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________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
COMMISSION FILE NUMBER: 333-10495
CHEVY CHASE PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 52-1998335
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
8401 CONNECTICUT AVENUE
CHEVY CHASE, MARYLAND 20815
(Address of principal executive office) (Zip Code)
(301) 986-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of Act:
Title of each class Name of each exchange on which registered
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10-3/8% Noncumulative Exchangeable New York Stock Exchange, Inc.
Preferred Stock, Series A
Securities registered pursuant to Section 12(g) of the Act:
N/A
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(Title of class)
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 No X
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The number of shares outstanding of the registrant's sole class of common stock
is 100 shares, $1 par value, as of January 31, 1997.
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CHEVY CHASE PREFERRED CAPITAL CORPORATION
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TABLE OF CONTENTS
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PART I PAGE
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ITEM 1. BUSINESS............................................. 1
General...................................................... 1
Description of Common Stock.................................. 1
Dividends................................................... 1
Voting Rights............................................... 2
Rights Upon Liquidation..................................... 2
Description of Series A Preferred Shares..................... 2
General..................................................... 2
Dividends................................................... 2
Automatic Exchange.......................................... 3
Voting Rights............................................... 4
Redemption.................................................. 5
Rights Upon Liquidation..................................... 6
Restrictions on Ownership and Transfer...................... 7
Dividend Policy.............................................. 8
The Bank..................................................... 8
The Advisor.................................................. 9
Mortgage Assets.............................................. 10
Loan Portfolio Composition................................. 10
Investment Policy.......................................... 11
Credit Risk Management Policies............................ 12
Delinquencies.............................................. 12
Geographic Distribution.................................... 13
Servicing.................................................... 13
Capital and Leverage Policies................................ 14
Employees.................................................... 14
Competition.................................................. 14
Environmental Matters........................................ 14
Tax Status of the Company.................................... 15
ITEM 2. PROPERTIES........................................... 15
ITEM 3. LEGAL PROCEEDINGS.................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. 15
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................. 16
Common Stock............................................... 16
Preferred Stock............................................ 16
ITEM 6. SELECTED FINANCIAL DATA............................. 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 18
Financial Condition........................................ 18
General................................................... 18
Residential Mortgage Loans................................ 18
Allowance for Loan Losses................................. 18
Interest Rate Risk........................................ 18
Significant Concentration of Credit Risk.................. 19
Liquidity and Capital Resources........................... 19
Results of Operations...................................... 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................... 21
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 21
Directors and Executive Officers........................... 21
Audit Committee............................................ 23
Section 16(a) Beneficial Ownership Reporting Compliance.... 23
ITEM 11. EXECUTIVE COMPENSATION............................. 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.............................. 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 24
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K................................ 25
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PART I
ITEM 1. BUSINESS
GENERAL
Chevy Chase Preferred Capital Corporation (the "Company") is a newly formed
Maryland corporation incorporated on August 20, 1996, and created for the
purpose of acquiring and holding real estate mortgage assets ("Mortgage
Assets"). The Company will elect to be treated as a real estate investment
trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"), and generally will not be subject to Federal income tax to the extent
that it distributes its earnings to its stockholders and maintains its
qualification as a REIT. All of the shares of the Company's common stock, par
value $1.00 per share (the "Common Stock"), are owned by Chevy Chase Bank,
F.S.B., a federally chartered and federally insured stock savings bank (the
"Bank"). The Company was formed by the Bank to provide the Bank with a cost-
effective means of raising capital.
On November 5, 1996, the Company was initially capitalized by the issuance to
the Bank of 100 shares of Common Stock. On December 3, 1996, the Company
commenced its operations upon the closing of the initial public offering (the
"Offering") of 3,000,000 shares of the Company's 10-3/8% Noncumulative
Exchangeable Preferred Stock, Series A, par value $5.00 per share (the "Series A
Preferred Shares"). The net proceeds to the Company from the sale of the Series
A Preferred Shares were $144.0 million. Simultaneous with the consummation of
the Offering, the Bank made capital contributions to the Company with respect to
its Common Stock in the amount of $150.0 million, plus an additional $6.0
million representing the underwriting discount and the expenses of the Offering.
The Company used the aggregate net proceeds of $300.0 million received in
connection with both the Offering and the capital contributions by the Bank to
purchase from the Bank the Company's initial portfolio of Mortgage Assets,
comprised entirely of residential mortgage loans, at their estimated fair value
of approximately $300.0 million. Such loans were recorded in the accompanying
financial statements at the Bank's historical cost basis, which approximated
their estimated fair values.
DESCRIPTION OF COMMON STOCK
DIVIDENDS. Holders of Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available
therefore, provided that, if the Company fails to declare and pay full dividends
on the Series A Preferred Shares in any dividend period, the Company may not
make any dividends or other distributions (including balancing distributions,
redemptions and purchases) with respect to the Common Stock until such time as
dividends on all outstanding Series A Preferred Shares have been (i) declared
and paid for three consecutive dividend periods and (ii) declared and paid or
declared and a sum sufficient for the payment thereof has been set apart for
payment for the fourth consecutive dividend period. In order to remain
qualified as a REIT, the Company must distribute annually at least 95% of its
annual "REIT taxable income" (not including capital gains) to stockholders. See
"Tax Status of the Company."
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VOTING RIGHTS. Subject to the rights, if any, of the holders of any class or
series of Preferred Stock, all voting rights are vested in the Common Stock.
The holders of Common Stock are entitled to one vote per share. All of the
issued and outstanding shares of Common Stock are currently held by the Bank.
RIGHTS UPON LIQUIDATION. In the event of the liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, after there have
been paid or set aside for the holders of all series of Preferred Stock the full
preferential amounts to which such holders are entitled, the holders of Common
Stock will be entitled to share equally and ratably in any assets remaining
after the payment of all debts and liabilities.
DESCRIPTION OF SERIES A PREFERRED SHARES
GENERAL. The Series A Preferred Shares form a series of the preferred stock of
the Company (the "Preferred Stock"), which Preferred Stock may be issued from
time to time in one or more series with such rights, preferences and limitations
as are determined by the Company's Board of Directors.
The holders of the Series A Preferred Shares have no preemptive rights with
respect to any shares of the capital stock of the Company or any other
securities of the Company convertible into or carrying rights or options to
purchase any such shares. The Series A Preferred Shares are not subject to any
sinking fund or other obligation of the Company for their repurchase or
retirement. The Series A Preferred Shares will be exchanged automatically on a
one-for-one basis for Bank Preferred Shares (as defined below) upon the
occurrence of the Exchange Event (as defined below).
The transfer agent, registrar and dividend disbursement agent for the Preferred
Stock is Norwest Bank Minnesota, N.A. The registrar for shares of Preferred
Stock will send notices to shareholders of any meetings at which holders of the
Preferred Stock have the right to elect directors of the Company.
DIVIDENDS. Holders of Series A Preferred Shares are entitled to receive, if,
when and as declared by the Board of Directors of the Company out of assets of
the Company legally available therefore, cash dividends at the rate of 10-3/8%
per annum of the liquidation preference (equivalent to $5.1875 per share per
annum). If declared, dividends on the Series A Preferred Shares shall be payable
quarterly in arrears on January 15, April 15, July 15 and October 15 of each
year, at such annual rate, commencing on January 15, 1997. Dividends in each
quarterly period will accrue from the first day of such period, whether or not
declared or paid for the prior quarterly period. Each declared dividend shall
be payable to holders of record as they appear at the close of business on the
stock register of the Company on such record dates, not exceeding 45 days
preceding the payment dates thereof, as shall be fixed by the Board of Directors
of the Company.
The right of holders of Series A Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A Preferred Shares for a quarterly dividend period, then
holders of the Series A Preferred Shares will have no right to receive a
dividend for that period, and the Company will have no obligation to pay a
dividend for that period, whether or not dividends are declared and paid for any
future period with respect to either the Series A Preferred Shares or the Common
Stock. If the Company fails to pay or declare and set aside for payment a
quarterly dividend on the Series A Preferred Shares, holders of the Preferred
Stock of the Company, including the Series A Preferred Shares, will be entitled
to elect two directors.
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If full dividends on the Series A Preferred Shares for any dividend period shall
not have been declared and paid, or declared and a sum sufficient for the
payment thereof shall not have been set apart for such payments, no dividends
shall be declared or paid or set aside for payment and no other distribution
shall be declared or made or set aside for payment upon the Common Stock or any
other capital stock of the Company ranking junior to or on a parity with the
Series A Preferred Shares as to dividends or amounts upon liquidation, nor shall
any Common Stock or any other capital stock of the Company ranking junior to or
on a parity with the Series A Preferred Shares as to dividends or amounts upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any monies to be paid to or made available for a sinking fund for the
redemption of any such stock) by the Company (except by conversion into or
exchange for other capital stock of the Company ranking junior to the Series A
Preferred Shares as to dividends and amounts upon liquidation), until such time
as dividends on all outstanding Series A Preferred Shares have been (i) declared
and paid for three consecutive dividend periods and (ii) declared and paid or
declared and a sum sufficient for the payment thereof has been set apart for
payment for the fourth consecutive dividend period.
When dividends are not paid in full (or a sum sufficient for such full payment
is not set apart) upon the Series A Preferred Shares and the shares of any other
series of capital stock ranking on a parity as to dividends with the Series A
Preferred Shares, all dividends declared upon the Series A Preferred Shares and
any other series of capital stock ranking on a parity as to dividends with the
Series A Preferred Shares shall be declared pro rata so that the amount of
dividends declared per share on the Series A Preferred Shares and such other
series of capital stock shall in all cases bear to each other the same ratio
that full dividends, for the then-current dividend period, per share on the
Series A Preferred Shares (which shall not include any accumulation in respect
of unpaid dividends for prior dividend periods) and full dividends, including
required or permitted accumulations, if any, on such other series of capital
stock bear to each other.
AUTOMATIC EXCHANGE. Each Series A Preferred Share will be exchanged
automatically for one newly issued Series B preferred share of the Bank (the
"Bank Preferred Share") if the appropriate federal regulatory agency directs in
writing (the "Directive") an exchange of the Series A Preferred Shares for Bank
Preferred Shares because (i) the Bank becomes "undercapitalized" under prompt
corrective action regulations established pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate federal regulatory
agency, in its sole discretion and even if the Bank is not "undercapitalized,"
anticipates the Bank becoming "undercapitalized" in the near term (the "Exchange
Event"). Upon the Exchange Event, each holder of Series A Preferred Shares shall
be unconditionally obligated to surrender to the Bank the certificates
representing each Series A Preferred Share of such holder, and the Bank shall be
unconditionally obligated to issue to such holder in exchange for each such
Series A Preferred Share a certificate representing one Bank Preferred Share
(the "Automatic Exchange"). Any Series A Preferred Shares purchased or redeemed
by the Company prior to the Time of Exchange (as defined below) shall not be
deemed outstanding and shall not be subject to the Automatic Exchange.
The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the date for
such exchange set forth in the Directive, or, if such date is not set forth in
the Directive, as of 8:00 a.m. on the earliest possible date such exchange could
occur consistent with the Directive (the "Time of Exchange"), as evidenced by
the issuance by the Bank of a press release prior to such time. As of the Time
of Exchange, all of the Series A Preferred Shares will be deemed cancelled
without any further action by the Company, all rights of the holders of Series A
Preferred Shares as stockholders of the Company will cease, and such persons
shall thereupon and thereafter be deemed to be and shall be for all purposes the
holders of Bank Preferred Shares. The Company will mail notice of the
occurrence of the Exchange Event to each holder of Series A Preferred Shares
within 30 days of such event,
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and the Bank will deliver to each such holder certificates for Bank Preferred
Shares upon surrender of certificates for Series A Preferred Shares. Until such
replacement stock certificates are delivered (or in the event such replacement
certificates are not delivered), certificates previously representing Series A
Preferred Shares shall be deemed for all purposes to represent Bank Preferred
Shares. Once the Directive is issued, no action will be required to be taken by
holders of Series A Preferred Shares, by the Bank or by the Company in order to
effect the Automatic Exchange as of the Time of Exchange.
Absent the occurrence of the Exchange Event, no shares of Bank Preferred Shares
will be issued. Upon the occurrence of the Exchange Event, the Bank Preferred
Shares to be issued as part of the Automatic Exchange would constitute a newly
issued series of preferred stock of the Bank and would constitute 100% of the
issued and outstanding shares of Bank Preferred Shares. Holders of Bank
Preferred Shares would have the same dividend rights, liquidation preference,
redemption options and other attributes as to the Bank as holders of Series A
Preferred Shares have as to the Company, except that the Bank Preferred Shares
would not be listed on the New York Stock Exchange. Any accrued and unpaid
dividends on the Series A Preferred Shares as of the Time of Exchange would be
deemed to be accrued and unpaid dividends on the Bank Preferred Shares. The
Bank Preferred Shares would rank pari passu in terms of dividend payment and
liquidation preference with any outstanding shares of preferred stock of the
Bank. The Bank Preferred Shares will not be registered with the Securities and
Exchange Commission (the "SEC") and will be offered pursuant to an exemption
from registration under Section 3(a)(5) of the Securities Act of 1933, as
amended (the "Securities Act"). The Bank does not intend to apply for listing of
the Bank Preferred Shares on any national securities exchange or for quotation
of the Bank Preferred Shares through the National Association of Securities
Dealers Automated Quotation System. Absent the occurrence of the Exchange Event,
however, the Bank will not issue any Bank Preferred Shares, although the Bank
will be able to issue preferred stock in series other than that of the Bank
Preferred Shares. There can be no assurance as to the liquidity of the trading
markets for the Bank Preferred Shares, if issued, or that an active public
market for the Bank Preferred Shares would develop or be maintained.
Holders of Series A Preferred Shares cannot exchange their Series A Preferred
Shares for Bank Preferred Shares voluntarily. In addition, absent the
occurrence of the Automatic Exchange, holders of Series A Preferred Shares will
have no dividend, voting, liquidation preference or other rights with respect to
any security of the Bank, such rights as are conferred by the Series A Preferred
Shares exist solely as to the Company.
VOTING RIGHTS. Except as expressly required by applicable law, or except as
indicated below, the holders of the Series A Preferred Shares will not be
entitled to vote. In the event the holders of Series A Preferred Shares are
entitled to vote as indicated below, each Series A Preferred Share will be
entitled to one vote on matters on which holders of the Series A Preferred
Shares are entitled to vote.
If at the time of any annual meeting of the Company's stockholders for the
election of directors the Company has failed to pay or declare and set aside for
payment a quarterly dividend during any of the four preceding quarterly dividend
periods on any series of Preferred Stock of the Company, including the Series A
Preferred Shares, the number of directors then constituting the Board of
Directors of the Company will be increased by two (if not already increased by
two due to a default in preference dividends), and the holders of the Series A
Preferred Shares, voting together with the holders of all other series of
Preferred Stock as a single class, will be entitled to elect such two additional
directors to serve on the Company's Board of Directors at each such annual
meeting. Each director elected by the holders of shares of the Preferred Stock
shall continue to serve as such director until the later of (i) the full term
for which he or she shall have been elected or (ii) the payment of four
quarterly dividends on the Preferred Stock, including the Series A Preferred
Shares.
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The affirmative vote or consent of the holders of at least 67% of the
outstanding shares of each series of Preferred Stock of the Company, including
the Series A Preferred Shares, will be required (a) to create any class or
series of stock which shall, as to dividends or distribution of assets, rank
prior to or on a parity with any outstanding series of Preferred Stock of the
Company other than a series which shall not have any right to object to such
creation or (b) alter or change the provisions of the Company's Articles of
Incorporation (including the Articles Supplementary establishing the Series A
Preferred Shares) so as to adversely affect the voting powers, preferences or
special rights of the holders of a series of Preferred Stock of the Company;
provided that if such amendment shall not adversely affect all series of
Preferred Stock of the Company, such amendment need only be approved by at least
67% of the holders of shares of all series of Preferred Stock adversely affected
thereby.
REDEMPTION. The Series A Preferred Shares will not be redeemable prior to
January 15, 2007 (except upon the occurrence of a Tax Event, as defined below).
On or after such date, the Series A Preferred Shares will be redeemable at the
option of the Company, in whole or in part, at any time or from time to time on
not less than 30 nor more than 60 days' notice by mail, at the following
redemption prices (expressed as a percentage of the $50.00 per share liquidation
preference), if redeemed during the 12-month period beginning January 15 of the
years indicated below, plus the quarterly accrued and unpaid dividend to the
date of redemption, if any, thereon:
Year Redemption Price
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2007.......................................... 105.187%
2008.......................................... 104.150%
2009.......................................... 103.112%
2010.......................................... 102.075%
2011.......................................... 101.037%
and thereafter at a redemption price of $50.00 per share, plus the quarterly
accrued and unpaid dividend to the date of redemption, if any, thereon.
Any such redemption must comply with the prompt corrective action and capital
distribution regulations of the Office of Thrift Supervision ("OTS"), which may
prohibit a redemption and will require the OTS' prior written approval. Unless
full dividends on the Series A Preferred Shares have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
has been set apart for payment for the then-current dividend period, no Series A
Preferred Shares shall be redeemed unless all outstanding Series A Preferred
Shares are redeemed and the Company shall not purchase or otherwise acquire any
Series A Preferred Shares; provided, however, that the Company may purchase or
acquire Series A Preferred Shares pursuant to a purchase or exchange offer made
on the same terms to holders of all outstanding Series A Preferred Shares.
The Company will also have the right at any time, upon the occurrence of a Tax
Event and with the prior written approval of the OTS, to redeem the Series A
Preferred Shares, in whole (but not in part) at a redemption price of $50.00 per
share, plus the quarterly accrued and unpaid dividend to the date of redemption,
if any, thereon. "Tax Event" means the receipt by the Company of an opinion of a
nationally recognized law firm experienced in such matters to the effect that,
as a result of (i) any amendment to, clarification of, or change (including any
announced prospective change) in, the laws or treaties (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein affecting taxation, (ii) any judicial decision
official administrative pronouncement, published or private ruling, regulatory
procedure, notice or announcement (including any notice or announcement of
intent to adopt such procedures or regulations) ("Administrative Action") or
(iii) any amendment to, clarification of, or change in the official position or
the interpretation of such Administrative
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Action or any interpretation or pronouncement that provides for a position with
respect to such Administrative Action that differs from the theretofore
generally accepted position, in each case, by any legislative body, court,
governmental authority or regulatory body, irrespective of the manner in which
such amendment, clarification or change is made known, which amendment,
clarification or change is effective or such pronouncement or decision is
announced on or after the date of issuance of the Series A Preferred Shares,
there is more than an insubstantial risk that (a) dividends paid or to be paid
by the Company with respect to the capital stock of the Company are not, or will
not be, fully deductible by the Company for United States Federal income tax
purposes or (b) the Company is, or will be, subject to more than a de minimis
amount of other taxes, duties or other governmental charges.
RIGHTS UPON LIQUIDATION. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of the Series
A Preferred Shares at the time outstanding will be entitled to receive out of
assets of the Company available for distribution to stockholders, before any
distribution of assets is made to holders of Common Stock or any other class of
stock ranking junior to the Series A Preferred Shares upon liquidation,
liquidating distributions in the amount of $50.00 per share, plus the quarterly
accrued and unpaid dividend thereon, if any, to the date of liquidation.
After payment of the full amount of the liquidating distributions to which they
are entitled, the holders of Series A Preferred Shares will have no right or
claim to any of the remaining assets of the Company. In the event that, upon
any such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all outstanding Series A Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the Series A Preferred
Shares in the distribution of assets upon any liquidation, dissolution or
winding up of the affairs of the Company, then the holders of the Series A
Preferred Shares and such other classes or series of capital stock shall share
ratably in any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Company with or into any
other entity, or the sale, lease or conveyance of all or substantially all of
the property or business of the Company, shall not be deemed to constitute
liquidation, dissolution or winding up of the Company.
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RESTRICTIONS ON OWNERSHIP AND TRANSFER. The Company's Articles of Incorporation
contain certain restrictions on the number of shares of Preferred Stock that
individual stockholders may directly or beneficially own. Such provisions
include a restriction that if any transfer of shares of capital stock of the
Company would cause the Company to be owned by fewer than 100 persons, such
transfer shall be null and void and the intended transferee will acquire no
rights to the stock. In addition, subject to certain exceptions specified in
the Company's Articles of Incorporation, no natural person or entity which is
considered to be an individual under Section 542(a)(2) of the Code is permitted
to own (including shares deemed to be owned by virtue of the relevant
attribution provisions of the Code), more that 1% (the "Ownership Limit") of any
issued and outstanding class or series of Preferred Stock. The Board of
Directors may (but in no event will be required to), upon receipt of a ruling
from the Internal Revenue Service or an opinion of counsel satisfactory to it,
raise or waive the Ownership Limit with respect to a holder if such holder's
ownership will not then or in the future jeopardize the Company's status as a
REIT.
The Articles of Incorporation provide that shares of any class or series of
Preferred Stock owned, or deemed to be owned, by, or transferred to a
stockholder in excess of the Ownership Limit, or which would otherwise cause the
Company to fail to qualify as a REIT (the "Excess Shares"), will automatically
be transferred, by operation of law, to a trustee as a trustee of a trust for
the exclusive benefit of a charity to be named by the Company as of the day
prior to the day the prohibited transfer took place. Any distributions paid
prior to the discovery of the prohibited transfer or ownership are to be repaid
by the original transferee to the Company and by the Company to the trustee; any
vote of the shares while the shares were held by the original transferee prior
to the Company's discovery thereof shall be void ab initio and the original
transferee shall be deemed to have given its proxy to the trustee. Any unpaid
distributions with respect to the original transferee will be rescinded as void
ab initio. In liquidation, the original transferee stockholder's ratable share
of the Company's assets would be limited to the price paid by the original
transferee for the Excess Shares or, if no value was given, the price per share
equal to the closing market price on the date of the purported transfer. The
trustee of the trust shall promptly sell the shares to any person whose
ownership is not prohibited, whereupon the interest of the trust shall
terminate. Proceeds of the sale shall be paid to the original transferee up to
its purchase price (or, if the original transferee did not purchase the shares,
the value on its date of acquisition) and any remaining proceeds shall be paid
to a charity to be named by the Company.
The constructive ownership rules of the Code are complex and may cause Preferred
Stock owned, directly or indirectly, by a group of related individuals and/or
entities to be deemed to be constructively owned by one individual or entity.
As a result, the acquisition or ownership of less than 1% of a class or series
of issued and outstanding Preferred Stock (or the acquisition or ownership of an
interest in an entity that owns shares of such
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series of Preferred Stock) by an individual or entity could cause that
individual or entity (or another individual or entity) to own constructively in
excess of 1% of such class or series of Preferred Stock, and thus subject such
stock to the applicable Ownership Limit. Direct or constructive ownership in
excess of the Ownership Limit would cause ownership of the shares in excess of
the limit to be transferred to the trustee.
All certificates representing shares of Preferred Stock will bear a legend
referring to the restrictions described above.
The Ownership Limit provisions will not be automatically removed even if the
REIT rules are changed so as to eliminate any ownership concentration limitation
or if the ownership concentration limitation is increased.
The Articles of Incorporation require that any person who beneficially owns 0.5%
(or such lower percentage as may be required by the Code or the Treasury
Regulations) of the outstanding shares of any class or series of Preferred Stock
of the Company must provide certain information to the Company within 30 days of
June 30 and December 31 of each year. In addition, each stockholder shall upon
demand be required to disclose to the Company in writing such information as the
Company may request in order to determine the effect, if any, of such
stockholder's actual and constructive ownership on the Company's status as a
REIT and to ensure compliance with the Ownership Limit.
DIVIDEND POLICY
The Company expects to pay an aggregate amount of dividends each year with
respect to its outstanding shares of stock equal to not less than 100% of the
Company's "REIT taxable income" for such year (excluding capital gains). The
Company anticipates that none of the dividends on the Series A Preferred Shares
and no material portion of the dividends on the Common Stock will constitute
non-taxable returns of capital. The Company paid a dividend to holders of
shares of Common Stock and to holders of Series A Preferred Shares on January
15, 1997. See "Management's Discussion and Analysis - Results of Operations."
Dividends are declared at the discretion of the Board of Directors after
considering the Company's distributable funds, financial requirements, tax
considerations and other factors. The Company's distributable funds consist
primarily of interest payments received in respect of the Mortgage Assets held
by it, and the Company anticipates that most of such assets will bear interest
at adjustable rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Interest Rate Risk."
THE BANK
The Bank is a federally chartered and federally insured stock savings bank which
at December 31, 1996 was conducting business from 114 full-service offices and
562 automated teller machines ("ATMs") primarily in Maryland, Virginia, and the
District of Columbia. The Bank's home office is located in McLean, Virginia and
its executive office is located in Montgomery County, Maryland, which are both
suburban communities of Washington, D.C. The Bank also maintains 22 mortgage
loan production offices in the mid-Atlantic region, 21 of which are operated by
a wholly owned mortgage banking subsidiary. At December 31, 1996, the Bank had
-8-
<PAGE>
total assets of $6.2 billion, total deposits of $4.2 billion and total
stockholders' equity of $344.7 million. Based on total consolidated assets at
December 31, 1996, the Bank is the largest bank headquartered in the Washington,
D.C. metropolitan area.
Because the Company is a subsidiary of the Bank, federal regulatory authorities
will have the right to examine the Company and its activities. Payment of
dividends on the Series A Preferred Shares could be subject to regulatory
limitations if the Bank became "undercapitalized" for purposes of the OTS prompt
corrective action regulations, which is currently defined as having a total
risk-based capital ratio of less than 8.0%, a tier 1 risk-based capital ratio of
less than 4.0% and a core capital (or leverage) ratio of less than 4.0%. At
December 31, 1996, the Bank's total risk-based capital ratio was 14.06%, its
tier 1 risk-based capital ratio was 7.05% and its core capital (or leverage)
ratio was 6.58%.
If the Exchange Event occurs, the Bank would likely be prohibited from paying
dividends on the Bank Preferred Shares. In all circumstances following the
Exchange Event, the Bank's ability to pay dividends would be subject to various
restrictions under OTS regulations, a resolution of the Bank's board of
directors and certain contractual provisions.
THE ADVISOR
On December 3, 1996, the Company entered into an advisory agreement (the
"Advisory Agreement") with the Bank (the "Advisor") to administer the day-to-day
operations of the Company. The Advisor is responsible for (i) monitoring the
credit quality of the Mortgage Assets held by the Company, (ii) advising the
Company with respect to the acquisition, management and financing of the
Company's Mortgage Assets, and (iii) maintaining the custody of the documents
related to the Company's Mortgage Loans (as defined below). The Advisor may from
time to time subcontract all or a portion of its obligations under the Advisory
Agreement to one or more of its affiliates involved in the business of managing
Mortgage Assets.
The Advisor and its affiliates have substantial experience in the mortgage
lending industry, both in the origination and in the servicing of mortgage
loans. At December 31, 1996, the Advisor and its affiliates owned approximately
$1.6 billion of residential mortgage loans, including approximately $300.0
million of the Company's Residential Mortgage Loans (as defined below). In their
residential mortgage loan business, the Advisor and its affiliates originate and
purchase residential mortgage loans. A portion of such loans are sold to
investors, primarily in the secondary market, generally on a servicing retained
basis. The Advisor and its affiliates also purchase servicing rights on
residential mortgage loans. In addition to loans serviced for its own portfolio,
the Advisor and its affiliates serviced residential mortgage loans having an
aggregate principal balance of approximately $3.0 billion as of December 31,
1996.
The Advisory Agreement has an initial term of three years, and will be renewed
automatically for additional one-year periods unless notice of nonrenewal is
delivered to the Advisor by the Company. The Advisory Agreement may be
terminated by the Company at any time upon 60 days' prior written notice. As
long as any Series A Preferred Shares remain outstanding, any decision by the
Company either to not renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the independent directors. The Advisor is entitled to receive
an annual advisory fee equal to $200,000 payable in equal quarterly installments
with respect to the advisory and management services provided to the Company.
See "Certain Relationships and Related Transactions."
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<PAGE>
MORTGAGE ASSETS
LOAN PORTFOLIO COMPOSITION. The Company's current portfolio of Mortgage Assets
consists of whole loans ("Mortgage Loans") secured by first mortgages or deeds
of trust on single-family residential real estate properties ("Residential
Mortgage Loans"). The following table sets forth information concerning the
Company's Residential Mortgage Loans, all of which were acquired from the Bank,
as of December 31, 1996 and December 3, 1996 (the date the initial purchase was
made).
Residential Mortgage Loan Portfolio
-----------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
At December 31, 1996 At December 3, 1996
---------------------------- --------------------------
Aggregate Percentage by Aggregate Percentage by
Principal Aggregate Principal Aggregate
Type Balance Balance Principal Balance
- ---- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Three-Year ARM $105,412 35.8% $108,125 36.0%
5/1 ARM 182,414 61.9% 185,262 61.8%
10/1 ARM 6,678 2.3% 6,691 2.2%
-------- ----- -------- -----
Total $294,504 100.0% $300,078 100.0%
======== ===== ======== =====
</TABLE>
Principal repayments on the Company's loans during the period from December 3,
1996 through December 31, 1996 were $7.1 million, which were offset by
additional purchases of Residential Mortgage Loans of $1.8 million. See
"Management's Discussion and Analysis - Financial Condition - Residential
Mortgage Loans."
All of the Residential Mortgage Loans included in the Company's portfolio at
December 31, 1996 bore interest at adjustable rates. The interest rate on an
"adjustable rate mortgage" or an "ARM" adjusts periodically based on an index
(such as the interest rate on United States Treasury Bills). ARMs are typically
subject to lifetime interest rate caps and periodic interest rate adjustment
caps. As of December 31, 1996, the interest rates on the Residential Mortgage
Loans included in the Company's portfolio ranged from 5.25% per annum to 9.50%
per annum and the weighted average interest rate was approximately 7.83% per
annum.
The interest rate of each type of ARM product included in the Company's
portfolio adjusts at the times (each, a "Rate Adjustment Date") and in the
manner described below, subject to lifetime interest rate caps, to minimum
interest rates and, in the case of most ARMs in the portfolio, to maximum
periodic adjustment increases or decreases, each as specified in the mortgage
note relating to the ARM. Information set forth below regarding interest rate
caps and minimum interest rates applies to the current portfolio only.
Residential Mortgage Loans purchased by the Company after December 31, 1996 may
be subject to different terms with respect to interest rates.
Each ARM bears interest at its initial interest rate until the first Rate
Adjustment Date. Effective with each Rate Adjustment Date, the monthly
principal and interest payment on an adjustable rate Residential Mortgage Loan
will be adjusted to an amount that will fully amortize the then-outstanding
principal balance of such loan over its remaining term to stated maturity and
that will be sufficient to pay interest at the adjusted interest rate. Certain
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<PAGE>
of the types of loan products that are ARMs contain an option, which may be
exercised by the mortgagor, to convert the ARM into a fixed rate loan for the
remainder of the mortgage term. If a loan that is an ARM is converted into a
fixed rate loan, the interest rate on the fixed rate loan will be determined at
the time of conversion as specified in the mortgage note relating to such loan
and will remain fixed at such rate for the remaining term of such loan. All the
Residential Mortgage Loans included in the portfolio allow the mortgagor to
repay at any time some or all of the outstanding principal balance of the loan
without a fee or penalty.
One-Year ARM. The interest rate with respect to a one-year ARM ("One-Year ARM")
- -------------
is fixed at an initial rate for the first twelve monthly payments and adjusts
annually thereafter on the date specified in the related mortgage note to a rate
equal to the then-current applicable treasury index plus the gross margin set
forth in such mortgage note, subject to a maximum annual interest rate increase
or decrease of 2.00%, a lifetime interest rate cap as specified in the related
mortgage note and a minimum interest rate no less than the gross margin.
Three-Year ARM. The interest rate with respect to each three-year ARM ("Three-
- ---------------
Year ARM") is fixed at an initial rate for the first 36 monthly payments and
adjusts every three years thereafter in the same manner as described for the
One-Year ARM, except that the treasury index is the weekly average yield on the
United States Treasury securities adjusted to a constant maturity of three
years.
Five-Year Fixed Rate Loan with Automatic Conversion to One-Year ARM. The
- --------------------------------------------------------------------
interest rate with respect to each five-year fixed rate loan with automatic
conversion to a One-Year ARM (a "5/1 ARM") is fixed at an initial rate for the
first 60 monthly payments and adjusts annually thereafter, as if the Residential
Mortgage Loan were a One-Year ARM, with a lifetime interest cap equal to the
initial interest rate with respect to such Residential Mortgage Loan plus 6% to
8%. There is no ability to continue at a fixed rate after the first Rate
Adjustment Date.
Ten-Year Fixed Rate Loan With Automatic Conversion to One-Year ARM. The
- -------------------------------------------------------------------
interest rate with respect to each ten-year fixed rate loan with automatic
conversion to a One-Year ARM (a "10/1 ARM") is fixed at an initial rate for the
first 120 monthly payments and adjusts annually thereafter, as if the
Residential Mortgage Loan were a One-Year ARM, with a lifetime interest cap
equal to the initial interest rate with respect to such Residential Mortgage
Loan plus 6% to 7%. There is no ability to continue at a fixed rate after the
first Rate Adjustment Date.
INVESTMENT POLICY. General. The Company currently intends to maintain at least
-------
95% of its portfolio in Mortgage Assets consisting of either Residential
Mortgage Loans or investment grade mortgage securities representing interests in
pools of Mortgage Loans ("Mortgage-Backed Securities") and may invest up to 5%
in Mortgage Loans secured by commercial real estate properties of multi-family
properties ("Commercial Mortgage Loans") or in other assets eligible to be held
by a REIT. The Company's current policy prohibits the acquisition of any
Mortgage Loan or any interest in a Mortgage Loan (other than an interest
resulting from the acquisition of Mortgage-Backed Securities) if the Mortgage
Loan (i) is delinquent in the payment of principal and interest; (ii) is or was
at any time during the preceding 12 months (a) classified, (b) in nonaccrual
status or (c) renegotiated due to the financial deterioration of the borrower;
or (iii) has been, more than once during the preceding 12 months, more than 30
days past due in the payment of principal or interest. Loans that are in
"nonaccrual status" are generally loans that are past due 90 days or more in
principal or interest, and "classified" loans are generally troubled loans which
are deemed substandard or doubtful with respect to collectibility.
The Company may from time to time acquire both conforming and nonconforming
Residential Mortgage Loans. Conventional conforming Residential Mortgage Loans
comply with the requirements for inclusion in a loan guarantee program sponsored
by either the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal
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<PAGE>
National Mortgage Association ("FNMA"). The nonconforming Residential Mortgage
Loans that the Company purchases will be nonconforming generally because they
have original principal balances which exceed the limits for FHLMC or FNMA
programs.
Mortgage-Backed Securities. While no Mortgage-Backed Securities are included in
- --------------------------
the current Mortgage Asset portfolio, the Company may from time to time in the
future acquire fixed-rate or variable-rate Mortgage-Backed Securities
representing interests in pools of Mortgage Loans. A portion of any Mortgage-
Backed Securities that the Company may purchase may have been originated by the
Bank by exchanging pools of Mortgage Loans for the Mortgage-Backed Securities.
The Mortgage Loans underlying the Mortgage-Backed Securities will be secured by
single-family residential properties located throughout the United States.
The Company intends to acquire only investment grade Mortgage-Backed Securities
issued by agencies of the Federal government or government sponsored agencies,
such as FHLMC, FNMA and the Government National Mortgage Association ("GNMA").
The Company does not intend to acquire any interest-only or principal-only
Mortgage-Backed Securities.
Commercial Mortgage Loans. While no Commercial Mortgage Loans are included in
- -------------------------
the current portfolio, the Company may from time to time in the future acquire
Commercial Mortgage Loans secured by industrial and warehouse properties,
recreational facilities, office buildings, retail space and shopping malls,
hotels and motels, hospitals, nursing homes or senior living centers. Unlike
Residential Mortgage Loans, Commercial Mortgage Loans generally lack
standardized terms. In addition, Commercial Mortgage Loans tend to be fixed
rate loans having shorter maturities than Residential Mortgage Loans.
Commercial Mortgage Loans may also not be fully amortizing, meaning that they
may have a significant principal balance or "balloon" payment due on maturity.
Moreover, commercial properties, particularly industrial and warehouse
properties, are generally subject to relatively greater environmental risks than
non-commercial properties, generally giving rise to increased costs of
compliance with environmental laws and regulations.
Other Real Estate Assets. The Company may invest up to 5% of the total value of
- ------------------------
its portfolio in assets (other than Residential Mortgage Loans and Mortgage-
Backed Securities) eligible to be held by REITs. Such assets could include
Commercial Mortgage Loans, Mortgage Loans secured by multi-family properties,
cash, cash equivalents, securities and shares or interests in other REITs.
CREDIT RISK MANAGEMENT POLICIES. The Company intends that each Mortgage Loan
that it acquires in the future will represent a first lien position and will be
originated in the ordinary course of the originator's real estate lending
activities based on the underwriting standards generally applied (at the time of
origination) for the originator's own account. The Company also intends that
all Mortgage Loans held by the Company will be serviced pursuant to the
servicing agreement between the Company and the Bank dated December 3, 1996 (the
"Servicing Agreement"). See "Servicing."
DELINQUENCIES. When a borrower fails to make a required payment on a mortgage
loan, the loan is considered delinquent and, after expiration of the applicable
cure period, the borrower is charged a late fee, which is retained by the
Servicer. The Bank and the Company follow practices customary in the banking
industry in attempting to cure delinquencies and in pursuing remedies upon
default. There were no delinquent Residential Mortgage Loans at December 31,
1996.
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<PAGE>
GEOGRAPHIC DISTRIBUTION. Substantially all of the Residential Mortgage Loans
included in the current loan portfolio are located in Washington D.C., Maryland,
and Virginia. Consequently, these loans may be subject to a greater risk of
default than other comparable loans in the event of adverse economic, political,
or business developments in Washington D.C., Maryland, and Virginia that may
affect the ability of residential property owners in any of these areas to make
payments of the principal and interest on the underlying mortgages. See
"Management Discussion and Analysis - Significant Concentration of Credit Risk."
SERVICING
The Residential Mortgage Loans owned by the Company are serviced by the Bank
(the "Servicer") pursuant to the terms of the Servicing Agreement. The Servicer
receives a fee equal to .375% per annum on the principal balances of the
Mortgage Loans serviced. See "Certain Relationships and Related Transactions."
The Servicing Agreement requires the Servicer to service the Company's Mortgage
Loans in a manner generally consistent with accepted secondary market practices,
with any servicing guidelines promulgated by the Company and, in the case of
Residential Mortgage Loans, with FNMA and FHLMC guidelines and procedures. The
Servicing Agreement requires the Servicer to service these loans solely with a
view toward the interests of the Company and without regard to the interests of
the Bank or any of its affiliates. The Servicer collects and remits principal
and interest payments, administers mortgage escrow accounts, submits and pursues
insurance claims and initiates and supervises foreclosure proceedings on the
loans it services. The Servicer also provides accounting and reporting services
required by the Company for such loans. The Servicing Agreement requires the
Servicer to follow such collection procedures as are customary in the industry,
including contacting delinquent borrowers and supervising foreclosures and
property disposition in the event of unremedied defaults in accordance with
servicing guidelines promulgated by the Company. The Servicer may, in its
discretion, arrange with a defaulting borrower a schedule for the liquidation of
delinquencies, provided that, in the case of Residential Mortgage Loans, no
primary mortgage guaranty insurance coverage is adversely affected.
The Servicer is entitled to retain any ancillary fees, including, but not
limited to, late payment charges, prepayment fees, penalties and assumption fees
collected in connection with the Mortgage Loans serviced by it. In addition,
the Servicer is entitled to receive any benefit derived from interest earned on
collected principal and interest payments between the date of collection and the
date of remittance to the Company and from interest earned on tax and insurance
impound funds with respect to Mortgage Loans serviced by the Servicer.
The Servicer is required to pay all expenses related to the performance of its
duties under the Servicing Agreement. The Servicer is required to make advances
of taxes and required insurance premiums that are not collected from borrowers
with respect to any Mortgage Loan serviced by it, unless it determines that such
advances are nonrecoverable from the mortgagor, insurance proceeds or other
sources with respect to such Mortgage Loan.
The Servicing Agreement can be terminated without cause with at least sixty days
notice to the Servicer and payment of a termination fee.
-13-
<PAGE>
CAPITAL AND LEVERAGE POLICIES
To the extent that the Board of Directors determines that additional funding is
required, the Company may raise such funds through additional equity offerings,
debt financing or retention of cash flow (after consideration of provisions of
the Code requiring the distribution by a REIT of a certain percentage of taxable
income and taking into account taxes that would be imposed on undistributed
taxable income, including capital gains), or a combination of these methods.
At December 31, 1996, the Company had no debt outstanding, and the Company does
not currently intend to incur any indebtedness. However, the organizational
documents of the Company do not contain any limitation on the amount or
percentage of debt, funded or otherwise, the Company might incur. The Company
may not, without the approval of a majority of the Independent Directors, incur
debt for borrowed money in excess of 25% of the Company's total stockholders'
equity, including intercompany advances made by the Bank to the Company.
The Company may also issue additional series of Preferred Stock. However, the
Company does not currently intend to issue any additional series of Preferred
Stock unless it simultaneously receives additional capital contributions from
the Bank equal to the sum of the aggregate offering price of such additional
Preferred Stock and the Company's expenses in connection with the issuance of
such additional shares of Preferred Stock. Prior to its issuance of additional
shares of Preferred Stock, the Company will take into consideration the Bank's
regulatory capital requirements and the cost of raising and maintaining that
capital at the time.
EMPLOYEES
The Company has six officers. The executive officers of the Company are
described further below under "Directors and Executive Officers." The Company
does not anticipate that it will require any additional employees because it has
retained the Advisor to administer the day-to-day activities of the Company
pursuant to the Advisory Agreement. Each officer of the Company currently is
also an officer and/or director of the Bank and/or affiliates of the Bank. The
Company maintains corporate records and audited financial statements that are
separate from those of the Bank or any of the Bank's affiliates.
COMPETITION
The Company does not anticipate that it will engage in the business of
originating Residential Mortgage Loans. It does anticipate that it will purchase
Mortgage Assets in addition to those in the current loan portfolio and that all
these Mortgage Assets will be purchased from the Bank or affiliates of the Bank.
Accordingly, the Company does not expect to compete with mortgage conduit
programs, investment banking firms, savings and loan associations, banks, thrift
and loan associations, finance companies, mortgage bankers or insurance
companies in acquiring its Mortgage Assets.
ENVIRONMENTAL MATTERS
In the event that the Company is forced to foreclose on a defaulted Mortgage
Loan to recover its investment in such Mortgage Loan, the Company may be subject
to environmental liabilities in connection with the underlying
-14-
<PAGE>
real property which could exceed the value of the real property. Although the
Company intends to exercise due diligence to discover potential environmental
liabilities prior to the acquisition of any property through foreclosure,
hazardous substances or waste, contaminants, pollutants or sources thereof (as
defined by state and federal laws and regulations) may be discovered on
properties during the Company's ownership or after a sale thereof to a third
party. If such hazardous substances are discovered on a property which the
Company has acquired through foreclosure or otherwise, the Company may be
required to remove those substances and clean up the property. There can be no
assurance that in such a case the Company would not incur full recourse
liability for the entire costs of any removal and clean-up, that the cost of
such removal and clean-up would not exceed the value of the property or that the
Company could recoup any such costs from any third party. The Company may also
be liable to tenants and other users of neighboring properties. In addition,
the Company may find it difficult or impossible to sell the property prior to or
following any such clean-up.
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856 through 860 of
the Code, commencing with its taxable year ended December 31, 1996. As a REIT,
the Company generally will not be subject to Federal income tax on its net
income (excluding capital gains) provided that it distributes annually 100
percent of its REIT taxable income to its stockholders, and meets certain
organizational, stock ownership and operational requirements. If in any taxable
year the Company fails to qualify as a REIT, the Company would not be allowed a
deduction for distributions to stockholders in computing its taxable income and
would be subject to Federal and state income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. In
addition, the Company would also be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.
ITEM 2. PROPERTIES
None.
ITEM 3. LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. None of the Company,
the Bank or any affiliate of the Bank is currently involved in nor, to the
Company's knowledge, is currently threatened with any material litigation with
respect to the Residential Mortgage Loans included in the portfolio, other than
routine litigation arising in the ordinary course of business, most of which is
covered by liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the Company's fiscal year ended December 31, 1996.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
There is no established public trading market in the Company's Common stock. As
of March 26, 1997, there were 100 issued and outstanding shares of Common Stock
held by one stockholder, the Bank. The following table reflects the
distributions paid by the Company on the Common Stock since the Company's
initial capitalization on November 5, 1996. For a discussion of the Company's
distribution policy with respect to the Common Stock, see "Business -- Dividend
Policy."
1996 Distributions
---- -------------
November 5 to December 31 $584,749 /(1)/
- ------------------------------
(1) On December 16, 1996, the Company declared a cash dividend of $5,847.49 per
share of Common Stock to stockholders of record on December 30, 1996. Of the
$584,749 that was paid on January 15, 1997, $578,234 of this amount was paid out
of retained earnings of the Company and the remaining $6,515 was treated as a
return of capital.
PREFERRED STOCK
The Series A Preferred Shares are listed on the New York Stock Exchange under
the trading symbol "CCP PrA." As of March 26, 1997, there were 3,000,000 issued
and outstanding Series A Preferred Shares held by approximately 14 holders of
record. The following table reflects the respective high and low sales prices
for the Series A Preferred Shares for the period from November 26, 1996, the
date upon which trading of such shares commenced, through December 31, 1996.
The table also indicates the distributions paid by the Company during this
period. For a discussion of the Company's distribution policy with respect to
the Series A Preferred Shares, see "Business -- Dividend Policy."
Price
---------------------------------
1996 High Low Distributions
- ---- ---------------------------------
November 26 to December 31 $52.50 $50.00 $1,253,640/(1)/
- ------------------------------
(1) On December 16, 1996, the Company declared a cash dividend of $0.41788 per
Series A Preferred Share to stockholders of record on December 30, 1996. The
dividend was paid on January 15, 1997 out of retained earnings of the Company.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company herein has been derived from the
Financial Statements of the Company, which statements have been audited by
Arthur Andersen LLP, independent public accountants, as indicated by their
report with respect thereto included elsewhere in this form 10-K. The data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements
included in this form 10-K.
For the Period From Inception (November 5, 1996) Through December 31, 1996
<TABLE>
<CAPTION>
OPERATING DATA:
<S> <C>
Interest income........................................... $ 1,943,288
Operating expenses........................................ 111,414
Net income................................................ 1,831,874
Earnings available to common stockholder.................. 578,234
Earnings per common share................................. 5,782.34
DIVIDENDS DECLARED:
Dividends on common stock................................. $ 584,749
Dividends on preferred stock.............................. 1,253,640
BALANCE SHEET DATA:
Mortgage loans............................................ $294,504,138
Total assets.............................................. 302,318,288
Total stockholders' equity................................ 299,993,485
Number of preferred shares outstanding.................... 3,000,000
Number of common shares outstanding....................... 100
Average yield on residential mortgage loans............... 7.79%
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
GENERAL
The Company is a newly formed Maryland corporation created for the purpose of
acquiring and holding Mortgage Assets that will generate net income for
distribution to stockholders. The Company is organized and intends to qualify as
a REIT for Federal income tax purposes.
The Company issued 100 shares of its Common Stock, par value $1.00 per share, to
the Bank on November 5, 1996. The Company commenced its operations on December
3, 1996, following the consummation of the Offering of the Company's Series A
Preferred Shares, and a simultaneous capital contribution made by the Bank. The
net cash proceeds of approximately $300.0 million from the Offering and the
capital contribution made by the Bank were used by the Company to purchase from
the Bank the Company's initial portfolio of Residential Mortgage Loans at their
estimated fair value of approximately $300.0 million.
RESIDENTIAL MORTGAGE LOANS
At December 31, 1996, the Company had $294.5 million invested in Residential
Mortgage Loans, which represents a 1.8% decline in the initial amount invested
on December 3, 1996, due primarily to principal collections of $7.1 million,
which were partially offset by additional Residential Mortgage Loan purchases of
$1.8 million. Management intends to continue to reinvest proceeds received from
repayments of loans in additional Residential Mortgage Loans to be purchased
from either the Bank or its affiliates.
At December 31, 1996, there were no delinquent or nonaccrual Residential
Mortgage Loans.
ALLOWANCE FOR LOAN LOSSES
Management reviews the loan portfolio to establish an allowance for estimated
losses if deemed necessary. An analysis of whether an allowance for loan losses
is required is performed periodically, and an allowance is provided after
considering such factors as the economy in lending areas, delinquency
statistics, past loss experience and estimated future loan losses. The
allowance for loan losses is based on estimates, and ultimate losses may vary
from current estimates. As adjustments to the allowance become necessary,
provisions for loan losses are reported in operations in the periods they are
determined to be necessary.
INTEREST RATE RISK
The Company's income consists primarily of interest payments on Residential
Mortgage Loans. If there is a decline in interest rates (as measured by the
indices upon which the interest rates of the Residential Mortgage Loans are
based), then the Company will experience a decrease in income available to be
distributed to its
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<PAGE>
stockholders. In such an interest rate environment, the Company may experience
an increase in prepayments on its Residential Mortgage Loans and may find it
more difficult to purchase additional loans bearing interest rates sufficient to
support payment of dividends on the Series A Preferred Shares. In addition,
certain Residential Mortgage Loan products which the Company holds allow
borrowers to convert an adjustable rate mortgage to a fixed rate mortgage, thus
"locking in" a fixed interest rate at a time when interest rates have declined.
Based on the outstanding balance of the Company's Residential Mortgage Loans at
December 31, 1996 and the interest rate on such loans, anticipated annual
interest income on the Company's loan portfolio was approximately 141.1% of the
projected annual dividend on the Series A Preferred Shares. There can be no
assurance that an interest rate environment in which there is a significant
decline in interest rates would not adversely affect the Company's ability to
pay dividends on the Series A Preferred Shares.
SIGNIFICANT CONCENTRATION OF CREDIT RISK
Concentration of credit risk arises when a number of customers engage in similar
business activities, or activities in the same geographical region, or have
similar economic features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic conditions.
Concentration of credit risk indicates the relative sensitivity of the Company's
performance to both positive and negative developments affecting a particular
industry.
The Company's exposure to geographic concentrations directly affects the credit
risk of the Residential Mortgage Loans within the portfolio. Substantially all
of the Company's Residential Mortgage Loans are loans secured by residential
real estate properties located in the Washington, D.C. metropolitan area.
Consequently, these loans may be subject to a greater risk of default than other
comparable residential mortgage loans in the event of adverse economic,
political or business developments and natural hazards in the region that may
affect the ability of residential property owners in the region to make payments
of principal and interest on the underlying mortgages.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments. In
managing liquidity, the Company takes into account various legal limitations
placed on a REIT as discussed below in "Tax Status of the Company."
The Company's principal liquidity need will be to fund the acquisition of
additional Mortgage Assets as Mortgage Assets held by the Company are repaid.
The acquisition of such additional Mortgage Assets held by the Company will be
funded with the proceeds of principal repayments on its current portfolio of
Mortgage Assets. The Company does not anticipate that it will have any other
material capital expenditures. The Company believes that cash generated from
the payment of principal and interest on its Mortgage Asset portfolio will
provide sufficient funds to meet its operating requirements, to pay dividends in
accordance with the requirements to be treated as a REIT for income tax purposes
for the foreseeable future. The Company may borrow as it deems necessary.
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<PAGE>
RESULTS OF OPERATIONS
During the period from inception (November 5, 1996) to December 31, 1996, the
Company reported net income of $1,831,874.
Interest income on Residential Mortgage Loans totaled $1,940,387, which
represents an average yield on such loans of 7.79%. The average loan balance of
the Residential Mortgage Loan portfolio for the period was $299.0 million.
Other interest income of $2,901 was recognized on the Company's interest bearing
deposits during the period.
Operating expenses totalling $111,414 were comprised of loan servicing fees paid
to parent, advisory fees paid to parent, directors fees and general and
administrative expenses. Loan servicing expenses of $91,413 were based on a
servicing fee rate of 0.375% of the outstanding principal balances of
Residential Mortgage Loans at December 31, 1996, pursuant to the Servicing
Agreement. See "Business - Servicing." Advisory fees paid to parent for the
period ended December 31, 1996 totalled $16,667. See "Business - The Advisor."
Directors fees totalled $3,167 and represent compensation to the independent
directors for their services. See "Executive Compensation."
On December 16, 1996, the Company declared a cash dividend of $0.41788 per share
on the outstanding shares of Series A Preferred Shares to stockholders of
record. Dividends of $1,253,640 were subsequently paid, out of the retained
earnings of the Company, on January 15, 1997.
The Company also declared a cash dividend of $5,847.49 per share of Common
Stock, $578,234 of which was out of the retained earnings of the Company and
$6,515 of which was treated as a return of capital. The dividend was paid on
January 15, 1997.
-20-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
Page
------
(a) Report of Independent Public Accountants..................... F-2
(b) Statement of Financial Condition at December 31, 1996........ F-3
(c) Statement of Operations for the Period from Inception
(November 5, 1996) through December 31, 1996................. F-4
(d) Statement of Stockholders' Equity for the Period from
Inception (November 5, 1996) through December 31, 1996....... F-5
(e) Statement of Cash Flows for the Period from Inception
(November 5, 1996) through December 31, 1996................. F-6
(f) Notes to Financial Statements................................ F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of the Chevy Chase Preferred Capital Corporation:
We have audited the accompanying statement of financial condition of the Chevy
Chase Preferred Capital Corporation (the "Company," a Maryland Corporation) as
of December 31, 1996, and the related statements of operations, stockholders'
equity and cash flows for the period from Inception (November 5, 1996) to
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1996, and the results of its operations and its cash flows for the period from
Inception (November 5, 1996) to December 31, 1996 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
March 20, 1997
F-2
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
STATEMENT OF FINANCIAL CONDITION
--------------------------------
<TABLE>
<CAPTION>
December 31,
1996
--------------
ASSETS
------
<S> <C>
Cash and interest-bearing deposits $ 365,175
Residential mortgage loans 294,504,138
Accounts receivable from parent 5,844,149
Accrued interest receivable 1,604,826
------------
Total assets $302,318,288
============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Accounts payable to parent $ 483,080
Accounts payable - others 3,334
Dividends payable to parent 584,749
Dividends payable - others 1,253,640
------------
Total liabilities 2,324,803
------------
10-3/8% Noncumulative Exchangeable
Preferred Stock, Series A, $5 par value
10,000,000 shares authorized, 3,000,000
shares issued and outstanding
(liquidation value of $150,000,000 plus
accrued and unpaid dividends) 15,000,000
Common stock, $1 par value
1,000 shares authorized, 100 shares
issued and outstanding 100
Capital contributed in excess of par 284,993,385
Retained earnings -
------------
Total stockholders' equity 299,993,485
------------
Total liabilities and stockholders' equity $302,318,288
============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
F-3
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
STATEMENT OF OPERATIONS
-----------------------
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1996) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
INTEREST INCOME:
<S> <C>
Residential mortgage loans $1,940,387
Other 2,901
----------
Total interest income 1,943,288
----------
OPERATING EXPENSES:
Loan servicing fees paid to parent 91,413
Advisory fees paid to parent 16,667
Directors fees 3,167
General and administrative 167
----------
Total operating expenses 111,414
----------
NET INCOME $1,831,874
==========
PREFERRED STOCK DIVIDENDS 1,253,640
----------
EARNINGS AVAILABLE TO
COMMON STOCKHOLDER $ 578,234
==========
EARNINGS PER COMMON SHARE $ 5,782.34
==========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
F-4
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
STATEMENT OF STOCKHOLDERS' EQUITY
---------------------------------
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1996) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
Capital
Contributed Total
Preferred Common in Excess Retained Stockholders'
Stock Stock of Par Earnings Equity
----------- ------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock
on November 5, 1996 $ - $100 $ 900 $ - $ 1,000
Initial public offering of 10-3/8%
Noncumulative Exchangeable
Preferred Stock, Series A
on December 3, 1996 15,000,000 - 129,000,000 - 144,000,000
Capital contribution from
Common Stockholder
on December 3, 1996 - - 155,999,000 - 155,999,000
Net income - - - 1,831,874 1,831,874
Dividends on 10-3/8%
Noncumulative Exchangeable
Preferred Stock, Series A - - - (1,253,640) (1,253,640)
Dividends on
Common Stock - - (6,515) (578,234) (584,749)
----------- ------ ------------ ----------- ------------
Balance, December 31, 1996 $15,000,000 $100 $284,993,385 $ - $299,993,485
=========== ====== ============ =========== ============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
F-5
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
STATEMENT OF CASH FLOWS
-----------------------
FOR THE PERIOD FROM INCEPTION (NOVEMBER 5, 1996) THROUGH DECEMBER 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<TABLE>
<CAPTION>
<S> <C>
Net income $1,831,874
Adjustments to reconcile net income to net cash
used in operating activities:
Increase in accounts receivable from parent (5,844,149)
Increase in accrued interest receivable (1,604,826)
Increase in accounts payable to parent 483,080
Increase in accounts payable - others 3,334
------------
NET CASH USED IN OPERATING ACTIVITIES (5,130,687)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of residential mortgage loans (301,637,523)
Repayments of residential mortgage loans 7,133,385
------------
NET CASH USED IN INVESTING ACTIVITIES (294,504,138)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,000
Net proceeds from issuance of preferred stock 144,000,000
Capital contribution from common stockholder 155,999,000
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 300,000,000
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 365,175
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -
-----------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1996 $ 365,175
===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
F-6
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1996
-----------------
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Chevy Chase Preferred Capital Corporation (the "Company") is a Maryland
corporation which was incorporated on August 20, 1996 and created for the
purpose of acquiring and holding real estate mortgage assets. The Company is a
wholly-owned subsidiary of Chevy Chase Bank, F.S.B. (the "Bank"), a federally
insured stock savings bank.
On November 5, 1996, the Company was initially capitalized with the issuance to
the Bank of 100 shares of the Company's common stock (the "Common Stock"), $1.00
par value. On December 3, 1996, the Company commenced its operations upon
consummation of an initial public offering of 3,000,000 shares of the Company's
10-3/8% Noncumulative Exchangeable Preferred Stock, Series A (the "Series A
Preferred Shares"), $5.00 par value. These offerings, together with a separate
capital contribution made by the Bank on December 3, 1996, raised net capital of
$300 million. All Common Stock is held by the Bank.
The Company used the proceeds raised from the initial public offering of the
Series A Preferred Shares, the sale of Common Stock to the Bank and the
additional capital contribution to the Company by the Bank to pay the expenses
related to the offering and the formation of the Company and to purchase from
the Bank the Company's initial portfolio of residential mortgage loans at their
estimated fair value of approximately $300 million. Such loans were recorded in
the accompanying statement of financial condition at the Bank's historical cost
basis which approximated their estimated fair values. See Note 7.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES:
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities as of the date of the statement of financial condition and income
and expenses for the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include cash and
interest-bearing deposits.
F-7
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------------------
DECEMBER 31, 1996
-----------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RESIDENTIAL MORTGAGE LOANS:
Residential mortgage loans are carried at the principal amount outstanding.
Interest income is accrued and recognized using the interest method or on a
basis approximating a level rate of return over the term of the loan.
Loans are reviewed on a monthly basis and are placed on non-accrual status when,
in the opinion of management, the full collection of principal or interest has
become unlikely. Uncollectible accrued interest receivable on non-accrual loans
is charged against current period income. The Company had no non-accrual loans
at December 31, 1996.
ALLOWANCE FOR LOSSES:
Management periodically reviews the residential mortgage loan portfolio to
establish an allowance for estimated losses if deemed necessary. An allowance
is provided after considering such factors as the economy in lending areas,
delinquency statistics, past loss experience and estimated future losses. The
allowance for losses is based on estimates, and ultimate losses may vary from
current estimates. As adjustments to the allowance become necessary, provisions
for losses are reported in operations in the periods they are determined to be
necessary.
CONCENTRATIONS OF CREDIT:
Substantially all of the Company's residential mortgage loans are located in the
metropolitan Washington, D.C. area. Service industries and Federal, state and
local governments employ a significant portion of the Washington, D.C. area
labor force. Adverse changes in economic conditions could have a direct impact
on the timing and amounts of payments by borrowers.
ACCOUNTS RECEIVABLE FROM PARENT:
Accounts receivable from parent represents principal and interest payments
received from borrowers by the Bank as servicer of the mortgage loans which are
being held by the servicer in a custodial account pending remittance to the
Company. The Company receives remittances from the servicer on the 10th day of
each month. See Note 6.
F-8
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------------------
DECEMBER 31, 1996
-----------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ACCOUNTS PAYABLE TO PARENT:
Accounts payable to parent represents fees owed to the Bank for managing the
operations of the Company and for servicing the Company's residential mortgage
loans and expenses paid by the Bank on behalf of the Company. See Note 6.
DIVIDENDS:
Preferred Stock. Dividends on the Series A Preferred Shares are payable at a
- ----------------
rate of 10-3/8% per annum of the liquidation preference (an amount equal to
$5.1875 per annum per share), if, when and as declared by the Board of Directors
of the Company. Dividends are not cumulative and, if declared, are payable
quarterly in arrears on the fifteenth day of January, April, July and October.
Common Stock. The stockholder is entitled to receive dividends when, as and if
- -------------
declared by the Board of Directors out of funds legally available after all
preferred dividends have been paid.
EARNINGS PER COMMON SHARE:
Dividends on preferred stock are deducted from earnings in the computation of
earnings per common share when declared by the Company's Board of Directors.
INCOME TAXES:
The Company will elect for Federal income tax purposes to be treated as a Real
Estate Investment Trust ("REIT") and intends to comply with the provisions of
the Internal Revenue Code of 1986 (the "IRC"), as amended. Accordingly, the
Company will not be subject to Federal corporate income taxes to the extent it
distributes 100% of its REIT taxable income to stockholders and as long as
certain asset, income and stock ownership tests are met in accordance with the
IRC. During the period ended December 31, 1996, the Company distributed 101.5%
of its taxable income. Because the Company believes it qualifies as a REIT for
Federal income tax purposes, no provision for income taxes is included in the
accompanying financial statements.
F-9
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------------------
DECEMBER 31, 1996
-----------------
NOTE 3 - RESIDENTIAL MORTGAGE LOANS:
Residential mortgage loans consist of three-year adjustable rate mortgages
("ARMs") and five-year and ten-year fixed-rate loans with automatic adjustment
to one-year ARMs. The following shows the residential mortgage loan portfolio
by type:
<TABLE>
<CAPTION>
<S> <C>
Three-year ARMs $105,412,171
5/1 ARMs 182,414,336
10/1 ARMs 6,677,631
------------
Total $294,504,138
============
</TABLE>
Each of the mortgage loans is secured by a mortgage, deed of trust or other
security instrument which created a first lien on the residential dwellings
located in their respective jurisdictions.
NOTE 4 - PREFERRED STOCK
On December 3, 1996, the Company sold $150 million of Series A Preferred Shares,
$5.00 par value and received net cash proceeds of $144 million. Cash dividends
on the Series A Preferred Shares are payable quarterly in arrears at an annual
rate of 10-3/8%. The liquidation value of each Series A Preferred Share is $50
plus accrued and unpaid dividends. The Series A Preferred Shares are not
redeemable until January 15, 2007, and are redeemable thereafter at the option
of the Company. Except under certain circumstances, the holders of the Series A
Preferred Shares have no voting rights. The Series A Preferred Shares are
automatically exchangeable for a new series of preferred stock of the Bank upon
the occurrence of certain events.
NOTE 5 - DIVIDENDS:
As of December 31, 1996, the Company's Board of Directors has declared
$1,253,640 of preferred stock dividends out of retained earnings of the Company
and $584,749 of common stock dividends, $578,234 of which was out of the
retained earnings of the Company and $6,515 of which was treated as a return of
capital. Such dividends were paid subsequent to December 31, 1996.
F-10
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------------------
DECEMBER 31, 1996
-----------------
NOTE 6 - RELATED PARTY TRANSACTIONS:
The Company has entered into an advisory agreement (the "Advisory Agreement")
with the Bank (the "Advisor"). The Advisor provides advice to the Board of
Directors and manages the operations of the Company as defined in the Advisory
Agreement. The Advisory Agreement has an initial term of three years commencing
on December 3, 1996 and automatically renews for additional one-year periods
unless the Company delivers a notice of nonrenewal to the Advisor. The Advisory
Agreement may be terminated by the Company at any time upon sixty days' prior
written notice. The advisory fee is $200,000 per annum payable in equal
quarterly installments. Advisory fees for the period ended December 31, 1996
totalled $16,667.
The Company also entered into a servicing agreement with the Bank for the
servicing of its residential mortgage loans (the "Servicing Agreement").
Pursuant to the Servicing Agreement, the Bank performs the actual servicing of
the residential mortgage loans owned by the Company, in accordance with normal
industry practice. The Servicing Agreement can be terminated without cause with
at least sixty days notice to the servicer and payment of a termination fee. The
servicing fee rate is 0.375% of the outstanding principal balance of the
residential mortgage loans. Servicing fees for the period ended December 31,
1996 totalled $91,413.
The Company has cash balances of $365,175 as of December 31, 1996 held in
various deposit accounts with the Bank. Interest earned on these accounts was
$2,901 for the period ended December 31, 1996.
NOTE 7 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The majority of the Company's assets and liabilities are financial instruments;
however, certain of these financial instruments lack an available trading
market. Significant estimates, assumptions and present value calculations were
therefore used for the purposes of deriving the Company's fair values, resulting
in a great degree of subjectivity inherent in the indicated fair value amounts.
Since the fair value is estimated as of the balance sheet date, the amount which
will actually be realized or paid upon settlement or maturity could be
significantly different. Comparability among REITs may be difficult due to the
wide range of permitted valuation techniques and the numerous estimates and
assumptions which must be made.
The following methods and assumptions were used to estimate the fair value
amounts at December 31, 1996.
CASH AND INTEREST-BEARING DEPOSITS: Carrying amount approximates fair value.
F-11
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
-----------------------------------------
DECEMBER 31, 1996
-----------------
NOTE 7 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
RESIDENTIAL MORTGAGE LOANS: Fair value of the residential mortgage loans is
estimated using discounted cash flow analyses based on contractual repayment
schedules. The discount rates used in these analyses are based on either the
interest rates paid on U.S. Treasury securities of comparable maturities
adjusted for credit risk and non-interest operating costs, or the interest rates
currently offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount reflected on the statement of financial condition
at December 31, 1996 approximates fair value.
OTHER FINANCIAL ASSETS: The carrying amounts of accounts receivable from parent
and accrued interest receivable approximate fair value.
FINANCIAL LIABILITIES: The carrying amounts of accounts payable to parent,
accounts payable - others, dividends payable to parent and dividends payable -
others approximate fair value.
F-12
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors currently consists of six members, two of whom
are not current officers or employees of the Company and are not current
directors, officers or employees of the Bank or any of its affiliates (the
"Independent Directors"). The Board of Directors met once in 1996 and all of
its members attended the meeting. Pursuant to the Articles Supplementary
establishing the Series A Preferred Shares, the Independent Directors are
required to take into account the interests of both the Series A Preferred
Shares and the Common Stock in assessing the benefit to the Company of any
proposed action requiring their consent. In considering the interests of the
holders of the Series A Preferred Shares, the Independent Directors shall owe
the same duties which the Independent Directors owe to holders of Common Stock.
The Company currently has six officers. The Company has no other employees and
does not anticipate that it will require additional employees.
The following persons are the Company's current directors and/or executive
officers, each of whom has served since 1996.
<TABLE>
<CAPTION>
Name Age Position and Offices Held
- ---- --- -------------------------
<S> <C> <C>
B. Francis Saul II......... 64 Chairman of the Board, President
and Chief Executive Officer
Alexander R. M. Boyle...... 58 Director
Stephen R. Halpin, Jr...... 41 Executive Vice President, Chief Financial
Officer, Treasurer and Director
N. Alexander MacColl, Jr... 62 Director
Leslie A. Nicholson........ 56 Executive Vice President, General
Counsel and Director
John J. O'Connor III....... 66 Director
</TABLE>
-21-
<PAGE>
The following is a summary of the experience of the executive officers and
directors of the Company:
B. FRANCIS SAUL II serves as Chairman of the Board and Chief Executive Officer
of the Bank. He also has been President and Chief Operating Officer of the B.
F. Saul Company since 1969. Mr. Saul has also served as the Chairman of the B.
F. Saul Real Estate Investment Trust since 1969 and as a trustee since 1964. He
is also a director of Derwood Investment Corporation. At December 31, 1996, B.
F. Saul Real Estate Investment Trust and Derwood Investment Corporation owned of
record 80% and 16%, respectively, of the Bank's outstanding common stock. Mr.
Saul serves as Chairman of the Board and Chief Executive Officer of Saul
Centers, Inc., a public real estate investment trust. He is also Chairman of
the Board of Directors of Chevy Chase Financial Limited and Chevy Chase Property
Company Limited and a past Chairman of Financial General Bankshares. He also
serves as a Trustee of the National Geographic Society, a member of the Trustees
Council of the National Gallery of Art and an Honorary Trustee of the Brookings
Institute. In addition, Mr. Saul is a director of Colonial Williamsburg Hotel
Properties, Inc., a member of the Folger Shakespeare Library and the Board of
Visitors and Governors of Washington College.
ALEXANDER R. M. BOYLE has been Vice Chairman of the Board of Directors of the
Bank since 1985. Prior to beginning service in this position, Mr. Boyle was the
President and a member of the Board of Directors of Government Services Savings
and Loan, Inc. from 1975 until its merger with the Bank in 1985. He has served
as a director of the U. S. League of Savings Institutions and as chairman of the
Maryland League of Financial Institutions. He currently serves as a director of
the Association of Financial Services Holding Companies and serves on the
Chancellor's Advisory Council of the University of Maryland and is a member of
the Rotary Club of Bethesda-Chevy Chase.
STEPHEN R. HALPIN, JR. serves as Executive Vice President and Chief Financial
Officer of the Bank. Mr. Halpin is also the Chief Financial Officer for the
B.F. Saul Company and the B. F. Saul Real Estate Investment Trust. He is a
Trustee of the B. F. Saul Employees Profit Sharing Retirement Trust. In
addition, Mr. Halpin is a Trustee for Hospice Caring, Inc. Before joining the
Bank in 1983, Mr. Halpin was with a regional accounting firm.
N. ALEXANDER MACCOLL, JR. was a Senior Vice President of the Union Trust Company
Loan Production Office from 1982 until 1990 when he retired. He served as
Corporate Vice President of Colonial Bancorp. from 1977 until 1981. Prior to
his position at Colonial Bancorp., he served as Second Vice President of the
National Bank of Detroit from 1962 until 1977.
LESLIE A. NICHOLSON joined Chevy Chase as Executive Vice President and General
Counsel on June 1, 1996. Prior to joining the Bank, Mr. Nicholson had been a
partner for twenty four years in the firm of Shaw, Pittman, Potts & Trowbridge
in Washington, D.C. where he was a member of its Management Committee and
Chairman of its Litigation Department. Mr. Nicholson is a member of the
American College of Real Estate Lawyers and the American College of Construction
Lawyers, where he served as a National Governor for three years, and a member of
the Board of Directors of the Frederick M. Abramson Foundation.
JOHN J. O'CONNOR III has been engaged in the practice of law since 1957. He has
been a partner in Bryan Cave LLP since 1988.
-22-
<PAGE>
AUDIT COMMITTEE
The Company's audit committee reviews the engagement of independent accountants
and reviews their independence. The audit committee also reviews the adequacy
of the Company's internal accounting controls. The audit committee is comprised
of John J. O'Connor III and N. Alexander MacColl, Jr. The audit committee did
not meet in 1996.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's officers, directors and persons who own more than
ten percent of either the Common Stock or the Series A Preferred Shares to file
reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the
SEC and the New York Stock Exchange. Such officers, directors and ten percent
shareholders are also required by SEC rules to furnish the Company with copies
of all Section 16(a) forms that they file.
Based solely on its review of copies of such reports received or representations
from certain reporting persons, the Company believes that, during the fiscal
year ended December 31, 1996, all of its officers, directors and ten percent
shareholders complied with all Section 16(a) filing requirements applicable to
them with respect to transactions during fiscal 1996.
ITEM 11. EXECUTIVE COMPENSATION
Since the Company's inception on November 5, 1996, no compensation has been
awarded to, earned by or paid to any of the Company's directors (other than its
Independent Directors), officers or employees. The Company does not intend to
pay any compensation to any of its directors (other than its Independent
Directors), officers or employees. The Company intends to pay the Independent
Directors annual compensation of $10,000, plus a fee of $750 for attendance (in
person or by telephone) at each meeting of the Board of Directors. In 1996,
each of the Independent Directors earned the $750 fee for attending one Board of
Directors meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 26, 1997, the number and percentage
of outstanding shares beneficially owned by (i) all persons known by the Company
to own more than five percent of the Common Stock; (ii) all persons known by the
Company to own more than five percent of the Series A Preferred Shares; (iii)
each director of the Company; (iv) each executive officer of the Company; and
(v) all executive officers and directors of the Company as a group. The persons
or entities named in the table have sole voting and sole investment power with
respect to each of the shares beneficially owned by such person or entity. The
calculations were based on a total of 100 shares of Common Stock and 3,000,000
Series A Preferred Shares outstanding as of March 26, 1997.
-23-
<PAGE>
<TABLE>
<CAPTION>
NAMES AND ADDRESS OF AMOUNT OF BENEFICIAL PERCENT OF CLASS OF
BENEFICIAL OWNER (1) OWNERSHIP OUTSTANDING SHARES
- -------------------- -------------------- --------------------
<S> <C> <C>
Chevy Chase Bank, F.S.B. 100 Common - 100%
B. Francis Saul II (2)(3) 0 0%
Alexander R. M. Boyle (2) 50 Preferred - 0.002%
Stephen R. Halpin, Jr. (2)(3) 1,000 Preferred - 0.033%
N. Alexander MacColl, Jr. (2) 0 0%
Leslie A. Nicholson (2)(3) 0 0%
John J. O'Connor III (2) 0 0%
All directors and executive 1,050 Preferred - .035%
officers as a group (6 persons)
</TABLE>
(1) The address of each beneficial owner is 8401 Connecticut Avenue, Chevy
Chase, Maryland 20815.
(2) Indicates a director of the Company.
(3) Indicates an executive officer of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below are certain transactions between the Company and its directors
and affiliates. Management believes that the transactions with related parties
described herein have been conducted on substantially the same terms as similar
transactions with unrelated parties.
The Bank administers the day-to-day operations of the Company and is entitled to
receive fees in connection with the Advisory Agreement. Advisory fees paid to
parent for the period ended December 31, 1996 totalled $16,667. See "Business -
The Advisor."
The Bank services the Residential Mortgage Loans included in the Company's
portfolio and is entitled to receive fees in connection with the Servicing
Agreement. Loan servicing fees paid to parent for the period ended December 31,
1996, totalled $91,413. See "Business - Servicing."
The Company had cash balances of $365,175 as of December 31, 1996 held in
various deposit accounts with the Bank. Interest earned on these accounts was
$2,901 for the period ended December 31, 1996.
-24-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of the Company are included in
Item 8 of this report:
Report of Independent Public Accountants Statement of Financial
Condition at December 31, 1996
Statement of Operations for the period from inception
(November 5, 1996) through December 31, 1996
Statement of Stockholders' Equity for the period from inception
(November 5, 1996) through December 31, 1996
Statement of Cash Flows for the period from inception
(November 5, 1996) through December 31, 1996
Notes to Financial Statements
(a)(2) All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instruction or are inapplicable and
therefore have been omitted.
(a)(3) Exhibits:
*3.1 Articles of Incorporation of the Company, as amended
3.2 Bylaws of the Company (incorporated herein by reference to
Exhibit 3(b) of Form S-11 (file number 333-10495)
filed by the company).
*4.1 Articles Supplementary of 10-3/8% Noncumulative Exchangeable Preferred
Stock, Series A.
*10.1 Residential Mortgage Loan Purchase Agreement
*10.2 Mortgage Loan Servicing Agreement
*10.3 Advisory Agreement between the Company and the Bank
*12.1 Computation of ratio of earnings to fixed charges and
Preferred Stock dividend requirements
*27 Financial Data Schedule
(b) No reports on Form 8-K were issued during the three months ended
December 31, 1996
__________
* Filed herewith.
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<PAGE>
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, in Chevy Chase, Maryland on
March 31, 1997.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
(Registrant)
By: /s/ B. Francis Saul II
-----------------------------------------
B. Francis Saul II
Chairman of the Board of Directors
and President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following officers and directors of the Registrant
and in the capacities and on the dates indicated.
March 31, 1997 By: /s/ Alexander R. M. Boyle
-----------------------------------------
Alexander R. M. Boyle
Director
March 31, 1997 By: /s/ Joel A. Friedman
-----------------------------------------
Joel A. Friedman
Senior Vice President and
Controller
(Principal Accounting Officer)
March 31, 1997 By: /s/ Stephen R. Halpin, Jr.
-----------------------------------------
Stephen R. Halpin, Jr.
Director,
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
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<PAGE>
March 31, 1997 By: /s/ N. Alexander MacColl, Jr.
--------------------------------------
N. Alexander MacColl, Jr.
Director
March 31, 1997 By: /s/ Leslie A. Nicholson
--------------------------------------
Leslie A. Nicholson
Director,
Executive Vice President and
General Counsel
March 31, 1997 By: /s/ John J. O'Connor III
--------------------------------------
John J. O'Connor III
Director
March 31, 1997 By: /s/ B. Francis Saul II
--------------------------------------
B. Francis Saul II
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
-27-
<PAGE>
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
CHEVY CHASE PREFERRED CAPITAL CORPORATION
CHEVY CHASE PREFERRED CAPITAL CORPORATION, a Maryland corporation having
its principal office in the State of Maryland at 8401 Connecticut Avenue, Chevy
Chase, Maryland 20815 (hereinafter, the "Corporation"), hereby certifies to the
Department of Assessments and Taxation of the State of Maryland, that:
FIRST: The Corporation desires to amend and restate its charter as
currently in effect.
SECOND: The provisions of the charter which are now in effect and as
amended hereby, stated in accordance with the Maryland General Corporation Law
(the "Charter"), are as follows:
FIRST AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CHEVY CHASE PREFERRED CAPITAL CORPORATION
__________________________________
ARTICLE I
NAME
The name of the Corporation is Chevy Chase Preferred Capital Corporation.
ARTICLE II
DURATION
The duration of the Corporation is perpetual.
<PAGE>
ARTICLE III
PURPOSES AND POWERS
The purposes for which the Corporation is formed are to conduct any
business for which corporations may be organized under the laws of the State of
Maryland including, but not limited to, the fo llowing: (i) to acquire, hold,
own, develop, construct, improve, maintain, operate, sell, lease, transfer,
encumber, convey, exchange and otherwise dispose of or deal with real and
personal property directly or through one or more subsidiaries or affiliates;
(ii) to enter into any partnership, joint venture or other similar arrangement
to engage in any of the foregoing; and (iii) in general, to possess and exercise
all the purposes, powers, rights and privileges granted to, or conferred upon
corporations by the laws of the State of Maryland now or hereafter in force, and
to exercise any powers suitable, convenient or proper for the accomplishment of
any of the purposes herein enumerated, implied or incidental to the powers or
purposes herein specified, or which at any time may appear conducive to or
expedient for the accomplishment of any such purposes.
The foregoing shall, except where otherwise expressed, in no way be limited
or restricted by reference to or inference from the terms of any other clause of
this or any other provision of this Charter or of any amendment hereto or
restatement hereof, and shall each be regarded as independent, and construed as
powers as well as purposes.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in the
State of Maryland is 8401 Connecticut Avenue, Chevy Chase, Maryland 20815. The
name and address of the resident agent of the Corporation is The Corporation
Trust Incorporated, 32 South Street, Baltimore, Maryland 21202. Said resident
agent is a Maryland corporation.
-2-
<PAGE>
ARTICLE V
AUTHORIZED STOCK
SECTION 5.1 Total Capitalization.
The total number of shares of all classes of capital stock that the
Corporation has authority to issue is Twenty Million One Thousand (20,001,000)
shares, consisting of (i) Ten Million (10,000,000) shares of preferred stock,
par value $5.00 per share (the "Preferred Stock"); (ii) One Thousand (1,000)
shares of common stock, par value $1.00 per share (the "Common Stock"); and
(iii) Ten Million (10,000,000) shares of excess stock, par value $5.00 per share
(the "Excess Stock"). The aggregate par value of all of the authorized shares
of all classes of capital stock having par value is One Hundred Million One
Thousand Dollars ($100,001,000.00).
SECTION 5.2 Preferred Stock.
The Preferred Stock may be issued from time to time in one or more series
as authorized by the Board of Directors. Prior to the issuance of shares of
each such series, the Board of Directors, by resolution, shall fix the number of
shares to be included in each series and the terms, rights, restrictions and
qualifications of the shares of each series. The authority of the Board of
Directors with respect to each series shall include, but not be limited to,
determination of the following:
(i) The designation of the series, which may be by distinguishing
number, letter or title.
(ii) The dividend rate on the shares of the series, if any, whether
any dividends shall be cumulative and, if so, from which date or
dates, and the relative rights of priority, if any, of payment of
dividends on shares of the series.
(iii) The redemption rights, including conditions and the price or
prices, if any, for shares of the series.
(iv) The terms and amounts of any sinking fund for the purchase or
redemption of shares of the series.
(v) The rights of the shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Corporation, and the relative rights of
priority, if any, of payment of shares of the series.
-3-
<PAGE>
(vi) Whether the shares of the series shall be convertible into shares
of any other class or series, or any other security, of the
Corporation or any other corporation or other entity, and, if so,
the specification of such other class or series of such other
security, the conversion price or prices or rate or rates, any
adjustments thereof, the date or dates on which such shares shall
be convertible and all other terms and conditions upon which such
conversion may be made.
(vii) Restrictions on the issuance or reissuance of shares of the
same series or of any other class or series.
(viii) The voting rights, if any, of the holders of shares of the
series; provided, however, that in no event shall any holder of
shares of any series of Preferred Stock be entitled to more than
one vote for each share of such Preferred Stock held by it.
(ix) Any other relative rights, preferences and limitations on that
series.
Subject to the express provisions of any other series of Preferred Stock
then outstanding, and notwithstanding any other provision of this Charter, the
Board of Directors may increase or decrease (but not below the number of shares
of such series then outstanding) the number of shares, or alter the designation
or classify or reclassify any unissued shares of a particular series of
Preferred Stock, by fixing or altering, in one or more respects, from time to
time before issuing the shares, the terms, rights, restrictions and
qualifications of the shares of any such series of Preferred Stock.
SECTION 5.3 Common Stock.
(A) Common Stock Subject to Terms of Preferred Stock. Notwithstanding any
------------------------------------------------
other provision of this Charter, the Common Stock shall be subject to the
express terms of any series of Preferred Stock.
(B) Dividend Rights. The holders of shares of Common Stock shall be
---------------
entitled to receive such dividends as may be declared by the Board of Directors
of the Corporation out of funds legally available therefor.
(C) Balancing Distributions. The Board of Directors is authorized to
-----------------------
establish procedures for (i) regularly determining the value of the Common Stock
relative to the value of the Corporation and (ii) distributing cash or property
to the holders of Common Stock at times when it is determined that the value of
the Common Stock exceeds 52 percent of the value of the Corporation.
Distributions made under such procedures ("Balancing Distributions") shall be in
an amount sufficient to reduce the value of the Common Stock to less than 52
percent of the value of the Corporation, but shall not be in an amount that will
reduce the value of the Common Stock to less than 50 percent of the value of the
Corporation.
-4-
<PAGE>
(D) Rights Upon Liquidation. In the event of any voluntary or involuntary
-----------------------
liquidation, dissolution or winding up, or any distribution of the assets of the
Corporation, the aggregate assets available for distribution to holders of
shares of the Common Stock shall be determined in accordance with applicable
law. Each holder of shares of Common Stock shall be entitled to receive,
ratably with each other holder of shares of Common Stock, that portion of such
aggregate assets available for distribution as the number of shares of the
outstanding Common Stock held by such holder bears to the total number of shares
of outstanding Common Stock then outstanding.
(E) Voting Rights. Except as may be provided in this Charter, and subject
-------------
to the express terms of any series of Preferred Stock, the holders of shares of
the Common Stock shall have the exclusive right to vote on all matters (as to
which a common stockholder shall be entitled to vote pursuant to applicable law)
at all meetings of the stockholders of the Corporation, and shall be entitled to
one (1) vote for each share of the Common Stock entitled to vote at such
meeting.
SECTION 5.4 Restrictions on Ownership, Transfer, Acquisition and
Redemption of Preferred Stock.
(A) Definitions. For purposes of Sections 5.4 and 5.5 hereof, the
-----------
following terms shall have the following meanings:
"Acquire" shall mean the acquisition of Beneficial Ownership of shares
of Preferred Stock by any means, including, without limitation, the exercise of
any rights under any option, warrant, convertible security, pledge or other
security interest or similar right to acquire shares, but shall not include the
acquisition of any such rights unless, as a result, the acquirer would be
considered a Beneficial Owner. The terms "Acquires" and "Acquisition" shall
have correlative meanings.
"Beneficial Ownership" shall mean ownership of shares of Preferred
Stock by an Individual, either directly or constructively through the
application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of
the Code. The terms "Beneficial Owner," "Beneficially Own," "Beneficially Owns"
and "Beneficially Owned" shall have correlative meanings.
"Beneficiary" shall mean a beneficiary of the Trust as determined
pursuant to paragraph (E) of Section 5.5.
"Board of Directors" shall mean the Board of Directors of the
Corporation.
-5-
<PAGE>
"Bylaws" shall mean the Bylaws of the Corporation, as the same are in
effect from time to time.
"Closing Price" on any day shall mean the last sale price, regular way
on such day, or, if no such sale takes place on that day, the average of the
closing bid and asked prices, regular way, in either case as reported on the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange, or if the affected
series of Preferred Stock is not so listed or admitted to trading, as reported
in the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange (including the
National Market System of the National Association of Securities Dealers, Inc.
Automated Quotation System) on which the affected series of Preferred Stock is
listed or admitted to trading or, if the affected series of Preferred Stock is
not so listed or admitted to trading, the last quoted price or, if not quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal automated
quotation system then in use or, if the affected series of Preferred Stock is
not so quoted by any such system, the average of the closing bid and asked
prices as furnished by a professional market maker selected by the Board of
Directors making a market in the affected series of Preferred Stock, or, if
there is no such market maker or such closing prices otherwise are not
available, the fair market value of the affected series of Preferred Stock as of
such day, as determined by the Board of Directors in its discretion.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute thereto. Reference to any provision of
the Code shall mean such provision as in effect from time to time, as the same
may be amended, and any successor provision thereto, as interpreted by any
applicable regulations as in effect from time to time.
"Excess Stock" shall have the meaning set forth in paragraph (C) of
this Section 5.4.
"Individual" shall mean a natural person or any entity considered an
individual for purposes of Section 542(a)(2) of the Code.
"Initial Public Offering" shall mean the closing of the sale of shares
of Preferred Stock pursuant to the Corporation's first effective registration
statement for such Preferred Stock, filed under the Securities Act of 1933, as
amended.
"Market Price" on any day shall mean the average of the Closing Prices
for the ten (10) consecutive Trading Days immediately preceding such day (or
those days during such 10-day period for which Closing Prices are available).
-6-
<PAGE>
"Person" shall mean an individual, corporation, partnership, estate,
trust (including a trust qualified under Section 401(a) or 501(c)(17) of the
Code), a portion of a trust permanently set aside for or to be used exclusively
for the purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock company
or other entity, or a group as that term is used for purposes of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended; but does not
include an underwriter which participated in a public offering of Preferred
Stock for a period of sixty (60) days following the purchase by such underwriter
of such Preferred Stock therein, provided that the foregoing exclusion shall
apply only if the ownership of such Preferred Stock by an underwriter or
underwriters participating in a public offering would not cause the Corporation
to fail to qualify as a REIT by reason of being "closely held" within the
meaning of Section 856(a) of the Code or otherwise cause the Corporation to fail
to qualify as a REIT.
"Preferred Stock Ownership Limit" shall mean 1.0 percent of the
outstanding shares of a particular series of Preferred Stock of the Corporation,
subject to increase pursuant to paragraph (J) of this Section 5.4 (but not more
than 2.0 percent of the outstanding shares of Preferred Stock, as so increased)
and to the limitations contained in paragraph (K) of this Section 5.4.
"Purported Beneficial Holder" shall mean, with respect to any event or
transaction other than a purported Transfer or Acquisition which results in
Excess Stock, the Person for whom the applicable Purported Record Holder held
the shares of Preferred Stock that were, pursuant to paragraph (C) of this
Section 5.4, automatically exchanged for Excess Stock upon the occurrence of
such event or transaction. The Purported Beneficial Holder and the Purported
Record Holder may be the same Person.
"Purported Beneficial Transferee" shall mean, with respect to any
purported Transfer or Acquisition which results in Excess Stock, the purported
beneficial transferee for whom the Purported Record Transferee would have
acquired shares of Preferred Stock if such Transfer or Acquisition had been
valid under paragraph (B) of this Section 5.4. The Purported Beneficial
Transferee and the Purported Record Transferee may be the same Person.
"Purported Record Holder" shall mean, with respect to any event or
transaction other than a purported Transfer or Acquisition which results in
Excess Stock, the record holder of the shares of Preferred Stock that were,
pursuant to paragraph (C) of this Section 5.4, automatically exchanged for
Excess Stock upon the occurrence of such an event or transaction. The Purported
Record Holder and the Purported Beneficial Holder may be the same Person.
"Purported Record Transferee" shall mean, with respect to any
purported Transfer or Acquisition which results in Excess Stock, the record
holder of the Preferred Stock if such Transfer had been valid under paragraph
(B) of this Section 5.4. The Purported Record Transferee and the Purported
Beneficial Transferee may be the same Person.
-7-
<PAGE>
"REIT" shall mean a real estate investment trust under Sections 856
through 860 of the Code.
"Restriction Termination Date" shall mean the first day after the date
of the Initial Public Offering on which the Board of Directors and the
stockholders of the Corporation determine that it is no longer in the best
interests of the Corporation to attempt, or continue, to qualify as a REIT.
"Saul Family Member" shall mean B.F. Saul II, Theresa Gardner Lyons
and Andrew Joseph Poljevka and, with respect to any of them, any sibling
(whether by the whole or half blood), spouse, ancestor or lineal descendant
thereof (provided that in the event the definition of "Family" pursuant to
Section 544(a)(2) of the Code shall be amended, the foregoing shall be deemed to
be similarly amended), as well as any entities owned or controlled by such
individuals.
"Trading Day" shall mean a day on which the principal national
securities exchange on which the affected series of Preferred Stock is listed or
admitted to trading is open for the transaction of business or, if the affected
series of Preferred Stock is not listed or admitted to trading, shall mean any
day other than a Saturday, Sunday or other day on which banking institutions in
the State of New York are authorized or obligated by law or executive order to
close.
"Transfer" shall mean any sale, transfer, gift, hypothecation,
assignment, devise or other disposition of a direct or indirect interest in
Preferred Stock or the right to vote or receive dividends on Preferred Stock
(including (i) the granting of any option (including any option to acquire an
option or any series of such options) or entering into any agreement for the
sale, transfer or other disposition of Preferred Stock or the right to vote or
receive dividends on Preferred Stock or (ii) the sale, transfer, assignment or
other disposition of any securities or rights convertible into or exchangeable
for Preferred Stock, whether voluntary or involuntary, of record, constructively
or beneficially, and whether by operation of law or otherwise. The terms
"Transfers," "Transferred" and
"Transferable" shall have correlative meanings.
"Trust" shall mean the trust created pursuant to paragraph (A) of
Section 5.5.
"Trustee" shall mean the Corporation as trustee for the Trust, and any
successor trustee appointed by the Corporation.
-8-
<PAGE>
(B) Ownership and Transfer Limitations.
----------------------------------
(1) Notwithstanding any other provision of this Charter, except as
provided in paragraph (I) of this Section 5.4 and Section 5.6, from the date of
the Initial Public Offering and prior to the Restriction Termination Date, no
Individual shall Beneficially Own shares of Preferred Stock in excess of the
Preferred Stock Ownership Limit, and no Individual shall Beneficially Own shares
of Preferred Stock in an amount that (in combination with the Beneficial
Ownership of the Common Stock and the other shares of Preferred Stock) would
cause the Corporation to fail to qualify as a REIT by reason of being "closely
held" within the meaning of Section 856(h) of the Code or otherwise.
(2) Notwithstanding any other provision of this Charter, except as
provided in paragraph (I) of this Section 5.4 and Section 5.6, from the date of
the Initial Public Offering and prior to the Restriction Termination Date, any
Transfer, Acquisition, change in the capital structure of the Corporation, or
other purported change in Beneficial Ownership of Preferred Stock or other event
or transaction that, if effective, would result in any Individual Beneficially
Owning Preferred Stock in excess of the Preferred Stock Ownership Limit shall be
void ab initio as to the Transfer, Acquisition, change in the capital structure
-- ------
of the Corporation, or other purported change in Beneficial Ownership or other
event or transaction with respect to that number of shares of Preferred Stock
which would otherwise be Beneficially Owned by such Individual in excess of the
Preferred Stock Ownership Limit, and none of the Purported Beneficial
Transferee, the Purported Record Transferee, the Purported Beneficial Holder or
the Purported Record Holder, as applicable, shall acquire any rights in that
number of shares of Preferred Stock.
(3) Notwithstanding any other provision of this Charter, except as
provided in Section 5.6, from the date of the Initial Public Offering and prior
to the Restriction Termination Date, any Transfer, Acquisition, change in the
capital structure of the Corporation, or other purported change in Beneficial
Ownership (including actual ownership) of shares of Preferred Stock or other
event or transaction that, if effective, would result in the Preferred Stock
being actually owned by fewer than one hundred (100) Persons (determined without
reference to any rules of attribution) shall be void ab initio as to the
-- ------
Transfer, Acquisition, change in the capital structure of the Corporation, or
other purported change in Beneficial Ownership (including actual ownership) or
other event or transaction with respect to that number of shares of Preferred
Stock which otherwise would be owned by the transferee, and the intended
transferee or subsequent owner (including a Beneficial Owner) shall acquire no
rights in that number of shares of Preferred Stock.
(4) Notwithstanding any other provision of this Charter, except as
provided in Section 5.6, from the date of the Initial Public Offering and prior
to the Restriction Termination Date, any Transfer, Acquisition, change in the
capital structure of the Corporation, or other purported change in Beneficial
Ownership of shares of Preferred Stock or other event or transaction that, if
effective, would cause the Corporation to fail to qualify as a REIT by reason of
being "closely held" within the meaning of Section 856(h) of
-9-
<PAGE>
the Code or otherwise, directly or indirectly, would cause the Corporation to
fail to qualify as a REIT shall be void ab initio as to the Transfer,
-- ------
Acquisition, change in the capital structure of the Corporation, or other
purported change in Beneficial Ownership or other event or transaction with
respect to that number of shares of Preferred Stock which would cause the
Corporation to be "closely held" within the meaning of Section 856(h) of the
Code or otherwise, directly or indirectly, would cause the Corporation to fail
to qualify as a REIT, and none of the Purported Beneficial Transferee, the
Purported Record Transferee, the Purported Beneficial Holder or the Purported
Record Holder shall acquire any rights in that number of shares of Preferred
Stock.
(5) Notwithstanding any other provision of this Charter, except as
provided in Section 5.6, from the date of the Initial Public Offering and prior
to the Restriction Termination Date, any Transfer, Acquisition, change in the
capital structure of the Corporation, or other purported change in Beneficial
Ownership of Preferred Stock or other event or transaction that, if effective,
would result in any Saul Family Member Beneficially Owning any Preferred Stock
shall be void ab initio as to the Transfer, Acquisition, change in the capital
-- ------
structure of the Corporation, or other purported change in Beneficial Ownership
or other event or transaction with respect to that number of shares of Preferred
Stock which would otherwise be Beneficially Owned by such Saul Family Member,
and no Saul Family Member shall acquire any rights in that number of shares of
Preferred Stock.
(C) Exchange for Excess Stock.
-------------------------
(1) If, notwithstanding the other provisions contained in this Article
V, at any time after the date of the Initial Public Offering and prior to the
Restriction Termination Date, there is a purported Transfer, Acquisition, change
in the capital structure of the Corporation, or other purported change in the
Beneficial Ownership of Preferred Stock or other event or transaction such that
any Individual would Beneficially Own Preferred Stock in excess of the Preferred
Stock Ownership Limit, then, except as otherwise provided in paragraph (I) of
this Section 5.4, such number of shares of Preferred Stock (rounded up to the
next whole number of shares) in excess of the Preferred Stock Ownership Limit
(whether such Preferred Stock is actually held by the Beneficial Owner or by
some other Person) automatically shall be exchanged for an equal number of
shares of Excess Stock having terms, rights, restrictions and qualifications
identical thereto, except to the extent that this Article V requires different
terms. Such exchange shall be effective as of the close of business on the
business day next preceding the date of the purported Transfer, Acquisition,
change in capital structure, or other purported change in Beneficial Ownership
of Preferred Stock or other event or transaction.
(2) If, notwithstanding the other provisions contained in this Article
V, at any time after the date of the Initial Public Offering and prior to the
Restriction Termination Date, the Beneficial Ownership of the Common Stock and
Preferred Stock is such that the Corporation would (but for this subparagraph)
fail to qualify as a REIT by reason of being
-10-
<PAGE>
"closely held" within the meaning of Section 856(h) of the Code, then shares of
Preferred Stock in an amount sufficient to prevent the Corporation from being
"closely held" (rounded up to the next whole number of shares) shall be
exchanged for an equal number of shares of Excess Stock having terms, rights,
restrictions and qualifications identical thereto, except to the extent that
this Article V requires different terms. The shares of Preferred Stock
automatically exchanged for Excess Stock under this subparagraph shall be chosen
on a share-by-share basis and shall be those shares Beneficially Owned by the
Beneficial Owner or Owners of the largest number of shares of Preferred Stock at
the time of the exchange, after giving effect to any prior exchanges of shares
of Preferred Stock for shares of Excess Stock under this subparagraph. If more
than one Individual Beneficially Owns the same number of Preferred Stock, after
giving effect to any prior exchanges of shares of Preferred Stock for shares of
Excess Stock under this subparagraph, and such number of shares is the largest
number of shares of Preferred Stock Beneficially Owned by any Individual, then
the shares of Preferred Stock exchanged under this subparagraph shall be chosen
on an alternating share-by-share basis from each of the largest Beneficial
Owners of the Preferred Stock. An automatic exchange under this subparagraph
shall be effective as of the close of business on the business day next
preceding the date that the Corporation would otherwise fail to qualify as a
REIT by reason of being "closely held" within the meaning of Section 856(h) of
the Code. Notwithstanding the above, if the Beneficial Ownership of the Common
Stock is such that all of the shares of Preferred Stock would otherwise be
exchanged for shares of Excess Stock under this subparagraph, then this
subparagraph shall not apply and none of the shares of Preferred Stock will be
exchanged for shares of Excess Stock.
(3) If, notwithstanding the other provisions contained in this Article
V, at any time after the date of the Initial Public Offering and prior to the
Restriction Termination Date, there is a purported Transfer, Acquisition, change
in the capital structure of the Corporation, or other purported change in
Beneficial Ownership of Preferred Stock or other event or transaction which, if
effective, would result in a violation of any of the restrictions described in
subparagraphs (2), (3), (4) and (5) of paragraph (B) of this Section 5.4 or,
directly or indirectly, would for any reason cause the Corporation to fail to
qualify as a REIT, then the number of shares of Preferred Stock (rounded up to
the next whole number of shares) being Transferred or Acquired or which are
otherwise affected by the change in capital structure or other purported change
in Beneficial Ownership or other event or transaction and which would result in
a violation of any of the restrictions described in subparagraphs (2), (3), (4)
and (5) of paragraph (B) of this Section 5.4 or, directly or indirectly, would
for any reason cause the Corporation to fail to qualify as a REIT, automatically
shall be exchanged for an equal number of shares of Excess Stock having terms,
rights, restrictions and qualifications identical thereto, except to the extent
that this Article V requires different terms. Such exchange shall be effective
as of the close of business on the business day next preceding the date of the
purported Transfer, Acquisition, change in capital structure, or other purported
change in Beneficial Ownership or other event or transaction.
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<PAGE>
(D) Remedies For Breach. If the Board of Directors or its designee shall
-------------------
at any time determine in good faith that a Transfer, Acquisition, or change in
the capital structure of the Corporation or other purported change in Beneficial
Ownership or other event or transaction has taken place in violation of
paragraph (B) of this Section 5.4 or that a Person intends to Acquire or has
attempted to Acquire ownership of any shares of Preferred Stock and such
acquisition would result in an Individual Beneficially Owning any shares of
Preferred Stock in violation of paragraph (B) of this Section 5.4, the Board of
Directors or its designee shall take such action as it deems advisable to refuse
to give effect to or to prevent such Transfer, Acquisition, or change in the
capital structure of the Corporation, or other attempt to Acquire Beneficial
Ownership of any shares of Preferred Stock or other event or transaction,
including, but not limited to, refusing to give effect thereto on the books of
the Corporation or instituting injunctive proceedings with respect thereto;
provided, however, that any Transfer, Acquisition, change in the capital
structure of the Corporation, attempted Transfer, or other attempt to Acquire
Beneficial Ownership of any shares of Preferred Stock or event or transaction in
violation of subparagraphs (2), (3), (4) or (5) of paragraph (B) of this Section
5.4 (as applicable) shall be void ab initio and, where applicable, automatically
-- ------
shall result in the exchange described in paragraph (C) of this Section 5.4,
irrespective of any action (or inaction) by the Board of Directors or its
designee.
(E) Notice of Restricted Transfer. Any Person who Acquires or attempts to
-----------------------------
Acquire ownership of any shares of Preferred Stock when such acquisition would
result in an Individual Beneficially Owning shares of Preferred Stock in
violation of paragraph (B) of this Section 5.4 and any Person who owns Excess
Stock as a transferee of shares of Preferred Stock resulting in an exchange for
Excess Stock, pursuant to paragraph (C) of this Section 5.4, or otherwise,
immediately shall give written notice to the Corporation, or, in the event of a
proposed or attempted Transfer or Acquisition or purported change in Beneficial
Ownership, shall give at least fifteen (15) days prior written notice to the
Corporation, of such event and shall promptly provide to the Corporation such
other information as the Corporation, in its sole discretion, may request in
order to determine the effect, if any, of such Transfer, attempted Transfer,
Acquisition, attempted Acquisition or other purported change in Beneficial
Ownership on the Corporation's status as a REIT.
(F) Owners Required To Provide Information. From the date of the Initial
--------------------------------------
Public Offering and prior to the Restriction Termination Date:
(1) Every Beneficial Owner of more than 0.5 percent, or such lower
percentage or percentages as determined pursuant to regulations under the Code
or as may be requested by the Board of Directors in its sole discretion, of the
outstanding shares of any series of Preferred Stock of the Corporation annually
shall, no later than January 31 of each calendar year, give written notice to
the Corporation stating (i) the name and address of such Beneficial Owner; (ii)
the number of shares of each series of Preferred Stock Beneficially Owned; and
(iii) a description of how such shares are held. Each such Beneficial Owner
promptly shall provide to the Corporation such additional information as the
Corporation, in its sole discretion, may request in order to determine the
effect, if any, of such Beneficial
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<PAGE>
Ownership on the Corporation's status as a REIT and to ensure compliance with
the Preferred Stock Ownership Limit and other restrictions set forth herein.
(2) Each Individual who is a Beneficial Owner of Preferred Stock and
each Person (including the stockholder of record) who is holding Preferred Stock
for a Beneficial Owner promptly shall provide to the Corporation such
information as the Corporation, in its sole discretion, may request in order to
determine the Corporation's status as a REIT, to comply with the requirements of
any taxing authority or other governmental agency, to determine any such
compliance or to ensure compliance with the Preferred Stock Ownership Limit and
other restrictions set forth herein.
(G) Remedies Not Limited. Nothing contained in this Article V except
--------------------
Section 5.6 shall limit the scope or application of the provisions of this
Section 5.4, the ability of the Corporation to implement or enforce compliance
with the terms thereof or the authority of the Board of Directors to take any
such other action or actions as it may deem necessary or advisable to protect
the Corporation and the interests of its stockholders by preservation of the
Corporation's status as a REIT and to ensure compliance with the Preferred Stock
Ownership Limit and other restrictions set forth herein, including, without
limitation, refusal to give effect to a transaction on the books of the
Corporation.
(H) Ambiguity. In the case of ambiguity in the application of any of the
---------
provisions of this Section 5.4, including any definition contained in paragraph
(A) hereof, the Board of Directors shall have the power and authority, in its
sole discretion, to determine the application of the provisions of this Section
5.4 with respect to any situation, based on the facts known to it.
(I) Exceptions. The Board of Directors, upon receipt of a ruling from the
----------
Internal Revenue Service, an opinion of counsel, or other evidence satisfactory
to the Board of Directors, in its sole discretion, in each case to the effect
that the restrictions contained in subparagraph (4) of paragraph (B) of this
Section 5.4 will not be violated, may waive or change, in whole or in part, the
application of the Preferred Stock Ownership Limit with respect to any Person
that is not an Individual. In connection with any such waiver or change, the
Board of Directors may require such representations and undertakings from such
Person or affiliates and may impose such other conditions, as the Board deems
necessary, advisable or prudent, in its sole discretion, to determine the
effect, if any, of the proposed transaction or ownership of Preferred Stock on
the Corporation's status as a REIT.
(J) Increase in Preferred Stock Ownership Limit. Subject to the
-------------------------------------------
limitations contained in paragraph (K) of this Section 5.4, the Board of
Directors may from time to time increase the Preferred Stock Ownership Limit.
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<PAGE>
(K) Limitations on Modifications.
----------------------------
(1) The Preferred Stock Ownership Limit may not be increased and no
additional ownership limitations may be created if, after giving effect to such
increase or creation, the Corporation would be "closely held" within the meaning
of Section 856(h) of the Code (assuming ownership of shares of Preferred Stock
by all Beneficial Owners of such stock equal to the greatest of (i) their actual
ownership, (ii) their Beneficial Ownership, or (iii) the Preferred Stock
Ownership Limit, and assuming the Beneficial Ownership of all of the shares of
Common Stock in equal amounts by three Individuals).
(2) Prior to any modification of the Preferred Stock Ownership Limit
with respect to any Person, the Board of Directors may require such opinions of
counsel, affidavits, undertakings or agreements as it may deem necessary,
advisable or prudent, in its sole discretion, in order to determine or ensure
the Corporation's status as a REIT.
(3) The Preferred Stock Ownership Limit may not be increased to a
percentage that is greater than 2.0 percent.
(L) Legend. Each certificate for shares of Preferred Stock shall bear
------
substantially the following legend:
"The securities represented by this certificate are subject to restrictions
on transfer and ownership for the purpose of maintenance of the
Corporation's status as a real estate investment trust (a "REIT") under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code"). Except as otherwise provided pursuant to the Charter of the
Corporation, no Individual may (i) Beneficially Own shares of Preferred
Stock of the Corporation in excess of 1.0 percent (or such greater percent
as may be determined by the Board of Directors of the Corporation) of the
outstanding shares of such Preferred Stock; or (ii) Beneficially Own
Preferred Stock (of any series) which would result in the Corporation being
"closely held" under Section 856(h) of the Code or which otherwise would
cause the Corporation to fail to qualify as a REIT. Any Person that has
ownership, or who Acquires or attempts to Acquire ownership of Preferred
Stock where such ownership or Acquisition of ownership of Preferred Stock
would result in an Individual having Beneficial Ownership, or Acquiring
Beneficial Ownership of Preferred Stock in excess of the above limitations
and any Person who owns Excess Stock as a transferee of shares of Preferred
Stock resulting in an exchange for Excess Stock (as described below)
immediately must notify the Corporation in writing or, in the event of a
proposed or attempted Transfer or Acquisition or purported change in
Beneficial Ownership, must give written notice to the Corporation at least
fifteen (15) days prior to the proposed or attempted transfer, transaction
or other event. Any Transfer or Acquisition of shares of Preferred Stock
or other event which results in violation of the ownership or transfer
limitations set forth in the Company's Charter shall be void ab initio and
-- ------
the Purported Beneficial and Record Transferee shall not have or acquire
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<PAGE>
any rights in such shares of Preferred Stock. If the transfer and
ownership limitations referred to herein are violated, the shares of
Preferred Stock represented hereby automatically will be exchanged for
shares of Excess Stock to the extent of violation of such limitations, and
such shares of Excess Stock will be held in trust by the Corporation, all
as provided by the Charter of the Corporation. All defined terms used in
this legend have the meanings identified in the Corporation's Charter, as
the same may be amended from time to time, a copy of which, including the
restrictions on transfer, will be sent without charge to each stockholder
who so requests."
SECTION 5.5 Excess Stock.
(A) Ownership In Trust. Upon any purported Transfer, Acquisition, change
------------------
in the capital structure of the Corporation, or other purported change in
Beneficial Ownership or event or transaction that results in Excess Stock
pursuant to paragraph (C) of Section 5.4, such Excess Stock shall be deemed to
have been transferred to the Corporation, as Trustee of a Trust for the benefit
of such Beneficiary or Beneficiaries to whom an interest in such Excess Stock
may later be transferred pursuant to paragraph (E) of this Section 5.5. Shares
of Excess Stock so held in trust shall be issued and outstanding stock of the
Corporation. The Purported Record Transferee (or Purported Record Holder) shall
have no rights in such Excess Stock except the right to designate a transferee
of such Excess Stock upon the terms specified in paragraph (E) of this Section
5.5. The Purported Beneficial Transferee (or Purported Beneficial Holder) shall
have no rights in such Excess Stock except as provided in paragraphs (C) and (E)
of this Section 5.5.
(B) Dividend Rights. Excess Stock shall not be entitled to any dividends
---------------
or distributions (except as provided in Paragraph (C) of this Section 5.5). Any
dividend or distribution paid prior to the discovery by the Corporation that the
shares of Preferred Stock have been exchanged for Excess Stock shall be repaid
to the Corporation upon demand, and any dividend or distribution declared but
unpaid at the time of such discovery shall be void ab initio with respect to
-- ------
such shares of Excess Stock.
(C) Rights Upon Liquidation. Except as provided below, in the event of any
-----------------------
voluntary or involuntary liquidation, dissolution or winding up, or any other
distribution of the assets, of the Corporation, each holder of shares of Excess
Stock resulting from the exchange of Preferred Stock of any specified series
shall be entitled to receive, ratably with each other holder of shares of Excess
Stock resulting from the exchange of shares of Preferred Stock of such series
and each holder of shares of Preferred Stock of such series, such accrued and
unpaid dividends, liquidation preferences and other preferential payments, if
any, as are due to holders of shares of Preferred Stock of such series. In the
event that holders of shares of any series of Preferred Stock are entitled to
participate in the Corporation's distribution of its residual assets, each
holder of shares of Excess Stock resulting from the exchange of Preferred Stock
of any such series shall be entitled to participate, ratably with (i) each other
holder of shares of Excess Stock resulting from the
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<PAGE>
exchange of shares of Preferred Stock of all series entitled to so participate;
(ii) each holder of shares of Preferred Stock of all series entitled to so
participate; and (iii) each holder of shares of Common Stock, that portion of
the aggregate assets available for distribution (determined in accordance with
applicable law) as the number of shares of such Excess Stock held by such holder
bears to the total number of (i) outstanding shares of Excess Stock resulting
from the exchange of Preferred Stock of all series entitled to so participate;
(ii) outstanding shares of Preferred Stock of all series entitled to so
participate; and (iii) outstanding shares of Common Stock. The Corporation, as
holder of the Excess Stock in trust, or, if the Corporation shall have been
dissolved, any trustee appointed by the Corporation prior to its dissolution,
shall distribute ratably to the Beneficiaries of the Trust, when determined, any
such assets received in respect of the Excess Stock in any liquidation,
dissolution or winding up, or any distribution of the assets, of the
Corporation. Anything to the contrary herein notwithstanding, in no event shall
the amount payable to a holder with respect to shares of Excess Stock resulting
from the exchange of shares of Preferred Stock exceed (i) the price per share
such holder paid for the Preferred Stock in the purported Transfer, Acquisition,
change in capital structure, or other transaction or event that resulted in the
Excess Stock or (ii) if the holder did not give full value for such Excess Stock
(as through a gift, devise or other event or transaction, including an
application of subparagraph (2) of paragraph (C) of Section 5.4), a price per
share equal to the Market Price for the shares of Preferred Stock on the date of
the purported Transfer, Acquisition, change in capital structure or other
transaction or event that resulted in such Excess Stock. Any amount available
for distribution in excess of the foregoing limitations shall be paid ratably to
the holders of shares of Preferred Stock and Excess Stock resulting from the
exchange of Preferred Stock to the extent permitted by the foregoing
limitations.
(D) Voting Rights. The holders of shares of Excess Stock shall not be
-------------
entitled to vote on any matters (except as required by the Maryland General
Corporation Law as in effect from time to time or any successor statute thereto
(the "MGCL")).
(E) Restrictions on Transfer; Designation of Beneficiary.
----------------------------------------------------
(1) Excess Stock shall not be Transferable. The Purported Record
--------------------------------------
Transferee (or Purported Record Holder) may freely designate a Beneficiary of
its interest in the Trust (representing the number of shares of Excess Stock
held by the Trust attributable to the purported Transfer that resulted in the
Excess Stock), if (i) the shares of Excess Stock held in the Trust would not be
Excess Stock in the hands of such Beneficiary and (ii) the Purported Beneficial
Transferee (or Purported Beneficial Holder) does not receive a price for
designating such Beneficiary that reflects a price per share for such Excess
Stock that exceeds (x) the price per share such Purported Beneficial Transferee
(or Purported Beneficial Holder) paid for the Preferred Stock in the purported
Transfer, Acquisition, change in capital structure, or other transaction or
event that resulted in the Excess Stock or (y) if the Purported Beneficial
Transferee (or Purported Beneficial Holder) did not give value for such shares
of Excess Stock in the purported Transfer, Acquisition, change in capital
structure, or other transaction or event (including an application of
subparagraph (2) of paragraph (C) of
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<PAGE>
Section 5.4) that resulted in the Excess Stock, a price per share equal to the
Market Price for the shares of Preferred Stock on the date of the purported
Transfer, Acquisition, change in capital structure, or other transaction or
event that resulted in the Excess Stock. Upon such Transfer of an interest in
the Trust, the corresponding shares of Excess Stock in the Trust automatically
shall be exchanged for an equal number of shares of Preferred Stock and such
shares of Preferred Stock shall be transferred of record to the Beneficiary of
the interest in the Trust designated by the Purported Record Transferee (or
Purported Record Holder), as described above, if such Preferred Stock would not
be Excess Stock in the hands of such Beneficiary. Prior to any Transfer of any
interest in the Trust, the Purported Record Transferee (or Purported Record
Holder) must give written notice to the Corporation of the intended Transfer and
the Corporation must have waived in writing its purchase rights under paragraph
(F) of this Section 5.5.
(2) Notwithstanding the foregoing, if a Purported Beneficial
Transferee (or Purported Beneficial Holder) receives a price for designating a
Beneficiary of an interest in the Trust that exceeds the amounts allowable under
subparagraph (1) of this paragraph (E), such Purported Beneficial Transferee (or
Purported Beneficial Holder) shall pay, or cause the Beneficiary of the interest
in the Trust to pay, such excess in full to the Corporation.
(3) If any of the Transfer restrictions set forth in this paragraph
(E) or any application thereof is determined to be void, invalid or
unenforceable by any court having jurisdiction over the issue, the Purported
Record Transferee (or Purported Record Holder) may be deemed, at the option of
the Corporation, to have acted as the agent of the Corporation in acquiring the
Excess Stock as to which such restrictions would otherwise, by their terms,
apply, and to hold such Excess Stock on behalf of the Corporation.
(F) Purchase Right in Excess Stock. Shares of Excess Stock shall be deemed
------------------------------
to have been offered for sale to the Corporation or its designee at a price per
share equal to the lesser of (i) the price per share in the transaction that
created such Excess Stock (or, in the case of a devise or gift or event other
than a Transfer or Acquisition which results in the issuance of Excess Shares,
including an application of subparagraph (2) of paragraph (C) of Section 5.4,
the Market Price at the time of the issuance of such Excess Shares) or (ii) the
Market Price of the Preferred Stock exchanged for such Excess Stock on the date
the Corporation or its designee accepts such offer. The Corporation and its
assignees shall have the right to accept such offer for a period of ninety (90)
days after the later of (i) the date of the purported Transfer, Acquisition,
change in capital structure of the Corporation, or purported change in
Beneficial Ownership or other event or transaction which resulted in such Excess
Stock and (ii) the date on which the Board of Directors determines in good faith
that a Transfer, Acquisition, change in capital structure of the Corporation, or
purported change in Beneficial Ownership or other event or transaction resulting
in Excess Stock has occurred, if the Corporation does not receive a notice
pursuant to paragraph (E) of Section 5.4, but in no event later than a permitted
Transfer pursuant to, and in compliance with, the terms of paragraph (E) of this
Section 5.5.
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<PAGE>
(G) Remedies Not Limited. Nothing contained in this Article V except
--------------------
Section 5.6 shall limit the scope or application of the provisions of this
Section 5.5, the ability of the Corporation to implement or enforce compliance
with the terms hereof or the authority of the Board of Directors to take any
such other action or actions as it may deem necessary or advisable to protect
the Corporation and the interests of its stockholders by preservation of the
Corporation's status as a REIT and to ensure compliance with the applicable
Ownership Limits and the other restrictions set forth herein, including, without
limitation, refusal to give effect to a transaction on the books of the
Corporation.
SECTION 5.6 Settlements.
Nothing in Sections 5.4 and 5.5 hereof shall preclude the settlement of any
transaction with respect to the Preferred Stock entered into through the
facilities of the New York Stock Exchange.
SECTION 5.7 Issuance of Rights to Purchase Securities and Other
Property.
Subject to the rights of the Holders of any series of Preferred Stock, the
Board of Directors is hereby authorized to create and to authorize and direct
the issuance (on either a pro rata or non-pro rata basis) by the Corporation of
rights, options or warrants for the purchase of shares of Common Stock or
Preferred Stock of the Corporation, other securities of the Corporation, or
shares or other securities of any successor in interest of the Corporation (a
"Successor"), at such times, in such amounts, to such persons, for such
consideration (if any), with such form and content (including without limitation
the consideration for which any shares of Common Stock or Preferred Stock of the
Corporation, other securities of the Corporation, or shares or other securities
of any Successor are to be issued) and upon such terms and conditions as it may,
from time to time, determine, subject only to the restrictions, limitations,
conditions and requirements imposed by the MGCL, other applicable laws and this
Charter. Without limiting the generality of the foregoing, the authority
granted hereby includes the authority to adopt a "rights plan" or similar plan
that treats stockholders in a discriminatory or non pro rata manner, based upon
the number of shares owned thereby or otherwise.
SECTION 5.8 Severability.
If any provision of this Article V or any application of any such provision
is determined to be void, invalid or unenforceable by any court having
jurisdiction over the issue, the validity and enforceability of the remainder of
this Article V shall not be affected and other applications of such provision
shall be affected only to the extent necessary to comply with the determination
of such court.
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<PAGE>
SECTION 5.9 Waiver.
The Corporation shall have authority at any time to waive the requirements
that Excess Stock be issued or be deemed outstanding in accordance with this
Article V if the Corporation determines, based on opinion of nationally
recognized tax counsel, that the issuance of such Excess Stock or the fact that
such Excess Stock is deemed to be outstanding, would jeopardize the status of
the Corporation as a REIT (as that term is defined in paragraph (A) of Section
5.4 hereof).
ARTICLE VI
BOARD OF DIRECTORS
The number of directors shall be no less than three (3), unless a lesser
number is permitted pursuant to the terms of the MGCL, nor more than eleven
(11). Subject to the foregoing, to Section 3.2 of the Bylaws and to the express
rights of the holders of any series of Preferred Stock to elect additional
directors under specified circumstances, the number of directors of the
Corporation shall be fixed by the Bylaws of the Corporation and may be increased
or deceased from time to time in such a manner as may be prescribed by the
Bylaws.
ARTICLE VII
MATTERS RELATING TO THE POWERS OF THE
CORPORATION AND ITS DIRECTORS AND STOCKHOLDERS
The following provisions are hereby adopted for the purpose of defining,
limiting and regulating the powers of the Corporation and of the directors and
stockholders thereof:
SECTION 7.1 Matters Relating to the Corporation.
(A) Business Combinations. Notwithstanding any other provision of this
---------------------
Charter or any contrary provision of law, Title 3, subtitle 6 of the MGCL shall
not apply to any "business combination" (as defined in Section 3-601(e) of the
MGCL) of the Corporation and any or all of B. Francis Saul II and lineal
descendants, Chevy Chase Bank, F.S.B., the B.F. Saul Company, the B.F. Saul Real
Estate Investment Trust, and any and all other entities whether currently
existing or formed in the future affiliated with any of the foregoing.
(B) Control Share Acquisitions. Notwithstanding any other provision of
--------------------------
this Charter or any contrary provision of law, Title 3, subtitle 7 of the MGCL
shall not apply to any acquisition of shares of stock of the Corporation by any
and all of the following persons or entities:
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<PAGE>
(1) B. Francis Saul II and lineal descendants, Chevy Chase Bank,
F.S.B., the B.F. Saul Company, the B.F. Saul Real Estate Investment Trust, and
any and all other entities whether currently existing or formed in the future
affiliated with any of the foregoing;
(2) Directors, officers and employees of the Corporation and of any
partnership in which the Corporation is a general partner; and
(3) Any persons authorized by resolution of the Board of Directors of
the Corporation, in its discretion.
SECTION 7.2 Matters Relating to the Board of Directors.
(A) Authority as to Bylaws. Except as otherwise provided herein, in
----------------------
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, alter, amend or repeal the Bylaws
of the Corporation and the Corporation may, in its Bylaws, confer powers on the
Board of Directors in addition to those contained herein or conferred by
applicable law.
(B) Authority as to Stock Issuances. The Board of Directors of the
-------------------------------
Corporation may authorize the issuance, from time to time, of shares of its
stock of any class or series, whether now or hereafter authorized, or securities
convertible into shares now or hereafter authorized, for such consideration as
the Board of Directors may deem advisable, subject to such restrictions or
limitations, if any, as may be set forth in the Charter or the Bylaws of the
Corporation or in the laws of the State of Maryland.
(C) Manner of Election. Unless and except to the extent that the Bylaws of
------------------
the Corporation shall so require, the election of directors of the Corporation
need not be by written ballot.
(D) Voluntary Bankruptcy. The affirmative vote of at least two-thirds of
--------------------
the Board of Directors is required in order for the Corporation to file a
voluntary petition of bankruptcy.
(E) Reserved Powers of Board. The enumeration and definition of particular
------------------------
powers of the Board of Directors included in this Article VII shall in no way be
limited or restricted by reference to or inference from the terms of any other
clause of this or any other provision of the Charter of the Corporation, or
construed or deemed by inference or otherwise in any manner to exclude or limit
the powers conferred upon the Board of Directors under the laws of the State of
Maryland as now or hereafter in force.
(F) Alteration of Authority Granted to the Board of Directors. The
---------------------------------------------------------
affirmative vote of that proportion of the then-outstanding shares of Common
Stock and Preferred Stock entitled to vote (the "Voting Stock") necessary to
approve an amendment to this Charter
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<PAGE>
pursuant to the MGCL, voting together as a single class, shall be required to
amend, repeal or adopt any provision inconsistent with Section 7.2 of this
Article VII.
(G) REIT Qualification. The Board of Directors shall use its best efforts
------------------
to cause the Corporation and its stockholders to qualify for U.S. federal income
tax treatment in accordance with the provisions of the Code applicable to REITs
(as those terms are defined in paragraph (A) of Section 5.4 hereof). In
furtherance of the foregoing, the Board of Directors shall use its best efforts
to take such actions as are necessary, and may take such actions as it deems
desirable (in its sole discretion) to preserve the status of the Corporation as
a REIT; provided, however, that in the event that the Board of Directors
determines, in its sole discretion, that it no longer is in the best interests
of the Corporation to qualify as a REIT, the Board of Directors shall take such
actions as are required by the Code, the MGCL and other applicable law, to cause
the matter of termination of qualification as a REIT (as that term is defined in
paragraph (A) of Section 5.4 hereof) to be submitted to a vote of the
stockholders of the Corporation pursuant to paragraph (B) of Section 7.3.
SECTION 7.3 Matters Relating to the Stockholders.
(A) Voting. Except as otherwise provided by this Charter, any matter
------
(other than the election of directors) submitted to the stockholders for a vote
shall be decided by a majority of the votes entitled to be cast on the matter,
including, if applicable, the majority of votes entitled to be cast by each
class of stock entitled to vote separately on the matter.
(B) Termination of REIT Status. Anything contained in this Charter to the
--------------------------
contrary notwithstanding, the affirmative vote of the holders of a majority of
the then-outstanding shares of Voting Stock, voting as a single class, and the
approval of the Board of Directors, shall be required to terminate voluntarily
the Corporation's status as a REIT (as that term is defined in paragraph (A) of
Section 5.4).
(C) No Preemptive Rights. Except as may be expressly provided with respect
--------------------
to any series of Preferred Stock, no holders of stock of the Corporation, of
whatever class or series, shall have any preferential right of subscription for
the purchase of any shares of stock of any class or series or for the purchase
of any securities convertible into shares of stock of any class or series of the
Corporation other than such rights, if any, as the Board of Directors, in its
sole discretion, may determine, and for such consideration as the Board of
Directors, in its sole discretion, may fix; and except as may be expressly
provided with respect to any series of Preferred Stock, any shares of stock of
any class or series of convertible securities which the Board of Directors may
determine to offer for subscription to the holders of stock may, as the Board of
Directors shall determine in its sole discretion, be offered to holders of any
then-existing class, classes or series of stock or other securities to the
exclusion of holders of any or all other then-existing classes or series of
securities.
(D) Authority as to Bylaws. Except as otherwise specifically required by
----------------------
the MGCL, and in addition to any affirmative vote of the holders of any
particular class or series
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<PAGE>
of the Voting Stock required by the MGCL, this charter or the Bylaws of the
Corporation with respect to any series of Preferred Stock the affirmative vote
of that proportion of the voting power of the Voting Stock necessary to approve
an amendment to this Charter pursuant to the MGCL, voting together as a single
class, may alter, amend or repeal any provision of the Bylaws.
ARTICLE VIII
DIRECTORS' LIABILITY
No director or officer of the Corporation shall be liable to the
Corporation or to its stockholders for money damages except (i) to the extent
that it is established that such director or officer actually received an
improper benefit or profit in money, property or services for the amount of the
benefit or profit in money, property or services actually received or (ii) to
the extent that a judgment or other final adjudication adverse to such director
or officer is entered in a proceeding based on a finding in such proceeding that
such director's or officer's action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding. In addition to, and not in limitation of, the foregoing, to the
maximum extent that Maryland law in effect from time to time permits limitation
of the liability of directors and officers, no director or officer of the
Corporation shall be liable to the Corporation or its stockholders for money
damages. Neither the amendment nor repeal of this Article VIII, nor the
adoption or amendment of any provision of the Charter or Bylaws of the
Corporation inconsistent with this Article VIII, shall apply to or affect in any
respect the applicability of the preceding sentence with respect to any act or
failure to act which occurred prior to such amendment, repeal or adoption.
ARTICLE IX
INDEMNIFICATION
Each person who is or was or who agrees to become a director or officer of
the Corporation, or each person who, while a director of the Corporation, is or
was serving or who agrees to serve, at the request of the Corporation, as a
director, officer, partner, joint venturer, employee or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise (including the heirs, executors, administrators or estate of such
person), shall be indemnified by the Corporation, and shall be entitled to have
paid on his behalf or be reimbursed for reasonable expenses in advance of final
disposition of a proceeding, in accordance with the Bylaws of the Corporation,
to the full extent permitted from time to time by the MGCL (but, in the case of
any amendment to the MGCL, only to the extent that such amendment permits the
Corporation to provide broader indemnification
-22-
<PAGE>
rights than said law permitted the Corporation to provide prior to such
amendment) or any other applicable laws presently or hereafter in effect. The
Corporation shall have the power, with the approval of the Board of Directors,
to provide such indemnification and advancement of expenses to any employee or
agent of the Corporation, in accordance with the Bylaws of the Corporation.
Without limiting the generality or the effect of the foregoing, the Corporation
may enter into one or more agreements with any person which provide for
indemnification greater or different than that provided in this Article IX. Any
amendment or repeal of this Article IX shall not adversely affect any right or
protection existing hereunder immediately prior to such amendment or repeal and
shall not adversely affect any right or protection then existing pursuant to any
such indemnification agreement.
ARTICLE X
AMENDMENT
The Corporation reserves the right at any time and from time to time to
amend, alter, change or repeal any provision contained in its Charter and any
other provisions authorized by the laws of the State of Maryland at the time in
force may be added or inserted in the manner now or hereafter prescribed herein
or by applicable law, and all rights, preferences and privileges of whatsoever
nature conferred upon stockholders, directors or any other persons whomsoever by
and pursuant to this Charter in its present form or as hereafter amended are
granted subject to the rights reserved in this Article X; provided, however,
that any amendment or repeal of Articles VIII or IX of this Charter or this
Article X shall not adversely affect any right or protection existing hereunder
immediately prior to such amendment or repeal.
***************
THIRD: This amendment and restatement of the Charter of the Corporation
has been duly advised by the Board of Directors and approved by the stockholders
of the Corporation as required by law.
FOURTH: The Corporation currently has authority to issue one hundred (100)
shares of capital stock, all of one class of common stock, par value $1.00 per
share. The number, classes, par values and preferences, rights, powers,
restrictions, limitations, qualifications, terms and conditions of the shares of
capital stock that the Corporation will have authority to issue upon
effectiveness of this amendment and restatement of its Charter are as set forth
in Article V of the foregoing amendment and restatement of such Charter.
-23-
<PAGE>
FIFTH: The current address of the principal office of the Corporation in
the State of Maryland is as set forth in ARTICLE IV of the foregoing amendment
and restatement of the Charter of the Corporation.
SIXTH: The name and address of the Corporation's current resident agent is
as set forth in ARTICLE IV of the foregoing amendment and restatement of the
Charter of the Corporation.
SEVENTH: The number of directors of the Corporation currently is four and
the names of the directors currently in office are as follows:
Alexander R. M. Boyle Leslie A. Nicholson
Stephen R. Halpin, Jr. B. Francis Saul II
-24-
<PAGE>
IN WITNESS WHEREOF, Chevy Chase Preferred Capital Corporation has caused
these Articles of Amendment and Restatement to be signed in its name and on its
behalf on this 29th day of November, 1996, by its Senior Vice President and
Controller, who acknowledges that these Articles are the act of the Corporation
and that, to the best of his knowledge, information and belief, and under
penalties for perjury, all matters and facts contained in these Articles are
true in all material respects.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
By: Joel A. Friedman
----------------
Joel A. Friedman
Senior Vice President and Controller
[Seal]
Attested: Mary Lou Hayes
--------------
Mary Lou Hayes
Secretary
-25-
<PAGE>
ARTICLES SUPPLEMENTARY
OF
10 3/8% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A
OF
CHEVY CHASE PREFERRED CAPITAL CORPORATION
Pursuant to Section 2-208 of the
Maryland General Corporation Law
CHEVY CHASE PREFERRED CAPITAL CORPORATION, a corporation organized and
existing under the laws of the State of Maryland (the "Corporation"), HEREBY
CERTIFIES that the following resolution was duly adopted by the Board of
Directors of the Corporation pursuant to authority conferred upon the Board of
Directors by the provisions of the First Amended and Restated Articles of
Incorporation of the Corporation, which authorize the issuance and
classification of up to 10,000,000 shares of preferred stock, $5.00 par value
per share (the "Preferred Stock"):
RESOLVED, that the issuance and classification of 4,000,000 shares of
10 3/8% Noncumulative Exchangeable Preferred Stock, Series A, $5.00 par
value per share, of the Corporation is hereby authorized, and the
designation, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of all 4,000,000 shares of this Series, in addition to those set
forth in the Corporation's First Amended and Restated Articles of
Incorporation, as the same may be amended or restated from time to time,
are hereby fixed as follows:
1. Designation. The designation of this Series shall be 10 3/8%
-----------
Noncumulative Exchangeable Preferred Stock, Series A (hereinafter referred
to as the "Series A Preferred Shares" or the "Series"), and the number of
Series A Preferred Shares constituting this Series shall be 4,000,000. The
Series A Preferred Shares shall have a liquidation preference of $50.00 per
share. The number of authorized Series A Preferred Shares may be reduced
by further resolution duly adopted by the Board of Directors of the
Corporation and by the filing of articles pursuant to the provisions of the
Maryland General Corporation Law stating that such reduction has been so
authorized. The number of authorized shares of this Series shall not be
increased.
2. Dividends. (a) Dividends on the Series A Preferred Shares shall
---------
be payable at a rate of 10 3/8% per annum of the liquidation preference,
if, when and as declared by the Board of Directors of the Corporation out
of assets of the Corporation legally available therefor. If declared,
dividends on the Series A Preferred Shares shall be payable quarterly in
arrears on
<PAGE>
January 15, April 15, July 15 and October 15 of each year (a "Dividend
Period"), commencing on January 15, 1997. Dividends will accrue from the
first day of each Dividend Period, whether or not declared or paid for the
prior Dividend Period. Each declared dividend shall be payable to holders
of record of the Series A Preferred Shares as they appear at the close of
business on the stock register of the Corporation on such record date, not
exceeding 45 days preceding the payment date thereof, as shall be fixed by
the Board of Directors of the Corporation.
(b) Dividends shall be noncumulative. If the Board of Directors of
the Corporation fails to declare a dividend on the Series A Preferred
Shares for a Dividend Period, then holders of the Series A Preferred Shares
will have no right to receive a dividend for that Dividend Period, and the
Corporation will have no obligation to pay a dividend for that Dividend
Period, whether or not dividends are declared and paid for any future
Dividend Period with respect to either the Series A Preferred Shares or the
common stock, par value $1.00 per share, of the Corporation (the "Common
Stock").
(c) If full dividends on the Series A Preferred Shares for any
Dividend Period shall not have been declared and paid, or declared and a
sum sufficient for the payment thereof shall not have been set apart for
such payments, no dividends shall be declared or paid or set aside for
payment and no other distribution (including any balancing distribution
authorized by the Corporation's First Amended and Restated Articles of
Incorporation, as the same may be amended or restated from time to time)
shall be declared or made or set aside for payment upon the Common Stock or
any other capital stock of the Corporation ranking junior to or on a parity
with the Series A Preferred Shares as to dividends or amounts upon
liquidation, nor shall any Common Stock or any other capital stock of the
Corporation ranking junior to or on a parity with the Series A Preferred
Shares as to dividends or amounts upon liquidation be redeemed, purchased
or otherwise acquired for any consideration (or any monies to be paid to or
made available for a sinking fund for the redemption of any such stock) by
the Corporation (except by conversion into or exchange for other capital
stock of the Corporation ranking junior to the Series A Preferred Shares as
to dividends and amounts upon liquidation), until such time as dividends on
all outstanding Series A Preferred Shares have been (i) declared and paid
for three consecutive Dividend Periods and (ii) declared and paid or
declared and a sum sufficient for the payment thereof has been set apart
for payment for the fourth consecutive Dividend Period. Notwithstanding
the above, nothing in this paragraph (c) shall prevent the Corporation from
treating an amount consented to by the holders of the Common Stock under
the provisions of Section 565 of the Internal Revenue Code of 1986, as
amended (the "Code"), as a dividend for purposes of the dividends paid
deduction under Section 561 of the Code.
2
<PAGE>
(d) When dividends are not paid in full (or a sum sufficient for such
full payment is not set apart) upon the Series A Preferred Shares and the
shares of any other series of capital stock ranking on a parity as to
dividends with the Series A Preferred Shares, all dividends declared upon
the Series A Preferred Shares and any other series of capital stock ranking
on a parity as to dividends with the Series A Preferred Shares shall be
declared pro rata so that the amount of dividends declared per share on the
Series A Preferred Shares and such other series of capital stock shall in
all cases bear to each other the same ratio that full dividends, for the
then-current Dividend Period, per share on the Series A Preferred Shares
(which shall not include any accumulation in respect of unpaid dividends
for prior Dividend Periods) and full dividends, including required or
permitted accumulations, if any, on such other series of capital stock bear
to each other.
(e) Holders of the Series A Preferred Shares shall not be entitled to
any dividend, whether payable in cash, property or stock, in excess of full
dividends, as herein provided, on the Series A Preferred Shares. No
interest, or sum of money in lieu of interest, shall be payable in respect
of any dividend payment or payments on the Series A Preferred Shares which
may be in arrears.
3. Redemption. (a) The Series A Preferred Shares are not redeemable
----------
prior to January 15, 2007, except upon the occurrence of a Tax Event (as
defined in paragraph (b) of this Section 3). Subject to the terms and
conditions of this Section 3, the Corporation, at its option, may redeem
the Series A Preferred Shares, in whole or in part, at any time or from
time to time, on or after January 15, 2007, at the following redemption
prices (expressed as a percentage of the $50.00 per share liquidation
preference), if redeemed during the 12-month period beginning January 15 of
the years indicated below, plus the quarterly accrued and unpaid dividend
thereon to the date fixed for redemption:
YEAR REDEMPTION
---- ----------
PRICE
-----
2007 . . . . . . . . . . . . . . . . . . . . 105.187%
2008 . . . . . . . . . . . . . . . . . . . . 104.150%
2009 . . . . . . . . . . . . . . . . . . . . 103.112%
2010 . . . . . . . . . . . . . . . . . . . . 102.075%
2011 . . . . . . . . . . . . . . . . . . . . 101.037%
and thereafter at a redemption price of $50.00 per share, plus the
quarterly accrued and unpaid dividend thereon to the date fixed for
redemption.
3
<PAGE>
(b) The Corporation will have the right, at any time upon the
occurrence of a Tax Event and with the prior written approval of the Office
of Thrift Supervision (the "OTS"), to redeem the Series A Preferred Shares,
in whole, but not in part, at a redemption price of $50.00 per share, plus
the quarterly accrued and unpaid dividend thereon to the date fixed for
redemption. "Tax Event" means the receipt by the Corporation of an opinion
of a nationally recognized law firm experienced in such matters to the
effect that, as a result of (i) any amendment to, clarification of, or
change (including any announced prospective change) in, the laws or
treaties (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein affecting
taxation, (ii) any judicial decision, official administrative
pronouncement, published or private ruling, regulatory procedure, notice or
announcement (including any notice or announcement of intent to adopt such
procedures or regulations) ("Administrative Action") or (iii) any amendment
to, clarification of, or change in the official position or the
interpretation of such Administrative Action or any interpretation or
pronouncement that provides for a position with respect to such
Administrative Action that differs from the theretofore generally accepted
position, in each case, by any legislative body, court, governmental
authority or regulatory body, irrespective of the manner in which such
amendment, clarification or change is made known, which amendment,
clarification or change is effective or such pronouncement or decision is
announced on or after the date of issuance of the Series A Preferred
Shares, there is more than an insubstantial risk that (a) dividends paid or
to be paid by the Corporation with respect to the capital stock of the
Corporation are not, or will not be, fully deductible by the Corporation
for United States federal income tax purposes or (b) the Corporation is, or
will be, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
(c) In the event that fewer than all the outstanding Series A
Preferred Shares are to be redeemed, the number of Series A Preferred
Shares to be redeemed shall be determined by the Board of Directors of the
Corporation, and the shares to be redeemed shall be determined by lot or
pro rata as may be determined by the Board of Directors or by any other
method as may be determined by the Board of Directors in its sole
discretion to be equitable, provided that such method satisfies any
applicable requirements of any securities exchange on which the Series A
Preferred Shares are listed.
(d) In the event the Corporation shall redeem any of the Series A
Preferred Shares, notice of such redemption shall be given by first-class
mail, postage prepaid, mailed not less than 30 nor more than 60 days prior
to the redemption date, to each holder of record of the Series A Preferred
Shares to be redeemed, at such holder's address as the same appears on the
stock register of the Corporation. Each such notice shall state: (i) the
redemption
4
<PAGE>
date; (ii) the number of Series A Preferred Shares to be redeemed and, if
fewer than all the Series A Preferred Shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (iii)
the redemption price; and (iv) the place or places where certificates for
such shares are to be surrendered for payment of the redemption price.
(e) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the Corporation in
providing money for the payment of the redemption price), said Series A
Preferred Shares shall no longer be deemed to be outstanding, and all
rights of the holders thereof as stockholders of the Corporation (except
the right to receive from the Corporation the redemption price) shall
cease. Upon surrender in accordance with said notices of the certificates
for any Series A Preferred Shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the Corporation shall
so require and the notice shall so state), such shares shall be redeemed by
the Corporation at the redemption price aforesaid. In case fewer than all
of the Series A Preferred Shares represented by any such certificate are
redeemed, a new certificate shall be issued representing the unredeemed
Series A Preferred Shares without cost to the holder thereof.
(f) Any Series A Preferred Shares, which shall at any time have been
redeemed, shall, after such redemption, have the status of authorized but
unissued shares of Preferred Stock, without designation as to series until
such shares are once more designated as part of a particular series by the
Board of Directors of the Corporation.
(g) Notwithstanding the foregoing provisions of this Section 3,
unless full dividends on the Series A Preferred Shares have been or
contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof has been set apart for payment for the then-current
Dividend Period, no Series A Preferred Shares shall be redeemed unless all
outstanding Series A Preferred Shares are redeemed and the Corporation
shall not purchase or otherwise acquire any Series A Preferred Shares;
provided, however, that the Corporation may purchase or acquire Series A
Preferred Shares pursuant to a purchase or exchange offer made on the same
terms to holders of all outstanding Series A Preferred Shares.
4. Automatic Exchange. (a) Subject to the terms and conditions of
------------------
this Section 4, each Series A Preferred Share will be exchanged
automatically (the "Automatic Exchange") for one share of 10 3/8%
Noncumulative Preferred Stock, Series B, $5.00 par value per share (a "Bank
Preferred Share"), of Chevy Chase Bank, F.S.B. (the "Bank"). The issuance
of the Bank Preferred Shares has been duly authorized by the board of
directors of the Bank. Prior to or contemporaneously with
5
<PAGE>
the filing of these Articles Supplementary with the Maryland State
Department of Assessments and Taxation, the Bank shall file with the OTS a
Certificate of Designation establishing the Bank Preferred Shares. The
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
the Bank Preferred Shares shall be substantially identical to the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
the Series A Preferred Shares established by these Articles Supplementary.
(b) The Automatic Exchange will occur only if the appropriate federal
regulatory agency directs in writing (a "Directive") an exchange of the
Series A Preferred Shares for Bank Preferred Shares because (i) the Bank
becomes "undercapitalized" under prompt corrective action regulations
established pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991, as amended, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate federal regulatory
agency, in its sole discretion and even if the Bank is not
"undercapitalized," anticipates the Bank becoming "undercapitalized" in the
near term (the "Exchange Event").
(c) Upon the Exchange Event, each holder of Series A Preferred Shares
shall be unconditionally obligated to surrender to the Bank the
certificates representing each Series A Preferred Share of such holder, and
the Bank shall be unconditionally obligated to issue to such holder in
exchange for each such Series A Preferred Share a certificate representing
one Bank Preferred Share.
(d) The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time
on the date for such exchange set forth in the Directive, or, if such date
is not set forth in the Directive, as of 8:00 a.m. on the earliest possible
date such exchange could occur consistent with the Directive (the "Time of
Exchange"), as evidenced by the issuance by the Bank of a press release
prior to such time. As of the Time of Exchange, all of the Series A
Preferred Shares will be deemed cancelled without any further action by the
Corporation, all rights of the holders of the Series A Preferred Shares as
stockholders of the Corporation shall cease, and such persons shall
thereupon and thereafter be deemed to be and shall be for all purposes the
holders of Bank Preferred Shares. Notice of the occurrence of the Exchange
Event shall be given by first-class mail, postage prepaid, mailed within 30
days of such event, to each holder of record of the Series A Preferred
Shares, at such holder's address as the same appears on the stock register
of the Corporation. Each such notice shall indicate the place or places
where certificates for the Series A Preferred Shares are to be surrendered
by the holders thereof, and the Bank shall deliver to each such holder
certificates for Bank Preferred Shares upon surrender of certificates for
the Series A Preferred Shares. Until such
6
<PAGE>
replacement stock certificates are delivered (or in the event such
replacement certificates are not delivered), certificates previously
representing the Series A Preferred Shares shall be deemed for all purposes
to represent Bank Preferred Shares.
(e) Any Series A Preferred Shares purchased or redeemed by the
Corporation in accordance with Section 3 hereof prior to the Time of
Exchange shall not be deemed outstanding and shall not be subject to the
Automatic Exchange. In the event of the Automatic Exchange, any accrued
and unpaid dividends on the Series A Preferred Shares as of the Time of
Exchange would be deemed to be accrued and unpaid dividends on the Bank
Preferred Shares.
5. Conversion. The holders of Series A Preferred Shares shall not
----------
have any rights to convert such shares into shares of any other class or
series of capital stock of the Corporation.
6. Liquidation Rights. (a) Upon the voluntary or involuntary
------------------
liquidation, dissolution or winding up of the Corporation, the holders of
the Series A Preferred Shares shall be entitled to receive and to be paid
out of assets of the Corporation available for distribution to its
stockholders, before any payment or distribution shall be made on the
Common Stock or on any other class of stock ranking junior to the Series A
Preferred Shares upon liquidation, the amount of $50.00 per share, plus the
quarterly accrued and unpaid dividend thereon to the date of liquidation.
(b) After payment to the holders of the Series A Preferred Shares of
the full preferential amounts provided for in this Section 6, the holders
of the Series A Preferred Shares shall have no right or claim to any of the
remaining assets of the Corporation.
(c) If, upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the amounts payable with respect to the
stated value of the Series A Preferred Shares and any other shares of stock
of the Corporation ranking as to any such distribution on a parity with the
Series A Preferred Shares are not paid in full, the holders of the Series A
Preferred Shares and of such other shares will share ratably in any such
distribution of assets of the Corporation in proportion to the full
respective liquidating distributions to which they are entitled.
(d) Neither the sale of all or substantially all the property or
business of the Corporation, nor the merger or consolidation of the
Corporation into or with any other corporation or the merger or
consolidation of any other corporation into or with the Corporation shall
be deemed to be a liquidation,
7
<PAGE>
dissolution or winding up, voluntary or involuntary, of the Corporation for
purposes of this Section 6.
(e) Upon the liquidation, dissolution or winding up of the
Corporation, the holders of the Series A Preferred Shares then outstanding
shall be entitled to be paid out of the assets of the Corporation available
for distribution to its stockholders all amounts to which such holders are
entitled pursuant to paragraph (a) of this Section 6 before any payment
shall be made to the holder of any class of capital stock of the
Corporation ranking junior to the Series A Preferred Shares upon
liquidation.
7. Ranking. For purposes of this resolution, any stock of any class
-------
or classes of the Corporation shall be deemed to rank:
(a) Prior to the Series A Preferred Shares, either as to dividends or
upon liquidation, if the holders of such class or classes shall be entitled
to the receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up of the Corporation, as the case may be, in
preference or priority to the holders of the Series A Preferred Shares;
(b) On a parity with the Series A Preferred Shares, either as to
dividends or upon liquidation, whether or not the dividend rates, dividend
payment dates or redemption or liquidation prices per share or sinking fund
provisions, if any, be different from those of the Series A Preferred
Shares, if the holders of such stock shall be entitled to the receipt of
dividends or of amounts distributable upon liquidation, dissolution or
winding up of the Corporation, as the case may be, without preference or
priority, one over the other, as between the holders of such stock and the
holders of the Series A Preferred Shares; and
(c) Junior to the Series A Preferred Shares, either as to dividends
or upon liquidation, if such class shall be Common Stock or if the holders
of the Series A Preferred Shares shall be entitled to receipt of dividends
or of amounts distributable upon liquidation, dissolution or winding up of
the Corporation, as the case may be, in preference or priority to the
holders of shares of such class or classes.
8. Voting Rights. The Series A Preferred Shares shall not have any
-------------
voting powers, either general or special, except that:
(a) If at the time of any annual meeting of the Corporation's
stockholders for the election of directors there is a default in preference
dividends on the Preferred Stock, including the Series A Preferred Shares,
the number of directors then constituting the Board of Directors of the
Corporation
8
<PAGE>
shall be increased by two (if not already increased by two due to a default
in preference dividends), and the holders of the Series A Preferred Shares,
voting together with the holders of all other series of Preferred Stock as
a single class without regard to series (whether or not the holders of such
series of Preferred Stock would be entitled to vote for the election of
directors if such default in preference dividends did not exist), shall
have the right at such meeting to the exclusion of the holders of Common
Stock, to elect two additional directors of the Corporation to fill such
newly created directorships. Each director elected by the holders of shares
of the Preferred Stock (a "Preferred Director") shall continue to serve as
such director until the later of (i) the full term for which he or she
shall have been elected or (ii) the payment of four quarterly dividends on
the Preferred Stock, including the Series A Preferred Shares. Any Preferred
Director may be removed by, and shall be not removed except by, the vote of
the holders of record of all the outstanding shares of Preferred Stock,
voting together as a single class without regard to series, at a meeting of
the Corporation's stockholders, or of the holders of shares of Preferred
Stock, called for that purpose. As long as a default in any preference
dividends on the Preferred Stock shall exist (i) any vacancy in the office
of a Preferred Director may be filled (except as provided in the following
clause (ii)) by an instrument in writing signed by the remaining Preferred
Director and filed with the Corporation, and (ii) in the case of the
removal of any Preferred Director, the vacancy may be filled by the vote of
the holders of all the outstanding shares of Preferred Stock, voting
together as a single class without regard to series, at the same meeting at
which such removal shall be voted. Each director appointed as aforesaid by
the remaining Preferred Director shall be deemed, for all purposes hereof,
to be a Preferred Director. Whenever the term of office of the Preferred
Directors shall end and a default in preference dividends shall no longer
exist, the number of directors constituting the Board of Directors shall be
reduced by two. For purposes hereof, a "default in preference dividends"
on the Preferred Stock shall be deemed to have occurred whenever the
Corporation has failed to declare and set aside for payment a quarterly
dividend during any of the four preceding quarterly dividend periods on any
series of Preferred Stock of the Corporation, including the Series A
Preferred Shares.
(b) Without the consent of the holders of shares entitled to cast at
least 67% of the votes entitled to be cast by the holders of the total
number of shares of Preferred Stock then outstanding, voting together as a
single class without regard to series, the holders of the Series A
Preferred Shares being entitled to cast one vote per share thereon, the
Corporation may not: (i) create any class or series of stock which shall
as to dividends or distribution of assets rank prior to or on a parity with
any outstanding series of Preferred Stock other than a series which shall
not have any right to object to such creation or (ii) alter or change the
provisions of the Corporation's First Amended and
9
<PAGE>
Restated Articles of Incorporation of the Corporation, as the same may be
amended or restated from time to time, so as to adversely affect the voting
powers preferences or special rights of the holders of a series of
Preferred Stock; provided, however, that if such creation, alteration or
change would adversely affect the voting power, preferences or special
rights of one or more, but not all, series of Preferred Stock at the time
outstanding, consent of the holders of shares entitled to cast at least 67%
of the votes entitled to be cast by the holders of all of the shares of all
such series so affected, voting together as a single class, shall be
required in lieu of the consent of the holders of shares entitled to cast
at least 67% of the votes entitled to be cast by the holders of the total
number of shares of Preferred Stock at the time outstanding.
9. Approval of Independent Directors. (a) As long as any Series A
---------------------------------
Preferred Shares are outstanding, the Corporation may not take the
following actions without first obtaining the approval of a majority of the
Independent Directors. "Independent Director" means any director of the
Corporation who is either (i) not a current officer or employee of the
Corporation or a current director, officer or employee of the Bank or any
affiliate of the Bank, or (ii) a Preferred Director. The actions which
require the prior approval of a majority of the Independent Directors
include (i) the issuance of additional Preferred Stock ranking on a parity
with the Series A Preferred Shares, (ii) the incurrence of debt for
borrowed money in excess of 25% of the Corporation's total stockholders'
equity, (iii) the modification of the general distribution policy of the
Corporation or the declaration of any distribution in respect of Common
Stock for any year if, after taking into account any such proposed
distribution, total distributions on the Series A Preferred Shares and the
Common Stock would exceed an amount equal to the sum of 105% of the
Corporation's "REIT taxable income" (excluding capital gains) for such year
plus net capital gains of the Corporation for that year, (iv) the
acquisition of real estate assets other than mortgage loans or mortgage
securities representing interests in or obligations backed by pools of
mortgage loans, (v) the redemption of any shares of Common Stock, (vi) the
termination or modification of, or the election not to renew, that certain
Advisory Agreement to be entered into by and between the Corporation and
the Bank in connection with the formation of the Corporation or that
certain Servicing Agreement to be entered into by and between the
Corporation and the Bank in connection with the formation of the
Corporation, or the subcontracting of any duties under said Servicing
Agreement to third parties unaffiliated with the Bank, (vii) any
dissolution, liquidation or termination of the Corporation prior to January
15, 2027, (viii) any material amendment to or modification of any
agreements pursuant to which the Corporation purchases its real estate
mortgage assets, and (ix) the determination to revoke the Corporation's
status as a real estate investment trust.
(b) In assessing the benefits to the Corporation of any proposed
action requiring their consent, the Independent Directors shall take into
account the
10
<PAGE>
interests of holders of shares of both the Common Stock and the Preferred
Stock, including, without limitation, the holders of the Series A Preferred
Shares. In considering the interests of the holders of the Preferred
Stock, including, without limitation, holders of the Series A Preferred
Shares, the Independent Directors shall owe the same duties that the
Independent Directors owe to holders of shares of Common Stock.
10. Maintenance of Status as Reporting Company. As long as any
------------------------------------------
Series A Preferred Shares are outstanding, the Corporation shall maintain
its status as a reporting company under the Securities Exchange Act of
1934, as amended.
[SIGNATURES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, CHEVY CHASE PREFERRED CAPITAL CORPORATION has caused
these Articles Supplementary to be signed and acknowledged in its name and on
its behalf by its Senior Vice President and Controller and attested to by its
Secretary on this 29th day of November, 1996.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
By: Joel A.Friedman
Name: Joel A. Friedman
Title: Senior Vice President and Controller
ATTEST:
Mary Lou Hayes
- --------------
Mary Lou Hayes
Secretary
THE UNDERSIGNED, Senior Vice President and Controller of CHEVY CHASE
PREFERRED CAPITAL CORPORATION, who executed on behalf of said corporation the
foregoing Articles Supplementary to its Articles of Amendment and Restatement,
of which this certificate is made a part, hereby acknowledges, in the name and
on behalf of said corporation, and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the approval thereof are true in all material respects under the
penalties of perjury.
Dated: November 29, 1996 Joel A. Friedman
----------------
Joel A. Friedman
Senior Vice President and Controller
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MORTGAGE LOAN PURCHASE AGREEMENT
This MORTGAGE LOAN PURCHASE AGREEMENT ("Agreement"), dated as of December 1,
1996, by and between Chevy Chase Preferred Capital Corporation, a Maryland
corporation having its principal office at 8401 Connecticut Avenue, Chevy Chase,
Maryland 20815 ("Purchaser") and Chevy Chase Bank, F.S.B., a federal savings
bank having its home office at 7926 Jones Branch Drive, McLean, Virginia 22101
("Seller").
W I T N E S S E T H :
WHEREAS, Seller desires to sell to Purchaser, and Purchaser desires to purchase
from Seller, certain conventional residential first mortgage loans ("Mortgage
Loans") on a servicing retained basis as described herein, and which shall be
delivered as whole loans on the Closing Date, as defined below;
WHEREAS, each Mortgage Loan is secured by a mortgage, deed of trust or other
security instrument creating a first lien on a residential dwelling located in
the jurisdiction indicated on the Mortgage Loan Schedule; and
WHEREAS, Purchaser and Seller wish to prescribe the manner of the conveyance,
servicing and control of the Mortgage Loans.
NOW, THEREFORE, in consideration of the promises and mutual agreements set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Purchaser and Seller agree as
follows:
SECTION 1. DEFINITIONS. For purposes of this Agreement the following
capitalized terms shall have the respective meanings set forth below. Other
capitalized terms used in this Agreement and not defined herein shall have the
respective meanings set forth in the Servicing Agreement attached hereto as
Exhibit B.
"ACCEPTED SERVICING PRACTICES" means, with respect to any Mortgage Loan, those
mortgage servicing practices of prudent mortgage lending institutions which
service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"ACT" means The National Housing Act, as amended from time to time.
"ADJUSTABLE RATE MORTGAGE LOAN" or "ARM" means any individual Mortgage Loan
purchased pursuant to this Agreement the interest rate of which adjusts
periodically.
"AFFILIATE" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"AGREEMENT" means this Mortgage Loan Purchase Agreement and all amendments and
supplements hereto.
"ALTA" means The American Land Title Association or any successor thereto.
"ANCILLARY INCOME" means all late charges, assumption fees, escrow account
benefits, reinstatement fees, and similar types of fees arising from or in
connection with any Mortgage, to the extent not otherwise payable to the
Mortgagor under applicable law or pursuant to the terms of the related Mortgage
Note.
"APPRAISED VALUE" means the value set forth in an appraisal made in connection
with the origination of the related Mortgage Loan as the value of the Mortgaged
Property.
"ASSIGNMENT AND ASSUMPTION AGREEMENT" has the meaning set forth in Section 19
hereof.
"ASSIGNMENT OF MORTGAGE" means an assignment of the Mortgage delivered in blank,
or equivalent instrument in recordable form, sufficient under the laws of the
jurisdiction wherein the related Mortgaged Property is located to reflect the
sale of the Mortgage to Purchaser.
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"BUSINESS DAY" means any day other than (i) a Saturday or Sunday, or (ii) a day
on which banking and savings and loan institutions in the State of Maryland are
authorized or obligated by law or executive order to be closed.
"CLOSING DATE" means December 1, 1996, or such other date as is mutually agreed
upon by the parties.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONDEMNATION PROCEEDS" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"CONVENTIONAL LOAN" means a conventional residential first lien mortgage loan
which is a Mortgage Loan.
"CONVERTIBLE MORTGAGE LOAN" means any individual Mortgage Loan purchased
pursuant to this Agreement which contains a provision whereby the Mortgagor is
permitted to convert the Mortgage Loan to a fixed rate Mortgage Loan in
accordance with the terms of the related Mortgage Note.
"CUSTODIAL ACCOUNT" means the separate trust account created and maintained
pursuant to Section 2.04 of the Servicing Agreement.
"CUT-OFF DATE" means December 1, 1996.
"DELETED MORTGAGE LOAN" means a Mortgage Loan that is repurchased or replaced
with a Qualified Substitute Mortgage Loan by Seller in accordance with the terms
of this Agreement.
"DETERMINATION DATE" means one (1) Business Day prior to the related Remittance
Date.
"DUE DATE" means the day of the month on which the Monthly Payment is due on a
Mortgage Loan, exclusive of any days of grace.
"ESCROW ACCOUNT" means the separate account created and maintained pursuant to
Section 2.06 of the Servicing Agreement with respect to each Mortgage Loan, as
specified in the Servicing Agreement.
"ESCROW PAYMENTS" means, with respect to any Mortgage Loan, the amounts
constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, mortgage insurance premiums, fire and hazard insurance
premiums, condominium charges, and any other payments required to be escrowed by
the Mortgagor with the mortgagee pursuant to the Mortgage or any other document.
"FHA" means the Federal Housing Administration, an agency within the United
States Department of Housing and Urban Development, or any successor thereto and
including the Federal Housing Commissioner and the Secretary of Housing and
Urban Development where appropriate under the FHA Regulations.
"FNMA" means the Federal National Mortgage Association, or any successor
thereto.
"HUD" means the Department of Housing and Urban Development, or any federal
agency or official thereof which may from time to time succeed to the functions
thereof with regard to FHA mortgage insurance. The term "HUD," for purposes of
this Agreement, is also deemed to include subdivisions thereof such as the FHA
and Government National Mortgage Association.
"INDEX", with respect to each ARM Loan, shall have the respective meaning
ascribed to it in each related Mortgage Note.
"INSURANCE PROCEEDS" means, with respect to each Mortgage Loan, proceeds of
insurance policies insuring the Mortgage Loan or the related Mortgaged Property.
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"INTEREST RATE ADJUSTMENT DATE" means, with respect to each ARM Loan, the date,
specified in the related Mortgage Note and the Mortgage Loan Schedule, on which
the Mortgage Interest Rate is adjusted.
"LIFETIME RATE CAPS" means the provision of each Mortgage Note related to an ARM
Loan which provides for an absolute maximum Mortgage Interest Rate thereunder.
The Mortgage Interest Rate during the terms of each ARM Loan shall not at any
time exceed the amount per annum set forth on the Mortgage Loan Schedule
attached hereto as Exhibit H.
"LIQUIDATION PROCEEDS" means cash received in connection with the liquidation of
a defaulted Mortgage Loan, whether through the sale or assignment of such
Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the sale of the
related Mortgaged Property if the Mortgaged Property is acquired in satisfaction
of the Mortgage Loan.
"LOAN-TO-VALUE RATIO" or "LTV" means, with respect to any Mortgage Loan, the
ratio (expressed as a percentage) of the original principal amount of the
Mortgage Loan to the lesser of (a) the Appraised Value of the Mortgaged Property
at origination and (b) if the Mortgage Loan was made to finance the acquisition
of the related Mortgaged Property, the purchase price of the Mortgaged Property.
"MARGIN" means, with respect to each ARM Loan, the fixed percentage amount set
forth in the related Mortgage Note which amount is added to the Index in
accordance with the terms of the related Mortgage Note to determine on each
Interest Rate Adjustment Date the Mortgage Interest Rate for such Mortgage Loan.
"MONTHLY PAYMENT" means the scheduled monthly payment of principal and interest
on a Mortgage Loan.
"MORTGAGE" means the mortgage, deed of trust or other instrument securing a
Mortgage Note, which creates a first lien on an unsubordinated estate in fee
simple in real property securing the Mortgage Note; except that with respect to
real property located in jurisdictions in which the use of leasehold estates for
residential properties is a widely accepted practice, the mortgage, deed of
trust or other instrument securing the Mortgage Note may secure and create a
first lien upon a leasehold estate of the Mortgagor.
"MORTGAGE FILE" means the items pertaining to a particular Mortgage Loan
referred to in Exhibit A annexed hereto, and any additional documents required
to be added to the Mortgage File pursuant to this Agreement.
"MORTGAGE INTEREST RATE" means the annual rate of interest set forth in a
Mortgage Note, which, in the case of an ARM Loan, shall be adjusted from time to
time, with respect to each Mortgage Loan.
"MORTGAGE INTEREST RATE CAP" means, with respect to each ARM Loan, the limit on
each Mortgage Interest Rate adjustment as set forth in the related Mortgage
Note.
"MORTGAGE LOAN" means an individual Mortgage Loan which is the subject of this
Agreement, each Mortgage Loan originally sold and subject to this Agreement
being identified on the applicable Mortgage Loan Schedule, which Mortgage Loan
includes without limitation the Mortgage File, the Monthly Payments, Principal
Prepayments, Liquidation Proceeds, Condemnation Proceeds, Insurance Proceeds,
and all other rights, benefits, proceeds and obligations arising from or in
connection with such Mortgage Loan, excluding replaced or repurchased mortgage
loans.
"MORTGAGE LOAN DOCUMENTS" means, with respect to each Mortgage Loan, the
following documents pertaining to such Mortgage Loan:
a. The original Mortgage Note (or, with respect to the Mortgage Loan listed on
Schedule I to Exhibit A hereto, a lost note affidavit, executed by an officer
of Seller, with a copy of the original note attached thereto) bearing all
intervening endorsements, if any, between the original lender (if other than
Seller) and Seller, and endorsed "Pay to the order of _____ without recourse"
and
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signed in the name of Seller by an authorized officer. To the extent that
there is no room on the face of the Mortgage Notes for endorsements, the
endorsement may be contained on an allonge, if applicable state law so
allows. If the Mortgage Loan was acquired by Seller in a merger, the
endorsement must be by "[Seller], successor by merger to [name of
predecessor]". If the Mortgage Loan was acquired or originated by Seller
while doing business under another name, the endorsement must be by
"[Seller], formerly known as [previous name]"; and
b. The original Assignment of Mortgage for each Mortgage Loan in form and
substance acceptable for recording endorsed "Pay to the order of ______" and
signed in the name of Seller. If the Mortgage Loan was acquired by Seller in
a merger, the Assignment of Mortgage must be made by "[Seller], successor by
merger to [name of predecessor]". If the Mortgage Loan was acquired or
originated by Seller while doing business under another name, the Assignment
of Mortgage must be by "[Seller], formerly known as [previous name]".
c. The original of any guarantee executed in connection with the Mortgage Note.
d. The original Mortgage, with evidence of recording thereon. If in connection
with any Mortgage Loan, Seller cannot deliver or cause to be delivered the
original Mortgage with evidence of recording thereon on, or prior to the
Closing Date because of a delay caused by the public recording office where
much Mortgage has been delivered for recordation, a photocopy of such
Mortgage certified by Seller to be true and correct will be delivered; if
such Mortgage has been lost or if such public recording office retains the
original recorded Mortgage, Seller shall deliver or cause to be delivered to
Purchaser, a photocopy of such Mortgage, certified by such public recording
office to be a true and complete copy of the original recorded Mortgage.
e. The originals of all assumption, modification, consolidation or extension
agreements, if any, with evidence of recording thereon or, if the originals
thereof are unavailable, certified copies of such documents
f. Originals of all intervening assignments of the Mortgage with evidence of
recording thereon, if such intervening assignment has been recorded.
g. The original mortgagee policy of title insurance or, in the event such
original title policy is unavailable, a certified true copy of the related
policy binder or commitment for title certified to be true and complete by
the title insurance company.
h. Any security agreement, chattel mortgage or equivalent executed in connection
with the Mortgage.
i. For Mortgage Loans with original LTVs greater than 80%, evidence of a PMI
Policy.
"MORTGAGE LOAN SCHEDULE" means the schedule of Mortgage Loans attached hereto as
Exhibit H setting forth at least the following information with respect to each
Mortgage Loan: (1) Seller's Mortgage Loan identifying number; (2) the location
of the Mortgaged Property by city, state and zip code; (3) a code indicating
whether the Mortgaged Property is owner-occupied, second home or investor owned;
(4) the type of residential units constituting the Mortgaged Property; (5) the
original number of months to maturity; (6) the remaining months to maturity from
the Cut-off Date, based on the original amortization schedule, and, if
different, the maturity expressed in the same manner but based on the actual
amortization schedule; (7) the Loan-to-Value Ratio at origination; (8) the
Mortgage Interest Rate as of the Cut-off Date; (9) the stated maturity date;
(10) the amount of the Monthly Payment as of the Cut-off Date; (11) the original
principal amount of the Mortgage Loan; (12) the principal balance of the
Mortgage Loan as of the close of business on the Cut-off Date, after deduction
of payments of principal due on or before the Cut-off Date whether or not
collected; (13) a code indicating the purpose of the loan (i.e., purchase, rate
and term refinance, equity take-out refinance); (14) a code indicating the
documentation style (i.e. full, alternative or reduced); (15) a code indicating
whether the Mortgage Loan is a Convertible Mortgage Loan; (16) the type of
Mortgage Loan product, if any; (17)
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the first payment Due Date; (18) the initial Mortgage Interest Rate; (19) the
amount of the first Monthly Payment; and (20) the name of any Qualified Insurer
with respect to a PMI Policy; and, with respect to any ARM Loan: (1) the Margin;
(2) the Lifetime Rate Cap; (3) any Periodic Rate Caps; (4) any minimum interest
rate, if other than the Margin; (5) the first Rate Adjustment Date after the
Cut-off Date; and (6) the applicable Index, in each case, under the terms of the
Mortgage Note. With respect to the Mortgage Loans in the aggregate, the Mortgage
Loan Schedule shall set forth the following information, as of the Cut-off Date:
(1) the number of Mortgage Loans; (2) the current aggregate outstanding
principal balance of the Mortgage Loans; (3) the weighted average Mortgage
Interest Rate of the Mortgage Loans; and (4) the weighted average maturity of
the Mortgage Loans.
"MORTGAGE NOTE" means the note or other evidence of the indebtedness of a
Mortgagor secured by a Mortgage.
"MORTGAGED PROPERTY" means the real property (or leasehold estate, if
applicable) securing repayment of the debt evidenced by a Mortgage Note.
"MORTGAGOR" means the obliger on a Mortgage Note.
"OFFICER'S CERTIFICATE" means a certificate signed by the Chairman of the Board,
any Vice Chairman of the Board, the President, any Executive Vice President, any
Senior Vice President, or any Vice President and by the Treasurer, the
Controller, the Secretary, any Assistant Treasurer or any Assistant Secretary of
the Seller, and delivered to the Purchaser as required by this Agreement.
"OPINION OF COUNSEL" means a written opinion of counsel, who may be counsel for
Seller, reasonably acceptable to Purchaser.
"PERIODIC RATE CAP" means the provision of each Mortgage Note related to each
ARM Loan which provides for an absolute maximum amount by which the Mortgage
Interest Rate therein may increase or decrease on an Interest Rate Adjustment
Date above or below the Mortgage Interest Rate previously in effect. The
Periodic Rate Cap for each ARM Loan is the rate set forth on Exhibit H hereto.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof.
"PMI POLICY" means a policy of primary mortgage guaranty insurance issued by a
Qualified Insurer.
"PRINCIPAL PREPAYMENT" means any payment or other recovery of principal on a
Mortgage Loan which is received in advance of its scheduled Due Date, including
any prepayment penalty or premium thereon and which is not accompanied by an
amount of interest representing scheduled interest due on any date or dates in
any month or months subsequent to the month of prepayment.
"PURCHASE PRICE" means the price paid on the Closing Date by Purchaser to Seller
in exchange for the Mortgage Loans purchased on the Closing Date as set forth in
Section 3 of this Agreement.
"PURCHASER" means Chevy Chase Preferred Capital Corporation, its designees,
successors or assigns.
"QUALIFIED APPRAISER" means an appraiser who had no interest, direct or
indirect, in the Mortgaged Property or in any loan made on the security thereof,
and whose compensation is not affected by the approval or disapproval of the
Mortgage Loan, and such appraiser and the appraisal made by such appraiser both
satisfy the requirements of Title XI of the Federal Institutions Reform,
Recovery, and Enforcement Act of 1989 and the regulations promulgated
thereunder, all as in effect on the date the Mortgage Loan was originated.
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"QUALIFIED INSURER" means an insurance company which is: duly qualified as such
under the laws of the state in which the related Mortgaged Property is located;
duly authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided; approved as an insurer by FNMA
with respect to primary mortgage insurance; and, with respect to hazard and
flood insurance, rated by Best's in one of its two highest categories.
"QUALIFIED SUBSTITUTE MORTGAGE LOAN" means a mortgage loan eligible to be
substituted by Seller for a Deleted Mortgage Loan which must, on the date of
such substitution, (i) have an outstanding principal balance, after deduction of
all scheduled payments due in the month of substitution (or in the case of a
substitution of more than one mortgage loan for a Deleted Mortgage Loan, an
aggregate principal balance), not in excess of the outstanding principal balance
of the Deleted Mortgage Loan (the amount of any shortfall will be deposited in
the Custodial Account by Seller in the month of substitution); (ii) have a
Mortgage Interest Rate equal to, or not more than 1.00% greater than, the
Mortgage Interest Rate of the Deleted Mortgage Loan; (iii) have a remaining term
to maturity equal to, or not more than one year less than that of the Deleted
Mortgage Loan; (iv) be of the same type as the Deleted Mortgage Loan (i.e.,
Mortgage Loan with the same Mortgage Interest Rate Caps or fixed rate); and (v)
comply with each representation and warranty (respecting individual Mortgage
Loans) set forth in Section 8.02 hereof.
"REMITTANCE DATE" is defined in the Servicing Agreement.
"REPURCHASE PRICE" means, with respect to any Mortgage Loan, a price equal to
(i) the unpaid principal balance of such Mortgage Loan plus (ii) interest on
such unpaid principal balance of such Mortgage Loan at the Mortgage Interest
Rate from the last date through which interest has been paid and distributed to
Purchaser to the date of repurchase, less amounts received or advanced, if any,
by Seller in respect of such repurchased Mortgage Loan.
"RESPA" means the Real Estate Settlement Procedures Act, as amended.
"SELLER" means Chevy Chase Bank, F.S.B., its successors and assigns.
"SERVICING AGREEMENT" means the agreement, attached hereto as Exhibit B, to be
entered into by Seller, as servicer, and Purchaser.
"SERVICING FEE" means the fee to be paid to Seller by Purchaser for servicing
each Mortgage Loan as more specifically defined in the Servicing Agreement.
"SERVICING FEE RATE" means the rate specified in the Servicing Agreement.
"SERVICING FILE" means with respect to each Mortgage Loan, the file retained by
Seller during the period in which Seller is acting as servicer pursuant to the
Servicing Agreement consisting of originals of all documents in the Mortgage
File which are not delivered to Purchaser and copies of the Mortgage Loan
Documents.
"STATED PRINCIPAL BALANCE" means as to each Mortgage Loan, (i) the principal
balance of the Mortgage Loan at the Cut-off Date after giving effect to payments
of principal due on or before such date, whether or not received, minus (ii) all
amounts previously received by Purchaser with respect to the related Mortgage
Loan representing payments or recoveries of principal or advances in lieu
thereof.
[SECTION 2. RESERVED.]
SECTION 3. AGREEMENT TO PURCHASE. Seller agrees to sell and Purchaser agrees to
purchase, at a price of par, Mortgage Loans having an aggregate principal
balance on the Cut-off Date of $300,078,499.10, or such other amount as agreed
by Purchaser and Seller as evidenced by the actual aggregate principal balance
of the Mortgage Loans accepted by Purchaser on the Closing Date. The initial
principal amount of the Mortgage Loans shall be the aggregate principal balance
of the Mortgage Loans, so computed as of the Cut-off Date, after application of
scheduled payments of principal due on or before the Cut-off Date whether or not
collected.
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In addition to the Purchase Price as described above, Purchaser shall pay to
Seller, at closing, accrued interest on the initial principal amount of the
related Mortgage Loans at the weighted average Mortgage Interest Rate of those
Mortgage Loans, minus any amounts attributable to Servicing Fees as provided in
the Servicing Agreement from the Cut-off Date through the day prior to the
Closing Date, inclusive.
The Purchase Price plus accrued interest as set forth in the preceding paragraph
shall be paid on the Closing Date by wire transfer of immediately available
funds.
Purchaser shall be entitled to (1) all scheduled principal due after the Cut-off
Date, (2) all other recoveries of principal collected on or after the Cut-off
Date (provided, however, that all scheduled payments of principal due on or
before the Cut-off Date and collected after the Cut-off Date shall belong, and
be paid, to Seller), and (3) all payments of interest on the Mortgage Loans net
of applicable Servicing Fees collected on or after the Cut-off Date (minus that
portion of any such payment which is allocable to the period prior to the Cut-
off Date). The outstanding principal balance of each Mortgage Loan as of the
Cut-off Date is determined after application of payments of principal due on or
before the Cut-off Date whether or not collected, together with any unscheduled
principal prepayments collected prior to the Cut-off Date; provided, however,
that payments of scheduled principal and interest prepaid for a Due Date beyond
the Cut-off Date shall not be applied to the principal balance as of the Cut-off
Date. Such prepaid amounts shall be the property of Purchaser. Any such prepaid
amounts shall be deposited into the Custodial Account, which account is
established for the benefit of Purchaser for subsequent remittance to Purchaser.
SECTION 4. ADDITIONAL MORTGAGE LOANS. From time to time Purchaser may agree to
purchase additional Mortgage Loans offered for sale by Seller ("Supplemental
Sale"). Such Supplemental Sale shall be evidenced by one or more Supplemental
Mortgage Loan Schedules (sequentially labeled Exhibit H-1, Exhibit H-2, etc.),
executed by the parties. Each such Supplemental Sale shall, in all respects, be
governed by this Agreement, including all Exhibits and Schedules hereto, with
the following exceptions:
a. The Closing Date, Cut-Off Date and Remittance Date (collectively, "Contract
Dates") stated in this Agreement or in any Exhibit or Schedule attached
hereto shall each be as set forth on the applicable Supplemental Mortgage
Loan Schedule. All other relevant dates and time periods in the Agreement
shall be deemed to be adjusted in order to conform to the amended Contract
Dates.
b. Any other exception mutually agreed between the parties and contained on the
applicable Supplemental Mortgage Loan Schedule.
SECTION 5. EXAMINATION OF MORTGAGE FILES. Prior to the date hereof, Seller has
(a) delivered to Purchaser in escrow, for examination with respect to each
Mortgage Loan to be purchased, the related Mortgage File, including a copy of
the Assignment of Mortgage, pertaining to each Mortgage Loan, or (b) made the
related Mortgage File available to Purchaser for examination at Seller's offices
or such other location as shall otherwise be agreed upon by Purchaser and
Seller. The fact that Purchaser has conducted or has failed to conduct any
partial or complete examination of the Mortgage Files shall not affect
Purchaser's (or its successor's) rights to demand repurchase, substitution or
other relief as provided herein.
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER.
6.01. Conveyance of Mortgage Loans; Possession of Files. Seller hereby agrees
to sell, transfer, assign and convey to Purchaser on the Closing Date, without
recourse, but subject to the terms of this Agreement, all right, title and
interest of Seller in and to the Mortgage Loans and the Mortgage Files and all
rights and obligations arising under the documents contained therein. The
Servicing File shall be retained by Seller in accordance with the terms of the
Servicing Agreement and, as provided therein, shall be appropriately identified
in Seller's books and records to clearly reflect the sale of the related
Mortgage Loan to Purchaser.
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On and after the Closing Date, each Mortgage and related Mortgage Note shall be
possessed solely by Purchaser. All rights arising out of the Mortgage Loans
including, but not limited to, all funds received by Seller after the Cut-off
Date in connection with a Mortgage Loan shall be vested in Purchaser provided,
however, that all funds received on or in connection with a Mortgage Loan shall
be received and held by Seller in trust for the benefit of Purchaser as the
owner of the Mortgage Loans pursuant to the terms of this Agreement.
The sale of each Mortgage Loan shall be reflected on Seller's balance sheet and
other financial statements as a sale of assets by Seller.
6.02. Delivery of Mortgage Loan Documents. On the Closing Date, Seller shall
deliver to Purchaser the Mortgage Loan Documents with respect to each Mortgage
Loan set forth on the Mortgage Loan Schedule. Seller shall forward to Purchaser
original documents evidencing an assumption, modification, consolidation,
conversion or extension of any Mortgage Loan entered into after the Closing Date
within two (2) weeks of their execution, provided, however, that Seller shall
provide Purchaser with a certified true copy of any such document submitted for
recordation within two (2) weeks of its execution, and shall promptly provide
the original of any document submitted for recordation or a copy of such
document certified by the appropriate public recording office to be a true and
complete copy of the original within ninety (90) days of its submission for
recordation.
In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
Purchaser within 90 days following the Closing Date (other than with respect to
the Assignments of Mortgage which shall be delivered to Purchaser in blank and
recorded subsequently by Purchaser), and in the event that Seller does not cure
such failure within 30 days of discovery or receipt of written notification of
such failure from Purchaser, the related Mortgage Loan shall, upon the request
of Purchaser, be repurchased by Seller at the price and in the manner specified
in Subsection 8.03. The foregoing repurchase obligation shall not apply in the
event that Seller cannot deliver, or cause to be delivered, such original or
copy of any document submitted for recordation to the appropriate public
recording office within the specified period due to a delay caused by the
recording office in the applicable jurisdiction; provided that Seller shall
instead deliver, or cause to be delivered, a recording receipt of such recording
office or, if such recording receipt is not available, an officer's certificate
of a servicing officer of Seller confirming that such documents have been
accepted for recording; provided that, upon request of Purchaser and delivery by
Purchaser to Seller of a schedule of the related Mortgage Loans, Seller shall
reissue and deliver to Purchaser said officer's certificate relating to the
related Mortgage Loans.
Seller shall pay all initial recording fees, if any, for the Assignments of
Mortgage and any other fees or costs in transferring all original documents to
Purchaser. Purchaser shall be responsible for recording the Assignments of
Mortgage and shall be reimbursed by Seller for the reasonable costs associated
therewith pursuant to the preceding sentence.
SECTION 7. SERVICING OF THE MORTGAGE LOANS. The Mortgage Loans have been sold
by Seller to Purchaser on a servicing retained basis. Purchaser shall retain
Seller as independent contract servicer of the Mortgage Loans pursuant to and in
accordance with the terms and conditions contained in the Servicing Agreement.
Purchaser and Seller shall execute the Servicing Agreement on the Closing Date
in the form attached hereto as Exhibit B. Pursuant to the Servicing Agreement,
Seller shall begin servicing the Mortgage Loans on behalf of Purchaser and shall
be entitled to the Servicing Fee and any Ancillary Income with respect to such
Mortgage Loans from the Closing Date until the termination of the Servicing
Agreement with respect to any of the Mortgage Loans as set forth in the
Servicing Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER; REMEDIES FOR
BREACH.
8.01. Representations and Warranties Regarding Seller. Seller represents,
warrants and covenants to Purchaser that as of the date hereof and as of the
Closing Date:
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a. Due Organization and Authority; Enforceability. Seller is a federal savings
bank duly organized, validly existing and in good standing under the laws of
the United States and has all licenses necessary to carry on its business as
now being conducted in each state wherein it owns or leases any material
properties or where a Mortgaged Property is located. Seller is in compliance
with the laws of any such state to the extent necessary to ensure the
enforceability of the related Mortgage Loan in accordance with the terms of
this Agreement; Seller has the full corporate power, authority and legal
right to hold, transfer and convey the Mortgage Loans and to execute and
deliver this Agreement and to perform its obligations hereunder; the
execution, delivery and performance of this Agreement (including all
instruments of transfer to be delivered pursuant to this Agreement) by Seller
and the consummation of the transactions contemplated hereby have been duly
and validly authorized; this Agreement and all agreements contemplated hereby
have been duly executed and delivered and constitute the valid, legal,
binding and enforceable obligations of Seller subject to bankruptcy laws and
other similar laws of general application affecting rights of creditors and
subject to the application of the rules of equity, including those respecting
the availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder,
regardless of whether such enforcement is sought in a proceeding in equity or
at law; and all requisite corporate action has been taken by Seller to make
this Agreement and all agreements contemplated hereby valid and binding upon
Seller in accordance with their terms;
b. Ordinary Course of Business. The consummation of the transactions
contemplated by this Agreement are in the ordinary course of business of
Seller, and the transfer, assignment and conveyance of the Mortgage Notes and
the Mortgages by Seller pursuant to this Agreement are not subject to the
bulk transfer or any similar statutory provisions in effect in any applicable
jurisdiction;
c. No Conflicts. Neither the execution and delivery of this Agreement, the sale
of the Mortgage Loans to Purchaser, the consummation of the transactions
contemplated hereby, nor the fulfillment of or compliance with the terms and
conditions of this Agreement, will conflict with or result in a breach of any
of the terms, conditions or provisions of Seller's charter or by-laws or any
legal restriction or any agreement or instrument to which Seller is now a
party or by which it is bound, or constitute a default or result in an
acceleration under any of the foregoing, or result in the violation of any
law, rule, regulation, order, judgment or decree to which Seller or its
property is subject, or result in the creation or imposition of any lien,
charge or encumbrance that would have an adverse effect upon any of its
properties pursuant to the terms of any mortgage, contract, deed of trust or
other instrument, or impair the ability of Purchaser to realize on the
Mortgage Loans, impair the value of the Mortgage Loans, or impair the ability
of Purchaser to realize the full amount of any mortgage insurance benefits
accruing pursuant to this Agreement;
d. Ability to Perform; Solvency. Seller does not believe, nor does it have any
reason or cause to believe, that it cannot perform each and every covenant
contained in this Agreement. Seller is solvent and the sale of the Mortgage
Loans will not cause Seller to become insolvent. The sale of the Mortgage
Loans is not undertaken with the intent to hinder, delay or defraud any of
Seller's creditors;
e. No Litigation Pending. There is no action, suit, proceeding or investigation
pending or threatened against Seller, before any court, administrative agency
or other tribunal asserting the invalidity of this Agreement, seeking to
prevent the consummation of any of the transactions contemplated by this
Agreement or which, either in any one instance or in the aggregate, could
result in any material adverse change in the business, operations, financial
condition, properties or assets of Seller, or in any material impairment of
the right or ability of Seller to carry on its business substantially as now
conducted, or in any material liability on the part of Seller, 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 Seller
contemplated herein, or which would be
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likely to impair materially the ability of Seller to perform under the terms
of this Agreement;
f. No Consent Required. No consent, approval, authorization or order of, or
registration or filing with, or notice to any court or governmental agency or
body including HUD is required for the execution, delivery and performance by
Seller of or compliance by Seller with this Agreement or the Mortgage Loans,
the delivery of a portion of the Mortgage Files to Purchaser or the sale of
the Mortgage Loans or the consummation of the transactions contemplated by
this Agreement, or if required, such approval has been obtained prior to the
Closing Date;
g. Selection Process. The Mortgage Loans were selected from among the
outstanding one-to four-family mortgage loans in Seller's portfolio at the
Closing Date as to which the representations and warranties set forth in
Subsection 8.02 could be made and such selection was not made in a manner so
as to affect adversely the interests of Purchaser;
h. Initial Portfolio. The aggregate characteristics of the Mortgage Loans are as
set forth under the heading " Business and Strategy--Description of Initial
Portfolio" in the Prospectus of Purchaser dated November 26, 1996;
i. No Untrue Information. Neither this Agreement nor any information, statement,
tape, diskette, report, form, or other document furnished or to be furnished
pursuant to this Agreement or in connection with the transactions
contemplated hereby contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to
make the statements contained herein or therein not misleading; and
j. No Brokers. Seller has not dealt with any broker, investment banker, agent or
other person that may be entitled to any commission or compensation in
connection with the sale of the Mortgage Loans.
8.02. Representations and Warranties Regarding Individual Mortgage Loans.
Seller hereby represents and warrants to Purchaser that, as to each Mortgage
Loan, as of the Closing Date:
a. Mortgage Loans as Described. The information set forth in the Mortgage Loan
Schedule is complete, true and correct in all material respects;
b. Payments Current; Status. All payments required to be made up to, but not
including, the Cut-off Date for the Mortgage Loan under the terms of the
Mortgage Note have been made and credited. No payment required under the
Mortgage Loan is delinquent nor has any payment under the Mortgage Loan been
30 days or more delinquent more than once within the twelve (12) months prior
to the Cut-off Date. The Mortgage Loan is not, and has not been at any time
in the preceding twelve months, (i) classified, (ii) in nonaccrual status or
(iii) renegotiated due to the deterioration of the financial condition of the
Mortgagor;
c. No Outstanding Charges. There are no defaults in complying with the terms of
the Mortgage, and all taxes, governmental assessments, insurance premiums,
water, sewer and municipal charges, leasehold payments or ground rents which
previously became due and owing have been paid, or an escrow of funds has
been established in an amount sufficient to pay for every such item which
remains unpaid and which has been assessed but is not yet due and payable.
Seller has not advanced funds, or induced, solicited or knowingly received
any advance of funds by a party other than the Mortgagor, directly or
indirectly, for the payment of any amount required under the Mortgage Loan,
except for interest accruing from the date of the Mortgage Note or date of
disbursement of the Mortgage Loan proceeds, whichever is earlier, to the day
which precedes by one month the Due Date of the first installment of
principal and interest;
d. Original Terms Unmodified. The terms of the Mortgage Note and Mortgage have
not been impaired, waived, altered or modified in any respect except by a
written instrument which has been recorded (if necessary to protect the
interests of
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Purchaser) and which has been delivered to Purchaser and the terms of which
are reflected in the Mortgage Loan Schedule, if applicable. The substance of
any such waiver, alteration or modification has been approved by the title
insurer, if any, to the extent required by the policy, and its terms are
reflected on the Mortgage Loan Schedule, if applicable. No Mortgagor has been
released, in whole or in part, except in connection with an assumption
agreement, which assumption agreement is part of the Mortgage Loan File
delivered to Purchaser and the terms of which are reflected in the Mortgage
Loan Schedule;
e. No Defenses. The Mortgage Loan is not subject to any right of rescission,
set-off, counterclaim or defense, including without limitation the defense of
usury, nor will the operation of any of the terms of the Mortgage Note or the
Mortgage, or the exercise of any right thereunder, render either the Mortgage
Note or the Mortgage unenforceable, in whole or in part and no such right of
rescission, set-off, counterclaim or defense has been asserted with respect
thereto, and no Mortgagor is now or was, at the time of origination of the
related Mortgage Loan, a debtor in any state or Federal bankruptcy or
insolvency proceeding;
f. Hazard Insurance. Pursuant to the terms of the Mortgage, all buildings or
other improvements upon the Mortgaged Property are insured by a generally
acceptable insurer against loss by fire, hazards of extended coverage and
such other hazards as are set forth in Section 2.10 of the Servicing
Agreement. If such coverage would be required by a lender subject to
applicable federal flood insurance laws, the Mortgage Loan is covered by a
flood insurance policy which meets all current federal guidelines and
conforms to FNMA guidelines, as well as all additional requirements set forth
in Section 2.10 of the Servicing Agreement. All individual insurance policies
contain a standard mortgagee clause naming Seller and its successors and
assigns as mortgagee, and all premiums thereon have been paid. The Mortgage
for each Mortgage Loan obligates the Mortgagor thereunder to maintain the
hazard insurance policy at the Mortgagor's cost and expense, and on the
Mortgagor's failure to do so, authorizes the holder of the Mortgage to obtain
and maintain such insurance at such Mortgagor's cost and expense, and to seek
reimbursement therefor from the Mortgagor. Where required by state law or
regulation, the Mortgagor has been given an opportunity to choose the carrier
of the required hazard insurance, provided the policy is not a "master" or
"blanket" hazard insurance policy covering a condominium, or any hazard
insurance policy covering the common facilities of a planned unit
development. The hazard insurance policy is the valid and binding obligation
of the insurer, is in full force and effect, and will be in full force and
effect and inure to the benefit of Purchaser upon the consummation of the
transactions contemplated by this Agreement. Seller has not engaged in, and
has no knowledge that the Mortgagors have engaged in, any act or omission
which would impair the coverage of any such policy, the benefits of the
endorsement provided for herein, or the validity and binding effect of either
including, without limitation, no unlawful fee, commission, kickback or other
unlawful compensation or value of any kind has been or will be received,
retained or realized by any attorney, firm or other person or entity, and no
such unlawful items have been received, retained or realized by Seller;
g. Compliance with Applicable Laws. All applicable federal, state and local laws
and regulations including, without limitation, usury, truth-in-lending, real
estate settlement procedures, consumer credit protection, fair housing, equal
credit opportunity and disclosure laws applicable to the Mortgage Loan have
been complied with, the consummation of the transactions contemplated hereby
will not involve the violation of any such laws or regulations, and Seller
shall maintain in its possession, available for Purchaser's inspection, and
shall deliver to Purchaser upon demand, evidence of such compliance.
h. No Satisfaction of Mortgage. The Mortgage has not been satisfied, canceled,
subordinated or rescinded, in whole or in part, and the Mortgaged Property
has not been released from the lien of the Mortgage, in whole or in part, nor
has any instrument been executed that would effect any such release,
cancellation, subordination or rescission. Seller has not waived the
performance by the Mortgagor of any action, if the Mortgagor's failure to
perform such action would cause the Mortgage Loan to be in default, nor has
Seller waived any default resulting from any action or inaction by the
Mortgagor;
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i. Location and Type of Mortgaged Property. The Mortgaged Property is located in
the state identified in the Mortgage Loan Schedule and consists of a single
parcel of real property with a detached single family residence erected
thereon, or a townhouse, or a two- to four-family dwelling, or an individual
condominium unit in a condominium project, or an individual unit in a planned
unit development, provided, however, that any condominium unit or planned
unit development shall conform with requirements acceptable to FNMA regarding
such dwellings. As of the date of origination, no portion of any Mortgaged
Property is used for commercial purposes;
j. Valid First Lien. The Mortgage is a valid, subsisting, enforceable and
perfected first lien on the related Mortgaged Property, including all
buildings and improvements on the Mortgaged Property and all installations
and mechanical, electrical, plumbing, heating and air conditioning systems
located in or annexed to such buildings, and all additions alterations and
replacements made at any time with respect to the foregoing. The lien of the
Mortgage is subject only to:
1. the lien of current real property taxes and assessments not yet due and
payable;
2. covenants, conditions and restrictions, rights of way, easements and
other matters of the public record as of the date of recording acceptable
to prudent mortgage lending institutions generally and specifically
referred to in the lender's title insurance policy delivered to the
originator of the Mortgage Loan and (a) specifically referred to or
otherwise considered in the appraisal made for the originator of the
Mortgage Loan or (b) which do not adversely affect the Appraised Value of
the Mortgaged Property set forth in such appraisal; and
3. other matters to which like properties are commonly subject which do not
materially interfere with the benefits of the security intended to be
provided by the Mortgage or the use, enjoyment, value or marketability of
the related Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document related to
and delivered in connection with the Mortgage Loan establishes and creates a
valid, subsisting, enforceable and perfected first lien and first priority
security interest on the property described therein and Seller has full right
to sell and assign the same to Purchaser. The Mortgaged Property was not, as
of the date of origination of the Mortgage Loan, subject to a mortgage, deed
of trust, deed to secure debt or other security instrument creating a lien
subordinate to the lien of the Mortgage (except any such subordinate loan
which was created in connection with the origination of the related Mortgage
Loan details of which are contained in the related Mortgage File);
k. Validity of Mortgage Documents. The Mortgage Note and the Mortgage and any
other agreement executed and delivered by a Mortgagor in connection with a
Mortgage Loan are genuine, and each is the legal, valid and binding
obligation of the maker thereof enforceable in accordance with its terms. All
parties to the Mortgage Note, the Mortgage and any other such related
agreement had legal capacity to enter into the Mortgage Loan and to execute
and deliver the Mortgage Note, the Mortgage and any such agreement, and the
Mortgage Note, the Mortgage and any other such related agreement have been
duly and properly executed by such parties. No fraud, error, omission,
misrepresentation, negligence or similar occurrence with respect to a
Mortgage Loan has taken place on the part of any Person, including without
limitation, the Mortgagor, any appraiser, any builder or developer, or any
other party involved in the origination of the Mortgage Loan. Seller has
reviewed all of the documents constituting the Servicing File and has made
such inquiries as it deems necessary to make and confirm the accuracy of the
representations set forth herein;
l. Full Disbursement of Proceeds. The Mortgage Loan has been closed and the
proceeds of the Mortgage Loan have been fully disbursed and there is no
requirement for future advances thereunder, and any and all requirements as
to completion of any on-site
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or off-site improvement and as to disbursements of any escrow funds therefor
have been complied with. All costs, fees and expenses incurred in making or
closing the Mortgage Loan and the recording of the Mortgage were paid, and
the Mortgagor is not entitled to any refund of any amounts paid or due under
the Mortgage Note or Mortgage;
m. Ownership. Seller is the sole owner of record and holder of the Mortgage Loan
and the indebtedness evidenced by each Mortgage Note, except for the
assignments of mortgage which have been sent for recording and upon
recordation, Seller will be the owner of record of each Mortgage and the
indebtedness evidenced by each Mortgage Note, and upon the sale of the
Mortgage Loans to Purchaser, Seller will retain the Mortgage Files or any
part thereof with respect thereto not delivered to Purchaser in trust only
for the purpose of servicing and supervising the servicing of each Mortgage
Loan. The Mortgage Loan is not assigned or pledged, and Seller has good,
indefeasible and marketable title thereto, and has full right to transfer and
sell the Mortgage Loan to Purchaser free and clear of any encumbrance,
equity, participation interest, lien, pledge, charge, claim or security
interest, and has full right and authority subject to no interest or
participation of, or agreement with, any other party, to sell and assign each
Mortgage Loan pursuant to this Agreement and following the sale of each
Mortgage Loan, Purchaser will own such Mortgage Loan free and clear of any
encumbrance, equity, participation interest, lien, pledge, charge, claim or
security interest. Seller intends to relinquish all rights to possess,
control and monitor the Mortgage Loan, except indirectly for purposes of
servicing the Mortgage Loan as set forth in the Servicing Agreement. After
the Closing Date, Seller will have no right to modify or alter the terms of
the sale of the Mortgage Loan and Seller will have no obligation or right to
repurchase the Mortgage Loan or substitute another Mortgage Loan, except as
provided in this Agreement;
n. Doing Business. All parties which have had any interest in the Mortgage Loan,
whether as mortgagee, assignee, pledges or otherwise, are (or, during the
period in which they held and disposed of such interest, were) (1) in
compliance with any and all applicable licensing requirements of the laws of
the state wherein the Mortgaged Property is located, and (2) either (i)
organized under the laws of such state, or (ii) qualified to do business in
such state, or (iii) a federal savings and loan association, a savings bank
or a national bank having a principal office in such state, or (3) not doing
business in such state;
o. LTV, PMI Policy. If the original LTV of each Conventional Loan exceeded 80%,
the excess over 75% is and will be insured as to payment defaults by a PMI
Policy until the LTV of such Conventional Loan is reduced to at least 80% and
such Loan otherwise meets Seller's ordinary requirements for cancellation of
PMI. All provisions of such PMI Policy have been and are being complied with,
such policy is valid and remains in full force and effect, and all premiums
due thereunder have been paid. No action, inaction, or event has occurred and
no state of facts exists that has, or will result in the exclusion from,
denial of, or defense to coverage by the PMI Policy. Any Conventional Loan
subject to a PMI Policy obligates the Mortgagor thereunder to maintain the
PMI Policy and to pay all premiums and charges in connection therewith. The
Mortgage Interest Rate for each Conventional Loan as set forth on the
Mortgage Loan Schedule is net of any such insurance premium;
p. Title Insurance. The Mortgage Loan is covered by an ALTA lender's title
insurance policy or other generally acceptable form of policy or insurance
acceptable to FNMA and each such title insurance policy is issued by a title
insurer acceptable to FNMA and qualified to do business in the jurisdiction
where the Mortgaged Property is located, insuring Seller, its successors and
assigns, as to the first priority lien of the Mortgage in the original
principal amount of the Mortgage Loan, subject only to the exceptions
contained in clauses (1), (2) and (3) of paragraph (j) of this Subsection
8.02, and against any loss by reason of the invalidity or unenforceability of
the lien resulting from the provisions of the Mortgage providing for
adjustment to the Mortgage Interest Rate and Monthly Payment. Where required
by state law or regulation, the Mortgagor has been given the opportunity to
choose the carrier of the required mortgage title insurance.
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Additionally, such lender's title insurance policy affirmatively insures
ingress and egress, and against encroachments by or upon the Mortgaged
Property or any interest therein. Seller, its successor and assigns, are the
sole insureds under such lender's title insurance policy, and such lender's
title insurance policy is valid and remains in full force and effect and will
be in force and effect upon the consummation of the transactions contemplated
by this Agreement. No claims have been made under such lender's title
insurance policy, and no prior holder of the related Mortgage, including
Seller, has done, by act or omission, anything which would impair the
coverage of such lender's title insurance policy, including without
limitation, no unlawful fee, commission, kickback or other unlawful
compensation or value of any kind has been or will be received, retained or
realized by any attorney, firm or other person or entity, and no such
unlawful items have been received, retained or realized by Seller;
q. No Defaults. No default, breach, violation or event which would permit
acceleration exists under the Mortgage or the Mortgage Note and no event
which, with the passage of time or with notice and the expiration of any
grace or cure period, would constitute a default, breach, violation or event
which would permit acceleration, and neither Seller nor its predecessors have
waived any default, breach, violation or event which would permit
acceleration;
r. No Mechanics' Liens. There are no mechanics' or similar liens or claims which
have been filed for work, labor or material (and no rights are outstanding
that under law could give rise to such liens) affecting the related Mortgaged
Property which are or may be liens prior to, or equal with, the lien of the
related Mortgage;
s. Location of Improvements; No Encroachments. All improvements which were
considered in determining the Appraised Value of the Mortgaged Property lay
wholly within the boundaries and building restriction lines of the Mortgaged
Property, and no improvements on adjoining properties encroach upon the
Mortgaged Property. No improvement located on or being part of the Mortgaged
Property is in violation of any applicable zoning law or regulation;
t. Origination; Payment Terms. The Mortgage Loan was originated by a mortgagee
approved by the Secretary of Housing and Urban Development pursuant to
Sections 203 and 211 of the Act, a savings and loan association, a savings
bank, a commercial bank, credit union, insurance company or similar
institution which is supervised and examined by a federal or state authority.
The documents, instruments and agreements submitted for loan underwriting
were not falsified and contain no untrue statement of material fact or omit
to state a material fact required to be stated therein or necessary to make
the information and statements therein not misleading. Principal payments on
the Mortgage Loan commenced no more than sixty (60) days after funds were
disbursed in connection with the Mortgage Loan. The Mortgage Interest Rate,
as well as the Lifetime Rate Cap and the Periodic Rate Cap if the Mortgage
Loan is an ARM Loan, are as set forth on Exhibit H hereto. The Mortgage Note
is payable on the first day of each month in equal monthly installments of
principal and interest, which installments of interest are subject to change
if the Mortgage Loan is an ARM Loan due to the adjustments to the Mortgage
Interest Rate on each Interest Rate Adjustment Date, with interest calculated
and payable in arrears, sufficient to amortize the Mortgage Loan fully by the
stated maturity date, over an original term of not more than thirty (30)
years from commencement of amortization. There is no negative amortization
with respect to any Mortgage Loan. Each Convertible Mortgage Loan contains a
provision allowing the Mortgagor to convert the Mortgage Note from an
adjustable interest rate Mortgage Note to a fixed interest rate Mortgage Note
in accordance with the terms of the Mortgage Note or a rider to the related
Mortgage Note;
u. Customary Provisions. The Mortgage contains customary and enforceable
provisions such as to render the rights and remedies of the holder thereof
adequate for the realization against the Mortgaged Property of the benefits
of the security provided thereby, including, (i) in the case of a Mortgage
designated as a deed of trust, by trustee's sale, and (ii) otherwise by
judicial foreclosure. Upon default by a Mortgagor on a Mortgage Loan and
foreclosure on, or trustee's sale of, the Mortgaged Property pursuant to the
proper procedures, the holder of the
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Mortgage Loan will be able to deliver good and merchantable title to the
Mortgaged Property. 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 the Mortgage, subject
to applicable federal and state laws and judicial precedent with respect to
bankruptcy and right of redemption or similar law. The Mortgage contains
due-on-sale provisions providing for the acceleration of the payment of the
unpaid principal balance of such Mortgage Loan in the event that all or any
part of the Mortgaged Property is sold or transferred without the prior
written consent of the Mortgagee;
v. Conformance with Agency and Underwriting Standards. The Mortgage Loan was
underwritten in accordance with the underwriting standards of Seller (a copy
of which is attached hereto as Exhibit J), or FNMA's underwriting standards
(except that the principal balance of certain Mortgage Loans may have
exceeded the limits of FNMA), in each case in effect at the time the
Mortgage Loan was originated. The Mortgage Note and Mortgage are on forms
acceptable to FNMA, except with respect to Mortgage Loans underwritten in
accordance with the underwriting guidelines of Seller, which are on forms
acceptable to Purchaser, in Purchaser's sole discretion, as evidenced by
Purchaser's purchase of the related Mortgage Loans, and, in either case,
Seller has not made any representations to a Mortgagor that are inconsistent
with the mortgage instruments used. All Mortgage Loans have full asset
verification;
w. Occupancy of the Mortgaged Property. As of the Closing Date, the Mortgaged
Property is lawfully occupied under applicable law. All inspections,
licenses and certificates required to be made or issued with respect to all
occupied portions of the Mortgaged Property and, with respect to the use and
occupancy of the same, including but not limited to certificates of
occupancy and fire underwriting certificates, have been made or obtained
from the appropriate authorities. Unless otherwise specified on the
description of characteristics for the Mortgage Loans contained on the
Mortgage Loan Schedule attached as Exhibit H and delivered pursuant to
Section 10 on the Closing Date, the Mortgagor represented at the time of
origination of the Mortgage Loan that the Mortgagor would occupy the
Mortgaged Property as the Mortgagor's primary residence;
x. No Additional Collateral. The Mortgage Note is not and has not been secured
by any collateral except the lien of the corresponding Mortgage and the
security interest of any applicable security agreement or chattel mortgage
referred to in clause (j) above;
y. Deeds of Trust. In the event the Mortgage constitutes a deed of trust, a
trustee, authorized and duly qualified under applicable law to serve as
such, has been properly designated and currently so serves and is named in
the Mortgage, and no fees or expenses are or will become payable by
Purchaser to the trustee under the deed of trust, except in connection with
a trustee's sale after default by the Mortgagor;
z. Acceptable Investment. There are no circumstances or conditions with respect
to the Mortgage, the Mortgaged Property, the Mortgagor, the Mortgage File or
the Mortgagor's credit standing that can reasonably be expected to cause the
Mortgage Loan to become delinquent, or adversely affect the value or
marketability of the Mortgage Loan;
aa. Delivery of Mortgage Documents. The Mortgage Note, the Mortgage, the
Assignment of Mortgage and any other Mortgage Loan Documents for each
Mortgage Loan have been delivered to Purchaser. Seller is in possession of a
complete, true and accurate Mortgage File in compliance with Exhibit A
hereto, except for such documents the originals of which have been delivered
to Purchaser;0
bb. Condominiums/Planned Unit Developments. If the Mortgaged Property is a
condominium unit or a planned unit development, it is acceptable to FNMA or
is located in a condominium or planned unit development project which has
received project approval from FNMA;
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cc. Transfer of Mortgage Loans. The Assignment of Mortgage with respect to each
Mortgage Loan is in recordable form and is acceptable for recording under
the laws of the jurisdiction in which the Mortgaged Property is located;
dd. Assumability. The Mortgage Loan Documents provide that a related Mortgage
Loan may only be assumed if the party assuming such Mortgage Loan meets
certain credit requirements stated in the Mortgage Loan Documents, except
that with respect to Mortgage Loans underwritten in accordance with the
underwriting guidelines of Seller, the Mortgage Loan Documents relating to
such Mortgage Loans do not preclude assumability;
ee. No Buydown Provisions; No Graduated Payments or Contingent Interests. The
Mortgage Loan does not contain provisions pursuant to which Monthly Payments
are paid or partially paid with funds deposited in any separate account
established by Seller, the Mortgagor, or anyone on behalf of the Mortgagor,
or paid by any source other than the Mortgagor nor does it contain any other
similar provisions which may constitute a "buydown" provision. The Mortgage
Loan is not a graduated payment mortgage loan and the Mortgage Loan does not
have a shared appreciation or other contingent interest feature;
ff. RESERVED
gg. Mortgaged Property Undamaged; No Condemnation Proceedings. There is no
proceeding pending or threatened for the total or partial condemnation of
the Mortgaged Property. The Mortgaged Property is undamaged by waste, fire,
earthquake or earth movement, windstorm, flood, tornado or other casualty so
as to affect adversely the value of the Mortgaged Property as security for
the Mortgage Loan or the use for which the premises were intended and each
Mortgaged Property is in good repair. There have not been any condemnation
proceedings with respect to the Mortgaged Property and Seller has no
knowledge of any such proceedings in the future;
hh. Collection Practices; Escrow Deposits; Interest Rate Adjustments. The
origination and collection practices used by Seller with respect to the
Mortgage Loan have in all respects been in compliance with Accepted
Servicing Practices, applicable laws and regulations, and have in all
respects been legal and proper. With respect to escrow deposits and Escrow
Payments, all such payments are in the possession of, or under the control
of, Seller, and there exist no deficiencies in connection therewith for
which customary arrangements for repayment thereof have not been made. All
Escrow Payments have been collected in full compliance with state and
federal law and the provisions of the related Mortgage Note and Mortgage. An
escrow of funds is not prohibited by applicable law and has been established
in an amount sufficient to pay for every item that remains unpaid and has
been assessed but is not yet due and payable. No escrow deposits or Escrow
Payments or other charges or payments due Seller have been capitalized under
the Mortgage or the Mortgage Note. All Mortgage Interest Rate adjustments to
the Monthly Payment, if the Mortgage Loan is an ARM Loan, have been made in
strict compliance with state and federal law and the terms of the related
Mortgage and Mortgage Note on the related Interest Rate Adjustment Date.
With respect to each ARM Loan, the Mortgage Interest Rate adjusts as set
forth herein. If, pursuant to the terms of the Mortgage Note, another index
was selected for determining the Mortgage Interest Rate, the same index was
used with respect to each Mortgage Note which required a new index to be
selected, and such selection did not conflict with the terms of the related
Mortgage Note. Seller executed and delivered any and all notices required
under applicable law and the terms of the related Mortgage Note and Mortgage
regarding the Mortgage Interest Rate and the Monthly Payment adjustments.
Any interest required to be paid pursuant to state, federal and local law
has been properly paid and credited;
ii. Other Insurance Policies. No action, inaction or event has occurred and no
state of facts exists or has existed that has resulted or could result in
the exclusion from, denial of, or defense to coverage under any hazard
insurance policy or PMI Policy. In connection with the placement of any such
insurance, no commission, fee, or other compensation has been or will be
received by Seller or by any officer, director, or employee of Seller or any
designee of Seller or any
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corporation in which Seller or any officer, director, or employee had a
financial interest at the time of placement of such insurance;
jj. No Violation of Environmental Laws. There is no pending action or proceeding
directly involving the Mortgaged Property in which compliance with any
environmental law, rule or regulation is an issue; there is no violation of
any environmental law, rule or regulation with respect to the Mortgaged
Property; and nothing further remains to be done to satisfy in full all
requirements of each such law, rule or regulation constituting a
prerequisite to use and enjoyment of said property;
kk. Soldiers' and Sailors' Civil Relief Act. The Mortgagor has not notified
Seller and Seller has no knowledge of any relief requested or allowed to the
Mortgagor under the Soldiers' and Sailors' Civil Relief Act of 1940;
ll. Appraisal. The Mortgage File contains an appraisal of the related Mortgaged
Property signed prior to the approval of the Mortgage Loan application by a
Qualified Appraiser who had no interest, direct or indirect, in the
Mortgaged Property or in any loan made on the security thereof, and whose
compensation is not affected by the approval or disapproval of the Mortgage
Loan, and the appraisal and appraiser both satisfy the requirements of FNMA
and Title XI of the Federal Institutions Reform, Recovery, and Enforcement
Act of 1989 and the regulations promulgated thereunder, all as in effect on
the date the Mortgage Loan was originated;0
mm. Disclosure Materials. The Mortgagor has received all disclosure materials
required by and Seller complied with all applicable law with respect to the
making of the Mortgage Loans;
nn. Construction or Rehabilitation of Mortgaged Property. No Mortgage Loan was
made in connection with the construction or rehabilitation of a Mortgaged
Property or facilitating the trade-in or exchange of a Mortgaged Property;
oo. Value of Mortgaged Property. Seller has no knowledge of any circumstances
existing that could reasonably be expected to adversely affect the value or
the marketability of any Mortgaged Property or Mortgage Loan;
pp. No Defense to Insurance Coverage. No action has been taken or failed to be
taken, no event has occurred and no state of facts exists or has existed on
or prior to the Closing Date (whether or not known to Seller on or prior to
such date) which has resulted or will result in an exclusion from, denial
of, or defense to coverage under any primary mortgage insurance (including,
without limitation, any exclusions, denials or defenses which would limit or
reduce the availability of the timely payment of the full amount of the loss
otherwise due thereunder to the insured) whether arising out of actions,
representations, errors, omissions, negligence, or fraud of Seller, the
related Mortgagor or any party involved in the application for such
coverage, including the appraisal, plans and specifications and other
exhibits or documents submitted therewith to the insurer under such
insurance policy, or for any other reason under such coverage, but not
including the failure of such insurer to pay by reason of such insurer's
breach of such insurance policy or such insurer's financial inability to
pay;
qq. Escrow Analysis. With respect to each Mortgage, Seller has within the last
twelve months (unless such Mortgage was originated within such twelve month
period) analyzed the required Escrow Payments for each Mortgage and adjusted
the amount of such payments so that, assuming all required payments are
timely made, any deficiency will be eliminated on or before the first
anniversary of such analysis, or any overage will be refunded to the
Mortgagor, in accordance with RESPA and any other applicable law;
rr. Prior Servicing. Each Mortgage Loan has been serviced in all material
respects in compliance with Accepted Servicing Practices; provided that, in
the event any Mortgage Loan was not so serviced, Seller shall not be
required to repurchase such Mortgage Loan unless such breach had, and
continues to have, a material and
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adverse effect on the value of the related Mortgage Loan or the interest of
Purchaser therein; and
ss. lost notes. With respect to each Mortgage Loan listed on Schedule I to
Exhibit A hereto, the failure to deliver the original Mortgage Note to the
Purchaser will not materially and adversely affect the value of the related
Mortgage Loan or interest of the Purchaser therein.
8.03. Remedies for Breach of Representations and Warranties. It is understood
and agreed that the representations and warranties set forth in Subsections 8.01
and 8.02 shall survive the sale of the Mortgage Loans to Purchaser and shall
inure to the benefit of Purchaser, notwithstanding any restrictive or qualified
endorsement on any Mortgage Note or Assignment of Mortgage or the examination or
failure to examine any Mortgage File. Upon discovery by either Seller or
Purchaser of a breach of any of representations and warranties contained in this
Section 8 which materially and adversely affects the value of the Mortgage Loans
or the interest of Purchaser, the party discovering such breach shall give
prompt written notice to the other.
Promptly after discovery of a breach of any representation or warranty, Seller
shall notify Purchaser of such breach and the details thereof. Within sixty (60)
days of the earlier of (i) notice by Seller pursuant to the immediately
preceding sentence or (ii) notice by Purchaser to Seller of any breach of a
representation or warranty with respect to a Mortgage Loan, Seller shall use its
best efforts promptly to cure such breach in all material respects and, if such
breach cannot be cured, Seller shall, at Purchaser's option, repurchase such
Mortgage Loan at the Repurchase Price, unless Seller elects to substitute a
Qualified Substitute Mortgage Loan for such Mortgage Loan pursuant to this
Subsection. In the event that a breach shall involve any representation or
warranty set forth in Subsection 8.01, and such breach cannot be cured within
sixty (60) days of the earlier of either discovery by or notice to Seller of
such breach, all of the Mortgage Loans shall, at Purchaser's option, be
repurchased by Seller at the Repurchase Price. However, if the breach shall
involve a representation or warranty set forth in Subsection 8.02 and Seller
discovers or receives notice of any such breach within two (2) years of the
Closing Date, Seller may, at Seller's option and provided that Seller has a
Qualified Substitute Mortgage Loan, rather than repurchase the Mortgage Loan as
provided above, remove such Mortgage Loan (a "Deleted Mortgage Loan") and
substitute in its place a Qualified Substitute Mortgage Loan or Loans, provided
that any such substitution shall be effected not later than two (2) years after
the Closing Date. If Seller has no Qualified Substitute Mortgage Loan, it shall
repurchase the deficient Mortgage Loan. Any repurchase of a Mortgage Loan or
Loans pursuant to the foregoing provisions of this Subsection 8.03 shall be
accomplished by either (a) if the Servicing Agreement is in effect, by deposit
in the Custodial Account of the amount of the Repurchase Price for payment to
Purchaser on the next scheduled Remittance Date, after deducting therefrom any
amount received in respect of such repurchased Mortgage Loan or Loans and being
held in the Custodial Account for future distribution or (b) if the Servicing
Agreement is no longer in effect, by direct remittance of the Repurchase Price
to Purchaser in accordance with Purchaser's instructions.
At the time of repurchase or substitution, Purchaser and Seller shall arrange
for the reassignment of the Deleted Mortgage Loan to Seller and the delivery to
Seller of any documents held by Purchaser relating to the Deleted Mortgage Loan.
In addition, upon any such repurchase, all funds maintained in the Escrow
Account with respect to such Deleted Mortgage Loan shall be transferred to
Seller. In the event of a repurchase or substitution, Seller shall,
simultaneously with such reassignment, give written notice to Purchaser that
such repurchase or substitution has taken place, amend the Mortgage Loan
Schedule to reflect the withdrawal of the Deleted Mortgage Loan from this
Agreement, and, in the case of substitution, identify a Qualified Substitute
Mortgage Loan and amend the Mortgage Loan Schedule to reflect the addition of
such Qualified Substitute Mortgage Loan to this Agreement. In connection with
any such substitution, Seller shall be deemed to have made as to such Qualified
Substitute Mortgage Loan the representations and warranties set forth in this
Agreement except that all such representations and warranties set forth in this
Agreement shall be deemed made as of the date of such substitution. Seller shall
effect such substitution by delivering to Purchaser for such Qualified
Substitute Mortgage Loan the documents
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required by Subsection 6.03, with the Mortgage Note endorsed as required by
Subsection 6.03. No substitution will be made in any calendar month after the
Determination Date for such month. Seller shall deposit in the Custodial Account
the Monthly Payment, or in the event that the Servicing Agreement is no longer
in effect remit directly to Purchaser in accordance with Purchaser's
instructions the Monthly Payment less the Servicing Fee due, if any, on such
Qualified Substitute Mortgage Loan or Loans in the month following the date of
such substitution. Monthly Payments due with respect to Qualified Substitute
Mortgage Loans in the month of substitution shall be retained by Seller. For the
month of substitution, payments to Purchaser shall include the Monthly Payment
due on any Deleted Mortgage Loan in the month of substitution, and Seller shall
thereafter be entitled to retain all amounts subsequently received by Seller in
respect of such Deleted Mortgage Loan.
For any month in which Seller substitutes a Qualified Substitute Mortgage Loan
for a Deleted Mortgage Loan, Seller shall determine the amount (if any) by which
the aggregate principal balance of all Qualified Substitute Mortgage Loans as of
the date of substitution is less than the aggregate Stated Principal Balance of
all Deleted Mortgage Loans (after application of scheduled principal payments
due in the month of substitution). The amount of such shortfall shall be
distributed by Seller directly to Purchaser in accordance with Purchaser's
instructions within two (2) Business Days of such substitution.
In addition to such repurchase or substitution obligation, Seller shall
indemnify Purchaser and hold it harmless against any losses, damages, penalties,
fines, forfeitures, reasonable and necessary legal fees and related costs,
judgments, and other costs and expenses resulting from any claim, demand,
defense or assertion based on or grounded upon, or resulting from, a breach of
Seller representations and warranties contained in this Agreement. It is
understood and agreed that the obligations of Seller set forth in this
Subsection 8.03 to cure, substitute for or repurchase a defective Mortgage Loan
and to indemnify Purchaser as provided in this Subsection 8.03 constitute the
sole remedies of Purchaser respecting a breach of the foregoing representations
and warranties.
Any cause of action against Seller relating to or arising out of the breach of
any representations and warranties made in Subsections 8.01 and 8.02 shall
accrue as to any Mortgage Loan upon (i) discovery of such breach by Purchaser or
notice thereof by Seller to Purchaser, (ii) failure by Seller to cure such
breach or repurchase such Mortgage Loan as specified above, and (iii) demand
upon Seller by Purchaser for compliance with this Agreement.
SECTION 9. CLOSING. The closing for the purchase and sale of the Mortgage Loans
shall take place on the Closing Date. At Purchaser's option, the closing shall
be either: by telephone, confirmed by letter or wire as the parties shall agree,
or conducted in person, at such place as the parties shall agree.
Such closing shall be subject to the following conditions:
a. all of the representations and warranties of Seller under this Agreement and
under the Servicing Agreement (with respect to each Mortgage Loan, as
specified therein) shall be true and correct as of the Closing Date and no
event shall have occurred which, with notice or the passage of time, would
constitute a default under this Agreement or an Event of Default under the
Servicing Agreement;
b. Purchaser shall have received, or Purchaser's attorneys shall have received
in escrow, all closing documents as specified in Section 10 of this
Agreement, in such forms as are agreed upon and acceptable to Purchaser, duly
executed by all signatories other than Purchaser as required pursuant to the
terms hereof;
c. Seller shall have delivered and released to Purchaser all Mortgage Loan
Documents with respect to each Mortgage Loan; and
d. all other terms and conditions of this Agreement shall have been complied
with.
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Subject to the foregoing conditions, Purchaser shall pay to Seller on the
Closing Date the Purchase Price, plus accrued interest pursuant to Section 3 of
this Agreement, by wire transfer of immediately available funds to the account
designated by Seller.
SECTION 10. CLOSING DOCUMENTS. The closing documents for the Mortgage Loans to
be purchased on the Closing Date shall consist of fully executed originals of
the following documents:
a. this Agreement;
b. the Servicing Agreement, dated as of the Cut-off Date, in the form of Exhibit
B hereto;
c. a Custodial Account Letter Agreement or a Custodial Account Certification, as
applicable, as required under the Servicing Agreement;
d. an Escrow Account Letter Agreement or an Escrow Account Certification, as
applicable, as required under the Servicing Agreement;
e. an Officer's Certificate, in the form of Exhibit C hereto, including all
attachments thereto;
f. an Opinion of Counsel of Seller (who may be an employee of Seller), in the
form of Exhibit D hereto;
g. a Security Release Certification, in the form of Exhibit E or Exhibit F. if
applicable, hereto executed by any person, as requested by Purchaser, if any
of the Mortgage Loans have at any time been subject to any security interest,
pledge or hypothecation for the benefit of such person;
h. a certificate or other evidence of merger or change of name, signed or
stamped by the applicable regulatory authority, if any of the Mortgage Loans
were acquired by Seller by merger or acquired or originated by Seller while
conducting business under a name other than its present name, if applicable;
i. Exhibit H to this Agreement; and
j. the underwriting guidelines of Seller to be attached hereto as Exhibit J.
Seller shall bear the risk of loss of the closing documents until such time as
they are received by Purchaser or its attorneys.
SECTION 11. COSTS. Purchaser shall pay all legal fees and expenses of its
attorneys. All other costs and expenses incurred in connection with the transfer
and delivery of the Mortgage Loans including recording fees, fees for recording
Assignments of Mortgage, fees for title policy endorsements and continuations,
if applicable, Seller's attorney's fees, shall be paid by Seller.
SECTION 12. MERGER OR CONSOLIDATION OF SELLER. Seller will keep in full effect
its existence, rights and franchises as a federal savings bank, and will obtain
and preserve its qualification to do business in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement, or any of the Mortgage Loans and to perform
its duties under this Agreement.
Any Person into which Seller may be merged or consolidated, or any corporation
resulting from any merger, conversion or consolidation to which Seller shall be
a party, or any Person succeeding to the business of Seller, shall be the
successor of Seller hereunder, without the execution or filing of any paper or
any further act on the part of any of the parties hereto, anything herein to the
contrary notwithstanding; provided, however, that the successor or surviving
Person shall have a tangible net worth of at least $30,000,000.
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SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST. The sale and
delivery on the Closing Date of the Mortgage Loans described on the Mortgage
Loan Schedule is mandatory from and after the date of the execution of this
Agreement, it being specifically understood and agreed that each Mortgage Loan
is unique and identifiable on the date hereof and that an award of money damages
would be insufficient to compensate Purchaser for the losses and damages
incurred by Purchaser (including damages to prospective purchasers of the
Mortgage Loans) in the event of Seller's failure to deliver (i) each of the
Mortgage Loans or (ii) one or more Qualified Substitute Mortgage Loans or (iii)
one or more Mortgage Loans otherwise acceptable to Purchaser on or before the
Closing Date. Seller hereby grants to Purchaser a lien on, and a continuing
security interest in, each Mortgage Loan and each document and instrument
evidencing each such Mortgage Loan to secure the performance by Seller of its
obligations under this Agreement, and Seller agrees that it shall hold such
Mortgage Loans in custody for Purchaser subject to Purchaser's (i) right to
reject any Mortgage Loan (or Qualified Substitute Mortgage Loan) under the terms
of this Agreement and to require another Mortgage Loan (or Qualified Substitute
Mortgage Loan) to be substituted therefor, and (ii) obligation to pay the
Purchase Price plus accrued interest as set forth in Section 3 hereof for the
Mortgage Loans. All rights and remedies of Purchaser under this Agreement are
distinct from, and cumulative with, any other rights or remedies under this
Agreement or afforded by law or equity and all such rights and remedies may be
exercised concurrently, independently or successively.
SECTION 14. NOTICES. All demands, notices and communications hereunder shall be
in writing and shall be deemed to have been duly given if mailed, by registered
or certified mail, return receipt requested, or, if by other means, when
received by the other party at the address as follows:
If to Seller: Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Attention: General Counsel
If to Purchaser: Chevy Chase Preferred Capital Corporation
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Attention: President
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 15. SEVERABILITY CLAUSE. Any part, provision, representation or
warranty of this Agreement which is prohibited or unenforceable or is held to be
void or unenforceable in any jurisdiction shall be ineffective, as to such
jurisdiction, to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction as to any Mortgage Loan shall not
invalidate or render unenforceable such provision in any other jurisdiction. To
the extent permitted by applicable law, the parties hereto waive any provision
of law which prohibits or renders void or unenforceable any provision hereof. If
the invalidity of any part, provision, representation or warranty of this
Agreement shall deprive any party of the economic benefit intended to be
conferred by this Agreement, the parties shall negotiate, in good faith, to
develop a structure the economic effect of which is nearly as possible the same
as the economic effect of this Agreement without regard to such invalidity.
SECTION 16. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts. Each counterpart shall be deemed to be an original, and
all such counterparts shall constitute one and the same instrument.
SECTION 17. GOVERNING LAW. This Agreement shall be deemed in effect when a
fully executed counterpart thereof is received by Purchaser in the State of
Maryland and
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shall be deemed to have been made in the State of Maryland. The Agreement shall
be construed in accordance with the laws of the State of Maryland and the
obligations, rights and remedies of the parties hereunder shall be determined-in
accordance with the substantive laws of the State of Maryland (without regard to
conflicts of laws principles), except to the extent preempted by Federal law.
SECTION 18. INTENTION OF THE PARTIES. It is the intention of the parties that
Purchaser is purchasing, and Seller is selling the Mortgage Loans and not a debt
instrument of Seller or another security. Accordingly, the parties hereto each
intend to treat the transaction for Federal income tax purposes as a sale by
Seller, and a purchase by Purchaser, of the Mortgage Loans.
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF PURCHASE AGREEMENT. This
Agreement shall bind and inure to the benefit of and be enforceable by Seller
and Purchaser and the respective permitted successors and assigns of Seller and
the successors and assigns of Purchaser. This Agreement shall not be assigned,
pledged or hypothecated by Seller to a third party without the consent of
Purchaser. This Agreement may be assigned, pledged or hypothecated by Purchaser
without the prior consent of Seller. If Purchaser assigns all or any of its
rights as Purchaser hereunder, the assignee of Purchaser will become the
"Purchaser" hereunder to the extent of such assignment. Any assignment by
Purchaser shall be accompanied by the delivery and execution of an Assignment
and Assumption Agreement (the "Assignment and Assumption Agreement")
substantially in the form attached hereto as Exhibit G. The Servicer shall be
required to remit all amounts required to be remitted to Purchaser hereunder to
said assignee commencing with the first Remittance Date falling after receipt of
said copy of the related Assignment and Assumption Agreement provided that
Seller receives said copy no later than three (3) Business Days immediately
prior to the first day of the month of the related Remittance Date.
SECTION 20. WAIVERS. No term or provision of this Agreement may be waived or
modified unless such waiver or modification is in writing and signed by the
party against whom such waiver or modification is sought to be enforced.
SECTION 21. EXHIBITS. The exhibits to this Agreement are hereby incorporated
and made a part hereof and are an integral part of this Agreement.
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES. For purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise requires:
a. the terms defined in this Agreement have the meanings assigned to them in
this Agreement and include the plural as well as the singular, and the use of
any gender herein shall be deemed to include the other gender;
b. accounting terms not otherwise defined herein have the meanings assigned to
them in accordance with generally accepted accounting principles;
c. references herein to "Articles", "Sections," "Subsections," "Paragraphs," and
other subdivisions without reference to a document are to designated
Articles, Sections, Subsections, Paragraphs and other subdivisions of this
Agreement;
d. reference to a Subsection without further reference to a Section is a
reference to such Subsection as contained in the same Section in which the
reference appears, and this rule shall also apply to Paragraphs and other
subdivisions;
e. the words "herein", "hereof", "hereunder" and other words of similar import
refer to this Agreement as a whole and not to any particular provision; and
f. the term "include" or "including" shall mean without limitation by reason of
enumeration.
SECTION 23. REPRODUCTION OF DOCUMENTS. This Agreement and all documents
relating thereto, including, without limitation, (a) consents, waivers and
modifications which may hereafter be executed, (b) documents received by any
party at the closing, and (c) financial statements, certificates and other
information previously or hereafter
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furnished, may be reproduced by any photographic, photostatic, microfilm, micro-
card, miniature photographic or other similar process. The parties agree that
any such reproduction shall be admissible in evidence as the original itself in
any judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
SECTION 24. FURTHER AGREEMENTS. Seller and Purchaser each agree to execute and
deliver to the other such reasonable and appropriate additional documents,
instruments or agreements as may be necessary or appropriate to effectuate the
purposes of this Agreement.
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE. To the extent permitted by
applicable law, each of the Assignments of Mortgage is subject to recordation in
all appropriate public offices for real property records in all the counties or
their comparable jurisdictions in which any or all of the Mortgaged Properties
are situated, and in any other appropriate public recording office or elsewhere,
such recordation to be effected at Seller's expense for a single recordation
with respect to each Assignment of Mortgage in the event recordation is either
necessary under applicable law or requested by Purchaser at its sole option.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as of
the date and year first above written.
ATTEST: CHASE PREFERRED CAPITAL CORPORATION
(Purchaser)
Joel A. Friedman By: Stephen Halpin
Name: Stephen Halpin
Title: Executive Vice President, Chief
Financial Officer and Treasurer
ATTEST: CHEVY CHASE BANK, F.S.B. (Seller)
Sherry Leigh Hughes By: Joel A. Friedman
Name: Joel A. Friedman
Title: Senior Vice President
and Controller
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EXHIBIT A
CONTENTS OF EACH MORTGAGE FILE
With respect to each Mortgage Loan, the Mortgage File shall include each of the
following items which shall be available for inspection by Purchaser and which
shall be delivered to Purchaser pursuant to Section 6.03 of the Mortgage Loan
Purchase Agreement (the "Agreement"):
1. The original Mortgage Note (or, with respect to the Mortgage Loan listed on
Schedule I to Exhibit A hereto, a lost note affidavit, executed by an
officer of Seller, with a copy of the original note attached thereto)
bearing all intervening endorsements, if any, between the original lender
(if other than Seller) and Seller, and endorsed "Pay to the order of _____
without recourse" and signed in the name of Seller by an authorized officer.
To the extent that there is no room on the face of the Mortgage Notes for
endorsements, the endorsement may be contained on an allonge, if applicable
state law so allows. If the Mortgage Loan was acquired by Seller in a
merger, the endorsement must be by "[Seller], successor by merger to [name
of predecessor]". If the Mortgage Loan was acquired or originated by Seller
while doing business under another name, the endorsement must be by
"[Seller], formerly known as [previous name].
2. The original of any guarantee executed in connection with the Mortgage Note.
3. The original Mortgage, with evidence of recording thereon. If in connection
with any Mortgage Loan, Seller cannot deliver or cause to be delivered the
original Mortgage with evidence of recording thereon on or prior to the
Closing Date because of a delay caused by the public recording office where
such Mortgage has been delivered for recordation, a photocopy of such
Mortgage certified by Seller to be true and correct will be delivered; if
such Mortgage has been lost or if such public recording office retains the
original recorded Mortgage, Seller shall deliver or cause to be delivered to
Purchaser, a photocopy of such Mortgage, certified by such public recording
office to be a true and complete copy of the original recorded Mortgage.
4. The originals of all assumption, modification, consolidation or extension
agreements, if any, with evidence of recording thereon or certified copies
of such documents if the originals thereof are unavailable.
5. The original Assignment of Mortgage for each Mortgage Loan endorsed "Pay to
the order of ___ " and signed in the name of Seller by an authorized
officer. If the Mortgage Loan was acquired by Seller in a merger, the
Assignment of Mortgage must be made by "[Seller], successor by merger to
[name of predecessor]". If the Mortgage Loan was acquired or originated by
Seller while doing business under another name, the Assignment of Mortgage
must be by "[Seller], formerly known as [previous name]".
6. Originals of all intervening assignments of the Mortgage with evidence of
recording thereon if such intervening assignment has been recorded.
7. The original mortgagee policy of title insurance or, in the event such
original title policy is unavailable, a certified true copy of the related
policy binder or commitment for title certified to be true and complete by
the title insurance company.
8. Any original security agreement, chattel mortgage or equivalent executed in
connection with the Mortgage.
9. The original hazard insurance policy and, if required, flood insurance
policy, in accordance with Section 8.02(f) of the Agreement.
10. Residential loan application.
11. Mortgage Loan closing statement.
12. Verification of employment and income.
13. Verification of acceptable evidence of source and amount of down payment.
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14. Credit report on the Mortgagor(s).
15. Residential appraisal report.
16. Photograph of the Mortgaged Property.
17. Survey of the Mortgaged Property, if any.
18. Copy of each instrument necessary to complete identification of any
exception set forth in the exception schedule in the title policy, i.e., map
or plat, restrictions, easements, sewer agreements, home association
declarations, etc.
19. All required disclosure statements.
20. If available, termite report, structural engineer's report, water
portability and septic certification.
21. Sales contract.
22. Tax receipts, insurance premium receipts, ledger sheets, insurance claim
files, correspondence, current and historical computerized data files, and
all other processing, underwriting and closing papers and records which are
customarily contained in a mortgage loan file and which are required to
document the Mortgage Loan or to service the Mortgage Loan.
23. For Mortgage Loans with original LTVs greater than 80%, evidence of a PMI
Policy.
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EXHIBIT B
[SERVICING AGREEMENT]
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EXHIBIT C
FORM OF SELLER'S OFFICER'S CERTIFICATE
I, _________ , hereby certify that I am the duly elected [Vice] President of
Chevy Chase Bank, F.S.B., a federal savings bank organized under the laws of the
United States ("Seller") and further certify as follows:
1. Attached hereto as Exhibit 1 is a true, correct and complete copy of
Seller's Charter which is in full force and effect on the date hereof and
which has been in effect without amendment, waiver, rescission or
modification since
2. Attached hereto as Exhibit 2 is a true, correct and complete copy of the
bylaws of Seller which are in effect on the date hereof and which have been
in effect without amendment, waiver, rescission or modification since
3. Attached hereto as Exhibit 3 is a certificate of corporate existence of
Seller issued by the Office of Thrift Supervision within 90 days of the date
hereof, and no event has occurred since the date thereof which would render
such certificate inaccurate.
4. Attached hereto as Exhibit 4 is a true, correct and complete copy of the
corporate resolutions of the Board of Directors of Seller authorizing Seller
to execute and deliver the Mortgage Loan Purchase Agreement, dated as of
__________, 1996, by and between Chevy Chase Preferred Capital Corporation
("Purchaser") and Seller (the "Purchase Agreement"), and to endorse the
mortgage notes and execute the assignments of mortgages by original or
facsimile signature, and such resolutions are in effect on the date hereof
and have been in effect without amendment, waiver, rescission or modification
since
5. Either (i) no consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by Seller of or compliance by Seller with the Purchase Agreement,
the sale of the mortgage loans or the consummation of the transactions
contemplated by the Purchase Agreement; or (ii) any required consent,
approval, authorization or order has been obtained by Seller.
6. Neither the consummation of the transactions contemplated by, nor the
fulfillment of the terms of, the Purchase Agreement conflicts or will
conflict with or results or will result in a breach of or constitutes or will
constitute a default under the charter or by-laws of Seller, the terms of any
indenture or other agreement or instrument to which Seller is a party or by
which it is bound or to which it is subject, or any statute or order, rule,
regulations, writ, injunction or decree of any court, governmental authority
or regulatory body to which Seller is subject or by which it is bound.
7. To the best of my knowledge, there is no action, suit, proceeding or
investigation pending or threatened against Seller which, in my judgment,
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 Seller or in any material impairment of the right or ability of
Seller to carry on its business substantially as now conducted or in any
material liability on the part of Seller or which would draw into question
the validity of the Purchase Agreement or the Mortgage Loans or of any action
taken or to be taken in connection with the transactions contemplated hereby,
or which would be likely to impair materially the ability of Seller to
perform under the terms of the Purchase Agreement.
8. Each person listed on Exhibit 5 attached hereto who, as an officer or
representative of Seller, signed the Purchase Agreement and any other
document delivered prior to or on the date hereof in connection with any
purchase described in the Purchase Agreement was, at the respective times of
such signing and delivery, and is now, a duly elected or appointed, qualified
and acting officer or representative of Seller, who holds the office set
forth opposite his or her name on Exhibit 5, and the signatures of such
persons appearing on such documents are their genuine signatures.
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9. Seller is duly authorized to engage in the transactions described and
contemplated in the Purchase Agreement.
[SIGNATURES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of Chevy
Chase Bank, F.S.B.
Dated:________________________, 1996 By:___________________________
______________________________
____________________________________ Name: _________________________________
____________________________________ Title: Vice President
_________________________________
I, __________________________, a Vice President of Chevy Chase Bank, F.S.B.,
hereby certify that ________ is the duly elected, qualified and acting Vice
President of Seller and that the signature appearing above is [her] [his]
genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:________________________, 1996 By:___________________________
______________________________
____________________________________ Name: _________________________________
____________________________________ Title: Vice President
_________________________________
<PAGE>
EXHIBIT D
FORM OF OPINION OF COUNSEL TO SELLER
November ___, 1996
_________________________________
_________________________________
_________________________________
Dear Sirs:
You have requested my opinion, as General Counsel of Chevy Chase Bank, F.S.B.
("Seller"), with respect to certain matters in connection with the sale by
Seller of the Mortgage Loans pursuant to that certain Mortgage Loan Purchase and
Warranties Agreement by and between Seller and Chevy Chase Preferred Capital
Corporation ("Purchaser"), dated as of December 1, 1996 (the "Purchase
Agreement") which sale is in the form of whole loans, delivered pursuant to a
Purchase Agreement and serviced pursuant to an Servicing Agreement, dated as of
December 1, 1996, by and between Seller and Purchaser (the "Servicing
Agreement"). Capitalized terms not otherwise defined herein have the meanings
set forth in the Purchase Agreement and the Servicing Agreement.
I have examined the following documents:
1. the Purchase Agreement;
2. the Servicing Agreement;
3. the form of Assignment of Mortgage;
4. the form of endorsement of the Mortgage Notes; and
5. such other documents, records and papers as we have deemed necessary and
relevant as a basis for this opinion.
To the extent I have deemed necessary and proper, I have relied upon the
representations and warranties of Seller contained in the Purchase Agreement. I
have assumed the authenticity of all documents submitted to me as originals, the
genuineness of all signatures, the legal capacity of natural persons and the
conformity to the originals of all documents.
Based upon the foregoing, it is my opinion that:
1. Seller is a federal savings bank duly organized, validly existing and in
good standing under the laws of the United States and is qualified to
transact business in, and is in good standing under all applicable laws;
2. Seller has the power to engage in the transactions contemplated by the
Purchase Agreement and all requisite power, authority and legal right to
execute and deliver the Purchase Agreement and to perform and observe the
terms and conditions of such agreements.
3. The Purchase Agreement has been duly authorized, executed and delivered by
Seller and is a legal, valid and binding agreement enforceable in accordance
with its respective terms against Seller, subject to bankruptcy laws and
other similar laws of general application affecting rights of creditors and
subject to the application of the rules of equity, including those respecting
the availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder or with
Purchaser's ownership of the Mortgage Loans.
4. Seller has been duly authorized to allow certain specified officers to
execute any and all documents by original signature in order to complete the
transactions contemplated by the Purchase Agreement and, by original or
facsimile signature, in order to execute the endorsements to the Mortgage
Notes and the Assignments of Mortgages, and the original or facsimile
signature of the officer at Seller
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executing the endorsements to the Mortgage Notes and the Assignments of
Mortgages represents the legal and valid signature of said officer of Seller.
5. Either (i) no consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by Seller of or compliance by Seller with the Purchase Agreement
and the sale of the Mortgage Loans or the consummation of the transactions
contemplated by the Purchase Agreement or (ii) any required consent,
approval, authorization or order has been obtained by Seller.
6. Neither the consummation of the transactions contemplated by, nor the
fulfillment of the terms of, the Purchase Agreement conflicts or will
conflict with or results or will result in a breach of or constitutes or will
constitute a default under the charter or by-laws of Seller, the terms of any
indenture or other agreement or instrument to which Seller is a party or by
which it is bound or to which it is subject, or violates any statute or
order, rule, regulations, writ, injunction or decree of any court,
governmental authority or regulatory body to which Seller is subject or by
which it is bound.
7. There is no action, suit, proceeding or investigation pending or, to the
best of my knowledge, threatened against Seller which, in my judgment, 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 Seller or in any material impairment of the right or ability of Seller to
carry on its business substantially as now conducted or in any material
liability on the part of Seller or which would draw into question the
validity of the Purchase Agreement or the Mortgage Loans or of any action
taken or to be taken in connection with the transactions contemplated
thereby, or which would be likely to impair materially the ability of Seller
to perform under the terms of the Purchase Agreement.
8. The sale of each Mortgage Note and Mortgage as and in the manner
contemplated by the Purchase Agreement is sufficient to fully transfer to
Purchaser all right, title and interest of Seller thereto as noteholder and
mortgagee.
9. The Mortgages have been duly assigned and the Mortgage Notes have been duly
endorsed as provided in the Purchase Agreement. The Assignments of Mortgage
are in recordable form, except for the insertion of the name of the assignee,
and upon the name of the assignee being inserted, and to the best of my
knowledge, are acceptable for recording under the laws of the states in which
such recording would occur. The endorsement of the Mortgage Notes, the
delivery to Purchaser of the Assignments of Mortgage, and the delivery of the
original endorsed Mortgage Notes to Purchaser, are sufficient to permit
Purchaser to avail itself of all protection available under applicable law
against the claims of any present or future creditors of Seller, and are
sufficient to prevent any other sale, transfer, assignment, pledge or
hypothecation of the Mortgages and the Mortgage Notes by Seller from being
enforceable.
This opinion is given to you for your sole benefit, and no other person or
entity is entitled to rely hereon except that Purchaser or purchasers to which
you initially and directly resell the Mortgage Loans may rely on this opinion as
if it were addressed to them as of its date.
Very truly yours,
Leslie A. Nicholson, Jr.
General Counsel
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EXHIBIT E
December ___, 1996
Federal Home Loan Bank of Atlanta (the "Association")
_____________________________________________
_____________________________________________
Attention: __________________________________
Re: Notice of Sale and Release of Collateral
Gentlemen:
This letter serves as notice that Chevy Chase Bank, F.S.B. ("Bank") has
committed to sell to Chevy Chase Preferred Capital Corporation ("Purchaser")
under a Mortgage Loan Purchase Agreement, dated as of December 1, 1996, certain
mortgage loans originated by the Bank. The Bank warrants that the mortgage loans
to be sold to Purchaser are in addition to and beyond any collateral required to
secure advances made by the Association to the Bank.
The Bank acknowledges that the mortgage loans to be sold to Purchaser shall not
be used as additional or substitute collateral for advances made by the
Association. Purchaser understands that the balance of the Bank's mortgage loan
portfolio may be used as collateral or additional collateral for advances made
by the Association, and confirms that it has no interest therein.
Execution of this letter by the Association shall constitute a full and complete
release of any security interest, claim, or lien which the Association may have
against the mortgage loans to be sold to Purchaser.
Very truly yours,
Chevy Chase Bank, F.S.B.
By: ____________________________________________________________
Name:___________________________________________________________
Title: _________________________________________________________
Date: _________________________________________________________
Acknowledged and approved:
Federal Home Loan Bank of Atlanta
By: ____________________________________________________________
Name:___________________________________________________________
Title: _________________________________________________________
Date: _________________________________________________________
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EXHIBIT F
FORM OF SECURITY RELEASE CERTIFICATION
I. Release of Security Interest
The financial institution named below hereby relinquishes any and all right,
title and interest it may have in all Mortgage Loans to be purchased by Chevy
Chase Preferred Capital Corporation from Chevy Chase Bank, F.S.B. pursuant to
that certain Mortgage Loan Purchase Agreement, dated as of December 1, 1996, and
certifies that all notes, mortgages, assignments and other documents in its
possession relating to such Mortgage Loans have been delivered and released to
Chevy Chase Bank, F.S.B. or its designees, as of the date and time of the sale
of such Mortgage Loans to Chevy Chase Preferred Capital Corporation.
Name of Financial Institution
Address of Financial Institution
By: ____________________________________________________________
Name:___________________________________________________________
Title: _________________________________________________________
Date: _________________________________________________________
II. Certification of Release
Chevy Chase Bank, F.S.B. (the "Company") hereby certifies to Chevy Chase
Preferred Capital Corporation that, as of the date and time of the sale of the
above-mentioned Mortgage Loans to Chevy Chase Preferred Capital Corporation, the
security interests in the Mortgage Loans released by the above-named financial
institution comprise all security interests relating to or affecting any and all
such Mortgage Loans. The Company warrants that, as of such time, there are and
will be no other security interests affecting any or all of such Mortgage Loans.
Chevy Chase Bank, F.S.B.
By: ____________________________________________________________
Name:___________________________________________________________
Title: _________________________________________________________
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<PAGE>
EXHIBIT G
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT, dated _____, between ____, a corporation
("Assignor") and ____, a corporation ("Assignee"):
For good and valuable consideration the receipt and sufficiency of which hereby
are acknowledged, and of the mutual covenants herein contained, the parties
hereto hereby agree as follows:
1. The Assignor hereby grants, transfers and assigns to Assignee, as Purchaser,
all of the right, title and interest of Assignor with respect to the mortgage
loans listed on Exhibit A attached hereto ("Mortgage Loans"), and with respect
to such Mortgage Loans, in, to and under (a) that certain Mortgage Loan Purchase
Agreement ("Purchase Agreement"), dated December 1 , 1996 by and between Chevy
Chase Bank, F.S.B. ("Seller") and Chevy Chase Preferred Capital Corporation
("Purchaser"); and (b) that certain Servicing Agreement dated as of December 1,
1996, by and between Purchaser and Chevy Chase Bank, F.S.B. ("Servicer")
("Servicing Agreement"; the Servicing Agreement and the Purchase Agreement are
collectively referred to as the "Agreements").
2. The Assignor warrants and represents to, and covenants with, the Assignee
that:
a. The Assignor is the lawful owner of the Mortgage Loans with the full right
to transfer the Mortgage Loans free from any and all claims and
encumbrances whatsoever;
b. The Assignor has not received notice of, and has no knowledge of, any
offsets, counterclaims or other defenses available to Seller with respect
to the Agreements or the Mortgage Loans;
c. The Assignor has not waived or agreed to any waiver under, or agreed to any
amendment or other modification of, the Agreements. The Assignor has no
knowledge of, and has not received notice of, any waivers under or
amendments or other modifications of, or assignments of rights or
obligations under, the Agreements; and
d. Neither the Assignor nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of the Mortgage Loans or
any interest in the Mortgage Loans, or solicited any offer to buy or accept
a transfer, pledge or other disposition of the Mortgage Loans, or any
interest in the Mortgage Loans or otherwise approached or negotiated with
respect to the Mortgage Loans, or any interest in the Mortgage with any
person in any manner, or made any general solicitation by means of general
advertising or in any other manner, or taken any other action which would
constitute a distribution of the Mortgage Loans under the Securities Act of
1933, as amended (the "1933 Act") or which would render the disposition of
the Mortgage Loans a violation of Section 5 of the 1933 Act or require
registration pursuant thereto.
3. The Assignee warrants and represents to, and covenants with, Assignor and
Seller pursuant to the Agreements that:
a. The Assignee is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, and has
all requisite corporate power and authority to acquire, own and purchase
the Mortgage Loans;
b. The Assignee has full corporate power and authority to execute, deliver and
perform under this Assignment and Assumption Agreement, and to consummate
the transactions set forth herein. The execution, delivery and performance
of the Assignee of this Assignment and Assumption Agreement, and the
consummation by it of the transactions contemplated hereby, have been duly
authorized by all necessary corporate action of the Assignee. This
Assignment and Assumption Agreement has been duly executed and delivered by
the Assignee and constitutes the valid and legally binding obligation of
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the Assignee enforceable against the Assignee in accordance with its
respective terms;
c. To the best of Assignee's knowledge, no material consent, approval, order
or authorization of, or declaration, filing or registration with, any
governmental entity is required to be obtained or made by the Assignee in
connection with the execution, delivery or performance by the Assignee of
this Assignment and Assumption Agreement, or the consummation by it of the
transactions contemplated hereby;
d. The Assignee agrees to be bound, as Purchaser, by all of the terms,
covenants and conditions of the Agreements, the Mortgage Loans, and from
and after the date hereof, the Assignee assumes for the benefit of each of
Seller and the Assignor all of the Assignor's obligations as Purchaser
thereunder, including, without limitation, the limitation on assignment set
forth in Section 19 of the Purchase Agreement;
e. The Assignee understands that the Mortgage Loans have not been registered
under the 1933 Act or the securities laws of any state;
f. The purchase price being paid by the Assignee for the Mortgage Loans is in
excess of $250,000 and will be paid by cash remittance of the full purchase
price within sixty (60) days of the sale;
g. The Assignee is acquiring the Mortgage Loans for investment for its own
account only and not for any other person;
h. The Assignee considers itself a sophisticated institutional investor having
such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of investment in the Mortgage
Loans;
i. The Assignee has been furnished with all information regarding the Mortgage
Loans that it has requested from the Assignor or Seller;
j. Neither the Assignee nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of the Mortgage Loans or
any interest in the Mortgage Loans, or solicited any offer to buy or accept
a transfer, pledge or other disposition of the Mortgage Loans or any
interest in the Mortgage Loans, or otherwise approached or negotiated with
respect to the Mortgage Loans or any interest in the Mortgage Loans with
any person in any manner which would constitute a distribution of the
Mortgage Loans under the 1933 Act or which would render the disposition of
the Mortgage Loans a violation of Section 5 of the 1933 Act or require
registration pursuant thereto, nor will it act, nor has it authorized or
will it authorize any person to act, in such manner with respect to the
Mortgage Loans; and
k. Either: (1) the Assignee is not an employee benefit plan ("Plan") within
the meaning of section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") or a plan (also "Plan") within the meaning of
section 4975(e)(1) of the Internal Revenue Code of 1986 ("Code"), and the
Assignee is not directly or indirectly purchasing the Mortgage Loans on
behalf of, investment manager of, as named fiduciary of, as Trustee of, or
with assets of, a Plan; or (2) the Assignee's purchase of the Mortgage
Loans will not result in a prohibited transaction under section 406 of
ERISA or section 4975 of the Code.
4. a. The Assignee's address for purposes of all notices and correspondence
related to the Mortgage Loans and the Agreements is:
b. The Assignee's wire instructions for purposes of all remittances and
payments related to the Mortgage Loans are:
c. The Assignor's address for purposes for all notices and correspondence
related to the Mortgage Loans and this Agreement is:
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5. This Agreement shall be construed in accordance with the substantive laws of
the State of Maryland (without regard to conflicts of laws principles) and the
obligations, rights and remedies of the parties hereunder shall be determined in
accordance with such laws, except to the extent preempted by federal law.
6. This Agreement shall inure to the benefit of the successors and assigns of
the parties hereto. This Agreement may not be assigned by the Assignee without
the express written consent of the Assignor. Any entity into which the Assignor
or Assignee may be merged or consolidated shall, without the requirement for any
further writing, be deemed the Assignor or Assignee, respectively, hereunder.
7. No term or provision of this Agreement may be waived or modified unless such
waiver or modification is in writing and signed by the party against whom such
waiver or modification is sought to be enforced.
8. This Agreement shall survive the conveyance of the Mortgage Loans and the
assignment of the Agreements by the Assignor.
9. Notwithstanding the assignment of the Agreements by either the Assignor or
Assignee, this Agreement shall not be deemed assigned by the Assignor or the
Assignee unless assigned by separate written instrument.
10. For the purpose for facilitating the execution of this Agreement as herein
provided and for other purposes, this Agreement may be executed simultaneously
in any number of counterparts, each of which counterparts shall be deemed to be
an original, and such counterparts shall constitute and be one and the same
instrument.
IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption
Agreement to be executed by their duly authorized officers as of the date first
above written.
ASSIGNOR
By: ____________________________________________________________
Name:___________________________________________________________
Title: _________________________________________________________
Taxpayer Identification No.: ___________________________________
ASSIGNEE
By: ____________________________________________________________
Name:___________________________________________________________
Title: __________________________________________________________
Taxpayer Identification No.: ____________________________________
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EXHIBIT H
MORTGAGE LOAN SCHEDULE
37
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SERVICING AGREEMENT
This SERVICING AGREEMENT (the "Servicing Agreement" or the "Agreement") is
entered into as of December 1, 1996, by and between Chevy Chase Bank, F.S.B.
(the "Servicer"), a federal savings bank, and Chevy Chase Preferred Capital
Corporation, a Maryland corporation (the "Purchaser").
WHEREAS, the Purchaser and Chevy Chase Bank, F.S.B. (as "Seller") entered into a
Mortgage Loan Purchase Agreement dated as of December 1, 1996 (the "Purchase
Agreement") pursuant to which the Purchaser agreed to purchase from the Seller
certain conventional, residential, adjustable rate first mortgage loans (the
"Mortgage Loans") to be delivered as whole loans, with the Servicer retaining
servicing rights in connection with the purchase of such Mortgage Loans; and
WHEREAS, the Purchaser desires to have the Servicer service the Mortgage Loans,
the Servicer desires to service and administer the Mortgage Loans on behalf of
the Purchaser, and the parties desire to provide the terms and conditions of
such servicing by the Servicer.
NOW, THEREFORE, in consideration of the mutual promises and agreements set forth
herein and for other good and valuable consideration, the receipt and the
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein have
the respective meanings set forth in the Purchase Agreement. The following terms
are defined as follows:
"ACCEPTED SERVICING PRACTICES" means, with respect to any Mortgage Loan, those
mortgage servicing practices of prudent mortgage lending institutions which
service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"ANCILLARY INCOME" means all late charges, assumption fees, escrow account
benefits, reinstatement fees, prepayment penalties and other miscellaneous and
similar types of fees arising from or in connection with any Mortgage Loan to
the extent not otherwise payable to the Mortgagor under applicable law or
pursuant to the terms of the related Mortgage Note.
"BESTS" means Best's Key Rating Guide.
"CLOSING DATE" means December 1, 1996, or such other date as is mutually agreed
upon by the parties hereto.
"CUSTODIAL ACCOUNT" means the separate account or accounts created and
maintained pursuant to Section 2.04.
"CUT-OFF DATE" means December 1, 1996.
"CONDEMNATION PROCEEDS" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"DETERMINATION DATE" means one (1) Business Day prior to the related Remittance
Date.
"DUE PERIOD" means with respect to each Remittance Date, the period commencing
on the second day of the month preceding the month of the Remittance Date and
ending on the first day of the month of the Remittance Date.
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"ERRORS AND OMISSIONS INSURANCE POLICY" means an errors and omissions insurance
policy to be maintained by the Servicer pursuant to Section 2.12.
"ESCROW ACCOUNT" means the separate account or accounts created and maintained
pursuant to Section 2.06.
"ESCROW PAYMENT" means, with respect to any Mortgage Loan, the amounts
constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, mortgage insurance premiums, fire and hazard insurance
premiums, condominium charges, and any other payments required to be escrowed by
the Mortgagor with the mortgagee pursuant to the Mortgage or any other document.
"EVENT OF DEFAULT" means any one of the conditions or circumstances enumerated
in Section 11.01.
"FDIC" means The Federal Deposit Insurance Corporation, or any successor
thereto.
"FIDELITY BOND" means a fidelity bond to be maintained by the Servicer pursuant
to Section 2.12.
"FNMA GUIDES" means the FNMA Sellers' Guide and the FNMA Servicers' Guide and
all amendments or additions thereto.
"INSURANCE PROCEEDS" means, with respect to each Mortgage Loan, proceeds of
insurance policies insuring the Mortgage Loan or the related Mortgaged Property.
"LIQUIDATION PROCEEDS" means cash received in connection with the liquidation of
a defaulted Mortgage Loan, whether through the sale or assignment of such
Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the sale of the
related Mortgaged Property if the Mortgaged Property is acquired in satisfaction
of the Mortgage Loan.
"MONTHLY REMITTANCE ADVICE" means the monthly remittance advice, in the form of
Exhibit 1 annexed hereto, to be provided to the Purchaser pursuant to Section
3.02.
"MORTGAGE IMPAIRMENT INSURANCE POLICY" means a mortgage impairment or blanket
hazard insurance policy as described in Section 2.11.
"NONRECOVERABLE ADVANCE" means any advance of principal and interest previously
made or proposed to be made in respect of a Mortgage Loan which, in the good
faith judgment of the Servicer, will not or, in the case of a proposed advance
of principal and interest, would not, be ultimately recoverable from related
Insurance Proceeds, Liquidation Proceeds or otherwise. The determination by the
Servicer that it has made a Nonrecoverable Advance or that any proposed advance
of principal and interest, if made, would constitute a Nonrecoverable Advance,
shall be evidenced by an Officers' Certificate delivered to the Purchaser.
"OCC" means Office of the Comptroller of the Currency, or any successor thereto.
"OFFICER'S CERTIFICATE" means a certificate signed by the Chairman of the Board,
any Vice Chairman of the Board, the President, any Executive Vice President, any
Senior Vice President, or any Vice President and by the Treasurer, the
Controller, the Secretary, any Assistant Treasurer or any Assistant Secretary of
the Servicer, and delivered to the Purchaser as required by this Agreement.
"PMI POLICY" means a policy of primary mortgage guaranty insurance issued by a
Qualified Insurer, as required by this Agreement with respect to certain
Mortgage Loans.
"PRIME RATE" means the prime rate announced to be in effect from time to time,
as published as the average rate in The Wall Street Journal (Northeast edition).
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"PRINCIPAL PREPAYMENT" means any payment or other recovery of principal on a
Mortgage Loan which is received in advance of its scheduled Due Date, including
any prepayment penalty or premium thereon, and which is not accompanied by an
amount of interest representing scheduled interest due on any date or dates in
any month or months subsequent to the month of prepayment.
"PURCHASE AGREEMENT" means the Mortgage Loan Purchase and Warranties Agreement
between the Purchaser and the Seller related to the purchase of the Mortgage
Loans dated as of December 1, 1996.
"QUALIFIED DEPOSITORY" means a Federal Home Loan Bank or a depository the
accounts of which are insured by the FDIC.
"QUALIFIED INSURER" means an insurance company duly qualified as such under the
laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, and approved by FNMA as an insurer
with respect to primary mortgage insurance, hazard insurance and flood
insurance.
"REMITTANCE DATE" means the 10th day (or if such 10th day is not a Business Day,
the first Business Day immediately following) of any month, beginning with the
first Remittance Date on December, 10, 1996.
"REO PROPERTY" means a Mortgaged Property acquired by the Servicer on behalf of
the Purchaser through foreclosure or by deed in lieu of foreclosure, as
described in Section 2.17.
"SERVICER EMPLOYEES" has the meaning set forth in Section 2.12.
"SERVICING ADVANCES" means all customary, reasonable and necessary "out of
pocket" costs and expenses (including reasonable attorneys' fees and
disbursements) incurred in the performance by the Servicer of its servicing
obligations, including, but not limited to, the cost of (a) the preservation,
restoration and protection of the Mortgaged Property, (b) any enforcement or
judicial proceedings, including foreclosures, (c) the management and liquidation
of the Mortgaged Property if the Mortgaged Property is acquired in satisfaction
of the Mortgage and (d) compliance with the obligations under Section 2.08
(except with respect to any expenses incurred in connection with procuring or
transferring Tax Service Contracts, as provided therein).
"SERVICING AGREEMENT" means this agreement between the Purchaser and the
Servicer for the servicing and administration of the Mortgage Loans.
"SERVICING FEE" means, with respect to each Mortgage Loan, the amount of the
annual fee the Purchaser shall pay to the servicer, which shall, for a period of
one (1) full month, be equal to one-twelfth of the product of the Servicing Fee
Rate and (2) the Stated Principal Balance of such Mortgage Loan. Such fee shall
be payable monthly, computed on the basis of the same principal amount and
period in respect of which any related interest payment on a Mortgage Loan is
computed and shall be pro rated for any portion of a month during which the
Mortgage Loan is serviced by the Servicer under this Agreement. The obligation
of the Purchaser to pay the Servicing Fee is limited to, and the Servicing Fee
is payable solely from, the interest portion (including recoveries with respect
to interest from Liquidation Proceeds, to the extent permitted by Section 4.03)
of such Monthly Payment collected by the Servicer, or as otherwise provided
under Section 4.03.
"SERVICING FEE RATE" means, with respect to each Mortgage Loan, a rate of 0.375%
per annum or such other rate to which the parties may mutually agree.
"SERVICING FILE" means, with respect to each Mortgage Loan, the file retained by
the Servicer consisting of originals of all documents in the Mortgage File which
are not delivered to the Purchaser and copies (which may be in microfiche form)
of the Mortgage Loan Documents listed on Exhibit A to the Purchase Agreement.
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"TAX SERVICE CONTRACT" means a paid-in-full, life-of-loan tax service contract
with TransAmerica Real Estate Tax Service, Inc. or other tax service vendor, as
described in Section 2.08 hereof.
"TERMINATION FEE" means the amount paid by the Purchaser to the Servicer in the
event of the Servicer's termination, without cause, as servicer. Such fee shall
equal the percentage amount set forth in Section 6.04 hereof of the then current
aggregate unpaid principal balance of the related Mortgage Loans.
ARTICLE II
SERVICING
SECTION 2.01. DUTIES OF SERVICER. From and after the Closing Date, the
Servicer, as an independent contractor, shall service and administer the
Mortgage Loans and shall have full power and authority, acting alone, to do any
and all things in connection with such servicing and administration which the
Servicer may deem necessary or desirable, consistent with the terms of this
Agreement and with Accepted Servicing Practices. Except as set forth in this
Agreement, the Servicer shall service the Mortgage Loans in strict compliance
with the servicing provisions of the FNMA Guides. In the event of any conflict,
inconsistency or discrepancy between any of the servicing provisions of this
Agreement and any of the servicing provisions of the FNMA Guides, the provisions
of this Agreement shall control and be binding upon the Purchaser and the
Servicer.
Consistent with the terms of this Agreement, the Servicer may waive, modify or
vary any term of any Mortgage Loan or consent to the postponement of strict
compliance with any such term or in any manner grant any forbearance or
indulgence to any Mortgagor if in the Servicer's reasonable and prudent
determination such waiver modification, postponement or indulgence is not
materially adverse to the Purchaser, provided. however, that unless the Servicer
has obtained the prior written consent of the Purchaser, the Servicer shall not
permit any modification with respect to any Mortgage Loan that would change the
Mortgage Interest Rate, defer or forgive the payment of principal or interest,
reduce or increase the outstanding principal balance (except for actual payments
of principal) or change the final maturity date on such Mortgage Loan. In the
event of any such modification which permits the deferral of interest or
principal payments on any Mortgage Loan, the Servicer shall, on the Business Day
immediately preceding the Remittance Date in any month in which any such
principal or interest payment has been deferred, deposit in the Custodial
Account from its own funds, in accordance with Section 2.04, the difference
between (a) such month's principal and one (1) month's interest at the Mortgage
Interest Rate on the unpaid principal balance of such Mortgage Loan and (b) the
amount paid by the Mortgagor. The Servicer shall be entitled to reimbursement
for such advances to the same extent as for all other advances made pursuant to
Section 2.05. Without limiting the generality of the foregoing, the Servicer
shall continue, and is hereby authorized and empowered, to execute and deliver
on behalf of itself and the Purchaser, all instruments of satisfaction or
cancellation, or of partial or full release, discharge and all other comparable
instruments, with respect to the Mortgage Loans and with respect to the
Mortgaged Properties. If reasonably required by the Servicer, the Purchaser
shall furnish the Servicer with any powers of attorney and other documents
necessary or appropriate to enable the Servicer to carry out its servicing and
administrative duties under this Agreement.
In servicing and administering the Mortgage Loans, the Servicer shall employ
procedures (including collection procedures) and exercise the same care that it
customarily employs and exercises in servicing and administering mortgage loans
for its own account, giving due consideration to Accepted Servicing Practices
where such practices do not conflict with the requirements of this Agreement,
the FNMA Guides and the Purchaser's reliance on the Servicer.
The Servicer shall keep at its servicing office books and records in which,
subject to such reasonable regulations as it may prescribe, the Servicer shall
note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be made
unless such transfer is in compliance with the terms hereof. For the purposes of
this Agreement, the Servicer shall be under no obligation to deal with any
Person with respect to this Agreement or the Mortgage Loans unless the Servicer
has been notified of such transfers as provided in this Section 2.01. The
Purchaser may sell and transfer,
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in whole or in part, the Mortgage Loans, provided that no such sale and transfer
shall be binding upon the Servicer unless such transferee shall agree in writing
in the form of the Assignment and Assumption Agreement attached to the Purchase
Agreement as Exhibit G. to be bound by the terms of this Agreement and the
Purchase Agreement, and an executed copy of the same shall have been delivered
to the Servicer. Upon receipt thereof, the Servicer shall mark its books and
records to reflect the ownership of the Mortgage Loans by such assignee, and the
previous Purchaser shall be released from its obligations hereunder. The
Servicer shall be required to remit all amounts required to be remitted to the
Purchaser hereunder to said transferee commencing with the first Remittance Date
falling after receipt of said copy of the related Assignment and Assumption
Agreement provided that the Servicer receives said copy no later than three (3)
Business Days immediately prior to the first day of the month of the related
Remittance Date. This Agreement shall be binding upon and inure to the benefit
of the Purchaser and the Servicer and their permitted successors, assignees and
designees.
The Servicing File retained by the Servicer pursuant to this Agreement shall be
appropriately marked and identified in the Servicer's computer system to clearly
reflect the sale of the related Mortgage Loan to the Purchaser. The Servicer
shall release from its custody the contents of any Servicing File retained by it
only in accordance with this Agreement, except when such release is required in
connection with a repurchase of any such Mortgage Loan pursuant to Section 8.03
of the Purchase Agreement.
The Servicer must have an internal quality control program that is capable of
evaluating and monitoring the overall quality of its servicing activities. The
program is to ensure that the Mortgage Loans are serviced in accordance with
prudent mortgage banking practices and accounting principles; guard against
dishonest, fraudulent, or negligent acts; and guard against errors and omissions
by officers, employees, or other authorized persons.
SECTION 2.02. LIQUIDATION OF MORTGAGE LOANS. In the event that any payment due
under any Mortgage Loan and not postponed pursuant to Section 2.01 is not paid
when the same becomes due and payable, or in the event the Mortgagor fails to
perform any other covenant or obligation under the Mortgage Loan and such
failure continues beyond any applicable grace period, the Servicer shall take
such action as (1) the Servicer would take under similar circumstances with
respect to a similar mortgage loan held for its own account for investment, (2)
shall be consistent with Accepted Servicing Practices, (3) the Servicer shall
determine prudently to be in the best interest of Purchaser, and (4) is
consistent with any related PMI Policy. In the event that any payment due under
any Mortgage Loan is not postponed pursuant to Section 2.01 and remains
delinquent for a period of ninety (90) days or any other default continues for a
period of ninety (90) days beyond the expiration of any grace or cure period (or
such other period as is required by law in the jurisdiction where the related
Mortgaged Property is located), the Servicer shall commence foreclosure
proceedings in accordance with the FNMA Guides, provided that, prior to
commencing foreclosure proceedings, the Servicer shall notify the Purchaser in
writing of the Servicer's intention to do so, and the Servicer shall not
commence foreclosure proceedings if the Purchaser objects to such action within
five (5) Business Days of receiving such notice or, if the provisions of the
next two paragraphs apply, in any event without the prior written consent of
Purchaser. In such connection, the Servicer shall from its own funds make all
necessary and proper Servicing Advances, provided, however, that the Servicer
shall not be required to expend its own funds in connection with any foreclosure
or towards the restoration or preservation of any Mortgaged Property, unless it
shall determine (a) that such preservation, restoration and/or foreclosure will
increase the proceeds of liquidation of the Mortgage Loan to Purchaser after
reimbursement to itself for such expenses and (b) that such expenses will be
recoverable by it either through Liquidation Proceeds (in respect of which it
shall have priority for purposes of withdrawals from the Custodial Account
pursuant to Section 2.05) or through Insurance Proceeds (in respect of which it
shall have similar priority).
Notwithstanding anything to the contrary contained herein, in connection with a
foreclosure, in the event the Servicer has reasonable cause to believe that a
Mortgaged Property is contaminated by hazardous or toxic substances or wastes,
or if the Purchaser otherwise requests an environmental inspection or review of
such Mortgaged Property to be conducted by a qualified inspector, the Servicer
shall cause the Mortgaged Property to be so inspected at the
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expense of the Purchaser. Upon completion of the inspection, the Servicer shall,
upon request, promptly provide the Purchaser with a written report of the
environmental inspection.
After reviewing the environmental inspection report, the Purchaser shall
determine how the Servicer shall proceed with respect to the Mortgaged Property.
In the event (a) the environmental inspection report indicates that the
Mortgaged Property is contaminated by hazardous or toxic substances or wastes
and (b) the Purchaser directs the Servicer to proceed with foreclosure or
acceptance of a deed in lieu of foreclosure, the Servicer shall be reimbursed
for all reasonable costs associated with such foreclosure or acceptance of a
deed in lieu of foreclosure and any related environmental clean up costs, as
applicable, from the related Liquidation Proceeds, or if the Liquidation
Proceeds are insufficient to fully reimburse the Servicer, the Servicer shall be
entitled to be reimbursed from amounts in the Custodial Account pursuant to
Section 2.05 hereof and to the extent amounts in the Custodial Account are
insufficient to fully reimburse the Servicer, the Servicer shall be entitled to
be reimbursed by the Purchaser for such deficiencies (upon presentation of
evidence of such deficiency). In the event the Purchaser directs the Servicer
not to proceed with foreclosure or acceptance of a deed in lieu of foreclosure,
the Servicer shall be reimbursed for all Servicing Advances made with respect to
the related Mortgaged Property from the Custodial Account pursuant to Section
2.05 hereof.
SECTION 2.03. COLLECTION OF MORTGAGE LOAN PAYMENTS. Continuously from the
Closing Date, the Servicer shall proceed diligently to collect all payments due
under each of the Mortgage Loans when the same shall become due and payable and
shall take special care in ascertaining and estimating Escrow Payments and all
other charges that will become due and payable with respect to the Mortgage
Loans and each related Mortgaged Property, to the end that the installments
payable by the Mortgagors will be sufficient to pay such charges if and when
they become due and payable.
SECTION 2.04. ESTABLISHMENT OF AND DEPOSITS TO CUSTODIAL ACCOUNT. The Servicer
shall segregate and hold all funds collected and received pursuant to the
Mortgage Loans separate and apart from any of its own funds and general assets
and shall establish and maintain one or more Custodial Accounts, in the form of
time deposit or demand accounts, titled "Chevy Chase Bank, F.S.B. in trust for
[named Purchaser], and various Mortgagors". The Custodial Account shall be
established with a Qualified Depository acceptable to the Purchaser. If the
Custodial Account is held at a Qualified Depository the deposit accounts of
which are insured by the FDIC, any funds deposited in the Custodial Account
shall at all times be insured to the full extent permitted under applicable law.
Funds deposited in the Custodial Account may be drawn on by the Servicer in
accordance with Section 2.05. The creation of any Custodial Account shall be
evidenced by a certification in the form of Exhibit 2 hereto, in the case of an
account established with the Servicer, or by a letter agreement in the form of
Exhibit 3 hereto, in the case of an account held by a depository other than the
Servicer. A copy of such certification or letter agreement shall be furnished to
the Purchaser and, upon request, to any subsequent Purchaser.
The Servicer shall deposit in the Custodial Account within one Business Day of
receipt, and retain therein, the following collections received by the Servicer
and payments made by the Servicer after the Cut-off Date, other than payments of
principal and interest due on or before the Cut-off Date, or received by the
Servicer prior to the Cut-off Date but allocable to a period subsequent thereto:
a. all payments on account of principal on the Mortgage Loans, including all
Principal Prepayments;
b. all payments on account of interest on the Mortgage Loans;
c. all Liquidation Proceeds and any amount received with respect to REO
Property;
d. all insurance Proceeds including amounts required to be deposited pursuant to
Section 2.10 (other than proceeds to be held in the Escrow Account and
applied to the restoration or repair of the Mortgaged Property or released to
the Mortgagor in accordance with Section 2.14), and Section 2.11;
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e. all Condemnation Proceeds which are not applied to the restoration or repair
of the Mortgaged Property or released to the Mortgagor in accordance with
Section 2.14;
f. any amount required to be deposited in the Custodial Account pursuant to
Section 2.01, 2.09, 2.15, 2.17, 3.01, 3.03 or 4.02;
g. any amounts payable in connection with the repurchase of any Mortgage Loan
pursuant to Section 8.03 of the Purchase Agreement; and
h. any amounts required to be deposited by the Servicer pursuant to section 2.11
in connection with the deductible clause in any blanket hazard insurance
policy.
The foregoing requirements for deposit into the Custodial Account shall be
exclusive, it being understood and agreed that, without limiting the generality
of the foregoing, Servicing Fee Income and Ancillary Income need not be
deposited by the Servicer into the Custodial Account. Any interest paid, or
other income earned, on funds deposited in the Custodial Account by the
depository institution shall accrue to the benefit of the Servicer and the
Servicer shall be entitled to retain and withdraw such interest and other income
earned from the Custodial Account pursuant to Section 2.05.
SECTION 2.05. PERMITTED WITHDRAWALS FROM CUSTODIAL ACCOUNT. Subject to Section
2.17 hereof, the Servicer shall, from time to time, withdraw funds from the
Custodial Account for the following purposes:
a. to make payments to the Purchaser in the amounts and in the manner provided
for in Section 3.01;
b. to reimburse itself for unreimbursed Servicing Advances (except to the extent
reimbursed pursuant to Section 2.07), any accrued but unpaid Servicing Fees
and for unreimbursed advances of Servicer funds made pursuant to Sections
2.15 or 2.17, the Servicer's right to reimburse itself pursuant to this
subclause (b) with respect to any Mortgage Loan being limited to related
Liquidation Proceeds, Condemnation Proceeds, Insurance proceeds and such
other amounts as may be collected by the Servicer from the Mortgagor or
otherwise relating to the Mortgage Loan, it being understood that, in the
case of any such reimbursement, the Servicer' a right thereto shall be prior
to the right. of the Purchaser except that, where the Seller or the Servicer
is required to repurchase a Mortgage Loan pursuant to Section 8.03 of the
Purchase Agreement or Section 4.02 of this Agreement, respectively, the
Servicer's right to such reimbursement shall be subsequent to the payment to
the Purchaser of the Repurchase Price pursuant to such sections and all other
amounts required to be paid to the Purchaser with respect to such Mortgage
Loan;
c. to pay itself any interest or other income earned on funds deposited in the
Custodial Account (all such interest to be withdrawn monthly not later than
each Remittance Date);
d. to withdraw any amounts deposited in error; and
e. to clear and terminate the Custodial Account upon the termination of this
Agreement.
In the event that the Custodial Account is interest bearing, on each Remittance
Date, the Servicer shall withdraw all funds from the Custodial Account except
for those amounts which, pursuant to Section 3.01, the Servicer is not obligated
to remit on such Remittance Date. The Servicer may use such withdrawn funds only
for the purposes described in this Section 2.05.
SECTION 2.06. ESTABLISHMENT OF AND DEPOSITS TO ESCROW ACCOUNT. The Servicer
shall segregate and hold all funds collected and received pursuant to a Mortgage
Loan constituting Escrow payments separate and apart from any of its own funds
and general assets and shall establish and maintain one or more Escrow
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Accounts, in the form of time deposit or demand accounts. The Escrow Account or
Accounts shall be established with a Qualified Depository. If the Custodial
Account is held at a Qualified Depository the deposit accounts of which are
insured by the FDIC, any funds deposited in the Custodial Account shall at all
times be insured to the full extent permitted under applicable law. Funds
deposited in the Escrow Accounts may be drawn on by the Servicer in accordance
with Section 2.07. The creation of any Escrow Account shall be evidenced by a
certification in the form of Exhibit 4 hereto, in the case of an account
established with the Servicer, or by a letter agreement in the form of Exhibit 5
hereto, in the case of an account held by a depository other than the Servicer.
A copy of such certification shall be furnished to the Purchaser and, upon
request, to any subsequent Purchaser.
The Servicer shall deposit in the Escrow Account or Accounts within one Business
Day of receipt, and retain therein:
a. all Escrow payments collected on account of the Mortgage Loans, for the
purpose of effecting timely payment of any such items as required under the
terms of this Agreement; and
b. all amounts representing Insurance Proceeds or Condemnation proceeds which
are to be applied to the restoration or repair of any Mortgaged Property.
The Servicer shall make withdrawals from the Escrow Account only to effect such
payments as are required under this Agreement, as set forth in Section 2.07. The
Servicer shall be entitled to retain any interest paid on, or other income
generated by and paid on, funds deposited in the Escrow Account by the
depository institution, other than interest on escrowed funds required by law or
the Mortgage Loan Documents to be paid to the Mortgagor. To the extent required
by law, the Servicer shall pay from its own funds interest on escrowed funds to
the Mortgagor notwithstanding that the Escrow Account may be noninterest bearing
or that interest paid thereon is insufficient for such purposes.
SECTION 2.07. PERMITTED WITHDRAWALS FROM ESCROW ACCOUNT. Withdrawals from each
Escrow Account may be made by the Servicer only:
a. to effect timely payments of ground rents, taxes, assessments, water rates,
mortgage insurance premiums, condominium charges, fire and hazard insurance
premiums or other items constituting Escrow Payments for the related
Mortgage;
b. to reimburse the Servicer for any Servicing Advance made by the Servicer
pursuant to Section 2.08 (except with respect to any expenses incurred in
procuring or transferring Tax Service Contracts) with respect to a related
Mortgage Loan, but only from amounts received on the related Mortgage Loan
which represent late payments or collections of Escrow Payments thereunder;
c. to refund to the related Mortgagor any funds found to be in excess of the
amounts required under the terms of the related Mortgage Loan or applicable
federal or state law or judicial or administrative ruling;
d. for transfer to the Custodial Account and application to reduce the principal
balance of the Mortgage Loan in accordance with the terms of the related
Mortgage and Mortgage Note;
e. for application to restoration or repair of the related Mortgaged Property in
accordance with the procedures outlined in Section 2.14;
f. to pay to the Servicer, or any Mortgagor to the extent required by law, any
interest paid on the funds deposited in the Escrow Account;
g. to pay to the person entitled thereto any amounts deposited in error; and
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h. to clear and terminate the Escrow Account on the termination of this
Agreement.
SECTION 2.08. PAYMENT OF TAXES, INSURANCE AND OTHER CHARGES, TAX CONTRACTS.
With respect to each Mortgage Loan, the Servicer shall maintain accurate records
reflecting the status of ground rents, taxes, assessments, water rates, sewer
rents, and other charges, as applicable, which are or may become a lien upon the
Mortgaged Property and the status of PMI Policy premiums and fire and hazard
insurance coverage and shall obtain, from time to time, all bills for the
payment of such charges (including renewal premiums) and shall effect payment
thereof prior to the applicable penalty or termination date, employing for such
purpose deposits of the Mortgagor in the Escrow Account which shall have been
estimated and accumulated by the Servicer in amounts sufficient for such
purposes, as allowed under the terms of the Mortgage. To the extent that a
Mortgage does not provide for Escrow Payments, the Servicer shall determine that
any such payments relating to taxes or maintaining insurance policies are made
by the Mortgagor at the time they first become due. The Servicer assumes full
responsibility for the timely payment of all such bills to the extent it has or
should have notice of such bills and shall effect timely payment of all such
charges irrespective of each Mortgagor's faithful performance in the payment of
same or the making of the Escrow Payments, and the Servicer shall make advances
from its own funds to effect such payments, such advances to be reimbursable to
the same extent as Servicing Advances.
The Servicer shall ensure that each of the Mortgage Loans shall be covered by a
Tax Service Contract. In the event Purchaser terminates this Agreement pursuant
to Section 6.04 hereof, such Tax Service Contracts shall be assigned to the
Purchaser at the Purchaser's expense. If this Agreement is terminated for any
other reason, such Tax Service Contracts shall be assigned to the Purchaser at
the Servicer's expense. To the extent that a Mortgage Loan does not have a Tax
Service Contract, the Purchaser shall procure a Tax Service Contract for such
Mortgage Loan and the Servicer shall reimburse the Purchaser upon request for
reasonable expenses incurred in connection therewith.
SECTION 2.09. PROTECTION OF ACCOUNTS. The Servicer may transfer the Custodial
Account or the Escrow Account to a different Qualified Depository from time to
time. Such transfer shall be made only upon obtaining the consent of the
Purchaser, which consent shall not be withheld unreasonably. The Servicer shall
bear any expenses, losses or damages sustained by the Purchaser because the
Custodial Account and/or the Escrow Account are not demand deposit accounts.
SECTION 2.10. MAINTENANCE OF HAZARD INSURANCE. The Servicer shall cause to be
maintained for each Mortgage Loan, hazard insurance such that all buildings upon
the Mortgaged Property are insured against loss by fire, hazards of extended
coverage and such other hazards as are required to be insured pursuant to the
FNMA Guides in an amount which does not exceed FNMA guidelines.
If required by applicable law, each Mortgage Loan is covered by a flood
insurance policy meeting the requirements of all current federal guidelines in
an amount representing coverage not less than the lesser of (i) the outstanding
principal balance of the related Mortgage Loan and (ii) the maximum amount of
insurance which is available under the Flood Disaster Protection Act of 1973, as
amended. If at any time during the term of the Mortgage Loan, the Servicer
determines in accordance with applicable law and pursuant to the FNMA Guides
that a Mortgaged Property is located in a special flood hazard area and is not
covered by flood insurance or is covered in an amount less than the amount
required by the Flood Disaster Protection Act of 1973, as amended, the Servicer
shall notify the related Mortgagor that the Mortgagor must obtain such flood
insurance coverage, and if said Mortgagor fails to obtain the required flood
insurance coverage within forty five (45) days after such notification, the
Servicer shall immediately purchase the required flood insurance on the
Mortgagor's behalf.
If a Mortgage is secured by a unit in a condominium project, the Servicer shall
verify that a Master Certificate indicating the existence of insurance coverage
for such project (including hazard, flood, liability, and fidelity coverage),
was obtained by the originating lender at the time the Mortgage Loan was
originated. If Servicer at any time receives notice of any cancellation,
reduction in amount or material change in such insurance coverage, Servicer
shall use its best efforts to obtain replacement coverage that is substantially
similar to the original. Failure of
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Servicer to obtain satisfactory replacement coverage within sixty (60) days
after receiving notice of any cancellation, reduction in amount or material
change in such insurance coverage will permit Purchaser to request repurchase of
any affected Mortgage Loan pursuant to Section 8.03 of the Purchase Agreement.
The Servicer shall cause to be maintained on each Mortgaged Property such other
or additional insurance as may be required pursuant to such applicable laws and
regulations as shall at any time be in force and as shall require such
additional insurance, or pursuant to the requirements of any primary mortgage
guaranty insurer. All policies required hereunder shall name the Servicer and
its successors and assigns as mortgagee and shall provide for at least thirty
(30) days' prior written notice of any cancellation, reduction in amount or
material change in coverage.
The Servicer shall not interfere with the Mortgagor's freedom of choice in
selecting either his insurance carrier or agent, provided, however, that the
Servicer shall not accept any such insurance policies from insurance companies
which do not meet or exceed applicable FNMA guidelines. The Servicer shall
determine that such policies provide sufficient risk coverage and amounts as
required pursuant to the FNMA Guides, that they insure the property owner, and
that they properly describe the property address. To the extent reasonably
possible the Servicer shall furnish to the Mortgagor a formal notice of
expiration of any such insurance in sufficient time for the Mortgagor to arrange
for renewal coverage by the expiration date; provided, however, that in the
event that no such notice is furnished by the Servicer, the Servicer shall
ensure that replacement insurance policies are in place in the required
coverages and the Servicer shall be solely liable for any losses in the event
such coverage is not provided.
Pursuant to Section 2.04, any amounts collected by the Servicer under any such
policies (other than amounts to be deposited in the Escrow Account and applied
to the restoration or repair of the related Mortgaged Property, or property
acquired in liquidation of the Mortgage Loan, or to be released to the
Mortgagor, in accordance with the Servicer's normal servicing procedures as
specified in Section 2.14) shall be deposited in the Custodial Account subject
to withdrawal pursuant to Section 2.05.
SECTION 2.11. MAINTENANCE OF MORTGAGE IMPAIRMENT INSURANCE. In the event that
the Servicer shall obtain and maintain a blanket policy insuring against losses
arising from fire and hazards covered under extended coverage on all of the
Mortgage Loans, then, to the extent such policy provides coverage in an amount
equal to the amount required pursuant to Section 2.10 and otherwise complies
with all other requirements of Section 2.10, it shall conclusively be deemed to
have satisfied its obligations as set forth in Section 2.10. Any amounts
collected by the Servicer under any such policy relating to a Mortgage Loan
shall be deposited in the Custodial Account subject to withdrawal pursuant to
Section 2.05. Such policy may contain a deductible clause, in which case, in the
event that there shall not have been maintained on the related Mortgaged
Property a policy complying with Section 2.10, and there shall have been a loss
which would have been covered by such policy, the Servicer shall deposit in the
Custodial Account at the time of such loss the amount not otherwise payable
under the blanket policy because of such deductible clause, such amount to be
deposited from the Servicer's funds, without reimbursement therefor. Upon
request of the Purchaser, the Servicer shall cause to be delivered to the
Purchaser a certified true copy of such policy and a statement from the insurer
thereunder that such policy shall in no event be terminated or materially
modified without thirty (30) days' prior written notice to the Purchaser.
SECTION 2.12. MAINTENANCE OF FIDELITY BOND AND ERRORS AND OMISSIONS INSURANCE.
The Servicer shall maintain with responsible companies, at its own expense, a
blanket Fidelity Bond and an Errors and Omissions Insurance Policy, with broad
coverage on all officers, employees or other persons acting in any capacity
requiring such persons to handle funds, money, documents or papers relating to
the Mortgage Loans ("Servicer Employees"). Any such Fidelity Bond and Errors and
Omissions Insurance Policy shall be in the form of the Mortgage Banker's Blanket
Bond and shall protect and insure the Servicer against losses, including
forgery, theft, embezzlement, fraud, errors and omissions and negligent acts of
such Servicer Employees. Such Fidelity Bond and Errors and Omissions Insurance
Policy also shall protect and insure the Servicer against losses in connection
with the release or satisfaction of a Mortgage Loan without having obtained
payment in full of the indebtedness secured thereby. No provision of this
Section 2.12 requiring such Fidelity Bond and Errors and Omissions Insurance
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Policy shall diminish or relieve the Servicer from its duties and obligations as
set forth in this Agreement. The minimum coverage under any such Fidelity Bond
and Errors and Omissions Insurance Policy shall be at least equal to the
corresponding amounts required in the FNMA Guides. Upon the request of the
Purchaser, the Servicer shall cause to be delivered to the Purchaser a certified
true copy of such Fidelity Bond and Errors and Omissions Insurance Policy and a
statement from the surety and the insurer that such Fidelity Bond and Errors and
Omissions Insurance Policy shall in no event be terminated or materially
modified without thirty (30) days' prior written notice to the Purchaser. In the
event that the surety or insurer charges the Servicer a fee for providing such
evidence, the Purchaser shall reimburse the Servicer for the reasonable expense
incurred by the Servicer in furnishing such evidence.
SECTION 2.13. INSPECTIONS. The Servicer shall inspect the Mortgaged Property as
often as deemed necessary by the Servicer to assure itself that the value of the
Mortgaged Property is being preserved. In addition, if any Mortgage Loan is more
than sixty (60) days delinquent, the Servicer promptly shall inspect the
Mortgaged Property and shall conduct subsequent inspections in accordance with
Accepted Servicing Practices or as may be required by the primary mortgage
guaranty insurer. The Servicer shall keep a written report of each such
inspection.
SECTION 2.14. RESTORATION OF MORTGAGED PROPERTY. The Servicer need not obtain
the approval of the Purchaser prior to releasing any Insurance Proceeds or
Condemnation Proceeds to the Mortgagor to be applied to the restoration or
repair of the Mortgaged Property if such release is in accordance with Accepted
Servicing Practices and the terms of this Agreement. At a minimum, the Servicer
shall comply with the following conditions in connection with any such release
of Insurance Proceeds or Condemnation Proceeds:
a. the Servicer shall receive satisfactory independent verification of
completion of repairs and issuance of any required approvals with respect
thereto;
b. the Servicer shall take all steps necessary to preserve the priority of the
lien of the Mortgage, including, but not limited to requiring waivers with
respect to mechanics' and materialmen's liens;
c. the Servicer shall verify that the Mortgage Loan is not in default; and
d. pending repairs or restoration, the Servicer shall place the Insurance
Proceeds or Condemnation Proceeds in the Escrow Account.
If the Purchaser is named as an additional mortgagee, the Servicer is hereby
empowered to endorse any loss draft issued in respect of such a claim in the
name of the Purchaser.
SECTION 2.15. MAINTENANCE OF PMI POLICY, CLAIMS. With respect to each Mortgage
Loan with an LTV in excess of 80%, Servicer shall, without any cost to the
Purchaser, maintain or cause the Mortgagor to maintain in full force and effect
a PMI Policy which insures that portion of the Mortgage Loan in excess of 75% of
value and is otherwise in accordance with Servicer's ordinary policies.
Servicer shall pay or shall cause the Mortgagor to pay the PMI Policy premium on
a timely basis until such Policy is cancelled in accordance with Servicer's
ordinary practices. In the event that such PMI Policy is terminated for any
reason other than routine cancellation, the Servicer shall obtain from another
Qualified Insurer a comparable replacement policy, with a total coverage equal
to the remaining coverage of such terminated PMI Policy. If the insurer shall
cease to be a Qualified Insurer, the Servicer shall determine whether recoveries
under the PMI Policy are jeopardized for reasons related to the financial
condition of such insurer, it being understood that the Servicer shall in no
event have any responsibility or liability for any failure to recover under the
PMI Policy for such reason. If the Servicer determines that recoveries are so
jeopardized, it shall notify the Purchaser and the Mortgagor, if required, and
obtain from another Qualified Insurer a replacement insurance policy. The
Servicer shall not take any action which would result in noncoverage under any
applicable PMI Policy of any loss which, but for the actions of the Servicer,
would have been covered thereunder. In connection with any assumption or
substitution agreement entered into or to be entered
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into pursuant to Section 4.01, the Servicer shall promptly notify the insurer
under the related PMI Policy, if any, of such assumption or substitution of
liability in accordance with the terms of such PMI Policy and shall take all
actions which may be required by such insurer as a condition to the continuation
of coverage under such PMI Policy. If such PMI Policy is terminated as a result
of such assumption or substitution of liability, the Servicer shall obtain a
replacement PMI Policy as provided above.
In connection with its activities as servicer, the Servicer agrees to prepare
and present, on behalf of itself and the Purchaser, claims to the insurer under
any PMI Policy in a timely fashion in accordance with the terms of such PMI
Policy and, in this regard, to take such action as shall be necessary to permit
recovery under any PMI Policy with respect to a defaulted Mortgage Loan.
Pursuant to Section 2.04, any amounts collected by the Servicer under any PMI
Policy shall be deposited in the Custodial Account, subject to withdrawal
pursuant to Section 2.05.
SECTION 2.16. DETERIORATING MORTGAGE LOANS. If, in the course of carrying out
its obligations under this Agreement, the Servicer discovers that a Mortgage
Loan (or an interest therein) (i) is or has been, at any time during the
preceding twelve months, (a) classified, (b) in nonaccrual status or (c)
renegotiated due to the financial deterioration of the Mortgagor or (ii) has
been, more than once during the preceding twelve months, more than 30 days past
due in the payment of principal and interest, the Servicer shall notify the
Purchaser as soon as possible and cooperate with the Purchaser in the
disposition of any such Mortgage Loan as soon as possible.
SECTION 2.17. TITLE, MANAGEMENT AND DISPOSITION OF REO PROPERTY. In the event
that title to any Mortgaged Property is acquired in foreclosure or by deed in
lieu of foreclosure, the deed or certificate of sale shall be taken in the name
of the Servicer as nominee for Purchaser.
The Servicer shall manage, conserve, protect and operate each REO Property for
the Purchaser solely for the purpose of its prompt disposition and sale. The
Servicer, either itself or through an agent selected by the Servicer and
reasonably acceptable to the Purchaser, shall manage, conserve, protect and
operate the REO Property in the same manner that it manages, conserves, protects
and operates other foreclosed property for its own account, and in the same
manner that similar property in the same locality as the REO Property is
managed. The Servicer shall attempt to sell the same (and may temporarily rent
the same for a period not greater than one (1) year, except as otherwise
provided below) on such terms and conditions as the Servicer deems to be in the
best interest of the Purchaser.
The Servicer shall use its best efforts to dispose of the REO Property as soon
as possible and shall sell such REO Property in any event within one year after
title has been taken to such REO Property, unless the Servicer determines, and
gives an appropriate notice to the Purchaser to such effect, that a longer
period is necessary for the orderly liquidation of such REO Property. If a
period longer than one (1) year is permitted under the foregoing sentence and is
necessary to sell any REO Property, the Servicer shall report monthly to the
Purchaser as to the progress being made in selling such REO Property.
The Servicer shall also maintain on each REO Property fire and hazard insurance
with extended coverage in an amount which is at least equal to the maximum
insurable value of the improvements which are a part of such property, liability
insurance and, to the extent required and available under the Flood Disaster
Protection Act of 1973, as amended, flood insurance in the amount required
above.
The disposition of REO Property shall be carried out by the Servicer at such
price, and upon such terms and conditions, as the Servicer deems to be in the
best interests of the Purchaser. The proceeds of sale of the REO Property shall
be promptly deposited in the Custodial Account. As soon as practical thereafter
the expenses of such sale shall be paid and the Servicer shall reimburse itself
pursuant to Section 2.05(iii) or 2.05(iv) hereof, as applicable, for any related
unreimbursed Servicing Advances, unpaid Servicing Fees and unreimbursed advances
made pursuant to this Section, and on the Remittance Date immediately following
the Due Period in which such sale proceeds are received the net cash proceeds of
such sale remaining in the Custodial Account shall be distributed to the
Purchaser;
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provided that such distribution shall, in any event, be made within ninety (90)
days from and after the closing of the sale of such REO Property.
In addition to the Servicer's obligations set forth in this Section 2.17, the
Servicer shall deliver written notice to the Purchaser whenever title to any
Mortgaged Property is acquired in foreclosure or by deed in lieu of foreclosure
together with a copy of the drive-by appraisal of the related Mortgaged Property
obtained by the Servicer on or prior to the date of such acquisition.
Notwithstanding anything to the contrary contained herein, the Purchaser may, at
the Purchaser's sole option, terminate the Servicer as servicer of any such REO
Property without payment of any Termination Fee with respect thereto, provided
that (i) the Purchaser gives the Servicer notice of such termination within ten
(10) Business Days of receipt of said written notice from the Servicer which
termination shall be effective no more than fifteen (15) Business Days from and
after the date of said notice from the Purchaser and (ii) the Servicer shall on
the date said termination takes effect be reimbursed by Purchaser for any
unreimbursed advances of the Servicer's funds made pursuant to section 3.02 and
any unreimbursed Servicing Advances in each case relating to the Mortgage Loan
underlying such REO Property. In the event of any such termination, the
provisions of Section 8.06 hereof shall apply to said termination and the
transfer of servicing responsibilities with respect to such REO Property to the
Purchaser.
With respect to each REO Property, the Servicer shall deposit all funds
collected and received in connection with the operation of the REO Property in
the Custodial Account. The Servicer shall cause to be deposited on a daily basis
upon the receipt thereof in the Custodial Account all revenues received with
respect to the conservation and disposition of the related REO Property.
SECTION 2.18. PERMITTED WITHDRAWALS WITH RESPECT TO REO PROPERTY. For so long
as the Servicer is acting as servicer of any Mortgage Loan relating to any REO
Property, the Servicer shall withdraw funds on deposit in the Custodial Account
with respect to each related REO Property necessary for the proper operation,
management and maintenance of the REO Property, including the cost of
maintaining any hazard insurance pursuant to Section 2.10 and the fees of any
managing agent acting on behalf of the Servicer. The Servicer shall make monthly
distributions on each Remittance Date to the Purchaser of the net cash flow from
the REO Property (which shall equal the revenues from such REO Property net of
the expenses described in Section 2.17 and of any reserves reasonably required
from time to time to be maintained to satisfy anticipated liabilities for such
expenses).
SECTION 2.19. REAL ESTATE OWNED REPORTS. For so long as the Servicer is acting
as servicer of any Mortgage Loan relating to any REO Property, the Servicer
shall furnish to the Purchaser on or before the 15th day of each month a
statement with respect to any REO Property covering the operation of such REO
Property for the previous month and the Servicer's efforts in connection with
the sale of such REO Property and any rental of such REO Property incidental to
the sale thereof for the previous month. That statement shall be accompanied by
such other information as the Purchaser shall reasonably request.
SECTION 2.20. LIQUIDATION REPORTS. For so long as the Servicer is acting as
servicer of any Mortgage Loan relating to any REO Property, upon the foreclosure
sale of any Mortgaged Property or the acquisition thereof by the Purchaser
pursuant to a deed in lieu of foreclosure, the Servicer shall submit to the
Purchaser a liquidation report with respect to such Mortgaged Property.
SECTION 2.21. REPORTS OF FORECLOSURES AND ABANDONMENTS. For so long as the
Servicer is acting as servicer of any Mortgage Loan relating to any REO
Property, following the foreclosure sale or abandonment of any Mortgaged
Property, the Servicer shall report such foreclosure or abandonment as required
pursuant to Section 6050J of the Code.
SECTION 2.22. NOTIFICATION OF ADJUSTMENTS. With respect to each ARM Loan, the
Servicer shall adjust the Mortgage Interest Rate on the related Interest Rate
Adjustment Date and shall adjust the Monthly Payment accordingly in compliance
with the requirements of applicable law and the related Mortgage and Mortgage
Note.
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If, pursuant to the terms of the Mortgage Note, another index is selected for
determining the Mortgage Interest Rate, the same index will be used with respect
to each Mortgage Note which requires a new index to be selected, provided that
such selection does not conflict with the terms of the related Mortgage Note.
The Servicer shall execute and deliver any and all necessary notices required
under applicable law and the terms of the related Mortgage Note and Mortgage
regarding the Mortgage Interest Rate and the Monthly Payment adjustments. The
Servicer shall promptly upon written request therefor, deliver to the Purchaser
such notifications and any additional applicable data regarding such adjustments
and the methods used to calculate and implement such adjustments. Upon the
discovery by the Servicer or the Purchaser that the Servicer has failed to
adjust a Mortgage Interest Rate or a Monthly Payment pursuant to the terms of
the related Mortgage Note and Mortgage, the Servicer shall immediately deposit
in the Custodial Account from its own funds the amount of any interest loss
caused the Purchaser thereby.
SECTION 2.23. NOTIFICATION OF MATURITY DATE. With respect to each Fixed Rate
Mortgage Loan, the Purchaser shall execute and deliver to the Mortgagor any and
all necessary notices required under applicable law and the terms of the related
Mortgage Note and Mortgage regarding the maturity date if required under
applicable law.
ARTICLE III
PAYMENTS TO PURCHASER
SECTION 3.01. REMITTANCES. On each Remittance Date the Servicer shall remit by
wire transfer of immediately available funds to the Purchaser (a) all amounts
deposited in the Custodial Account as of the close of business on the
Determination Date, minus (b) any amounts payable to Servicer under Article II
of this Agreement.
With respect to any remittance received by the Purchaser after the second
Business Day following the Business Day on which such payment was due, the
Servicer shall pay to the Purchaser interest on any such late payment at an
annual rate equal to the Prime Rate, adjusted as of the date of each change,
plus one (1) percentage point, but in no event greater than the maximum amount
permitted by applicable law. Such interest shall be deposited in the Custodial
Account by the Servicer on the date such late payment is made and shall cover
the period commencing with and including the day following such second Business
Day and ending with the Business Day on which such payment is made, exclusive of
such Business Day; provided, however, that in the event that the Servicer remits
such amounts after 1:00 P.M. Eastern time on any day, such period shall include
such day. Such interest shall be remitted along with the distribution payable on
the next succeeding Remittance Date. The payment by the Servicer of any such
interest shall not be deemed an extension of time for payment or a waiver of any
Event of Default by the Servicer.
SECTION 3.02. STATEMENTS TO PURCHASER. Not later than the twentieth day of each
month, the Servicer shall furnish to Purchaser in a mutually-acceptable format a
listing of the outstanding Mortgage Loans, including with respect to each
Mortgage Loan: the Mortgage Loan number, the actual balance, the actual paid-
through dates and the Mortgage Interest Rate and principal and interest payment,
and with respect to ARM Loans, the next Interest Rate Adjustment Date, the
Mortgage Interest Rate and the principal and interest payment effective as of
the next Interest Rate Adjustment Date (if available), and shall furnish to the
Purchaser manually a Monthly Remittance Advice, with a trial balance report
attached thereto, in the form of Exhibit 1 annexed hereto as to the preceding
remittance and the period ending on the preceding Determination Date.
In addition, the Servicer shall furnish to Purchaser an annual statement in
accordance with the requirements of applicable federal income tax law as to the
aggregate of remittances for the applicable portion of such year. Such
obligation of the Servicer shall be deemed to have been satisfied to the extent
that substantially comparable information shall be provided by the Servicer
pursuant to any requirements of the Code as from time to time are in force.
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The Servicer shall prepare and file, with respect to each Mortgage Loan, any and
all tax returns, information statements or other filings required to be
delivered to any governmental taxing authority or to the Purchaser pursuant to
any applicable law with respect to the Mortgage Loans and the transactions
contemplated hereby. In addition, the Servicer shall provide the Purchaser with
such information concerning the Mortgage Loans as is necessary for the Purchaser
to prepare its federal income tax return as the Purchaser may reasonably request
from time to time.
SECTION 3.03. RESERVED.
ARTICLE IV
GENERAL SERVICING PROCEDURES
SECTION 4.01. TRANSFERS OF MORTGAGED PROPERTY. The Servicer shall be required
to enforce any "due-on-sale" provision contained in any Mortgage or Mortgage
Note and to deny assumption by the person to whom the Mortgaged Property has
been or is about to be sold whether by absolute conveyance or by contract of
sale, whether or not the Mortgagor remains liable on the Mortgage and the
Mortgage Note. When the Mortgaged Property has been conveyed by the Mortgagor,
the Servicer shall, to the extent it has knowledge of such conveyance, exercise
its rights to accelerate the maturity of such Mortgage Loan under the "due-on-
sale" clause applicable thereto, provided, however, that the Servicer shall not
exercise such rights if prohibited by law from doing so or if the exercise of
such rights would impair or threaten to impair any recovery under the related
PMI Policy, if any.
If the Servicer reasonably believes it is unable under applicable law to enforce
such "due-on-sale" clause, the Servicer, in the Purchaser's name, shall, to the
extent permitted by applicable law, enter into (i) an assumption and
modification agreement with the person to whom such property has been conveyed,
pursuant to which such person becomes liable under the Mortgage Note and the
original Mortgagor remains liable thereon or (ii) in the event the Servicer is
unable under applicable law to require that the original Mortgagor remain liable
under the Mortgage Note and the Servicer has the prior consent of the primary
mortgagee guaranty insurer, a substitution of liability agreement with the
purchaser of the Mortgaged Property pursuant to which the original Mortgagor is
released from liability and the purchaser of the Mortgaged Property is
substituted as Mortgagor and becomes liable under the Mortgage Note. In
connection with any such assumption, neither the Mortgage Interest Rate borne by
the related Mortgage Note, the term of the Mortgage Loan nor the outstanding
principal amount of the Mortgage Loan shall be changed.
To the extent that any Mortgage Loan is assumable, the Servicer shall inquire
diligently into the creditworthiness of the proposed transferee, and shall use
the underwriting criteria for approving the credit of the proposed transferee
which are used by FNMA with respect to underwriting mortgage loans of the same
type as the Mortgage Loans. For Mortgage Loans which are not eligible for
purchase by FNMA (commonly referred to as "non-conforming"), Servicer shall use
underwriting criteria which would be used by a prudent lender in underwriting
non-conforming loans for its own portfolio. If the credit of the proposed
transferee does not meet such underwriting criteria, the Servicer diligently
shall, to the extent permitted by the Mortgage or the Mortgage Note and by
applicable law, accelerate the maturity of the Mortgage Loan.
SECTION 4.02. SATISFACTION OF MORTGAGES AND RELEASE OF MORTGAGE FILES. Upon the
payment in full of any Mortgage Loan, or the receipt by the Servicer of a
notification that payment in full will be escrowed in a manner customary for
such purposes, the Servicer shall notify the Purchaser in the Monthly Remittance
Advice as provided in Section 3.02, and may request the release of any Mortgage
Loan Documents from the Purchaser in accordance with this Section 4.02 hereof.
The Servicer shall obtain discharge of the related Mortgage Loan as of record
within any related time limit required by applicable law.
If the Servicer satisfies or releases a Mortgage without first having obtained
payment in full of the indebtedness secured by the Mortgage or should the
Servicer otherwise prejudice any rights the Purchaser may have under the
mortgage instruments, upon written demand of the Purchaser, the Servicer shall
repurchase the related Mortgage Loan
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at the Repurchase Price by deposit thereof in the Custodial Account within two
(2) Business Days of receipt of such demand by the Purchaser. Upon such
repurchase, all funds maintained in the Escrow Account with respect to such
repurchased Mortgage Loan shall be transferred to the Servicer. The Servicer
shall maintain the Fidelity Bond and Errors and Omissions Insurance Policy as
provided for in Section 2.12 insuring the Servicer against any loss it may
sustain with respect to any Mortgage Loan not satisfied in accordance with the
procedures set forth herein.
SECTION 4.03. SERVICING COMPENSATION. As consideration for servicing the
Mortgage Loans hereunder, the Servicer shall deduct the Servicing Fee with
respect to each Mortgage Loan from payments as received from Mortgagors, and
shall remit the net balance into the Custodial Account. The Servicing Fee shall
be pro-rated when servicing is for less than one month. The obligation of the
Purchaser to pay, and the Servicer's right to withdraw, the Servicing Fee is
limited to, and the Servicing Fee is payable solely from, the interest portion
(including recoveries with respect to interest from Liquidation Proceeds, to the
extent permitted by Section 2.05), of such Monthly Payment collected by the
Servicer, or as otherwise provided under Section 2.05.
Additional servicing compensation in the form of Ancillary Income shall be
retained by the Servicer as and when collected. The Servicer shall be required
to pay all expenses incurred by it in connection with its servicing activities
hereunder and shall not be entitled to reimbursement thereof except as
specifically provided for herein.
SECTION 4.04. ANNUAL STATEMENT AS TO COMPLIANCE. The Servicer shall deliver to
the Purchaser: on or before December 31 each year beginning December 31, 1997,
an Officer's Certificate, stating that (i) a review of the activities of the
Servicer during its preceding fiscal year (October 1 through September 30) and
of performance under this Agreement has been made under such officer's
supervision, and (ii) the Servicer has complied in all material respects with
the provisions of Article II and Article IV, and (iii) to the best of such
officer's knowledge, based on such review, the Servicer has fulfilled all its
obligations under this Agreement throughout such year or part thereof, or, if
there has been a default in the fulfillment of any such obligation, specifying
each such default known to such officer and the nature and status thereof and
the action being taken by the Servicer to cure such default.
SECTION 4.05. ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SERVICING REPORT. On or
before December 31 of each year, beginning with December 31, 1997, the Servicer
at its expense shall cause a firm of independent public accountants (who may
also render other services to the Servicer or any affiliate thereof) which is a
member of the American Institute of Certified Public Accountants to furnish a
statement to the Purchaser to the effect that such firm has, as part of their
examination of the financial statements of the Servicer, performed tests
embracing the records and documents relating to mortgage loans serviced by the
Servicer in accordance with the requirements of the Uniform Single Audit Program
for Mortgage Bankers and that their examination disclosed no exceptions that, in
their opinion, were material, relating to mortgage loans serviced by the
Servicer.
SECTION 4.06. RIGHT TO EXAMINE SERVICER RECORDS. The Purchaser, upon reasonable
notice, shall have the right to examine and audit any and all of the books,
records, or other information of the Servicer, whether held by the Servicer or
by another on its behalf, with respect to or concerning this Agreement or the
Mortgage Loans, during business hours or at such other times as may be
reasonable under applicable circumstances, upon reasonable advance notice.
ARTICLE V
SERVICER TO COOPERATE
SECTION 5.01. PROVISION OF INFORMATION. During the term of this Agreement, the
Servicer shall furnish to the Purchaser such periodic, special, or other reports
or information, whether or not provided for herein, as shall be necessary,
reasonable, or appropriate with respect to the Purchaser or the purposes of this
Agreement. All such reports or information shall be provided by and in
accordance with all reasonable instructions and directions which the Purchaser
may give. The Servicer shall execute and deliver all such instruments and take
all such action as the
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Purchaser may reasonably request from time to time, in order to effectuate the
purposes and to carry out the terms of this Agreement.
SECTION 5.02. FINANCIAL STATEMENTS; SERVICING FACILITIES. In connection with
disposition of Mortgage Loans, the Purchaser may make available to a prospective
purchaser audited financial statements of the Servicer for the most recently
completed two (2) fiscal years for which such statements are available, as well
as a Consolidated Statement of Condition at the end of the last two (2) fiscal
years covered by any Consolidated Statement of Operations. If it has not already
done so, the Servicer shall furnish promptly to the Purchaser or a prospective
purchaser copies of the statements specified above; provided, however, that
prior to furnishing such statements or information to any prospective purchaser,
the Servicer may require such prospective purchaser to execute a confidentiality
agreement in form reasonably satisfactory to it.
The Servicer shall make available to the Purchaser or any prospective Purchaser
a knowledgeable financial or accounting officer for the purpose of answering
questions with respect to recent developments affecting the Servicer or the
financial statements of the Servicer, and to permit any prospective purchaser to
inspect the Servicer's servicing facilities for the purpose of satisfying such
prospective purchaser that the Servicer has the ability to service the Mortgage
Loans as provided in this Agreement.
ARTICLE VI
TERMINATION
SECTION 6.01. AGENCY SUSPENSION. Should the Servicer at any time during the
term of this Agreement have its right to service temporarily or permanently
suspended by FNMA or otherwise cease to be an approved seller/servicer of
conventional residential mortgage loans for FNMA, then the Purchaser may
immediately terminate this Agreement without assessment of any termination fee
and accelerate performance of the provisions of the Purchase Agreement to
require immediate transfer of the Servicing Rights.
SECTION 6.02. DAMAGES. The Purchaser shall have the right at any time to seek
and recover from the Servicer any damages or losses suffered by it as a result
of any failure by the Servicer to observe or perform any duties, obligations,
covenants or agreements herein contained, or as a result of a party's failure to
remain an approved FNMA mortgage servicer.
SECTION 6.03. TERMINATION. The respective obligations and responsibilities of
the Servicer shall terminate upon: (i) the later of the final payment or other
liquidation (or any advance with respect thereto) of the last Mortgage Loan
serviced by the Servicer or the disposition of all REO Property serviced by the
Servicer and the remittance of all funds due hereunder; or (ii) by mutual
consent of the Servicer and the Purchaser in writing, unless earlier terminated
pursuant to this Agreement.
SECTION 6.04. TERMINATION WITHOUT CAUSE. The Purchaser may, at its sole option,
upon not less than thirty (30) days' prior written notice to the Servicer
terminate any rights the Servicer may have hereunder with respect to any or all
of the Mortgage Loans, without cause, upon written notice, provided that the
Servicer shall have an additional period of not more than sixty (60) days from
and after the date of said notice from the Purchaser within which to effect the
related transfer of servicing. Any such notice of termination shall be in
writing and delivered to the Servicer as provided in Section 12.01 of this
Agreement. In the event of such termination, the Servicer shall be entitled to a
Termination Fee, equal to 2.0% of the then current aggregate unpaid principal
balance of the related Mortgage Loans; provided, however, that the successor
servicer is not an Affiliate of the Servicer.
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ARTICLE VII
BOOKS AND RECORDS
SECTION 7.01. POSSESSION OF SERVICING FILES. The contents of each Servicing
File are and shall be held in trust by the Servicer for the benefit of the
Purchaser as the owner thereof. The Servicer shall maintain in the Servicing
File a copy (which may be in microfiche form) of the contents of each Mortgage
File and the originals of the required documents in each Mortgage File not
delivered to the Purchaser. The possession of the Servicing File by the
Servicer is at the will of the Purchaser for the sole purpose of servicing the
related Mortgage Loan, pursuant to this Agreement, and such retention and
possession by the Servicer is in its capacity as Servicer only and at the
election of the Purchaser. The Servicer shall release its custody of the
contents of any Servicing File only in accordance with written instructions from
the Purchaser or other termination of the Servicer with respect to the related
Mortgage Loans, unless such release is required as incidental to the Servicer's
servicing of the Mortgage Loans pursuant to this Agreement, or is in connection
with a repurchase of any Mortgage Loan pursuant to Section 8.03 of the Purchase
Agreement or Section 4.02 of this Agreement.
The Servicer shall be responsible for maintaining, and shall maintain, a
complete set of books and records for each Mortgage Loan which shall be marked
clearly to reflect the ownership of each Mortgage Loan by the Purchaser. In
particular, the Servicer shall maintain in its possession, available for
inspection by the Purchaser during normal business hours, and shall deliver to
the Purchaser upon reasonable notice, evidence of compliance with all federal,
state and local laws, rules and regulations, and requirements of FNMA including
but not limited to documentation as to the method used in determining the
applicability of the provisions of the Flood Disaster Protection Act of 1973, as
amended, to the Mortgaged Property, documentation evidencing insurance coverage
and eligibility of any condominium project for approval by FNMA and periodic
inspection reports as required by Section 2.13 and the FNMA Guides.
To the extent that original documents are not required for purposes of
realization of Liquidation Proceeds or Insurance Proceeds, documents maintained
by the Servicer may be in the form of microfilm or microfiche so long as the
Servicer complies with the requirements of the FNMA Guides.
The Servicer shall keep at its servicing office books and records in which,
subject to such reasonable regulations as it may prescribe, the Servicer shall
note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be made
unless such transfer is in compliance with the terms hereof. For the purposes of
this Agreement, the Servicer shall be under no obligation to deal with any
person with respect to this Agreement or the Mortgage Loans unless the books and
records show such person as the owner of the Mortgage Loan. The Purchaser may,
subject to the terms of this Agreement, sell or transfer one or more of the
Mortgage Loans. The Purchaser also shall advise the Servicer of the transfer.
Upon receipt of notice of the transfer, the Servicer shall mark its books and
records to reflect the ownership of the Mortgage Loans of such assignee, and
shall release the Purchaser from its obligations hereunder with respect to the
Mortgage Loans sold or transferred.
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
SECTION 8.01. INDEMNIFICATION. The Servicer agrees to indemnify and hold the
Purchaser harmless from any liability, claim, loss or damage (including, without
limitation, any reasonable legal fees, judgments or expenses relating to such
liability, claim, loss or damage) to the Purchaser directly or indirectly
resulting from the Servicer's failure to observe and perform any or all of
Servicer's duties, obligations, covenants, agreements, warranties or
representations contained in this Agreement or in the Purchase Agreement or the
Servicer's failure to comply with all applicable requirements with respect to
the transfer of Servicing Rights as set forth herein.
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The Servicer shall notify the Purchaser as soon as reasonably possible if a
claim is made by a third party with respect to this Agreement.
SECTION 8.02. LIMITATION ON LIABILITY OF SERVICER AND OTHERS. Neither the
Servicer nor any of the directors, officers, employees or agents of the Servicer
shall be under any liability to the Purchaser for any action taken or for
refraining from the taking of any action in good faith pursuant to this
Agreement, or for errors in judgment, provided, however, that this provision
shall not protect the Servicer or any such person against any breach of
warranties or representations made herein, or failure to perform its obligations
in material compliance with any standard of care set forth in this Agreement, or
any liability which would otherwise be imposed by reason of any breach of the
terms and conditions of this Agreement. The Servicer and any director, officer,
employee or agent of the Servicer may rely in good faith on any document of any
kind prima facie properly executed and submitted by any Person with respect to
any matter arising hereunder. The Servicer shall not be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
duties to service the Mortgage Loans in accordance with this Agreement and which
in its opinion may involve it in any expense or liability, provided, however,
that the Servicer may, with the prior written consent of the Purchaser,
undertake any such action which it may deem necessary or desirable in respect to
this Agreement and the rights and duties of the parties hereto. In such event,
the Servicer shall be entitled to reimbursement from the Purchaser of the
reasonable legal expenses and costs of such action.
SECTION 8.03. LIMITATION ON REGISTRATION AND ASSIGNMENT BY SERVICER. The
Purchaser has entered into this Agreement with the Servicer in reliance upon the
independent status of the Servicer, and the representations as to the adequacy
of its servicing facilities, plant, personnel, records and procedures, its
integrity, reputation and financial standing, and the continuance thereof.
Therefore, the Servicer shall not (i) assign this Agreement or the servicing
hereunder or (ii) delegate any substantial part of its rights or duties
hereunder without the prior written consent of the Purchaser, which consent
shall not be unreasonably withheld or conditioned provided that (a) any
delegation of such rights or duties shall not release the Servicer from its
obligations hereunder and the Servicer shall remain responsible hereunder for
all acts and omissions of any delegee as if such acts or omissions were those of
the Servicer and (b) any such assignee or designee shall satisfy the
requirements for a successor or surviving Person set forth in Section 8.05 and
Section 8.06 hereof. The Servicer shall notify the Purchaser in writing at least
30 days prior to selling or otherwise disposing of all or substantially all of
its assets and receipt of such notice shall entitle the Purchaser to terminate
this Agreement, without payment of any termination fee, except as set forth in
Section 8.05 hereof.
The Servicer shall not resign from the obligations and duties hereby imposed on
it except by mutual consent of the Servicer and the Purchaser or upon the
determination that its duties hereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Servicer. Any such
determination permitting the resignation of the Servicer shall be evidenced by
an Opinion of Counsel to such effect delivered to the Purchaser which Opinion of
Counsel shall be in form and substance acceptable to the Purchaser. No such
resignation shall become effective until a successor shall have assumed the
Servicer's responsibilities and obligations hereunder in the manner provided in
Section 8.06.
Without in any way limiting the generality of this Section 8.03, in the event
that the Servicer either shall assign this Agreement or the servicing
responsibilities hereunder or delegate its duties hereunder or any portion
thereof without (i) satisfying the requirements set forth herein or (ii) the
prior written consent of the Purchaser, then the Purchaser shall have the right
to terminate this Agreement as set forth in Section 6.04, without any payment of
any penalty or damages and without any liability whatsoever to the Servicer
(other than with respect to accrued but unpaid Servicing Fees and Servicing
Advances remaining unpaid) or any third party.
SECTION 8.04. ASSIGNMENT BY PURCHASER. The Purchaser shall have the right
without the consent of the Servicer, to assign, in whole or in part, its
interest under this Agreement with respect to some or all of the Mortgage Loans
and designate any person to exercise any rights of the Purchaser hereunder, by
executing an
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Assignment and Assumption Agreement substantially in the form of Exhibit G to
the Purchase Agreement and the assignee or designee shall accede to the rights
and obligations hereunder of the Purchaser with respect to such Mortgage Loans.
All references to the Purchaser in this Agreement shall be deemed to include its
assignee or designee.
SECTION 8.05. MERGER OR CONSOLIDATION OF THE SERVICER. The Servicer will keep
in full effect its existence, rights and franchises as a corporation under the
laws of the state of its incorporation except as permitted herein, and will
obtain and preserve its qualification to do business as a foreign corporation in
each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of this Agreement, or any of the
Mortgage Loans and to perform its duties under this Agreement.
Any Person into which the Servicer may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Servicer shall be a party, or any Person succeeding to the business of the
Servicer, shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything herein to the contrary notwithstanding; provided,
however, that the successor or surviving Person shall be an institution whose
deposits are insured by FDIC or a company whose business includes the
origination and servicing of mortgage loans; shall be a FNMA-approved servicer
in good standing; and shall have a tangible net worth of not less than
$30,000,000.
SECTION 8.06. SUCCESSOR TO THE SERVICER. Prior to termination of Servicer's
responsibilities and duties under this Agreement pursuant to Sections 2.17,
6.01, 6.04, 8.03 or 11.01, the Purchaser shall (i) succeed to and assume all of
the Servicer's responsibilities, rights, duties and obligations under this
Agreement, or (ii) appoint a successor which shall succeed to all rights and
assume all of the responsibilities, duties and liabilities of the Servicer under
this Agreement. In connection with such appointment and assumption, the
Purchaser may make such arrangements for the compensation of such successor out
of payments on Mortgage Loans as it and such successor shall agree. In the event
that the Servicer's duties, responsibilities and liabilities under this
Agreement should be terminated pursuant to the aforementioned sections, the
Servicer shall discharge such duties and responsibilities during the period from
the date it acquires knowledge of such termination until the effective date
thereof with the same degree of diligence and prudence which it is obligated to
exercise under this Agreement, and shall take no action whatsoever that might
impair or prejudice the rights or financial condition of its successor. The
resignation or removal of Servicer pursuant to the aforementioned Sections shall
not become effective until a successor shall be appointed pursuant to Article X
hereof this Section and shall in no event relieve the Servicer of the
representations, warranties and covenants made pursuant to and the remedies
available to the Purchaser with respect thereto, it being understood and agreed
that the provisions of such Article X shall be applicable to the Servicer
notwithstanding any such resignation or termination of the Servicer, or the
termination of this Agreement.
Any successor appointed as provided herein shall execute, acknowledge and
deliver to the Servicer and to the Purchaser, an instrument accepting such
appointment, whereupon such successor shall become fully vested with all the
rights, powers, duties, responsibilities, obligations and liabilities of the
Servicer, with like effect as if originally named as a party to this Agreement.
Any termination of this Agreement pursuant to Section 2.17, 6.01, 6.04, 8.03 or
11.01 shall not affect any claims that the Purchaser may have against the
Servicer arising prior to any such termination or resignation.
The Servicer shall timely deliver to the successor the funds in the Custodial
Account and the Escrow Account and the Mortgage Files and related documents and
statements held by it hereunder and the Servicer shall account for all funds.
The Servicer shall execute and deliver such instruments and do such other things
all as may reasonably be required to more fully and definitely vest and confirm
in the successor all such rights, powers, duties, responsibilities, obligations
and liabilities of the Servicer. The successor shall make arrangements as it may
deem appropriate to reimburse the Servicer for amounts the Servicer actually
expended pursuant to this Agreement which the successor is entitled to retain
hereunder and which would otherwise have been recovered by the Servicer pursuant
to this Agreement but for the appointment of the successor servicer.
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Upon a successor's acceptance of appointment as such, the Servicer shall notify
by mail the Purchaser of such appointment.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
As of the Closing Date, the Purchaser warrants and represents to, and covenants
and agrees with, the Servicer as follows:
SECTION 9.01. DUE ORGANIZATION AND AUTHORITY. The Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
state of Maryland. The Purchaser has the full corporate power and authority to
execute and deliver this Agreement and to perform in accordance herewith; the
execution, delivery and performance of this Agreement by the Purchaser and the
consummation of the transactions contemplated hereby have been duly and validly
authorized; this Agreement evidences the valid, binding and enforceable
obligation of the Purchaser; and all requisite corporate action has been taken
by the Purchaser to make this Agreement valid and binding upon the Purchaser in
accordance with its terms;
SECTION 9.02. NO CONFLICTS. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Purchaser's charter or by-laws or any legal
restriction or any agreement or instrument to which the Purchaser is now a party
or by which it is bound, or constitute a default or result in an acceleration
under any of the foregoing, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Purchaser or its property is
subject;
SECTION 9.03. ABILITY TO PERFORM. The Purchaser does not believe, nor does it
have any reason or cause to believe, that it cannot perform each and every
covenant made by it in this Agreement.
SECTION 9.04. NO LITIGATION PENDING. There is no action, suit, proceeding or
investigation pending or threatened against the Purchaser, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or 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 Purchaser, or in
any material impairment of the right or ability of the Purchaser to carry on its
business substantially as now conducted, or in any material liability on the
part of the Purchaser, 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 Purchaser contemplated herein.
SECTION 9.05. NO CONSENT REQUIRED. No consent, approval, authorization or order
of any court or governmental agency or body is required for the execution,
delivery and performance by the Purchaser of, or compliance by the Purchaser
with, this Agreement as evidenced by the consummation of the transactions
contemplated by this Agreement, or if required, such approval has been obtained
prior to the Closing Date.
SECTION 9.06. ASSISTANCE. To the extent reasonably possible, the Purchaser
shall cooperate with and assist the Servicer as requested by the Servicer, in
carrying out Servicer's covenants, agreements, duties and responsibilities under
the Purchase Agreement and in connection therewith shall execute and deliver all
such papers, documents and instruments as nay be necessary and appropriate in
furtherance thereof.
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SERVICER
As of the Closing Date, the Servicer warrants and represents to, and covenants
and agrees with, the Purchaser as follows:
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SECTION 10.01. DUE ORGANIZATION AND AUTHORITY. The Servicer is a federal
savings bank duly organized, validly existing and in good standing under the
laws of the United States, and is licensed, qualified and in good standing in
each state where a mortgaged property is located if applicable laws require
licensing or qualification in order to conduct business of the type conducted by
the Servicer, and in any event the Servicer is in compliance with the laws of
any such state to the extent necessary to ensure the enforceability of the
related mortgage loan in accordance with the terms of this Agreement; the
Servicer has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery and
performance of this Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Servicer and the consummation of
the transactions contemplated hereby have been duly and validly authorized; this
Agreement evidences the valid, legal, binding and enforceable obligation of the
Servicer subject to bankruptcy laws and other similar laws of general
application affecting rights of creditors and subject to the application of the
rules of equity, including those respecting the availability of specific
performance, none of which will materially interfere with the realization of the
benefits provided thereunder, regardless of whether such enforcement is sought
in a proceeding in equity or at law; and all requisite corporate action has been
taken by the Servicer to make this Agreement valid and binding upon the Servicer
in accordance with its terms.
SECTION 10.02. ORDINARY COURSE OF BUSINESS. The consummation of the
transactions contemplated by this Agreement are in the ordinary course of
business of the Servicer.
SECTION 10.03. NO CONFLICTS. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Servicer's charter or by-laws or any legal
restriction or any agreement or instrument to which the Servicer is now a party
or by which it is bound, or constitute a default or result in an acceleration
under any of the foregoing, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Servicer or its property is
subject, or impair the ability of the Purchaser to realize on the Mortgage
Loans, impair the value of the Mortgage Loans, or impair the ability of the
Purchaser to realize the full amount of any mortgage insurance benefits accruing
pursuant to this Agreement.
SECTION 10.04. ABILITY TO SERVICE. The Servicer is an approved seller/servicer
of conventional residential mortgage loans for FNMA, with the facilities,
procedures, and experienced personnel necessary for the sound servicing of
mortgage loans of the same type as the Mortgage Loans. The Servicer is duly
qualified, licensed, registered and otherwise authorized under all applicable
federal, state and local laws, and regulations, if applicable, meets the minimum
capital requirements set forth by the OTS, the OCC or the FDIC, and is in good
standing to enforce, originate, sell mortgage loans to, and service mortgage
loans in the jurisdiction wherein the Mortgaged Properties are located for,
either FNMA, and no event has occurred, including but not limited to a change in
insurance coverage, which would make the Servicer unable to comply with either
FNMA eligibility requirements or which would require notification to FNMA.
SECTION 10.05. ABILITY TO PERFORM. The Servicer does not believe, nor does it
have any reason or cause to believe, that it cannot perform each and every
covenant contained in this Agreement.
SECTION 10.06. NO LITIGATION PENDING. There is no action, suit, proceeding or
investigation pending or threatened against the Servicer, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or 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 Servicer, or in any
material impairment of the right or ability of the Servicer to carry on its
business substantially as now conducted, or in any material liability on the
part of the Servicer, 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 the Servicer contemplated herein, or which
would be likely to impair materially the ability of the Servicer to perform
under the terms of this Agreement.
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SECTION 10.07. NO CONSENT REQUIRED. No consent, approval, authorization or
order of any court or governmental agency or body is required for the execution,
delivery and performance by the Servicer of or compliance by the Servicer with
this Agreement or the servicing of the Mortgage Loans as evidenced by the
consummation of the transactions contemplated by this Agreement, or if required,
such approval has been obtained prior to the Closing Date.
SECTION 10.08. NO UNTRUE INFORMATION. Neither this Agreement nor any statement,
tape, diskette, form, report or other document furnished or to be furnished
pursuant to this Agreement or in connection with the transactions contemplated
hereby contains any untrue statement of fact or omits to state a fact necessary
to make the statements contained therein not misleading.
SECTION 10.09. REASONABLE SERVICING FEE. The Servicer acknowledges and agrees
that the Servicing Fee represents reasonable compensation for performing such
services and that the entire Servicing Fee shall be treated by the Servicer, for
accounting and tax purposes, as compensation for the servicing and
administration of the Mortgage Loans pursuant to this Agreement.
SECTION 10.10. FINANCIAL STATEMENTS. The Servicer has delivered to the
Purchaser financial statements as to its last two complete fiscal years. All
such financial statements fairly present the pertinent results of operations and
changes in financial position for each of such periods and the financial
position at the end of each such period of the Servicer and its subsidiaries and
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as set forth in the
notes thereto. There has been no change in the business, operations, financial
condition, properties or assets of the Servicer since the date of the Servicer's
financial statements that would have a material adverse effect on its ability to
perform its obligations under this Agreement.
SECTION 10.11. CONFLICT OF INTEREST. The Servicer agrees that it shall service
the Mortgage Loans hereunder solely with a view toward the interests of the
Purchaser, and without regard to the interests of the Seller or its other
affiliates.
ARTICLE XI
DEFAULT
SECTION 11.01. EVENTS OF DEFAULT. The following shall constitute an Event of
Default under this Agreement on the part of the Servicer:
a. any failure by the Servicer to remit to the Purchaser any payment required to
be made under the terms of this Agreement which continues unremedied for a
period of five (5) Business Days after the date upon which written notice of
such failure, requiring the same to be remedied, shall have been given to the
Servicer by the Purchaser; or
b. the failure by the Servicer duly to observe or perform in any material
respect any other of the covenants or agreements on the part of the Servicer
set forth in this Agreement which continues unremedied for a period of thirty
(30) days (except that such number of days shall be fifteen (15) in the case
of a failure to pay any premium for any insurance policy required to be
maintained under this Agreement) after the date on which written notice of
such failure, requiring the same to be remedied, shall have been given to the
Servicer by the Purchaser; or
c. a decree or order of a court or agency or supervisory authority having
jurisdiction for the appointment of a conservator or receiver or liquidator
in any insolvency, bankruptcy, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding-up or liquidation of
its affairs, shall have been entered
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against the Servicer and such decree or order shall have remained in force
undischarged or unstayed for a period of sixty (60) days; or
d. the Servicer shall consent to the appointment of a conservator or receiver or
liquidator in any insolvency, bankruptcy, readjustment of debt marshaling of
assets and liabilities or similar proceedings of or relating to the Servicer
or of or relating to all or substantially all of its property; or
e. the Servicer shall admit in writing its inability to pay its debts generally
as they become due, file a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit of
its creditors, or voluntarily suspend payment of its obligations; or
f. the Servicer ceases to meet the qualifications of a FNMA seller/servicer
which continues unremedied for a period of thirty (30) days after the date of
such cessation, or the right of the Servicer to service conventional
residential mortgage loans is temporarily or permanently suspended by FNMA;
or
g. the Servicer, without the consent of the Purchaser (other than as permitted
by Sections 8.03 or 8.05 hereof), attempts to assign this Agreement or the
servicing responsibilities hereunder or to delegate any substantial part of
its duties hereunder or any portion thereof; or
h. the Servicer fails to maintain its license to do business or service
residential mortgage loans in any jurisdiction where the Mortgaged Properties
are located and such failure results in a material adverse effect on the
Mortgage Loans, the servicing of the Mortgage Loans, or the Purchaser's
rights with respect to the Mortgage Loans; or
In each and every such case, so long as an Event of Default shall not have been
remedied, in addition to whatsoever rights the Purchaser may have at law or
equity to damages, including injunctive relief and specific performance, the
Purchaser, by notice in writing to the Servicer, may terminate without
compensation or reimbursement (other than Servicing Fees previously earned but
remaining unpaid and Servicing Advances remaining unreimbursed) all the rights
and obligations of the Servicer under this Agreement and in and to the Mortgage
Loans and the proceeds thereof.
Upon receipt by the Servicer of such written notice, all authority and power of
the Servicer under this Agreement, whether with respect to the Mortgage Loans or
otherwise, shall pass to and be vested in the successor appointed pursuant to
Section 8.06. Upon written request from the Purchaser, the Servicer shall
prepare, execute and deliver any and all documents and other instruments
reasonably requested by the Purchaser, place in such successor's possession all
Mortgage Files (to the extent not properly delivered to the Purchaser by the
Servicer previously), and do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise, at the Servicer's sole expense. The Servicer
agrees to reasonably cooperate with the Purchaser and such successor in
effecting the termination of the Servicer's responsibilities and rights
hereunder, including, without limitation, the transfer to such successor for
administration by it of all cash amounts which shall at the time be credited by
the Servicer to the custodial Account or Escrow Account or thereafter received
with respect to the Mortgage Loans.
SECTION 11.02. WAIVER OF DEFAULTS. The Purchaser may waive any default by the
Servicer in the performance of its obligations hereunder and its consequences.
Upon any such waiver of a past default, such default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been remedied for
every purpose of this Agreement. No such waiver shall extend to any subsequent
or other default or impair any right consequent thereon except to the extent
expressly so waived.
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ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01. NOTICES. All notices, requests, demands and other communications
which are required or permitted to be given under this Agreement shall be in
writing and shall be deemed to have been duly given upon the delivery or mailing
thereof, as the case may be, sent by registered or certified mail, return
receipt requested:
a. If to Purchaser to: Chevy Chase Preferred Capital Corporation
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Attention: Stephen R. Halpin, Jr.
b. If to Servicer to: Chevy Chase Bank, F.S.B.
6151 Chevy Chase Drive
Laurel, Maryland 20707
Attention: Vicki L. Parry
SECTION 12.02. WAIVERS. Either the Servicer or the Purchaser may upon consent
of all parties, by written notice to the others: (a) waive compliance with any
of the terms, conditions or covenants required to be complied with by the others
hereunder; and (b) waive or modify performance of any of the obligations of the
others hereunder. The waiver by any party hereto of a breach of any provision of
this Agreement shall not operate or be construed as a waiver of any other
subsequent breach.
SECTION 12.03. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Purchase
Agreement constitute the entire agreement between the parties with respect to
servicing of the Mortgage Loans. This Agreement may be amended and any provision
hereof waived, but, only in writing signed by the party against whom such
enforcement is sought.
SECTION 12.04. EXECUTION; BINDING EFFECT. This Agreement may be executed in one
or more counterparts and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed to be an
original; such counterparts, together, shall constitute one and the same
agreement. Subject to Sections 8.03 and 8.04, this Agreement shall inure to the
benefit of and be binding upon the Servicer and the Purchaser and their
respective successors and assigns.
SECTION 12.05. HEADINGS. Headings of the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
SECTION 12.06. APPLICABLE LAW. This Agreement shall be construed in accordance
with the laws of the State of Maryland and the obligations, rights and remedies
hereunder shall be determined in accordance with the substantive laws of the
State of Maryland (without regard to conflicts of laws principles), except to
the extent preempted by Federal law.
SECTION 12.07. RELATIONSHIP OF PARTIES. Nothing herein contained shall be
deemed or construed to create a partnership or joint venture between the
parties. The duties and responsibilities of the Servicer shall be rendered by it
as an independent contractor and not as an agent of the Purchaser. The Servicer
shall have full control of all of its acts, doings, proceedings, relating to or
requisite in connection with the discharge of its duties and responsibilities
under this Agreement.
SECTION 12.08. SEVERABILITY OF PROVISIONS. If any one or more of the covenants,
agreements, provisions or terms of this Agreement shall be held invalid for any
reason whatsoever, then such covenants, agreements, provisions or terms shall be
deemed severable from the remaining covenants, agreements, provisions
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or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
SECTION 12.09. RECORDATION OF ASSIGNMENTS OF MORTGAGE. Each of the Assignments
of Mortgage is in a form acceptable for recordation in all appropriate public
offices for real property records in all the counties or other comparable
jurisdictions in which any or all of the Mortgaged Properties are situated, and
in any other appropriate public recording office or elsewhere. Recordation may
be effected by the Purchaser at the appropriate public recording office or, in
upon Servicer's request, through MERS (a privately owned and operated Mortgage
Electronic Recording System), but in any event, at the Servicer's expense for a
single recordation relating to each Assignment of Mortgage in the event
recordation is either necessary under applicable law or requested by the
Purchaser at its sole option.
SECTION 12.10. EXHIBITS. The exhibits to this Agreement are hereby incorporated
and made a part hereof and are integral parts of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
By: Stephen Halpin
Name: Stephen Halpin
Title: Executive Vice President, Chief Financial Officer and Treasurer
CHEVY CHASE BANK, F.S.B.
By: Joel A. Friedman
Name: Joel A. Friedman
Title: Senior Vice President and Controller
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EXHIBIT 1
MONTHLY REMITTANCE ADVICE
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EXHIBIT 2
CUSTODIAL ACCOUNT CERTIFICATION
_____________________________________, 1996
Chevy Chase Bank, F.S.B. hereby certifies that it has established the account
described below as a Custodial Account pursuant to Section 2.04 of the Servicing
Agreement, dated as of December 1, 1996.
Title of Account: Chevy Chase Bank, F.S.B., in trust for [named Purchaser],
and various Mortgagors
Account Number:____________________________________________
Address of office or branch of the Servicer at which Account is maintained:
_______________________________________________________________________________
_______________________________________________________________________________
CHEVY CHASE BANK, F.S.B.
By: ___________________________________________________________________
Name: ________________________________________________________________
Title: ________________________________________________________________
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EXHIBIT 3
CUSTODIAL ACCOUNT LETTER AGREEMENT
_________________________________, 1996
To: _____________________________________________ (the "Depository")
As Servicer under the Servicing Agreement dated as of December 1, 1996 (the
"Agreement"), we hereby authorize and request you to establish an account, as a
Custodial Account pursuant to Section 2.04 of the Agreement, to be designated as
"Chevy Chase Bank, F.S.B., in trust for [named Purchaser] and various
Mortgagors." All deposits in the account shall be subject to withdrawal
therefrom by order signed by Chevy Chase Bank, F.S.B. This letter is submitted
to you in duplicate. Please execute and return one original to us.
CHEVY CHASE BANK, F.S.B.
By: ________________________________________________________________
Name: ________________________________________________________________
Title: ________________________________________________________________
The undersigned, as Depository, hereby certifies that the above described
account has been established under Account Number
_______________________________________, at the office of the Depository
indicated above, and agrees to honor withdrawals on such account as provided
above.
DEPOSITORY
By: ________________________________________________________________
Name: ________________________________________________________________
Title: _________________________________________________________________
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EXHIBIT 4
ESCROW ACCOUNT CERTIFICATION
______________________________________, 1996
Chevy Chase Bank, F.S.B. hereby certifies that it has established the account
described below as an Escrow Account pursuant to Section 2.06 of the Servicing
Agreement, dated as of December 1, 1996.
Title of Account: Chevy Chase Bank, F.S.B., in trust for [named Purchaser],
and various Mortgagors
Account Number: _______________________________________________________
Address of office or branch of the Servicer at which Account is maintained:
________________________________________________________________________________
________________________________________________________________________________
CHEVY CHASE BANK, F.S.B.
By: ________________________________________________________________
Name: ________________________________________________________________
Title: _________________________________________________________________
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EXHIBIT 5
ESCROW ACCOUNT LETTER AGREEMENT
______________________________________, 1996
To: ___________________________________________, (the "Depository")
As Servicer under the Servicing Agreement, dated as of December 1, 1996 (the
"Agreement'), we hereby authorize and request you to establish an account, as an
Escrow Account pursuant to Section 2.06 of the Agreement, to be designated as
"Chevy Chase Bank, F.S.B., in trust for [named Purchaser] and various
Mortgagors." All deposits in the account shall be subject to withdrawal
therefrom by order signed by Chevy Chase Bank, F.S.B., the Servicer. This letter
is submitted to you in duplicate. Please execute and return one original to us.
CHEVY CHASE BANK, F.S.B.
By: ________________________________________________________________
Name: ________________________________________________________________
Title: ________________________________________________________________
The undersigned, as Depository, hereby certifies that the above described
account has been established under Account Number
_______________________________________, at the office of the Depository
indicated above, and agrees to honor withdrawals on such account as provided
above.
DEPOSITORY
By: ________________________________________________________________
Name: ________________________________________________________________
Title: _________________________________________________________________
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ADVISORY AGREEMENT
THIS ADVISORY AGREEMENT ("Agreement") is made this 3rd day of December,
1996 by and between CHEVY CHASE PREFERRED CAPITAL CORPORATION, a Maryland
corporation (the "Company"), and CHEVY CHASE BANK, F.S.B., a federally chartered
and federally insured stock savings bank (the "Advisor"). Capitalized terms
used herein shall have the meanings set forth in Section 1 of this Agreement.
WHEREAS, the Company intends to qualify as a "real estate investment trust"
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company desires to avail itself of the experience and
assistance of the Advisor and to have the Advisor undertake, on the Company's
behalf, the duties and responsibilities hereinafter set forth, subject to the
control and supervision of the Board of Directors of the Company (the "Board of
Directors") as provided for herein; and
WHEREAS, the Advisor desires to render such services to the Company subject
to the control and supervision of the Board of Directors, on the terms and
conditions hereinafter set forth.
NOW THEREFORE, the parties hereto agree as follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms shall have the respective meanings set
forth below:
"Advisor" has the meaning set forth in the forepart of this Agreement.
"Advisor Termination Date" means the date on which this Agreement
terminates.
"Agreement" means this Advisory Agreement, as amended, modified and
supplemented from time to time.
"Board of Directors" has the meaning set forth in the forepart of this
Agreement.
"Code" has the meaning set forth in the forepart of this Agreement.
"Company" has the meaning set forth in the forepart of this Agreement.
"Independent Directors" means the members of the Board of Directors who are
not current officers or employees of the Company or current directors, employees
or officers of the Advisor or any affiliate of the Advisor.
<PAGE>
"Operating Expenses" for any period means all of the operating expenses of
the Company (with the exception of those expenses to be borne by the Advisor in
accordance with Section 4 hereof), including without limitation the following:
(a) interest, taxes and other expenses incurred in connection with the real
estate mortgage assets of the Company;
(b) expenses related to the officers, directors and employees of the
Company, including without limitation any fees or expenses of the directors;
(c) fees and expenses payable to accountants, appraisers, auditors,
consultants, attorneys, collection and paying agents and all other Persons who
contract with or are retained by the Company or by the Advisor on behalf of the
Company;
(d) legal and other expenses incurred in connection with advice concerning,
obtaining or maintaining the Company's status as a REIT, the determination of
the Company's taxable income, any formal or informal administrative action or
legal proceedings which involve a challenge to the REIT status of the Company or
any claim that the activities of the Company, any member of the Board of
Directors or any officer were improper;
(e) expenses relating to communications and reports to stockholders of the
Company, including without limitation the costs of preparing, printing,
duplicating and mailing the certificates for the stock of the Company, proxy
solicitation materials and reports to stockholders, and the costs of arranging
meetings of stockholders;
(f) the costs of insurance described in Section 2 hereof, including
directors and officers liability insurance covering the directors and officers
of the Company;
(g) expenses relating to the acquisition, disposition and ownership of real
estate mortgage assets, including, without limitation and to the extent not paid
by others, legal fees and other expenses for professional services and fees;
(h) expenses connected with the payments of dividends or interest or
distributions in cash or any other form made or caused to be made by the Board
of Directors to the stockholders of the Company;
(i) expenses connected with any office or office facilities maintained by
the Company separate from the office of the Advisor, including without
limitation rent, telephone, utilities, office furniture and equipment and
machinery; and
2
<PAGE>
(j) other miscellaneous expenses of the Company which are not expenses of
the Advisor under Section 4 hereof.
"Person" means and includes individuals, corporations, limited
partnerships, general partnerships, joint stock companies or associations,
limited liability companies, joint ventures, associations, consortia, companies,
trusts, banks, trust companies, land trusts, common law trusts, business trusts
or other entities, governments and agencies and political subdivisions thereof.
"REIT" has the meaning set forth in the forepart of this Agreement.
SECTION 2. DUTIES OF THE ADVISOR.
The Advisor shall consult with the Board of Directors and the officers of
the Company and shall, at the request of the Board of Directors and/or the
officers of the Company, furnish advice and recommendations with respect to all
aspects of the business and affairs of the Company. Subject to the control and
discretion and at the request of the Board of Directors, the Advisor shall:
(a) administer the day-to-day operations and affairs of the Company,
including without limitation the performance or supervision of the functions
described in this Section 2;
(b) monitor the credit quality of the real estate mortgage assets held by
the Company;
(c) advise the Company with respect to the acquisition, management,
financing and disposition of the Company's real estate mortgage assets;
(d) represent the Company in its day-to-day dealings with Persons with whom
the Company interacts, including without limitation stockholders of the Company,
the transfer agent of the Company, consultants, accountants, attorneys,
servicers of the Company's mortgage loans, custodians, insurers and banks;
(e) establish and provide necessary services for the Company, including
executive, administrative, accounting, stockholder relations, secretarial,
recordkeeping, copying, telephone, mailing and distribution facilities;
3
<PAGE>
(f) provide the Company with office space, conference room facilities,
office equipment and personnel necessary for the services to be performed by the
Advisor hereunder;
(g) arrange, schedule and coordinate the regular and special meetings of
the Board of Directors required for the conduct of the affairs of the Company or
for timely action on any matters the Company is required to act upon and
implement all decisions of the Board of Directors, unless otherwise instructed,
with regard to the Company and its assets;
(h) maintain communications and relations with the stockholders of the
Company, including, but not limited to, responding to inquiries, proxy
solicitations, providing reports to stockholders and arranging and coordinating
all meetings of stockholders;
(i) arrange for the investment and management of any short-term investments
of the Company;
(j) arrange for the services of third parties to collect and distribute
funds of the Company and to perform such functions as the Board of Directors
shall from time to time require;
(k) monitor and supervise the performance of all parties who have contracts
to perform services for the Company, provided that the Advisor shall have no
duty to assume the obligations or guarantee the performance of such parties
under such contracts;
(l) establish and maintain such bank accounts in the name of the Company as
may be required by the Company and approved by the Board of Directors and ensure
that all funds collected by the Advisor in the name or on behalf of the Company
shall be held in trust and shall not be commingled with the Advisor's own funds
or accounts;
(m) make payment on behalf of the Company of all Operating Expenses;
(n) arrange for the execution and delivery of such documents and
instruments by the officers of the Company as may be required in order to
perform the functions herein described and to take any other required action
contemplated by the terms of this Agreement;
(o) arrange for insurance for the Company, including liability insurance,
errors and omissions policies and officers and directors policies, which shall
cover and insure the Company, members of the Board of Directors and the officers
of the Company in amounts and with deductibles and insurers approved by the
Board of Directors;
4
<PAGE>
(p) maintain proper books and records of the Company's affairs and furnish
or cause to be furnished to the Board of Directors such periodic reports and
accounting information as may be required from time to time by the Board of
Directors, including, but not limited to, quarterly reports of all income,
expenses and distributions of the Company;
(q) consult and work with legal counsel for the Company in implementing
Company decisions and undertaking measures consistent with all pertinent
Federal, state and local laws and rules or regulations of governmental or quasi-
governmental agencies, including, but not limited to, Federal and state
securities laws, the Code, as it relates to the Company's qualification as a
REIT, and the regulations promulgated under each of the foregoing;
(r) consult and work with accountants for the Company in connection with
the preparation of financial statements, annual reports and tax returns;
(s) arrange for an annual audit of the books and records of the Company by
the accounting firm designated for such purposes by the Board of Directors;
(t) prepare and distribute in consultation with the accountants for the
Company, annual reports to stockholders which will contain audited financial
statements;
(u) furnish reports to the Board of Directors and provide research,
economical and statistical data in connection with the Company's investments;
and
(n) as reasonably requested by the Company, make reports to the Company of
its performance of the foregoing services and furnish advice and recommendations
with respect to other aspects of the business of the Company.
SECTION 3. COMPENSATION OF THE ADVISOR.
The Company shall pay to the Advisor, for services rendered by the Advisor
hereunder, an advisory fee equal to Two Hundred Thousand Dollars ($200,000.00)
per year, payable in equal quarterly installments.
SECTION 4. EXPENSES OF THE ADVISOR.
(a) Without regard to the compensation received pursuant to Section 3
hereof, the Advisor shall bear the following expenses:
5
<PAGE>
(i) employment expenses of the personnel employed by the Advisor,
including without limitation salaries, wages, payroll taxes and the cost of
employee benefit plans; and
(ii) rent, telephone equipment, utilities, office furniture and
equipment and machinery and other office expenses of the Advisor incurred
in connection with the maintenance of any office facility of the Advisor.
(a) The Company shall reimburse the Advisor within 30 days of a written
request by the Advisor for any Operating Expenses paid or incurred by the
Advisor on behalf of the Company.
SECTION 5. RECORDS.
The Advisor shall maintain appropriate books of account and records
relating to services performed hereunder, and such books of account and records
shall be accessible for inspection by the Board of Directors and representatives
of the Company at all times.
SECTION 6. REIT QUALIFICATION AND COMPLIANCE.
The Advisor shall consult and work with the Company's legal counsel in
maintaining the Company's qualification as a REIT. Notwithstanding any other
provisions of this Agreement to the contrary, the Advisor shall refrain from any
action which, in its reasonable judgment or in the judgment of the Board of
Directors (of which the Advisor has received written notice), would adversely
affect the qualification of the Company as a REIT or which would violate any
law, rule or regulation of any governmental body or agency having jurisdiction
over the Company or its securities, or which would otherwise not be permitted by
the articles of incorporation or by-laws of the Company. Furthermore, the
Advisor shall take any action which, in its judgment or the judgment of the
Board of Directors (of which the Advisor has received written notice), may be
necessary to maintain the qualification of the Company as a REIT or prevent the
violation of any law or regulation of any governmental body or agency having
jurisdiction over the Company or its securities.
SECTION 7. TERM; TERMINATION.
This Agreement shall be in full force and effect for a term beginning on
the date hereof with an initial term of three years, and will be renewed
automatically for additional one-year periods unless the Company delivers a
notice of nonrenewal to the Advisor not less than 60 days prior to the
expiration of the initial term of this Agreement or 60 days prior to the
expiration of any renewal term. Notwithstanding the foregoing, at any time
after the initial term, the Company may terminate this Agreement at any time
upon 60 days' prior
6
<PAGE>
written notice; provided, however, that as long as any shares of the Company's
10 3/8% Noncumulative Exchangeable Preferred Stock, Series A, par value $5.00
per share, remain outstanding, any decision by the Company either not to renew
this Agreement or to terminate this Agreement must be approved by a majority of
the Board of Directors, as well as by a majority of the Independent Directors.
SECTION 8. OTHER ACTIVITIES OF THE ADVISOR.
(a) Nothing herein contained shall prevent the Advisor, an affiliate of the
Advisor or an officer, director, employee or stockholder of the Advisor from
engaging in any activity, including without limitation originating, purchasing
and managing real estate mortgage assets, rendering of services and investment
advice with respect to real estate investment opportunities to any other Person
(including other REITs) and managing other investments (including the
investments of the Advisor and its affiliates).
(b) Officers, directors, employees, stockholders and agents of the Advisor
or of any affiliate of the Advisor may serve as officers, directors, employee or
agents of the Company, but shall receive no compensation (other than
reimbursement for expenses) from the Company for such service.
SECTION 9. BINDING EFFECT; ASSIGNMENT.
This Agreement shall inure to the benefit of and shall be binding upon the
parties hereto and their respective successors and assigns. Neither party may
assign this Agreement or any of its respective rights hereunder (other than an
assignment to a successor organization which acquires substantially all of the
property of such party or, in the case of the Advisor, to an affiliate of the
Advisor) without the prior written consent of the other party to this Agreement.
SECTION 10. SUBCONTRACTING.
The Advisor may at any time subcontract all or a portion of its obligations
under this Agreement to one or more affiliates of the Advisor that are involved
in the business of managing real estate mortgage assets without the consent of
the Company. If no affiliate of the Advisor is engaged in the business of
managing real estate mortgage assets, the Advisor may, with the approval of a
majority of the Board of Directors, as well as a majority of the Independent
Directors, subcontract all or a portion of its obligations under this Agreement
to unrelated third parties. Notwithstanding the foregoing, the Advisor will
not, in connection with subcontracting any of its obligations under this
Agreement, be discharged or relieved in any respect from its obligations under
this Agreement.
7
<PAGE>
SECTION 11. LIABILITY AND INDEMNITY OF THE ADVISOR.
The Advisor assumes no responsibilities under this Agreement other than to
perform the services called for hereunder in good faith. Neither the Advisor
nor any of its affiliates, stockholders, directors, officers or employees will
have any liability to the Company, stockholders of the Company or others except
by reason of acts or omissions constituting gross negligence or willful breach
of any of the Advisor's material obligations under this Agreement. The Company
shall indemnify and reimburse (if necessary) the Advisor, its stockholders,
directors, officers, employees and agents for any and all expenses (including
without limitation attorneys' fees and expenses), losses, damages, liabilities,
demands and charges of any nature whatsoever in respect of or arising from any
acts or omissions by the Advisor pursuant to this Agreement, provided that the
conduct against which the claim is made was determined by such Person, in good
faith, to be in the best interests of the Company and was not the result of
gross negligence by such Person or willful breach of any of such Person's
material obligations by such Person. The Advisor agrees that any such
indemnification is recoverable only from the assets of the Company and not from
the stockholders.
SECTION 12. ACTION UPON NOTICE OF NON-RENEWAL OR TERMINATION.
Forthwith upon giving of notice of non-renewal of this Agreement by the
Company or of termination of this Agreement by the Company, the Advisor shall
not be entitled to compensation after the Advisor Termination Date for further
services under this Agreement, but shall be paid all compensation accruing to
the Advisor Termination Date and shall be reimbursed for all expenses of the
Company paid or incurred by the Advisor as of the Advisor Termination Date which
are reimbursable by the Company under this Agreement. The Advisor shall
promptly after the Advisor Termination Date:
(i) deliver to the Company all assets and documents of the Company
then in the custody of the Advisor; and
(ii) cooperate with the Company and take all reasonable steps
requested to assist the Board of Directors in making an orderly transfer of
the administrative functions of the Company.
SECTION 13. NO JOINT VENTURE OR PARTNERSHIP.
Nothing in this Agreement shall be deemed to create a joint venture or
partnership between the parties, whether for purposes of taxation or otherwise.
8
<PAGE>
SECTION 14. NOTICES.
Unless expressly provided otherwise herein, all notices, requests, demands
and other communications required or permitted under this Agreement shall be in
writing and shall be made by hand delivery, certified mail, overnight courier
service, telex or telecopier. Any notice shall be duly addressed to the parties
as follows:
If to the Company:
Chevy Chase Preferred Capital Corporation
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Telephone: (301) 986-7000
Telecopy: (301) 986-7401
Attention: Stephen R. Halpin, Jr.
If to the Advisor:
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Telephone: (301) 986-7000
Telecopy: (301) 986-7401
Attention: Stephen R. Halpin, Jr.
Either party may alter the address to which communications or copies are to
be sent by giving notice of such change of address in conformity with the
provisions of this Section 14 for the giving of notice.
SECTION 15. SEVERABILITY.
If any term or provision of this Agreement or the application thereof with
respect to any Person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Agreement, or the application of that term
or provision to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Agreement shall be valid and be enforced to the fullest extent
permitted by law.
9
<PAGE>
SECTION 16. GOVERNING LAW.
This Agreement and all questions relating to its validity, interpretation,
performance and enforcement shall be governed by and construed, interpreted and
enforced in accordance with the laws of the State of Maryland, notwithstanding
any Maryland choice of law rules that would apply the substantive law of any
other jurisdiction.
SECTION 17. AMENDMENTS.
This Agreement shall not be amended, changed, modified, terminated or
discharged in whole or in part except by an instrument in writing signed by both
parties hereto or their respective successors or assigns, or otherwise as
provided herein.
SECTION 18. HEADINGS.
The section headings herein have been inserted for convenience of reference
only and shall not be construed to affect the meaning, construction or effect of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized as of the date first above
written.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
By: Stephen R. Halpin, Jr.
Name: Stephen R. Halpin, Jr.
Title: Executive Vice President, Chief Financial
Officer and Treasurer
CHEVY CHASE BANK, F.S.B.
By: Joel A. Friedman
Name: Joel A. Friedman
Title: Senior Vice President and Controller
10
<PAGE>
EXHIBIT 12.1
CHEVY CHASE PREFERRED CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
--------------------------------------------------
For the Period from Inception (November 5, 1996) through December 31, 1996
(in thousands, except ratio)
Net income $1,832
Fixed charges -
------
Earnings before fixed charges $1,832
======
Fixed charges, as above $ -
Preferred stock dividend requirements 1,254
------
Fixed charges including preferred
stock dividends $1,254
======
Ratio of earnings to fixed charges
and preferred stock dividend
requirements 1.46
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 365,175
<SECURITIES> 0
<RECEIVABLES> 301,953,113
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 302,318,288
<CURRENT-LIABILITIES> 2,324,803
<BONDS> 0
0
15,000,000
<COMMON> 100
<OTHER-SE> 284,993,385
<TOTAL-LIABILITY-AND-EQUITY> 299,993,485
<SALES> 0
<TOTAL-REVENUES> 1,943,288
<CGS> 0
<TOTAL-COSTS> 91,413
<OTHER-EXPENSES> 1,273,641
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 578,234
<INCOME-TAX> 0
<INCOME-CONTINUING> 578,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 578,234
<EPS-PRIMARY> 5,782.34
<EPS-DILUTED> 0
</TABLE>
