-----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, RIatbA1ULaSs8ZV3jNYRQIFuMVd9NRQKCxYVYBdJmNUg6CpWB2GK/XFTk65dbF/d wk73KtPggONLaaEv1sTKyA== 0000950124-97-002592.txt : 19970501 0000950124-97-002592.hdr.sgml : 19970501 ACCESSION NUMBER: 0000950124-97-002592 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970430 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCA FINANCIAL CORP /MI/ CENTRAL INDEX KEY: 0000880935 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 383014001 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-98644 FILM NUMBER: 97592441 BUSINESS ADDRESS: STREET 1: 23999 NORTHWESTERN HWY CITY: SOUTHFIELD STATE: MI ZIP: 48075 BUSINESS PHONE: 8103585555 10-K405 1 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------- ------------------------ Commission File No. 33-98644 MCA FINANCIAL CORP. (Exact name of registrant as specified in its charter) Michigan 38-3014001 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 23999 Northwestern Hwy. Southfield, Michigan 48075 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (810) 358-5555 Securities registered pursuant to Section 12(b) of the Act: None 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. [X] The aggregate market value of the registrant's outstanding voting stock held by non-affiliates as of April 1, 1997, computed by reference to the book value of the Company's common stock as of January 31, 1997 (because there is no market for the Registrant's common stock) was $1,314,870. At April 1, 1997, there were outstanding 523,283 shares of the registrant's common stock (including shares subject to forfeiture). Documents Incorporated By Reference: None. 2 ITEM 1. BUSINESS. GENERAL MCA Financial Corp. ("MCAFC" or the "Company") is a holding company which, through its principal subsidiaries and certain affiliates, engages in mortgage banking, land contract and mortgage syndication, loan originating and servicing and real estate acquisitions, rehabilitation, leasing and sales. MCAFC is a Michigan corporation which was formed in 1989 and was inactive until 1991 when it became a holding company for its principal subsidiaries. Currently, MCAFC operates through the following wholly-owned subsidiaries: - MCA Mortgage Corporation ("MCA Mortgage") is a Michigan corporation that was incorporated in 1985 and has conducted a mortgage banking business since that date. It was known as Primary Mortgage Corporation until that date and was known as Mortgage Corporation of America from August 1985 until March 1993. - Mortgage Corporation of America ("MCA") is a Michigan corporation that was incorporated in 1984 and has conducted a mortgage banking business since that date. It was known as First American Mortgage Corporation, Inc. until September 1989 and as First American Mortgage Associates, Inc. from September 1989 until October 1993. - RIMCO Realty & Mortgage Company, doing business as MCA Realty Corporation ("MCA Realty"), is a Michigan corporation that was incorporated in 1993 and was acquired by MCAFC on January 31, 1995. MCA Realty is engaged in the purchase and sale of residential real estate. - Mortgage Corporation of America, Inc. ("MCA-Ohio") is an Ohio Corporation that was incorporated in 1993 and has conducted a mortgage banking business, emphasizing non-conforming loans, since that date. It was known as Charter 1st Mortgage Banc, Inc. from May 1993 until July 1995 when it was acquired by MCA. MCAFC has two other subsidiaries, Complete Financial Corporation and Securities Corporation of America, both Michigan corporations, which are currently inactive. Unless otherwise indicated, MCAFC and its subsidiaries are hereinafter collectively referred to as the "Company." MORTGAGE BANKING Mortgage banking is the business of acting as a financial intermediary in the origination of mortgage loans, the holding or warehousing of such loans, the subsequent marketing of such loans to investors and the ongoing management or servicing of such loans during the repayment term. Mortgage bankers earn revenue in each of the four phases of the mortgage banking process: origination, warehousing, marketing, and servicing. Origination. The origination of mortgage loans produces revenue through fees paid by the borrower upon applying for a loan and at the loan closing. The origination process involves providing competitive mortgage loan rates, soliciting loan applications, performing title and credit review and funding loans at closing. The Company originates mortgage loans through direct solicitation of borrowers by its own sales force and through referrals from real estate brokers, builder-developers and others (commonly referred to as retail origination). In connection with the origination of each loan, the Company prepares mortgage documentation, conducts credit checks, has the property appraised by independent appraisers and closes the loan. The Company's underwriting standards and procedures with respect to loans it originates, as described above, conform to the requirements of its mortgage loan investors. Referrals from real estate 2 3 brokers account for the largest portion of the Company's originated loans. In addition, advertising is used in the local markets where offices are located and generates additional origination activity. The following tables set forth the aggregate amount of retail loans and the percentage of such retail loans that related to properties in the various states in which the Company operates.
Year State $ Amount of Retail Loans Percentage of Retail Loans - ---- ----- ------------------------ -------------------------- 1997 Michigan $247 million 40% Indiana 72 million 12% Florida 103 million 17% Ohio 35 million 6% Illinois 82 million 13%
Year State $ Amount of Retail Loans Percentage of Retail Loans - ---- ----- ------------------------ -------------------------- 1996 Michigan $193 million 39% Indiana 57 million 11% Florida 85 million 17% Ohio 46 million 9% Illinois 55 million 11%
Year State $ Amount of Retail Loans Percentage of Retail Loans - ---- ----- ------------------------ -------------------------- 1995 Michigan $234 million 59% Indiana 51 million 13% Washington 31 million 8% Ohio 48 million 12%
The remaining retail loans for fiscal 1997, 1996 and 1995 related to properties located in various other states. The Company currently purchases a substantial portion of its originated mortgage loans through "wholesale" operations. Wholesale operations involve the origination of loans by unrelated mortgage companies which prepare the necessary documentation, but leave the credit evaluation, property appraisal and loan funding functions for the Company to perform. The standards of loan documentation by such unrelated mortgage company originators may not be as stringent as the standards applied by the Company on its own direct originations. For each wholesale loan the Company's credit evaluation and property appraisal procedures are the same as for its retail originations. The following tables set forth the aggregate amount of wholesale loans and the percentage of such wholesale loans that related to properties in the various states in which the Company operates.
Year State $ Amount of Wholesale Loans Percentage of Wholesale Loans - ---- ----- --------------------------- ----------------------------- 1997 Florida $ 33 million 17% Michigan 61 million 31% Illinois 34 million 18% Ohio 41 million 21%
Year State $ Amount of Wholesale Loans Percentage of Wholesale Loans - ---- ----- --------------------------- ----------------------------- 1996 Florida $ 11 million 8% Michigan 66 million 47% Illinois 28 million 20% Ohio 25 million 18%
Year State $ Amount of Wholesale Loans Percentage of Wholesale Loans - ---- ----- --------------------------- ----------------------------- 1995 Florida $ 45 million 33% Michigan 35 million 25% Indiana 17 million 12% Oregon 9 million 7%
The remaining wholesale loans for fiscal 1997, 1996 and 1995 related to properties located in various other states. The Company is engaged in the origination of conventional mortgage loans, secured by one- to four-family residential properties (including condominiums), that conform to the requirements for sale to either the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The Company also originates non-conforming conventional loans that exceed the maximum amounts qualifying for sale to Freddie Mac or Fannie Mae (currently $214,600) but that otherwise conform to their requirements ("jumbo loans"). The Company's principal mortgage banking subsidiary, MCA Mortgage, is an approved seller/servicer for Freddie Mac, the Government National Mortgage Association ("Ginnie Mae") and Fannie Mae, while its other principal subsidiary, MCA, is an approved seller/servicer for Freddie Mac. In addition, MCA Mortgage and MCA are qualified to originate mortgage loans insured by the Federal Housing Administration ("FHA") and mortgage loans partially guaranteed by the Veterans Administration ("VA"), which qualify for pooling by Ginnie Mae and qualify for sale to other institutional investors. The Company also originates loans which do not conform to Freddie Mac or Fannie Mae requirements. These "non-conforming" loans are typically made to self-employed individuals and others unable to meet the underwriting standards for conventional lending. Generally, these loans carry higher interest rates and fees 3 4 commensurate with the additional credit risk. These loans are typically sold on the secondary market to a different group of investors than the conventional loans originated by the Company. The Company expanded its originations in this market through the acquisition of MCA-Ohio in July 1995, a company which has been engaged in this type of lending since 1993. 4 5 The following table sets forth for the periods indicated the number, dollar volume and percentage of total volume of the Company's loan production (dollars in thousands except Average Loan Balances):
Fiscal Year ended January 31, ---------------------------------- 1997 1996 1995 RETAIL LOANS - ------------ Conventional Loans: Number of Loans. . . . . . . . . . . . 3,076 2,715 2,241 Volume of Loans. . . . . . . . . . . . $272,943 $243,154 $186,452 Percent of Total Volume 33.71% 38.47% 33.04% FHA/VA Loans: Number of Loans. . . . . . . . . . . . 3,765 2,669 2,681 Volume of Loans. . . . . . . . . . . . $291,601 $202,803 $186,136 Percent of Total Volume. . . . . . . . 36.01% 32.07% 32.99% Non-Conforming Loans: Number of Loans. . . . . . . . . . . . 418 581 1,425 Volume of Loans. . . . . . . . . . . . $ 32,012 $ 34,133 $ 42,301 Percent of Total Volume. . . . . . . . 3.96% 5.40% 7.50% Jumbo Loans Number of Loans. . . . . . . . . . . . 68 40 41 Volume of Loans. . . . . . . . . . . . 17,491 $ 11,478 $ 11,397 Percent of Total Volume. . . . . . . . 2.16% 1.81% 2.02% Average Loan Balance . . . . . . . . . . . $ 83,806 $ 81,860 $ 66,732 Total Volume of Loans . . . . . . . . . . . $614,047 $491,568 $426,286 WHOLESALE LOANS(1) - ------------------ Conventional Loans: Number of Loans. . . . . . . . . . . . 546 617 655 Volume of Loans. . . . . . . . . . . . $ 48,048 $ 60,590 $ 54,740 Percent of Total Volume. . . . . . . . 5.93% 9.58% 9.70% FHA/VA Loans: Number of Loans. . . . . . . . . . . . 427 309 1,059 Volume of Loans. . . . . . . . . . . . $ 37,904 $ 27,158 $ 73,746 Percent of Total Volume. . . . . . . . 4.68% 4.30% 13.07% Non-Conforming Loans: Number of Loans. . . . . . . . . . . . 1,803 995 122 Volume of Loans. . . . . . . . . . . . $108,928 $ 52,485 $ 9,463 Percent of Total Volume. . . . . . . . 13.45% 8.30% 1.68% Jumbo Loans Number of Loans. . . . . . . . . . . . 4 2 * Volume of Loans. . . . . . . . . . . . $ 829 $ 480 * Percent of Total Volume. . . . . . . . .10% .07% * Average Loan Balance . . . . . . . . . . . $ 70,400 $ 73,174 $ 75,136 Total Volume of Loans(1) . . . . . . . . . $195,709 $140,713 $137,949 TOTAL LOANS - ----------- Number of Loans . . . . . . . . . . . . . . 10,107 7,928 8,224 Volume of Loans . . . . . . . . . . . . . . $809,756 $632,281 $564,235 Average Loan Balance . . . . . . . . . . . $ 80,118 $ 79,753 $ 68,608
*Indicates that these types of loans were not originated by the Company during the applicable period. (1) During fiscal 1997, no single company was responsible for greater than 10% of the Company's wholesale originations. During fiscal 1996, Watson Financial Group ("Watson") was responsible for 13% of the Company's wholesale originations. Watson is not affiliated with the Company. During fiscal 1995, no single company was responsible for greater than 10% of the Company's wholesale originations. 5 6 At January 31, 1997, the Company had applications in process for approximately 2,022 mortgage loans, aggregating approximately $154 million. At January 31, 1996, the Company had applications in process for approximately 1,947 mortgage loans, aggregating approximately $186 million. Based on experience, the Company anticipates that 75% to 80% of the loan applications will close within 45 to 90 days. Warehousing. Warehousing is the term used to describe the process of holding mortgage loans pending their sale to investors (typically financial institutions) or into the secondary market. During the warehousing period the Company earns income equal to the difference between the interest received on the mortgage loans and the interest paid on short-term advances from banks which are used typically to fund the mortgage loans. During periods when short-term warehouse borrowing rates exceed long-term mortgage lending rates, the warehousing of mortgage loans can result in a loss. Pending sale and delivery to investors, the Company's mortgage loans are funded almost entirely by borrowings under warehousing lines of credit from banks. The Company typically holds mortgage loans for a period of up to 60 days after closing in order to prepare them for sale. Borrowed funds are repaid when the Company receives payment upon the sale of the loans. Accordingly, the Company is dependent on loan sales to free warehousing credit lines in order that new loans can be closed. Among its short-term financing sources, the Company maintains a loan agreement with Texas Commerce Bank N.A. and a mortgage loan agreement with Paine Webber Real Estate Securities. As is customary in the industry, these credit facilities can be terminated on demand or upon relatively short notice. In such an event, the Company would seek replacement or new credit facilities from other lenders for these existing lines of credit on terms at least as favorable. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Marketing. The offering, sale, packaging and delivery of closed mortgage loans to investors is the activity which distinguishes a mortgage banker as a financial intermediary from a portfolio lender or permanent investor. Marketing mortgage loans is the most complex aspect (both financially and operationally) of the mortgage banking business. It requires matching the needs of the retail origination market (consisting of home buyers and homeowners seeking new mortgages) with the needs of the secondary market for mortgage loans (consisting of securities broker-dealers, depository institutions, insurance companies, pension funds and other investors). Conventional mortgage loans (i.e., those not guaranteed or insured by agencies of the federal government), which are secured by one-to-four family residential properties (including condominiums) and which comply with applicable requirements, are packaged for direct sale to mortgage investors. In addition, there is an active private market for mortgage loans which have not been pooled or securitized. Factors which may influence the market value of packaged loans include the general level of interest rates, the types of loans (e.g., conventional mortgage loans or larger jumbo loans), interest payment and principal amortization schedules (e.g., self-amortizing or balloon, fixed-rate or indexed adjustable-rate, equal monthly payment or adjustable payment), type of mortgaged property (e.g., one-to four family detached, row or townhouse, condominium or planned unit development), ratio of loan proceeds to appraised property value, property location, credit profile, and whether loans are packaged into pools (represented by securities) or sold separately on a whole loan basis. 6 7 The following table sets forth for the periods indicated, the Company's loan production by type of interest payment and principal amortization schedule as well as loan to value ratio information (dollars in thousands):
Year ended January 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------ ------- ------ ------- 30-year Fixed Rate: Number of Loans . . . . . . . . . . . . 6,092 5,349 4,569 5,084 818 Volume of Loans . . . . . . . . . . . . $492,949 $424,994 $339,394 $448,762 $ 94,297 Percent of Total Volume . . . . . . . . 60.88% 67.22% 60.15% 65.28% 46.43% 15-year Fixed Rate: Number of Loans . . . . . . . . . . . . 785 611 844 1,953 678 Volume of Loans . . . . . . . . . . . . $ 49,149 $ 40,137 $ 49,536 $142,340 $ 50,985 Percent of Total Volume . . . . . . . . 6.07% 6.35% 8.78% 20.70% 25.11% Adjustable Rate ("ARMS"): Number of Loans . . . . . . . . . . . . 1,487 1,239 1,217 299 248 Volume of Loans . . . . . . . . . . . . $143,453 $114,619 $108,983 $ 34,073 $ 26,534 Percent of Total Volume . . . . . . . . 17.71% 18.13% 19.32% 4.96% 13.07% Other (1): Number of Loans . . . . . . . . . . . . 0 69 352 194 245 Volume of Loans . . . . . . . . . . . . 0 $ 5,225 $ 6,154 $ 3,121 $ 3,408 Percent of Total Volume . . . . . . . . 0% 0.82% 1.09% 0.45% 1.68% Balloon Payment: Number of Loans . . . . . . . . . . . 1743 660 1,242 1,380 464 Volume of Loans . . . . . . . . . . . $124,205 $ 47,306 $ 60,167 $ 59,188 $ 27,863 Percent of Total Volume . . . . . . . . 15.34% 7.48% 10.66% 8.61% 13.71% Total Number of Loans . . . . . . . . . 10,107 7,928 8,224 8,910 2,448 Total Volume . . . . . . . . . . . . . . $809,756 $632,281 $564,235 $687,484 $203,087 Total Loan to Value Percent. . . . . . . 84.13% 83.8% 90.5% 94.5% n/a*
- ------------------- *n/a = not available for this period. (1) This category represents mortgages and land contracts with other than 15 or 30 year terms, which have no balloon payment. 7 8 The following table sets forth for the periods indicated, the number, dollar volume and percent of total volume of the Company's loan production by occupancy status and type of mortgaged property (dollars in thousands):
Year Ended January 31 ------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Detached - Single Family - ------------------------ Owner Occupied: Number of Loans . . . . . . . . . . . . . 8,939 6,943 6,916 7,441 1,864 Volume of Loans . . . . . . . . . . . . . $724,011 $578,154 $506,714 $636,440 $178,515 Percent of Total Volume 89.41% 91.44% 89.81% 92.58% 87.90% Non-owner occupied: Number of Loans. . . . . . . . . . . . . 442 133 947 1,088 447 Volume of Loans $ 20,733 $ 6,121 $ 28,603 $ 23,441 $ 14,427 Percent of Total Volume 2.56% 0.97% 5.07% 3.41% 7.11% Other (1): Number of Loans. . . . . . . . . . . . . 76 66 39 64 9 Volume of Loans. . . . . . . . . . . . . $ 6,022 $ 5,929 $ 3,310 $ 4,894 698 Percent of Total Volume. . . . . . . . . 0.75% 0.94% 0.59% 0.71% 0.34% Multi-Unit and Commercial - ------------------------- Owner Occupied: Number of Loans. . . . . . . . . . . . . . 523 360 262 265 101 Volume of Loans. . . . . . . . . . . . . . $ 52,489 $ 28,919 $ 19,909 $ 18,895 $ 7,655 Percent of Total Volume. . . . . . . . . . 6.48% 4.57% 3.53% 2.75% 3.77% Non-owner occupied: Number of Loans. . . . . . . . . . . . . . 127 426 60 52 27 Volume of Loans. . . . . . . . . . . . . . $ 6,501 $ 13,158 $ 5,699 $ 3,814 $ 1,792 Percent of Total Volume. . . . . . . . . . 0.80% 2.08% 1.00% 0.55% 0.88%
- ----------------- (1) Includes second homes and vacant land. The sale of mortgage loans produces a net gain or loss equal to the sum of (i) the difference between the principal amount of the loans and the net price at which the loans are sold (the cash gain or loss on sales) and (ii) the present value of the difference (the "premium on sale of mortgage loans"), if any, between the stated interest rate collected by the mortgage banker from the mortgage loan borrowers and the interest rate paid by the mortgage banker to the purchasers of the loans, net of a normal servicing fee. The Company typically holds its mortgage loans for up to 60 days before selling them to investors. The Company sells conforming loans either directly on a loan-by-loan basis to Freddie Mac, Fannie Mae or other financial institutions, or by a process of "securitization" of loan pools. Conforming loans and loans qualifying for securitization through Ginnie Mae programs may be grouped in pools and assigned to Freddie Mac, Fannie Mae or Ginnie Mae, as applicable, which issues a mortgage-backed security ("MBS") representing an undivided interest in the loan pool. For issuing the MBS, Freddie Mac, Fannie Mae or Ginnie Mae receives an annual fee, up to .50% of the declining principal amount of the loan pool. The Company, through investment bankers, may then sell these MBSs to investors or hold them for investment. Loan pools may be sold to Freddie Mac or Fannie Mae, or securitized in the form of Ginnie Mae mortgaged-backed securities and sold to institutional investors with or without recourse in the event of default by the borrowers. If a loan pool is sold without recourse, Freddie Mac will typically charge a fee for issuing the MBS which is .05% to 8 9 .07% higher than if such loan pool were sold with recourse. The Company decides to sell loan pools with or without recourse based primarily upon capital market conditions and perceived risks of the terms of such mortgage loan documents. To date all of the loan pools sold by the Company to Freddie Mac or Fannie Mae or through Ginnie Mae programs have been sold on a non-recourse basis. Mortgage loans are also sold on a loan-by-loan basis to banks, mortgage companies and other private investors and, in the case of conforming loans, may be sold to Freddie Mac or Fannie Mae. Such individual loan sales are typically made by the Company on a non-recourse basis. During fiscal 1997, 1996 and 1995, the Company made $809.8 million, $632.3 million and $564.2 million of non-recourse loans, respectively, and did not sell any loans with recourse. Loans underwritten and sold may be subject to repurchase if the underwriting standards of the investor are not met, potentially resulting in actual loss and/or the limitation of the Company's liquidity. The Company packages substantially all of its FHA-insured and VA-guaranteed mortgage loans into pools of loans sold in the form of pass-through mortgage-backed securities guaranteed by Ginnie Mae. With respect to loans secured through Ginnie Mae programs, the Company is insured against foreclosure loss by the FHA or partially guaranteed against foreclosure loss by the VA (at present generally 25% to 100% of the loan). Since the Company is not an end investor in these types of loans, its risk with respect to these loans is minimal. FHA-insured and VA-guaranteed mortgage loans represent approximately 33% of the Company's originations in any given year. The discontinuance of these programs would have a limited impact upon the Company due to the Company's ability to originate a substantial volume of conventional loans which enables the Company to market mortgage loans to Freddie Mac, Fannie Mae or other investors. The Company commits to sell loans in an amount equal to the closed loans held in inventory, plus a portion of the loans that the Company has committed to make but has not yet closed. This enables the Company to mitigate the interest rate risk resulting from the fact that market interest rates may change between the time that the Company commits to make or purchase a loan and the time the Company commits to sell or sells such loans. The portion of loans that have not yet closed which the Company commits to sell depends on numerous factors, including the total amount of the Company's outstanding commitments to make loans, the portion of such loans that is likely to close, the timing of such closings and anticipated changes in interest rates. The Company constantly monitors these factors and adjusts its commitments position accordingly. The Company's commitment position may consist of mandatory forward commitments on mortgage-backed securities or mortgage loans, options on mortgage-backed securities or treasury futures contracts, or outright futures contracts. See Note 9 of Notes to Consolidated Financial Statements for a discussion of financial instruments with off-balance-sheet risk. Non-conforming loans are sold to a different group of investors. They are typically packaged with other similar loans and sold servicing released, in bulk, to obtain a more favorable price. In the fourth quarter, the Company entered into an agreement with another party to sell substantial portions of the Company's non-conforming production for purposes of securitization. This entitles the Company to the difference between the weighted average coupon rate of the loan it originated and the security's stated yield, less a normal servicing fee and certain other fees. Servicing. At January 31, 1997, the Company owned servicing rights for mortgages with outstanding balances of approximately $1.48 billion and to land contracts with outstanding net balances of approximately $117 million. The Company intends to increase significantly its servicing of residential mortgage loans, and to maintain a mortgage and land contract servicing system that emphasizes cash management and compliance with investor servicing requirements. To this end, the Company intends to purchase conventional mortgage loan servicing rights from other unaffiliated loan servicers. The Company also obtains additional servicing through the retention of servicing with respect to mortgages and land contracts that it originates and sells to others. For residential mortgage loans which it originates, the Company retains the servicing related to most of these loans temporarily, then sells the servicing rights from time to time on the open market. The Company intends to restrict its purchases of mortgage servicing to servicing that can be purchased at a price that provides targeted rates of return, and is compatible with the Company's systems and processes. During fiscal 1997, the Company purchased servicing with respect to approximately $830 million of mortgage loans and has sold servicing with respect to approximately $1.8 billion of mortgage loans. A loan servicing portfolio creates an earning asset in the form of income created from servicing fees, which range generally from 0.25% to 0.50% per year for mortgage loans and from 0.25% to 2.5% per year for land contracts, based 9 10 on the declining principal balance of the mortgage loans or the declining net principal balances of land contracts serviced, and the potential interest earnings on escrow funds held until the time payment for taxes and insurance must be made. Based upon current market conditions, the Company estimates that servicing rights for residential mortgage loans and land contracts have a market value from 1.25% to 2.5% and from 1.25% to 4.0%, respectively, of the principal balance of the mortgage loans and the declining net principal balances of land contracts serviced. One of the Company's strategies is to build and retain its servicing portfolio. The Company believes that it has developed systems that enable it to service mortgage and land contract loans efficiently and therefore enhance the returns it can earn from investments in servicing rights. In addition, the Company believes that the earnings from its servicing portfolio may to some extent offset the effect of interest rate fluctuations on loan origination revenue. In general, the value of the Company's loan servicing portfolio may be adversely affected as mortgage interest rates decline and expected loan prepayments increase. Income generated from the Company's loan servicing portfolio also may decline in such an environment. On the other hand, these effects may be offset somewhat by an increase in originations and servicing income attributable to new loans which historically increase in periods of declining mortgage interest rates. However, there can be no assurance that low mortgage rates will result in increased loan originations, particularly during periods of slow or negative economic growth. As of January 31, 1997, the weighted average rate on mortgages serviced by the Company but owned by others was 8.04% and the weighted average rate on mortgages and land contracts serviced by the Company but owned by MCA Mortgage or MCA-sponsored pass-through pools was 10.98%. The following table sets forth information about the Company's retail and wholesale loan origination and servicing activities:
Year Ended January 31 ------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- --------- (dollars in thousands, except average loan balance) Beginning loan servicing portfolio . . . . . . . . . . . . . $2,206,460 $1,303,628 $1,105,534 $ 234,743 $ 44,380 Add: Loans purchased and originated by the Company for resale. . . . . . . . . . . . 727,007 632,281 536,881 687,484 203,087 Loans purchased by the Company for syndication. . . . . . . . 20,849 25,597 27,354 19,188 16,475 Mortgage servicing purchased (net of sales) (862,569) 618,780 (166,577) 471,587 98,808 ---------- ---------- ---------- ---------- --------- $2,091,747 $2,580,286 $1,503,192 $1,413,002 $ 362,750 Less: Amortization . . . . . . . . . . . . . . . . . . (53,761) (43,491) (43,228) (36,832) (1,146) Prepayments of loans. . . . . . . . . . . . (237,196) (172,100) (107,571) (210,305) (7,773) Loans sold with servicing sold. . . . . . . . . . . . . . . . . (199,748) (158,235) (48,765) (60,331) (119,088) ---------- ---------- ---------- ---------- --------- Ending loan servicing portfolio. . . . . . . . . . . . . . . . . . . $1,601,042 $2,206,460 $1,303,628 $1,105,534 $ 234,743 ========== ========== ========== ========== ========= Number of loans serviced (end of period). . . . . . . . . . . . . . 21,248 27,357 16,372 15,900 4,063 Average loan balance. . . . . . . . . . . . $ 75,350 $ 80,650 $ 79,625 $ 69,530 $ 57,776
10 11 The following table sets forth, for the periods indicated, the mortgage delinquency rate of the Company's loan servicing portfolio and information relating to foreclosed properties:
Year ended January 31, -------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Delinquent mortgage loans at Period end: 30 days: Number of loans . . . . . . . . . . . . . 838 227 359 259 157 Percent of total loans 3.94% 0.83% 2.19% 1.87% 3.86% 60 days: Number of loans . . . . . . . . . . . . . 216 49 97 77 26 Percent of total loans 1.02% 0.18% 0.59% 0.56% 0.64% 90 days or more: Number of loans . . . . . . . . . . . . . 367 75 143 43 45 Percent of total loans 1.73% 0.27% 0.87% 0.31% 1.11% Total delinquencies: Number of loans . . . . . . . . . . . . . 1421 351 599 379 228 Percent of total loans 6.69% 1.28% 3.65% 2.74% 5.61% Foreclosed Properties: Beginning inventory . . . . . . . . . . . 122 84 83 84 34 Properties acquired . . . . . . . . . . . 106 136 89 122 162 Ending inventory . . . . . . . . . . . . 113 122 84 83 84 Aggregate carrying value, net (-000's) . . . . . . . . . . . $ 2,576 $ 2,288 $ 1,500 $ 1,495 $ 1,701 Average carrying value . . . . . . . . . . $22,798 $18,754 $17,854 $18,012 $20,246
OTHER BUSINESS ACTIVITIES Securitization and Syndication of Real Estate Interests. The Company is involved in marketing real estate interests in the form of pass-through securities which represent the ownership of undivided fractional interests in a defined pool of real estate related loans and loan participations. The Company's primary objective in marketing these securities is to provide investors with consistent high income without undue risk of loss. To accomplish this, the Company has developed a program of acquiring for resale real estate related investments consisting primarily of land contract seller's interests and real estate mortgage notes. The Company emphasizes investments in land contract seller's interests because of the traditional absence of competition from financial institutions in this market, which generally results in higher yields, and the belief that legal rights and remedies available to land contract sellers are more flexible and lead to collection of delinquent accounts with greater success than can be realized with respect to mortgage notes. In addition, a land contract may be used only as an instrument facilitating the sale and exchange of real property. Therefore, the nature of the debt owed by the land contract purchaser is a result of the purchaser's desire to own, through installment payments, the realty involved. 11 12 Through January 31, 1997, the Company had sponsored 114 offerings of pass-through certificates. For each offering, a subsidiary acts as the sponsor and servicing agent for the land contracts, mortgages and other real estate interests which are held for the benefit of the certificate holders. Pursuant to the master pooling and servicing agreement relating to the pools, the sponsor is obligated to purchase all outstanding participation certificates held by investors in that pass-through pool at such time as the aggregate net receivable balance of each pass-through pool is less than 10% of the original face amount. At January 31, 1997, the maximum amount of these future purchase commitments totaled approximately $9.4 million. The sponsor can satisfy its repurchase obligation for such a paid-down pool by arranging a purchase of the underlying real estate interests by another pass-through pool or a mortgage investor. The following table shows the growth of the Company's originations and purchases of loans for syndication in pass-through pools during the fiscal years indicated:
Year ended January 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Number of Land Contracts purchased for syndication . . . . . . . . 855 933 1,002 798 308 Average balance . . . . . . . . . . . . . . $ 24,418 $ 23,485 $ 22,453 $ 17,759 $ 31,413 Total amount of Land Contracts purchased for syndication. . . . . . . . . . . . . . . . 20,877,360 $21,911,707 $22,498,079 $14,172,104 $ 9,675,388 Number of Mortgage Notes purchased for syndication . . . . . . . . 46 78 212 344 260 Average loan balance. . . . . . . . . . . . $ 62,930 $ 47,246 $ 22,906 $ 14,580 $ 26,152 Total amount of Mortgage Notes purchased for syndication . . . . . . . . . . . . . . . $ 2,894,797 $ 3,685,207 $ 4,856,239 $ 5,015,723 $ 6,799,612 Total number of loans purchased for syndication . . . . . . . . 901 1,011 1,214 1,142 568 Average loan balance . . . . . . . . . . . $ 26,384 $ 25,318 $ 22,513 $ 16,802 $ 29,005 Total amount purchased for syndication . . . . . . . . . . . . . . . $23,772,157 $25,596,914 $27,354,318 $19,187,827 $16,475,000
Purchase and Resale of Real Property. The Company purchases and sells income-producing real estate, with sales made primarily to limited partnerships for which an affiliated company acts as general partner. This activity produces income to the Company in the form of gains on the sale of such real estate. In addition, MCA Realty purchases distressed residential real estate, which is rehabilitated and sold to non-related individuals. During the year ended January 31, 1997, the Company acquired and sold 820 single family homes for a total gain of $8.2 million, $7.5 million of which represented sales to the limited partnerships described above. During fiscal 1996, 1995, and 1994, the Company acquired and sold 723, 735, and 415 single-family homes for total gains of $7.3 million, $7.4 million, and $4.9 million, respectively, of which $6.5 million, $7.3 million and $4.8 million, respectively, represented sales to related parties. See Note 14 of Notes to Consolidated Financial Statements for a summary of selected consolidated segment financial information. The income producing real estate which is purchased by the Company and its affiliates is acquired through the assistance of both affiliated and unaffiliated real estate brokers. Approximately 60% and 40%, respectively, is acquired through affiliated and nonaffiliated brokers. There appears to be increased competition for these income-producing real estate properties as real estate values continue to escalate and the economy continues to grow. 12 13 Most of the income-producing real estate is sold by the Company and its affiliates on land contracts to limited partnerships controlled by an affiliate of the Company. These transactions are not arm's length transactions with independent third party appraisals. The land contracts are then sold by the Company to real estate pass-through pools of which MCA is the sponsor of the pools. The remaining balance of income-producing real estate is sold to unrelated third parties. Because most of the income-producing real estate sales are directed to affiliated partnerships, the normal real estate concerns associated with purchasers and fluctuating market values are not applicable. These partnerships are engaged in the business of renting income producing properties to individuals. The day-to-day real estate rental concerns are those of the syndicated real estate limited partnerships of the affiliates and not those of the Company. However, the payments to the Company pursuant to the land contract receivables are dependent upon the ability of these partnerships to generate rental income. Other. During fiscal 1996, the Company made a common stock investment of approximately $1.0 million in a Delaware Limited Liability Company. This start-up company participates in the used vehicle retail industry through providing floor plan financing and joint venture activities with existing dealers. The Company's investment in the Class B Securities issued by this Limited Liability Company provides it the right to participate in earnings and distributions, if any, subject to the preferential right of certain other shareholders. COMPETITION The Company competes with other mortgage bankers, state and national banks, thrift institutions and insurance companies for loan originations and purchases. While there are several dominant competitors in the industry, the Company believes it is a mid-range mortgage company in its markets. Many of its competitors have substantially greater resources than the Company. However, the Company believes that it offers a more diversified and, in some cases, unique product line to its customers. The Company competes, in part, through print and electronic media advertising campaigns, by motivating its sales force through incentive compensation based on volume of loan originations, by maintaining a network of branch locations designed to provide sales support for its originators and by maintaining close relationships with real estate brokers and builder-developers. REGULATION The Company is subject to the rules and regulations of, and examinations by, Freddie Mac, Fannie Mae, Ginnie Mae and the Department of Housing and Urban Development ("HUD") with respect to the processing, origination and purchase, sale and servicing of mortgage loans and contracts. These rules and regulations prohibit discrimination, provide for inspection and appraisals of properties, require credit reports on prospective borrowers and, in some cases, fix maximum interest rates, fees and loan amounts. The Company is required to meet certain financial requirements and to submit certified financial statements to these agencies annually. Mortgage loan origination activities are subject to the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Real Estate Settlement Procedures Act and the regulations promulgated thereunder which prohibit discrimination and require the disclosure of certain information to borrowers concerning credit and settlement costs. Mortgage loans, other than first mortgages, are also subject to the usury statutes of the states in which the Company does business. Additionally, there are various state laws affecting the Company's mortgage banking operations, including licensing requirements and substantive limitations on the interest and fees that may be charged. MCA Mortgage and MCA are registered with the Commissioner of the Michigan Financial Institutions Bureau under the Michigan Mortgage Brokers, Lenders, and Servicers Licensing Act and are subject to the provisions of such law. MCA Realty is a licensed real estate broker in the state of Michigan. Expansion of the Company's operations has subjected it to similar regulations in the states of Indiana, Illinois, Idaho, Kentucky, Maryland, Ohio, Florida, West Virginia, California, North Carolina and Pennsylvania. 13 14 EMPLOYEES At January 31, 1997, 452 individuals were employed by the Company, of which 433 were full-time employees, including 157 mortgage and land contract originators and mortgage and land contract servicers. The remaining full-time employees are administrative and management personnel. None of the Company's employees is represented by a bargaining agent. The Company believes its relations with its employees are good. ITEM 2. PROPERTIES. The Company's executive and administrative offices and its mortgage banking and real estate operations are located in approximately 39,000 square feet of leased office space in Southfield, Michigan. The basic annual rent for the Southfield office space is approximately $482,000. The lease for this office expires on September 30, 1999. The Company believes that its offices are adequate for present purposes and for any foreseeable increase in its business activities. As of January 31, 1997, the Company leased office space in 29 other locations: 12 in Michigan, 4 in Indiana, 5 in Florida, 3 in Ohio, 2 in Illinois and one in each of Kentucky, North Carolina and California. These locations are used by certain of the Company's mortgage and land contract originators. ITEM 3. LEGAL PROCEEDINGS. The Company is a party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate will have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of the security holders during the fourth quarter of the fiscal year ended January 31, 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. There is no established public trading market for any class of common equity of the Company. As of April 1, 1997, there were 67 shareholders of record of the Company's common stock. The Company has never paid a dividend on its common stock and has no present plans to pay dividends in the future. The Company is restricted in its ability to pay dividends under the terms of Indentures with respect to its outstanding 11% Asset-Backed Subordinated Debentures, Series 1994 due June 30, 2000 and its 11% Subordinated Debentures, Series 1996 due June 30, 2002. 14 15 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected historical financial data of the Company for each of the periods indicated in the five-year period ended January 31, 1997, which were derived from the audited consolidated financial statements of the Company. The audited consolidated financial statements of the Company for each of the periods in the three-year period ended January 31, 1997 are included elsewhere in this Annual Report on Form 10-K. This table should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto.
Year ended January 31, ------------------------------------------------------------ Income Data: 1997 1996 1995 1994 1993 ----- ----- ----- ----- ----- Revenues: (Dollars in thousands, except per share data) Gain on sale of land contracts. . . . . . . . . . . $ 3,438 $ 2,981 $ 2,983 $ 1,753 $ 1,433 Gain on sale of real estate. . . . . . . . . . . . . 708 751 -- 67 299 Gain on sale of real estate-related parties. . . . . . . . . . . . . . . 7,539 6,529 7,365 4,811 3,249 Gain on bulk sales of servicing rights . . . . . . . . . . . . . . . . . 5,231 4,726 7,475 5,579 997 Mortgage origination fees and gain on . . . . . . . 24,862 14,339 5,584 11,282 6,280 sale of mortgages Servicing fees . . . . . . . . . . . . . . . . . . . 8,499 6,244 4,617 1,917 851 Interest income. . . . . . . . . . . . . . . . . . . 8,168 5,903 5,106 3,948 856 Other. . . . . . . . . . . . . . . . . . . . . . . . 481 478 241 177 428 -------- ------- -------- --------- ------- Total revenues. . . . . . . . . . . . . . . . . . 58,926 41,951 33,371 29,534 14,393 Expenses . . . . . . . . . . . . . . . . . . . . . . 57,522 40,823 33,547 28,562 13,477 -------- ------- -------- --------- ------- Income (loss) before federal income taxes. . . . . . . . . . . . . . . . 1,404 1,128 (176) 972 916 Provision for federal income taxes . . . . . . . . . . . . . . . . . . . . 639 512 102 421 330 -------- ------- -------- --------- ------- Net income (loss) . . . . . . . . . . . . . . . . $ 765 $ 616 $ (278) $ 551 $ 586 ======== ======= ======== ========= ======= Net income (loss) per share. . . . . . . . . . . . . $ 1.61 $ 1.44 $ (.69) $ 1.60 $ 2.15 Ratio of earnings over fixed charges (2) . . . . . . 1.11x 1.13x -- 1.20x 1.82x Earnings (deficiency of earnings) over fixed charges. . . . . . . . . . . . . . . . . . . . 1,404 1,128 (176) 972 916
Year ended January 31, Balance Sheet Data: ---------------------------------------------------- Assets: 1997 1996 1995 1994 1993 ------- ------- ------ ------- ------ Cash. . . . . . . . . . . . . . . . . . . . . . . . $ 3,097 $ 2,730 $ 2,931 $ 4,782 $ 3,699 Mortgages held for resale.. . . . . . . . . . . . . 54,430 63,306 15,702 39,250 14,084 Other.. . . . . . . . . . . . . . . . . . . . . . . 87,465 69,155 58,479 32,813 10,849 -------- -------- ------- ------- ------- Total assets . . . . . . . . . . . . . . . . . . $144,992 $135,191 $77,112 $76,845 $28,632 ======== ======== ======= ======= ======= Liabilities: Notes payable(3). . . . . . . . . . . . . . . . . . $ 83,975 $ 86,598 $44,843 $54,549 $13,824 11% Subordinated Debentures due 1997, 2000 and 2002 . . . . . . . . . . . . . . 15,542 9,174 4,938 4,938 3,171 10% Subordinated Notes Payable. . . . . . . . . . . 15,000 -- -- -- --
15 16 Other. . . . . . . . . . . . . . . . . . . . 19,570 29,258 18,041 8,495 6,465 -------- -------- ------- ------- ------- Total liabilities . . . . . . . . . . . . $134,087 $125,030 $67,822 $67,982 $23,460 Redeemable Common Stock(4) . . . . . . . . . 256 -- -- 300 300 Stockholders' equity . . . . . . . . . . . . 10,649 10,161 9,290 8,563 4,872 -------- -------- ------- ------- ------- Total liabilities and stockholders' equity. . . . . . . . . . . . $144,992 $135,191 $77,112 $76,845 $28,632 ======== ======== ======= ======= =======
Year ended January 31, --------------------------------------------- Operating Data: 1997 1996 1995 1994 1993 ---- ----- ---- ---- ---- Loan production: Number of loans originated 10,107 7,928 8,224 8,910 2,448 Average loan balance. . . . . . . . . . . . . . . . $ 80 $ 80 $ 69 $ 77 $ 83 Total loans originated. . . . . . . . . . . . . . . $809,756 $632,281 $564,235 $687,484 $203,087 Number of full-time employees. . . . . . . . . . . . . . . . . . . . . . 433 412 336 448 202
(1) On July 19, 1994 the Company purchased substantially all of the revenue producing activities of Liberty National Mortgage Corporation. See Note 15 of Notes to Consolidated Financial Statements. (2) The ratio of earnings to fixed charges was computed by dividing (a) net income (loss) for the period plus fixed charges by (b) fixed charges, which consist of interest expense, amortization of debt expense and that portion of rentals that represents interest. The ratio of earnings over fixed charges and preferred dividends was 1.12x, 1.12x, 1.19x, and 1.79x for the years ended January 31, 1997, 1996, 1994, 1993, respectively. Earnings were insufficient to cover fixed charges for the year ended January 31, 1995. The deficiency of earnings over fixed charges and preferred dividends was $.6 million for the year ended January 31, 1995. (3) See Note 3 of Notes to Consolidated Financial Statements. (4) See Note 5 of Notes to Consolidated Financial Statements ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES The Company's primary financing needs are for mortgage banking activities, loan funding activities, operating cash flows and the purchase of mortgage servicing rights. Loan funding activities are primarily financed through the use of mortgage warehouse lines of credit with commercial banks. See Note 3 of Notes to Consolidated Financial Statements. The Company also provides funding for loans by using a technique known as "table funding," which is common in the mortgage banking industry. In this case, funds are advanced directly to the title company for closing from a third party source of funds, typically another mortgage bank or a financial institution. This technique avoids the use of the Company's warehouse lines of credit, but proves less profitable as a result of fees charged by the third party provider of funds. For the past year, the Company financed approximately 95% of its mortgage originations using its warehouse lines of credit and approximately 5% with table funding sources. The Company currently has a $115 million loan agreement with Texas Commerce Bank N.A. This revolving warehousing line of credit provides financing for funding and originating a variety of residential mortgage loans including, but not limited to, conforming mortgages, non-conforming mortgages and land 16 17 contracts. Interest on bank borrowings are based on LIBOR plus .85 to 2.5% depending on the type of loan. Mortgage loans held for resale are pledged as collateral. This facility is scheduled to expire on September 3, 1997. The Company also has a $10 million warehousing line of credit with Paine Webber Real Estate Securities, Inc. ("Paine Webber"). Interest on borrowings under this facility are based on Libor plus 1.5%. This facility is scheduled to expire on November 1, 1997. The Company expects to renew these warehousing lines of credit upon their respective expirations. At January 31, 1997 a total of $52.8 million was outstanding under these facilities. The Company also has a $15 million loan and financing agreement with the Board of Trustees of the Policeman and Firemen Retirement System of the City of Detroit. This subordinated term loan has been provided to expand the Company's non-conforming lending business. Interest on this borrowing is 10% and is payable quarterly. Commencing July 1, 2001 equal quarterly installments of principal and interest will be paid until the loan terminates and is repaid in full on June 30, 2006. Under conditions of this agreement, the lender was issued 30,197 shares of the Company's common stock. This represented 6% of the outstanding unrestricted shares at July 18, 1996. As part of the agreement the lender has the right to "put" these shares back to the Company on August 1, 2006 or upon default under a number of different scenarios. The Company also utilizes mortgage loan repurchase agreements with Paine Webber pursuant to which Paine Webber purchases mortgage loans until such time as the loans are pooled for resale to an end investor at which time the Company repurchases such loans. Such agreements provide for interest payments based on the federal funds rate. These agreements can be terminated on demand. The Company utilizes a strategy of retaining servicing rights on a portion of its loan originations in order to provide a steady stream of servicing revenues and cash flow in future years and as a hedge against inflation and rising interest rates. To help facilitate this strategy, the Company utilizes four funding sources: proceeds from a $4.9 million debenture offering that was completed in July 1993, a bank credit facility, which was first made available to the Company in April 1993 and proceeds from additional $10 million and $6 million debenture offerings. The $4.9 million and the $10.0 million series of debentures, as well as the credit facility are collateralized by certain of the Company's servicing rights and rights to servicing income. The debenture offering completed in April 1993 was terminated March 17, 1997. The credit facility, which is currently at $28.5 million, is with Comerica Bank and is enhanced by a stand-by Note Purchase Agreement between Comerica Bank and the Policemen and Firemen Retirement System of the City of Detroit (the "Fund") whereby the Fund has agreed to provide payment to Comerica Bank upon the occurrence of certain events of default by the Company. This credit enhancement permits the Company to obtain a more favorable interest rate and collateralization terms from the lending bank. In consideration for the credit enhancement provided, the Company agreed to pay certain fees to the Fund and provide it with an option to purchase up to 5% of the Company's outstanding common stock, at 70% of the public offering price per share, if the Company completes a firm commitment underwritten sale of its common stock prior to April 30, 2000. At January 31, 1997, $28.3 million was outstanding under the Comerica Bank credit facility. During the years ended January 31, 1997 and 1996, mortgage servicing rights with respect to approximately 75% and 75%, respectively, of loan originations, or $607 million and $474 million principal amount, respectively, were retained by the Company and financed primarily through operations, the debenture offerings and the Comerica Bank credit facility. The Company intends to continue the level of retained servicing and may purchase additional mortgage servicing rights. As in mortgage banking, the Company also has a need to finance loan funding activities with respect to its land contract and mortgage syndication until such time as the loans are packaged and sold to investors. The principal sources of this financing are two limited partnerships which have been established in order to provide up to $4 million for this purpose. These partnerships will terminate in December 1997. The Company also has $4 17 18 million available as part of its $115 million facility with Texas Commerce Bank. The Company is considering several alternatives to extend or replace these financing sources at the time of their respective terminations. There is no assurance that the Company will be successful in extending or replacing these financing sources, however. The Company has $1.0 million available under a credit facility with a commercial bank for the acquisition and rehabilitation of residential real property prior to resale. At January 31, 1997, $.28 million was outstanding under this facility. See Note 3 of Notes to Consolidated Financial Statements. The Company also has $1 million available under a $1.5 million credit facility with a commercial bank which is similar in structure to a mortgage warehouse line of credit. This portion of the credit facility is used exclusively for the warehousing of land contracts. The additional $0.5 million is available for working capital. At January 31, 1997, $.25 million was outstanding under this facility. See Note 3 of Notes to Consolidated Financial Statements. This facility was terminated in April 1997. During fiscal 1997, the Company's operating activities used $23.6 million. Of this, $15.5 million was used to fund the increase in accounts receivable - mortgages sold. The increase in accounts receivable, primarily receivables related to bulk sales of servicing rights, used $7.3 million. The Company used $8.0 million to increase excess interest spread receivable and $9.5 million to decrease accounts payable. These uses of cash were offset by a $8.9 million net decrease in mortgages held for resale. The Company's investing activities during fiscal 1997 provided $5.9 million. Financing activities provided the Company $18.1 million during fiscal 1997. The Company used proceeds from notes payable of $814.9 million to fund mortgage loans and invest in purchased servicing rights. Proceeds from sales of mortgage loans and investments in purchased servicing rights of $817.7 million were used to make payments on notes payable. Sales of the Company's 11% Subordinated Debentures due June 30, 2000 and 2002 provided $6.4 million. Proceeds from subordinated notes payable also provided $15.0 million. RESULTS OF OPERATIONS Revenue for the year ended January 31, 1997 increased by 40.5% to $58.9 million. Revenue for the year ended January 31, 1996, increased by 25.7% to $42.0 million as compared to $33.4 million for the fiscal year ended January 31, 1995. Net earnings increased by 24.3% to net earnings of $765,338 for fiscal 1997 as compared to net earnings of $615,530 for fiscal 1996. Net earnings in fiscal 1996 had increased from a net loss of $227,546 in fiscal 1997. In fiscal 1997 revenue increased in virtually every revenue item. The most substantial increase, $10,522,661, occurred in mortgage origination fees and gain on sale of mortgages. Interest income and servicing fees increased $2,265,185 and $2,255,648, respectively. The increase in revenue during fiscal 1996 was the result of increased mortgage origination fees to $14.34 million in fiscal 1996 as compared to $5.58 million in fiscal 1995. Servicing fees also increased to $6.24 million in fiscal 1996 from $4.62 million in fiscal 1995. The only revenue item to substantially decrease was gain on bulk sales of servicing rights which declined to $4.73 million in fiscal 1996 as compared to $7.48 million in fiscal 1995. The increase in earnings in fiscal 1997 resulted from increased overall revenues, specifically in non-conforming originations. The increase in earnings during fiscal 1996 is attributable to a general decline in interest rates during the year resulting in increased originations, gains on loan resale and increased non-conforming originations. The net loss during fiscal 1995 was due to significant increases in long-term interest rates during the first six months of the year. This severely curtailed mortgage refinancings and increased competitive pressures in the market. The mortgage prepayment rate was 8.9%, 9.8% and 12.5% during fiscal 1995, 1996 and 1997, respectively. The amount of refinancing activity was $173 million during fiscal 1995, $172 million during fiscal 1996, and $194 million during 1997. Mortgage origination fees, including gains on sale from loan resale transactions, for fiscal 1997, increased to $24.86 million as compared to $14.34 million in fiscal 1996, an increase of 73.4%. Such mortgage origination fees had increased in fiscal 1996 from $5.58 million in fiscal 1995. The total dollar volume of loans originated increased by 28.2% to $810 million, for fiscal 1997, up from $632 million for fiscal 1996 which represented a 12.1% increase from $564 million in fiscal 1995. The total number of loans produced increased 18 19 27.5% from 7,928 in fiscal 1996 to 10,107 in fiscal 1997. The total number of loans produced decreased 3.8% from 8,224 in fiscal 1995 to 7,928 in fiscal 1996. The average loan balance increased to $80,118 in fiscal 1997 from $79,753 in fiscal 1996 and $68,608 in fiscal 1995. Increased mortgage originations in fiscal 1997 resulted from steady (relatively low) interest rates, strong home buying and building markets and the continued addition of new loan origination branches. The increase in the dollar volume of loan originations during fiscal 1996 resulted from the general decline in long-term interest rates and the continuity in production from branches opened in fiscal 1995 for a full year. Included in mortgage origination fees are gains and losses on sale from loan resale transactions of $4.40 million in fiscal 1997, $3.77 million fiscal 1996 and $(.43) million in fiscal 1995. In fiscal 1997, wholesale originations totaled $195.71 million, in fiscal 1996, approximately $140.71 million and in fiscal 1995, approximately $137.95 million. The increase in wholesale originations from fiscal 1996 to fiscal 1997 was the result of the Company focusing its wholesale efforts on non-conforming wholesale originations which increased from $52.49 million to $108.93 million, respectively. Non-conforming wholesale originations in fiscal 1996 increased to $52.49 million from $9.46 million in fiscal 1995. Mortgage origination revenues as a percent of total mortgage origination volume increased from 1.0% in fiscal 1995 to 2.3% in fiscal 1996 to 3.1% in fiscal 1997. The increase from fiscal 1995 to fiscal 1996 reflects an easing in the competitive pressures experienced in fiscal 1995 resulting from the decline in interest rates, increased production volume in non-conforming mortgages, which typically have higher margins, and increased gains from loan resale transactions. The increase in fiscal 1997 was attributable, primarily, to the continued increase in the volume of non-conforming loan production. The Company recorded revenues of $5.23 million related to the sale of bulk servicing rights of $1.8 billion during fiscal 1997 as compared to $4.73 million on bulk sales of $940 million. Gains on bulk sales as a percent of servicing rights sold decreased to .29% for fiscal 1997 from 0.5% in fiscal 1996. This decrease was due to the net effect of an increase of $500 million of bulk sales involving servicing previously purchased. The gain on bulk sales of this bulk-purchased servicing is lower because the Company's basis is much greater than in originated mortgages. Revenues from bulk sales of servicing in fiscal 1995 were $7.48 million, 0.4% of servicing rights sold. In fiscal 1996 and fiscal 1995, respectively, the Company sold servicing rights of $.7 billion and $1.2 billion that had previously been purchased by the Company in bulk. Interest income increased from $5.11 million in fiscal 1995 to $5.90 million in fiscal 1996, an increase of 15.5%, and increased to $8.20 million in fiscal 1997, an increase of 39.0% as compared to fiscal 1996. Interest income is earned primarily on loans held by the Company pending resale in the secondary market. The increases in fiscal 1997 and fiscal 1996 resulted from increased production volumes in general and specifically increased non-conforming production volumes which typically carry higher interest rates. Servicing fee revenue increased $4.62 million in fiscal 1995 to $6.24 million, an increase of 35.2%, and increased to $8.50 million in fiscal 1997, an increase of 36.2% as compared to fiscal 1996. In fiscal 1995 as compared to fiscal 1996, the Company's servicing portfolio increased from $1.3 billion to $2.2 billion and from 16,372 loans serviced to 27,357 loans serviced. At the end of fiscal 1997, the Company's servicing portfolio was $1.6 billion with $21,248 loans serviced. The Company sold $1.0 billion of servicing at the end of fiscal 1997. Average servicing revenue per loan remained constant at $286 per loan for fiscal 1995 and fiscal 1996 and increased to $350 per loan for fiscal 1997. The variance was primarily due to the timing of bulk sales. Servicing fees, measured in terms of an average percentage applied to the amount of the outstanding mortgage, have not materially changed from year to year. The aggregate of gains on the sale of real estate-related parties and gains on the sale of real estate decreased from approximately $7.4 million in fiscal 1995 to $7.3 million in fiscal 1996 and increased in fiscal 1997 to $8.2 million. Of these amounts, gains on the sale of real estate-related parties represented approximately $7.4 million in fiscal 1995, $6.5 million in fiscal 1996 and $7.5 million in fiscal 1997. This reflects the Company's 19 20 strategy to develop its business of real estate limited partnership syndications through a former subsidiary. During fiscal 1997, 1996, and 1995, 820, 723, and 735 income producing properties were sold. Typically, these properties are acquired in distressed situations, requiring rehabilitation expenditures or having substantial tax delinquencies which need to be paid. Gains on the sale of land contracts were stable during fiscal 1996 and fiscal 1995, remaining approximately $3.0 million for both years and increased to $3.4 million in fiscal 1997. This reflects an increase in the number of loan originators employed by the Company and increased marketing efforts. The Company syndicated 16 pass-through pools with a total of $20.9 million of real estate related loans in fiscal 1997. In fiscal 1996, the Company syndicated 15 pass-through pools of real estate related loans with a total of $21.9 million of loans, as compared to 15 pools with a total of $22.5 million of loans in fiscal 1995. Gains as a percentage of total syndication amounts increased from 13.3% in fiscal 1995 to 13.6 % in fiscal 1996, and 16.3% in fiscal 1997. These percentages are consistent with past results. Expenses for fiscal 1997 increased by $16.7 million over fiscal 1996 from a total of $40.8 million to a total of $57.5 million, an increase of 40.9%. Expenses for fiscal 1996 increased by $7.3 million from a total of $33.5 million in fiscal 1995 to $40.8 million in fiscal 1996, an increase of 21.8%. These increases were in line with the overall increase in revenue during these three years. Higher expenses directly resulted from increases in virtually every category of revenue, reflecting the Company's overall growth to meet increases in production levels and number of loans serviced. As a percentage of revenue, however, payroll and commissions dropped from 46.7% to 42.6% and 40.8% for fiscal 1995, fiscal 1996 and fiscal 1997, respectively. These continued improvements in efficiency have resulted from the Company's commitment to keeping up with the available technology in the industry. Interest expense increased in fiscal 1997 to $11.4 million from $7.6 million in fiscal 1996 and $6.0 million in fiscal 1995, following increased production levels. As a percentage of revenue, interest expense has been 19.4%, 18.0% and 18.0% for fiscal 1997, 1996 and 1995, respectively. General and administrative expense remained consistent at 24.8%, 24.1% and 24.4%, as a percentage of revenue for fiscal 1997, 1996 and 1995, respectively. Amortization expense increased from $1.9 million in fiscal 1995 to $3.3 million in fiscal 1996 and $4.9 million in fiscal 1997. The increases correspond with the balances in the servicing portfolio and the corresponding runoff and increased amortization of certain deferred charges and other assets. The Company is party to financial instruments with off-balance-sheet risk in the normal course of business through the production and sale of mortgage loans and the management of interest rate risk. These financial instruments include commitments to extend credit and forward contracts to deliver and sell loans to investors. The Company is exposed to credit loss in the event of nonperformance by the counter-parties. However, the Company does not anticipate such nonperformance and the Company's exposure to credit risk with respect to commitments to extend credit are limited due to the non-recourse nature of the loans upon sale to investors meeting certain requirements. At January 31, 1995, 1996 and 1997, respectively, the Company had approved loans that had not yet closed amounting to approximately $23.08 million, $74.3 million and $40.1 million. See Note 9 of Notes to Consolidated Financial Statements. INFLATION Inflation affects the Company primarily in the mortgage banking operations as a result of its impact on interest rates. Historically, interest rates have increased during periods of high inflation and this has had a negative impact on the Company's mortgage origination volume. Conversely, during periods of low inflation interest rates have also been low and this has had a positive impact on mortgage originations. The total dollar volume of land contracts purchased and originated have been consistent at $22.5 million, $21.9 million and $20.9 million for fiscal 1995, fiscal 1996, and fiscal 1997, respectively. The Company's land contract originations volume tends to run counter-cyclical to the mortgage origination cycle described above. As mortgage interest rates increase, especially above 11%, the use of land contract financing increases and has a 20 21 positive impact on land contract originations. As interest rates decrease, mortgage financing activity increases and land contract originations tend to decrease. The Company's strategy of increasing its servicing portfolio may also act as an inflationary hedge. As interest rates increase, prepayments decrease, which decreases amortization expense and increases the earnings potential of the servicing portfolio. However, during periods of low inflation and decreasing interest rates, prepayments increase, which increases amortization expense and results in a decrease in the earnings potential of the servicing portfolio. SEASONALITY The mortgage banking industry is usually subject to an unpredictable degree of seasonal trends. These trends reflect the general pattern of nationwide home sales. Such sales typically peak during the spring and summer seasons and decline to lower levels from October through January. In an effort to mitigate this, the Company has opened eight branch offices in Florida. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information called for by this Item 8 is hereby incorporated by reference from the Company's Consolidated Financial Statements, including the reports of independent certified public accountants thereon, beginning at page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 21 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below is certain information about the directors and executive officers of MCAFC.
Name and Age Principal Position(s) Held with MCAFC Patrick D. Quinlan, 50 Chairman, Chief Executive Officer and Director Thomas P. Cronin, 50 Vice Chairman and Director Lee P. Wells, 36 President, Chief Operating Officer and Director Keith D. Pietila, 47 Executive Vice President, Chief Financial Officer and Director Alexander J. Ajemian, 33 Senior Vice President, Controller and Treasurer James B. Quinlan, 45 Director C. Thompson Wells, Jr., 56 Director D. Michael Jehle, 47 Director
The Board of Directors is divided into three classes, with each class serving a three-year term. At each annual meeting of the shareholders, directors in the class whose term expires are elected to serve a three-year term. Lee P. Wells and Thomas P. Cronin are serving for a term ending at the annual meeting of shareholders to be held in 1997 and Patrick D. Quinlan, C. Thompson Wells and D. Michael Jehle are serving for a term ending at the annual meeting of shareholders to be held in 1998. Keith D. Pietila and James B. Quinlan are serving for a term ending at the annual meeting of shareholders to be held in 1999. Executive officers serve at the pleasure of the Board of Directors. The business experience of each director and executive officer during the past five years is described below. PATRICK D. QUINLAN has been Chairman of the Board, Chief Executive Officer and a director of MCAFC since its inception and served as President of MCAFC from its inception until July 1995. Mr. Quinlan was a founder and served as Chairman of the Board, President and a director of MCA Mortgage from 1985 until July 1992. Mr. Quinlan is the brother of James B. Quinlan. See Item 12 "Security Ownership of Certain Beneficial Owners and Management." THOMAS P. CRONIN has been Vice Chairman of MCAFC since July 1995 and a director of MCAFC since January 1993. Mr. Cronin has been Chief Executive Officer of MCA Mortgage since November 1993. Mr. Cronin served as President of MCA Mortgage from October 1992 until November 1993 and has been a director of MCA Mortgage since August 1992. From October 1990 until October 1992, Mr. Cronin was an Executive Vice President of MCA. From 1977 until 1990, Mr. Cronin was a member of the Chicago Board of Trade and a licensed floor broker with the Commodity Futures Trading Commission. LEE P. WELLS has been President and Chief Operating Officer of MCAFC since July 1995 and has been a director of MCAFC since its inception. Mr. Wells served as Executive Vice President of MCAFC from its inception until July 1995, and served as Executive Vice President of MCA Mortgage from 1990 until November 1993 and was a director of MCA Mortgage from 1990 until July 1992. Mr. Wells is responsible for land contract originations and syndication of land contracts and mortgages into pass-through pools which are sold to private mortgage investors. From 1987 until 1990 Mr. Wells was a Vice President of MCA Mortgage, and served as the Controller of MCA Mortgage from 1987 until 1988. Mr. Wells is the son of C. Thompson Wells, Jr. See Item 12 "Security Ownership of Certain Beneficial Owners and Management." 22 23 KEITH D. PIETILA has been Executive Vice President and Chief Financial Officer of MCAFC since July 1995 and has been a director of MCAFC since its inception. Mr. Pietila served as Chief Operating Officer and Vice President of MCAFC from MCAFC's inception until July 1995. Mr. Pietila also was a Vice President, Chief Financial Officer and Chief Operating Officer and a director of MCA Mortgage from 1990 until July 1992. Mr. Pietila has been a Director of U.S. Mutual Financial Corporation since 1991. From 1982 until 1990, Mr. Pietila was employed by Acorn Building Components, Inc., and served in several positions, the last of which was as Chief Operating Officer. ALEXANDER J. AJEMIAN has been a Senior Vice President of MCAFC since July 1995 and has been Controller and Treasurer of MCAFC since its inception. Mr. Ajemian served as Vice President of MCAFC from its inception until July 1995, served as Vice President of MCA Mortgage since November 1992 and has served as Treasurer of MCA Mortgage since November 1993. Mr. Ajemian was the Controller of MCA Mortgage from 1990 until July 1992 and was the Vice President and Assistant Secretary of MCA Mortgage from 1991 until July 1992. From 1986 until 1990, Mr. Ajemian was in the audit department of BDO Seidman, independent certified public accountants. Mr. Ajemian is a Certified Public Accountant licensed in Michigan. JAMES B. QUINLAN has been a director of MCAFC since its inception. Mr. Quinlan is the President of Standard Home Mortgage, Inc., a residential mortgage broker located in Grosse Pointe, Michigan. Mr. Quinlan served as Senior Vice President of MCAFC from 1991 until August 1993. Mr. Quinlan has served as a director of MCA Mortgage since 1985 and served as a Senior Vice President of MCA Mortgage from 1985 until August 1993. Mr. Quinlan also served as Treasurer of MCA Mortgage from 1985 until August 1993. Mr. Quinlan is the brother of Patrick D. Quinlan and the brother-in-law of David C. Wells. See Item 12 "Security Ownership of Certain Beneficial Owners and Management." C. THOMPSON WELLS, JR., has been a director of MCAFC since its inception and previously served in the same capacity with MCA Mortgage from 1990 until July 1992. Since 1987, Mr. Wells has been the President of Wells' System, Inc., a consulting firm, and has been involved in child care centers as the Chief Executive Officer of three primary entities: Discovery Learning Centers, Discovery Learning Centers Limited Partnership and Kids at Work, operating through 25 other related secondary entities. Of these entities four filed bankruptcy petitions in 1991 and 1992. Two entities have completed their liquidations and the other two entities' petitions under the Bankruptcy laws have been dismissed. Mr. Wells is also the President and a director of Austin Kids, Inc., which filed a bankruptcy petition in December 1994 and for which an order confirming its plan of reorganization was entered in April 1995. C. Thompson Wells, Jr. is the father of Lee P. Wells. See Item 12 "Security Ownership of Certain Beneficial Owners and Management." D. MICHAEL JEHLE has been a director of MCAFC since November 1993 and has served as a director of MCA Mortgage since November 1993. Mr. Jehle served as President and Chief Operating Officer of MCA Mortgage from November 1993 to November 1994 and since March 1996 has been the Chairman-Office of Production for MCA Mortgage. Mr. Jehle served as the President and Chief Executive Officer of Rimco Financial Corporation from November 1994 to February 1996 and currently serves as a director of Rimco Financial Corporation. Prior to joining the Company, Mr. Jehle was employed by First Fidelity Thrift and Loan in San Diego, California, from 1991 to 1993 in both loan production and servicing capacities. From 1989 to 1991, Mr. Jehle was self-employed in both residential and commercial loan originations and prior to that he was President of ABQ MoneyCenter, Inc., in San Diego, California. Certain of the directors and executive officers of MCAFC are also directors or officers of MCAFC's other subsidiaries. 23 24 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth, for the fiscal years shown, information regarding amounts paid to or accrued for the Chief Executive Officer of MCAFC, and the other four most highly compensated executive officers of MCAFC (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
Long-Term Compensation Annual Compensation Awards ------------------- Other ------------ Name Annual Restricted All Other Principal Fiscal Compen- Stock Compen- Position Year Salary Bonus sation Awards(1) sation (2) - -------------- ----- ------ ----- ------- ---------- --------- Patrick D. Quinlan - 1997 $208,061 $ -- $-- $ -- $23,172 Chairman 1996 206,458 -- -- -- 16,048 and Chief Executive 1995 195,000 -- -- -- 16,878 Officer Thomas P. Cronin - 1997 $224,136 $ -- $-- $ -- $ 9.670 Vice Chairman 1996 218,099 -- -- -- 9,670 1995 204,200 -- -- 110,000 9,670 Lee P. Wells - 1997 $170,000 $26,675 $-- $ -- $ 1,766 President and Chief 1996 159,583 19,500 -- -- 2,146 Operating Officer 1995 117,000 40,000 -- -- 1,766 Keith D. Pietila - 1997 $160,000 $30,000 $-- $ -- $11,640 Chief Financial 1996 153,333 25,000 -- -- 11,552 Officer and Executive 1995 124,800 22,000 -- 66,000 10,818 Vice President Alexander J. Ajemian 1997 $100,000 $15,000 $-- $ -- $ -- Controller, 1996 94,375 10,000 -- -- -- Treasurer and 1995 69,600 -- -- 66,000 -- Sr. Vice President
(1) During fiscal 1995, Mr. Pietila was awarded 6,000 shares of restricted stock with a value of $66,000, with 2,000 shares vesting in each of fiscal 1996, 1997 and 1998. As of January 31, 1996, Mr. Pietila held 4,000 shares of restricted stock with a value of $27,160. During fiscal 1995, Mr. Cronin was awarded 10,000 shares of restricted stock with a value of $110,000 with 6,000 shares vesting in fiscal 1996 and 2,000 shares vesting in each of fiscal 1997 and 1998. As of January 31, 1996, Mr. Cronin held 4,000 shares of restricted stock with a value of $27,160. During fiscal 1995, Mr. Ajemian was awarded 6,000 shares of restricted stock with a value of $66,000, with 2,000 shares vesting in each of fiscal 1996, 1997 and 1998. As of January 31, 1996, Mr. Ajemian held 4,000 shares of restricted stock with a value of $27,160. Dividends are payable on the restricted stock when paid on the Company's Common Stock. 24 25 (2) Represents for each of the Named Executive Officers, premiums paid by the Company for life insurance for the last fiscal year. (3) Represents award of 2,000 shares of unrestricted stock valued at $9.00 per share. For the year ended January 31, 1997, the Company paid non-employee directors an annual fee of $20,000 and paid James B. Quinlan an additional annual fee of $10,000 for serving on the board of MCA Mortgage. This policy is subject to review annually. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Patrick D. Quinlan, Keith D. Pietila and Lee P. Wells served on the Compensation Committee of the Board of Directors of the Company during the year ended January 31, 1997. Each of Messrs. Quinlan, Pietila and Wells is a director and executive officer of the Company. Messrs. Quinlan and Wells are executive officers and directors of Rimco Financial Corporation and certain of its subsidiaries and Mr. Jehle is a director of Rimco Financial Corporation. Messrs. Wells and Pietila are also directors and officers of Property Corporation of America ("PCA") and Mr. Quinlan is a director of PCA. Mr. Pietila is an officer and director of U.S. Mutual Financial Corporation. During fiscal 1997 the Company recognized a gain of $7,539,447 on the sale of properties purchased from unrelated third parties and subsequently sold to limited partnerships whose general partner is owned by Patrick D. Quinlan and Lee P. Wells. During fiscal 1997, the Company paid commissions in connection with the acquisition of these properties totaling $1,968,000 to Rimco Financial Corp. which is owned equally by Patrick D. Quinlan, Lee P. Wells and Leroy G. Rogers. The Company provides accounting and administrative services to U.S. Mutual Financial Corporation ("U.S. Mutual") and receives a base monthly fee of $3,000 plus additional amounts as periodically agreed to by the respective parties. U.S. Mutual is a publicly-owned corporation; however Patrick D. Quinlan together with his wife, Cheryl J. Quinlan, and James B. Quinlan, their brother John E. Quinlan and their mother Bonnie B. Quinlan collectively own approximately 15% of the outstanding voting stock of U.S. Mutual, and it is therefore considered an affiliate of the Company, as defined by the Securities and Exchange Commission. The service arrangement between the Company and U.S. Mutual can be terminated by either party at any time. The Company earned $36,000 in management fees for administrative services provided to U.S. Mutual during fiscal 1997. Keith D. Pietila is a director of U.S. Mutual. From time to time the Company has retained Consulting Services of America, Inc. ("CSA") as a consultant for specific long range planning and other projects. John E. Quinlan, the brother of Patrick and James Quinlan, is a shareholder, director and executive officer of CSA. For their services, CSA charges the Company its normal billing rate of $150 per hour, and receives a minimum retainer of $5,000 per month. During fiscal 1997, the Company paid $105,000 in consulting fees to CSA. In February 1993, Patrick D. Quinlan and Lee P. Wells each purchased 500 shares of common stock of PCA for $5,000 in cash, as part of the reorganization of PCA. In connection with such reorganization, the Company exchanged its PCA common stock for shares of PCA non-voting preferred stock. As a result of the reorganization, Messrs. Quinlan and Wells became the owners of all of the outstanding voting common stock of PCA and the Company's property management subsidiary became a wholly-owned subsidiary of PCA. In July 1995, Janet K. Wells purchased 20,000 shares of common stock of the Company for $30 per share in exchange for promissory notes with an aggregate principal amount of $600,000, secured by mortgages on certain appraised real estate. The appraisal was performed by the Real Estate Appraisal Group, an unaffiliated licensed real estate appraisal firm, and the value of the stock was negotiated by the parties with approval by the Company's Board of Directors. From time to time the Company has made working capital loans to related entities, and these entities have entered into transactions in the ordinary course of business with the Company pursuant to which the Company accrues net payables to 25 26 these entities. At January 31, 1997, the Company's accounts receivable from these related entities, net of accounts payable to these entities, were $571,000 due from Rimco Financial Corp., a company owned by Patrick D. Quinlan, Lee P. Wells and Leroy G. Rogers, and $1,674,000 due from PCA, the common stock of which is owned by Patrick D. Quinlan and Lee P. Wells. In addition, there is $3,384,000 due from investor pass-through pools sponsored by MCA Mortgage or MCA and limited partnerships sponsored by other affiliates of the Company. On January 31, 1995, MCAFC purchased all of the issued and outstanding common stock of Rimco Realty & Mortgage Company from Rimco Financial Corp. for $12,918. The payment for such shares was in the form of a reduction in debt owed by Rimco Financial Corp. to MCAFC. Rimco Realty & Mortgage Company was engaged in the purchase and sale of residential real estate and now operates as MCA Realty Corporation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information as of April 1, 1997, regarding each person known by the Company to own more than five (5%) percent of the issued and outstanding shares of Common Stock of the Company, each current director, each of the Named Executive Officers and all directors and executive officers of the Company as a group. Unless otherwise noted, each person is the record owner of the shares indicated and possesses the sole voting and investment power with respect to such shares. Unless otherwise noted, the address for each person is 23999 Northwestern Hwy., Southfield, Michigan 48075.
Amount and Nature of Percent Beneficial of Name and Address Ownership Class(1) - ----------------- ------------ -------- Patrick D. Quinlan 112,135(2) 21.43% James B. Quinlan 55,734(3) 10.65% 17150 Kercheval Ave. Grosse Pointe, Michigan 48230 C. Thompson Wells, Jr. 86,200(4) 16.47% Lee P. Wells 48,372(2) 9.24% NML, Inc. 33,700(2) 6.44% David C. Wells 28,347(5) 5.42% Keith D. Pietila 28,167(6) 5.38% Thomas P. Cronin 13,200(6) 2.52% D. Michael Jehle 11,000(6) 2.10% Janet K. Wells 86,200(4) 16.47% 3 Sycamore Grosse Pointe, Michigan 48230 Alexander J. Ajemian 8,280(6) 1.58%
26 27 All executive officers and directors as a group (8 persons) 397,293(2)(4)(6) 75.92% - ---------- (1) As of April 1, 1997, there were 523,283 shares of Common Stock of the Company outstanding. This number includes 20,002 shares of Common Stock which are subject to forfeiture. (2) Patrick D. Quinlan owns 50% of NML, Inc. and Lee P. Wells owns 50% of NML, Inc. (3) These 55,734 shares are held by Standard Home Mortgage, Inc., a corporation wholly owned by James B. Quinlan. Of these shares, 1,334 shares are subject to forfeiture. (4) Janet K. Wells holds 86,200 shares in a revocable trust and has voting and investment power with respect to these shares. Ms. Wells is the wife of C. Thompson Wells, Jr., who disclaims beneficial ownership of these shares. (5) Includes 1,334 shares subject to forfeiture. (6) Includes the following shares that were issued pursuant to compensation arrangements and are subject to forfeiture: Mr. Pietila - 2,000 shares; Mr. Cronin - 2,000 shares; Mr. Jehle - 2,668 shares; Mr. Ajemian - 2,000 shares; and all executive officers and directors as a group - 10,002 shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. From time to time, the Company and its subsidiaries have entered into various contracts and other transactions with affiliates of the company, including certain officers and directors of the Company. The terms and conditions of such transactions were not negotiated at arm's length and may not have been as favorable to the Company as terms and conditions that would have been obtained with unaffiliated parties. The additional disclosure provided under Item 11 "Executive Compensation - Compensation Committee Interlocks and Insider Participation" is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements, Schedules and Exhibits 1. The following consolidated financial statements are filed herewith: Consolidated Balance Sheets as of January 31, 1997 and 1996. Consolidated Statements of Operations for the years ended January 31, 1997, 1996, and 1995. Consolidated Statements of Stockholders' Equity for the years ended January 31,1997, 1996, and 1995. Consolidated Statements of Cash Flows for the years ended January 31,1997, 1996, and 1995. Notes to Consolidated Financial Statements 2. Financial Statement Schedules 3. Exhibits: 27 28 The exhibits filed with this report are listed on the "Exhibit Index" on pages E-1 through E-6. (b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the quarter ended January 31, 1997. 29 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE CONSOLIDATED FINANCIAL STATEMENTS Report of independent certified public accountants F-2 Consolidated balance sheets F-3 Consolidated statements of operations F-4 Consolidated statements of stockholders' equity F-5 Consolidated statements of cash flows F-6 Notes to consolidated financial statements F-9 F-1 30 Report of Independent Certified Public Accountants To the Board of Directors of MCA FINANCIAL CORP. We have audited the accompanying consolidated balance sheets of MCA Financial Corp. and Subsidiaries as of January 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MCA Financial Corp. and its Subsidiaries as of January 31, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended January 31, 1997, in conformity with generally accepted accounting principles. As described in Note 1, in February 1996, the Company adopted Statement of Financial Accounting Standards No. 122, "Accounting for Certain Mortgage Servicing Rights". Moore Stephens Grant Thornton LLP Doeren Mayhew, P.C. Detroit, Michigan April 28, 1997 Troy, Michigan F-2 31 MCA FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS ASSETS
JANUARY 31, 1997 1996 ------------ ------------ Cash $ 3,096,993 $ 2,730,408 Land contracts held-for-resale 10,351,425 11,484,877 Mortgages held-for-resale 54,430,155 63,306,372 Accounts receivable - mortgages sold 15,489,908 - Accounts receivable 16,997,311 9,722,527 Accounts receivable - related parties 6,827,285 8,256,090 Mortgage servicing rights - net 16,324,263 27,293,358 Excess interest spread receivable 7,987,053 - Investments 2,571,750 2,492,816 Property and office equipment 5,582,612 4,856,330 Deferred charges and other assets 5,333,058 5,047,863 ------------ ------------ Total assets $144,991,813 $135,190,641 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Notes payable $ 83,975,834 $ 86,597,703 Subordinated debentures 15,542,000 9,174,000 Subordinated notes payable 15,000,000 - Accounts payable 15,705,913 25,206,687 Accounts payable - related parties 1,043,842 1,693,311 Accrued interest and other expenses 2,419,048 2,058,080 Deferred federal income tax 400,000 300,000 ------------ ------------ Total liabilities 134,086,637 125,029,781 ------------ ------------ REDEEMABLE COMMON STOCK 256,373 - COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY Common stock Authorized 3,750,000 shares at January 31, 1997 and 1996. No par, stated value $.01 each. Issued and outstanding, 503,281 shares at January 31, 1997 and 448,617 shares at January 31, 1996 5,033 4,486 Preferred stock (Series A) Authorized 350,000 shares, $10 stated value, issued and outstanding 203,022 shares at January 31, 1997 and 1996 2,030,220 2,030,220 Preferred stock (Series B) Authorized 750,000 shares, $10 stated value, issued and outstanding 336,619 shares at January 31, 1997 and 1996 3,366,190 3,366,190 Additional paid-in capital 3,664,976 1,457,251 Retained earnings 1,582,384 1,302,713 ------------ ------------ Total stockholders' equity 10,648,803 10,160,860 ------------ ------------ Total liabilities and stockholder's equity $144,991,813 $135,190,641 ============ ============
See accompanying notes to consolidated financial statements F-3 32 MCA FINANCIAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JANUARY 31, 1997 1996 1995 ---------- ----------- ----------- REVENUES Gain on sale of land contracts $ 3,437,662 $ 2,981,138 $ 2,983,022 Gain on sale of real estate 707,754 750,800 -- Gain on sale of real estate - related parties 7,539,447 6,529,708 7,365,199 Gain on bulk sales of servicing rights 5,231,163 4,725,872 7,475,444 Mortgage origination fees and gain on sale of mortgages 24,861,881 14,339,220 5,584,454 Servicing fees 8,499,396 6,243,748 4,616,738 Interest income 8,167,899 5,902,714 5,106,041 Other income 481,138 477,810 240,783 ---------- ---------- ---------- Total revenues 58,926,340 41,951,010 33,371,681 ---------- ---------- ---------- EXPENSES Payroll 15,775,097 11,955,536 10,985,576 Interest 11,426,082 7,565,044 6,018,518 Commissions 8,257,703 5,929,844 4,591,079 Professional services 1,879,525 1,447,810 1,511,215 Depreciation 687,333 554,904 351,964 Amortization 4,869,475 3,259,131 1,924,872 General and administrative 14,626,787 10,111,211 8,163,619 ---------- ---------- ---------- Total expenses 57,522,002 40,823,480 33,546,843 ---------- ---------- ---------- INCOME (LOSS) BEFORE FEDERAL INCOME TAXES 1,404,338 1,127,530 (175,162) PROVISION FOR FEDERAL INCOME TAXES 639,000 512,000 102,384 ---------- ---------- ---------- NET INCOME (LOSS) $ 765,338 $ 615,530 $ (277,546) ========== ========== ========== EARNINGS (LOSS) PER SHARE $ 1.61 $ 1.44 $ (.69) ========== ========== ==========
See accompanying notes to consolidated financial statements F-4 33 MCA FINANCIAL CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEAR ENDED JANUARY 31, 1997, 1996 AND 1995
PREFERRED ADDITIONAL STOCK COMMON PREFERRED PAID-IN RETAINED SUB- STOCK STOCK CAPITAL EARNINGS SCRIPTIONS TOTAL ------ --------- ---------- -------- ---------- ----- Balance - February 1, 1994 $4,023 $4,698,870 $2,848,350 $1,897,815 $(886,000) $ 8,563,058 Net loss -- -- -- (277,546) -- (277,546) Issuance of common stock 26 -- 28,211 -- -- 28,237 Issuance of preferred stock -- 697,540 (159,531) -- 886,000 1,424,009 Preferred stock dividends -- -- -- (447,446) -- (447,446) ------ ---------- ---------- ---------- ---------- ----------- Balance - January 31, 1995 4,049 5,396,410 2,717,030 1,172,823 -- 9,290,312 Net income -- -- -- 615,530 -- 615,530 Issuance of common stock 444 -- 764,300 -- -- 764,744 Repurchase of common stock (7) -- (24,079) -- -- (24,086) Preferred stock dividends -- -- -- (485,640) -- (485,640) ------ ---------- ---------- ---------- ---------- ----------- Balance - January 31, 1996 4,486 5,396,410 3,457,251 1,302,713 -- 10,160,860 Net income -- -- -- 765,338 -- 765,338 Issuance of common stock 547 -- 207,725 -- -- 208,272 Preferred stock dividends -- -- -- (485,667) -- (485,667) ------ ---------- ---------- ---------- ---------- ----------- Balance - January 31, 1997 $5,033 $5,396,410 $3,664,976 $1,582,384 $ -- $10,648,803 ====== ========== ========== ========== ========== ===========
See accompanying notes to consolidated financial statements F-5 34 MCA FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JANUARY 31, 1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 765,338 $ 615,530 $ (277,546) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 5,556,808 3,814,035 2,276,836 Stock award compensation 207,970 165,744 28,237 Decrease (increase) in land contracts held-for-resale 1,133,452 (2,175,379) (5,439,497) Origination and purchase of mortgages held-for-resale (794,266,291) (632,281,000) (564,235,000) Sale of mortgages held-for-resale 803,142,508 585,277,031 587,782,628 Increase in accounts receivable - mortgages sold (15,489,908) -- -- Decrease (increase) in accounts receivable (7,274,784) 4,432,277 (7,325,104) Decrease (increase) in accounts receivable - related parties 1,428,805 (986,951) (1,333,086) Increase in excess interest spread receivable (7,987,053) -- -- Increase in deferred charges and other assets (1,104,199) (2,123,743) (1,538,268) Increase (decrease) in accounts payable (9,500,774) 9,852,602 9,047,933 Increase (decrease) in accounts payable - related parties (649,469) 193,729 194,211 Increase in accrued interest and other expenses 360,968 1,071,831 205,166 Increase in deferred Federal income taxes 100,000 100,000 20,000 ------------- ----------- ----------- Net cash provided by (used in) operating activities (23,579,629) (32,044,292) 19,406,510
See accompanying notes to consolidated financial statements F-6 35 MCA FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1997 1996 1995 ------- ------ ------ Net cash provided by (used in) operating activities - total from previous page $ (23,576,629) $(32,044,294) $ 19,406,510 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of MCA Realty Corporation - - 163,341 Investment in mortgage servicing rights-net 7,175,299 (12,125,632) (10,645,117) Decrease (increase) in investments (78,934) 36,912 (224,702) Capital expenditures (1,207,774) (1,073,420) (232,962) ------------- ------------ -------------- Net cash provided by (used in) investing activities 5,888,591 (13,162,140) (10,939,440) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 814,899,838 548,960,490 529,181,111 Payments on notes payable (817,727,548) (597,680,156) (540,175,700) Proceeds from subordinated debentures 6,368,000 4,236,000 - Proceeds from subordinated notes payable 15,000,000 - - Redemption of common stock - - (300,000) Repurchase of common stock - (25,086) - Proceeds from issuance of preferred stock - - 1,583,540 Preferred stock issuance costs - - (159,531) Dividends on preferred stock (485,667) (485,640) (447,446) ------------- ------------ -------------- Net cash provided by (used in) financing activities 18,054,623 45,005,608 (10,318,026) ------------- ------------ -------------- NET INCREASE (DECREASE) IN CASH 366,585 (200,826) (1,850,956) CASH - BEGINNING 2,730,408 2,931,234 4,782,190 ------------- ------------ -------------- CASH - ENDING $ 3,096,993 $ 2,730,408 $ 2,931,234 ============= ============ ==============
See accompanying notes to consolidated financial statements F-7 36 MCA FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
YEAR ENDED JANUARY 31, 1997 1996 1995 ----------- ---------- ---------- Cash paid during the period for: Interest $10,950,833 $7,435,339 $5,943,047 =========== ========== ========== Income taxes $ 412,000 $ 66,506 $ 325,878 =========== ========== ==========
During the year ended January 31, 1997, the Company issued 24,467 shares of common stock to employees and recognized $207,970 in compensation expense. The Company also issued 30,197 shares of redeemable common stock as part of a loan agreement with The Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit and recorded $256,675 in deferred charges. Capital leases totaling $205,841 were entered into for the purchase of various property and equipment during the year ended January 31, 1997. During the year ended January 31, 1996, the Company issued 24,410 shares of common stock to employees and recognized $164,744 in compensation expense. The Company also issued 20,000 shares of common stock to a shareholder/director of the Company in exchange for $600,000 in notes receivable. Prior to January 31, 1996, the notes receivable were assigned to Investor Pass-Through Trusts in satisfaction of amounts due the Trust by MCAFC. In December of 1995, the Company exchanged a $1,000,000 investment in a real estate partnership acquired from a related party in exchange for a reduction in amounts due the Company for an interest in a limited liability company whose primary activity involves providing financing for automobile dealerships. During the year ended January 31, 1996, capital leases totaling $474,077 were entered into for the purchase of various property and equipment. During the year ended January 31, 1995, the Company issued 2,567 shares of common stock to employees and recognized $28,237 in compensation expense. The Company also entered into capital lease arrangements for the purchase of various property and equipment in the amount of $767,145. On January 31, 1995, the Company acquired MCA Realty Corporation (see note 15) in a non-cash transaction. The following assets and liabilities were acquired in exchange for a $945,117 net reduction in accounts receivable from RIMCO Financial Corporation: Cash $ 163,341 Accounts receivable 414,126 Property and equipment 947,967 Deferred charges and other 18,918 Notes payable (521,634) Accounts payable (77,601) --------- $ 945,117 =========
See accompanying notes to consolidated financial statements F-8 37 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements at January 31, 1997, 1996 and 1995 include the accounts of MCA Financial Corp. (MCAFC) and its wholly owned subsidiaries MCA Mortgage Corp. (MCAMC), Mortgage Corporation of America (MCA), MCA Realty Corporation (MRC) and Complete Financial Corp. (CFC). Mortgage Corporation of America - Ohio (MCA-Ohio) is a wholly owned subsidiary of MCA. Intercompany accounts and transactions are eliminated in consolidation. NATURE OF OPERATIONS MCAFC and its subsidiaries (the Company) is a diversified mortgage banking and real estate services enterprise. The Company generates revenue from four primary sources including mortgage banking, land contract syndication, loan servicing and real estate sales. The Company originates first mortgage loans on residential properties. Loans are delivered, primarily on a pre-sold basis, to various institutional investors throughout the United States. These mortgage loans are typically sold on a non-recourse basis. Loans underwritten and sold may be subject to repurchase if the underwriting standards of the investor are not met. These transactions are accounted for as sales of loans since the Company is able to estimate its obligation under the recourse provisions, which historically have been immaterial. Gains and losses from loan sale transactions are recognized when the mortgage loans are sold and amount to approximately $12,513,000, $6,068,000 and $430,000 for the years ending January 31, 1997, 1996 and 1995, respectively. MCA purchases land contracts and mortgage notes at a discount from face value and packages (securitizes) these real estate investments into Investor Pass-through Trusts. MCA is the sponsor of the Trusts, which are sold as securities to investors by independent security broker-dealers. The Trusts hold the entire interest, including any residual, in the transferred loans. Gain on sale is recognized when the Trusts have broken escrow (investor funds have been received). F-9 38 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED NATURE OF OPERATIONS -- CONTINUED -------------------- MCAMC and MCA service the land contracts and mortgages for various investors. Servicing revenues are recognized monthly according to the servicing contracts related to the various portfolio interests. MCAFC, MCA and MRC purchase residential and commercial income properties which are sold to limited partnerships. Revenues related to limited partnership sales are recognized when the sales are closed. Substantially all of the real estate and land contracts held by the limited partnerships and Investor Pass-through Trusts are located in, or relate to, properties located in the greater Detroit, Michigan metropolitan area. LAND CONTRACTS HELD-FOR-RESALE ------------------------------ Land contracts held-for-resale are recorded at the lower of cost or market and consisted of the following at:
JANUARY 31, 1997 1996 --------- --------- Land contracts receivable $11,684,696 $12,158,775 Discount (197,796) (416,418) Senior liens payable (1,135,475) (257,480) ----------- ----------- $10,351,425 $11,484,877 =========== ===========
MORTGAGES HELD-FOR-RESALE ------------------------- Mortgages held-for-resale are recorded at the lower of cost or market which is determined by the aggregate method (unrealized losses are offset by unrealized gains). Cost approximated market value, therefore, no valuation allowance was necessary at January 31, 1997 and 1996. F-10 39 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED ACCOUNTS RECEIVABLE - MORTGAGES SOLD Accounts receivable - mortgages sold represents amounts due from the purchaser on sales of non-conforming mortgages. Management believes the outstanding balance is fully collectible at January 31, 1997, and accordingly no allowance for doubtful accounts has been provided. ACCOUNTS RECEIVABLE Accounts receivable consisted of the following at:
JANUARY 31, 1997 1996 ----------- ---------- Accounts receivable - sales of mortgage servicing rights $14,136,266 $5,912,243 Accrued fees and commissions 919,155 1,505,378 Accounts receivable - syndication sales 154,352 662,577 Accounts receivable - escrows on closed loans 983,971 563,061 Accounts receivable - shareholders 233,342 182,679 Accrued interest 181,420 211,843 Employee commission draws 128,178 113,799 Other 260,627 570,947 ----------- ---------- $16,997,311 $9,722,527 =========== ==========
Accounts receivable - related parties consist mainly of non-interest bearing advances and other administrative charges to Investor Pass-through Trusts and limited partnerships sponsored by the Company, and other related entities. Included in accounts receivable - related parties at January 31, 1997 and 1996, respectively, are approximately $571,000 and $793,000 due from an entity owned by certain directors and shareholders of the Company; $1,674,000 and $1,676,000 due from Property Corporation of America (PCA), an entity owned by certain directors and shareholders of the Company, and $3,384,000 and $4,568,000 due from investor pass-through trusts and limited partnerships is substantially dependent upon successful syndication of partnership interests and operating cash flows generated by rental operations. The Company uses the allowance method to account for possible losses of accounts receivable, and no allowance was deemed necessary at January 31, 1997 and 1996. F-11 40 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED MORTGAGE SERVICING RIGHTS In February 1996, the Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights". This requires the capitalization of a mortgage servicing asset for every origination whether it be originated or purchased. SFAS No. 122 also dictates prescribed rules for the amortization, periodic valuation, and the required valuation adjustment. As discussed in Note 1, the Company adopted SFAS 122 in February 1996. The effect of the adoption was to increase earnings by approximately $.73 million for Fiscal 1996 or $1.54 per share. Prior to adoption, a value was capitalized for purchased mortgage servicing rights. This capitalization was in accordance with SFAS Statement of Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking Practices". The following is an analysis of the changes in mortgage servicing rights: Balance - January 31, 1994 $ 8,257,305 Additions 22,145,428 Scheduled amortization (1,334,724) Amortization due to changes in prepayment and other assumptions -- Sales (11,500,311) ----------- Balance - January 31, 1995 17,567,698 Additions 25,711,919 Scheduled amortization (1,991,974) Amortization due to changes in prepayment and other assumptions (468,007) Sales (13,526,278) ----------- Balance - January 31, 1996 27,293,358 Additions 10,780,600 Scheduled amortization (3,699,194) Amortization due to changes in prepayment and other assumptions -- Sales (18,050,501) ----------- Balance - January 31, 1997 $16,324,263 ===========
F-12 41 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED MORTGAGE SERVICING RIGHTS -- CONTINUED ------------------------- Amortization of purchased servicing rights is based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized from the purchased servicing rights on a discounted basis. Projected net servicing income is determined on the basis of the estimated balance of the underlying mortgage loan portfolio, which declines over time from prepayment and scheduled amortization. The Company estimates future prepayment rates based on current interest rate levels and other economic conditions, as well as relevant characteristics of the servicing portfolio, such as loan types, interest rate stratification and recent prepayment experience. Amortization of purchased servicing rights was $3,699,194, $2,459,981 and $1,334,724 for the years ended January 31, 1997, 1996 and 1995, respectively. Accumulated amortization of purchased servicing rights was $5,806,181, $2,887,705 and $427,704 at January 31, 1997, 1996 and 1995, respectively. Properties securing the mortgage loans in the Company's servicing portfolio are located throughout the United States. At January 31, 1997, the net book value of the mortgage servicing rights portfolio approximated fair value. EXCESS INTEREST SPREAD RECEIVABLE --------------------------------- The Company sells mortgage loans in bulk to a third party for purposes of securitization. By agreement, the Company is entitled to the difference between the weighted average coupon rate of the loans it originated in the security and the security's stated yield, less a normal servicing fee and certain other fees. The Company determines fair value based on a discounted cash flow analysis. The analysis takes into consideration projected prepayments, defaults, interest rate and credit risks. Income is recognized at the time of sale and is included in mortgage origination fees and gain on sale of mortgages. INVESTMENTS ----------- Partnership investments consist of partnership interests in limited partnerships and are accounted for under the equity method. The partnerships invest primarily in residential rental properties. Presented below is summary unaudited financial information for the above limited partnerships as of, and for the year ended: F-13 42 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED INVESTMENTS - CONTINUED
DECEMBER 31, 1996 1995 -------- -------- Total assets $8,586,116 $9,327,310 Total liabilities 2,945,782 2,885,888 Partnership equity 5,640,334 6,441,422 Net income 432,499 510,748
Included in investments at January 31, 1997 and 1996 is a $1,000,000 membership interest investment in a LLC which was made in December 1995. This start-up Company participates in the used vehicle retail industry through providing floor plan financing and participating in joint venture activities with existing dealers. The Company's investment in the Class B interest issued by this LLC provides it the right to participate in earnings and distributions, if any, subject to preferential rights of certain other members. This investment is being accounted for on the cost method. PROPERTY AND OFFICE EQUIPMENT Property and office equipment are recorded at cost. Depreciation is calculated principally using the straight-line method based upon the estimated useful lives of the assets, ranging from seven to ten years. Property and office equipment consisted of the following at:
JANUARY 31, 1997 1996 -------- --------- Property and office equipment under capital lease $ 2,370,809 $ 2,475,010 Property and office equipment 3,729,214 2,653,472 Building and improvements 1,498,614 1,090,714 ----------- ----------- 7,598,637 6,219,196 Less accumulated depreciation (2,016,025) (1,362,866) ----------- ----------- $ 5,582,612 $ 4,856,330 =========== ===========
Depreciation expense for the year ended January 31, 1997, 1996 and 1995 amounted to $687,313, $554,904 and $351,964, respectively. F-14 43 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED REVENUE RECOGNITION Gains on the sale of mortgage servicing rights are recognized when title and all risks and rewards have irrevocably passed to the buyer and there are no significant unresolved contingencies. Mortgage origination fees on loans held-for-sale are recognized as income at the time the loan is sold. FAIR VALUE OF FINANCIAL INSTRUMENTS Statements of Financial Accounting Standards ("SFAS") No. 107 issued by the Financial Accounting Standards Board ("FASB"), "Disclosures About Fair value of Financial Instruments", requires the disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition, where it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. 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 CASH EQUIVALENTS For these short-term instruments, the carrying amount is a reasonable estimate of fair value. LAND CONTRACTS HELD-FOR-RESALE This portfolio consists of land contracts held-for-resale underlying single family residential properties. These are valued based on the fair value of obligations with similar credit characteristics. MORTGAGES HELD-FOR-RESALE This portfolio consists of single family mortgage loans held-for-sale and is valued using fair values attributable to similar mortgage loans. F-15 44 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED MORTGAGE SERVICING RIGHTS The fair value of the mortgaged servicing rights is determined using the discounted present value of the net cash flows. Market estimates are used for servicing costs, prepayment speeds and discount rates. EXCESS INTEREST SPREAD RECEIVABLE The fair value is determined by using the discounted present value of the net cash flows. Market estimates are used for servicing costs, prepayment spreads and discount rates. NOTES PAYABLE, SUBORDINATED DEBENTURES AND SUBORDINATED NOTES PAYABLE The carrying amount for these instruments approximates fair value. The following table sets forth the fair value of the Company's financial instruments:
JANUARY 31, 1997 1996 ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- ------- -------- ------- Assets: Cash and cash equivalents $ 3,096,993 $ 3,096,993 $ 2,730,408 $ 2,730,408 Land contracts held-for-resale 10,351,425 10,351,425 11,484,877 11,484,877 Mortgage held-for-resale 54,430,155 54,430,155 63,306,372 63,306,372 Mortgage servicing rights 16,324,263 16,324,263 27,293,358 27,293,358 Excess interest spread receivable 7,987,053 7,987,053 -- -- Liabilities: Notes payable, subordinated debentures and subordinated notes payable 114,517,834 114,517,834 95,771,703 95,771,703
F-16 45 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. EARNINGS PER SHARE Earnings per share are computed based on the weighted average number of common and common equivalent shares outstanding during the period. The weighted average number of shares used in the determination of earnings per share was 475,949, 426,762 and 403,622 for the years ended January 31, 1997, 1996 and 1995. RECLASSIFICATION Certain amounts in the prior year's financial statements have been reclassified to conform to the January 31, 1997 presentation. NEW PRONOUNCEMENTS In June 1996, the FASB issued "SFAS No. 125 - Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement was to have been effective prospectively from December 31, 1996, but was deferred when the FASB issued "SFAS No. 127 - Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." The effective date of the certain provisions have been deferred one year. The Company adopted certain of the provisions for transactions entered into during January, 1997. The effect of this adoption was not significant to net income. Management does not believe adoption of the remaining provisions will have a material effect on the financial statements. F-17 46 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED NEW PRONOUNCEMENTS - CONTINUED In February 1997, the FASB issued SFAS No. 128. "Earnings Per Share," which replaces the presentation of primary earnings per share ("EPS") with a presentation of basic EPS, requires dual presentation of basic and diluted EPS on the face of the statement of earnings regardless of whether basic and diluted EPS are the same, and requires a reconciliation of the numerator and denominator used in computing basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion 15. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. This Statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, earlier application is not permitted, and requires restatement of all prior period EPS data presented. NOTE 2 - RESTRICTED CASH Included in cash and accounts payable are advance payments by borrowers on loans serviced by the Company in the amount of approximately $511,000 and $378,000, respectively, at January 31, 1997 and 1996. F-18 47 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 3 - NOTES PAYABLE
JANUARY 31, 1997 1996 -------- -------- Note payable under $115 million mortgage warehouse credit facility, subject to renewal on September 3, 1997, interest is computed at LIBOR plus .85% to 2.5% depending on type of loan and payable monthly, principal payable upon sale of mortgage collateral (mortgages held-for-resale) to institutional investors $ 48,369,064 $ - Note payable under $25 million mortgage warehouse credit facility, interest is computed at the bank's prime rate less 1/2% and payable monthly; principal payable upon sale of mortgage collateral (mortgages held-for-resale) to institutional investors or on demand. This facility was terminated January 8, 1997 - 22,557,781 Note payable under $28.5 million revolving credit facility, subject to renewal on October 31, 1997, interest is computed at the Federal Funds rate plus 1.5% (6.8% at January 31, 1997), collateralized by mortgage servicing rights 28,305,175 28,500,000 Note payable under $30 million mortgage warehouse facility, interest is computed at the federal funds rate plus 1.5% and deducted from the proceeds of investor fundings, principal payable upon sale of mortgage collateral (mortgages held-for-resale) to institutional investors or on demand. This facility was terminated August 31, 1996 - 26,554,708 ----------- ----------- Total - this page 76,674,239 77,612,489
F-19 48 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 3 - NOTES PAYABLE - CONTINUED
JANUARY 31, 1997 1996 -------- -------- Total - previous page $ 76,674,239 $ 77,612,489 Note payable under $10 million mortgage warehouse facility, subject to renewal on November 1, 1997, interest is computed at LIBOR plus 1.5% (6.94% at January 31, 1997), principal payable upon sale of mortgage collateral (mortgages held-for-resale) to institutional investors. 4,426,335 3,729,748 Note payable under $1 million line-of-credit for the acquisition and rehabilitation of residential real property subject to renewal on February 1, 1998, interest is computed at the bank's prime rate plus 1% (9.25% at January 31, 1997) collateralized by a first security interest in residential real property 284,200 - Revolving line-of-credit/note payable, $.5 million credit line for working capital, $1 million note payable for purchases of land contracts, interest is computed at the bank's prime rate plus 1% (9.25% at January 31, 1997). Land contracts are assigned to the bank as collateral, personally guaranteed by certain officers of the Company, payable upon sale of collateral. This facility was terminated April 14, 1997 250,000 1,500,000 ---------- ---------- Total-this page 81,634,774 82,842,237
F-20 49 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 3 - NOTES PAYABLE - CONTINUED
JANUARY 31, 1997 1996 -------- -------- Total - previous page $ 81,634,774 $ 82,842,237 Note payable under $1.5 million line-of-credit for the acquisition and rehabilitation of residential real property interest is computed at 12%, collateralized by residential real property and personally guaranteed by certain officers of the Company, principal payable upon sale of collateral. This facility was terminated December 13, 1996 - 1,448,042 Note payable under $1.5 million line-of-credit for the acquisition and rehabilitation of residential real property, interest is computed at the bank's prime rate plus 3/4%, collateralized by residential real property and personally guaranteed by certain officers of the Company, principal payable upon sale of collateral. This facility was terminated September 17, 1996 - 408,773 Land contracts payable to certain Investor Pass-through Trusts sponsored by the Company for purchase of a building, interest at 11%, collateralized by the building, principal payable based on 30 year amortization, balloon payment required in 10 years 452,898 542,556 Other notes payable, including obligations under capital leases, expiring at various times through 2002 1,888,162 1,356,095 ------------ ------------ $ 83,975,834 $ 86,597,703 ============ ============
F-21 50 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 3 - NOTES PAYABLE - CONTINUED In connection with the $28.5 million credit facility, the Company entered into an arrangement with the Policemen and Firemen Retirement System of the City of Detroit (The "Fund") whereby the Fund has agreed to provide payment upon the occurrence of certain events of default by the Company. In consideration for this, the Company pays certain fees to the Fund, and has provided it with an option to purchase up to five percent of the Company's outstanding common stock, at seventy percent of the public offering price per share, if the Company completes a firm commitment underwritten sale of its common stock prior to April 30, 2000. The above notes payable place certain financial restrictions on the Company. If for any reason the warehouse credit facilities are terminated, the Company's ability to fund mortgage loans will be adversely impacted. The Company anticipates renewal of all of its existing credit facilities. NOTE 4 - SUBORDINATED DEBENTURES In December 1991, the Company began offering up to $7,500,000 of 11% Asset-Backed Subordinated Debentures due March 15, 1997. Interest on the Debentures is payable quarterly. The Debentures are subordinate in right of payment to all current and future senior indebtedness of the Company. Payment of principal and interest on the Debentures is collateralized by a security interest in and lien upon certain existing and future contract rights to service mortgages and land contracts. These rights must at all times have a formula value, as determined by provisions of the Indenture, of at lease 105% of the principal amount of Debentures outstanding. Under certain limited conditions, the Debentures are redeemable commencing June 15, 1993 only up to $25,000 per holder in each calendar year and only up to an aggregate of $100,000 per calendar year for all holders. The right of redemption does not exist if the Company is in default under any senior indebtedness. Through January 31, 1997 there have been $17,000 in redemptions. The Debentures also place restrictions on dividends and certain equity transactions should the Company's consolidated retained earnings fall below $1,000,000. The Debentures are registered with the Securities and Exchange Commission. These debentures were redeemed in full on March 17, 1997. Through January 31, 1997, the Company has incurred approximately $866,000 in fees related to the debenture offering. These costs are included in deferred charges and other assets and are being amortized over the life of the debentures on the straight-line method. Accumulated amortization was $840,000 and $686,000 at January 31, 1997 and 1996. F-22 51 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 4 - SUBORDINATED DEBENTURES - CONTINUED In December 1994, the Company began offering up to $10,000,000 of 11% Asset-Backed Subordinated Debentures due June 30, 2000. Interest on the Debentures is payable quarterly. The Debentures are subordinate in right of payment to all current and future senior indebtedness of the Company. Payment of principal and interest on the Debentures is collateralized by a security interest in and lien upon certain existing and future contract rights to service mortgages and land contracts and specified mortgage notes and land contract vendors' interests relating to one-to-four family residential and commercial real estate. This collateral must at all times have a formula value, as determined by provisions of the Indenture, of at least 105% of the principal amount of Debentures outstanding. Under certain limited conditions, the Debentures are redeemable only up to $25,000 per holder in each calendar year and only up to an aggregate of $100,000 per calendar year for all holders. The right of redemption does not exist if the Company is in default under any senior indebtedness. Through January 31, 1997 there have been no redemptions. The Debentures are registered with the Securities and Exchange Commission. Through January 31, 1997, the Company has incurred approximately $1,513,000 in fees related to the debenture offering. These costs are included in deferred charges and other assets and are being amortized over the life of the debentures on the straight-line method. Accumulated amortization was $405,000 and $109,000 at January 31, 1997 and 1996. In June 1996, the Company began offering up to $6,000,000 of unsecured 11% subordinated debentures due June 30, 2002. Interest on the Debentures is payable quarterly. The debentures are subordinate in right of payment to all current and future indebtedness of the Company. Under certain limited conditions, the Debentures are redeemable only up to $25,000 per holder in each calendar year and only up to an aggregate of $100,000 per calendar year for all holders. The right of redemption does not exist if the Company is in default under any senior indebtedness. The Debentures are registered with the Securities and Exchange Commission. Through January 31, 1997, the Company has incurred approximately $67,000 in fees related to the debenture offering. These costs are included in deferred charges and other assets and are being amortized over the life of the debentures on the straight-line method. Accumulated amortization was $1,000 at January 31, 1997. F-23 52 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 5 -- SUBORDINATED NOTES PAYABLE In July 1996, the Company entered into a loan and financing agreement with The Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit ("The Fund") to provide the Company $15 million to expand its non-conforming lending business. Interest on this borrowing is 10% and is payable quarterly. Commencing July 1, 2001 equal quarterly installments of principal and interest will be paid until the loan terminates and is repaid in full on June 30, 2006. As a result of this agreement, the Fund was issued 30,197 shares, or 6% of the Company's common stock at the time. Anti-dilution provisions of the agreement may require the Company to issue additional shares in the future. The Fund has the right to "put" these redeemable shares back to the Company, under a number of different scenarios, on August 1, 2006, or upon an event of default with a minimum guaranteed repurchase of $1,400,000. NOTE 6 -- PREFERRED STOCK In March 1992 MCAFC began offering up to 350,000 units consisting of one share of Series A 9%, $10 stated value, cumulative convertible preferred stock and one warrant to purchase one share of common stock of the Company. The stock is convertible only in the event of an initial public offering of the Company's common stock. The warrants are conditional on an initial public offering of the Company's common stock within one year of the redemption of the warrant holders Series A preferred stock. The preferred stock is redeemable at any time at the option of the Company only. Redemption prices per share increase $.20 per year from $10.20 in 1993 to $11 in 1997 and thereafter. Through January 31, 1997 there have been no redemptions. Dividends are payable quarterly. In June 1993, MCAFC began offering up to 750,000 units consisting of one share of Series B 9%, $10 stated value, cumulated convertible preferred stock. The stock is convertible only in the event of an initial public offering of the Company's common stock. The preferred stock is redeemable at any time on or after July 15, 1994 at the option of the Company only at a redemption price of $10 per share. Through January 31, 1997 there have been no redemptions. Dividends are payable quarterly. Through January 31, 1997 the Company has incurred approximately $603,000 in fees related to the preferred stock offering. These costs have been offset against additional paid-in capital. F-24 53 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 7 -- FEDERAL INCOME TAXES Deferred income taxes are provided for on the liability method and reflect the net tax effects of temporary differences between the carrying cost and amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax liability are as follows:
January 31, 1997 1996 ----------- ------------ Depreciation of property and office equipment $ 518,000 $ 416,000 Amortization of goodwill (120,000) (108,000) Other 2,000 (8,000) --------- --------- $ 400,000 $ 300,000 ========= =========
Components of income tax expense are:
January 31, 1997 1996 1995 ----------- ----------- ------------ Current $539,000 $412,000 $ 82,384 Deferred 100,000 100,000 20,000 -------- -------- -------- $639,000 $512,000 $102,384 ======== ======== ========
The income tax provision reconciled to the tax computed at the statutory federal rate is as follows for the years ended January 31: Tax (benefit) at statutory rate $478,000 $383,000 $(59,000) Non-deductible items 161,000 169,000 107,000 Adjustment of prior year accrual -- -- 38,000 Other -- (40,000) 16,384 -------- -------- -------- $639,000 $512,000 $102,384 ======== ======== ========
F-25 54 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 8 - RELATED PARTY TRANSACTIONS The Company purchased various real estate parcels during the years ended January 31, 1997, 1996 and 1995. These parcels purchased from unrelated third parties were subsequently sold to limited partnerships, for which PCA is the general partner. Gains totaling $7,539,447, $6,529,708 and $7,365,199 for the years ended January 31, 1997, 1996 and 1995 were recognized on the sales, respectively. During the years ended January 31, 1997, 1996 and 1995 the Company agreed to pay commissions of $1,968,000, $1,735,000 and $1,315,000, respectively for the acquisition of properties acquired from unrelated third parties to a Company owned by three shareholders of MCAFC. These commissions reduced "Gain on Sale of Real Estate" in the consolidated Statements of Operations. MCA earned $36,000 for management fees for administrative services provided to U.S. Mutual Financial Corporation (USMFC) during each of the years ended January 31, 1997, 1996 and 1995, respectively. Certain shareholders of the Company are directors or major shareholders of USMFC. Included in accounts payable at January 31, 1997 and 1996 are approximately $1,044,000 and $1,500,000 attributable to transactions with partnerships, trusts and other related entities. Such transactions include rental payments received on behalf of these entities and disbursed in subsequent months. F-26 55 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 9 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is party to financial instruments with off-balance sheet risk in the normal course of business through the production and sale of mortgage loans and the management of interest rate risk. These financial instruments include commitments to extend credit and forward contracts to deliver and sell loans to investors. The Company is exposed to credit loss in the event of nonperformance by the counter-parties to the various agreements. However, the Company does not anticipate nonperformance by the counter-parties. The Company's exposure to credit risk with respect to commitments to extend credit are limited due to the non-recourse nature of the loans upon sale to investors. At January 31, 1997 and 1996, respectively, the Company has approved loans that had not yet closed amounting to approximately $40,081,000 and $74,259,000. The Company manages credit risk with respect to forward contracts by entering into agreements only with investors meeting certain requirements. In the event of default by the counter-party the Company's exposure to credit risk is the difference between the contract price and the current market price. NOTE 10 - LEASE COMMITMENTS The Company leases office space and equipment under long-term capital and operating leases with varying terms which expire through 2002. Rent expense on operating leases approximated $2,282,000, $1,803,000 and $1,251,000 for the years ended January 31, 1997, 1996 and 1995, respectively, and is included in the caption "General and Administrative" expense in the Consolidated Statements of Operations. F-27 56 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 10 -- LEASE COMMITMENTS - CONTINUED As of January 31, 1997, approximate future minimum lease payments under capital leases and future minimum lease payments under operating leases that have initial or remaining noncancelable terms in excess of one year as of follows:
Capital Operating Leases Leases -------- ---------- 1998 $536,145 $1,314,462 1999 164,757 990,970 2000 1,555 645,592 2001 -- 32,679 2002 -- 15,000 -------- ---------- Total minimum lease payments 702,457 $2,998,703 ========== Less: amount representing interest 66,159 -------- Present value of minimum lease payments $636,298 ========
NOTE 11 -- COMMITMENTS AND CONTINGENCIES In accordance with the terms of the investor Pass-through Trust Participation Agreements, the Company is obligated to purchase all outstanding participation certificates held by investors at such time as the aggregate net receivable balances of each Trust is less than 10% of the original face amount of the Trust. At January 31, 1997 and 1996, the maximum amount of these future purchase commitments totaled approximately $9,381,000 and $8,011,000. Although the Company is approved as a correspondent with numerous mortgage investors, three investors purchased substantially all of the Company's mortgage loans originated during fiscal 1997, 1996 and 1995. Management believes that the loss of these investors would have a material adverse effect on the Company. The Company is a party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse affect on the financial condition or results of operations of the Company. F-28 57 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 12 -- EMPLOYEE BENEFIT PLAN The Company has a 401(k) plan covering substantially all its employees. The Company has the option of making an annual discretionary profit sharing contribution and is matching each employee's contribution up to a predetermined limit. The Company's combined contribution to the plan amounted to $86,000, $22,000 and $17,000 for the years ended January 31, 1997, 1996 and 1995. NOTE 13 -- RESTRICTED STOCK AWARDS At the discretion of the Board of Directors, shares may be issued to employees and non-employees as incentives for performance. The number of shares awarded, and the terms under which such shares become vested (nonforfeitable), are determined on an individual basis. The Company recognizes the issuance of restricted shares when they become vested. As of January 31, 1997, a total of 20,002 shares have been awarded and remain unvested. The aggregate number of shares and the years in which they become vested in each of the periods succeeding January 31, 1997 are as follows: 1998 $12,168 1999 7,834 F-29 58 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 14 - SEGMENT INFORMATION The Company and its subsidiaries operate primarily in two business segments. Operations in mortgage banking involve the origination and purchase of mortgage loans in the secondary mortgage market, servicing of mortgage loans, and the purchase and sale of mortgage servicing rights. Operations in the real estate industry consist of the purchase and resale and the securitization and syndication of real estate interests. The following is a summary of selected consolidated segment information for the mortgage banking and real estate industry segments for the years ended:
JANUARY 31, 1997 1996 1995 --------- --------- --------- REVENUE Mortgage banking $ 46,512,944 $ 31,051,952 $22,512,856 Real estate 12,413,396 10,899,058 10,858,825 ------------ ------------ ----------- Total $ 58,926,340 $ 41,951,010 $33,371,681 ============ ============ =========== INCOME (LOSS) BEFORE INCOME TAXES Mortgage banking $ 824,964 $ (1,195,323) $(3,057,212) Real estate 579,374 2,322,853 2,882,050 ------------ ------------ ----------- Total $ 1,404,338 $ 1,127,530 $ (175,162) ============ ============ =========== IDENTIFIABLE ASSETS Mortgage banking $115,310,484 $104,990,975 $46,523,533 Real estate 19,256,062 27,147,572 23,238,535 Other 10,425,267 3,052,094 7,349,452 ------------ ------------ ----------- Total $144,991,813 $135,190,641 $77,111,520 ============ ============ ===========
F-30 59 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 15 -- BUSINESS ACQUISITION On July 19, 1994, the Company purchased substantially all of the revenue producing activities of Liberty National Mortgage Corporation (Liberty) in a transaction accounted for using the purchase method. These assets included certain furniture and equipment located in Liberty branch offices in Michigan, Maryland, West Virginia and Illinois and the right-to-process and close certain mortgage loans in process originated by Liberty. The purchase price of the furniture and equipment was determined by independent appraisal and payable within 45 days of this agreement. The appraised value was $85,000. At the closing of this agreement a down payment of $350,000 was made as an advance against amounts due as a result of future Liberty branch loan closings. This down payment is included in deferred charges and other assets in the accompanying consolidated balance sheet. Liberty was paid based on a negotiated formula tied to loan closings at Liberty branches over an eighteen month period. The total purchase price, was $885,000. This consists of the $85,000 referred to above which was capitalized and amortized as furniture and equipment, approximately $200,000 for loans-in-process, which upon closing were capitalized and amortized as a cost of the loan origination, and $500,000 for future branch loan closings, $150,000 of which was paid during July and August, 1994 and $350,000, which was paid at the closing. The benefits to be derived from the acquisition of these production offices will extend beyond the eighteen month earn-out period, and, accordingly have been capitalized as goodwill (included in deferred charges and other assets on the balance sheet) and amortized over a five year period, subject to periodic re-evaluation. In connection with the acquisition, the Company acquired approximately $4,000,000 of loans held-for-resale which were funded by the Company's warehouse credit facilities and subsequently purchased by outside investors under terms similar to any Company originated loan. The following unaudited pro-forma summary presents the consolidated results of operations as if the acquisition had occurred at February 1, 1993, after giving effect to certain adjustments. These pro-forma results have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the acquisition been made as of those dates or of results which may occur in the future. F-31 60 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 15 - BUSINESS ACQUISITION - CONTINUED
YEAR ENDED JANUARY 31, 1995 --------------------------- MCAFC PRO-FORMA MCAFC (HISTORICAL) ADJUSTMENTS (PRO-FORMA) ------------ ----------- ----------- REVENUES Gain on sale of land contracts $ 2,983,022 $ - $ 2,983,022 Gain on sale of real estate 7,365,199 - 7,365,199 Gain on bulk sales of servicing rights 7,475,444 1) 1,737,609 9,213,053 Mortgage origination fees 5,584,454 1) 1,862,821 7,447,275 Servicing fees 4,616,738 1) 429,081 5,045,819 Interest income 5,106,041 1) 245,634 5,351,675 Other income 240,783 128,035 368,818 ----------- ---------- ---------- Total revenues 33,371,681 4,403,180 37,774,861 ----------- ---------- ---------- EXPENSES Payroll 10,985,576 1) 1,705,338 12,690,914 Interest 6,018,518 1) 171,221 6,189,739 Commissions 4,591,079 1) 836,669 5,427,748 Professional services 1,511,215 1) 80,798 1,592,013 Depreciation 351,964 1) 49,275 401,239 Amortization 1,924,872 1)2) 110,000 2,034,872 General administrative 8,163,619 843,557 9,007,176 ----------- ---------- ---------- Total expenses 33,546,843 3,796,858 37,343,701 ----------- ---------- ---------- INCOME (LOSS) BEFORE FEDERAL INCOME TAXES (175,162) 606,322 431,160 Provision (credit) for Federal income taxes 102,384 3) 206,149 308,533 ----------- ---------- ---------- NET INCOME (LOSS) $ (277,546) $ 400,173 $ 122,627 =========== ========== ========== Earnings (loss) per share $ (.69) $ .99 $ .30 =========== ========== ==========
Summary of Pro-Forma Adjustments: 1) To include historical operating results of the Liberty National Mortgage Corporation for the year ended December 31, 1993 and the period ended May 31, 1994. (Certain amounts have been reclassified to conform to the MCAFC historical presentation.) 2) Amortization of $500,000 of goodwill over five years. 3) Estimated Federal income tax accrual. F-32 61 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 15 - BUSINESS ACQUISITION - CONTINUED On January 31, 1995, the Company acquired all of the issued and outstanding common stock of RIMCO Realty & Mortgage from RIMCO Financial Corporation (an entity owned by three shareholder of the Company) in exchange for a $945,117 reduction in amounts due the Company. Amounts assigned in the accompanying consolidated balance sheet to assets purchased and liabilities assumed were based on the seller's historical cost which is less than fair value. 62 Report of Independent Certified Public Accountants on Supplementary Information To the Board of Directors MCA FINANCIAL CORP. Our audit was conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole of MCA Financial Corp. and subsidiaries as of and for the year ended January 31, 1997, which are presented in the preceding section of this report. The accompanying consolidated balance sheet and statement of operations are presented for purposes of additional analysis and are not a required part of the basic consolidated financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. Moore Stephens Grant Thornton LLP Doeren Mayhew, P.C. Detroit, Michigan April 28, 1997 Troy, Michigan F-34 63 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, on April 29, 1997. MCA FINANCIAL CORP. By: /s/ Patrick D. Quinlan ----------------------------- Patrick D. Quinlan, Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 29, 1997.
Signature Title (Capacity) --------- ---------------- /s/ Patrick D. Quinlan Chairman and Director April 29, 1997 - ---------------------- (Principal Executive Officer) Patrick D. Quinlan /s/ Keith D. Pietila Executive Vice President and Director April 29, 1997 - ---------------------- (Principal Financial and Accounting Officer) Keith D. Pietila /s/ Lee P. Wells Director April 29, 1997 - ---------------------- Lee P. Wells Director April 29, 1997 - ---------------------- C. Thompson Wells Director April 29, 1997 - ---------------------- Thomas P. Cronin /s/ D. Michael Jehle Director April 29, 1997 - ---------------------- D. Michael Jehle Director April 29, 1997 - ---------------------- James B. Quinlan
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. No Annual Report or Proxy Materials have been or will be sent to security holders. S-1 64 EXHIBIT INDEX Exhibit Number Description of Exhibit 3.1 Restated Articles of Incorporation, as amended (previously filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-QSB for the period ended April 30, 1993, and incorporated herein by reference). 3.2 Bylaws, as amended. (previously filed as Exhibit 3.2 to Amendment No. 1 to the Registrant's Registration Statement on Form SB-2, File No. 33-79190, and incorporated herein by reference). 4.1 Indenture, dated as of December 30, 1994, between the Registrant and First Fidelity Bank, N.A., as Trustee, relating to the Registrant's 11% Asset-Backed Subordinated Debentures Due June 30, 2000 (previously filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-1, File No. 33-98644, and incorporated herein by reference). 4.2 First Supplemental Indenture between the Registrant and First Fidelity Bank, N.A. dated as of October 10, 1995. 4.3 Indenture, dated as of January 1, 1992, between the Registrant and IBJ Schroder Bank & Trust Company relating to the Registrant's 11% Asset-Backed Subordinated Debentures Due 1997 (previously filed as Exhibit 4 to Amendment No. 2 to the Registrant's Registration Statement on Form S-18, File No. 33-43765C, and incorporated herein by reference). 10.1 Lease Agreement, dated April 1, 1991, between Mortgage Corporation of America and Multi-City Investment Company, as amended by First Amendment (previously filed as Exhibit 10.15 to the Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-18, File No. 33-43765C, and incorporated herein by reference). 10.2 Second, Third, Fourth, Fifth and Sixth Amendments to Exhibit 10.1 (previously filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1994, and incorporated herein by reference). 10.3 Agreement and Plan of Reorganization by and among the Registrant, Metro Rental Properties, Inc., Patrick D. Quinlan, Lee P. Wells and C. Thompson Wells, Jr. (previously filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1993, and incorporated herein by reference). 10.4 Revolving Credit Loan Agreement, dated April 30, 1993 by and among the Registrant, MCA Mortgage Corporation, First American Mortgage E-1 65 Associates, Inc., Complete Financial Corporation, Securities Corporation of America and Comerica Bank (previously filed as Exhibit 10.17 to the Registrant's Registration Statement on Form SB-2, File No. 33-63206C, and incorporated herein by reference). 10.5 First Amendment to Revolving Credit Loan Agreement, dated December 27, 1993, by and among the Registrant, MCA Mortgage Corporation, Mortgage Corporation of America, Complete Financial Corporation, Securities Corporation of America and Comerica Bank, amending Exhibit 10.4 (previously filed as Exhibit 10.18 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1994, and incorporated herein by reference). 10.6 Second Amendment to Revolving Credit Loan Agreement, dated February 25, 1994, by and among the Registrant, MCA Mortgage Corporation, Mortgage Corporation of America, Complete Financial Corporation, Securities Corporation of America and Comerica Bank, amending Exhibit 10.4 (previously filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1994, and incorporated herein by reference). 10.7 Credit Enhancement Umbrella Agreement, dated April 30, 1993, by and among the Registrant, MCA Mortgage Corporation, First American Mortgage Associates, Inc. and The Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit (previously filed as Exhibit 10.18 to the Registrant's Registration Statement on Form SB-2, File No. 33-63206C, and incorporated herein by reference). 10.8 First Amendment to Credit Enhancement Umbrella Agreement, dated December 27, 1993, by and among the Registrant, MCA Mortgage Corporation, Mortgage Corporation of America and the Board of Trustees of the Policemen and Firemen Pension Fund of the City of Detroit, amending Exhibit No. 10.7 (previously filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1994, and incorporated herein by reference). 10.9 Piggyback Rights Agreement, dated April 30, 1993, between the Registrant and The Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit (previously filed as Exhibit 10.19 to the Registrant's Registration Statement on Form SB-2, File No. 33-63206C, and incorporated herein by reference). 10.10 Form of Stock Redemption Agreement, dated January 20, 1994, between the Registrant and each of Patrick D. Quinlan, James B. Quinlan, Keith D. Pietila, Thomas P. Cronin, Lee P. Wells and David C. Wells (previously filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1994, and incorporated herein by reference). E-2 66 10.11 Agreement and Plan of Reorganization, dated January 27, 1994, by and among the Registrant, North-Side Homes, Inc., Patrick D. Quinlan, Lee P. Wells, Roger Smigiel, Leroy G. Rogers, David C. Wells and Janet K. Wells (previously filed as Exhibit 10.25 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1994, and incorporated herein by reference). 10.12 Mortgage Loan Participation Agreement, dated May 19, 1993, between MCA Mortgage Corporation and Paine Webber Real Estate Securities Inc. (previously filed as Exhibit 10.26 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1994, and incorporated herein by reference). 10.13 Conforming Mortgage Loan Participation Agreement, dated May 19, 1993, between MCA Mortgage Corporation and Paine Webber Real Estate Securities Inc. (previously filed as Exhibit 10.27 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1994, and incorporated herein by reference). 10.14 Escrow Agreement between the Registrant and Comerica Bank, as Escrow Agent (previously filed as Exhibit 10.23 to Amendment No. 1 to the Registrants Registration Statement on Form SB-2, File No. 33-79190, and incorporated herein by reference). 10.15 Agreement and Plan of Acquisition and Merger dated as of June 20, 1994 among MCA Financial Corp., Complete Financial Corporation and Liberty National Mortgage Corporation (previously filed as Exhibit 2 to the Registrant's Current Report on Form 8-K dated July 27, 1994, and incorporated herein by reference). 10.16 Warehousing Credit and Security Agreement dated as of July 1, 1994 between MCA Mortgage Corporation, PNC Mortgage Bank, N.A. and Marine Midland Bank (replacing agreements previously filed as Exhibits 10.13, 10.14, 10.15 and 10.23 to Registration Statement No. 33-79190) (previously filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB for the period ended July 31, 1994, and incorporated herein by reference). 10.17 Whole loan Financing Program dated as of October 6, 1993 among MCA Mortgage Corporation, DLJ Mortgage Capital, Inc. and Sears Savings Bank, FSB (previously filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for the period ended July 31, 1994, and incorporated herein by reference). 10.18 Amendment to Whole loan Financing Program dated as of April 30, 1994 among MCA Mortgage Corporation and DLJ Mortgage Capital, Inc., amending Exhibit No. 10.17 (previously filed as Exhibit 10.27 to Amendment No. 2 to the Registrant's Registration Statement on Form SB-2, File No. 33-79190, and incorporated herein by reference). E-3 67 10.19 Third Amendment to Revolving Credit Loan Agreement, dated May 26, 1994, by and among the Registrant, MCA Mortgage Corporation, Mortgage Corporation of America, Complete Financial Corporation, Securities Corporation of America and Comerica Bank, amending Exhibit 10.4 (previously filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB for the period ended April 30, 1994, and incorporated herein by reference). 10.20 Fourth Amendment to Revolving Credit Loan Agreement, dated September 30, 1994, by and among the Registrant, MCA Mortgage Corporation, Mortgage Corporation of America, Complete Financial Corporation, Securities Corporation of America and Comerica Bank, amending Exhibit 10.4 (previously filed as Exhibit 10.29 to Amendment No. 2 to the Registrant's Registration Statement on Form SB-2, File No. 33-79190, and incorporated herein by reference). 10.21 Second Amendment to Credit Enhancement Umbrella Agreement, dated May 26, 1994, by and among the Registrant, MCA Mortgage Corporation, Mortgage Corporation of America and the Board of Trustees of the Policemen and Firemen Pension Fund of the City of Detroit, amending Exhibit No. 10.7 (previously filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for the period ended April 30, 1994, and incorporated herein by reference). 10.22 Third Amendment to Credit Enhancement Umbrella Agreement, dated September 8, 1994, by and among the Registrant, MCA Mortgage Corporation, Mortgage Corporation of America and the Board of Trustees of the Policemen and Firemen Pension Fund of the City of Detroit, amending Exhibit No. 10.7 (previously filed as Exhibit 10.31 to Amendment No. 2 to the Registrant's Registration Statement on Form SB-2, File No. 33-79190, and incorporated herein by reference). 10.23 Line of Credit Agreement, dated October 1994, among MCA Mortgage Corporation, Rimco Financial Corp. and Sterling Bank & Trust FSB (previously filed as Exhibit 10.32 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1995, and incorporated herein by reference). 10.24 Stock Purchase Agreement, dated January 31, 1995, between the Registrant and Rimco Financial Corp. (previously filed as Exhibit 10.33 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1995, and incorporated herein by reference). 10.25 Line of Credit Agreement, dated March 17, 1995, among MCA Financial Corp., RIMCO Realty & Mortgage Co. and Comerica Bank (previously filed as Exhibit 10.01 to the Registrants Quarterly Report on Form 10-Q for the period ended April 30, 1995, and incorporated herein by reference) 10.26 First Amendment to Escrow Agreement, dated September 18, 1995, between the Registrant and Comerica Bank, as Escrow Agent, amending E-4 68 Exhibit No. 10.14 (previously filed as Exhibit 10.26 to the Registrant's Registration Statement on Form S-1, File No. 33-98644, and incorporated herein by reference). 10.27 Seventh and Eighth Amendments to Exhibit 10.1. 10.28 Mortgage Loan Repurchase Agreement, dated November 1, 1995, between MCA Mortgage Corporation, Mortgage Corporation of America and Paine Webber Real Estate Securities Inc. 10.29 Loan and Financing Agreement, dated July 18, 1996, by and among the Company and its subsidiaries and the Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit. Previously filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, and incorporated herein by reference. 10.30 Subordinated Promissory Note, dated July 18, 1996, by and among the Company and its subsidiaries, and the Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit. Previously filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, and incorporated herein by reference. 10.31 Piggyback Rights Agreement, dated July 18, 1996, by and among the Company and the Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit. Previously filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q, and incorporated herein by reference. 10.32 Put Agreement, dated July 18, 1996, by and among the Company and the Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit. Previously filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q, and incorporated herein by reference. 10.33 Escrow Agreement, dated July 18, 1996, by and among the Company and its subsidiaries, the Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit. Previously filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q, and incorporated herein by reference. 10.34 Loan Agreement, dated September 3, 1996, by and among the Company, MCA Mortgage Corporation, Mortgage Corporation of America and Texas Commerce Bank National Association. Previously filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q, and incorporated herein by reference. 10.35* Securitization Access Agreement, dated November 1, 1996, by and among MCA Financial Corp., MCA Mortgage Corporation, Mortgage Corporation of America, Advanta Mortgage Conduit Services, Inc. and Advanta Mortgage Corp. USA. E-5 69 10.36* Amended and Restated Securitization Access Agreement, amended as of February 21, 1997, by and among MCA Financial Corp., MCA Mortgage Corporation, Mortgage Corporation of America, Advanta Mortgage Conduit Services Inc. and Advanta Mortgage Corp. USA. 12* Computation of Ratio of Earnings to Fixed Charges. 21 Subsidiaries of the Registrant (previously filed as Exhibit 10.21 to the Registrant's Registration Statement on Form S-1, File No. 33-98644, and incorporated herein by reference). 27* Financial Data Schedule - ---------- *Filed herewith E-6 EX-10.35 2 EXHIBIT 10.35 1 EXHIBIT 10.35 ============================================================================== SECURITIZATION ACCESS AGREEMENT Dated as of November 1, 1996 by and among MCA FINANCIAL CORP. MCA MORTGAGE CORPORATION, MORTGAGE CORPORATION OF AMERICA, ADVANTA MORTGAGE CONDUIT SERVICES, INC. and ADVANTA MORTGAGE CORP. USA, ============================================================================== 2 TABLE OF CONTENTS
Page ---- Section 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2. Interest Calculations . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 3. Purchases and Sales . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 4. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 5. Establishment of Advanta Trusts . . . . . . . . . . . . . . . . . . . 12 Section 6. Defective Mortgage Files; Repurchase of Mortgage Loans . . . . . . . 14 Section 7. Representations and Warranties Regarding the MCA Companies, the Buyer and the Master Servicer . . . . . . . . . . . . . . . . . . . . . . . 14 Section 8. Representations and Warranties of the MCA Companies Regarding the Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 9. Application of Residual Excess Servicing . . . . . . . . . . . . . . 19 Section 10. Distribution Date Statement . . . . . . . . . . . . . . . . . . . . . 20 Section 11. Merger or Consolidation of MCA . . . . . . . . . . . . . . . . . . . 21 Section 12. Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 13. Authorized Representatives . . . . . . . . . . . . . . . . . . . . . 22 Section 14. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 15. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 16. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 17. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 18. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 19. Severability of Provisions . . . . . . . . . . . . . . . . . . . . . 24 Section 20. No Agency; No Partnership or Joint Venture . . . . . . . . . . . . . 24 Section 21. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 22. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 23. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . 24
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Page ---- Section 24. Legal Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 25. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Exhibit A -- Form of Conveyance Agreement Exhibit B -- Contents of Mortgage File Exhibit C -- Form of Mortgage Loan Schedule Exhibit D -- Authorized Representatives Exhibit E -- Applicable Guidelines Exhibit F -- Representations and Warranties Exhibit G -- Operational Procedures Exhibit H -- Form of Opinion Exhibit I -- Form of Synthetic Residual Certificate Exhibit J -- Form of Tri-Party Security Agreement 4 THIS SECURITIZATION ACCESS AGREEMENT, dated as of November 1, 1996, among MCA Financial Corp., as seller (the "Sponsor"), MCA Mortgage Corporation and Mortgage Corporation of America, (each company, an "MCA Company" and collectively, the "MCA Companies"), Advanta Mortgage Conduit Services, Inc. ("Advanta Conduit"), Advanta Mortgage Corp. USA (the "Advanta Mortgage" and together with Advanta Conduit, the "Buyer"), and Advanta Mortgage Corp. USA, in its capacity as master servicer (Advanta Mortgage, in such capacity, the "Master Servicer"), W I T N E S S E T H T H A T : WHEREAS, the MCA Companies originate mortgage loans which the MCA Companies desire to include in securitization transactions sponsored by the Buyer; WHEREAS, the Buyer desires to include such mortgage loans in its securitization transactions; and WHEREAS, the MCA Companies and the Buyer desire that the Master Servicer service such mortgage loans. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the parties hereto hereby agree as follows: Section 1. Definitions. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the meanings specified in this Article. Accumulation Pool: As of any date, all Mortgage Loans previously sold by the Seller hereunder and which are held by the Conduit Acquisition Trust on such date. The Accumulation Pool may represent any number of Pools. Additional Initial Reserve Amount: With respect to any Securitized Loan Pool, any additional amount required to be added to the Reserve Amount in connection with the conveyance of such Securitized Loan Pool to the related Advanta Trust (including conveyances of any "pre-funded" Mortgage Loans). The parties acknowledge that their expectation is that the Additional Initial Reserve Amount will be zero. Additional Representations and Warranties: With respect to any Pool, the additional representations and warranties made by each MCA Company with respect thereto, as set forth in the related Conveyance Agreement. Advances: Together, any "Delinquency Advances" as may be required in connection with a Securitized Loan Pool, as defined in the "Pooling and Servicing" or similar agreement relating to the applicable Advanta Trust, and any Servicing Advances. Advanta Trust: Any trust which the Buyer may from time to time sponsor for the purpose of securitizing, among other things, all or a portion of the Mortgage Loans and selling the interests therein to investors. 5 Agreement: This Securitization Access Agreement and all amendments hereof and supplements hereto. Applicable Guidelines: For purposes of this Agreement only (i.e., not necessarily for purposes of the Whole Loan Agreement) those underwriting guidelines set forth on Exhibit E hereto, as such Exhibit E may be revised from time to time by the Buyer and the Sponsor. Applicable Pool Balance: With respect to any Pool as of any Distribution Date, the aggregate Principal Balances of the Mortgage Loans in such Pool as of the opening of business on the first day of the prior calendar month. Applicable Rate: With respect to any Mortgage Loan included in the Accumulation Pool, Prime. With respect to any Mortgage Loan included in a Securitized Loan Pool, the actual "Pass-Through Rate(s)" for the related classes of securities for the related period. Appraised Value: The appraised value of any Mortgaged Property based upon the appraisal or other valuation made at the time of the origination of the related Mortgage Loan; or, in the case of a Mortgage Loan which is a purchase money mortgage; or in the case of a home which is purchased within the last twelve (12) months, the sale price of the Mortgaged Property at such time of origination, if such sale price is less than such appraised value. ARM Loan: A Mortgage Loan which bears an adjustable rate of interest. Bond Pricing Discount: An estimated percentage of pricing discount on the public-offered securities to be issued by an Advanta Trust, as determined by the Underwriter(s) selected by the Buyer. The parties acknowledge that their expectation is that the Bond Pricing Discount will be zero, or as close to zero as reasonably practical. Business Day: Any day other than (a) a Saturday or a Sunday, or (b) a day on which national banks in the states of California, or New York and Delaware are required or authorized by law, executive order or governmental decree to be closed. Buyer Information: As defined in Section 5(d) hereof. Closing Date: With respect to any Pool, the date established as the "Closing Date" in the related Conveyance Agreement. Combined Loan-to-Value Ratio: With respect to any First Mortgage Loan, the percentage equal to the Original Principal Amount of the related Note divided by the Appraised Value of the related Mortgaged Property and with respect to any Second Mortgage Loan, the percentage equal to (a) the sum (i) the remaining principal balance, as of origination of the Second Mortgage Loan, of the Senior Lien note(s) relating to such Second Mortgage Loan, and (ii) the Original Principal Amount of the Note relating to such Second Mortgage Loan, divided by (b) the Appraised Value. Compensating Interest: Amounts advanced by the Master Servicer as a result of a prepayment in full by a Mortgagor on a date other than the scheduled Due Date, and equal to the excess of (x) a full month's interest on the related Mortgage Loan calculated at the related Coupon Rate less the Servicing Fee Rate over (y) the interest actually paid by the related Mortgagor for the related monthly period. The Master Servicer 2 6 shall fund Compensating Interest monthly, but not in excess, in the aggregate for any monthly period, of the aggregate Servicing Fee retained by the Master Servicer with respect to such monthly period. Conduit Acquisition Trust: The Conduit Acquisition Trust created pursuant to that certain Pooling and Servicing Agreement dated as of February 15, 1995 among the Buyer, the Master Servicer and the Trustee. Conveyance Agreement: With respect to the purchase of a Pool, the Conveyance Agreement in substantially the form of Exhibit A hereto executed with respect thereto (which term includes the related "Closing Statement and Funding Recap Summary"). Credit Enhancer: Any financial guarantor or other financial institution which provides third-party credit enhancement with respect to an Advanta Trust. Cut-Off Date: With respect to any Pool, the date established as the "Cut-Off Date" in the related Conveyance Agreement. Cut-Off Date Principal Balance: As to any Mortgage Loan, its Principal Balance as of the opening of business on the related Cut-Off Date. Defective Mortgage Loan: Any Mortgage Loan which is required to be repurchased by the MCA Companies pursuant to Section 5(b), 5(c), 6(b) or 8(c) hereof. Distribution Date: With respect to the Accumulation Pool or any Securitized Loan Pool, the 25th day of each month or, if such day is not a Business Day, the Business Day immediately following such 25th day, beginning in the month specified in the related Conveyance Agreement. Due Date: With respect to any Mortgage Loan the fixed date in each month on which the Mortgagor's Monthly Mortgage Payment is due. "Excess Servicing" means: (x) with respect to the Accumulation Pool, as of any Distribution Date, the sum of all interest due (minus the amount of any interest not required to be advanced by the Master Servicer as a non-recoverable "Delinquency Advance" or as "Compensating Interest" in excess of the Servicing Fee) with respect to the Mortgage Loans in the Accumulation Pool during the prior calendar month (minus any portion of such interest previously received by the MCA Companies as part of the related Pool Purchase Price), less the sum of the following amounts, to be deducted in the following order of priority: (i) one-twelfth of the Servicing Fee Rate times the related Applicable Pool Balance; (ii) the interest, calculated at the Applicable Rate, which accrued on the Applicable Pool Balance which relates for the applicable preceding interest accrual period; and (iii) the amount of any Advances made or paid by the Master Servicer with respect to any Mortgage Loans included in the Accumulation Pool or such Securitized Loan Pool during the 3 7 prior calendar month, less the amount of any Advances made or paid by the Master Servicer on prior monthly periods and recovered during the current monthly period; and (y) with respect to any Securitized Loan Pool, as of any Distribution Date, the sum of all interest due (minus the amount of any interest not required to be advanced by the Master Servicer as a non-recoverable "Delinquency Advance" or as "Compensating Interest" in excess of the Servicing Fee) with respect to the Mortgage Loans in such Securitized Loan Pool, during the prior calendar month (minus any portion of such interest previously received by the MCA Companies as part of the related Pool Purchase Price), less the sum of the following amounts, to be deducted in the following order of priority: (i) one-twelfth of the 35 basis point Monthly Fee rate times the Applicable Pool Balance of the Accumulation Pool or such Securitized Loan Pool; (ii) one-twelfth of the Servicing Fee Rate times the related Applicable Pool Balance; (iii) the sum of (x) the interest, calculated at the Applicable Rate for the related ARMs, which accrued on that portion of the Applicable Pool Balance which relates to ARMs, plus (y) the interest, calculated at the Applicable Rate for the related Fixed Rate Loans, which accrued on that portion of the Applicable Pool Balance which relates to Fixed Rate Loans, in each case for the applicable preceding interest accrual period; and (iv) the amount of any Advances made or paid by the Master Servicer with respect to any Mortgage Loans included in the Accumulation Pool or such Securitized Loan Pool during the prior calendar month, less the amount of any Advances made or paid by the Master Servicer on prior monthly periods and recovered during the current monthly period; and FDIC: The Federal Deposit Insurance Corporation and its successors in interest. FEMA: The Federal Emergency Management Agency and its successors in interest. FHLMC: The Federal Home Loan Mortgage Corporation and its successors in interest. First Mortgage Loan: A Mortgage Loan which constitutes a first priority mortgage lien with respect to any Mortgaged Property. Fixed Rate Loan: A Mortgage Loan which bears interest at a fixed rate. 4 8 FNMA: The Federal National Mortgage Association and its successors in interest. Initial Reserve Amount: With respect to any Pool, the initial amount of Reserves relating thereto, as set forth in the related Conveyance Agreement. The parties acknowledge that their expectation is that the Initial Reserve Amount will be zero, or as close to zero as reasonably practical. Insurance Policy: Any hazard, floor, title or primary mortgage insurance policy relating to a Mortgage Loan. Insurance Proceeds: Proceeds paid by any insurer and received by the Master Servicer during the prior calendar month pursuant to any insurance policy covering a Mortgage Loan or the related Mortgaged Property, and the proceeds from any fidelity bond or errors and omission policy, net of any component thereof covering any expenses incurred by or on behalf of the Master Servicer. Issuance Costs: With respect to any Securitized Loan Pool, all costs incurred by the MCA Companies and by the Buyer in connection with the purchase and sale of a Pool, the establishment of the related Advanta Trust and the sale of mortgage-backed securities by such Advanta Trust, including, without limitation, legal, accounting, printing, initial Trustee's fee, Underwriter's discount, initial Credit Enhancer's fee, Rating Agency's fees and other customary costs of issuance. Second Mortgage Loan: Any Mortgage Loan secured by a Mortgage with a lien of other than first priority. Liquidated Mortgage Loan: As to any Distribution Date, any Mortgage Loan as to which the Master Servicer has determined, in accordance with its regular servicing practices during the prior calendar month, that all Liquidation Proceeds which it expects to recover from or on account of such Mortgage Loan have been recovered, which determination may include "charging off" such Mortgage Loan. Liquidation Expenses: Expenses which are incurred by the Master Servicer in connection with the liquidation of any Mortgage Loan and not recovered under any insurance policy or from any Mortgagor. Such expenses shall include, without limitation, legal fees and expenses, real estate brokerage commissions, any unreimbursed amount expended by the Master Servicer respecting the related Mortgage Loan (including, without limitation, amounts voluntarily advanced to correct defaults on each related Senior Lien) and any related and previously unreimbursed Advances. Liquidation Proceeds: Cash (other than Insurance Proceeds) received in connection with the liquidation of any Mortgaged Property, whether through trustee's sale, foreclosure sale or otherwise received in respect of any Mortgage Loan foreclosed upon (including, without limitation, proceeds from the rental of the related Mortgaged Property). Master Commitment: The Master Commitment dated as of November 1, 1996 between the Buyer and the MCA Companies hereto. Master Servicer: Advanta Mortgage Corp. USA, a Delaware corporation. Monthly Fee: As defined in Section 4(a) hereof. 5 9 Monthly Mortgage Payment: With respect to any Mortgage Note, the amount of each fixed monthly payment (other than final balloon payments) payable under such Mortgage Note in accordance with its terms, net of any portion of such monthly payment that represents late payment charges, prepayment or extension fees or collections allocable to payments to be made by Mortgagors for payment of insurance premiums, real estate taxes or similar items. Mortgage: The mortgage, deed of trust or other instrument creating a first, second or third lien on an estate in fee simple interest in real property securing a Mortgage Loan. Mortgage File: With respect to any Mortgage Loan, the items set forth on Exhibit B hereto. Mortgage Loan: Each of the Mortgage Loans sold by the Seller hereunder. Mortgage Loan Rate: As to any Mortgage Loan, the per annum rate of interest applicable to the calculation of interest thereon. Mortgage Loan Schedule: With respect to any Pool, the schedule of Mortgage Loans delivered by the MCA Companies with respect thereto on the related Closing Date. Each such schedule shall be delivered in computer-readable form on diskette or magnetic tape and physical form and shall contain the information listed on Exhibit C hereto with respect to each Mortgage Loan, as amended from time to time. Mortgage Note: The note or other instrument of indebtedness evidencing the indebtedness of a Mortgagor under the related Mortgage Loan. Mortgaged Property: The underlying property securing a Mortgage Loan. Mortgagor: The obligor under a Mortgage Note. Net Insurance Proceeds: Insurance Proceeds from any policy of insurance covering a Mortgage Loan which (a) are applied by the Master Servicer to reduce the Principal Balance of the related Mortgage Loan and (b) not applied to the restoration or repair of the related Mortgaged Property or released to the related Mortgagor in accordance with the Master Servicer's regular servicing procedures or the terms of the related Mortgage Loan. Net Liquidation Proceeds: As to any Mortgage Loan, Liquidation Proceeds net of Liquidation Expenses. For all purposes of this Agreement, Net Liquidation Proceeds shall be allocated first to accrued and unpaid interest on the related Mortgage Loan and then to the Principal Balance thereof. Net Purchase Price: With respect to any Pool, the related Pool Purchase Price minus (i) the related Initial Reserve Amount, if any, (ii) the related Sponsor's Transaction Expenses and (iii) the related Placement Fee, all as set forth in the related Conveyance Agreement. Offering Document: A prospectus, placement memorandum or other document pursuant to which an Underwriter offers mortgage-backed securities issued by an Advanta Trust. 6 10 Original Principal Amount: With respect to any Mortgage Note, the original principal amount due under such Mortgage Note as of its date of origination. Other Expenses: Any additional expenses incurred by the Buyer in connection with the inclusion of Mortgage Loans sold by the Seller in an Advanta Trust, including, but not limited to the costs of (i) data integrity review of loan files versus the servicing system, (ii) accountant's "comfort letter" with respect to any Sponsor Information and (iii) third-party due diligence expenses relating to on-site review of the MCA Companies or the Mortgage Loans, to the extent over and above the Buyer's normal expenses for such a review. The Other Expenses shall not exceed $25,000 per Securitized Loan Pool, and in no event will exceed $50,000 in any single twelve-month period. Pair-Off Fee: As defined in the Master Commitment For Corporate Finance Relationships. Person: Any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. Placement Fee: With respect to each Mortgage Loan included in a Securitized Loan Pool and purchased by the Buyer hereunder, 0.45% times the Principal Balance of such Mortgage Loan. Pool: Any group of Mortgage Loans sold by the Seller hereunder and designated as a "pool" for purposes of this Agreement. For convenience, each Pool shall be designated by the year of its sale and numbered sequentially, e.g., 1996-A, 1996-B, etc. Pool Principal Balance: As of any date, the aggregate Principal Balances of all Mortgage Loans in the related Pool as of such date. Pool Purchase Price: With respect to any Pool, the sum of, for each Mortgage Loan in such Pool (x) the aggregate Principal Balance of each such Mortgage Loan as of the opening of business on the related Cut-Off Date, (y) interest accrued on the amount described in clause (x) from and including the date to which interest was last paid by the Mortgagor (including any prepaid interest) to but excluding the Closing Date, calculated at the related Mortgage Loan Rate. Prime: The Prime Rate of interest charged from time to time by The Chase Manhattan Bank. Principal Balance: As to any Mortgage Loan and any date of determination, the Principal Balance thereof as of the related Cut-Off Date, less all amounts theretofore applied in reduction of such Principal Balance after the related Cut-Off Date; provided, however, that a Mortgage Loan that has become liquidated will be deemed to have a Principal Balance of zero. Principal Payment: As to any Mortgage Loan and calendar month, all amounts received or, deemed to have been received by the Master Servicer from or on behalf of the related Mortgagor during such calendar month (including Principal Prepayments) which, at the time of receipt or at the time deemed to have been received, were applied or were required to be applied by the Master Servicer in reduction of the Principal Balance of such Mortgage Loan. 7 11 Principal Prepayment: As to any Mortgage Loan and calendar period, any Mortgagor payment or other recovery in respect of principal on a Mortgage Loan (including Net Liquidation Proceeds) which, in the case of a Mortgagor payment, is received in advance of its Due Date and is not accompanied by an amount as to interest representing scheduled interest for any month subsequent to the month of such payment or was accompanied by instructions from the related Mortgagor directing the Master Servicer to apply such payments to the Principal Balance of such Mortgage Loan. Qualified Mortgage: "Qualified Mortgage" shall have the meaning set forth from time to time in the definition thereof at Section 860G(a)(3) of the Internal Revenue Code of 1986, as amended (or any successor statute thereto). Qualifying Loan: Mortgage Loans which (i) conform to the Applicable Guidelines, and (ii) which conform to all Representations and Warranties, as defined in this Agreement and applicable to the related Mortgage Loans. Rating Agencies: Collectively, all nationally recognized statistical credit rating agencies providing a rating on any class of mortgage-backed securities issued by an Advanta Trust. Realized Loss: As to any Liquidated Mortgage Loan, the excess, if any, of (x) the Principal Balance thereof as of the date of liquidation, together with all unreimbursed Advances over (y) the related Net Liquidation Proceeds, if any. Remaining Excess Servicing: With respect to all Securitized Loan Pools in the aggregate as of any Distribution Date, the excess, if any, of (x) the aggregate Excess Servicing for all Securitized Loan Pools over (y) the aggregate Reserve Deposit for all Securitized Loan Pools. REO Property: Any Mortgaged Property as to which title has become vested in the Trustee, the Conduit Acquisition Trust or an Advanta Trust as a result of foreclosure, deed in lieu of foreclosure, etc. Representations and Warranties: As defined in Section 8(a) hereof. Repurchase Price: With respect to any Mortgage Loan repurchased by the MCA Companies pursuant to the provisions hereof, an amount equal to (i) the sum of (A) the Principal Balance of such Mortgage Loan as of the beginning of the calendar month next preceding the Distribution Date on which the proceeds of such repurchase or purchase are required to be distributed, (B) interest computed at the applicable Mortgage Loan Rate on such Principal Balance from the date to which interest was last paid by the Mortgagor to the end of the calendar month immediately preceding such Distribution Date on which such repurchase or purchase occurs and (C) any previously unreimbursed Advances made on or in respect of such Mortgage Loan less (ii) any payments of principal and interest in respect of such Mortgage Loan, made by or on behalf of the related Mortgagor during such calendar month. Reserve Amount: With respect to the Accumulation Pool or any Securitized Loan Pool, as of any Distribution Date the excess of (x) the sum of (i) the Initial Reserve Amount(s) for the related Pool(s), (ii) any Additional Initial Reserve Amounts, (iii) the aggregate, cumulative amount of Reserve Deposits applicable to the Accumulation Pool or such Securitized Loan Pool, as the case may be and (iv) investment earnings at Advanta Corp.'s then-standard reinvestment rate (which, as of the date hereof, is based on the then- 8 12 current 30-day commercial paper rate) over (y) the sum of (i) the aggregate, cumulative amount of Realized Losses experienced with respect to the related Pool(s) since their sale by the Seller, (ii) the aggregate, cumulative amount of Reserve Release Amounts distributed to the MCA Companies on all prior Distribution Dates and (iii) any amount described in the second sentence of Section 9(b) hereof which are paid to the MCA Companies. Reserve Deposit: With respect to the Accumulation Pool or any Securitized Loan Pool, on any Distribution Date, the lesser of (x) the related Excess Servicing for such Distribution Date or (y) any related Reserve Shortfall for such Distribution Date. Reserve Release Amount: As of any Distribution Date and with respect to any Securitized Loan Pool, the excess of (x) the related Reserve Amount on such Distribution Date, after taking into account all credits to, and deductions therefrom on such Distribution Date over (y) the related Reserve Requirement for such Distribution Date. Reserve Requirement: With respect to any Securitized Loan Pool and Distribution Date, the required amount of Reserves for such Distribution Date. In no event shall the level of the Reserve Requirement exceed the level that would be required by the related Credit Enhancer, if the MCA Companies were to do a stand-alone transaction. Reserves: The amount of any first-loss protection maintained with respect to any Pool or group of Pools. Reserve Shortfall: With respect to any Securitized Loan Pool, on any Distribution Date, any excess of (x) the related Reserve Requirement for such Distribution Date over (y) the related Reserve Amount immediately prior to such Distribution Date. Residual Excess Servicing: For all Securitized Loan Pools in the aggregate, the Residual Excess Servicing for any Distribution Date shall equal the Remaining Excess Servicing, if any, for such Distribution Date plus the aggregate Reserve Release Amount, if any, for such Distribution Date. Second Mortgage Loan: A Mortgage Loan which constitutes a second priority mortgage lien with respect to the related Mortgaged Property. Securitization Statement: Each statement delivered to the MCA Companies by the Buyer at the time of establishment of an Advanta Trust containing Mortgage Loans sold by the MCA Companies hereunder, which statement shall set forth the final Reserve Requirement for the related Securitized Loan Pool, the Pass-Through Rate(s) applicable to such Securitized Loan Pool and related information. Securitized Loan Pool: Any group of Mortgage Loans sold by the Seller hereunder and held by a particular Advanta Trust, whether acquired initially by such Advanta Trust or subsequently acquired through "pre-funded" purchases. A Securitized Loan Pool may represent any number of Pools. Seller: Sponsor and its affiliates, Mortgage Corporation of America and MCA Mortgage Corporation, Senior Lien: With respect to any Second Mortgage Loan, the mortgage loan relating to the corresponding Mortgaged Property having a first priority lien. Sponsor: MCA Financial Corp., a Michigan corporation. 9 13 Sponsor Information: As defined in Section 5(d) hereof. Sponsor's Transaction Expenses: With respect to any Pool, the MCA Companies' pro rata share (based upon the relative aggregate principal balances of the Mortgage Loans sold by the Seller to the total aggregate principal balance for all mortgage loans) of the Issuance Costs, which shall be a minimum of 0.60% times the aggregate Principal Balance of the related Mortgage Loans. Servicing Advance: Any out-of-pocket costs or expenses incurred by the Master Servicer in connection with the performance of its servicing obligations, including, but not limited to, preservation expenses, payments for taxes, insurance and payments made to Senior Lien holders, enforcement and judicial proceedings, including foreclosures, the management and liquidation of "REO" Properties, etc. Servicing Fee: The servicing fees payable to the Master Servicer, as set forth in the Loan Servicing Agreement dated November 1, 1996 among the Master Servicer, the Sponsor and Mortgage Corporation of America. Total Loan-to-Value Ratio: With respect to any Mortgage Loan, the percentage equal to the sum of (i) the Original Principal Amount of the related Note and (ii) the remaining principal balance(s), as of origination of such Mortgage Loan, of all other note(s) secured by liens, whether senior or subordinate, on the related Mortgaged Property, divided by the Appraised Value of the related Mortgaged Property. Trustee: The trustee designated by the Buyer. Underwriter: Collectively, any underwriters or placement agents engaged or consulted by the Buyer in connection with the sale of mortgage-backed securities by an Advanta Trust. Whole Loan Agreement: The Master Loan Purchase Agreement dated as of July 1, 1996 among the parties hereto. Whole Loan Purchases: A pool of Mortgage Loans purchased pursuant to a Whole Loan Agreement. Section 2. Interest Calculations. All calculations of interest hereunder, including, without limitation, calculations of interest at the Mortgage Loan Rate, which are made in respect of the Principal Balance of a Mortgage Loan shall be made on a daily basis using a 360-day year, except to the extent that any different convention (e.g., "actual/360", "actual/365") is used with respect to any securities issued by an Advanta Trust. Section 3. Purchases and Sales. (a) Purchases and Sales hereunder shall generally be governed by the terms of the Master Commitment. (b) Purchases of Qualifying Loans under this Agreement shall occur no more frequently than monthly, in minimal Pool sizes of $7,500,000 aggregate Principal Balance. Offers of Pools, document review, servicing transfer and settlement shall be performed by the parties as set forth in Appendix G hereto, Operational Procedures, as such procedures may be revised from time to time by the Buyer. (c) To consummate a proposed purchase the MCA Companies and the Buyer on behalf of the Conduit Acquisition Trust shall, on or prior to the related Closing Date, 10 14 execute and deliver a Conveyance Agreement with respect to the related Pool in substantially the form of Exhibit A hereto. On the related Closing Date the Buyer shall cause the Net Purchase Price for the related Pool to be wired to the MCA Companies in immediately available funds. (d) In connection with each purchase of a Pool the Conduit Acquisition Trust shall, pursuant to the related Conveyance Agreement, purchase all of the Seller's right, title and interest to each Mortgage Loan, including all interest accruing thereon and principal received on or with respect to such Mortgage Loan on or after the related Cut-Off Date. (e) the MCA Companies agree to cause their records relating to the Mortgage Loans to indicate that the Mortgage Loans have been sold to the Conduit Acquisition Trust. The MCA Companies will treat each sale of a Pool as a sale for generally accepted accounting purposes, will reflect such sale on its accounting records, and shall furnish to the Buyer, in connection with the execution of each Conveyance Agreement an officer's certificate certifying to the MCA Companies' treatment of the transactions contemplated hereby as sales, and such other matters as the Buyer may reasonably request. (f) Prior to the purchase of the first Pool purchased hereunder the MCA Companies shall cause to be provided to the Buyer and the Trustee an opinion of counsel in a form approved by the Buyer (and attached as Exhibit H) relating to the execution and delivery of this Agreement by the MCA Companies. In connection with each subsequent execution of a Conveyance Agreement, the MCA Companies shall provide to the Buyer and the Trustee an officer's certificate in a form approved by the Buyer as to certain legal and factual matters with respect to such sale. (g) The MCA Companies shall cause at least 10% (by number of loans) of each Pool to be reviewed in accordance with quality control procedures which are standard in the residential mortgage loan industry. Such review may be undertaken by employees of the MCA Companies or of the Buyer or its affiliates. Copies of all quality control review reports shall be furnished to the Buyer on request. Section 4. Fees and Expenses. (a) On each Distribution Date the Buyer shall receive a monthly fee ("Monthly Fee"), with respect to each Securitized Loan Pool, from cashflows on the related Pool, equal to one-twelfth of 35 basis points times the Applicable Pool Balance as of the first day of the prior calendar month. Any amounts due to the Buyer or to the Master Servicer hereunder or under the Whole Loan Agreement, including, but not limited, to the fees described above, and the Pair-Off Fee, and any hedging costs, and not paid when due, shall remain payable by the MCA Companies. Such amounts shall bear interest at Prime plus 1% and may be funded from any Residual Excess Servicing otherwise due to the MCA Companies, or offset against any amounts otherwise payable to the MCA Companies by the Buyer or the Master Servicer. (b) The MCA Companies shall pay up to $25,000 of the fees and expenses of Dewey Ballantine incurred in connection with the preparation of this Agreement, at the time of execution and delivery of this Agreement. 11 15 (c) All expenses of recording assignments of mortgage shall be paid by the MCA Companies, provided that MCA shall be liable for no more than one such recording fee per Mortgage Loan. Section 5. Establishment of Advanta Trusts. (a) In connection with the creation of an Advanta Trust the Buyer may cause the Conduit Acquisition Trust to convey to such Advanta Trust any or all of the Mortgage Loans then held as the Accumulation Pool. In connection with any such conveyance to an Advanta Trust the related Pass-Through Rate(s) and Reserve Requirement applicable to such Mortgage Loans shall be established by the Buyer, the related Underwriter(s) and the related Credit Enhancer. Any such Mortgage Loan so conveyed to an Advanta Trust shall cease to be a "Mortgage Loan" within the meaning of this Agreement and the rights relating thereto shall thenceforth be as provided in the related Advanta Pooling Agreement. The MCA Companies shall pay the applicable Bond Pricing Discount and the applicable Other Expenses at the time of the establishment of the related Advanta Trust (which amounts may be offset against any amounts due to the MCA Companies). In connection with the conveyance of any Mortgage Loans to an Advanta Trust the Buyer shall furnish the MCA Companies with the related Securitization Statement. If the inclusion in an Advanta Trust of Mortgage Loans sold hereby would adversely impact the overall Reserve Requirements or pricing relating to such Advanta Trust, the Buyer, after consulting with the MCA Companies, may segregate such Mortgage Loans as a separate pool and/or "REMIC" in such Advanta Trust, and (but shall not be required to) issue specified classes of securities with respect to such Mortgage Loans. The parties acknowledge their expectation that no such separate treatment should be necessary with respect to Mortgage Loans which are Qualifying Loans. Each such separate pool and/or "REMIC" will have its own Pass-Through Rate and its own Reserve Requirement. Any additional costs relating to such a structure shall constitute "Sponsor's Transaction Expenses" payable by the MCA Companies. The MCA Companies shall have the right, prior to the "cut-off date" for the related Advanta Trust, to substitute for any Mortgage Loan described in the preceding paragraph a replacement Mortgage Loan of similar or better characteristics and unpaid Principal Balance of equal or lesser amount reasonably acceptable to the Buyer and which is eligible for inclusion in such Advanta Trust. (b) If, in connection with the establishment of an Advanta Trust, any Mortgage Loan in a Securitized Loan Pool is 30 or more days contractually delinquent and such Mortgage Loan is determined by the Buyer to be ineligible for inclusion in such Advanta Trust, the Buyer shall promptly inform the MCA Companies, and the MCA Companies shall have the option to repurchase such Mortgage Loan in accordance with the provisions of this Section 5 prior to the closing date of such Advanta Trust, to substitute for such Mortgage Loan a replacement Mortgage Loan of similar or better characteristics and with an unpaid Principal Balance of equal or lesser amount reasonably acceptable to the Buyer and which is eligible for inclusion in such Advanta Trust, or to have such ineligible Mortgage Loan remain in the Accumulation Pool. The MCA Companies shall have the further right, but not the obligation to repurchase any Mortgage Loan in an Accumulation Pool which is 30 or more days contractually delinquent. 12 16 In connection with any such repurchase the MCA Companies shall deliver the Repurchase Price to the Buyer. In connection with any such substitution the MCA Companies shall deliver the substitute Mortgage Loan and the items which constitute the related Mortgage File to the Trustee, and shall deliver to the Buyer the excess of (x) the outstanding Principal Balance of the replaced Mortgage Loan over (y) the outstanding Principal Balance of the substitute Mortgage. In connection with any such repurchase or substitution the Buyer shall cause the Conduit Acquisition Trust to reconvey the repurchased or replaced Mortgage Loan to the MCA Companies in the manner described in Section 6(b) hereof. (c) Upon the request of the Buyer, the MCA Companies shall supply to the Buyer access to, and information regarding, the MCA Companies, the Mortgage Loans, the Sub-Servicer's underwriting practices, financial condition and related matters. The MCA Companies hereby represent and warrant to the Buyer that any such information so furnished by the MCA Companies ("Sponsor Information") shall be true, correct and complete in all material respects. If requested by the Buyer or Underwriter's counsel, the MCA Companies shall cause a nationally recognized accounting firm to provide the Buyer with a letter in a form acceptable to Buyer with respect to any Sponsor Information. The parties acknowledge their expectation that, to the extent that the Mortgage Loans have been sold servicing-released, no accountant's letter is expected to be required. The MCA Companies agree to comply with any reasonable regulatory and quality control requirements requested by the Buyer based upon the Buyer's review of any Sponsor Information and other review of the MCA Companies' origination activities. The MCA Companies shall indemnify and hold the Buyer harmless from any losses suffered by the Buyer and its affiliates as a result of (i) any misstatement in, or omission from, any Sponsor Information or (ii) any breach by the MCA Companies of any representation or warranty set forth in Section 7(a) hereof. The Buyer shall indemnify and hold the MCA Companies and its affiliates harmless from any losses suffered by the MCA Companies as a result of (i) any misstatement in, or omission from any Buyer Information or (ii) any breach by the Buyer of any representation or warranty set forth in Section 7(b) hereof. "Buyer Information" means any information in any Offering Document other than Sponsor Information. (d) Each MCA Company agrees to cooperate reasonably and in good faith with the Buyer, its attorneys and accountants, Credit Enhancers, Underwriters and Rating Agencies in connection with the establishment of each Advanta Trust. (e) The Buyer acknowledges to the MCA Companies that it is the Buyer's present intent to sponsor Advanta Trusts quarterly; the Buyer shall advise the MCA Companies of any change in such intent as soon as possible. Section 6. Defective Mortgage Files; Repurchase of Mortgage Loans. (a) If the MCA Companies are informed by the Trustee, the Master Servicer or the Buyer that any document constituting a part of a Mortgage File has not been executed or received or is unrelated to the Mortgage Loans identified in the related Mortgage Loan Schedule, the MCA Companies shall have a period of 15 days after such notice within which to correct or cure any such defect. (b) If the Trustee, the Master Servicer or the Buyer has notified the MCA Companies of a defect in a Mortgage File and the defect remains uncured to the satisfaction of the Buyer and, in the opinion of the Buyer, such defect materially and adversely affects 13 17 the value, collectibility or marketability of the related Mortgage Loan, the MCA Companies shall, not later than 30 days after receipt of notice of such defect, and provided that such defect has not been cured to the Buyer's reasonable satisfaction, repurchase the related Mortgage Loan (including any property acquired in respect thereof and any insurance policy or insurance proceeds with respect thereto) at a price equal to the Repurchase Price, which shall be accomplished by delivery of such amount by the MCA Companies to the Buyer. Upon receipt by the Buyer of the Repurchase Price for a Defective Mortgage Loan, the Buyer shall cause the Conduit Acquisition Trust to execute and deliver such instrument of transfer or assignment presented to it by the MCA Companies, in each case without recourse, as shall be necessary to vest in the MCA Companies legal and beneficial ownership of such repurchased Defective Mortgage Loan (including any property acquired in respect thereof or insurance policy or insurance proceeds with respect thereto). (c) In the event that the MCA Companies fail, within the time periods specified in this Agreement, to cure any material defect in a Mortgage File, the Buyer, in addition to any rights it may have under paragraph (b) above, shall have the right thereafter to receive any Residual Excess Servicing otherwise payable to the MCA Companies, to the extent of any loss suffered by the Buyer. (d) The remedies described in paragraphs (b) and (c) above, together with all other remedies the Buyer may have at law or in equity, shall survive any resignation or termination of Advanta Mortgage Corp. USA as Master Servicer. Section 7. Representations and Warranties Regarding the MCA Companies, the Buyer and the Master Servicer. (a) Each MCA Company hereby represents and warrants to the Buyer, the Master Servicer and their respective successors and assigns that, as of the date hereof: (i) Each MCA Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan and has all licenses and qualifications necessary to carry on its business as now being conducted and to perform its obligations hereunder; each MCA Company has the power and authority to execute and deliver this Agreement and to perform its obligations in accordance herewith; the execution, delivery and performance of this Agreement (including any Conveyance Agreement and any other instruments of transfer to be delivered pursuant to this Agreement) by each MCA Company and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and do not violate the organization documents of any MCA Companies, contravene or violate any law or regulation applicable to any MCA Companies or contravene, violate or result in any breach of any provision of, or constitute a default under, or result in the imposition of any lien on any assets of any MCA Companies pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which any MCA Companies is a party or which purports to be binding upon Sponsor or any of Sponsor's assets; this Agreement evidences the valid and binding obligation of each MCA Company enforceable against each MCA Company in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or the application of equitable principles in any proceeding, whether at law or in equity; (ii) All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, 14 18 given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency, that are necessary in connection with the execution and delivery by the MCA Companies of this Agreement, have been duly taken, given or obtained, as the case may be, are in full force and effect, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize the consummation of the transactions contemplated by this Agreement on the part of the MCA Companies and the performance by the MCA Companies of their respective obligations under this Agreement; (iii) There is no action, suit, proceeding or investigation pending or, to the best of the MCA Companies' knowledge, threatened against any MCA Company which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of any MCA Company or in any material impairment of the right or ability of any MCA Company to carry on its business substantially as now conducted, or in any material liability on the part of any MCA Company or which would draw into question the validity of this Agreement or the Mortgage Loans or of any action taken or to be taken in connection with the obligations of any MCA Company contemplated herein, or which would be likely to impair the ability of any MCA Company to perform under the terms of this Agreement; (iv) Each MCA Company is not in default with respect to any mortgage, indenture, contract, agreement or other undertaking to which such MCA Company is a party or which purports to be binding upon Sponsor or any of Sponsor's assets, or with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of any MCA Company or its properties or might have consequences that would adversely affect its performance hereunder; (v) The transfer, assignment and conveyance of the Mortgage Loans by the MCA Companies pursuant to this Agreement are not subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction; (vi) All information supplied by the MCA Companies to the Buyer, the Master Servicer or the Trustee is true and correct in all material respects, and does not omit to state a material fact necessary to make the statements set forth in such information not misleading; and (vii) The MCA Companies have a consolidated tangible net worth as determined in accordance with generally accepted accounting principles of at least $16 million. The representations and warranties set forth in this paragraph (a) shall survive the sale and assignment of the Mortgage Loans by the MCA Companies hereunder. Upon discovery of a material breach of any of the foregoing representations and warranties, the Buyer or the Master Servicer shall give prompt written notice to the MCA Companies. Within 30 days of 15 19 the earlier of its discovery or its receipt of notice of breach, the MCA Companies shall cure such breach to the satisfaction of the Buyer. (b) The Buyer hereby represents and warrants to the MCA Companies and the Master Servicer that, as of the date hereof: (i) The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; the Buyer has the power and authority to execute and deliver this Agreement and to perform its obligations in accordance herewith; the execution, delivery and performance of this Agreement (including any Conveyance Agreement executed by the Buyer on behalf of the Conduit Acquisition Trust and any other instruments of transfer to be delivered pursuant to this Agreement) by the Buyer and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and do not violate the organization documents of the Buyer, contravene or violate any law or regulation applicable to the Buyer or contravene, violate or result in any breach of any provision of, or constitute a default under, or result in the imposition of any lien on any assets of the Buyer pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which the Buyer is a party or which purports to be binding upon Buyer or any of Buyer's assets; this Agreement evidences the valid and binding obligation of the Buyer enforceable against the Buyer in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or the application of equitable principles in any proceeding, whether at law or in equity; (ii) All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency, that are necessary in connection with the execution and delivery by the Buyer of this Agreement, have been duly taken, given or obtained, as the case may be, are in full force and effect, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize the consummation of the transactions contemplated by this Agreement on the part of the Buyer and the performance by the Buyer of its obligations under this Agreement; (iii) There is no action, suit, proceeding or investigation pending or, to the best of the Buyer's knowledge, threatened against the Buyer which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of the Buyer or in any material impairment of the right or ability of the Buyer to carry on its business substantially as now conducted, or in any material liability on the part of the Buyer or which would draw into question the validity of this Agreement or of any action taken or to be taken in connection with the obligations of the Buyer contemplated herein, or which would be likely to impair the ability of the Buyer to perform under the terms of this Agreement; and (iv) The Buyer is not in default with respect to any mortgage, indenture, contract, agreement or other undertaking to which the Buyer is a party or which purports to be binding upon Buyer or any of Buyer's assets, or with 16 20 respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of the Buyer or its properties or might have consequences that would adversely affect its performance hereunder. The representations and warranties set forth in this paragraph (b) shall survive the sale and assignment of the Mortgage Loans by the MCA Companies hereunder. Upon discovery of a breach of any of the foregoing representations and warranties which materially and adversely affects the interests of the MCA Companies, the MCA Companies shall give prompt written notice to the Buyer. Within 30 days of its discovery or its receipt of notice of breach, the Buyer shall cure such breach in all material respects. (c) The Master Servicer hereby represents and warrants to the Buyer and the MCA Companies that, as of the date hereof: (i) The Master Servicer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all licenses and qualifications necessary to carry on its business as now being conducted and to perform its obligations hereunder; the Master Servicer has the power and authority to execute and deliver this Agreement and to perform its obligations in accordance herewith; the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and do not violate the organization documents of the Master Servicer, contravene or violate any law or regulation applicable to the Master Servicer or contravene, violate or result in any breach of any provision of, or constitute a default under, or result in the imposition of any lien on any assets of the Master Servicer pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which the Master Servicer is a party or which purports to be binding upon Master Servicer or any of Master Servicer's assets; this Agreement evidences the valid and binding obligation of the Master Servicer enforceable against the Master Servicer in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or the application of equitable principles in any proceeding, whether at law or in equity; (ii) All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency, that are necessary in connection with the execution and delivery by the Master Servicer of this Agreement, have been duly taken, given or obtained, as the case may be, are in full force and effect, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize the consummation of the transactions contemplated by this Agreement on the part of the Master Servicer and the performance by the Master Servicer of its obligations under this Agreement; (iii) There is no action, suit, proceeding or investigation pending or, to the best of the Master Servicer's knowledge, threatened against the Master Servicer which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of the 17 21 Master Servicer or in any material impairment of the right or ability of the Master Servicer to carry on its business substantially as now conducted, or in any material liability on the part of the Master Servicer or which would draw into question the validity of this Agreement or of any action taken or to be taken in connection with the obligations of the Master Servicer contemplated herein, or which would be likely to impair the ability of the Master Servicer to perform under the terms of this Agreement; and (iv) The Master Servicer is not in default with respect to any mortgage, indenture, contract, agreement or other undertaking to which the Master Servicer is a party or which purports to be binding upon Master Servicer or any of Master Servicer's assets, or with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of the Master Servicer or its properties or might have consequences that would adversely affect its performance hereunder. The representations and warranties set forth in this paragraph (c) shall survive the sale and assignment of the Mortgage Loans by the MCA Companies hereunder. Upon discovery of a breach of any of the foregoing representations and warranties which materially and adversely affects the interests of the MCA Companies, the MCA Companies shall give prompt written notice to the Master Servicer. Within 30 days of its discovery or its receipt of notice of breach, the Master Servicer shall cure such breach in all material respects. Section 8. Representations and Warranties of the MCA Companies Regarding the Mortgage Loans. (a) Set forth in Exhibit F hereto is a listing of representations and warranties which will be deemed to have been made by the MCA Companies to the Buyer, the Master Servicer and the Trustee in connection with each purchase of a Pool with respect to the Mortgage Loans in such Pool. In addition, a Conveyance Agreement may, with respect to the Mortgage Loans in the related Pool, delete or modify any of such representations and warranties, or may add additional representations and warranties ("Additional Representations and Warranties"). The representations and warranties listed in Exhibit F hereto, together with any Additional Representations and Warranties, are the "Representations and Warranties". It is understood and agreed that the Representations and Warranties shall survive the sale and assignment of the Mortgage Loans to the Conduit Acquisition Trust and by the Conduit Acquisition Trust to an Advanta Trust. Upon discovery by any MCA Company, the Master Servicer or the Buyer of a breach of any of the Representations and Warranties (without regard to any limitation set forth in such Representation or Warranty concerning the knowledge of any MCA Company as to the facts stated therein so long as the Buyer is required to repurchase the related Mortgage Loan or Mortgage Loans pursuant to the related Advanta Pooling Agreement without regard to any similar limitation), which breach, in the opinion of the Buyer, materially and adversely affects the value, collectibility or marketability of the related Mortgage Loan or Mortgage Loans, the party discovering such breach shall give prompt written notice to the other party and the MCA Companies shall be required to take the remedial actions required by Section 8(c) hereof within the time periods required pursuant thereto. (b) Within 30 days of the earlier of its discovery or its receipt of notice of breach, the MCA Companies shall use all reasonable efforts to cure such breach to the reasonable satisfaction of the Buyer. Unless, prior to the expiration of such 30 day period, such breach has been cured or otherwise does not exist or continue to exist, the MCA Companies shall repurchase such Mortgage Loan (or, in the case of a Representation and 18 22 Warranty of the nature specified in clauses (xx) and (xli), repurchase Mortgage Loans such that, after giving effect to such repurchase, the related Representation and Warranty would be complied with) (including any property acquired in respect thereof and any insurance policy or insurance proceeds with respect thereto) in the same manner and subject to the same conditions as set forth in Section 6 hereof. Upon making any such repurchase, the MCA Companies shall be entitled to receive an instrument of assignment or transfer from the Trustee, without recourse to the Buyer or the Trustee, to the same extent as set forth in Section 6 hereof with respect to the repurchase of Defective Mortgage Loans under that Section. (c) In the event that the MCA Companies fail, within the time periods specified in this Agreement, to cure any material breach of a Representation and Warranty, the Buyer shall have the right thereafter to receive any Residual Excess Servicing otherwise payable to the MCA Companies, to the extent of any loss suffered by the Buyer. (d) The remedies described in paragraphs (b) and (c) above, together with all other remedies the Buyer may have at law or in equity, shall survive any resignation or termination of Advanta Mortgage Corp. USA as Master Servicer. Section 9. Application of Residual Excess Servicing. (a) All available Excess Servicing with respect to the Accumulation Pool shall be applied as a Reserve Deposit or to the amount payable by the MCA Companies described in the last paragraph in Section 4(a) hereof. (b) At the time any Pools are transferred from the Accumulation Pool to an Advanta Trust (thereby becoming all or part of a Securitized Loan Pool) the Reserve Amount then relating to such Pool shall be credited against the initial Reserve Amount for the related Securitized Loan Pool. If the initial Reserve Amount exceeds the initial Required Reserve Amount applicable to such Securitized Loan Pool (i.e., the amount of any "initial deposit" at securitization) the amount of such excess shall be paid by the Buyer to the MCA Companies. Conversely, if the initial Required Reserve Amount for such Securitized Loan Pool exceeds the actual Reserve Amount for the related Pools the amount of such shortfall shall be paid by the MCA Companies to the Buyer as an additional initial Reserve Amount for such Securitized Loan Pool. (c) Any Residual Excess Servicing relating to a Securitized Loan Pool shall be paid by the Buyer to the Sponsor within five Business Days of each Distribution Date, subject to offset for any amounts due to the Buyer or to the Master Servicer from the MCA Companies, as provided herein. (d) The Buyer's obligation to pay the Residual Excess Servicing amounts to the Sponsor will be evidenced by the Synthetic Residual Certificate in the form of Exhibit I hereto, which evidences a secured corporate obligation of the Buyer, and will not represent any direct ownership interest in any Mortgage Loans. (e) The Master Servicer shall furnish the statements described in Section 10 hereto to the Sub-Servicer, by facsimile on each Distribution Date; such statements shall, inter alia, contain information relating to the Residual Excess Servicing for such Distribution Date. The Buyer and the Master Servicer shall permit the inspection, on reasonable notice, by any MCA Company or their respective designees of all of the Buyer's and the Master Servicer's books and records relating to the Mortgage Loans and the Residual Excess 19 23 Servicing. All calculations made by the Buyer or the Master Servicer shall be conclusive in the absence of manifest error. Section 10. Distribution Date Statement. A. The Master Servicer shall, not later than each Distribution Date, furnish in writing to the MCA Companies and the Buyer a statement setting forth the following information with respect to the Accumulation Pool and each Securitized Loan Pool: (i) the total amount of payments in respect of or allocable to interest on the Mortgage Loans received or deemed to have been received from the related Mortgagors by the Master Servicer during the prior calendar month (including any net income from REO Properties received during the prior calendar month); (ii) the aggregate of all Principal Payments and Principal Prepayments received or deemed to have been received from the related Mortgagors by the Master Servicer during the prior calendar month; (iii) the total amount of recoveries of delinquent principal and interest payments received during the prior calendar month; (iv) the total amount of prepayment penalties received during the prior calendar month; (v) the aggregate of any Net Insurance Proceeds received by the Master Servicer during the prior calendar month; (vi) the aggregate of any Net Liquidation Proceeds received by the Master Servicer during the prior calendar month; (vii) the total amount of Compensating Interest payments to be paid by the Master Servicer for such Distribution Date; (viii) the aggregate Repurchase Prices for any Mortgage Loans which the MCA Companies are required to repurchase on or prior to such Distribution Date pursuant to Sections 5(b), 5(c), 6(b) or 8(c) hereof; (ix) the aggregate amount of Advances made by the Master Servicer during or with respect to the prior calendar month; (X) the related monthly Servicing Fee; (xi) the aggregate amount of Advances reimbursable to the Master Servicer for such Distribution Date and not previously reimbursed; (xii) the weighted average Mortgage Loan Rate as of the last day of the prior calendar month (separately for ARMs and Fixed Rate Loans); (xiii) the related Reserve Amount, Required Reserve Amount and Residual Excess Servicing as of such Distribution Date; and (xiv) the book value of any REO Properties as of the last day of the prior calendar month. 20 24 (b) In addition, on each Distribution Date the Master Servicer will furnish by telecopy to the Buyer and the Sub-Servicer, the following information with respect to the Mortgage Loans in the Accumulation Pool and each Securitized Loan Pool as of the last day of the related prior calendar month: (i) the total number of Mortgage Loans and the aggregate Principal Balances thereof, together with the number, aggregate principal balances of such Mortgage Loans and the percentage of the aggregate Principal Balances of such Mortgage Loans to the aggregate Principal Balance of all Mortgage Loans (a) 30-59 delinquent, (b) 60-89 days delinquent and (c) 90 or more days delinquent; (ii) the number, aggregate Principal Balances of all Mortgage Loans and percentage of the aggregate Principal Balances of such Mortgage Loans to the aggregate Principal Balance of all Mortgage Loans in foreclosure proceedings (and whether any such Mortgage Loans are also included in any of the statistics described in the foregoing clause (i)); (iii) the number, aggregate Principal Balances of all Mortgage Loans and percentage of the aggregate Principal Balances of such Mortgage Loans to the aggregate Principal Balance of all Mortgage Loans relating to Mortgagors in bankruptcy proceedings (and whether any such Mortgage Loans are also included in any of the statistics described in the foregoing clause (i)); and (iv) the number, aggregate Principal Balances of all Mortgage Loans and percentage of the aggregate Principal Balances of such Mortgage Loans to the aggregate Principal Balance of all Mortgage Loans relating to REO Properties (and whether any such Mortgage Loans are also included in any of the statistics described in the foregoing clause (i)). Section 11. Merger or Consolidation of MCA. Any corporation or other entity (i) into which any MCA Company may be merged or consolidated, (ii) which may result from any merger, conversion or consolidation to which any MCA Company shall be a party, or (iii) which may succeed to all or substantially all of the business of any MCA Company , which corporation or other entity shall, in any case where an assumption shall not be effected by operation of law, execute an agreement of assumption to perform every obligation of any MCA Company under this Agreement, shall be the successor to any MCA Company hereunder without the execution or filing of any document or any further act by any of the parties to this Agreement, except that if any MCA Company in any of the foregoing cases is not the surviving entity, then the surviving entity shall execute and deliver to the Buyer, the Master Servicer and to the Trustee an agreement of assumption to perform every obligation of such MCA Company hereunder. Section 12. Servicing. A. The Master Servicer shall service all Mortgage Loans sold by the Seller hereby on a fully servicing-released basis, applying the standards and requirements for servicing as described in the Buyer's Registration Statement relating to the Buyer's mortgage loan securitization program. Such servicing standards and requirements shall include (i) the making of Advances, (ii) the payment of Compensating Interest and (iii) the disposition of REO Properties within 24 months of the taking of title. The Master Servicer also agrees to implement an industry recognized gain/loss standard at the commencement of foreclosure proceedings and use a standard recoverability standard with respect to the making of Advances. As described in the Master Commitment, the parties may hereafter provide for the retention by the MCA Companies rights, of all or any portion of the servicing rights, duties, and obligations on a prospective basis. 21 25 (b) The Servicing Fees shall be as set forth in the Loan Servicing Agreement among the Master Servicer, the Sponsor and MCA Mortgage Corporation. (c) The Master Servicer hereby represents and warrants to, and covenants with, the MCA Companies that the Master Servicer will service the Mortgage Loans without distinction as to the identity of the MCA Companies as the residual, first-loss holder of the Mortgage Loans, and on the same terms by which the Master Servicer services mortgage loans for which it or its affiliates are the residual, first-loss holder. (d) The Master Servicer may retain sub-servicers to perform all or a part of its servicing duties hereunder, without the consent of or notice to the MCA Companies, except that no retention of any sub-servicer shall release the Master Servicer from any liability to the MCA Companies. (e) The Master Servicer shall enter into a sub-servicing agreement with Mortgage Corporation of America within a reasonable time after the effectiveness of this Agreement. Section 13. Authorized Representatives. The names of the officers of each MCA Company, the Master Servicer and of the Buyer who are authorized to give and receive notices, requests and instructions and to deliver certificates and documents in connection with this Agreement on behalf of each MCA Company, the Master Servicer and of the Buyer (the "Authorized Representatives") are set forth on Exhibit D, along with the specimen signature of each such officer. From time to time, each MCA Company, the Master Servicer or the Buyer may, by delivering to the others a revised exhibit, change the information previously given. Section 14. Notices. All demands, notices and communications relating to this Agreement shall be in writing and shall be deemed to have been duly given when received by one of the Authorized Representatives of the other party or parties at the address shown below, or such other address as may hereafter be furnished to the other party or parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee. If to the MCA Companies: MCA Financial Corp. 23999 Northwestern Highway Suite 101 Southfield, MI 48075 Telecopy: 810-358-4639 If to the Seller: MCA Financial Corp. 23999 Northwestern Highway Suite 101 Southfield, MI 48075 Telecopy: 810-358-4639 22 26 with a copy to: Mortgage Corporation of America 23999 Northwestern Highway Suite 101 Southfield, MI 48075 Telecopy: 810-358-4639 If to the Buyer: Advanta Mortgage Conduit Services, Inc. 16875 West Bernardo Drive San Diego, California 92127 Attention: Loan Servicing Telecopy: (619) 674-3880 If to the Master Servicer: Advanta Mortgage Corp. USA 500 Office Center Drive Suite 400 Fort Washington, PA 19034 Telecopy: (215) 283-4280 The parties may, from time to time hereafter, by written notice, change addresses listed above. Section 15. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without regard to conflict of laws rules applied in the State of California. Section 16. Assignment. No party to this Agreement may assign its rights or delegate its obligations under this Agreement without the express written consent of the other parties, except as otherwise set forth in this Agreement. Section 17. Counterparts. For the purpose of facilitating the execution of this Agreement and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original, and together shall constitute and be one and the same instrument. Section 18. Amendment. This Agreement may be amended from time to time by the MCA Companies, the Buyer and the Master Servicer only by a written instrument executed by such parties. Section 19. Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. 23 27 Section 20. No Agency; No Partnership or Joint Venture. None of MCA Companies, the Master Servicer nor the Buyer is the agent or representative of one or both of the others, and nothing in this Agreement shall be construed to make any of the MCA Companies, the Master Servicer or the Buyer liable to any third party for services performed by it or for debts or claims accruing to it against the other party. Nothing contained herein nor the acts of the parties hereto shall be construed to create a partnership or joint venture between the Buyer, the Master Servicer and the MCA Companies. Section 21. Arbitration. Any dispute or disagreement under this Agreement shall be rendered by submitting such dispute or disagreement to an independent, mutually agreed upon arbitrator. The arbitrator shall conduct the arbitration in accordance with the Rules of the American Arbitration Association. If the parties are unable to select an arbitrator, the arbitrator shall be selected in accordance with the procedures of the American Arbitration Association. The decision of the arbitrator shall be final and binding upon the parties and non-appealable. Any decision and award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Any arbitration pursuant to this Agreement shall be conducted in Manhattan. Section 22. Confidentiality. No party hereto shall disclose to third parties, without the prior consent of the other parties, in writing, the existence of or the terms of this Agreement, except to its accountants and attorneys or as required by law. Section 23. Further Assurances. The parties hereto agree to cooperate reasonably and in good faith with one another in the performance of this Agreement. Section 24. Legal Costs. The parties hereto agree that in the event of arbitration or litigation between them, the non-prevailing party shall reimburse the prevailing party for all related legal fees and expenses of counsel incurred by the prevailing party. The prevailing party shall be the party in whose favor a final decision or judgment is entered, after the conclusion of any appeals or after the time during which an appeal may be taken shall have run. Payment of sums owning under this Section 24 shall be made within ten (10) days following the date that the right to receive payment shall be final. Section 25. Term. The buy-sell provisions of this Agreement shall terminate on the Commitment Termination Date, as defined in the Master Commitment; the other obligations of the parties set forth herein shall continue in full force and effect until the payment in full (or other liquidation) of the Mortgage Loans. 24 28 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers, all as of the day and year first above written. MCA FINANCIAL CORP., By: /s/ Lee P. Wells ------------------------------- Name: Lee P. Wells Title: President MORTGAGE CORPORATION OF AMERICA, By: /s/ Lee P. Wells --------------------------------- Name: Lee P. Wells Title: President MCA MORTGAGE CORPORATION, By: /s/ Lee P. Wells ---------------------------------- Name: Lee P. Wells Title: President ADVANTA MORTGAGE CONDUIT SERVICES, INC., as Buyer By: /s/ Mark A. Casale ------------------------------- Name: Mark A. Casale Title: Vice President ADVANTA MORTGAGE CORP. USA, as a Buyer and as Master Servicer By: /s/ Mark A. Casale ------------------------------- Name: Mark A. Casale Title: Vice President 29 EXHIBIT A FORM OF CONVEYANCE AGREEMENT MCA Financial Corp., MCA Mortgage Corporation and Mortgage Corporation of America (the "Seller") and Conduit Acquisition Trust, as purchaser (the "Buyer"), pursuant to the Securitization Access Agreement dated as of November 1, 1996 among the MCA Companies, Advanta Mortgage Conduit Services, Inc. and Advanta Mortgage Corp. USA (the "Securitization Access Agreement"), hereby confirm their understanding with respect to the sale by the Seller and the purchase by the Buyer of those Mortgage Loans listed on the attached Mortgage Loan Schedule (the "Purchased Mortgage Loans"). Conveyance of Purchased Mortgage Loans. The Seller, concurrently with the execution and delivery of this Conveyance Agreement, does hereby irrevocably transfer, assign, set over and otherwise convey to the Buyer, without recourse (except as otherwise explicitly provided for herein) all of its right, title and interest in and to the Purchased Mortgage Loans, including specifically, without limitation, the Mortgages, the Mortgage Files and all other documents, materials and properties appurtenant thereto and the Mortgage Notes, including all interest accruing thereon and principal received on or with respect to such Purchased Mortgage Loans on or after the related Cut-Off Date and all interest accruing thereon since the related Mortgagor's most recent paid-to date (or date of origination if no payment is yet due), together with all of its right title and interest in and to the proceeds received on or after the related Cut-Off Date of any related insurance policies on behalf of the Buyer. If the Seller cannot deliver the original Mortgage or mortgage assignment with evidence of recording thereon concurrently with the execution and delivery of this Conveyance Agreement solely because of a delay caused by the public recording office where such original Mortgage or mortgage assignment has been delivered for recordation, the Seller shall promptly deliver to the Buyer's designee on behalf of the Buyer such original Mortgage or mortgage assignment with evidence of recording indicated thereon upon receipt thereof from the public recording official, with a copy thereof delivered to the Master Servicer. The costs relating to the delivery of the documents specified in this Conveyance Agreement shall be borne by the MCA Companies. The MCA Companies hereby additionally certifies to the Buyer: (i) The representations and warranties of the MCA Companies contained in the Securitization Access Agreement and all related agreements, as of the date hereof, are true and correct, and the MCA Companies have complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the date hereof in connection with the sale of the Purchased Mortgage Loans. (ii) There are no actions, suits or proceedings pending or threatened against or affecting any MCA Company which if adversely determined, individually or in the aggregate, would be reasonably likely to adversely affect in any material way any MCA Company's obligations under any agreement to which any MCA Company is a party. No merger, liquidation, dissolution or bankruptcy of any MCA Company is pending or contemplated. A-1 30 (iii) No material adverse change in the condition, financial or otherwise, or properties of the Sponsor has occurred since the date of the Securitization Access Agreement. All terms and conditions of the Securitization Access Agreement are hereby incorporated herein provided that in the event of any conflict the provisions of this Conveyance Agreement shall control over the conflicting provisions of the Securitization Access Agreement. Terms capitalized herein and not defined herein shall have their respective meanings as set forth in the Securitization Access Agreement. A-2 31 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers, all as of the _____ day of _______________. MCA FINANCIAL CORP., By:____________________________ Title:_________________________ MORTGAGE CORPORATION OF AMERICA By:_____________________________ Title:__________________________ MCA MORTGAGE CORPORATION By:______________________________ Title:___________________________ CONDUIT ACQUISITION TRUST, By:_____________________________ Title:__________________________ Attachments A. Schedule of Purchased Mortgage Loans. B. Trustee's initial exception report. C. Sponsor's officer's certificate. D. Closing Statement and Recap Summary. A-3 32 Closing Statement and Funding Recap Summary MCA Pool: ____ Date Prepared: Sale Cut-Off Date: (Close of Business) Sale Funding Date: Pricing Date: ---------------------------------------------------------------------- Buyer: Advanta Mortgage Conduit Services, Inc. on behalf Seller: of Conduit Acquisition Trust _________________ ---------------------------------------------------------------------- Originator: _________________ Servicer: Advanta Mortgage Corp. USA Scheduled Servicing Transfer Date: Broker Number: ---------------------------------------------------------------------- Fixed Pool Identification Number: ARM Pool Identification Number: Investor Number: Number of Loans: ---------------------------------------------------------------------- Fixed Pool Balance: ARM Pool Balance: Total Pool Balance: ---------------------------------------------------------------------- ---------------------------------------------------------------------- Total Pool Balance ---------------------------------------------------------------------- Accrued interest from Cut-Off Date to Closing Initial Applicable Rate ___% ---------------------------------------------------------------------- Premium in Dollars % of Scheduled Prin. Bal.: 0.00000% ---------------------------------------------------------------------- Transaction/Initial Fees Expense: Transaction Expense Share: Placement Fee: ---------------------------------------------------------------------- Initial Reserve Amount: Initial Reserve Amt. (Fixed) Initial Reserve Amt. (ARM) ---------------------------------------------------------------------- Recordation Fees: ---------------------------------------------------------------------- Net Due Seller/Funding Transfer Amt. ---------------------------------------------------------------------- A-4 33 EXHIBIT B CONTENTS OF MORTGAGE FILE 1. Collateral File (a) the original Note endorsed by the MCA Companies as follows: For value received, pay to the order of "Bankers Trust Company of California, N.A. as Custodian or Trustee", without recourse with all intervening endorsements showing a complete chain of title from the original lender to the MCA Companies; (b) the original Mortgage or Deed of Trust, with evidence of recording thereon, or, until the original Mortgage or Deed of Trust has been received from the applicable public recording office, a copy of the Mortgage or Deed of Trust certified by Sponsor to be a true and complete copy of the original Mortgage or Deed of Trust submitted for recording; (c) the Note riders signed as required; (d) a copy of the original unrecorded assignment of the Mortgage or Deed of Trust from Sponsor to "Bankers Trust Company of California, N.A. as Custodian or Trustee"; (e) documentation of all intervening mortgage assignments with evidence of recording thereon, sufficient to show a complete chain of assignment from the originator of the Mortgage Loan to the MCA Companies; (f) any and all assumption, modification, written assurance or substitution agreements, where the terms or provisions of a Mortgage or Note have been modified or such Mortgage or Note have been assumed; (g) the title insurance policy and preliminary policy, including all endorsements and/or riders, or until an original policy is received, a binding commitment to issue such a policy, which contains a legal description of the Mortgaged Property and which has been signed on the origination date by an authorized agent of the title insurer; 2. Servicing File (using the Advanta Stacking Order as of July 1, 1995) -------------- (a) any primary credit insurance policy or certificate of insurance; (b) all required hazard and flood insurance policies with respect to the Mortgage Property; (c) (the tax service contract, where applicable; (d) any Private Mortgage Insurance Certificate; (e) any guaranty(s), surety agreement(s), and/or survey(s); (f) any appraisals on the Mortgaged Property; (g) the completed loan application signed by the Mortgagor; (h) the signed mortgage loan settlement sheet; B-1 34 (i) all employment, deposit and mortgage verifications, credit reports and reports and any other document relied upon in making the Mortgage Loan; (j) any Truth-In-Lending RESPA and ECOA related documents required by law; (k) all records, ledger cards and other documents relating to the Mortgage Loan; (l) LIW Loan information worksheet; (m) Copies of all applicable transfer notifications i.e. borrower insurance, flood, hazard, PMI (n) the original unrecorded assignment of the Mortgage or Deed of Trust from Sponsor to Bankers Trust Company of California, N.A, as Custodian or Trustee. B-2 35 EXHIBIT C FORM OF MORTGAGE LOAN SCHEDULE C-1 36 EXHIBIT D AUTHORIZED REPRESENTATIVES Reference is hereby made to the Securitization Access Agreement, dated as of November 1, 1996 (the "Agreement"), among MCA Financial Corp., MCA Mortgage Corporation and Mortgage Corporation of America (collectively, the "MCA Companies"), Advanta Mortgage Conduit Services, Inc. and Advanta Mortgage Corp. USA: The following are the MCA Companies' Authorized Representatives for purposes of the Agreement: Name Title Specimen Signature The following are the Buyer's Authorized Representatives for purposes of the Agreement: Name Title Specimen Signature The following are the Master Servicer's Authorized Representatives for purposes of the Agreement: Name Title Specimen Signature William P. Garland D-1 37 EXHIBIT E Applicable Guidelines (a) Each Mortgage Loan is secured by a closed-end mortgage, in first or second lien position, to A to D credit borrowers (as defined by Fitch Investors Service), on single family 1-4 unit properties; (b) No less than 50% of any Pool will have been originated with A and B credit grades; (c) No ARM Pool will be more than 2% teased at origination calculated on a weighted average basis; (d) Each ARM is in a first lien position; (e) Each ARM's interest rate will be tied to either 6 month LIBOR or 1 year CMT; (f) Each ARM will have a 2% periodic (per annum) and a minimum lifetime cap of 6%; (g) No more than 25% of any Pool will consist of 2 year fixed/1 year adjustable, 3/1 or 5/1 intermediate mortgages (Treasury based index); and (h) No Mortgage Loan is a simple interest loan. (i) No more than 10% of any Pool will consist of loans with CLTVs in excess of 90% (without mortgage insurance from a carrier acceptable to the Master Servicer). (j) No less than 70% of each Pool will have been originated under a full documentation program. (k) No loan is more than 30 days contractually delinquent as of the securitization cut-off date. E-1 38 EXHIBIT F REPRESENTATION AND WARRANTIES (i) The information with respect to each Mortgage Loan set forth in the related Mortgage Loan Schedule is true and correct as of the Cut- Off Date. (ii) All of the original or certified documentation required to be delivered to the Buyer, the Master Servicer or the Buyer's designee pursuant to the [Operational Procedures Requirements as set forth on Exhibit G] with respect to each Mortgage Loan has been or will be delivered to the Buyer, the Master Servicer or the Buyer's designee, as required thereby. Each Mortgage Loan is documented on a note and mortgage form, with appropriate riders approved by Buyer. (iii) Each Mortgage is a valid and existing first or second lien of record on the Mortgaged Property, (subject in the case of any Second Mortgage Loan only to a Senior Lien on such Mortgaged Property) and subject in all cases to the exceptions to title set forth in the title insurance policy, if any, with respect to the related Mortgage Loan, which exceptions are generally acceptable to banking institutions in connection with their regular mortgage lending activities, and such other exceptions to which similar properties are commonly subject and which do not materially and adversely affect the benefits of the security intended to be provided by such Mortgage. (iv) Immediately prior to the transfer and assignment herein contemplated, the related MCA Company held good, marketable, and indefeasible title to, and was the sole owner of, each Mortgage Loan conveyed by such related MCA Company subject to no liens, charges, mortgages, encumbrances or rights of others except as set forth in clause (iii) or other liens which will be released simultaneously with such transfer and assignment and upon receipt of each Mortgage Loan, the Buyer will hold good, marketable, and indefeasible title to, and will be the sole owner of each Mortgage Loan, free and clear of any liens, charges, mortgages, encumbrances, or rights of others except as set forth in paragraph (iii) or any liens created by the Buyer. (v) As of the related Cut-Off Date, no Mortgage Loan is thirty (30) or more days contractually delinquent, and no Mortgage Loan has been thirty (30) or more days contractually delinquent more than once during the twelve (12) months preceding the related Cut-Off Date, except for those loans Buyer reviews during due diligence and agrees to purchase with knowledge of delinquency; there is no valid and enforceable offset, defense or counterclaim to any Note or Mortgage, including the obligation of the related Mortgagor to pay the unpaid principal of or interest on such Note. Except for any such delinquencies, there is no default, breach, violation or event of acceleration existing under any Mortgage or the related Note and no event which, with the passage of time or with notice and the expiration of any cure period, would constitute a default, breach, violation or event of acceleration; the Seller has not waived any default breach, violation or event of acceleration. (vi) There is no delinquent tax or assessment lien or mechanic's lien, or claim for work, labor, or material on any Mortgaged Property; there is no proceeding pending or threatened or currently occurring for the total or partial condemnation of any Mortgaged Property to the best of Seller's knowledge; each Mortgaged Property is free of substantial damage and is in good repair, except for those items specifically mentioned in the appraisal, or any applicable appraisal review of any mortgaged property. F-1 39 (vii) Each Mortgage Loan at the time it was made, and the origination of such Mortgage Loan, complied in all material respects with all applicable local, state and federal laws and regulations, including, without limitation, the federal Truth-in-Lending Act, the Real Estate Settlement Procedures Act, and other consumer protection laws, usury, equal credit opportunity, disclosure and recording laws. Any Mortgage Loan, and the origination thereof, which is subject to the "high cost or high fee mortgage" provisions of the Home Ownership and Equity Protection Act of 1994, complies with the requirements of such Act. No fraud was committed, nor was any material misrepresentation made, by any Person, including without limitation the related Mortgagor, in connection with the origination of such Mortgage Loan; each Mortgage Loan is a Qualified Mortgage and is a Qualifying Loan. (viii) With respect to each Mortgage Loan, a lender's title insurance policy, issued in standard American Land Title Association or California Land Title Association form by a title insurance company authorized to transact business in the state in which the related Mortgaged Property is situated, in an amount at least equal to the Original Principal Amount of such Mortgage Loan insuring the mortgagee's interest under the related MortGage Loan as the holder of a valid first or second mortgage lien of record on the real property described in the related Mortgage, as the case may be, subject only to exceptions of the character referred to in paragraph (iii) above, was effective on the date of the origination of such Mortgage Loan, and, as of the Cut-Off Date such policy will be valid and thereafter such policy shall continue in full force and effect for the benefit of the Buyer and its assignees, in care of the Master Servicer. (ix) Each Mortgaged Property is improved by a single (one-to-four) family residential dwelling, which may include condominiums and townhouses but shall not include cooperatives; the improvements upon each Mortgaged Property are covered by a valid and existing hazard insurance policy with a generally acceptable carrier that provides for fire and extended coverage representing coverage not less than the least of (A) the outstanding principal balance of the related Mortgage Loan Together, in the case of a Second Mortgage Loan, with the outstanding principal balance of any Senior Liens), (B) the minimum amount required to compensate for damage or loss on a replacement cost basis or (C) the full insurable value of the Mortgaged Property. (x) For all Mortgage Loans, there is in place a fully-paid life of loan flood certification from Pinnacle Data Corporation or another vendor approved by the Buyer, assigned in care of the Master Servicer, which provides for notification to the Master Servicer of changes in designated flood areas which would affect such Mortgage Loan; in addition, if any Mortgaged Property, as of the Cut-Off Date of the related Mortgage Loan, is in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards, a flood insurance policy in a form meeting the requirements of the current guidelines of the Federal Insurance Administration is in effect for the benefit of the Buyer and its assignees, in care of the Master Servicer, with respect to such Mortgaged Property with a generally acceptable carrier in an amount representing coverage not less than the least of (A) the outstanding principal balance of the related Mortgage Loan (together, in the case of a Second Mortgage Loan, with the outstanding principal balance of any Senior Liens), (B) the minimum amount required to compensate for damage or loss on a replacement cost basis or (C) the maximum amount of insurance that is available under the Flood Disaster Protection Act of 1973. (xi) Each Mortgage and Note is the legal, valid and binding obligation of the maker thereof and is enforceable in accordance with its terms, except only as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other F-2 40 similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether considered in a proceeding or action in equity or at law). The maker of such Mortgage and Note had the legal capacity to execute such Mortgage and Note at the time such Mortgage and Note were executed. (xii) MCA has caused and will cause to be performed any and all acts required to be performed to preserve the rights end remedies of the Master Servicer in any Insurance Policies applicable to any Mortgage Loans delivered by any Seller, including any necessary notifications of insurers, assignments of policies or interests therein, and establishments of co-insured, joint loss payee and mortgagee rights in favor of the Buyer and its assignees in care of the Master Servicer. (xiii) Interest on each Note is calculated in accordance with the actuarial method; the terms of each Note and each Mortgage have not been impaired, altered or modified in any respect, except by a written instrument which has been recorded, if necessary, to protect the interest of the Buyer and which has been included in the related Funding Package to be delivered to the Buyer. The substance of any such alteration or modification is reflected on the related Mortgage Loan Schedule and has been approved by the primary mortgage guaranty insurer, if any. (xiv) Except as otherwise required by law or pursuant to the statute under which the related Mortgage Loan was made, the related Note will not be secured by any collateral, pledged account or other security except the lien of the corresponding Mortgage. (xv) No Mortgage Loan will be originated under a buydown plan: no Mortgage Loan provides for negative amortization, has a shared appreciation feature, or other contingent interest feature; and as of the related Cut-Off Date, no Mortgage Loan had a Combined Loan-to-Value-Ratio or a Total Loan-to-Value Ratio in excess of the maximum for the related product type as set forth in the Applicable Guidelines, unless Buyer acknowledges any such exception(s) through its due diligence, and agrees to purchase the Mortgage Loan based on the exception(s). (xvi) Any advances made after the date of origination of a Mortgage Loan but prior to the Cut-Off Date, have been consolidated with the outstanding principal amount secured by the related Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term reflected on the related Mortgage Loan Schedule. No Note has been modified, except as reflected on the related Mortgage Loan Schedule, and evidence of any modification is in the related Funding Package and has been supplied to the Buyer. The consolidated principal amount does not exceed the original principal amount of the related Mortgage Loan. No Note permits or obligates the Master Servicer, any sub-servicer or the Buyer or its assignees to make future advances to the related Mortgagor at the option of the Mortgagor. (xvii) Any and all requirements as to completion of any on-site or off-site improvements and as to disbursements of any escrow funds therefor have been complied with, subject to any escrow hold-back for improvements pending completion. All costs, fees and expenses incurred in making, closing or recording the Mortgage Loans were paid. (xviii) To the best of Seller's knowledge, all of the improvements which were included for the purposes of determining the Appraised Value of any Mortgaged Property lie wholly within the boundaries and building restriction lines of such Mortgaged F-3 41 Property, and are stated in the title insurance policy and affirmatively insured; no improvement located on or being part of any Mortgaged Property is in violation of any applicable zoning law or regulation. To the best of Seller's knowledge, all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of each Mortgaged Property and, with respect to the use and occupancy of the same, including out not limited to certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities. (xix) With respect to each Mortgage constituting a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in such Mortgage, and no fees or expenses are or will become payable by the Buyer or its assignees under the deed of trust, except in connection with a trustee's sale after default by the related Mortgagor. (xx) With respect to each Second Mortgage Loan, either [A) no consent for such Mortgage Loan was required by the holder of the related Senior Lien prior to the making of such Mortgage Loan or (B) such consent has been obtained and is contained in the related Loan Servicing File. (xxi) Each Mortgage contains a provision for the acceleration of the payment of the unpaid principal balance of the related Mortgage Loan in the event the related Mortgaged Property is sold without the prior consent of the Mortgagee thereunder; each Mortgage contains customary and enforceable provisions which render the rights and remedies of the holder thereof adequate for the realization against the related Mortgaged Property of the benefits of the security, including (A) in the case of a Mortgage designated as a deed of trust, by trustee's sale and (B) otherwise by judicial foreclosure. Subject to any statutory redemption rights of the Mortgagor, upon default by a Mortgagor on a Mortgage Loan and foreclosure on, or trustee's sale of, the Mortgaged Property, the holder of the Mortgage Loan will be able to deliver good and marketable title to the Mortgaged Property. To the best of Seller's knowledge, there is no homestead or other exemption available to a Mortgagor which would interfere With the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose on the Mortgaged Property. (xxii) No instrument of release or waiver has been executed in connection with any Mortgage Loan, and no Mortgagor has been released, in whole or in part, except in connection with an assumption agreement which has been approved by the primary mortgage guaranty insurer, if and, and which has been included in the related Funding Package delivered to the Buyer. (xxiii) The maturity date of each Mortgage Loan which is a Second Mortgage Loan is at least twelve (12) months prior to the maturity cats of the related first mortgage loan if such first mortgage loan provides for a balloon payment. (xxiv) Each Mortgage Loan has been originated in accordance with all required provisions of the Applicable Guidelines; a full appraisal was performed with respect to each Mortgage Loan in compliance with the applicable requirements set forth in the Applicable Guidelines. The fair market value of the related Mortgaged Property was at least as stated in the appraisal, as of the date thereof. (xxv) As of the related Closing Date, to the best knowledge of the Seller, there does not exist on any Mortgaged Property any hazardous substances, hazardous wastes or solid wastes, as such terms are defined in the Comprehensive Environmental F-4 42 Response Compensation and Liability Act, the Resource Conservation and Recovery Act of 1976, or other federal, state or local environmental legislation. (xxvi) Each Mortgage Loan which is a First Mortgage Loan shall be covered by a valid and transferable tax service contract with Transamerica, or other party approved by the Buyer. (xxvii) No mortgage reconveyance, release, satisfaction or trustee fees have been collected by Seller or paid by any Mortgagor. In addition, if there is, in Buyer's reasonable judgment, a documentation problem that would make reconveyance of satisfaction difficult, cumbersome or expensive to the Buyer, then MCA or it's designee shall at the Buyer's request complete the reconveyance of satisfaction of the Mortgage, including the recordation of the necessary documentation, at MCA's sole cost and expense. (xxviii) The Mortgage Loan is not in default, and all Monthly Payments due prior to the related Cut-Off Date and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents have been paid, to the best knowledge of the Seller. The Seller has not advanced funds, or induced or solicited any advance of funds by a party other then the Mortgagor directly or indirectly, for the payment of any amount required by the Mortgage Loan. The collection practices used by each entity which has serviced the Mortgage Loan have been in all respects legal, proper, prudent and customary in the mortgage servicing business. With respect to escrow deposits and payments in those instances where such were required, there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made and no escrow deposits or payments or other charges or payments have been capitalized under any Mortgage or the related Mortgage Note. F-5 43 EXHIBIT G OPERATIONAL PROCEDURES 44 Persons on Attached Schedule 1 November __, 1996 Page 7 EXHIBIT H FORM OF OPINION __________, 1996 To: The Addresses identified on "Schedule I" attached hereto Ladies and Gentlemen: I am general counsel to each of MCA Financial Corp., a Michigan corporation ("MCA Financial"), MCA Mortgage Corporation, a Michigan corporation ("MCA Mortgage") and Mortgage Corporation of America, a Michigan corporation ("MCA"), and have acted as such in connection with the execution and delivery of the following agreements: 1. The Securitization Access Agreement among MCA Financial, MCA, MCA Mortgage (collectively, the "MCA Companies"), Advanta Mortgage Conduit Services, Inc. ("Advanta Conduit") and Advanta Mortgage Corp. USA ("Advanta Mortgage"), dated November 1, 1996; 2. The Master Commitment for Corporate Finance Relationships by and among the MCA Companies, Advanta Conduit and Advanta Mortgage dated as of November 1, 1996. The foregoing documents are sometimes collectively referred to below as the "Documents", and any one of them is sometimes referred to below as a "Document". All capitalized terms herein not otherwise defined herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. In rendering the opinions set forth herein, I have (i) examined executed copies of the Documents; (ii) examined originals or photostatic or certified copies of all such corporate records of each of the MCA Companies, and such certificates of public officials, certificates of corporate officers, and other documents, records financial statements and papers and have made such inquiries of officers, employees and representatives of each of the MCA Companies as I have deemed appropriate and necessary as a basis for the opinions hereinafter expressed, and I have further assumed the truth, accuracy and completeness of all information provided to me by such persons; (iii) assumed the genuineness of all signatures (other than those of the officers of each of the MCA Companies affixed to the Documents) and the authenticity of all documents submitted to me as originals and the conformity to original documents of all documents submitted to me as certified or photostatic copies; and (iv) assumed the due execution and delivery, pursuant to the due authorization, of each of the Documents by each of the respective parties (other than each of the MCA Companies) to each such Document. I am qualified to practice law only in the State of Michigan, and I am not expert in and express no opinion as to the laws of other jurisdictions other than the federal law of the United States. In rendering the above opinions, I have assumed that the state law(s) H-1 45 Persons on Attached Schedule 1 November __, 1996 Page 8 applicable to the Documents and under which the same are to be construed is identical in all material respects to the law of the State of Michigan. Furthermore, the opinions expressed herein do not purport to opine as to applicable state "Blue Sky" laws, legal investment laws, or other state or federal laws pertaining to any securities law issues and securities matters relating to the transactions described in the Documents. Based upon the foregoing, and subject to the other qualifications stated herein, I am of the opinion that: 1. Each of the MCA Companies is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan. 2. Each of the MCA Companies is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan and has all licenses and qualifications necessary to carry on its business as now being conducted and to perform its obligations hereunder; the MCA Companies have the power and authority to execute and deliver this Agreement and to perform its obligations in accordance herewith; the execution, delivery and performance of this Agreement (including any Conveyance Agreement and any other instruments of transfer to be delivered pursuant to this Agreement) by the MCA Companies and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and do not violate the organization documents of the MCA Companies, contravene or violate any law or regulation applicable to the MCA Companies or contravene, violate or result in any breach of any provision of, or constitute a default under, or result in the imposition of any lien on any assets of the MCA Companies pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which any MCA Company is a party or which purports to be binding upon Sponsor or any of Sponsor's assets; this Agreement evidences the valid and binding obligation of any MCA Company enforceable against each MCA Company in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or the application of equitable principles in any proceeding, whether at law or in equity; 3. All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency, that are necessary in connection with the execution and delivery by the MCA Companies of this Agreement, have been duly taken, given or obtained, as the case may be, are in full force and effect, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize the consummation of the transactions contemplated by this Agreement on the part of the MCA Companies and the performance by the MCA Companies of their respective obligations under this Agreement; 4. There is no action, suit, proceeding or investigation pending or, to the best of the MCA Companies' knowledge, threatened against any MCA Company which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of any MCA Company or in any material impairment of the right or ability of any MCA Company to carry on its business H-2 46 Persons on Attached Schedule 1 November __, 1996 Page 9 substantially as now conducted, or in any material liability on the part of any MCA Company or which would draw into question the validity of this Agreement or the Mortgage Loans or of any action taken or to be taken in connection with the obligations of any MCA Company contemplated herein, or which would be likely to impair the ability of any MCA Company to perform under the terms of this Agreement; 5. Each of the MCA Companies is not in default with respect to any mortgage, indenture, contract, agreement or other undertaking to which any MCA Company is a party or which purports to be binding upon Sponsor or any of Sponsor's assets, or with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of any MCA Company or its properties or might have consequences that would adversely affect its performance hereunder; 6. The execution and delivery of each of the Documents to which each of the MCA Companies is a party, and its respective performance of its obligations thereunder, will not (i) require any action by or in respect of, or filing with, any governmental body, agency or official (other than the filing of Uniform Commercial Code financing statements), or (ii) contravene, or constitute a default under, any provision of applicable law or regulation or of its Certificate (or Articles) of Incorporation or Bylaws or of any agreement, judgment, injunction, order, decree or other instrument binding upon such company. The foregoing opinions are being rendered for the benefit only of the Addressees listed on the attachment and may not be disclosed to, quoted to or relied upon by any other person or entity without the prior written consent of the undersigned. Very truly yours, _____________________________ Title: General Counsel H-3 47 Persons on Attached Schedule 1 November __, 1996 Page 10 SCHEDULE 1 Advanta Mortgage Corp. USA 500 Office Center Drive Suite 400 Fort Washington, PA 19034 Advanta Mortgage Conduit Services, Inc. 16875 West Bernardo Drive San Diego, CA 92127 H-4 48 Persons on Attached Schedule 1 November __, 1996 Page 11 EXHIBIT I FORM OF SYNTHETIC RESIDUAL CERTIFICATE This Synthetic Residual Certificate (this "Certificate") has been issued in accordance with Section 9(d) of the Securitization Access Agreement dated as of November 1, 1996 (the "Securitization Access Agreement") by and among MCA Financial Corp. (the "Sponsor"), MCA Mortgage Corporation, and Mortgage Corporation of America, Advanta Mortgage Conduit Services, Inc. (the "Buyer") and Advanta Mortgage Corp. USA (the "Master Servicer"). This Certificate is the Synthetic Residual Certificate referenced in Section 2 of the Tri-Party Security Agreement dated as of November 1, 1996 (the "Security Agreement") by and among the Buyer, the Master Servicer (the Buyer and the Master Servicer together are referred to herein as the "Pledgors"), MCA Financial Corp. and Bankers Trust Company of California, N.A., as trustee. Unless otherwise indicated, terms used herein but not defined shall have the respective meanings given to such terms in the Securitization Access Agreement. This Certificate evidences the secured corporate obligation of the Pledgors to pay the Residual Excess Servicing amounts to the Sponsor as required by Section 9(c) of the Securitization Access Agreement. To secure such obligation, the Pledgors have granted a security interest in the Collateral (as such term is defined in the Security Agreement) to the Sponsor pursuant to the Security Agreement. This Certificate does not represent any direct ownership interest in any Mortgage Loans. THIS CERTIFIES THAT MCA Financial Corp. is the owner of this Certificate. This Certificate is not transferrable. IN WITNESS WHEREOF, the Pledgors have caused this Certificate to be signed, manually or in facsimile by its authorized officer. Dated: November __, 1996 ADVANTA MORTGAGE CONDUIT SERVICES, INC. By:______________________ Name: Title: ADVANTA MORTGAGE CORP. USA By:______________________ Name: Title: I-1 49 EXHIBIT J ______________________________________________________________________________ TRI-PARTY SECURITY AGREEMENT By and Among ADVANTA MORTGAGE CONDUIT SERVICES, INC., ADVANTA MORTGAGE CORP. USA, MCA FINANCIAL CORP. and BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Trustee Dated as of November 1, 1996 ______________________________________________________________________________ 50 TRI-PARTY SECURITY AGREEMENT This TRI-PARTY SECURITY AGREEMENT (this "Agreement"), dated as of November 1, 1996 by and among ADVANTA MORTGAGE CONDUIT SERVICES, INC. ("Advanta Mortgage Conduit"), ADVANTA MORTGAGE CORP. USA ("Advanta Mortgage Corp.", together with Advanta Mortgage Conduit, the "Pledgors"), MCA FINANCIAL CORP. (the "Secured Party") and BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as trustee (the "Trustee"). NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the parties hereto agree as follows: Section 1. Definitions. In addition to the terms defined elsewhere in this Agreement, the following terms shall have the following meanings when used in this Agreement: "Collateral" means the Pledgors' rights to receive payments of Residual Excess Servicing in connection with each and every Securitized Loan Pool. "Securitization Access Agreement" means the Securitization Access Agreement dated as of November 1, 1996 by and among the Secured Party, MCA Mortgage Corporation, Mortgage Corporation of America and the Pledgors, as amended from time to time. Capitalized terms used and not otherwise defined herein shall for all purposes of this Agreement have the respective meanings specified therefor in the Securitization Access Agreement. Section 2. Pledge and Security. Each Pledgor hereby pledges all of its respective right, title, and interest in and to, and grants a first lien on, and security interest in, the Collateral to the Secured Party to secure the obligation of the Pledgors to make payments of Residual Excess Servicing to the Secured Party in accordance with Section 9(c) of the Securitization Access Agreement, which obligation is evidenced by the Synthetic Residual Certificate in the form of Exhibit I to the Securitization Access Agreement. Section 3. Financing Statement. The Pledgors covenant that, on the date of execution of this Agreement, the Pledgors shall cause to be filed a financing statement (Form UCC-1) with the Secretary of State of California to perfect by filing thereof the security interest in the Collateral granted by the Pledgors herein. The Pledgors covenant to file in other jurisdictions upon the reasonable request of the MCA Companies. Section 4. Events of Default. Each of the following shall constitute an "Event of Default" hereunder: (a) Failure of the Pledgors to make any payment of Residual Excess Servicing, owing to the Secured Party under Section 9(c) of the Securitization Access Agreement, to the Secured Party which failure is not remedied within five Business Days after written notice to the Pledgors thereof. 1 51 (b) The filing against either Pledgor of a petition for liquidation, reorganization, arrangement or adjudication as a bankrupt or similar relief under the bankruptcy, insolvency or similar laws of the United States or any state or territory thereof or of any foreign jurisdiction as to which such Pledgor fails to secure dismissal within 60 days of such filing. Appointment of a receiver, conservator, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of either Pledgor or of any substantial part of its property, the ordering of the winding-up or liquidation of its affairs, or the entry of a decree or order for relief by a court having jurisdiction in the premises in respect of either Pledgor in any involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect. (c) Commencement by either Pledgor of a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by either Pledgor to the entry of an order for relief in an involuntary case under any such law or to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of either Pledgor or of any substantial part of its property, or the making by either Pledgor of any general assignment for the benefit of creditors, or the failure of either Pledgor generally to pay its debts as such debts become due, or the taking of corporate action by either Pledgor in furtherance of any of the foregoing. Section 5. Remedy Upon Default. Upon the happening of one or more Events of Default, the Secured Party shall have the right to collect and receive all further payments of Residual Excess Servicing due to it under Section 9(c) of the Securitization Access Agreement directly from the Trustee. The parties hereto agree that, upon the happening of one or more Events of Default, the Trustee shall calculate the amounts, if any, owed by the Pledgors to the Secured Party pursuant to Section 9(c) of the Securitization Access Agreement and shall pay any and all such amounts from the Residual Excess Servicing related to the Securitized Loan Pools that would otherwise be payable to either Pledgor directly to the account of the Secured Party at _____ ___________________________________ or to such other account of the Secured Party identified by the Secured Party from time to time to the Trustee. The Pledgors and the Secured Party acknowledge that the Secured Party has no recourse against the Collateral upon the happening of an Event of Default, other than as described in this Section 5. Notwithstanding the security interest granted hereby, the Synthetic Residual Certificate represents a general corporate liability of the Pledgors. Section 6. Notices. All demands, notices and communications relating to this Agreement shall be in writing and shall be deemed to have been duly given when received by the other party or parties at the address shown below, or such other address as may hereafter be furnished to the other party or parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee. If to the Pledgors: Mark A. Casale Advanta Mortgage Corp. USA 500 Office Center Drive Suite 400 Fort Washington, PA 19034 Telecopy: (215) 444-4743 2 52 If to the Secured Party: MCA Financial Corp. 23999 Northwestern Highway Suite 101 Southfield, MI 48075 Telecopy: 810-358-4639 If to the Trustee: Bankers Trust Company of California, N.A. 3 Park Plaza, 16th Floor Irvine, CA 92714 Telecopy: (714) 253-8289 Section 7. Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. Section 8. Assignment; Successors and Assigns. No party to this Agreement may assign its rights or delegate its obligations under this Agreement without the express written consent of the other parties, except as otherwise set forth in this Agreement. This Agreement shall be binding upon the successors and assigns of the parties hereto. Section 9. Counterparts. For the purpose of facilitating the execution of this Agreement and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original, and together shall constitute and be one and the same instrument. Section 10. Amendment. This Agreement may be amended from time to time by the parties hereto only by a written instrument executed by such parties. Section 11. Governing Law; Agreement Constitutes Security Agreement. This Agreement is intended by the parties hereto to be governed by, and construed in accordance with, California law, without regard to conflict of laws rules applied in California, and to constitute a security agreement within the meaning of the California Uniform Commercial Code. 3 53 IN WITNESS WHEREOF, the parties have executed this TRI-PARTY SECURITY AGREEMENT as of the day and year first above written. ADVANTA MORTGAGE CONDUIT SERVICES, INC. By:___________________________________________________ Name: Title: ADVANTA MORTGAGE CORP. USA By:___________________________________________________ Name: Title: MCA FINANCIAL CORP. By:___________________________________________________ Name: Title: BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Trustee By:___________________________________________________ Name: Title: 4 EX-10.36 3 EXHIBIT 10.36 1 EXHIBIT 10.36 EXECUTION COPY =============================================================================== AMENDED AND RESTATED SECURITIZATION ACCESS AGREEMENT Amended as of February 21, 1997 by and among MCA FINANCIAL CORP. MCA MORTGAGE CORPORATION, MORTGAGE CORPORATION OF AMERICA, ADVANTA MORTGAGE CONDUIT SERVICES, INC. and ADVANTA MORTGAGE CORP. USA, =============================================================================== 2 TABLE OF CONTENTS Page Section 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2. Interest Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 3. Purchases and Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 5. Establishment of Advanta Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 6. Defective Mortgage Files; Repurchase of Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 7. Representations and Warranties Regarding the MCA Companies, the Buyer and the Master Servicer . . . . . . 16 Section 8. Representations and Warranties of the MCA Companies Regarding the Mortgage Loans . . . . . . . . . . . . . 20 Section 9. Application of Residual Excess Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 10. Distribution Date Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 11. Merger or Consolidation of MCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 12. Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 13. Authorized Representatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 14. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 15. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 16. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 17. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 18. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 19. Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 20. No Agency; No Partnership or Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 21. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 22. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 23. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 24. Legal Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 25. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3 Exhibits Exhibit A -- Form of Conveyance Agreement Exhibit B -- Contents of Mortgage File Exhibit C -- Authorized Representatives Exhibit D -- Applicable Guidelines Exhibit E -- Representations and Warranties Exhibit F -- Form of Opinion Exhibit G -- Form of Synthetic Residual Certificate Exhibit H -- Form of Multi-Party Security Agreement Exhibit I -- Mutual Confidentiality Agreement 4 THIS AMENDED AND RESTATED SECURITIZATION ACCESS AGREEMENT, dated as of February 21, 1997, among MCA Financial Corp., as seller (the "Seller"), MCA Mortgage Corporation and Mortgage Corporation of America, (each company, an "MCA Company" and collectively, the "MCA Companies"), Advanta Mortgage Conduit Services, Inc. ("Advanta Conduit"), Advanta Mortgage Corp. USA (the "Advanta Mortgage" and together with Advanta Conduit, the "Buyer"), and Advanta Mortgage Corp. USA, in its capacity as master servicer (Advanta Mortgage, in such capacity, the "Master Servicer"), W I T N E S S E T H T H A T : WHEREAS, the MCA Companies originate mortgage loans which the MCA Companies desire to include in securitization transactions sponsored by the Buyer; WHEREAS, the Buyer desires to include such mortgage loans in its securitization transactions; and WHEREAS, the MCA Companies and the Buyer desire that the Master Servicer service such mortgage loans. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the parties hereto hereby agree as follows: Section 1. Definitions. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the meanings specified in this Article. Accepted Servicing Practices: As defined in the Pooling and Servicing Agreement or similar agreement relating to an Advanta Trust. Accumulation Pool: As of any date, all Mortgage Loans previously sold by the Seller hereunder and which are held by the Conduit Acquisition Trust on such date. The Accumulation Pool may represent any number of Pools. Additional Initial Reserve Amount: With respect to any Securitized Loan Pool, any additional amount required to be added to the Reserve Amount in connection with the conveyance of such Securitized Loan Pool to the related Advanta Trust (including conveyances of any "pre-funded" Mortgage Loans). The parties acknowledge that their expectation is that the Additional Initial Reserve Amount will be zero. Additional Representations and Warranties: With respect to any Pool, the additional representations and warranties made by each MCA Company with respect thereto, as set forth in the related Conveyance Agreement. Advances: Any "Delinquency Advances" as may be required in connection with a Securitized Loan Pool, as defined in the "Pooling and Servicing" or similar agreement relating to the applicable Advanta Trust, and any Servicing Advances. 5 Advanta Trust: Any trust which the Buyer may from time to time sponsor for the purpose of securitizing, among other things, all or a portion of the Mortgage Loans and selling the interests therein to investors. Aggregate Overadvance Amount: As of the closing date of any Advanta Securitization, the sum of all Overadvance Amounts previously paid to the Seller and not theretofore repaid, plus interest thereon (calculated from the date the related Overadvance Amount was paid) at Prime. Agreement: This Amended and Restated Securitization Access Agreement and all amendments hereof and supplements hereto. Applicable Guidelines: For purposes of this Agreement only (i.e., not necessarily for purposes of the Whole Loan Agreement) those underwriting guidelines set forth on Exhibit D hereto, as such Exhibit D may be revised from time to time by the Buyer and the Seller. Applicable Pool Balance: With respect to any Pool as of any Distribution Date, the aggregate Principal Balances of the Mortgage Loans in such Pool as of the opening of business on the first day of the prior calendar month. Applicable Rate: With respect to any Mortgage Loan included in the Accumulation Pool, Prime. With respect to any Mortgage Loan included in a Securitized Loan Pool, the "Pass-Through Rate(s)" for the related classes of securities for the related period; such "Pass-Through Rate(s)" may be either the actual rates or, in the case of a derivative, such derivative hedged rate(s). Appraised Value: The appraised value of any Mortgaged Property based upon the appraisal or other valuation made at the time of the origination of the related Mortgage Loan; or, in the case of a Mortgage Loan which is a purchase money mortgage; or in the case of a home which is purchased within the last twelve (12) months, the sale price of the Mortgaged Property at such time of origination, if such sale price is less than such appraised value. ARM Loan: A Mortgage Loan which bears an adjustable rate of interest. Bond Pricing Discount: An estimated percentage of pricing discount on the publicly-offered securities to be issued by an Advanta Trust, as determined by the Underwriter(s) selected by the Buyer. The parties acknowledge that their expectation is that the Bond Pricing Discount will be zero, or as close to zero as reasonably practicable. Business Day: Any day other than (a) a Saturday or a Sunday, or (b) a day on which national banks in the states of California, or New York and Delaware are required or authorized by law, executive order or governmental decree to be closed. Buyer Information: As defined in Section 5(d) hereof. Carry-Forward Amount: With respect to any Identified Securitized Loan Pool and any Distribution Date, the excess, if any, of (x) the amount described in clause (y) of the definition of "Deferred Premium Payment" for such Distribution Date over (y) the Residual Excess Servicing for such Identified Securitized Loan Pool for such Distribution Date. 2 6 Closing Date: With respect to any Pool, the date established as the "Closing Date" in the related Conveyance Agreement. Combined Loan-to-Value Ratio: With respect to any First Mortgage Loan, the percentage equal to the Original Principal Amount of the related Note divided by the Appraised Value of the related Mortgaged Property and with respect to any Second Mortgage Loan, the percentage equal to (a) the sum (i) the remaining principal balance, as of origination of the Second Mortgage Loan, of the Senior Lien note(s) relating to such Second Mortgage Loan, and (ii) the Original Principal Amount of the Note relating to such Second Mortgage Loan, divided by (b) the Appraised Value. Compensating Interest: Amounts advanced by the Master Servicer as a result of a prepayment in full by a Mortgagor on a date other than the scheduled Due Date, and equal to the excess of (x) a full month's interest on the related Mortgage Loan calculated at the related Coupon Rate less the Servicing Fee Rate over (y) the interest actually paid by the related Mortgagor for the related monthly period. The Master Servicer shall fund Compensating Interest monthly, but not in excess, in the aggregate for any monthly period, of the aggregate Servicing Fee retained by the Master Servicer with respect to such monthly period. Conduit Acquisition Trust: The Conduit Acquisition Trust created pursuant to that certain Pooling and Servicing Agreement dated as of February 15, 1995 among the Buyer, the Master Servicer and the Trustee. Conveyance Agreement: With respect to the purchase of a Pool, the Conveyance Agreement in substantially the form of Exhibit A hereto executed with respect thereto (which term includes the related "Closing Statement and Funding Recap Summary"). Credit Enhancer: Any financial guarantor or other financial institution which provides third-party credit enhancement with respect to an Advanta Trust. Cut-Off Date: With respect to any Pool, the date established as the "Cut-Off Date" in the related Conveyance Agreement. Cut-Off Date Principal Balance: As to any Mortgage Loan, its Principal Balance as of the opening of business on the related Cut-Off Date. Defective Mortgage Loan: Any Mortgage Loan which is required to be repurchased by the MCA Companies pursuant to Section 5(b), 5(c), 6(b) or 8(c) hereof. Deferred Premium Payment: With respect to any Identified Securitized Loan Pool and any Distribution Date, the excess, if any, of (x) 100% of the Residual Excess Servicing for such Distribution Date over (y) the sum of (i) the related Initial Premium Amortization Current Amount plus (ii) the related Initial Premium Fee plus (iii) the related Carry-Forward Amount, if any, for the immediately preceding Distribution Date. Delinquency Advances: For each remittance period for the related Securitization, an amount equal to the sum of the interest portions (net of the Servicing Fees) due, but not collected, with respect to delinquent Mortgage Loans, which the Master Servicer advances to the Trust. The Master Servicer is only required to make Delinquency Advances if the Master Servicer believes, in its good faith business judgment, that such amount will ultimately be recovered from the related Mortgage Loan. 3 7 Distribution Date: With respect to the Accumulation Pool or any Securitized Loan Pool, the 25th day of each month or, if such day is not a Business Day, the Business Day immediately following such 25th day, beginning in the month specified in the related Conveyance Agreement. Due Date: With respect to any Mortgage Loan the fixed date in each month on which the Mortgagor's Monthly Mortgage Payment is due. "Excess Servicing" means: (x) with respect to the Accumulation Pool, as of any Distribution Date, the sum of all interest due (minus the amount of any interest not required to be advanced by the Master Servicer as a non-recoverable "Delinquency Advance" or as "Compensating Interest" in excess of the Servicing Fee) with respect to the Mortgage Loans in the Accumulation Pool during the prior calendar month (minus any portion of such interest previously received by the MCA Companies as part of the related Pool Purchase Price), less the sum of the following amounts, to be deducted in the following order of priority: (i) one-twelfth of the Servicing Fee Rate times the related Applicable Pool Balance; (ii) the interest, calculated at the Applicable Rate, which accrued on the Applicable Pool Balance which relates for the applicable preceding interest accrual period; and (iii)the amount of any Advances, including, but not limited to, any Nonrecoverable Advances, made or paid by the Master Servicer with respect to any Mortgage Loans included in the Accumulation Pool or such Securitized Loan Pool during the prior calendar month, less the amount of any Advances made or paid by the Master Servicer in prior monthly periods and recovered during the current monthly period; and (y) with respect to any Securitized Loan Pool, as of any Distribution Date, the sum of all interest due with respect to the Mortgage Loans in such Securitized Loan Pool (minus the amount of any interest not required to be advanced by the Master Servicer as a non-recoverable "Delinquency Advance" or as "Compensating Interest" in excess of the Servicing Fee), during the prior calendar month (minus any portion of such interest previously received by the MCA Companies as part of the related Pool Purchase Price), less the sum of the following amounts, to be deducted in the following order of priority: (i) one-twelfth of the applicable Monthly Fee rate times the Applicable Pool Balance of the Securitized Loan Pool; (ii) one-twelfth of the Servicing Fee Rate times the related Applicable Pool Balance; (iii) the sum of (x) the interest, calculated at the Applicable Rate for the related ARMs, which accrued on that portion of the Applicable Pool Balance which relates to ARMs, plus (y) the interest, calculated at the Applicable Rate for the related 4 8 Fixed Rate Loans, which accrued on that portion of the Applicable Pool Balance which relates to Fixed Rate Loans, in each case for the applicable preceding interest accrual period; and (iv) the amount of any Advances, including, but not limited to, any Nonrecoverable Advances, made or paid by the Master Servicer with respect to any Mortgage Loans included in the Accumulation Pool or such Securitized Loan Pool during the prior calendar month, less the amount of any Advances made or paid by the Master Servicer on prior monthly periods and recovered during the current monthly period; and FDIC: The Federal Deposit Insurance Corporation and its successors in interest. FEMA: The Federal Emergency Management Agency and its successors in interest. FHLMC: The Federal Home Loan Mortgage Corporation and its successors in interest. First Mortgage Loan: A Mortgage Loan which constitutes a first priority mortgage lien with respect to any Mortgaged Property. Fixed Rate Loan: A Mortgage Loan which bears interest at a fixed rate. FNMA: The Federal National Mortgage Association and its successors in interest. Identified Securitized Loan Pool: Any Securitized Loan Pool sold by the Seller hereunder and held by a particular Advanta Trust which has been identified on the closing date of the related Securitization in the Buyer's Securitization Statement as participating in the Buyer's deferred premium program. Initial Premium Amortization Amount Schedule: With respect to any Identified Securitized Loan Pool, a schedule setting forth all Initial Premium Amortization Current Amounts for each Distribution Date. Initial Premium Amortization Current Amount: With respect to any Identified Securitized Loan Pool (i) for each Distribution Date occurring during the amortization period (which shall in no event be less than 36 months or greater than 48 months) set forth in the related Securitization Statement, the amount set forth with respect to such Distribution Date in the Initial Premium Amortization Amount Schedule attached to the related Securitization Statement and (ii) with respect to each Distribution Date thereafter, the related Unamortized Initial Premium Amount immediately prior to such Distribution Date. Initial Premium Fee: With respect to any Identified Securitized Loan Pool and any Distribution Date, the product of (i) one-twelfth of the sum of (a) LIBOR plus (b) 2.00% and (ii) the related Unamortized Initial Premium Amount immediately prior to such Distribution Date. 5 9 Initial Premium Payment: An amount paid to the Seller on the closing date of the related Advanta Securitization equal to the product of (i) the related Initial Premium Percentage and (ii) the Synthetic Residual Value. Initial Premium Percentage: With respect to each Identified Securitized Loan Pool, the percentage indicated as the Initial Premium Percentage in the related Securitization Statement, which percentage shall not be less than 50%. Initial Reserve Amount: With respect to any Pool, the initial amount of Reserves relating thereto, as set forth in the related Conveyance Agreement. The parties acknowledge that their expectation is that the Initial Reserve Amount will be zero, or as close to zero as reasonably practicable. Insurance Policy: Any hazard, flood, title or primary mortgage insurance policy relating to a Mortgage Loan. Insurance Proceeds: Proceeds paid by any insurer and received by the Master Servicer during the prior calendar month pursuant to any insurance policy covering a Mortgage Loan or the related Mortgaged Property, and the proceeds from any fidelity bond or errors and omission policy, net of any component thereof covering any expenses incurred by or on behalf of the Master Servicer. Issuance Costs: With respect to any Securitized Loan Pool, all costs incurred by the MCA Companies and by the Buyer in connection with the purchase and sale of a Pool, the establishment of the related Advanta Trust and the sale of mortgage-backed securities by such Advanta Trust, including, without limitation, legal, accounting, printing, initial Trustee's fee, Underwriter's discount, initial Credit Enhancer's fee, Rating Agency's fees and other customary costs of issuance. Second Mortgage Loan: Any Mortgage Loan secured by a Mortgage with a lien of other than first priority. Liquidated Mortgage Loan: As to any Distribution Date, any Mortgage Loan as to which the Master Servicer has determined, in accordance with its regular servicing practices during the prior calendar month, that all Liquidation Proceeds which it expects to recover from or on account of such Mortgage Loan have been recovered, which determination may include "charging off" such Mortgage Loan. Liquidation Expenses: Expenses which are incurred by the Master Servicer in connection with the liquidation or foreclosure of any Mortgage Loan and not recovered under any insurance policy or from any Mortgagor. Such expenses shall include, without limitation, legal fees and expenses, real estate brokerage commissions, any unreimbursed amount expended by the Master Servicer respecting the related Mortgage Loan (including, without limitation, amounts voluntarily advanced to correct defaults on each related Senior Lien) and any related and previously unreimbursed Advances. Liquidation Proceeds: Cash (other than Insurance Proceeds) received in connection with the liquidation of any Mortgaged Property, whether through trustee's sale, foreclosure sale or otherwise received in respect of any Mortgage Loan foreclosed upon (including, without limitation, proceeds from the rental of the related Mortgaged Property). Master Commitment: The Master Commitment dated as of November 1, 1996 between the Buyer and the MCA Companies hereto. 6 10 Master Servicer: Advanta Mortgage Corp. USA, a Delaware corporation. Monthly Fee: As defined in Section 4(a) hereof. Monthly Mortgage Payment: With respect to any Mortgage Note, the amount of each fixed monthly payment (other than final balloon payments) payable under such Mortgage Note in accordance with its terms, net of any portion of such monthly payment that represents late payment charges, prepayment or extension fees or collections allocable to payments to be made by Mortgagors for payment of insurance premiums, real estate taxes or similar items. Mortgage: The mortgage, deed of trust or other instrument creating a first, second or third lien on an estate in fee simple interest in real property securing a Mortgage Loan. Mortgage File: With respect to any Mortgage Loan, the items set forth on Exhibit B hereto. Mortgage Loan: Each of the Mortgage Loans sold by the Seller hereunder. Mortgage Loan Rate: As to any Mortgage Loan, the per annum rate of interest applicable to the calculation of interest thereon. Mortgage Loan Schedule: With respect to any Pool, the schedule of Mortgage Loans delivered by the MCA Companies with respect thereto on the related Closing Date. Each such schedule shall be delivered in computer-readable form on diskette or magnetic tape and in physical form, as amended from time to time. Mortgage Note: The note or other instrument of indebtedness evidencing the indebtedness of a Mortgagor under the related Mortgage Loan. Mortgaged Property: The underlying property securing a Mortgage Loan. Mortgagor: The obligor under a Mortgage Note. Net Insurance Proceeds: Insurance Proceeds from any policy of insurance covering a Mortgage Loan which (a) are applied by the Master Servicer to reduce the Principal Balance of the related Mortgage Loan and (b) not applied to the restoration or repair of the related Mortgaged Property or released to the related Mortgagor in accordance with the Master Servicer's regular servicing procedures or the terms of the related Mortgage Loan. Net Liquidation Proceeds: As to any Mortgage Loan, Liquidation Proceeds net of Liquidation Expenses. For all purposes of this Agreement, Net Liquidation Proceeds shall be allocated first to accrued and unpaid interest on the related Mortgage Loan and then to the Principal Balance thereof. Net Purchase Price: With respect to any Pool, the related Pool Purchase Price minus (i) the related Initial Reserve Amount, if any, (ii) the related Seller's Transaction Expenses and (iii) the related Placement Fee, all as set forth in the related Conveyance Agreement. 7 11 Nonrecoverable Advances: With respect to any Mortgage Loan, any Delinquency Advance or any Servicing Advance previously made and not reimbursed which, in the good faith business judgment of the Master Servicer, would not be ultimately recoverable. Offering Document: A prospectus, placement memorandum or other document pursuant to which an Underwriter offers mortgage-backed securities issued by an Advanta Trust. Original Principal Amount: With respect to any Mortgage Note, the original principal amount due under such Mortgage Note as of its date of origination. Other Expenses: Any additional expenses incurred by the Buyer in connection with the inclusion of Mortgage Loans sold by the Seller in an Advanta Trust, including, but not limited to the costs of (i) data integrity review of loan files versus the servicing system, (ii) accountant's "comfort letter" with respect to any Seller Information and (iii) third-party due diligence expenses relating to on-site review of the MCA Companies or the Mortgage Loans, to the extent over and above the Buyer's normal expenses for such a review. The Other Expenses shall not exceed $25,000 per Securitized Loan Pool, and in no event will exceed $50,000 in any single twelve-month period. Overadvance Amount: With respect to any Pool Purchase Price, the excess, if any, of (i) the sum of (a) the amount described in clause (x) of the definition of "Pool Purchase Price" and (b) the amount described in clause (y) of the definition of "Pool Purchase Price" over (ii) the sum of (a) the amount described in clause (x)(i) of the definition of "Pool Purchase Price" and (b) the amount described in clause (y) of the definition of "Pool Purchase Price, calculated for this purpose only using par. Overadvance Percentage: The premium, if any, paid by the Buyer in connection with the purchase of any Pool, expressed as a percentage. Pair-Off Fee: As defined in the Master Commitment. Person: Any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. Placement Fee: With respect to each Mortgage Loan included in a Securitized Loan Pool and purchased by the Buyer hereunder, 0.45% times the Principal Balance of such Mortgage Loan. Pool: Any group of Mortgage Loans sold by the Seller hereunder and designated as a "pool" for purposes of this Agreement. For convenience, each Pool shall be designated by the year of its sale and lettered sequentially, e.g., 1996-A, 1996-B, etc. Pool Principal Balance: As of any date, the aggregate Principal Balances of all Mortgage Loans in the related Pool as of such date. Pool Purchase Price: With respect to any Pool, the sum of (x) the sum of (i) the aggregate Principal Balance of each Mortgage Loan in such Pool as of the opening of business on the related Cut-Off Date and (ii) the product of the Overadvance Percentage times the amount described in clause (i) of this definition and (y) for each Mortgage Loan, interest accrued on the amount described in clause (x) from and including the date to which 8 12 interest was last paid by the Mortgagor (including any prepaid interest) to but excluding the Closing Date, calculated at the related Mortgage Loan Rate. Prime: The Prime Rate of interest charged from time to time by The Chase Manhattan Bank. Principal Balance: As to any Mortgage Loan and any date of determination, the Principal Balance thereof as of the related Cut-Off Date, less all amounts theretofore applied in reduction of such Principal Balance after the related Cut-Off Date; provided, however, that a Mortgage Loan that has become liquidated will be deemed to have a Principal Balance of zero. Principal Payment: As to any Mortgage Loan and calendar month, all amounts received or, deemed to have been received by the Master Servicer from or on behalf of the related Mortgagor during such calendar month (including Principal Prepayments) which, at the time of receipt or at the time deemed to have been received, were applied or were required to be applied by the Master Servicer in reduction of the Principal Balance of such Mortgage Loan. Principal Prepayment: As to any Mortgage Loan and calendar period, any Mortgagor payment or other recovery in respect of principal on a Mortgage Loan (including Net Liquidation Proceeds) which, in the case of a Mortgagor payment, is received in advance of its Due Date and is not accompanied by an amount as to interest representing scheduled interest for any month subsequent to the month of such payment or was accompanied by instructions from the related Mortgagor directing the Master Servicer to apply such payments to the Principal Balance of such Mortgage Loan. Qualified Mortgage: "Qualified Mortgage" shall have the meaning set forth from time to time in the definition thereof at Section 860G(a)(3) of the Internal Revenue Code of 1986, as amended (or any successor statute thereto). Qualifying Loan: Mortgage Loans which (i) conform to Seller's Applicable Guidelines, and (ii) which conform to all Representations and Warranties, as defined in this Agreement and applicable to the related Mortgage Loans. Rating Agencies: Collectively, all nationally recognized statistical credit rating agencies providing a rating on any class of mortgage- backed securities issued by an Advanta Trust. Realized Loss: As to any Liquidated Mortgage Loan, the excess, if any, of (x) the Principal Balance thereof as of the date of liquidation, together with all unreimbursed Advances over (y) the related Net Liquidation Proceeds, if any. Related Conduit Agreements: As defined in the Master Commitment. Remaining Excess Servicing: With respect to any Securitized Loan Pools in the aggregate as of any Distribution Date, the excess, if any, of (x) the Excess Servicing for such Securitized Loan Pool over (y) the Reserve Deposit for such Securitized Loan Pool. REO Property: Any Mortgaged Property as to which title has become vested in the Trustee, the Conduit Acquisition Trust or an Advanta Trust as a result of foreclosure, deed in lieu of foreclosure, etc. 9 13 Representations and Warranties: As defined in Section 8(a) hereof. Repurchase Price: With respect to any Mortgage Loan repurchased by the MCA Companies pursuant to the provisions hereof, an amount equal to (i) the sum of (A) the Principal Balance of such Mortgage Loan as of the beginning of the calendar month next preceding the Distribution Date on which the proceeds of such repurchase or purchase are required to be distributed, (B) interest computed at the applicable Mortgage Loan Rate on such Principal Balance from the date to which interest was last paid by the Mortgagor to the end of the calendar month immediately preceding such Distribution Date on which such repurchase or purchase occurs and (C) any previously unreimbursed Advances made on or in respect of such Mortgage Loan less (ii) any payments of principal and interest in respect of such Mortgage Loan, made by or on behalf of the related Mortgagor during such calendar month. Reserve Amount: With respect to the Accumulation Pool or any Securitized Loan Pool, as of any Distribution Date the excess of (x) the sum of (i) the Initial Reserve Amount(s) for the related Pool(s), (ii) any Additional Initial Reserve Amount and (iii) the aggregate, cumulative amount of Reserve Deposits applicable to the Accumulation Pool or such Securitized Loan Pool, as the case may be and (iv) investment earnings at Advanta Corp.'s then-standard reinvestment rate (which, as of the date hereof, is based on the then-current 30-day commercial paper rate) over (y) the sum of (i) the aggregate, cumulative amount of Realized Losses experienced with respect to the related Pool(s) since their sale by the Seller reduced by any amounts described in clause (Y) of Section 9(e) hereof which have previously been applied in respect of such Realized Losses, (ii) the aggregate, cumulative amount of Reserve Release Amounts distributed to the MCA Companies on all prior Distribution Dates and (iii) any amount described in the second sentence of Section 9(b) hereof which are paid to the MCA Companies. Reserve Deposit: With respect to the Accumulation Pool or any Securitized Loan Pool, on any Distribution Date, the lesser of (x) the related Excess Servicing for such Distribution Date or (y) any related Reserve Shortfall for such Distribution Date. Residual Excess Servicing: With respect to any Securitized Loan Pools, as of any Distribution Date an amount equal to the Remaining Excess Servicing, if any, for such Distribution Date plus the aggregate Reserve Release Amount, if any, for such Distribution Date plus any prepayment fees collected for such Distribution Date. Reserve Release Amount: As of any Distribution Date and with respect to any Securitized Loan Pool, the excess of (x) the related Reserve Amount on such Distribution Date, after taking into account all credits to, and deductions therefrom on such Distribution Date over (y) the related Reserve Requirement for such Distribution Date. Reserve Requirement: With respect to any Securitized Loan Pool and Distribution Date, the required amount of Reserves for such Distribution Date. In no event shall the level of the Reserve Requirement exceed the level that would be required by the related Credit Enhancer, if the MCA Companies were to do a stand-alone transaction. Reserves: The amount of any first-loss protection maintained with respect to any Pool or group of Pools. Reserve Shortfall: With respect to any Securitized Loan Pool, on any Distribution Date, any excess of (x) the related Reserve Requirement for such Distribution Date over (y) the related Reserve Amount immediately prior to such Distribution Date. 10 14 Second Mortgage Loan: A Mortgage Loan which constitutes a second priority mortgage lien with respect to the related Mortgaged Property. Securitization: A periodic securitization of Mortgage Loans by the Buyer. Securitization Statement: Each statement delivered to the MCA Companies by the Buyer at the time of establishment of an Advanta Trust containing Mortgage Loans sold by the MCA Companies hereunder, which statement shall set forth the final Reserve Requirement for the related Securitized Loan Pool, the Pass-Through Rate(s) applicable to such Securitized Loan Pool and related information. Securitized Loan Pool: Any group of Mortgage Loans sold by the Seller hereunder and held by a particular Advanta Trust, whether acquired initially by such Advanta Trust or subsequently acquired through "pre-funded" purchases. A Securitized Loan Pool may represent any number of Pools and includes Identified Securitized Loan Pools. Seller: Seller and its affiliates, Mortgage Corporation of America and MCA Mortgage Corporation. Seller's Applicable Guidelines: The guidelines used by the Seller to underwrite Mortgage Loans. Seller Information: As defined in Section 5(d) hereof. Seller's Transaction Expenses: With respect to any Pool, the MCA Companies' pro rata share (based upon the relative aggregate principal balances of the Mortgage Loans sold by the Seller to the total aggregate principal balance for all mortgage loans) of the Issuance Costs, which shall be a minimum of 0.60% times the aggregate Principal Balance of the related Mortgage Loans. Senior Lien: With respect to any Second Mortgage Loan, the mortgage loan relating to the corresponding Mortgaged Property having a first priority lien. Servicing Advance: Any out-of-pocket costs or expenses incurred by the Master Servicer in connection with the performance of its servicing obligations, including, but not limited to, preservation expenses, payments for taxes, insurance and payments made to Senior Lien holders, enforcement and judicial proceedings, including foreclosures, the management and liquidation of "REO" Properties, etc. Servicing Fee: The servicing fees payable to the Master Servicer, as set forth in the Loan Servicing Agreement dated November 1, 1996 among the Master Servicer, the Seller and Mortgage Corporation of America. Servicer will be entitled to retain additional servicing compensation for incidental fees or charges provided for in the applicable Note and/or Mortgage that are customarily collected from the Mortgagor by the Servicer in the ordinary course of performing its obligations herein, including, but not limited to, late payment charges, assumption, processing charges and assumption fees, modification charges, demand fees, insufficient funds fees, reconveyance charges, tax service fees, fees for statement of account or payoff of Mortgage Loans. Synthetic Residual Value: With respect to any Identified Securitized Loan Pool, a lump-sum, dollar amount, equal to the present value of the related expected 11 15 Residual Excess Servicing on each future Distribution Date determined by the Buyer as set forth on the related Securitization Statement. Total Loan-to-Value Ratio: With respect to any Mortgage Loan, the percentage equal to the sum of (i) the Original Principal Amount of the related Note and (ii) the remaining principal balance(s), as of origination of such Mortgage Loan, of all other note(s) secured by liens, whether senior or subordinate, on the related Mortgaged Property, divided by the Appraised Value of the related Mortgaged Property. Trustee: The trustee designated by the Buyer. Unamortized Initial Premium Amount: With respect to any Identified Securitized Loan Pool and any Distribution Date, the original related Initial Premium Amount minus (i) the aggregate, cumulative amount of the related Residual Excess Servicing applied in respect of the amortization thereof on previous Distribution Dates pursuant to Section 9(d) hereof and minus (ii) the aggregate, cumulative amounts applied in respect of the amounts described in clause (Z) of Section 9(e) hereof on previous Distribution Dates). Underwriter: Collectively, any underwriters or placement agents engaged or consulted by the Buyer in connection with the sale of mortgage- backed securities by an Advanta Trust. Whole Loan Agreement: The Master Loan Purchase Agreement dated as of July 1, 1996 among the parties hereto. Whole Loan Purchases: A pool of Mortgage Loans purchased pursuant to a Whole Loan Agreement. Section 2. Interest Calculations. All calculations of interest hereunder, including, without limitation, calculations of interest at the Mortgage Loan Rate, which are made in respect of the Principal Balance of a Mortgage Loan shall be made on a daily basis using a 360-day year, except to the extent that any different convention (e.g., "actual/360", "actual/365") is used with respect to any securities issued by an Advanta Trust. Section 3. Purchases and Sales. (a) Purchases and sales hereunder shall generally be governed by the terms of the Master Commitment. (b) Purchases of Qualifying Loans under this Agreement shall occur no more frequently than monthly, in minimal Pool sizes of $7,500,000 aggregate Principal Balance. Offers of Pools, document review, servicing transfer and settlement shall initially be performed by following the same procedures set forth in the Whole Loan Agreement, as such procedures may be revised from time to time by the Buyer. (c) To consummate a proposed purchase the MCA Companies and the Buyer on behalf of the Conduit Acquisition Trust shall, on or prior to the related Closing Date, execute and deliver a Conveyance Agreement with respect to the related Pool in substantially the form of Exhibit A hereto. On the related Closing Date the Buyer shall cause the Net Purchase Price for the related Pool to be wired to the MCA Companies in immediately available funds. (d) In connection with each purchase of a Pool the Conduit Acquisition Trust shall, pursuant to the related Conveyance Agreement, purchase all of the Seller's right, title and interest to each Mortgage Loan, including all interest accruing thereon and 12 16 principal received on or with respect to such Mortgage Loan on or after the related Cut-Off Date. (e) The MCA Companies agree to cause their records relating to the Mortgage Loans to indicate that the Mortgage Loans have been sold to the Conduit Acquisition Trust. The MCA Companies will treat each sale of a Pool as a sale for generally accepted accounting purposes, will reflect such sale on its accounting records, and shall furnish to the Buyer, in connection with the execution of each Conveyance Agreement an officer's certificate certifying to the MCA Companies' treatment of the transactions contemplated hereby as sales, and such other matters as the Buyer may reasonably request. (f) Prior to the purchase of the first Pool purchased hereunder the MCA Companies shall cause to be provided to the Buyer and the Trustee an opinion of counsel in a form approved by the Buyer (and attached hereto as Exhibit F) relating to the execution and delivery of this Agreement by the MCA Companies. In connection with each subsequent execution of a Conveyance Agreement, the MCA Companies shall provide to the Buyer and the Trustee an officer's certificate in a form approved by the Buyer as to certain legal and factual matters with respect to such sale. (g) The MCA Companies shall cause at least 10% (by number of loans) of each Pool to be reviewed in accordance with quality control procedures which are standard in the residential mortgage loan industry. Such review may be undertaken by employees of the MCA Companies or of the Buyer or its affiliates. Copies of all quality control review reports shall be furnished to the Buyer on request. Section 4. Fees and Expenses. (a) On each Distribution Date the Buyer shall receive a monthly fee ("Monthly Fee"), with respect to each Identified Securitized Loan Pool, from cashflows on the related Pool, equal to one-twelfth of 60 basis points times the Applicable Pool Balance as of the first day of the prior calendar month provided, that, such Monthly Fee shall equal one-twelfth of 35 basis points times the Applicable Pool Balance beginning on the Distribution Date following the calendar month in which the Buyer distributes the final Deferred Premium Payment with respect to an Identified Securitized Loan Pool to the Seller. The Monthly Fee with respect to each Securitized Loan Pool, other than the Identified Securitized Loan Pool, shall also equal one-twelfth of 35 basis points times the Applicable Pool Balance as of the first day of the prior calendar month. Any amounts due to the Buyer or to the Master Servicer hereunder or under the Whole Loan Agreement, including, but not limited, to the fees described above, and the Pair-Off Fee, and any hedging costs, and not paid when due, shall remain payable by the MCA Companies. Such amounts shall bear interest at 1% and may be funded from any Remaining Excess Servicing or Deferred Premium Payments otherwise due to the MCA Companies, or offset against any amounts otherwise payable to the MCA Companies by the Buyer or the Master Servicer. (b) The MCA Companies shall pay up to $25,000 of the fees and expenses of Dewey Ballantine incurred in connection with the preparation of this Agreement, at the time of execution and delivery of this Agreement. 13 17 (c) All expenses of recording assignments of mortgage shall be paid by the MCA Companies, provided that MCA shall be liable for no more than one such recording fee per Mortgage Loan. Section 5. Establishment of Advanta Trusts. (a) In connection with the creation of an Advanta Trust the Buyer may cause the Conduit Acquisition Trust to convey to such Advanta Trust any or all of the Mortgage Loans then held as the Accumulation Pool. In connection with any such conveyance to an Advanta Trust the related Pass-Through Rate(s) and Reserve Requirement applicable to such Mortgage Loans shall be established by the Buyer, the related Underwriter(s) and the related Credit Enhancer. Any such Mortgage Loan so conveyed to an Advanta Trust shall cease to be a "Mortgage Loan" within the meaning of this Agreement and the rights relating thereto shall thenceforth be as provided in the related Advanta Pooling Agreement. The MCA Companies shall pay the applicable Bond Pricing Discount and the applicable Other Expenses at the time of the establishment of the related Advanta Trust (which amounts may be offset against any amounts due to the MCA Companies). In connection with the conveyance of any Mortgage Loans to an Advanta Trust the Buyer shall furnish the MCA Companies with the related Securitization Statement. If the inclusion in an Advanta Trust of Mortgage Loans sold hereby would adversely impact the overall Reserve Requirements or pricing relating to such Advanta Trust, the Buyer, after consulting with the MCA Companies, may segregate such Mortgage Loans as a separate pool and/or "REMIC" in such Advanta Trust, and (but shall not be required to) issue specified classes of securities with respect to such Mortgage Loans. The parties acknowledge their expectation that no such separate treatment should be necessary with respect to Mortgage Loans which are Qualifying Loans. Each such separate pool and/or "REMIC" will have its own Pass-Through Rate and its own Reserve Requirement. Any additional costs relating to such a structure shall constitute "Seller's Transaction Expenses" payable by the MCA Companies. The MCA Companies shall have the right, prior to the "cut-off date" for the related Advanta Trust, to substitute for any Mortgage Loan described in the preceding paragraph a replacement Mortgage Loan of similar or better characteristics and unpaid Principal Balance of equal or lesser amount reasonably acceptable to the Buyer and which is eligible for inclusion in such Advanta Trust. (b) If, in connection with the establishment of an Advanta Trust, any Mortgage Loan in a Securitized Loan Pool is 30 or more days contractually delinquent and such Mortgage Loan is determined by the Buyer to be ineligible for inclusion in such Advanta Trust, the Buyer shall promptly inform the MCA Companies, and the MCA Companies shall have the option to repurchase such Mortgage Loan in accordance with the provisions of this Section 5 prior to the closing date of such Advanta Trust, to substitute for such Mortgage Loan a replacement Mortgage Loan of similar or better characteristics and with an unpaid Principal Balance of equal or lesser amount reasonably acceptable to the Buyer and which is eligible for inclusion in such Advanta Trust, or to have such ineligible Mortgage Loan remain in the Accumulation Pool. The MCA Companies shall have the further right, but not the obligation to repurchase any Mortgage Loan in an Accumulation Pool which is 30 or more days contractually delinquent. 14 18 In connection with any such repurchase the MCA Companies shall deliver the Repurchase Price to the Buyer. In connection with any such substitution the MCA Companies shall deliver the substitute Mortgage Loan and the items which constitute the related Mortgage File to the Trustee, and shall deliver to the Buyer the excess of (x) the outstanding Principal Balance of the replaced Mortgage Loan over (y) the outstanding Principal Balance of the substitute Mortgage. In connection with any such repurchase or substitution the Buyer shall cause the Conduit Acquisition Trust to reconvey the repurchased or replaced Mortgage Loan to the MCA Companies in the manner described in Section 6(b) hereof. (c) Upon the request of the Buyer, the MCA Companies shall supply to the Buyer access to, and information regarding, the MCA Companies, the Mortgage Loans, the Sub-Servicer's underwriting practices, financial condition and related matters. The MCA Companies hereby represent and warrant to the Buyer that any such information so furnished by the MCA Companies ("Seller Information") shall be true, correct and complete in all material respects. If requested by the Buyer or Underwriter's counsel, the MCA Companies shall cause a nationally recognized accounting firm to provide the Buyer with a letter in a form acceptable to Buyer with respect to any Seller Information. The parties acknowledge their expectation that, to the extent that the Mortgage Loans have been sold servicing-released, no accountant's letter is expected to be required. The MCA Companies agree to comply with any reasonable regulatory and quality control requirements requested by the Buyer based upon the Buyer's review of any Seller Information and other review of the MCA Companies' origination activities. The MCA Companies shall indemnify and hold the Buyer harmless from any losses suffered by the Buyer and its affiliates as a result of (i) any misstatement in, or omission from, any Seller Information or (ii) any breach by the MCA Companies of any representation or warranty set forth in Section 7(a) hereof. The Buyer shall indemnify and hold the MCA Companies and its affiliates harmless from any losses suffered by the MCA Companies as a result of (i) any misstatement in, or omission from any Buyer Information or (ii) any breach by the Buyer of any representation or warranty set forth in Section 7(b) hereof. "Buyer Information" means any information in any Offering Document other than Seller Information. (d) Each MCA Company agrees to cooperate reasonably and in good faith with the Buyer, its attorneys and accountants, Credit Enhancers, Underwriters and Rating Agencies in connection with the establishment of each Advanta Trust. (e) The Buyer acknowledges to the MCA Companies that it is the Buyer's present intent to sponsor Advanta Trusts quarterly; the Buyer shall advise the MCA Companies of any change in such intent as soon as possible. (f) The Seller acknowledges that, to the extent it, at or prior to the time of the formation of a Securitized Loan Pool, elects not to repurchase any Mortgage Loan pursuant to its repurchase options set forth in this Section 5 or as required under Section 6, the Reserve requirements and/or the Initial Reserve Amount applicable to the related Securitized Loan Pool is likely to increase substantially. Section 6. Defective Mortgage Files; Repurchase of Mortgage Loans. (a) If the MCA Companies are informed by the Trustee, the Master Servicer or the Buyer that any document constituting a part of a Mortgage File has not been executed or received or is unrelated to the Mortgage Loans identified in the related Mortgage Loan Schedule, the MCA 15 19 Companies shall have a period of 15 days after such notice within which to correct or cure any such defect. (b) If the Trustee, the Master Servicer or the Buyer has notified the MCA Companies of a defect in a Mortgage File and the defect remains uncured to the satisfaction of the Buyer and, in the opinion of the Buyer, such defect materially and adversely affects the value, collectibility or marketability of the related Mortgage Loan, the MCA Companies shall, not later than 30 days after receipt of notice of such defect, and provided that such defect has not been cured to the Buyer's reasonable satisfaction, repurchase the related Mortgage Loan (including any property acquired in respect thereof and any insurance policy or insurance proceeds with respect thereto) at a price equal to the Repurchase Price, which shall be accomplished by delivery of such amount by the MCA Companies to the Buyer. Upon receipt by the Buyer of the Repurchase Price for a Defective Mortgage Loan, the Buyer shall cause the Conduit Acquisition Trust to execute and deliver such instrument of transfer or assignment presented to it by the MCA Companies, in each case without recourse, as shall be necessary to vest in the MCA Companies legal and beneficial ownership of such repurchased Defective Mortgage Loan (including any property acquired in respect thereof or insurance policy or insurance proceeds with respect thereto). (c) In the event that the MCA Companies fail, within the time periods specified in this Agreement, to cure any material defect in a Mortgage File, the Buyer, in addition to any rights it may have under paragraph (b) above, shall have the right thereafter to receive any Residual Excess Servicing otherwise payable to the MCA Companies, to the extent of any loss suffered by the Buyer. (d) The remedies described in paragraphs (b) and (c) above, together with all other remedies the Buyer may have at law or in equity, shall survive any resignation or termination of Advanta Mortgage Corp. USA as Master Servicer. Section 7. Representations and Warranties Regarding the MCA Companies, the Buyer and the Master Servicer. (a) Each MCA Company hereby represents and warrants to the Buyer, the Master Servicer and their respective successors and assigns that, as of the date hereof: (i) Each MCA Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan and has all licenses and qualifications necessary to carry on its business as now being conducted and to perform its obligations hereunder; each MCA Company has the power and authority to execute and deliver this Agreement or the Related Conduit Agreements and to perform its obligations in accordance herewith; the execution, delivery and performance of this Agreement (including any Conveyance Agreement and any other instruments of transfer to be delivered pursuant to this Agreement or the Related Conduit Agreements) by each MCA Company and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and do not violate the organization documents of any MCA Companies, contravene or violate any law or regulation applicable to any MCA Companies or contravene, violate or result in any breach of any provision of, or constitute a default under, or result in the imposition of any lien on any assets of any MCA Companies pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which any MCA Companies is a party or which purports to be binding upon Seller or any of Seller's assets; this Agreement or the Related Conduit Agreements evidence the valid and binding 16 20 obligation of each MCA Company enforceable against each MCA Company in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or the application of equitable principles in any proceeding, whether at law or in equity; (ii) All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency, that are necessary in connection with the execution and delivery by the MCA Companies of this Agreement or the Related Conduit Agreements, have been duly taken, given or obtained, as the case may be, are in full force and effect, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize the consummation of the transactions contemplated by this Agreement on the part of the MCA Companies and the performance by the MCA Companies of their respective obligations under this Agreement or the Related Conduit Agreements; (iii) There is no action, suit, proceeding or investigation pending or, to the best of the MCA Companies' knowledge, threatened against any MCA Company which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of any MCA Company or in any material impairment of the right or ability of any MCA Company to carry on its business substantially as now conducted, or in any material liability on the part of any MCA Company or which would draw into question the validity of this Agreement or the Related Conduit Agreements or the Mortgage Loans or of any action taken or to be taken in connection with the obligations of any MCA Company contemplated herein, or which would be likely to impair the ability of any MCA Company to perform under the terms of this Agreement or the Related Conduit Agreements; (iv) Each MCA Company is not in default with respect to any mortgage, indenture, contract, agreement or other undertaking to which such MCA Company is a party or which purports to be binding upon Seller or any of Seller's assets, or with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of any MCA Company or its properties or might have consequences that would adversely affect its performance hereunder; (v) The transfer, assignment and conveyance of the Mortgage Loans by the MCA Companies pursuant to this Agreement or any Related Conduit Agreements are not subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction; (vi) All information supplied by the MCA Companies to the Buyer, the Master Servicer or the Trustee is true and correct in all material respects, and does not omit to state a material fact necessary to make the statements set forth in such information not misleading; and 17 21 (vii) The MCA Companies have a consolidated tangible net worth as determined in accordance with generally accepted accounting principles of at least $16 million. The representations and warranties set forth in this paragraph (a) shall survive the sale and assignment of the Mortgage Loans by the MCA Companies hereunder. Upon discovery of a material breach of any of the foregoing representations and warranties, the Buyer or the Master Servicer shall give prompt written notice to the MCA Companies. Within 30 days of the earlier of its discovery or its receipt of notice of breach, the MCA Companies shall cure such breach to the satisfaction of the Buyer. (b) The Buyer hereby represents and warrants to the MCA Companies and the Master Servicer that, as of the date hereof: (i) The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; the Buyer has the power and authority to execute and deliver this Agreement and to perform its obligations in accordance herewith; the execution, delivery and performance of this Agreement (including any Conveyance Agreement executed by the Buyer on behalf of the Conduit Acquisition Trust and any other instruments of transfer to be delivered pursuant to this Agreement or the Related Conduit Agreement) by the Buyer and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and do not violate the organization documents of the Buyer, contravene or violate any law or regulation applicable to the Buyer or contravene, violate or result in any breach of any provision of, or constitute a default under, or result in the imposition of any lien on any assets of the Buyer pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which the Buyer is a party or which purports to be binding upon Buyer or any of Buyer's assets; this Agreement and the Related Conduit Agreement evidence the valid and binding obligation of the Buyer enforceable against the Buyer in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or the application of equitable principles in any proceeding, whether at law or in equity; (ii) All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency, that are necessary in connection with the execution and delivery by the Buyer of this Agreement and the Related Conduit Agreement, have been duly taken, given or obtained, as the case may be, are in full force and effect, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize the consummation of the transactions contemplated by this Agreement and the Related Conduit Agreement on the part of the Buyer and the performance by the Buyer of its obligations under this Agreement and the Related Conduit Agreements; (iii) There is no action, suit, proceeding or investigation pending or, to the best of the Buyer's knowledge, threatened against the Buyer which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of the Buyer or 18 22 in any material impairment of the right or ability of the Buyer to carry on its business substantially as now conducted, or in any material liability on the part of the Buyer or which would draw into question the validity of this Agreement and the Related Conduit Agreements or of any action taken or to be taken in connection with the obligations of the Buyer contemplated herein, or which would be likely to impair the ability of the Buyer to perform under the terms of this Agreement and the Related Conduit Agreements; and (iv) The Buyer is not in default with respect to any mortgage, indenture, contract, agreement or other undertaking to which the Buyer is a party or which purports to be binding upon Buyer or any of Buyer's assets, or with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of the Buyer or its properties or might have consequences that would adversely affect its performance hereunder. The representations and warranties set forth in this paragraph (b) shall survive the sale and assignment of the Mortgage Loans by the MCA Companies hereunder. Upon discovery of a breach of any of the foregoing representations and warranties which materially and adversely affects the interests of the MCA Companies, the MCA Companies shall give prompt written notice to the Buyer. Within 30 days of its discovery or its receipt of notice of breach, the Buyer shall cure such breach in all material respects. (c) The Master Servicer hereby represents and warrants to the Buyer and the MCA Companies that, as of the date hereof: (i) The Master Servicer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all licenses and qualifications necessary to carry on its business as now being conducted and to perform its obligations hereunder; the Master Servicer has the power and authority to execute and deliver this Agreement and the Related Conduit Agreements to which it is a party and to perform its obligations in accordance herewith; the execution, delivery and performance of this Agreement and the Related Conduit Agreements to which it is a party and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and do not violate the organization documents of the Master Servicer, contravene or violate any law or regulation applicable to the Master Servicer or contravene, violate or result in any breach of any provision of, or constitute a default under, or result in the imposition of any lien on any assets of the Master Servicer pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which the Master Servicer is a party or which purports to be binding upon Master Servicer or any of Master Servicer's assets; this Agreement evidences the valid and binding obligation of the Master Servicer enforceable against the Master Servicer in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or the application of equitable principles in any proceeding, whether at law or in equity; (ii) All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency, that are necessary in connection with the execution and delivery by the Master Servicer of this Agreement and the Related Conduit 19 23 Agreements to which it is a party, have been duly taken, given or obtained, as the case may be, are in full force and effect, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize the consummation of the transactions contemplated by this Agreement and the Related Conduit Agreements to which it is a party on the part of the Master Servicer and the performance by the Master Servicer of its obligations under this Agreement and the Related Conduit Agreements to which it is a party; (iii) There is no action, suit, proceeding or investigation pending or, to the best of the Master Servicer's knowledge, threatened against the Master Servicer which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of the Master Servicer or in any material impairment of the right or ability of the Master Servicer to carry on its business substantially as now conducted, or in any material liability on the part of the Master Servicer or which would draw into question the validity of this Agreement and the Related Conduit Agreements to which it is a party or of any action taken or to be taken in connection with the obligations of the Master Servicer contemplated herein, or which would be likely to impair the ability of the Master Servicer to perform under the terms of this Agreement and the Related Conduit Agreements to which it is a party; and (iv) The Master Servicer is not in default with respect to any mortgage, indenture, contract, agreement or other undertaking to which the Master Servicer is a party or which purports to be binding upon Master Servicer or any of Master Servicer's assets, or with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of the Master Servicer or its properties or might have consequences that would adversely affect its performance hereunder. The representations and warranties set forth in this paragraph (c) shall survive the sale and assignment of the Mortgage Loans by the MCA Companies hereunder. Upon discovery of a breach of any of the foregoing representations and warranties which materially and adversely affects the interests of the MCA Companies, the MCA Companies shall give prompt written notice to the Master Servicer. Within 30 days of its discovery or its receipt of notice of breach, the Master Servicer shall cure such breach in all material respects. Section 8. Representations and Warranties of the MCA Companies Regarding the Mortgage Loans. (a) Set forth in Exhibit E hereto is a listing of representations and warranties which will be deemed to have been made by the MCA Companies to the Buyer, the Master Servicer and the Trustee in connection with each purchase of a Pool with respect to the Mortgage Loans in such Pool. In addition, a Conveyance Agreement may, with respect to the Mortgage Loans in the related Pool, delete or modify any of such representations and warranties, or may add additional representations and warranties ("Additional Representations and Warranties"). The representations and warranties listed in Exhibit E hereto, together with any Additional Representations and Warranties, are the "Representations and Warranties". It is understood and agreed that the Representations and Warranties shall survive the sale and assignment of the Mortgage Loans to the Conduit Acquisition Trust and by the Conduit Acquisition Trust to an Advanta Trust. Upon discovery by any MCA Company, the Master Servicer or the Buyer of a breach of any of the Representations and Warranties (without regard 20 24 to any limitation set forth in such Representation or Warranty concerning the knowledge of any MCA Company as to the facts stated therein so long as the Buyer is required to repurchase the related Mortgage Loan or Mortgage Loans pursuant to the related Advanta Pooling Agreement without regard to any similar limitation), which breach, in the opinion of the Buyer, materially and adversely affects the value, collectibility or marketability of the related Mortgage Loan or Mortgage Loans, the party discovering such breach shall give prompt written notice to the other party and the MCA Companies shall be required to take the remedial actions required by Section 8(c) hereof within the time periods required pursuant thereto. (b) Within 30 days of the earlier of its discovery or its receipt of notice of breach, the MCA Companies shall use all reasonable efforts to cure such breach to the reasonable satisfaction of the Buyer. Unless, prior to the expiration of such 30 day period, such breach has been cured or otherwise does not exist or continue to exist, the MCA Companies shall repurchase such Mortgage Loan (or, in the case of a Representation and Warranty of the nature specified in clauses (xx) and (xli), repurchase Mortgage Loans such that, after giving effect to such repurchase, the related Representation and Warranty would be complied with) (including any property acquired in respect thereof and any insurance policy or insurance proceeds with respect thereto) in the same manner and subject to the same conditions as set forth in Section 6 hereof. Upon making any such repurchase, the MCA Companies shall be entitled to receive an instrument of assignment or transfer from the Trustee, without recourse to the Buyer or the Trustee, to the same extent as set forth in Section 6 hereof with respect to the repurchase of Defective Mortgage Loans under that Section. (c) In the event that the MCA Companies fail, within the time periods specified in this Agreement, to cure any material breach of a Representation and Warranty, the Buyer shall have the right thereafter to receive any Residual Excess Servicing otherwise payable to the MCA Companies, to the extent of any loss suffered by the Buyer. (d) The remedies described in paragraphs (b) and (c) above, together with all other remedies the Buyer may have at law or in equity, shall survive any resignation or termination of Advanta Mortgage Corp. USA as Master Servicer. Section 9. Application of Residual Excess Servicing. (a) On each Distribution Date, all available Excess Servicing with respect to the Accumulation Pool shall be applied as a Reserve Deposit or to the amount payable by the MCA Companies, if any, described in the last paragraph in Section 4(a) hereof. (b) At the time any Pools are transferred from the Accumulation Pool to an Advanta Trust (thereby becoming all or part of a Securitized Loan Pool) the Reserve Amount then relating to such Pool shall be credited against the initial Reserve Amount for the related Securitized Loan Pool. If the initial Reserve Amount exceeds the initial Reserve Requirement applicable to such Securitized Loan Pool (i.e., the amount of any "initial deposit" at securitization) the amount of such excess shall be paid by the Buyer to the MCA Companies. Conversely, if the initial Reserve Requirement for such Securitized Loan Pool exceeds the actual Reserve Amount for the related Pools the amount of such shortfall shall be paid by the MCA Companies to the Buyer as an Additional initial Reserve Amount for such Securitized Loan Pool. (c) On the closing date of the related Advanta Securitization, (i) the Aggregate Overadvance Amount then outstanding shall become immediately due and payable by the Seller and (ii) the Buyer shall pay to the Seller the Initial Premium Payment with respect 21 25 to the Identified Securitized Loan Pools; such amounts may be offset as a single net amount. Any Residual Excess Servicing relating to a Securitized Loan Pool, other than an Identified Securitized Loan Pool, shall be paid by the Buyer to the Sponsor within five Business Days of each Distribution Date, subject to offset for any amounts due to the Buyer or to the Master Servicer from the Seller, as provided in paragraph (e) below. (d) On each Distribution Date, 100% of the Residual Excess Servicing with respect to any individual Identified Securitized Loan Pool shall first be applied, to the extent of the related Initial Premium Amortization Current Amount, as a reduction in the related Unamortized Initial Premium Amount. On each Distribution Date, the Master Servicer will distribute to the Seller, on behalf of the Buyer, the Deferred Premium Payment if any, then due. (e) Notwithstanding the foregoing, the Master Servicer shall be entitled to withhold from any distribution of any Residual Excess Servicing (with respect to any Securitized Loan Pool which is not an Identified Securitized Loan Pool) or any Deferred Premium Payment (with respect to any Identified Securitized Loan Pool) and pay over to the Buyer, the following amounts: (X) any amounts described in the second paragraph of Section 4(a) hereof; (Y) the amount, if any, by which (i) the aggregate, cumulative amount of Realized Losses with respect to any other Securitized Loan Pool exceeds (ii) the aggregate, cumulative amount of Reserve Deposits with respect to such other Securitized Loan Pool; and (Z) the amount of any Unamortized Initial Premium Amount with respect to any other Identified Securitized Loan Pool which remains outstanding after 48 months. (f) The Buyer's obligation to pay the Residual Excess Servicing and the Deferred Premium Payments to the Seller will be a secured corporate obligation of the Buyer, and will not represent any direct ownership interest in any Mortgage Loans. (g) The Master Servicer shall furnish the statements described in Section 10 hereto to the Sub-Servicer, by facsimile on each Distribution Date; such statements shall, inter alia, contain information relating to the Residual Excess Servicing and the Deferred Premium Payments for such Distribution Date. The Buyer and the Master Servicer shall permit the inspection, on reasonable notice, by any MCA Company or their respective designees of all of the Buyer's and the Master Servicer's books and records relating to the Mortgage Loans and the Residual Excess Servicing. All calculations made by the Buyer or the Master Servicer shall be conclusive in the absence of manifest error. Section 10. Distribution Date Statement. (a) The Master Servicer shall, not later than each Distribution Date, furnish in writing to the MCA Companies and the Buyer a statement setting forth the following information with respect to the Accumulation Pool and each Securitized Loan Pool: (i) the total amount of payments in respect of or allocable to interest on the Mortgage Loans received or deemed to have been received from the related 22 26 Mortgagors by the Master Servicer during the prior calendar month (including any net income from REO Properties received during the prior calendar month); (ii) the aggregate of all Principal Payments and Principal Prepayments received or deemed to have been received from the related Mortgagors by the Master Servicer during the prior calendar month; (iii) the total amount of recoveries of delinquent principal and interest payments received during the prior calendar month; (iv) the total amount of prepayment penalties received during the prior calendar month; (v) the aggregate of any Net Insurance Proceeds received by the Master Servicer during the prior calendar month; (vi) the aggregate of any Net Liquidation Proceeds received by the Master Servicer during the prior calendar month; (vii) the total amount of Compensating Interest payments to be paid by the Master Servicer for such Distribution Date; (viii) the aggregate Repurchase Prices for any Mortgage Loans which the MCA Companies are required to repurchase on or prior to such Distribution Date pursuant to Sections 5(b), 5(c), 6(b) or 8(c) hereof; (ix) the aggregate amount of Advances made by the Master Servicer during or with respect to the prior calendar month; (x) the related monthly Servicing Fee; (xi) the aggregate amount of Advances reimbursable to the Master Servicer for such Distribution Date and not previously reimbursed; (xii) the weighted average Mortgage Loan Rate as of the last day of the prior calendar month (separately for ARMs and Fixed Rate Loans); (xiii) the related Reserve Amount, Reserve Requirement, Residual Excess Servicing as of such Distribution Date; and (xiv) the book value of any REO Properties as of the last day of the prior calendar month; and (xv) the Residual Excess Servicing for each Securitized Loan Pool, other than an Identified Securitized Loan Pool, the Residual Excess Servicing for each Identified Securitized Loan Pool, the Deferred Premium Payment, the Initial Premium Amortization Current Amount, the Carry-Forward Amount for each Pool, the Initial Premium Amortization Current Amounts and the Unamortized Initial Premium Amounts. (b) In addition, on each Distribution Date the Master Servicer will furnish by telecopy to the Buyer and the Sub-Servicer, the following information with respect to the Mortgage Loans in the Accumulation Pool and each Securitized Loan Pool as of the last day of the related prior calendar month: 23 27 (i) the total number of Mortgage Loans and the aggregate Principal Balances thereof, together with the number, aggregate principal balances of such Mortgage Loans and the percentage of the aggregate Principal Balances of such Mortgage Loans to the aggregate Principal Balance of all Mortgage Loans (a) 30-59 delinquent, (b) 60-89 days delinquent and (c) 90 or more days delinquent; (ii) the number, aggregate Principal Balances of all Mortgage Loans and percentage of the aggregate Principal Balances of such Mortgage Loans to the aggregate Principal Balance of all Mortgage Loans in foreclosure proceedings (and whether any such Mortgage Loans are also included in any of the statistics described in the foregoing clause (i)); (iii) the number, aggregate Principal Balances of all Mortgage Loans and percentage of the aggregate Principal Balances of such Mortgage Loans to the aggregate Principal Balance of all Mortgage Loans relating to Mortgagors in bankruptcy proceedings (and whether any such Mortgage Loans are also included in any of the statistics described in the foregoing clause (i)); and (iv) the number, aggregate Principal Balances of all Mortgage Loans and percentage of the aggregate Principal Balances of such Mortgage Loans to the aggregate Principal Balance of all Mortgage Loans relating to REO Properties (and whether any such Mortgage Loans are also included in any of the statistics described in the foregoing clause (i)). Section 11. Merger or Consolidation of MCA. Any corporation or other entity (i) into which any MCA Company may be merged or consolidated, (ii) which may result from any merger, conversion or consolidation to which any MCA Company shall be a party, or (iii) which may succeed to all or substantially all of the business of any MCA Company , which corporation or other entity shall, in any case where an assumption shall not be effected by operation of law, execute an agreement of assumption to perform every obligation of any MCA Company under this Agreement, shall be the successor to any MCA Company hereunder without the execution or filing of any document or any further act by any of the parties to this Agreement, except that if any MCA Company in any of the foregoing cases is not the surviving entity, then the surviving entity shall execute and deliver to the Buyer, the Master Servicer and to the Trustee an agreement of assumption to perform every obligation of such MCA Company hereunder. Section 12. Servicing. (a) The Master Servicer agrees to service, the Mortgage Loans sold by the Seller to the Buyer in accordance with Accepted Servicing Practices, but without regard to: (i) any relationship that Master Servicer or any of its affiliates may have with any Borrower or affiliates or manager thereof, (ii) Master Servicer's obligations to make advances or to incur servicing expenses with respect to the Mortgage Loans, or (iii) the Master Servicer's right to receive compensation for its services hereunder. Such servicing standards and requirements shall, subject to the requirements of paragraph (d) below, include (i) the making of Advances, (ii) the advancing of Compensating Interest to be reimbursed by the Residual Excess Servicings due to the Seller and (iii) the disposition of REO Properties within 24 months of the taking of title. (b) Subject to the provisions of this Section 12, the Master Servicer shall have full power and authority to do and cause to be done any and all things in connection with the servicing and administration of the Mortgage Loans which Master Servicer may reasonably deem necessary or desirable. The Seller will provide the Master Servicer, upon request, with 24 28 any powers of attorney necessary or appropriate to enable the Master Servicer to carry out its servicing and administrative duties under this Agreement. (c) The Master Servicer shall and is hereby authorized and empowered by the Seller to (i) execute and deliver, on behalf of the Seller, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge and all other comparable instruments, with respect to the Mortgage Loans and with respect to the Mortgaged Properties, (ii) consent to any modification of the terms of the Note if the effect of any such modification will not materially or adversely affect the security afforded by the related Mortgaged Property and such modification does not reduce the accrued interest or the interest rate payable by a Borrower without Seller's prior written consent, (iii) institute foreclosure proceedings or obtain a deed-in-lieu of foreclosure on behalf of the Seller, and (iv) take title in the name of the Seller to any Mortgaged Property upon such foreclosure or delivery of deed in lieu of foreclosure. (d) (i) From time to time as appropriate in the servicing of any Mortgage Loan, including without limitation, the payment in full of any Mortgage Loan, notification that payment in full will be escrowed, foreclosures or other comparable conversion of a mortgage or collection under any applicable insurance policy, the Seller, upon request of the Master Servicer, shall release or cause the release and delivery of the related Mortgage Loan Documents to the Master Servicer, if the Mortgage Loan Documents have not previously been delivered by the Seller to the Buyer. (ii) The Master Servicer shall promptly notify the Seller if a claim is made by a third party with respect to any Mortgage Loans and the Seller at its option may assume the defense of any such claim. The Seller shall, within ten (10) business days of receiving a statement of amounts advanced by the Master Servicer in connection with the defense of any such claim, reimburse the Master Servicer for all amounts advanced by it in connection with such defense, except to the extent that such claim is a result of the Master Servicer's negligent failure to service the Mortgage Loans in compliance with the terms of the Mortgage Loans or of this Agreement. Seller shall have no obligation to reimburse the Master Servicer for claims made with respect to any Mortgage Loans purchased by the Buyer. (e) Master Servicer, shall, at its own expense, maintain at all times, policies of fidelity, theft, forgery and errors and omissions insurance. Such policies shall be for responsible amounts with acceptable standard coverages in accordance with prudent mortgage industry standards. (f) The Servicing Expenses shall be as follows: (i) in the event no "lifetime" tax contracts are presently in force which are assignable to Master Servicer, Seller agrees to reimburse the Master Servicer for the cost of purchasing a tax contract for each Mortgage Loan in this category. (ii) Seller agrees to reimburse the Master Servicer and/or the Buyer for any recordation fees the Master Servicer and/or the Buyer incurs pursuant to this Agreement and the Related Conduit Agreements upon purchase of the Mortgage Loans from the Seller. (g) The Master Servicer hereby represents and warrants to, and covenants with the Seller that the Master Servicer will service the Mortgage Loans without distinction as to the identity of the Seller as the residual, first-loss holder of the Mortgage Loans, and on the same terms by which the Master Servicer services mortgage loans for which it or its affiliates are the residual, first-loss holder. 25 29 (h) The Master Servicer may retain sub-servicers to perform all or a part of its servicing duties hereunder, with the prior, written consent of the Seller (which consent shall not be unreasonably withheld), except that no retention of any sub-servicer shall release the Master Servicer from any liability to the Seller. (i) The Seller shall indemnify and hold the Master Servicer, its affiliates and each of their officers, directors, employees and agents harmless from and shall reimburse the Master Servicer or such other indemnified person for any losses, damages, deficiencies, claims, penalties, forfeitures, causes of action or expenses of any nature (including reasonable attorneys' fees) incurred by any of them which arise out of or result from: (i) the inaccuracy of any representation of the Seller contained in this Agreement or material breach of any warranty, covenant or agreement made or to be performed by the Seller pursuant to this Agreement; (ii) the failure of the originator of any Mortgage Loan to originate such Mortgage Loan in accordance with applicable law; (iii) the failure of any prior servicer to service the Mortgage Loan in accordance with applicable law and any agreement under which it may have serviced such Mortgage Loan; (iv) any matters that occurred prior to the transfer date for the servicing of the Mortgage Loan involved or any incomplete or incorrect Mortgage Loan data, records, or information provided in connection with the origination or prior servicing of any Mortgage Loans; (v) any matters resulting from the Seller's preventing, hampering or impeding Master Servicer's performance of its duties and responsibilities under this Agreement; or (vi) any litigation or claim with respect to the Mortgage Loans not arising out of, or resulting from, the Master Servicer's failure to observe the terms and covenants of the Mortgage Loans or this Agreement. Section 13. Authorized Representatives. The names of the officers of each MCA Company, the Master Servicer and of the Buyer who are authorized to give and receive notices, requests and instructions and to deliver certificates and documents in connection with this Agreement on behalf of each MCA Company, the Master Servicer and of the Buyer (the "Authorized Representatives") are set forth on Exhibit C, along with the specimen signature of each such officer. From time to time, each MCA Company, the Master Servicer or the Buyer may, by delivering to the others a revised exhibit, change the information previously given. Section 14. Notices. All demands, notices and communications relating to this Agreement shall be in writing and shall be deemed to have been duly given when received by one of the Authorized Representatives of the other party or parties at the address shown below, or such other address as may hereafter be furnished to the other party or parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee. 26 30 If to the MCA Companies: MCA Financial Corp. 23999 Northwestern Highway Suite 101 Southfield, MI 48075 Telecopy: 810-358-4639 If to the Seller: MCA Financial Corp. 23999 Northwestern Highway Suite 101 Southfield, MI 48075 Telecopy: 810-358-4639 with a copy to: Mortgage Corporation of America 23999 Northwestern Highway Suite 101 Southfield, MI 48075 Telecopy: 810-358-4639 If to the Buyer: Advanta Mortgage Conduit Services, Inc. 16875 West Bernardo Drive San Diego, California 92127 Attention: Loan Servicing Telecopy: (619) 674-3880 If to the Master Servicer: Advanta Mortgage Corp. USA 500 Office Center Drive Suite 400 Fort Washington, PA 19034 Telecopy: (215) 283-4280 The parties may, from time to time hereafter, by written notice, change addresses listed above. Section 15. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without regard to conflict of laws rules applied in the State of California. Section 16. Assignment. No party to this Agreement may assign its rights or delegate its obligations under this Agreement without the express written consent of the other parties, except as otherwise set forth in this Agreement. 27 31 Section 17. Counterparts. For the purpose of facilitating the execution of this Agreement and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original, and together shall constitute and be one and the same instrument. Section 18. Amendment. This Agreement may be amended from time to time by the MCA Companies, the Buyer and the Master Servicer only by a written instrument executed by such parties. Section 19. Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. Section 20. No Agency; No Partnership or Joint Venture. None of MCA Companies, the Master Servicer nor the Buyer is the agent or representative of one or both of the others, and nothing in this Agreement shall be construed to make any of the MCA Companies, the Master Servicer or the Buyer liable to any third party for services performed by it or for debts or claims accruing to it against the other party. Nothing contained herein nor the acts of the parties hereto shall be construed to create a partnership or joint venture between the Buyer, the Master Servicer and the MCA Companies. Section 21. Arbitration. Any dispute or disagreement under this Agreement shall be rendered by submitting such dispute or disagreement to an independent, mutually agreed upon arbitrator. The arbitrator shall conduct the arbitration in accordance with the Rules of the American Arbitration Association. If the parties are unable to select an arbitrator, the arbitrator shall be selected in accordance with the procedures of the American Arbitration Association. The decision of the arbitrator shall be final and binding upon the parties and non- appealable. Any decision and award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Any arbitration pursuant to this Agreement shall be conducted in Manhattan. Section 22. Confidentiality. No party hereto shall disclose to third parties, without the prior consent of the other parties, in writing, the existence of or the terms of this Agreement, except to its accountants and attorneys or as required by law. Section 23. Further Assurances. The parties hereto agree to cooperate reasonably and in good faith with one another in the performance of this Agreement. Section 24. Legal Costs. The parties hereto agree that in the event of arbitration or litigation between them, the non- prevailing party shall reimburse the prevailing party for all related legal fees and expenses of counsel incurred by the prevailing party. The prevailing party shall be the party in whose favor a final decision or judgment is entered, after the conclusion of any appeals or after the time during which an appeal may be taken shall have run. Payment of sums owning under this Section 24 shall be made within ten (10) days following the date that the right to receive payment shall be final. Section 25. Term. The buy-sell provisions of this Agreement shall terminate on the Commitment Termination Date, as defined in the Master Commitment; the other obligations of the parties set forth herein shall continue in full force and effect until the payment in full (or other liquidation) of the Mortgage Loans. 28 32 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers, all as of the day and year first above written. MCA FINANCIAL CORP., By: /s/ Lee P. Wells ---------------------------- Name: Lee P. Wells Title: President MORTGAGE CORPORATION OF AMERICA, By: /s/ Lee P. Wells ----------------------------- Name:Lee P. Wells Title:President MCA MORTGAGE CORPORATION, By: /s/ Lee P. Wells ------------------------------ Name:Lee P. Wells Title:President ADVANTA MORTGAGE CONDUIT SERVICES, INC., as Buyer By:/s/ Mark A. Casale ------------------------------- Name:Mark A. Casale Title:Vice President ADVANTA MORTGAGE CORP. USA, as a Buyer and as Master Servicer By:/s/ Mark A. Casale -------------------------------- Name:Mark A. Casale Title:Vice President 30 33 EXHIBIT A FORM OF CONVEYANCE AGREEMENT MCA Financial Corp., MCA Mortgage Corporation and Mortgage Corporation of America (the "Seller") and Conduit Acquisition Trust, as purchaser (the "Buyer"), pursuant to the Amended and Restated Securitization Access Agreement amended as of February 21, 1997 among the MCA Companies, Advanta Mortgage Conduit Services, Inc. and Advanta Mortgage Corp. USA (the "Securitization Access Agreement"), hereby confirm their understanding with respect to the sale by the Seller and the purchase by the Buyer of those Mortgage Loans listed on the attached Mortgage Loan Schedule (the "Purchased Mortgage Loans"). Conveyance of Purchased Mortgage Loans. The Seller, concurrently with the execution and delivery of this Conveyance Agreement, does hereby irrevocably transfer, assign, set over and otherwise convey to the Buyer, without recourse (except as otherwise explicitly provided for herein) all of its right, title and interest in and to the Purchased Mortgage Loans, including specifically, without limitation, the Mortgages, the Mortgage Files and all other documents, materials and properties appurtenant thereto and the Mortgage Notes, including all interest accruing thereon and principal received on or with respect to such Purchased Mortgage Loans on or after the related Cut-Off Date and all interest accruing thereon since the related Mortgagor's most recent paid-to date (or date of origination if no payment is yet due), together with all of its right title and interest in and to the proceeds received on or after the related Cut-Off Date of any related insurance policies on behalf of the Buyer. If the Seller cannot deliver the original Mortgage or mortgage assignment with evidence of recording thereon concurrently with the execution and delivery of this Conveyance Agreement solely because of a delay caused by the public recording office where such original Mortgage or mortgage assignment has been delivered for recordation, the Seller shall promptly deliver to the Buyer's designee on behalf of the Buyer such original Mortgage or mortgage assignment with evidence of recording indicated thereon upon receipt thereof from the public recording official, with a copy thereof delivered to the Master Servicer. The costs relating to the delivery of the documents specified in this Conveyance Agreement shall be borne by the MCA Companies. The MCA Companies hereby additionally certifies to the Buyer and the Master Servicer: (i) The representations and warranties of the MCA Companies contained in the Securitization Access Agreement and all related agreements, as of the date hereof, are true and correct, and the MCA Companies have complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the date hereof in connection with the sale of the Purchased Mortgage Loans. (ii) There are no actions, suits or proceedings pending or threatened against or affecting any MCA Company which if adversely determined, individually or in the aggregate, would be reasonably likely to adversely affect in any material way any MCA Company's obligations under any agreement to which any MCA Company is a party. No merger, liquidation, dissolution or bankruptcy of any MCA Company is pending or contemplated. A-1 34 (iii) No material adverse change in the condition, financial or otherwise, or properties of the Seller has occurred since the date of the Securitization Access Agreement. All terms and conditions of the Securitization Access Agreement are hereby incorporated herein provided that in the event of any conflict the provisions of this Conveyance Agreement shall control over the conflicting provisions of the Securitization Access Agreement. Terms capitalized herein and not defined herein shall have their respective meanings as set forth in the Securitization Access Agreement. A-2 35 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers, all as of the _____ day of _______________. MCA FINANCIAL CORP., By:____________________________ Title:_________________________ MORTGAGE CORPORATION OF AMERICA By:_____________________________ Title:__________________________ MCA MORTGAGE CORPORATION By:______________________________ Title:___________________________ CONDUIT ACQUISITION TRUST, By:_____________________________ Title:__________________________ Attachments A. Schedule of Purchased Mortgage Loans. B. Trustee's initial exception report. C. Seller's officer's certificate. D. Closing Statement and Recap Summary. A-3 36 Closing Statement and Funding Recap Summary MCA Pool: ____ Date Prepared: Sale Cut-Off Date: (Close of Business) Sale Funding Date: Pricing Date: Buyer: Advanta Mortgage Conduit Services, Inc. on behalf of Conduit Seller: Acquisition Trust ----------------- Originator: Servicer: Scheduled Servicing Transfer Date: Broker Number: ------------------ Advanta Mortgage Corp. USA Fixed Pool Identification Number: ARM Pool Identification Number: Investor Number: Number of Loans: Fixed Pool Balance: ARM Pool Balance: Total Pool Balance: Total Pool Balance Accrued interest from Cut-Off Date to Closing Initial Applicable Rate ___% Premium in Dollars % of Scheduled Prin. Bal.: 0.00000% Transaction/Initial Fees Expense: Transaction Expense Share: Placement Fee: Initial Reserve Amount: Initial Reserve Amt. (Fixed) Initial Reserve Amt. (ARM) Recordation Fees: Net Due Seller/Funding Transfer Amt.
A-4 37 EXHIBIT B CONTENTS OF MORTGAGE FILE 1. Collateral File (a) the original Note endorsed by the MCA Companies as follows: For value received, pay to the order of "Bankers Trust Company of California, N.A. as Custodian or Trustee", without recourse with all intervening endorsements showing a complete chain of title from the original lender to the MCA Companies; (b) the original Mortgage or Deed of Trust, with evidence of recording thereon, or, until the original Mortgage or Deed of Trust has been received from the applicable public recording office, a copy of the Mortgage or Deed of Trust certified by Seller to be a true and complete copy of the original Mortgage or Deed of Trust submitted for recording; (c) the Note riders signed as required; (d) a copy of the original unrecorded assignment of the Mortgage or Deed of Trust from Seller to "Bankers Trust Company of California, N.A. as Custodian or Trustee"; (e) documentation of all intervening mortgage assignments with evidence of recording thereon, sufficient to show a complete chain of assignment from the originator of the Mortgage Loan to the MCA Companies; (f) any and all assumption, modification, written assurance or substitution agreements, where the terms or provisions of a Mortgage or Note have been modified or such Mortgage or Note have been assumed; (g) the title insurance policy and preliminary policy, including all endorsements and/or riders, or until an original policy is received, a binding commitment to issue such a policy, which contains a legal description of the Mortgaged Property and which has been signed on the origination date by an authorized agent of the title insurer; 2. Servicing File (using the Advanta Stacking Order as of July 1, 1995) (a) any primary credit insurance policy or certificate of insurance; (b) all required hazard and flood insurance policies with respect to the Mortgage Property; (c) (the tax service contract, where applicable; (d) any Private Mortgage Insurance Certificate; (e) any guaranty(s), surety agreement(s), and/or survey(s); (f) any appraisals on the Mortgaged Property; (g) the completed loan application signed by the Mortgagor; (h) the signed mortgage loan settlement sheet; B-1 38 (i) all employment, deposit and mortgage verifications, credit reports and reports and any other document relied upon in making the Mortgage Loan; (j) any Truth-In-Lending RESPA and ECOA related documents required by law; (k) all records, ledger cards and other documents relating to the Mortgage Loan; (l) LIW Loan information worksheet; (m) Copies of all applicable transfer notifications i.e. borrower insurance, flood, hazard, PMI (n) the original unrecorded assignment of the Mortgage or Deed of Trust from Seller to Bankers Trust Company of California, N.A, as Custodian or Trustee. B-2 39 EXHIBIT C AUTHORIZED REPRESENTATIVES Reference is hereby made to the Amended and Restated Securitization Access Agreement, dated as of February 21, 1997 (the "Agreement"), among MCA Financial Corp., MCA Mortgage Corporation and Mortgage Corporation of America (collectively, the "MCA Companies"), Advanta Mortgage Conduit Services, Inc. and Advanta Mortgage Corp. USA: The following are the MCA Companies' Authorized Representatives for purposes of the Agreement: Name Title Specimen Signature - ---- ----- ------------------ The following are the Buyer's Authorized Representatives for purposes of the Agreement: Name Title Specimen Signature - ---- ----- ------------------ Mark A. Casale Vice-President, Corporate Finance Services The following are the Master Servicer's Authorized Representatives for purposes of the Agreement: Name Title Specimen Signature - ---- ----- ------------------ Mark A. Casale Vice President C-1 40 EXHIBIT D APPLICABLE GUIDELINES (a) Each Mortgage Loan is secured by a closed-end mortgage, in first or second lien position, to A to D credit borrowers (as defined by Advanta Mortgage Conduit Services, Inc.), on single family 1-4 unit properties; (b) No less than 50% of any Pool will have been originated with A and B credit grades; (c) No ARM Pool will be more than 2% teased at origination calculated on a weighted average basis; (d) Each ARM is in a first lien position; (e) Each ARM's interest rate will be tied to either 6 month LIBOR or 1 year CMT; (f) Each ARM will have a 2% periodic (per annum) and a minimum lifetime cap of 6%; (g) No more than 25% of any Pool will consist of 2 year fixed/1 year adjustable, 3/1 or 5/1 intermediate mortgages (Treasury based index); and (h) No Mortgage Loan is a simple interest loan. (i) No more than 10% of any Pool will consist of loans with CLTVs in excess of 90% (without mortgage insurance from a carrier acceptable to the Master Servicer). (j) No less than 70% of each Pool will have been originated under a full documentation program. (k) No loan is more than 30 days contractually delinquent as of the securitization cut-off date. D-1 41 EXHIBIT E REPRESENTATION AND WARRANTIES (i) The information with respect to each Mortgage Loan set forth in the related Mortgage Loan Schedule is true and correct as of the Cut-Off Date. (ii) All of the original or certified documentation required to be delivered to the Buyer, the Master Servicer or the Buyer's designee pursuant to the documentation requirements as set forth on the attached Exhibit B, with respect to each Mortgage Loan has been or will be delivered to the Buyer, the Master Servicer or the Buyer's designee, as required thereby. Each Mortgage Loan is documented on a note and mortgage form, with appropriate riders approved by Buyer. (iii) Each Mortgage is a valid and existing first or second lien of record on the Mortgaged Property, (subject in the case of any Second Mortgage Loan only to a Senior Lien on such Mortgaged Property) and subject in all cases to the exceptions to title set forth in the title insurance policy, if any, with respect to the related Mortgage Loan, which exceptions are generally acceptable to banking institutions in connection with their regular mortgage lending activities, and such other exceptions to which similar properties are commonly subject and which do not materially and adversely affect the benefits of the security intended to be provided by such Mortgage. (iv) Immediately prior to the transfer and assignment herein contemplated, the related MCA Company held good, marketable, and indefeasible title to, and was the sole owner of, each Mortgage Loan conveyed by such related MCA Company subject to no liens, charges, mortgages, encumbrances or rights of others except as set forth in clause (iii) or other liens which will be released simultaneously with such transfer and assignment and upon receipt of each Mortgage Loan, the Buyer will hold good, marketable, and indefeasible title to, and will be the sole owner of each Mortgage Loan, free and clear of any liens, charges, mortgages, encumbrances, or rights of others except as set forth in paragraph (iii) or any liens created by the Buyer. (v) As of the related Cut-Off Date, no Mortgage Loan is thirty (30) or more days contractually delinquent, and no Mortgage Loan has been thirty (30) or more days contractually delinquent more than once during the twelve (12) months preceding the related Cut-Off Date, except for those loans Buyer reviews during due diligence and agrees to purchase with knowledge of delinquency; there is no valid and enforceable offset, defense or counterclaim to any Note or Mortgage, including the obligation of the related Mortgagor to pay the unpaid principal of or interest on such Note. Except for any such delinquencies, there is no default, breach, violation or event of acceleration existing under any Mortgage or the related Note and no event which, with the passage of time or with notice and the expiration of any cure period, would constitute a default, breach, violation or event of acceleration; the Seller has not waived any default breach, violation or event of acceleration. (vi) There is no delinquent tax or assessment lien or mechanic's lien, or claim for work, labor, or material on any Mortgaged Property; there is no proceeding pending or threatened or currently occurring for the total or partial condemnation of any Mortgaged Property to the best of Seller's knowledge; each Mortgaged Property is free of substantial damage and is in good repair, except for those items specifically mentioned in the appraisal, or any applicable appraisal review of any mortgaged property. E-1 42 (vii) Each Mortgage Loan at the time it was made, and the origination of such Mortgage Loan, complied in all material respects with all applicable local, state and federal laws and regulations, including, without limitation, the federal Truth-in-Lending Act, the Real Estate Settlement Procedures Act, and other consumer protection laws, usury, equal credit opportunity, disclosure and recording laws. Any Mortgage Loan, and the origination thereof, which is subject to the "high cost or high fee mortgage" provisions of the Home Ownership and Equity Protection Act of 1994, complies with the requirements of such Act. No fraud was committed, nor was any material misrepresentation made, by any Person, including without limitation the related Mortgagor, in connection with the origination of such Mortgage Loan; each Mortgage Loan is a Qualified Mortgage and is a Qualifying Loan. (viii) With respect to each Mortgage Loan, a lender's title insurance policy, issued in standard American Land Title Association or California Land Title Association form by a title insurance company authorized to transact business in the state in which the related Mortgaged Property is situated, in an amount at least equal to the Original Principal Amount of such Mortgage Loan insuring the mortgagee's interest under the related Mortgage Loan as the holder of a valid first or second mortgage lien of record on the real property described in the related Mortgage, as the case may be, subject only to exceptions of the character referred to in paragraph (iii) above, was effective on the date of the origination of such Mortgage Loan, and, as of the Cut-Off Date such policy will be valid and thereafter such policy shall continue in full force and effect for the benefit of the Buyer and its assignees, in care of the Master Servicer. (ix) Each Mortgaged Property is improved by a single (one-to-four) family residential dwelling, which may include condominiums and townhouses but shall not include cooperatives; the improvements upon each Mortgaged Property are covered by a valid and existing hazard insurance policy with a generally acceptable carrier that provides for fire and extended coverage representing coverage not less than the least of (A) the outstanding principal balance of the related Mortgage Loan (together, in the case of a Second Mortgage Loan, with the outstanding principal balance of any Senior Liens), (B) the minimum amount required to compensate for damage or loss on a replacement cost basis or (C) the full insurable value of the Mortgaged Property. (x) For all Mortgage Loans, there is in place a fully-paid life of loan flood certification from Pinnacle Data Corporation or another vendor approved by the Buyer, assigned in care of the Master Servicer, which provides for notification to the Master Servicer of changes in designated flood areas which would affect such Mortgage Loan; in addition, if any Mortgaged Property, as of the Cut-Off Date of the related Mortgage Loan, is in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards, a flood insurance policy in a form meeting the requirements of the current guidelines of the Federal Insurance Administration is in effect for the benefit of the Buyer and its assignees, in care of the Master Servicer, with respect to such Mortgaged Property with a generally acceptable carrier in an amount representing coverage not less than the least of (A) the outstanding principal balance of the related Mortgage Loan (together, in the case of a Second Mortgage Loan, with the outstanding principal balance of any Senior Liens), (B) the minimum amount required to compensate for damage or loss on a replacement cost basis or (C) the maximum amount of insurance that is available under the Flood Disaster Protection Act of 1973. (xi) Each Mortgage and Note is the legal, valid and binding obligation of the maker thereof and is enforceable in accordance with its terms, except only as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other E-2 43 similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether considered in a proceeding or action in equity or at law). The maker of such Mortgage and Note had the legal capacity to execute such Mortgage and Note at the time such Mortgage and Note were executed. (xii) MCA has caused and will cause to be performed any and all acts required to be performed to preserve the rights and remedies of the Master Servicer in any Insurance Policies applicable to any Mortgage Loans delivered by any Seller, including any necessary notifications of insurers, assignments of policies or interests therein, and establishments of co-insured, joint loss payee and mortgagee rights in favor of the Buyer and its assignees in care of the Master Servicer. (xiii) Interest on each Note is calculated in accordance with the actuarial method; the terms of each Note and each Mortgage have not been impaired, altered or modified in any respect, except by a written instrument which has been recorded, if necessary, to protect the interest of the Buyer and which has been included in the related Mortgage File to be delivered to the Buyer. The substance of any such alteration or modification is reflected on the related Mortgage Loan Schedule and has been approved by the primary mortgage guaranty insurer, if any. (xiv) Except as otherwise required by law or pursuant to the statute under which the related Mortgage Loan was made, the related Note will not be secured by any collateral, pledged account or other security except the lien of the corresponding Mortgage. (xv) No Mortgage Loan will be originated under a buydown plan: no Mortgage Loan provides for negative amortization, has a shared appreciation feature, or other contingent interest feature; and as of the related Cut-Off Date, no Mortgage Loan had a Combined Loan-to-Value-Ratio or a Total Loan-to-Value Ratio in excess of the maximum for the related product type as set forth in the Seller's Applicable Guidelines, as amended by the Pool Parameters attached hereto as Exhibit D, unless Buyer acknowledges any such exception(s) through its due diligence, and agrees to purchase the Mortgage Loan based on the exception(s). (xvi) Any advances made after the date of origination of a Mortgage Loan but prior to the Cut-Off Date, have been consolidated with the outstanding principal amount secured by the related Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term reflected on the related Mortgage Loan Schedule. No Note has been modified, except as reflected on the related Mortgage Loan Schedule, and evidence of any modification is in the related Mortgage File and has been supplied to the Buyer. The consolidated principal amount does not exceed the original principal amount of the related Mortgage Loan. No Note permits or obligates the Master Servicer, any sub-servicer or the Buyer or its assignees to make future advances to the related Mortgagor at the option of the Mortgagor. (xvii) Any and all requirements as to completion of any on-site or off-site improvements and as to disbursements of any escrow funds therefor have been complied with, subject to any escrow hold-back for improvements pending completion. All costs, fees and expenses incurred in making, closing or recording the Mortgage Loans were paid. (xviii) To the best of Seller's knowledge, all of the improvements which were included for the purposes of determining the Appraised Value of any Mortgaged E-3 44 Property lie wholly within the boundaries and building restriction lines of such Mortgaged Property, and are stated in the title insurance policy and affirmatively insured; no improvement located on or being part of any Mortgaged Property is in violation of any applicable zoning law or regulation. To the best of Seller's knowledge, all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of each Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities. (xix) With respect to each Mortgage constituting a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in such Mortgage, and no fees or expenses are or will become payable by the Buyer or its assignees under the deed of trust, except in connection with a trustee's sale after default by the related Mortgagor. (xx) With respect to each Second Mortgage Loan, either [A) no consent for such Mortgage Loan was required by the holder of the related Senior Lien prior to the making of such Mortgage Loan or (B) such consent has been obtained and is contained in the related Loan Servicing File. (xxi) Each Mortgage contains a provision for the acceleration of the payment of the unpaid principal balance of the related Mortgage Loan in the event the related Mortgaged Property is sold without the prior consent of the Mortgagee thereunder; each Mortgage contains customary and enforceable provisions which render the rights and remedies of the holder thereof adequate for the realization against the related Mortgaged Property of the benefits of the security, including (A) in the case of a Mortgage designated as a deed of trust, by trustee's sale and (B) otherwise by judicial foreclosure. Subject to any statutory redemption rights of the Mortgagor, upon default by a Mortgagor on a Mortgage Loan and foreclosure on, or trustee's sale of, the Mortgaged Property, the holder of the Mortgage Loan will be able to deliver good and marketable title to the Mortgaged Property. To the best of Seller's knowledge, there is no homestead or other exemption available to a Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose on the Mortgaged Property. (xxii) No instrument of release or waiver has been executed in connection with any Mortgage Loan, and no Mortgagor has been released, in whole or in part, except in connection with an assumption agreement which has been approved by the primary mortgage guaranty insurer, if and, and which has been included in the related Mortgage File delivered to the Buyer. (xxiii) The maturity date of each Mortgage Loan which is a Second Mortgage Loan is at least twelve (12) months prior to the maturity date of the related first mortgage loan if such first mortgage loan provides for a balloon payment. (xxiv) Each Mortgage Loan has been originated in accordance with all required provisions of the Seller's Applicable Guidelines as amended by the Pool Parameters attached hereto as Exhibit D; a full appraisal was performed with respect to each Mortgage Loan in compliance with the applicable requirements set forth in the Applicable Guidelines. The fair market value of the related Mortgaged Property was at least as stated in the appraisal, as of the date thereof. (xxv) As of the related Closing Date, to the best knowledge of the Seller, there does not exist on any Mortgaged Property any hazardous substances, hazardous E-4 45 wastes or solid wastes, as such terms are defined in the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation and Recovery Act of 1976, or other federal, state or local environmental legislation. (xxvi) Each Mortgage Loan which is a First Mortgage Loan shall be covered by a valid and transferable tax service contract with Transamerica, or other vendors approved by the Buyer in its sole discretion. (xxvii) No mortgage reconveyance, release, satisfaction or trustee fees have been collected by Seller or paid by any Mortgagor. In addition, if there is, in Buyer's reasonable judgment, a documentation problem that would make reconveyance of satisfaction difficult, cumbersome or expensive to the Buyer, then MCA or it's designee shall at the Buyer's request complete the reconveyance of satisfaction of the Mortgage, including the recordation of the necessary documentation, at MCA's sole cost and expense. (xxviii) The Mortgage Loan is not in default, and all Monthly Payments due prior to the related Cut-Off Date and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents have been paid, to the best knowledge of the Seller. The Seller has not advanced funds, or induced or solicited any advance of funds by a party other than the Mortgagor directly or indirectly, for the payment of any amount required by the Mortgage Loan. The collection practices used by each entity which has serviced the Mortgage Loan have been in all respects legal, proper, prudent and customary in the mortgage servicing business. With respect to escrow deposits and payments in those instances where such were required, there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made and no escrow deposits or payments or other charges or payments have been capitalized under any Mortgage or the related Mortgage Note. E-5 46 EXHIBIT F FORM OF OPINION __________, 1997 To: The Addresses identified on "Schedule I" attached hereto Ladies and Gentlemen: I am general counsel to each of MCA Financial Corp., a Michigan corporation ("MCA Financial"), MCA Mortgage Corporation, a Michigan corporation ("MCA Mortgage") and Mortgage Corporation of America, a Michigan corporation ("MCA"), and have acted as such in connection with the execution and delivery of the following agreements: 1. The Amended and Restated Securitization Access Agreement among MCA Financial, MCA, MCA Mortgage (collectively, the "MCA Companies"), Advanta Mortgage Conduit Services, Inc. ("Advanta Conduit") and Advanta Mortgage Corp. USA ("Advanta Mortgage"), amended as of February 21, 1997; 2. The Master Commitment for Corporate Finance Relationships by and among the MCA Companies, Advanta Conduit and Advanta Mortgage dated as of November 1, 1996. 3. The Mutual Confidentiality Agreement among the MCA Companies and Advanta Conduit dated as of February 21, 1997. 4. The Multi-Party Security Agreement by and among Advanta Mortgage, Advanta Conduit, MCA Financial and Bankers Trust Company of California dated as of February 21, 1997. The foregoing documents are sometimes collectively referred to below as the "Documents", and any one of them is sometimes referred to below as a "Document". All capitalized terms herein not otherwise defined herein shall have the respective meanings set forth in the Amended and Restated Securitization Access Agreement and the Master Commitment. In rendering the opinions set forth herein, I have (i) examined executed copies of the Documents; (ii) examined originals or photostatic or certified copies of all such corporate records of each of the MCA Companies, and such certificates of public officials, certificates of corporate officers, and other documents, records financial statements and papers and have made such inquiries of officers, employees and representatives of each of the MCA Companies as I have deemed appropriate and necessary as a basis for the opinions hereinafter expressed, and I have further assumed the truth, accuracy and completeness of all information provided to me by such persons; (iii) assumed the genuineness of all signatures (other than those of the officers of each of the MCA Companies affixed to the Documents) and the authenticity of all documents submitted to me as originals and the conformity to original documents of all documents submitted to me as certified or photostatic copies; and (iv) assumed the due execution and delivery, pursuant to the due authorization, of each of the Documents by each of the respective parties (other than each of the MCA Companies) to each such Document. F-1 47 Persons on Attached Schedule 1 January __, 1997 Page 7 I am qualified to practice law only in the State of Michigan, and I am not expert in and express no opinion as to the laws of other jurisdictions other than the federal law of the United States. In rendering the above opinions, I have assumed that the state law(s) applicable to the Documents and under which the same are to be construed is identical in all material respects to the law of the State of Michigan. Furthermore, the opinions expressed herein do not purport to opine as to applicable state "Blue Sky" laws, legal investment laws, or other state or federal laws pertaining to any securities law issues and securities matters relating to the transactions described in the Documents. Based upon the foregoing, and subject to the other qualifications stated herein, I am of the opinion that: 1. Each of the MCA Companies is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan. 2. Each of the MCA Companies is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan and has all licenses and qualifications necessary to carry on its business as now being conducted and to perform its obligations hereunder; the MCA Companies have the power and authority to execute and deliver this Agreement and to perform its obligations in accordance herewith; the execution, delivery and performance of this Agreement (including any Conveyance Agreement and any other instruments of transfer to be delivered pursuant to this Agreement) by the MCA Companies and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and do not violate the organization documents of the MCA Companies, contravene or violate any law or regulation applicable to the MCA Companies or contravene, violate or result in any breach of any provision of, or constitute a default under, or result in the imposition of any lien on any assets of the MCA Companies pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which any MCA Company is a party or which purports to be binding upon Seller or any of Seller's assets; this Agreement evidences the valid and binding obligation of any MCA Company enforceable against each MCA Company in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or the application of equitable principles in any proceeding, whether at law or in equity; 3. All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency, that are necessary in connection with the execution and delivery by the MCA Companies of this Agreement, have been duly taken, given or obtained, as the case may be, are in full force and effect, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize the consummation of the transactions contemplated by this Agreement on the part of the MCA Companies and the performance by the MCA Companies of their respective obligations under this Agreement; 4. There is no action, suit, proceeding or investigation pending or, to the best of the MCA Companies' knowledge, threatened against any MCA Company which, either in F-2 48 Persons on Attached Schedule 1 January __, 1997 Page 8 any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of any MCA Company or in any material impairment of the right or ability of any MCA Company to carry on its business substantially as now conducted, or in any material liability on the part of any MCA Company or which would draw into question the validity of this Agreement or the Mortgage Loans or of any action taken or to be taken in connection with the obligations of any MCA Company contemplated herein, or which would be likely to impair the ability of any MCA Company to perform under the terms of this Agreement; 5. Each of the MCA Companies is not in default with respect to any mortgage, indenture, contract, agreement or other undertaking to which any MCA Company is a party or which purports to be binding upon Seller or any of Seller's assets, or with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of any MCA Company or its properties or might have consequences that would adversely affect its performance hereunder; 6. The execution and delivery of each of the Documents to which each of the MCA Companies is a party, and its respective performance of its obligations thereunder, will not (i) require any action by or in respect of, or filing with, any governmental body, agency or official (other than the filing of Uniform Commercial Code financing statements), or (ii) contravene, or constitute a default under, any provision of applicable law or regulation or of its Certificate (or Articles) of Incorporation or Bylaws or of any agreement, judgment, injunction, order, decree or other instrument binding upon such company. The foregoing opinions are being rendered for the benefit only of the Addressees listed on the attachment and may not be disclosed to, quoted to or relied upon by any other person or entity without the prior written consent of the undersigned. Very truly yours, ---------------------- Title: General Counsel F-3 49 Persons on Attached Schedule 1 January __, 1997 Page 9 SCHEDULE 1 Advanta Mortgage Corp. USA 500 Office Center Drive Suite 400 Fort Washington, PA 19034 Advanta Mortgage Conduit Services, Inc. 16875 West Bernardo Drive San Diego, CA 92127 F-4 50 EXHIBIT G FORM OF SYNTHETIC RESIDUAL CERTIFICATE This Synthetic Residual Certificate (this "Certificate") has been issued in accordance with Section 9(d) of the Amended and Restated Securitization Access Agreement amended as of February 21, 1997 (the "Securitization Access Agreement") by and among MCA Financial Corp. (the "Seller"), MCA Mortgage Corporation, and Mortgage Corporation of America, Advanta Mortgage Conduit Services, Inc. (the "Buyer") and Advanta Mortgage Corp. USA (the "Master Servicer"). This Certificate is the Synthetic Residual Certificate referenced in Section 2 of the Multi-Party Security Agreement dated as of February 21, 1997 (the "Security Agreement") by and among the Buyer, the Master Servicer (the Buyer and the Master Servicer together are referred to herein as the "Pledgors"), MCA Financial Corp. and Bankers Trust Company of California, N.A., as trustee. Unless otherwise indicated, terms used herein but not defined shall have the respective meanings given to such terms in the Securitization Access Agreement. This Certificate evidences the secured corporate obligation of the Pledgors to pay the Residual Excess Servicing amounts to the Seller as required by Section 9(d) of the Securitization Access Agreement. To secure such obligation, the Pledgors have granted a security interest in the Collateral (as such term is defined in the Security Agreement) to the Seller pursuant to the Security Agreement. This Certificate does not represent any direct ownership interest in any Mortgage Loans. THIS CERTIFIES THAT MCA Financial Corp. is the owner of this Certificate. This Certificate is not transferrable. IN WITNESS WHEREOF, the Pledgors have caused this Certificate to be signed, manually or in facsimile by its authorized officer. Dated: February 21, 1997 ADVANTA MORTGAGE CONDUIT SERVICES, INC. By: ---------------------- Name: Title: ADVANTA MORTGAGE CORP. USA By: ---------------------- Name: Title: G-1 51 EXHIBIT H ============================================================================== MULTI-PARTY SECURITY AGREEMENT By and Among ADVANTA MORTGAGE CONDUIT SERVICES, INC., ADVANTA MORTGAGE CORP. USA, MCA FINANCIAL CORP. and BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Trustee Dated as of February 21, 1997 ============================================================================== 52 MULTI-PARTY SECURITY AGREEMENT This Multi-Party Security Agreement (this "Agreement"), dated as of February 21, 1997 by and among ADVANTA MORTGAGE CONDUIT SERVICES, INC. ("Advanta Mortgage Conduit"), ADVANTA MORTGAGE CORP. USA ("Advanta Mortgage Corp.", together with Advanta Mortgage Conduit, the "Pledgors"), MCA FINANCIAL CORP. (the "Secured Party") and BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as trustee (the "Trustee"). NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the parties hereto agree as follows: Section 1. Definitions. In addition to the terms defined elsewhere in this Agreement, the following terms shall have the following meanings when used in this Agreement: "Collateral" means the Pledgors' rights to receive payments of Residual Excess Servicing in connection with each and every Securitized Loan Pool. "Securitization Access Agreement" means the Amended and Restated Securitization Access Agreement amended as of February 21, 1997 by and among the Secured Party, MCA Mortgage Corporation, Mortgage Corporation of America and the Pledgors, as amended from time to time. Capitalized terms used and not otherwise defined herein shall for all purposes of this Agreement have the respective meanings specified therefor in the Securitization Access Agreement. Section 2. Pledge and Security. Each Pledgor hereby pledges all of its respective right, title, and interest in and to, and grants a first lien on, and security interest in, the Collateral to the Secured Party to secure the obligation of the Pledgors to make payments of Deferred Premium Payments to the Secured Party in accordance with Section 9(d) of the Securitization Access Agreement, which obligation is evidenced by the Synthetic Residual Certificate in the form of Exhibit I to the Securitization Access Agreement. Section 3. Financing Statement. The Pledgors covenant that, on the date of execution of this Agreement, the Pledgors shall cause to be filed a financing statement (Form UCC-1) with the Secretary of State of California to perfect by filing thereof the security interest in the Collateral granted by the Pledgors herein. The Pledgors covenant to file in other jurisdictions upon the reasonable request of the MCA Companies. 1 53 Section 4. Events of Default. Each of the following shall constitute an "Event of Default" hereunder: (a) Failure of the Pledgors to make any payment of Deferred Premium Payments, owing to the Secured Party under Section 9(d) of the Securitization Access Agreement, to the Secured Party which failure is not remedied within five Business Days after written notice to the Pledgors thereof. (b) The filing against either Pledgor of a petition for liquidation, reorganization, arrangement or adjudication as a bankrupt or similar relief under the bankruptcy, insolvency or similar laws of the United States or any state or territory thereof or of any foreign jurisdiction as to which such Pledgor fails to secure dismissal within 60 days of such filing. Appointment of a receiver, conservator, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of either Pledgor or of any substantial part of its property, the ordering of the winding-up or liquidation of its affairs, or the entry of a decree or order for relief by a court having jurisdiction in the premises in respect of either Pledgor in any involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect. (c) Commencement by either Pledgor of a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by either Pledgor to the entry of an order for relief in an involuntary case under any such law or to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of either Pledgor or of any substantial part of its property, or the making by either Pledgor of any general assignment for the benefit of creditors, or the failure of either Pledgor generally to pay its debts as such debts become due, or the taking of corporate action by either Pledgor in furtherance of any of the foregoing. Section 5. Remedy Upon Default. Upon the happening of one or more Events of Default, the Secured Party may give written notice to the Trustee stating the date and the nature of the Event of Default, and identifying the appropriate Advanta Trust or Trusts relating to the Securitized Loan Pools. The Secured Party shall have the right to direct the Trustee to make all further payments of Residual Excess Servicing and Deferred Premium Payments due to it under Section 9(d) of the Securitization Access Agreement directly from the Certificate Account into an account designated by the Secured Party in such notice, before payments may be made to the Pledgors under the terms of the Securitization Access Agreement. The parties hereto agree that, upon the happening of one or more Events of Default and notice to the Trustee, the Trustee shall calculate the amounts, if any, owed by the Pledgors to the Secured Party pursuant to Section 9(d) of the Securitization Access Agreement and shall pay any and all such amounts from the Residual Excess Servicing related to the Securitized Loan Pools that would otherwise be payable to either Pledgor directly to the account of the Secured Party as identified by the Secured Party from time to time to the Trustee. The Pledgors and the Secured Party acknowledge that the Secured Party has no recourse against the Collateral upon the happening of an Event of Default, other than as described in this Section 5. Section 6. Trustee's Duties. (a) The Trustee (i) undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Trustee and (ii) in the absence of bad faith on its part, may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished pursuant to and conforming to the requirements of this Agreement. 2 54 (b) No provision of this Agreement shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this subsection shall not be construed to limit the effect of subsection (a) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by an authorized officer of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Secured Party or the Pledgors or relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Agreement, provided, that, any such action taken or omission taken is consistent with the terms of this Agreement. Additionally, the Trustee is permitted to rely and shall be protected in acting or refraining from acting upon any certificates, statement, instrument opinion, report, request, direction, consent, order, bond, note, notices, or other paper or document delivered hereunder believed by it to be genuine and to have been signed or presented by the proper party or parties. (c) Whether or not therein expressly so provided, every provision of this Agreement relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. (d) No provision of this Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (e) The Trustee shall be under no obligation to institute any suit, or to take any remedial proceeding under this Agreement, or to take any steps in the execution of the trusts hereby created or in the enforcement of any rights and powers hereunder until it shall be indemnified to its satisfaction against any and all costs and expenses, outlays and counsel fees and other reasonable disbursements and against all liability, except liability which is adjudicated to have resulted from its negligence or willful misconduct, in connection with any action so taken. (f) The Pledgors agree to indemnify the Trustee, and its officers, directors, employees and agents and hold it harmless against, any and all losses, liabilities, damages, claims or expenses (including reasonable legal fees and expenses), that may be imposed on, incurred by or asserted against the Trustee in any way relating to or arising out of this Agreement or any action taken by the Trustee pursuant to this Agreement, unless such liabilities, obligations, losses, expenses, legal fees or disbursements were imposed on, incurred by, or asserted against the Trustee as a result of the Trustee's own 3 55 negligence or bad faith or willful misconduct. The foregoing indemnification shall survive any termination of this Agreement or the resignation of or removal of the Trustee. Section 7. Notices. All demands, notices and communications relating to this Agreement shall be in writing and shall be deemed to have been duly given when received by the other party or parties at the address shown below, or such other address as may hereafter be furnished to the other party or parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee. If to the Pledgors: Mark A. Casale Advanta Mortgage Corp. USA 500 Office Center Drive Suite 400 Fort Washington, PA 19034 Telecopy: (215) 444-4743 If to the Secured Party: MCA Financial Corp. 23999 Northwestern Highway Suite 101 Southfield, MI 48075 Telecopy: 810-358-4639 If to the Trustee: Bankers Trust Company of California, N.A. 3 Park Plaza, 16th Floor Irvine, CA 92714 Telecopy: (714) 253-8289 Section 8. Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. Section 9. Assignment; Successors and Assigns. No party to this Agreement may assign its rights or delegate its obligations under this Agreement without the express written consent of the other parties, except as otherwise set forth in this Agreement. This Agreement shall be binding upon the successors and assigns of the parties hereto. 4 56 Section 10. Counterparts. For the purpose of facilitating the execution of this Agreement and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original, and together shall constitute and be one and the same instrument. Section 11. Amendment. This Agreement may be amended from time to time by the parties hereto only by a written instrument executed by such parties. Section 12. Governing Law; Agreement Constitutes Security Agreement. This Agreement is intended by the parties hereto to be governed by, and construed in accordance with, California law, without regard to conflict of laws rules applied in California, and to constitute a security agreement within the meaning of the California Uniform Commercial Code. 5 57 IN WITNESS WHEREOF, the parties have executed this MULTI-PARTY SECURITY AGREEMENT as of the day and year first above written. ADVANTA MORTGAGE CONDUIT SERVICES, INC. By: -------------------------- Name: Title: ADVANTA MORTGAGE CORP. USA By: --------------------------- Name: Title: MCA FINANCIAL CORP. By: --------------------------- Name: Title: BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Trustee By: ---------------------------- Name: Title: 6 58 EXHIBIT I MUTUAL CONFIDENTIALITY AGREEMENT THIS CONFIDENTIALITY AGREEMENT ("Agreement") is entered into this 21 day of February, 1997, by and among MCA Financial Corp. ("MCA CORP"), MCA Mortgage Corporation of America ("MCA Mortgage") and Mortgage Corporation of America ("MCA America" together with MCA CORP and MCA Mortgage, "MCA"), Advanta Mortgage Conduit Services, Inc. ("CONDUIT"). WHEREAS, MCA and CONDUIT are contemplating entering into a Master Commitment for Corporate Finance Relationships, the Amended and Restated Securitization Access Agreement and the Multi-Party Security Agreement (the "Conduit Agreements"). WHEREAS, during the course of this arrangement, CONDUIT may give MCA access to, or MCA may learn about various information and material relating to the financial status, marketing strategies, business practices, products, customers, potential customers, procedures, methods, models, materials, technical knowledge and the like of CONDUIT, its affiliates and subsidiaries (the "Confidential Data") all of which CONDUIT considers to be of a proprietary nature and MCA may give CONDUIT access to, or CONDUIT may learn about various information and material relating to the financial status, marketing strategies, business practices, products, customers, potential customers, procedures, methods, models, materials, technical knowledge and the like, which MCA considers to be of a proprietary nature and all of which are referred to herein as "Confidential Data." WHEREAS, MCA and CONDUIT agree that the Conduit Agreements and this Agreement are confidential arrangements (the "Confidential Agreements") that may not be disclosed to any third parties except as provided below. NOW, THEREFORE, intending to be legally bound hereby, MCA and CONDUIT agree as follows: (1) All Confidential Data shall be deemed proprietary. (2) Each party acknowledges that Confidential Data is considered proprietary and acknowledges that the unauthorized use or disclosure of any Confidential Data could be detrimental to the other party. (3) No party shall distribute, disclose or convey to third parties any Confidential Data without the prior written approval of the other Party. (4) Except to each party's respective attorneys, accountants and other agents and except, where disclosure is required by governmental or regulatory authorities or in connection with any due diligence conducted by any potential purchaser of MCA or any potential purchaser of CONDUIT or their respective affiliates, MCA and CONDUIT agree to keep the terms and conditions of the Confidential Agreements confidential and not to disclose the terms and conditions to any third parties, unless agreed to by both parties in writing; provided, however, that (a) MCA may disclose the Confidential Agreements in order to maintain or obtain a warehouse line of I-1 59 credit or if such disclosure is directly in connection with capital raising activities and (b) CONDUIT may disclose the general terms hereof to any third party without disclosing the identity of MCA in connection therewith. (5) Each party agrees that: a. Only employees, with a defined "need to know" basis shall be granted access to any Confidential Data; b. No party shall distribute, disclose or convey Confidential Data to any consultant or subcontractor, except upon prior written approval of the other party; c. Each party shall protect the confidentiality of the Confidential Data of the other party in the same manner in which it protects the confidentiality of its own proprietary and confidential data of like kind. Access to the Confidential Data shall be restricted to those engaged in a use permitted hereby; d. No party shall copy or reproduce any Confidential Data, except as necessary to complete the scope of its work in providing services to the other; e. All Confidential Data made available to each party, including copies thereof, shall be returned upon the earlier of the completion of the scope of work identified above or a request of the other party; f. Nothing is this Agreement shall prohibit or limit the parties use of information (including, but not limited to, financial data and financial strategies and methodologies), (i) previously known to it, (ii) acquired by it from a third party which is not under an obligation not to disclose such information, or (iii) which is or becomes publicly available through no breach of this Agreement; and g. No party shall make use of any of the Confidential Data for its own independent benefit. (6) Each party agrees that, should a third party request it to submit Confidential Data pursuant to a subpoena, summons, search warrant, court or governmental order, the party receiving the subpoena (the "Subpoenaed Party") will notify the other Party promptly upon receipt of such request. If the other party objects to the release of the Confidential Data, the Subpoenaed Party will permit counsel chosen by the other party to represent the Subpoenaed Party in order to resist release of the Confidential Data. The other party will pay the Subpoenaed Party for any reasonable expenses incurred by the Subpoenaed Party in connection with resisting the release of the Confidential Data. (7) Each party acknowledges and agrees that any violation of the terms of this Agreement relating to the disclosure, dissemination or use of Confidential Data of the other party or the terms and provisions of the Confidential Agreement may result in irreparable injury and damage to the other party that may not be adequately compensable in money damages, and for which the other party will have no adequate remedy at law. Each party therefore consents and agrees that the other party may obtain injunctions, orders or decrees as may be necessary to protect such Confidential Data or the terms and provisions of the Confidential Agreements, which rights shall be I-2 60 cumulative and in addition to any other rights or remedies to which the other party may be entitled. (8) All the terms, rights, duties and conditions contained in this Agreement shall merge into any future agreement between the parties. In the event that any specific terms of any future agreement between the parties regarding confidentiality directly conflicts with the terms of this Agreement, such future agreement's terms shall supersede the terms herein. (9) This Agreement is binding on the parties and their successors and assigns, and is provisions may be waived or modified by written agreement of the parties. (10) This Agreement is executed and delivered in California, and shall be governed by the laws of the State of California. I-3 61 IN WITNESS WHEREOF, the parties have hereto caused this Mutual Confidentiality Agreement to be duly executed by their respective officers, all as of the day and year first above written. MCA MORTGAGE CORPORATION By: ----------------------------------- Name: ----------------------------- Title: ----------------------------- MCA FINANCIAL CORP. By: ---------------------------------- Name: ---------------------------- Title: ---------------------------- MORTGAGE CORPORATION OF AMERICA By: ---------------------------------- Name: Title: ADVANTA MORTGAGE CONDUIT SERVICES, INC. By: --------------------------------- Name: Title: I-4 EX-12 4 EXHIBIT 12 1 EXHIBIT 12 MCA FINANCIAL CORP. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year ended January 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------- ----- ------- Income (Loss) Before Federal Income Taxes ................. $ 1,404,338 $1,127,530 $ (175,162) $ 972,185 $ 915,602 Add: Portion of Rents Representative of the Interest Factor .......... 273,840 216,360 134,075 72,234 57,265 Interest on Indebtedness ...... 11,426,082 7,565,044 6,018,518 4,428,925 962,439 Amortization of Debt Expense ................. 957,956 687,390 421,189 286,009 102,675 ----------- ---------- ---------- ---------- ---------- $14,062,216 $9,596,324 $6,398,620 $5,759,353 $2,037,981 =========== ========== ========== ========== ========== Fixed Charges: Portion of Rents Representative of the Interest Factor .......... $ 273,840 $ 216,360 $ 134,075 $ 72,234 $ 57,265 Interest on Indebtedness ...... 11,426,082 7,565,044 6,018,518 4,428,925 962,439 Amortization of Debt Expense .. 957,956 687,390 421,189 286,009 102,675 ----------- ---------- ---------- ---------- ---------- $12,657,878 $8,468,794 $6,573,782 $4,787,168 $1,122,379 =========== ========== ========== ========== ========== Ratio of Earnings to Fixed Charges ............. 1.11 1.13 --- 1.20 1.82 Deficiency of Earnings over Fixed Charges ........... $ -- $ -- $ (175,162) $ -- $ ---
EX-27 5 EXHIBIT 27
5 1,000 YEAR JAN-31-1997 FEB-01-1996 JAN-31-1997 3,097 0 39,315 0 0 0 7,599 2,016 144,992 0 15,542 0 5,396 5 5,248 144,992 0 58,926 0 57,522 0 0 11,426 1,404 639 765 0 0 0 765 1.61 1.61
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