidiaries approved a corporate restructuring plan that will strengthen the Company by increasing its stockholders' equity. The most significant part of the plan is that Source One will receive a capital contribution of common stock of Financial Security Assurance Holdings, Ltd. ("FSA") and options to purchase common stock of FSA. These securities have a total current estimated fair value of approximately $126 million. In mid-March 1997, the Company sold 230,293 shares of its common stock to FAE in exchange for 1 million shares of the common stock of FSA valued at $27.8 million. The balance of the contribution is subject to insurance regulatory and lender approvals and is expected to occur in the second quarter of 1997. In addition, as part of this restructuring plan, the Company sold 105,000 shares of its common stock to Fund American for $12.7 million in mid-March 1997. SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 40 39 [LOGO] SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for 1996 and 1995 is shown in the following table. The quarterly financial data includes, in the opinion of management, all necessary recurring adjustments for a fair presentation of the results of operations for the interim periods. In the third quarter of 1995, the Company retroactively adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," as of January 1, 1995. Accordingly, the following table reconciles the reported 1995 first and second quarter amounts that would have been reported under SFAS No. 122:
- ------------------------------------------------------------------------------------------------------------------------------- Quarters Ended March June September December (in thousands, except for per share amounts) 31 30 30 31 - ------------------------------------------------------------------------------------------------------------------------------- 1996 Total revenue $ 48,684 $ 39,762 $ 39,859 $ 20,375 Net income (loss) $ 13,294 $ 5,922 $ 8,258 $ (31,800)(a) Net income (loss) per share $ 5.50 $ 2.22 $ 3.26 $ (14.55) - ------------------------------------------------------------------------------------------------------------------------------- 1995 Total revenue, as reported $ 57,269 $ 28,537 $ 34,580 $ 31,258 SFAS No. 122 adjustment 4,409 (7,458) - - - ------------------------------------------------------------------------------------------------------------------------------- Total revenue, as adjusted $ 61,678 $ 21,079 $ 34,580 $ 31,258 - ------------------------------------------------------------------------------------------------------------------------------- Income before extraordinary loss, as reported $ 19,196 $ 990 $ 4,760 $ 4,204 SFAS No. 122 adjustment 2,858 (4,858) - - - ------------------------------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary loss, as adjusted 22,054 (3,868) 4,760 4,204 - ------------------------------------------------------------------------------------------------------------------------------- Extraordinary loss (675) (227) - - Net income, as reported 18,521 763 4,760 4,204 SFAS No. 122 adjustment 2,858 (4,858) - - - ------------------------------------------------------------------------------------------------------------------------------- Net income (loss), as adjusted $ 21,379 $ (4,095) $ 4,760 $ 4,204 - ------------------------------------------------------------------------------------------------------------------------------- Net income (loss) per share before extraordinary loss, as reported $ 5.33 $ (.45) $ 1.13 $ 1.24 SFAS No. 122 adjustment per share .89 (1.97) - - - ------------------------------------------------------------------------------------------------------------------------------- Net income (loss) per share before extraordinary loss, as adjusted 6.22 (2.42) 1.13 1.24 - ------------------------------------------------------------------------------------------------------------------------------- Extraordinary loss per share (.21) (.09) - - Net income (loss) per share, as reported 5.12 (.54) 1.13 1.24 SFAS No. 122 adjustment per share .89 (1.97) - - - ------------------------------------------------------------------------------------------------------------------------------- Net income (loss) per share, as adjusted $ 6.01 $ (2.51) $ 1.13 $ 1.24 - ------------------------------------------------------------------------------------------------------------------------------- (a) Includes a $29.1 million pretax write-off of the Company's goodwill and other intangible assets.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT 41 EX-16.(A) 13 EXHIBIT 16(A) 1 Exhibit 16(a) March 27, 1997 Securities and Exchange Commission Washington, D.C. 20549 We have read Item 9 of Form 10-K dated March 28, 1997 of Source One Mortgage Services Corporation and are in agreement with the statement contained in the second paragraph of Item 9. We have no basis to agree or disagree with other statements of the registrant contained therein. Very truly yours, /s/ Ernst & Young LLP EX-21 14 EXHIBIT 21 1 EXHIBIT 21 *SOURCE ONE MORTGAGE SERVICES CORPORATION (full service mortgage corporation) (subsidiaries) THE MORTGAGE CMC INSURANCE MHMC INSURANCE SOMSC SERVICES AUTHORITY, INC. AGENCY, INC. AGENCY, INC. INC. (whole loan/ (credit insurance (credit insurance (biweekly mortgage broker purchasing) agency) agency) payment admin.) **CENTRAL PACIFIC MORTGAGE COMPANY (full service mortgage corporation) (subsidiaries) NORTHWEST PACIFIC MORTGAGE COMPANY
EX-23 15 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Source One Mortgage Services Corporation of our report dated January 30, 1997, except for Notes 7 and 22, as to which the date is March 21, 1997, included in the 1996 Annual Report to Shareholder of Source One Mortgage Services Corporation. We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 33-47025 and Form S-4 No. 33-62765) of Source One Mortgage Services Corporation and in the related Prospectuses of our report dated January 30, 1997, except for Notes 7 and 22, as to which the date is March 21, 1997, with respect to the consolidated financial statements of Source One Mortgage Services Corporation incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ Ernst & Young LLP Detroit, Michigan March 27, 1997 EX-24 16 EXHIBIT 24 1 EXHIBIT 24 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that James A. Conrad does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, and Robert L. Densmore, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the seventh day of March, 1997. /s/ James A. Conrad ___________________________________ James A. Conrad 2 EXHIBIT 24 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Robert R. Densmore does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the seventh day of March, 1997. /s/ Robert R. Densmore ___________________________________ Robert R. Densmore 3 EXHIBIT 24 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that James H. Ozanne does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert R. Densmore and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the seventh day of March, 1997. /s/ James H. Ozanne ___________________________________ James H. Ozanne 4 EXHIBIT 24 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Gordon S. Macklin does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the seventh day of March, 1997. /s/ Gordon S. Macklin ___________________________________ Gordon S. Macklin 5 EXHIBIT 24 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Michael C. Allemang does hereby make, constitute and appoint Mark A. Janssen, Robert R. Densmore, and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the seventh day of March, 1997. /s/ Michael C. Allemang ___________________________________ Michael C. Allemang 6 EXHIBIT 24 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Terry Baxter does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the seventh day of March, 1997. /s/ Terry Baxter ___________________________________ Terry Baxter 7 EXHIBIT 24 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Robert P. Keller does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the seventh day of March, 1997. /s/ Robert P. Keller ___________________________________ Robert P. Keller 8 EXHIBIT 24 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Allan L. Waters does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the seventh day of March, 1997. /s/ Allan L. Waters ___________________________________ Allan L. Waters 9 EXHIBIT 24 SOURCE ONE MORTGAGE SERVICES CORPORATION KNOW ALL MEN by these presents that Roger K. Taylor does hereby make, constitute and appoint Mark A. Janssen, Michael C. Allemang, and James A. Conrad, and each of them, the true and lawful attorney-in-fact of the undersigned, with full power of substitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver the Annual Report on Form 10-K of Source One Mortgage Services Corporation for the year ended December 31, 1996, and any and all amendments thereto; such Form 10-K and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney for such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of the seventh day of March, 1997. /s/ Roger K. Taylor ___________________________________ Roger K. Taylor EX-27 17 EXHIBIT 27
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 923 2,312 0 0 0 0 28,054 0 1,131,054 0 0 0 18 22 314,717 1,131,054 0 148,680 0 143,553 0 10,260 36,018 5,127 9,453 (4,326) 0 0 0 (4,326) (3.57) 0
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